Losing Their Grip

Can China's CFOs keep their companies from growing out of control?

Major change can’t happen without support from the CEO. “You need a CEO who is open to someone new and to a different way of thinking,” says Cheng Li-lan, CFO of E-House, an online real estate brokerage in Shanghai. “Particularly if you want to do an overseas IPO, you need to have a balance between going for the absolute highest return and risk. You need diversification and dilution of decision making and a higher level of transparency.”

Unfortunately, at some companies — especially state-owned enterprises (SOEs) that have gone public — it’s hard to reach that kind of understanding. The CEO and chairman of such companies are typically appointed by the Communist party, creating a conflict of interest. According to a senior executive of one state-owned enterprise, because many top SOE officials hope for a powerful government appointment later, they typically feel more responsibility to the party than to shareholders. At this enterprise it has resulted in a short-term focus on topline revenue.

This is a common problem, according to Jamie Allen, secretary-general of the Asian Corporate Governance Association. “The business decisions of these companies are being influenced by state policy, not what’s best for the shareholders. It could result in a manufacturer setting up a factory in the area to provide jobs, which may help provide a stable and harmonious society but may not be in the interest of the minority shareholders.” The outcome is that CFOs of SOEs can find themselves restrained by the CEO from making decisions needed to get the business on the right track.

Taking Control

Chinese CFOs realize that there’s work to do. According to the CFO China survey, their top priorities are internal controls, risk management, higher profitability, and providing better analysis for decision making. And, in fact, consulting firms such as IBM report a sharp rise in the number of companies launching large-scale finance-transformation projects, which aim to improve basic financial processes and enable finance to help the business make wiser decisions.

Not surprisingly, the CFOs of successful high-growth ventures are acutely aware that they need control to keep their businesses growing. Hsieh of New Oriental Education is one of them. He had worked as an investment banker and a lawyer in addition to a stint as a Silicon Valley CFO when he was recruited by New Oriental founder Michael Yu.

Hsieh has set up a system of financial controls to wield some control over New Oriental’s far-flung operations. Each week, his financial team (about 150 people, mostly working in operations) compiles management reports, which the senior managers review. “Before we had controls in place, the CEO and the SVPs didn’t know if a school was broken for six months or a year, because the school could hide it,” says Hsieh. “They didn’t know until the end of the year, when they did the accounts, and people would say, ‘Wow, you didn’t make any money.’”

Hsieh says he is fortunate to have a boss who recognizes the importance of good controls. The CEO assigned him to build New Oriental’s finance and administrative functions, and as a result his job has a wide span, encompassing finance, human resources, M&A, and legal.

All of this, Hsieh believes, means that New Oriental will be able to respond to a downturn better than other Chinese companies. Unfortunately, companies like New Oriental still appear to be in the minority in China. Many more are barreling ahead, growing fast but ill-prepared to steer around the obstacles that appear in their headlights. Costly mishaps may await them.

“Profitability and growth are always the most important things in a company like ours,” says Cheng of E-House. “But at the same time, if you ignore good management, it will come back to bite you.”

Don Durfee, Yang Jian, and Wu Chen write for CFO in Hong Kong and Shanghai.

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