Corporate governance is constraining CEOs in China

30 November 2015

CEOs of the Chinese arms of multinational companies are facing an increasingly challenging business environment. Chinese growth is slowing while regional stock-markets have taken a turn for the worse. Dealing with the situation is hampered for many, according to a recent McKinsey survey, by the need to align key business strategies with those higher up the management chain – executives who in many cases do not find themselves in the best position to oversee key decisions and guarantee agility.

Growth in Asia’s powerhouse economy has been slowing of late, with growth at 6.9% in the third quarter of 2015, the weakest rate since the global financial crisis, and in addition the Chinese Stock market has seen considerable losses recently as investor confidence cracked. One of the consequences of the turbulent times in China is pressure at the top of multinational companies, as their local leaders face growing uncertainties in their respective business environments. As such, CEOs of multinationals in China now find themselves under severe time constraints. 40% say that they do not have the time to respond quickly to the rapid changes in the Chinese market, while a further 40% admit that they are hard pressed to do so.

To identify how the locally situated leaders of the Chinese arms of multinationals are faring, McKinsey & Company surveyed 70 China-based CEOs ('China CEOs'). The companies they lead are some of the largest B2B and B2C players in the country, although 90% are European or US headquartered, generating more than $200 billion in revenue in the region between them. 40% of the heads are Chinese nationals, with a similar number from Europe or North America. Half the CEOs had more than ten years’ experience before taking the lead, while around 30% were new to the region or had been there for less than two years.

China CEOs reporting to HQ

China-based CEO constraints
The survey finds that responding CEOs tend to face two main issues. The first is the large amounts of time required to hit the numbers within the uncertainty of the downturn, combined with building their local teams. The second major issue is navigating themselves through corporate governance structures, with in particular managing headquarters standing out. Headquarters-focussed CEOs spend 40% of their time at or dealing with headquarters, while even locally focused China CEOs spend about 20% of their time at or speaking with the global command centre.

This is because, while many have direct line control over support functions such as branding and corporate affairs, they face direct line reporting in upstream areas like product development, operations, and supply-chain management. As such, fewer than 50% are permitted to make overall strategy decisions for China. Further, independent decisions making about pricing (40%) and product strategy (27%) were even lower, while independent decisions about annual budget, investment stand at 35%, and long-term, multi-year China investment planning at 24%. Hiring and firing was something that China CEOs could autonomously do at 71% of organisations surveyed.

A further complication faced by CEOs in China is the internal reporting hierarchy within the wider business. The survey finds that 41% of China CEOs report to an Asia head, and 20% to the global CEO. The global functional head is the go-to for 16% of the respondents, while 13% report to the business-unit CEO. The McKinsey report highlights that reporting to the regional Asia head can be problematic, as China sometimes accounts for an over-large part of the Asian region’s capacity, thereby increasing the risk that they will duplicate approaches to targeting and reaching customers made at a regional level, along with lengthy planning and decision cycles.

China CEOs reporting to directly

Improving the corporate governance
Given the rapidly changing environment in China, reporting can be a hobble to business performance as China CEOs and their superiors lose time through their correspondence, says McKinsey. The authors highlight that a number of strategies are being considered by those surveyed to provide more speed and agility to China-base CEOs.

These include, removing the regional structure and elevating China to a position equal to that of the rest of Asia, consolidating all Chinese activities under a China CEO with direct access to the global CEO or even bringing a China CEO into an executive position within the company. Some companies are moving full business units and global senior executives to the country to boost leadership ‘power’, while others have created a dedicated China advisory board of senior global executives who coordinate and accelerate the local agenda.