But when revenues are rising, the threats to a business aren’t obvious. “In some ways, China is like the U.S. in the 1990s; when economies are booming, the risks are submerged,” says Chris Low, head of China operations for Protiviti, an internal-audit and risk-management consultancy. “But what happens if some of the variables change?”
For A-share companies, at least, there isn’t much pressure for financial improvements coming from the retail investors that currently dominate the domestic stock markets. “The average investor is poorly educated,” says Lou. Instead of doing careful analysis investors typically trade on themes, and do so quickly and often. Lou has seen some investors suggest in online discussions that it makes sense to buy stocks that are “cheap” — in other words, a 5-yuan stock would be a better deal than a 10-yuan stock.
Indeed, the survey shows that China’s CFOs feel relatively little pressure from retail investors, and only slightly more from institutional investors. Just 15 percent of listed-company CFOs claim to feel significant pressure for change from individual investors, while 32 percent feel such pressure from institutional investors. That shouldn’t come as a surprise. In many of the recent instances where listed companies were punished by Chinese regulators, their share prices actually rose, buoyed by overall optimism about the market.
If investor pressure on Chinese CFOs is low, other pressures more than compensate. “[Running finance] is a massive challenge during the first year after an IPO,” says Hsieh of New Oriental Education, which listed on the New York Stock Exchange in 2006. “You are setting up the finance function, setting up employee share plans, investors are calling you, and you have to comply with Sarbanes-Oxley.”
Finding qualified employees — particularly in finance — is another drain on the CFO’s time. Hsieh should know: this year, his firm has opened 38 facilities and has added 1,200 people to the payroll, bringing the total number of employees to 5,900.
There are structural challenges, too. The broad-based CFO position that’s common at U.S. and European companies is rare in China. At many Chinese companies, treasury is separate from financial control. Nor do many CFOs have the authority of their Fortune 500 peers. “Here in China a lot of CFOs are just now earning the right to sit at the [decision-making] table,” says David White, a consultant with Oliver Wyman in Beijing. Asked about the challenges confronting finance, 45 percent of CFO China’s survey respondents cited the narrowness of the CFO role.
The lack of authority becomes a problem when finance chiefs try to address challenges arising from a company’s fragmented structure. Big Chinese companies typically have many divisions and governance models that require complex diagrams to comprehend. One result is a lack of clean financial data across the enterprise. “As companies go public, the CEO wants a better line of sight and asks finance to help,” says IBM’s Knight. “That brings finance into some conflict with the divisions.”