China is recognised as the second largest economy in the world behind the US in terms of GDP, and as the largest by reference to purchasing power parity. It now has the second largest number (95) of Fortune Global 500 companies by revenue after the US, with its economy characterised by the presence of a large number of Listed State owned enterprises (‘SOE’s) partly or wholly owned by the State alongside wholly privately owned listed enterprises (‘POE’s). This transformation of the Chinese economy, particularly its corporate business structure, has occurred in just over four decades – from around 1976. These factors, combined with the enormous influence that China’s business entities listed on Chinese and overseas stock markets now wield, make it imperative to understand the forces that have helped transform Chinese business entities into the behemoths that they are now, and the system of governance of these entities, particularly its SOEs, and how they compare with, for example, the US and UK systems of corporate governance.
My paper examines how politics, economics, and culture have shaped corporate governance in China. China’s embrace of the market system, in a State dominated by a single political party since its 1949 Revolution, and its adaptation of the Western model of capitalism to meet its specific economic growth and development needs have been made possible by the events and circumstances of its recent history in which its cultural traditions have had a significant role to play. While institutional structure (such as two-tier versus single tier boards, relational versus stock market financing, and employee participation in governance) and type of ownership (State, and substantial shareholders whether institutional investors, hedge funds and investment funds or families) help shape the conduct and performance of business entities, they do not by themselves help explain how and why they function in the way they do. Similarly, while institutional design and structure are generally portable, explanations on how they adapt to and function in the host jurisdiction have to be looked for elsewhere, namely, in the historical and cultural setting into which they have been transplanted. This is particularly so in the case of China. In this setting, the paper examines the appropriateness of the use of the referents of ownership, control, management, supervisory structure, and executive remuneration as governance tools – standards commonly used to assess and evaluate the effectiveness of governance institutions and structure in the Anglo jurisdictions – to assess and evaluate the success of China’s business enterprises and their governance structure, particularly in the case of SOEs. Overall, China’s version of a modern market economy ‘with Chinese characteristics,’ including lower managerial compensation and State ownership of shares, suggests that culture and institutions can well overcome the challenges presented by international capital markets. The flow-on effect of these developments appears to go well beyond Karl Polanyi’s thesis of ‘embeddedness’ within non-market economies and ‘disembeddedness’ in market economies, as well as Mark Granovetter’s claim of a lack of ‘disembeddedness’ even in market economies, to evidence a lack of ‘disembeddedness’ despite market globalisation. In other words, such developments seem to go against claims of the end of history for corporate law and the emergence of a single model of corporate law.
The discussion in the paper is structured as follows. Part I discusses the basic comparator of corporate governance, namely manager, board, and shareholder relationships; Part II examines the recent evolutionary history of China’s SOE governance system; Part III evaluates the management of China’s system of SOE executive compensation; Part IV discusses the role of cultural norms in shaping the emergence of a Chinese form of corporate governance based on governance structure, institutional norms, and reward structure; Part V concludes.
Razeen Sappideen is Foundation Professor of Law at the University of Western Sydney.