WORLDWIDE CORPORATE GOVERNANCE CONVERGENCE WITHIN A PLURALISTIC BUSINESS LEGAL ORDER---COMPANY LAW AND INDEPENDENT DIRECTOR SYSTEM IN CONTEMPORARY CHINA

Chi-Wei Huang, University of Pennsylvania

Abstract

Worldwide Corporate Governance Convergence within A Pluralistic Business Legal Order—Company Law and Independent Director System in Contemporary China

Chi-Wei Huang, S.J.D. University of Pennsylvania Law School March 29, 2007

Abstract:

A deeper tendency across developed market jurisdictions has been a convergence toward a single, standard corporate structure. The essential legal features of a shareholder-oriented ideology are well established among those developed market jurisdictions and noticeably dominate the development of worldwide corporate forms. Striving to increase long-term shareholder value has become the most competitive corporate governance theory among developed economies. A series of examinations of worldwide corporate governance and ownership have concluded that there is a correlation among adequate legal protection of shareholders, dispersion of ownership, and strong securities markets. That most large-scale international companies list on more mature securities markets proves the shareholder-oriented/dispersed ownership corporate model emerges victorious over stakeholder-oriented/concentrated ownership model.

Recent commentary has found that a dispersed shareholder corporate model is unlikely to develop in civil-law countries. Two of the major reasons are (1) the lack of adequate protections for minority shareholders, (2) the political vulnerability of dispersed ownership in “social democracies”. Some scholars further argue that even the whole world is converging toward a dispersed shareholder corporate model; China may be an exception since its current economic achievements do not result from the certainty brought by a clear and definite legal system to support a shareholder-oriented/dispersed ownership model, but from the planned commands brought by their autonomous government. Nevertheless, this article finds that significant movement in the direction of shareholder-oriented/dispersed ownership corporate model has also occurred in contemporary China, a communist country which used to be lack of adequate protections for minority shareholders. This article investigates China’s convergence toward shareholder-oriented/dispersed ownership corporate model by making intense deliberation and examination of relevant laws and rules of the U.S. and Chinese corporate governance, with particular attention to how the convergence is affected by its unique path dependency forces.

Although China’s current economic achievements do not result from the predictability brought by a clear and definite legal system which supports a shareholder-oriented/dispersed ownership model, the Chinese government believes “rule of law” is the ground for economic growth, it also believes “law” will enable itself to pursue economic development without democracy. It monopolizes over law-making initiatives, and has made up relatively clear and defined formal rules (constitutions, laws and rules) and functional informal constraints (norms, conventions and codes of conduct). However, China’s law-making initiatives have been deeply influenced by its path dependencies derived from its “rule of man” background. The “rule of man” tradition has seriously frustrated the development of an accomplished corporate legal system.

This article provides several insightful suggestions for China’s corporate governance system to improve those path dependency problems with Chinese characteristics: (1) installs the audit committee, (2) marks a definite boundary between independent director system and supervisory board, (3) sets effective enforcement authority for China Securities Regulatory Commission, (4) promotes true independence of independent directors, and (5) establishes enforcement power of rules and opinions regarding independent directors. The article further suggests the Chinese regulators to assure those private controlling groups in Chinese corporate governance system that: (1) the shareholders-oriented/dispersed ownership system will increase their wealth, and the increase will be greater than the loss of their private benefit of control; and (2) their private rights will not be expropriated after the installation of developed corporate governance system, in order to eliminate their reluctance. China needs to gradually change to a softer, societal version of corporatism which allows private interest groups to enjoy more self-regulation under a clear rule of law structure.