Corporate Governance Analysis of GOME

By Group 4 Lin Yan Song Jiani Wu Shuang Zhang Yin Zhao Jun He

Outline
Background Introduction Corporate Governance - Internal Corporate Governance - External GOME vs. Suning Strength & Weakness Suggestions

BACKGROUND INTRODUCTION
Companys Profile Corporate Culture Key Figures

Background Information
GOME Electrical Appliances Holding Limited(SEHK: 493) Leading Position in China Founding year: 1987 Founder: Mr. Wong Kwong Yu Incorporated: Bermuda Listed in August 2004 on HKSE

Background Information
826 outlets 208 large and mediumsized cities 522 stores located in the first-tier markets

11th in 2011 global top 30 EEO( Electronics,

Entertainment and Office Supplies)

Corporate Culture
Mission Statement: Perfecting the quality of life Symbol of GOME: eagle The persistence, the courage and the aggressiveness of everyone in GOME.

Key Figures
Wong Kwong Yu -Founder of GOME -The top of the richest people in China for three times -Controlling shareholder -04-08 Chairman of the group -2010 Sentenced to prison for 14 years

Key Figures
Chen Xiao
-Founder of China Paradise Electronics Retail Limited, which was merged by GOME in 2006 -07-08 the president and executive director of GOME -09-10 the chairman of GOME

Key Figures
Zhang Da Zhong
-Founder of Da Zhong Electronics Retail Limited, which was merged by GOME in 2007 -2011 Chairman of GOME

 In July 2006, GOME announced the merger with China Paradise, the biggest M&A in the retail industry of home appliances and consumer electronic products in China at that time. Not until January 2007 did GOME complete the M&A with China Paradise and found the new GOME.

CORPORATE GOVERNANCE - INTERNAL

Ownership Corporate Structure Management Compensation

Corporate Governance Internal

20072008

Wong Kwong Yu
Chen Xiao Zhang Da Zhong

20092010

2011

2007-2008: Wong Kwong Yu

Ownership
The Capital Group Companies, Inc. 5.10%

2007 Approximate % shareholding

Others 20.60%

Morgan Stanley 8.73% JPMorgan Chase & Co. Chen Xiao 8.10% 15.41%

Du Juan, Wong Kwong Yu 42.06%

Ownership cont
2008 Approximate % shareholding
Others 14.25% Du Juan, Wong Kwong Yu 35.55% Chen Xiao 13.21%

Capital Research and Management Company 8.02%

JPMorgan Morgan Stanley T. Rowe Price Chase & Co. 9.37% Associates, Inc. 10.38% and its Affiliates 9.22%

1. 2. 3.

Mr. Wong, controlling shareholder Increase of institutional investors Shares owned by minority shareholders decreased

2007-2008: Corporate Structure

Remuneration Committee Shareholder
Nomination Committee

Board of Director
Audit Committee President Independent Committee Executives

2007-2008: Corporate Structure

cont
Executive Directors Non-Executive Directors Independent Non-Executive Directors

4 6

1 1

6 6

2007-2008: Corporate Structure

cont
chief executive of Hanson Capital Investments Limited authorized representative and approved person of the UK Financial Services Authority
president of the Shanghai Pacific Institute for International Strategy Studies Chief Editor of the Strategy and management magazine
SZE Tsai Ping,Michael

member of the Disciplinary Appeals Committee of the Stock Exchange of Hong Kong Limited and the Market Misconduct

Mark Christopher GREAVES

CHAN Yuk Sang

INED
LIU Peng Hui YU Tung Ho
Thomas Joseph MANNING the CEO of Indachin Limited the founder of China Board Directors Limited

independent non-executive director of Four Seas Mercantile Holdings Limited

a director and the chief consultant of Asia Television Limited

Remuneration Committee

Nomination Committee

Audit Committee

Independent Committee

Executive Directors

NonExecutive Directors

INED

Duties
1. to monitor the continuing compliance by Mr. Wong of his obligations and any other undertaking which Mr. Wong and his associates may have given to the Group. 2. to make recommendations to the Board for the purpose of asserting the Companys rights and preserving its position in the event of any non-compliance of Mr. Wongs Obligations.

2007-2008: management compensation

Executive directors
Mr.Wong Kwong Yu

2007 salaries
1573

2008 pension
12

salaries
2138

pension
11

Ms.Du Juan
Mr.Lam Pang Mr.Ng Kin Wah Mr.Chen Xiao(2007) Mr.Wang Jun Zhou(2008)

871
153 417 1290 -

12
4 12 20 -

821

27

596 1751 14

11 22 1

Mr. Wong Kwong Yu and Chen Xiao s compensation are relatively high No other incentive apart from the basic salary

Independent nonexecutive directors Mr. Chan Yuk Sang Mr. Sze Tsai Ping Mr. Mark C. Greaves Dr. Liu Peng Hui Mr. Thomas Joseph Manning Mr. Yu Tung Ho

2007

2008

243 243 243 243

149 149

247 247 247 247

247 247

Salaries are low compared with the executive directors May not have the strong incentive to monitor

Features
Family-owned company INEDs can maintain their independence Majority of committee members are INEDs INEDs dont have strong incentive to monitor No other incentive for the management apart from the basic salary

2009-2010: Chen Xiao

2009-2010: Ownership
2009 Approximate % Shareholding
2008: Chen Xiao: 10%+
Others 35.87% Wong Kwong Yu, Du Juan 32.47%

JPMorgan Chase & Co. Morgan Stanley 10.18% 9.07% Chen Xiao 1.60%

Bain Capital Investors, LLC 10.81%

2009-2010: Ownership

cont

2009 Approximate % Shareholding Wong Kwong Yu,

Du Juan 32.47%

Chen Xiao 1.60%

Bain Capital Investors, LLC 10.81%

2008: Chen Xiao: 10%+

1.

2009: Chen Xiao: 1.6%

2. 3.

Reorganization of Trust fund(Retail Management Company Limited) Gift to Daughter, Chen Ye Open Offer Shares on July 29,2009

2009-2010: Ownership
2010 Approximate % Shareholding

cont

Others 48.71%

Du Juan 32.47%

Chen Xiao 1.38%

JPMorgan Chase & Co. 6.38%

Bain Capital Asia Integral Investors, LP.,Bain Capital Investors, LLC 11.06%

2009-2010: Corporate Structure

Remuneration Committee Nomination Committee Shareholder Board of Director President Special Action Committee Executives Executive Committee Audit Committee Independent Committee

2009-2010: Corporate Structure cont

Responsibilities of Special Action Committee:
to closely monitor and assess the impact on the Groups financial condition and operations caused by the Investigation; to advise on the Companys timely disclosure, investor relations and regulatory compliance; and to propose recommendations to the Board concerning the actions to be taken by the Company in connection

2009-2010: Corporate Structure cont

Remuneration Committee Nomination Committee Shareholder Board of Director President Special Action Committee Executives Executive Committee Audit Committee Independent Committee

2009-2010: Corporate Structure

cont
Executive Directors Non-Executive Directors
2008: 1 +3?

Independent Non-Executive Directors

5 6 5

6 4

2009-2010: management compensation

Executive director Mr.Ng Kin Wah Mr.Chen Xiao Mr.Wang Jun Zhou Mr.Wei Qiu Li Mr.Sun Yi Ding

2009 salaries pension

740 2254 1013 966 830 11 25 27 27 19 Share options 2001 4402 4003 3602 2602

2010 salaries pension

1200 5464 3240 2643 2438 28 29 29 24 Share options 3185 7007 6370 5733 4140

2009-2010: management compensation cont

2007 2008 independent non-executive directors 2008 2009 2009 2010 2010 salaries 247

non-executive directors

salaries 243

salaries
102

salaries
809

salaries 705

salaries
0

salaries 261 261

Mr.Chan Yuk Sang(2004-)

Mr.Sun Qiang Chang(2006-2009)

Mr.Sze Tsai Ping(2002-)

243 243 243 149 149

247

264

Mr.Zhu Jia 2009-

Mr.Mark C.Greaves(2005-2009) 247

109
1018

95
-

Ms.Wang Li Hong2009-
Dr.Liu Peng Hui(2006-2009) 247 247 247

109
132

95
705 595

Mr.Ian Andrew Reynolds 2009-

Mr.Thomas Joseph Manning(2007-)

109

95

261 -

MS.Huang Yan Hong (2010) Mr.Yu Tung Ho(2007-2009)

2009-2010: management compensation cont

2008 non-executive directors
Mr.Sun Qiang Chang(2006-2009) Mr.Zhu Jia 2009- Ms.Wang Li Hong2009- Mr.Ian Andrew Reynolds 2009- MS.Huang Yan Hong (2010)

2009 salaries
809 109 109 109

2010 salaries
0 95 95 95

salaries
102

2009-2010:Special Events
2 attempts to issue new shares Board Meeting Special Shareholder Meeting Result:
Special Shareholder Meeting Part of the Agenda 1.Dismiss Chen Xiao 2.Veto the boards decision of issuing new shares Result Not approved

Approved

2009-2010Features
Family-Owned Company Public Company Wong Kwong Yu: Controlling Shareholder Chen Xiao: Made two attempts to dilute Wongs Shares 3 INED joined Improved Remuneration Package New Committee established

2011: Zhang Dazhong

2011: Ownership

Du Juan 33% Others 48%

Chen Xiao JPMorgan Chase & Co. 1% 7%

Bain Capital Asia Integral Investors, LP. And Bain Capital Investors, LLC 11%

2011: Corporate Structure

Executive Directors Non-Executive Directors

cont

Independent Non-Executive Directors

2011: Key Features

Wong Kwong Yu: Controlling Shareholder Structure of Board: Wongs interest in essence

CORPORATE GOVERNANCE EXTERNAL

M&A Institutional investors, auditors Legal environment Information and disclosure

Merge & Acquisition

number of traditional stores

1000 800 600 400 200 0 2004 2005 2006 2007 2008

April, 2005

Harbin Black Swan Home Appliances Retail Co., Ltd.

northeast

August,20 Shenzhen Yihaojia Retail Co.,Ltd. southern 05

November central ,2005
Wuhan China's Merchants Group

December, Appliances Retail Co.,Ltd. 2005

Jiangsu Golden Sun Home

Profit for the year

1400 1200 1000 800 600 400 200 0 2004 2005 2006 2007 2008
738 943 777 1168 1099

east

November ,2006

China aradise

December, Beijing Dazhong Home 2007 Appliances Retail Co.,Ltd. Shaanxi Cellstar December, Telecommunication Retail 2007 Chain Company Limited

Apr. 2005: Harbin Black Swan Home Appliances Retail Co., Ltd.

Nov. 2006 China Paradise Nov.2005 Wuhan China's Merchants Group

Aug. 2005: Shenzhen Yihaojia Retail Co.,Ltd.

Dec.2005 Jiangsu Golden Sun Home Appliances Retail Co.,Ltd.

Dec. 2007 Beijing Dazhong Home Appliances Retail Co.,Ltd. Shaanxi Cellstar Telecommunication Retail Chain Company Limited

Merge & Acquisitions

Good performance after M&A
Number of traditional stores increased

Increasing profit Stock price

Institutional Investors and Auditors

Institutional Investors
2007 2008 Morgan Stanley 2009 Bain Capital Investors, LLC 2010 Bain Capital Investors, LLC 2011 Bain Capital Investors, LLC

Retail Management Company Limited JPMorgan Chase & Co.

Warburg Pincus & Co.

JPMorgan Chase & Co.

T. Rowe Price Associates, Inc. and its Affiliates Capital Research and Management Company

JPMorgan Chase & Co.

JPMorgan Chase & Co.

JPMorgan Chase & Co.

Morgan Stanley

Morgan Stanley

Institutional investors cont

Activism by Bain Capital Investors, LLC
-- 3 non-executive directors

-- took part in voting for director election and executive compensation e.g. stock option

Effectiveness:
--successfully promote the changes in corporate governance of the Group

Institutional investors cont

JP Morgan Chase & Co.
--a leading financial services firm -- block shareholder(>5%) -- no inventive to monitor
e.g. absence in special shareholder meeting Suggestion:
-- appoint non-executive directors from JP Morgan.

Auditor
Ernst & Young
Big International Audit Firm Auditor of GOME since 2004
Suggestion : appoint a new external auditor

Legal Environment

Legal Environment
Companies Amendment Act 2006 in Bermuda HKSE Listing Rule --- have the motivation to meet the requirement of List rules --- two examples

Legal Environment cont

the increasing size and geographic spread of the Group

Accounting standards 2004: HKFRS

IFRS

Information and Disclosure

Information and disclosure

Mandated reports Voluntary disclosure
good news contributing to the increase of stock price e.g. In 2009, announcement about the investment agreement between Bain Capital and GOME.

Problem ?
Important internal news was released before announcement

e.g. In 2011, news that Zhang Da Zhong would be appointed as the

chairman

GOME VS. SUNING

GOME vs. Suning: Ownership

2011 GOME
Du Juan 33% 48% 13% Zhang Jindong

2011 Suning
Suning Electric Group Company Limited

Others 45%

28% Chen Jinfeng

Jin Ming
Bain Capital Investors, LLC 11%

Chen Xiao 1%

JPMorgan Chase & Co. 10%

1% 1% 1% 1% 1%

2% 3%

1%

CCB-YinHuan Core Value Equity Fund

ICBC-Guangfajufeng securities investment fund UBS AG

GOME vs. Suning: Corporate structure

Supervisory Board

Shareholder
Board of Director President Directorate Secretary

Remuneration Committee Nomination Committee Audit Committee

Executives

GOME vs.Suning board of director

Numbers of directors(2011) GOME SUNING

executive directors
:

2 4 5

5 1 3

non-executive directors independent non-executive directors

-GOME vs. Suning: Management Compensation

-GOME vs. Suning: Management Compensation

GOME vs. Suning: Audit

GOME: Ernst & Young Suning: Pricewaterhousecooper

GOME vs. Suning: Information Disclosure

GOME: not efficient in recent years Suning: good information disclosure system

GOME vs. Suning: Social Responsibility

Charity

Social responsibility for customers:

GOME vs. Suning: Conclusion

GOME: professional management
may not be directly applied Suning: insists professional management model all the time

Strength and Weakness

Strength
Enocompensation to executive directors

Fine Board Structure Management compensation has been efficient Good performance after M&A

Weakness
Insufficient incentives to INED Majority shareholder ignore interests of minority ones Independence of auditor? Imperfect system of information disclosure Institutional investors withdrawal of capital affects the confidence of the public

SUGGESTIONS

Suggestion
Improve compensation package for INED Build up information disclosure system More information about creditors More information about creditors Focus on shareholder's interest Seek a new auditor

Suggestion cont
Improve compensation on the part of INED compensate for their efforts and compare with benchmark give matchable salary and stock options

Suggestion cont
Build up information

disclosure system
voluntary disclosure control internal information regulating directorship secretary

Suggestion cont
Focus on the interests of minority shareholders

improve board independence legal assistance for minority shar eholders

Suggestion cont
Seek a new auditor
employ E.Y. for consulting service employ another big international audit firm

Thank You!
Group 4
Lin Yan Song Jiani Wu Shuang Zhang Yin Zhao Jun He