Are US-Listed Chinese Firms a Minefield? A Board Perspective

In the midst of the ongoing Sino-US tensions, a remarkable flashpoint was the massive corporate scandal of Luckin Coffee (Luckin). Luckin, a Cayman Islands incorporated, NASDAQ-listed Chinese company, operated the largest coffee chain in China measured by stores, and was touted as an upstart rival to upend Starbuck’s dominance in the Chinese market. Founded in 2017, Luckin went public in May 2019, making it one of the fastest companies in the world to go from founding to initial public offering (IPO). Only into the eleventh month of its run as a publicly traded company, however, Luckin shocked the market in April 2020 with the disclosure that it had fabricated much of its reported sales. Its market capitalization plunged over 97 per cent from an all-time high of $12 billion in January 2020 to $350 million in June 2020, saddling institutional and individual investors both in Asia and the West with heavy losses. 

In the wake of Luckin’s scandal, US-listed Chinese companies as a group have been seen as posing particularly significant risks to investors in the US stock markets. The US Securities and Exchange Commission warned, with an unambiguous reference to China, that ‘there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to US domestic companies’. The Holding Foreign Companies Accountable Act was passed unanimously by the US Senate and the House and was signed into law in December 2020,  in effect, giving US-listed Chinese companies three years to comply with the US audit requirements, or to give up their US listings. 

Are the US-listed Chinese firms, as a group, truly a corporate governance minefield to be avoided at all cost? Was the Luckin scandal revealing of the commonly-shared, deep-rooted governance deficiencies of the NYSE- and NASDAQ-listed Chinese firms, or was Luckin but an outlier? Much of the focus in the current debate has been, perhaps deservedly, on the decade-old issue of access to the audit papers located in China, an issue known for its political intricacy and complexity. The current Sino-US confrontation has made the issue, albeit important, all the less likely to be resolved in the near future. It is useful, therefore, to direct our attention also to an alternative and potentially productive venue: the corporate board. Drawing upon two unique, comprehensive datasets we have created specifically for this research, our article (published in The International Lawyer 54 (2021) 201) sheds fresh empirical light on some previously little-known characteristics and patterns of the US-listed Chinese listed companies and, in particular, their boards and board committees.

With a total market capitalization of over $1.8 trillion as of December 31, 2019, the cohort of US-listed Chinese companies are far more heterogeneous than widely perceived. Counterintuitively, the NYSE-listed Chinese companies, generally larger in size (as measured by market capitalization) and more mature (as measured by the years of listing), have less independent boards than their NASDAQ-listed counterparts. Equally counterintuitive are our findings that the Chinese firms listed on the NYSE are (slightly) less likely than their NASDAQ-listed counterparts to set up all three key board committees. They are also less likely than the NASDAQ-listed Chinese firms to have fully independent audit committees, compensation committees, and nominating and corporate governance committees.

Boards of the NASDAQ-listed Chinese firms, as a group, appear to be less independent than those of the S&P 500 and Russell 3000 firms. Their audit committees are, however, pretty much as independent as those of the S&P 1500-indexed companies, although their compensation committees and nominating committees exhibit a lower level of independence than those of the S&P 500 firms. Caution, however, is warranted in interpreting these findings. One must resist the temptation of drawing the conclusion that independence of the NASDAQ-listed Chinese firms’ boards and board committees is questionable and they therefore pose a particularly greater governance risk. 

Our research also offers little support to the popular views that Luckin is representative of all US-listed Chinese companies and that the Luckin scandal unearths serious systemic governance failures commonly plaguing this group of firms as a whole. We show that Luckin’s board and board committees were among the least independent in the NASDAQ-listed Chinese companies. In that sense, Luckin should better be seen as an outlier, rather than as the tip of the iceberg. To be clear, important lessons must be learnt from the Luckin scandal, lessons based upon further analysis and evidence-gathering: How did it happen? To what extent did the lack of adequate board (and committee) independence contribute to the accounting fraud? What can be done, at both national and international levels, to prevent the scandals of this kind from happening? It is too hasty, however, to judge the whole group of US-listed Chinese companies on the basis of what appears to be an outlier member of that group. 

Chao XI is Professor and Outstanding Fellow of the Faculty of Law at The Chinese University of Hong Kong.

Yurong Huang is a PhD Candidate at the Faculty of Law, The Chinese University of Hong Kong.