Home > Property & Casualty > Securities Litigation and publicly-traded Chinese firms: lacking checks and balances

Securities Litigation and publicly-traded Chinese firms: lacking checks and balances

Reports continue to be made of accounting and corporate governance irregularities for publicly traded companies based in China.  These companies, which may be listed on stock markets in the U.S., Hong Kong, mainland China or some combination of the three have greatly increased in number over the past five years.

Reports in today’s Wall Street Journal outline continued shortcomings in the accuracy of reporting from these companies.  The article specifically mentions Sino-Forest in regard to allegations that it misrepresented the actual timber holdings of this firm.  The article goes on to discuss the sentiment, strong until recently, that these shortcomings could be ignored given the great growth of the Chinese market and GDP.

What seems to be lacking in China is the ability of shareholders to bring class-action lawsuits against the managers of these companies.  While U.S. courts may be a source of recovery for shareholders of the U.S. listed companies (see the latest Stanford report there appears to be no plaintiffs’ bar to bring similar litigation in China).

As with any market, checks and balances are needed to ensure both credibility and long-term viability. Currently, the Chinese market lacks the checks (in the form of sticks) that investors need to curtail the predilection of many Chinese companies to follow loose accounting and corporate governance practices. The absence of strong rule of law in China and other developing countries has certainly been a source of complaint in many general legal critiques. Securities litigation may just be the missing tip of the spear of regulation that thwarts the success of securities markets in a less than fully transparent China.  Investors should consider these risks, and not just in China.

About the Author

Phil Edmundson is the Chairman and CEO of William Gallagher Associates (WGA), insurance brokers and consultants for businesses with over 30 years in the insurance industry. He manages strategy, talent acquisition and development, and management / acquisitions at WGA.
617.646.0229 PEdmundson@wgains.com  Connect with Phil on LinkedIn


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