Comparative corporate governance: a Chinese perspective

  • Yuwa Wei

Student thesis: Doctoral Thesis

Abstract

In 1997, the Fifteenth National Congress of the Communist Party of China clarified the direction of the enterprise reform of the country. It was decided that the reform of establishing a modern enterprise system should be speeded up, and large and medium sized state-owned enterprises should be reformed into corporations. Since then, the speed of corporatisation in China has been accelerated. With more and more enterprises are converted into companies, the issue of corporate governance becomes the focus of the enterprise reform.

This thesis carries out research into the development of the corporation and corporate governance in China. It mainly concerns itself with the following important issues: (1) How has the system of corporate governance developed in the context of the enterprise reform in China? (2) How do corporate theories and corporate practice in other systems influence current Chinese thinking and practice? (3) What are the problems existing in China's corporate governance system? ( 4) What is the best arrangement of corporate governance for China?

Corporate Governance and Its Significance to the Enterprise Reform in China
Corporatisation of state-owned enterprises is the last resort of the enterprise reform in China. Before corporatisation, many strategies were tried and gained limited success. The final decision as to corporatisation is based on years of reform experiment and deliberation. The decision has its solid theoretical and practical grounds.

It has been widely acknowledged that the governance structure of a state-owned enterprise does not encourage profit maximizing behaviour. This has been thoroughly discussed by Chinese policy makers and scholars. In their discussions, modern enterprise and governance theories were applied
to analyse the problems of Chinese enterprise system. What took a long time to be debated in the early years of enterprise reform were the reform policies and measures. The Chinese were aware of the fact that simple privatisation would not achieve the reform purpose. The political, social and economic conditions •in China determined that such an approach would increase social costs and
jeopardize the prosperity of the whole economic reform program. The Chinese were also uncertain about whether corporatisation without privatisation could bring much improvement on enterprise performance. As a result, instead of corporatisation, China introduced less radical measures of enterprise reform such as increasing enterprise autonomy and introducing a director responsibility
system.

However, state-owned enterprises continually delivered unsatisfactory econorruc performance. Furthermore, these reform programs produced new problems. A severe problem was insider control. These problems persisted and began to have an impact on all important economic sectors and areas. The Chinese saw no alternative but to take profound measures to reform their enterprises. It was agreed that China must introduce modern corporate governance structure into its enterprises so_ as to build a modern enterprise system. Thus, corporatisation was carried out in steps, from initial trials to full scale reforms.

Today, many enterprises take the corporate form. However, the corporate form does not automatically bring high economic efficiency and performance. What decides the outcome of the enterprise reform is whether these enterprises are effectively governed to produce high economic performance and to benefit all interested groups. At this point, more efforts need to be made by Chinese policy makers, enterprises, investors, managers, and entrepreneurs.

Designing a Practicable Model of Corporate Governance for China
Just as the economic efficiency of an enterprise does not necessarily improve simply because it adopts the corporate form, merely introducing modern corporate governance mechanisms into a company does not necessarily guarantee the company is better governed. This is because a good governance model may have little to do with practicability. An economic model is usually built on the assumption that society and individuals, based on perfect information about the costs and benefits of alternative choices, can make rational decisions. However, the reality is that we live in a society of incomplete information, with a complex environment, and where individuals hold their own subjective perceptions of the external world. Hence, there are gaps between a model based on rational choice and efficient market hypotheses, and the practicability of the model. A model of little practicability amounts to a mere scrap of paper. Furthermore, divergent corporate governance models adopted by different systems illustrate the fact that the development of a model in a particular system is shaped by social, ideological, economic, historical and cultural conditions of that particular system.

Therefore, to select a system of corporate governance requires balancing a number of considerations. The vitality of a corporate governance system lies in both its economic rationality and practicability. To adopt a model giving insufficient consideration to the special social situations of a particular society will increase the cost of the institutional change and the cost of reception of
the model. Consequently, its adoption becomes undesirable. The most desirable choice is a choice that represents the best economic efficiency after balancing the economic benefits and the cost of reception. Hence, in the process of designing a suitable model of corporate governance for China, important situations that influence corporate behavior should be taken into account. This model has to give adequate consideration to China's current economic situation and political system, the Chinese people's ideological and cultural preferences, the developing path of corporate practice in China, and the significance of the model relating to sustainable development of the nation's economy.
Date of Award9 Feb 2002
Original languageEnglish
SupervisorJohn Farrar (Supervisor)

Cite this

Comparative corporate governance: a Chinese perspective
Wei, Y. (Author). 9 Feb 2002

Student thesis: Doctoral Thesis