Corporate governance with chinese characteristics: the case of state owned enterprises

• Author: Razeen Sappideen
• Pages: 90-113

FRONTIERS OF LAW IN CHINA

VOL. 12 MARCH 2017 NO. 1

DOI 10.3868/s050-006-017-0006-7

ARTICLE

CORPORATE GOVERNANCE WITH CHINESE CHARACTERISTICS: THE CASE OF

STATE OWNED ENTERPRISES

Razeen Sappideen*

Abstract This article examines the reception of Western corporate governance models

and standards into the Chinese system of corporate governance. It investigates how

China has adapted these models to fit in with its political, economic, and cultural norms

in relation to its state owned enterprises (SOEs), a large number of which are now listed

in onthe Fortune Global 500 list. Overall, the study highlights that firstly, the importance

of culture in the shaping and functioning of human behavior as well as that of

institutions, and in their subsequent path dependence; and secondly the limited impact of

property rights, minority shareholder rights, and financial markets as arbiters of the

destination of investment funds.

Keywords China, state owned enterprises, governance, culture as a determinant

INTRODUCTION ...................................................................................................................... 90

I. GOVERNANCE AND THE BOARD-MANAGER-SHAREHOLDER BALANCE OF

POWER....................................................................................................................... 92

II. A BRIEF SURVEY OF THE EVOLUTION OF SOE GOVERNANCE.................................. 94

III. MANAGING EXECUTIVE COMPENSATION.............................................................. 101

IV. CULTURE, INSTITUTIONS, AND CORPORATE GOVERNANCE .................................. 105

CONCLUSION.........................................................................................................................111

INTRODUCTION

This article examines how politics, economics, and culture have shaped corporate

governance in China. China’s embrace of free markets and its adaptation of the Western

model of governance structure to meet its specific economic growth and development

needs has been made possible by the events and circumstances of its recent history in

which its cultural traditions have had a significant role to play. As a result of these

transformative shifts, China has emerged as the second largest economy in the world

* Razeen Sappideen, J.S.D., Columbia University, New York, USA; Foundation Professor of Law, School

of Law, Western Sydney University, Sydney, Australia. Contact: r.sappideen@uws.edu.au

2017] CORPORATE GOVERNANCE WITH CHINESE CHARACTERISTICS 91

behind the US in terms of GDP,1 and as the largest economy in the world by reference to

purchasing power parity.2 It is reputedly the largest creditor of the US, and its economy is

characterized by high savings and low domestic consumption, as compared to the low

savings and high domestic consumption economy of the US. China now has the second

largest stock market in the world with a market capitalization of US$ 6 trillion, and is the

world’s largest investor in total fixed assets with a value totalling US$ 4.9 trillion as

compared e.g. to estimates of US investments of US$ 3.4 trillion, and Japan US$ 1.1

trillion.3 China is, at the same time, one of the largest recipients of inward foreign direct

investment (IFDI), signifying the confidence with which it is viewed by the investment

community. More importantly, China now has the second largest number (95) of Fortune

Global 500 companies by revenue after the US,4 with its economy characterized by the

presence of a large number of listed state owned enterprises (SOEs) partly or wholly

owned by the state alongside wholly privately owned listed enterprises (POEs).5 This

transformation of the Chinese economy, particularly its corporate business structure, has

occurred in just over four decades — from around 1976.6 These factors, combined with

the enormous influence that China’s business entities listed on Chinese and overseas

stock markets now wield, makes it imperative to understand firstly, the forces that have

helped transform Chinese business entities to the behemoths that they are now, and

secondly the system of governance of these entities, particularly its SOEs, and how they

compare with the US, UK, and Australian systems of corporate governance (hereinafter

“the Anglo jurisdictions”).

While institutional structure (such as two-tier versus single-tier boards, relational

1 The World Bank, China Overview, available at http://www.worldbank.org/en/country/china/overview

(last visited Feb. 27, 2015).

2 International Monetary Fund, World Economic Outlook October 2014, available at http://www.imf.

org/external/pubs/ft/weo/2014/02/weodata/weorept.aspx?pr.x=84&pr (last visited Feb. 27, 2015).

3 Jennifer N. Carpenter, LU Fangzhou & Robert F. Whitelaw, The Real Value of China’s Stock Market,

NBER Working Paper 20957, available at http://www.nber.org/papers/w20957 (last visited Feb. 20, 2015).

4 The Fortune Global 500 Companies List for 2014 Provides the following statistics for China: Two of

the top five, three of the top ten, fifteen of the top one hundred, and ninety-five of the top five hundred are

Chinese companies, available at http://www.erewise.com/current-affairs/fortune-500-2014-list-of-world-

s-biggest-500-companies_art53bbb95640ff6.html#.VQkzfI6Ue2lwww.erewise.com (last visited Mar. 18,

2015). For a somewhat different view, see, China Daily, Jul. 8, 2014, Chinese companies fill 100 places on

the Fortune Global 500 list for 2014 with Sinopec group taking third spot for the first time. The Fortune

Global 500 released on Jul. 7 featured an unprecedented 100 Chinese companies, available at

http://www.chinadaily.com.cn/business/2014-07/08/content_17673632.htm (last visited Feb. 27, 2015).

5 Approximately 155,000 enterprises are still owned by the central and local governments, of which

around 80,000 are “…in the economic lowlands: they run hotels, build property developments, manage

restaurants and operate shopping malls.” See State-Owned Enterprises, Fixing China Inc, The Economist,

Aug. 30, 2014, available at http://www.economist.com/news/china/21614240-reform-state-companies-

back-agenda-fixing-china-inc (last visited Feb. 27, 2015). There are approximately 600,000 foreign

companies and more than 400 of Fortune 500 companies now operating in China.

6 See discussions in Part II.