As China's resources companies expand overseas, corporate governance will become a more pressing consideration, according to research presented in a new book*.

The country's resources companies should be making more effort to increase the level of independence of their boards of directors, which are currently staffed mainly by government-appointed or government-linked individuals, says Jia Xinting, responsible investment specialist at Mercer in Melbourne and co-author of the book.

As a result of this set-up, companies may be making decisions that are not always in the best interests of shareholders, adds Jia, who wrote the book with Roman Tomasic, chair of company law at Durham University in the UK.

"Our research highlights the unique role the Chinese government plays in listed companies, the majority of which have the government as their major shareholder," Jia says. "However, in some cases we found that minority shareholder rights may not be properly protected and transactions between the major shareholders and the listed entities can be problematic."

State ownership of listed companies -- particularly resources companies -- is a very ingrained culture in China, so the big question is how to tackle enterprise reform. Before they list, Chinese resources companies tend to belong to corporate groups, which are usually controlled by government, says Jia. And when they list, sometimes it can be difficult to keep the activities of the listed companies totally separate from the parent company.

In 2002, there was an effort to make resources companies independent of their parent post-listing, she says, but adds that, in reality, it can be difficult to ensure that this happens particularly when the corporate culture has been in place for a long time. Nevertheless, China is making some progress in its governance reform, for example there is a trend among companies to allow minority shareholders to vote online.

Moreover, in 2005, the government started the process of converting the non-tradable shares it owns as a majority shareholder to tradable shares. Once this is complete, government shares will potentially be managed under the same market discipline as those held by minority shareholders.

Senior Chinese officials have certainly been making the right noises with regard to corporate governance, but implementation of a new culture will not take place overnight.

Still, despite the drawbacks, there have been considerable changes since China carried out its economic and enterprise reform 30 years ago, says Jia. The book intends to help investors to understand the evolution these resources companies have undergone under China's unique economic, political and social environment and how these companies are governed at firm level, she adds.

While the main themes explored in the book relate to corporate governance, the wider contemporary issues of resource security and environmental change, which are closely related to the depletion of the world's natural resources, are also tackled.

"China's resources companies are becoming increasingly active players in global resources markets," says Jia. "As such, it is critical that they take environmental, social and governance [ESG] issues into consideration in their management practices." She suggests they are indeed doing so, although again it will take time for methods to change.

Helga Birgden, Asia-Pacific head of responsible investment with Mercer's investment consulting business, says the findings from the book's research are consistent with Mercer's responsible investment study on China. This study was commissioned by the World Bank's International Finance Corporation unit, suggesting ESG issues are growing in importance in major emerging markets.

 * Corporate Governance and Resource Security in China: The transformation of China's global resources companies.