Transparency calls may cap Chinese firms’ sky-high ambitions

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By all accounts the Chinese conglomerate HNA has built a successful company. It’s a major player in its home market and, until recently, its global deal-making foray had been proceeding apace.

Among its overseas investments, successive acquisitions of US and Irish aircraft-leasing companies have created a subsidiary with nearly 870 aircraft. It owns a 25% stake in Hilton and a nearly 10% stake in Deutsche Bank. Fortune ranks HNA No 170 on its Global 500 List with annual revenue of more than US$50 billion.

Shanghai world financial center_cropped

Shanghai World Financial Center. Photo: Daniel Del Re

Despite its business savvy, HNA stumbled in high-profile fashion with a recent attempt to shed light on its ownership structure. This disclosure was supposed to assuage concerns about the ultimate ownership and control of HNA’s assets, and silence claims that it benefits from ties to China’s government.

Globetrotting Chinese companies face growing public and market pressure to share more about themselves, putting them in a tough spot. Home-market politics can make revealing too much risky. But halfhearted disclosures that offer a pretense of transparency inevitably fan flames of suspicion in overseas markets and can threaten Chinese companies’ global ambitions.

Pressure mounted on HNA around its purchase of Deutsche Bank shares and its pending acquisition of onetime Donald Trump spokesman Anthony Scaramucci’s stake in the investment firm SkyBridge Capital.

In response, the company released a list of 15 individuals and entities that constitute its shareholders. Among several head-scratching aspects, HNA said that its affiliated charitable foundation now owned more than half of the company thanks to the transfer of ownership of a 30% block of shares to the foundation’s New York-based arm.

HNA said this block of shares came from a Chinese individual about whom little is known, and the chief executive of a firm called Bravia Capital that has advised HNA on overseas transactions. In a subsequent interview, HNA’s chief executive told the Financial Times that this transfer of ownership took place without payment.

Also, HNA made the quizzical pronouncement that, as The Wall Street Journal reported, the company expects the charitable foundation to take full ownership as its others shareholders “have pledged to donate all of their shares to the Foundation upon resignation or death”.

This thumbnail sketch of its ownership, surrounded by murky details, raised more questions than it answered, as evinced in numerous media headlines.

“HNA’s disclosure doesn’t solve the mystery of its ownership,” was the WSJ’s reaction. “Revelations of HNA stake deal fail to clear up mystery,” wrote the Financial Times, referring to the transfer of ownership to the foundation. “HNA shines dim light on ownership,” was Reuters Breakingviews’ headline. Other global news outlets took a similar tack.

What more could HNA have done? For starters, it could have better explained the transfer of ownership to the New York-based arm of the foundation, and the ostensibly altruistic ambition to have 100% ownership by the foundation. Such a tight connection between a company and an outside organization, even one with a philanthropic mandate, raises questions about conflicts of interest between the organizations’ leaders.

In addition, HNA could have explained its ownership history, including significant cross-shareholding agreements with other entities, a chart depicting those relationships and a chart depicting the nature and structure of the group. This would have been a prodigious effort given what reporters have unearthed about the company’s dispersed ownership. But it would have addressed obvious and long-standing questions.

HNA could have gone beyond a first pass at ownership transparency and laid out certain governance parameters. For instance, what checks on management exist if management will exercise the foundation’s voting rights, as the CEO told the media? How transferable are the foundation’s equity stakes? What voting rights do other minority shareholders have or have they too relinquished their votes? Are there plans to include independent, non-executive stakeholders on the board of directors?

Another helpful disclosure would have been for HNA to provide something akin to the “management discussion and analysis” section of a Western-styled annual report with supporting financial statements.

And last, it could have outlined non-financial information, such as its business ethics, employee protections and code of conduct, and any commitments to corporate social responsibility and philanthropy.

In short, there’s lots more that HNA could have done. Media headlines would nonetheless have abounded, but likely would have been much more favorable.

Private companies of any national orientation would balk at such a fulsome disclosure, which is de rigueur for their public peers. But all companies face greater calls for transparency, governance and community engagement.

Chinese firms are held to an even higher a standard when they venture overseas. “Brand China” is still viewed skeptically. That skepticism is acute for companies unknown outside of Asia or those that lack the imprimatur of a listing on a reputable stock exchange with disclosure and governance requirements.

In the US, the stakes are rising for Chinese companies. There are signs that the Committee on Foreign Investment in the United States, which vets transactions for national-security concerns, will expand its remit to include general public-safety and other non-defense concerns.

Simmering trade disputes with China could complicate matters; parties opposing deals with Chinese firms, whether labor groups or politicians, could link their opposition to broader concerns about unfair rules for US companies in China or fears of intellectual-property expropriation.

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