ANN ARBOR, MI: 9 May 2013 - The past decade has seen sustained academic criticism in the United States of corporate governance reforms implemented through U.S. federal securities law, colorfully termed “quack corporate governance”.  The development of a legal corporate governance regime in the PRC, however, makes the “quack corporate governance” concern seem quaint, because from the start of China’s “corporatization” program corporate governance in the PRC has been largely determined by China Securities Regulatory Commission (CSRC) regulation governing listed companies. 

The breadth of this sustained intervention over two decades is stunning, and has seen the delivery of significant doctrines and governance norms into Chinese corporate law by securities regulation alone, including: fiduciary duties (for orthodox fiduciaries and controlling shareholders); an independent director system; a negative veto for holders of the public float (as a quasi-class) on certain decisions; supermajority approval requirements for related party and self-dealing transactions; and share classes in a regime where such share classifications were prohibited.  Even more remarkable is the fact that the great majority of these doctrines and norms are designed to stymie, or at least make accountable, controlling shareholders of Chinese firms and their appointed insiders which/who are identities of state or Communist Party organizations, representatives of central or local government institutions, or party nomenklatura appointments – thus, politically as well as economically powerful control parties.          

Why has the CSRC acted so provocatively to construct China’s legal corporate governance regime?  A number of key factors seem determinative: the political economy of China and the consequences of its “corporatization without privatization” policy; the political and economic power of China’s controlling shareholders and their appointed insiders; technically deficient legislative drafting, and a legislative process manipulated to protect the power of state controlling shareholders; concerns about the competence, autonomy and independence of the Chinese judiciary in enforcing legal norms; and almost blanket non-implementation before the judiciary of the corporate law with respect to widely-held companies.  The CSRC has been left as the only state institution capable of: expert drafting of substantive corporate law, in particular of the “self-enforcing” type; effective resistance against controlling state shareholders (and the political-economic systems behind them); substitution for an inexpert, bureaucratic, and politically-cowed judiciary; and the institution of corporate governance norms to protect minority shareholders in listed companies against structurally-determined exploitation by state control shareholders.    

A focus on the asserted differences between corporate and securities law, and an understanding of why the PRC breaches the border between them so readily, reveals the nature of both corporate law and governed firms in China.  Indeed, the U.S. “quack corporate governance” critique is animated in part by the often unstated notion that corporate law predicated on private ordering in the embrace of default rules must be protected  against the imposition of mandatory rules which constrain the space for private agreement or alter the mutability of state-offered default prods; a notion based in turn on the belief that capital accumulates, and will be efficiently allocated to useful projects, through an infinite variety of negotiated arrangements bearing on both entity governance and investor rights.  An offshoot of this line of thinking, and especially strong in the U.S. with a resurgent libertarian tradition, is the mindset which recoils at the thought of intervention by “the state” or anything “mandatory” into the “private” or “self-ordered” realm. 

How then does the contemporary Chinese accommodation between company law and securities regulation of corporate governance fit into a discourse about two legal systems: contractarian/enabling corporate law vs. mandatory securities law?  In 1993-4 the PRC government began company law-making very much in the “mandatory”/business regulation mode.  Only with the 2006 PRC Company Law did China move formally towards an enabling statute which allows for increased contracting-out of default rules, and not incidentally significantly expanded scope for the judiciary applying standards ex post.   Yet, as noted in this paper, as China’s formal corporate law has moved in one direction, the imposition of mandatory norms by the CSRC has pushed the applied law of corporate governance in just the opposite direction.  The reasons for this administrative agency counter-strike reveal something about the real political economy of China and its “corporatized” state-owned enterprises.  Indeed, describing modern PRC company law as “enabling” appropriately conjures another use of that term -- the “enabling” of an addict on the slide towards a recognized evil.  Given the lopsided capital structures of PRC firms and the governance regime’s dominant horizontal agency concern, the unconstrained economic, political and governance power of state controlling shareholders and their appointed insiders, a serious information asymmetry between controlling shareholders and public investors, etc., an enabling company law functions as a wide invitation for dominant shareholders to freely exploit far weaker actors in the firm, especially where minority shareholders have very little power ex ante to bargain for effective protections or obtain price discounts.  Accordingly, in China mandatory corporate governance norms -- albeit issuing from a securities regulation platform -- designed to protect the rights of minority investors have been, and remain, necessary. 

This view should also prod a reappraisal of the “spheres of freedom” concern, and the assumed role of “law” in protecting private spheres of autonomy.  If we recognize a distinction between the party-state as an over-bearing political-economic actor spawning a parade of controlling shareholders, on one hand, and the party-state as a publicly-interested regulator cum promoter of the capital markets, on the other, we obtain a new vision of the CSRC’s mandatory-type regulatory incursions into the province of mostly-enabling legal corporate governance.  For, with the PRC’s “corporatization without privatization” program we are confronted with a merely rhetorical “retreat” of the state “under law” – a legal regime which cloaks the maintenance of concentrated power by the state metamorphosed into a politically privileged controlling shareholder, where the state also ensures that formal “legal” protections for the exploited minority are never really implemented by the courts.  The only remedy for these achieved deprivations of autonomy and power, and the inability of the enforcement system to apply whatever formal “legal” protections are on offer, is state intervention of another sort: an agency’s injection into enabling corporate law of immutable substantive doctrines and mandatory corporate governance mechanisms designed to protect those who will suffer such deprivations, and constrain the retained power of party-state forces metamorphosed -- by operation of  (corporate) “law” no less -- into controlling shareholders of the new “corporatized”, but still thoroughly dominated, corporation.