Corporate Governance in China and India

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The question arises, "What happens when there is a conflict of interest between an outside shareholder and the Party?" I suspect the Party wins.

Is there any political interference on Indian boards?

Not in the private sector. No more than there would be in the U.S. In the state-owned enterprises, yes, there would be political influence.

Are companies in India and China making progress in developing talent in the same way that Western multinationals do?

They're both making progress. But Indian companies are significantly further along, partly because India never had a Cultural Revolution as China did, which wiped out much of the business class. It had a residue of corporations already in existence. Some companies are 100 or 150 years old and they have an established way of doing things.

Where are the Chinese when it comes to managing multiculturally?

Utterly zero. It's hard to blame them because there's a language barrier also. You may remember the acquisition of a German company, Schneider, by TCL in 2002, which was based in Shenzhen. It was a disaster. Then they followed that disaster with a bigger disaster in 2004, by buying assets from Thomson (TMS) in France, which they also destroyed.

A lot of the internal tensions were about language and cultural barriers, and questions like, Can a Frenchman report to a Chinese? And what if the French guy makes more than the Chinese guy?

How do companies of the two countries compare when it comes to corruption?

Here, I am not positive on India at all. Transparency International puts out these indices, and India and China are both close to the bottom of that list. China does a little bit better than India. In China, there is corruption, but it is constructive corruption. You, as a bureaucrat, get to be corrupt but only after you generate some value for society. You get a piece of it.

In India, there is corruption but it's not constructive. You're not fostering new bridges or highways. It's just shuffling stuff back and forth. I don't think we've cracked that in India at all. I'm very sorry about that.

In the final analysis, does it matter that Indian companies, on the whole, have an edge over the Chinese in reaching international standards of governance? The Chinese have huge capital at their disposal because of their $1.5 trillion in foreign exchange reserves. Couldn't they still be fearsome competitors?

I think that's right. Corporate governance matters because you want to reassure the providers of inputs—whether it's time and talent, or ideas, or capital—that their rights will be respected and they will get a return on it. But if you're already sitting on hundreds of billions of dollars of capital, and you don't need to reassure anybody else because you already have your capital, why have good corporate governance?

The reason the Chinese feel less pressured to do something about it is not because they don't know how to do it—far from it, they have the best technical help from Hong Kong and other places. It's because they make a reasoned judgment that it's not worth their while.

In addition to writing Armchair MBA for BusinessWeek.com, William J. Holstein writes for The New York Times, Fortune, Corporate Board Member, Dealmaker, and Strategy + Business.