Issues in brief

BoardroomDirect®
Update on the current board issues: May 2013

Issues in brief

 

Gauging China’s growth not so easy for US boards

The $7 billion reconstruction of the San Francisco-Oakland Bay Bridge is an example of how a state can finance a huge infrastructure construction project without federal funds. China is playing a significant role and the reconstruction illustrates how China is doing business around the world, even as its domestic economic model morphs to consumption-based from exports-based.

It is important for US-based multinationals to strategically evaluate how they will approach business in China. This includes assessing that country’s growth status, and the real size of any company’s addressable market space.

"From a board perspective, especially now as China’s economy transitions, it is critical to assure that companies have realistic targets for their China market growth and profitability,” David Hoffman, vice president and managing director of The Conference Board’s China Center said during a Director Roundtable last month in New York City. “Growth is slowing markedly due to structural factors, and significant margin pressure is setting in as firms grapple to maintain or increase share”.

For so long, Western companies have set China targets extremely high, Hoffman said. "Doing so now risks value destruction", he said. "It’s time to hunker down and weather the storm".

That was one of the messages and anecdotes from the Director Roundtable last month in New York City moderated by Mary Ann Cloyd, leader of PwC’s Center for Board Governance. Joining Hoffman and Cloyd on the panel was Adm. Joseph Prueher, former US ambassador to China and a director for Emerson Electric, Fluor Corp., Amerigroup Corp. and DynCorp International.

"The rebuilding of the Bay Bridge in San Francisco and Oakland is an example of the relationship between US and Chinese businesses", said Adm. Prueher. "The trusses, the crane and barge for putting them in place, and the ship for moving the barge, the ‘Left Coast Lifter’, were all fabricated in China”.

California Department of Transportation (Caltrans) was able to use Chinese steel made by Shanghai Zhenhua Heavy Industries because it didn’t take federal money for the project that was a joint venture with Fluor and American Bridge Co. Doing so would have limited the state to using domestic steel for the bridge.

This example of a US/Sino business relationship is indicative of where the Chinese economy is going over the next five years: moving from manufacturing consumer products for export to manufacturing infrastructure for export and consumer products for consumption domestically. At the same time, it is building an economy that is becoming more consumptive as its middle class emerges.

While the full potential of foreign trade with China has not been reached, the country has attracted more than $11.7 billion of foreign direct investment in 2012, according to the 2013 China Development Forum Survey that was conducted by PwC. The survey also found that 70% of the 227 multinational CEO respondents plan to increase their investment over the next five years.

At the same time, China’s economic engine has started to cool down. The Conference Board’s Global Economic Outlook projects China’s trend growth rate to slow to 5.8% from 2013-2018 and fall further to 3.7% from 2019-2025. The Conference Board report also states that since China has been growing above the forecast trends for several years, the economy’s deceleration will be more rapid than many expect. Earlier this month the official purchasing managers’ index in China fell to 50.6 in April from 50.9 in March. Analysts had forecast a reading of 51. The data suggests that while Chinese manufacturing is still growing, the growth rate has slowed.

For more information on doing business in China, directors may want to read the following:

 

Two new PwC publications on governance for companies going public available

PwC U.S. recently released two reports to help companies that are contemplating public offerings to better understand the myriad corporate governance decisions.

Governance for Companies Going Public – What Works Best™ guides directors and executives of companies planning an IPO through the many governance decisions necessary; offers insights from interviews with directors, executives, investors, and board advisors; reports results of PwC’s proprietary research on pre-and post-IPO governance structures; and helps those involved understand the governance landscape. Its companion piece, Going Public? Five Governance Factors to Focus On, outlines key governance considerations companies should address when pursuing a public offering.

“Ongoing regulatory and investor scrutiny of corporate governance structures and approaches is impacting companies of all shapes and sizes, including new issuers”, said Mike Gould, a partner in PwC’s Deals practice. “When a company embarks on an IPO, management faces a multitude of responsibilities in a condensed period of time, and governance questions can overwhelm boards and executives if they aren’t prepared to handle the many layers of governance planning”.

Catherine Bromilow, a partner in PwC’s Center for Board Governance, said on a PwC Deals practice webcast last month that there are two reasons more time should be taken when IPO companies make corporate governance decisions. “There is the chance that management might not understand the implications of the corporate governance decisions and there is the chance it doesn’t understand how the decisions will be perceived by future shareholders”, Bromilow said.

The considerations detailed in PwC’s Going Public? Five Governance Factors to Focus On include:

  • Understanding the requirements
  • Evaluating board composition
  • Understanding shareholder and other influences
  • Reviewing governance choices and implications
  • Securing the right resources
 

Summary of NACD risk oversight advisory council meeting

The National Association of Corporate Directors (NACD), in conjunction with PwC and Gibson Dunn, published a summary of the proceedings from the second NACD Advisory Council on Risk Oversight meeting.

Matters discussed at the advisory council meeting ranged from disruptive technologies to board and management processes. The advisory council agreed to continue working on the identification of leading practices for risk oversight, including allocation of risk oversight responsibilities and the development of a risk strategy document. The guidance of this group will help shape discussions in the continuing dialogue surrounding NACD Directorship 2020.

In its recent meeting the council focused on four areas: board processes and people, recognizing information risk, linking strategy to risk, and the allocation of risk oversight. The council on risk oversight was formed with the following in mind:

  • Discuss ways the board can get engaged in addressing risk areas
  • Highlight the practices and processes the board should focus on
  • Develop more precise definitions of risk oversight practices
  • Identify resources needed to help engage in those practices