Distance (from China) gets hearts racing for the wrong reasons

Romantics can say what they like about distance making hearts fonder. Chinese companies on London's junior market make investors' hearts race, but not in a good way.

Last week, John McLean, chairman of Sorbic International, maker of food preservatives, admitted he had failed to wrest control of the Shandong-based business from Wang Yan Ting, former chief executive in China.

Mr Wang was removed from office in April. But the former policeman has kept the company's "chop", the all-important seal that bestows power over a company's operations and finances in China.

The company has said it knows Mr Wang has transferred nearly £8m in cash, but without the chop, Mr McLean says he can't find out where. The shares have been suspended and Sorbic remains in default.

It is easy to say investors should have seen it coming. Mr Wang has been proving difficult for a while and, until January, Sorbic only had two directors: Mr Wang in China and Mr McLean, a UK-based accountant paid £50,000 a year, who has never lived in China and doesn't speak Chinese. That is odd governance for a company however small and wherever it is based.

While one fiasco might be an aberration, more begins to look like a pattern. Less than a fortnight ago, the UK directors of Chinese sports shoe retailer Naibu Global started legal action to gain control of the group's operations and bank accounts. Naibu's UK-based non-executive directors haven't been able to get hold of executive chairman, Houyan Lin, or other execs on the ground to tell them what is going on.

Aim has provided rich pickings for Chinese bosses with more than 80 companies listing over the past decade or so, of which about 50 remain. According to the London Stock Exchange, Aim's overseer, they raised more money on average than most Aim entrants. That should make the LSE question how a western stock exchange can best regulate small enterprises on the other side of the world. Aim's oversight is already rife with conflicts of interest. The exchange earns good fees from Aim admissions while leaving the policing of Aim to nominated advisers or "nomads", usually small brokerages employed by companies. Geographical and cultural distance makes the exercise more perilous.

The LSE says it warned of the cultural and commercial differences between China and the west in 2011. Regular site visits and face-to-face meetings are essential in building trust, it suggested. Speaking Chinese is useful. Some Chinese names "start with the surname and others with the first name", it added helpfully.

The LSE ought to have hammered home the message that boards of Chinese companies should be well stocked with local non-execs who can keep executives in line. Brokers and directors must be able to drop their golf clubs in a heartbeat to grab the company chop. Polite emails don't cut it. As it is, Aim investors and brokers have been burnt too often. As one nomad says bitterly: "Chinese companies? Never again".

Casting off retirement scheme shackles

Renold, the industrial chain maker, is a small old-fashioned Manchester manufacturer. But it has just signed a decidedly newfangled contract to cut the risks to cash flows posed by a defined benefit pension scheme going back to 1948.

The group, valued in the market at £140m, is paying an insurer £25m to take on the burden of paying the pensions of 35 staff. The 35 are a teeny fraction of the thousands of staff and former staff in Renold's retirement scheme. But the cost of the pension promises made to the 35 is calculated at about £27m or a quarter of the group's total pension liabilities. The contract would have cost more if the insurer hadn't peeked at the medical records allowing it to assess the life expectancies of the 35 individuals.

It is a good time for small businesses to tidy up legacy pension schemes, particularly those where a small number of staff represent a big proportion of the total liabilities. The market in medically underwritten bulk annuity contracts didn't exist three years ago. Now the UK's four providers are offering bargain rates to establish their hold in the market. Renold's initiative is an illustration of what small companies can do to lessen the burden of legacy pension promises before being overwhelmed by them.

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