1. To seek a more universally applicable governance model for Chinese companies. “It is difficult for elephants to hide behind the trees.”Modern society is a corporate society which has vividly depicted the huge impact of companies on modern economic life. No matter for super-large transnational corporations or corporate clusters as major economies in the society, their governance level will not only profoundly influence their own operation and survival, but also deeply concern the interests and wellbeing of stakeholders like shareholders, managers, employees, creditors and community so as to become an increasingly importance global public topic. Although different organization and individuals may differ in the attitude and expectation of corporate governance, no one can ignore its value.
As the core of corporate legal system, corporate governance will influence its ability of sustainable development and competency in international competitions. Good corporate governance will reduce agency cost, guarantee protection of investors’ interests, effectively enhance corporate images and elevate their position in the international market so as to help realize corporate goals. In the global economic integration, with the competition in capital and product market and accompanying pressure, competition of corporate governance model is inevitable. It is because “the liberation of free trade rules and irresistible dissemination, especially free flow of capital and finance, economy has gradually get rid of political control”. Therefore, market competition has spread to corporate legislation and evolved into the completion of national legal system. Countries continue to conduct modern reform of company law, as a result of competition and reform, company law of different corporate governance began to learn from, copy and absorb from each other which lead to a convergence of corporate governance model.
“It is difficult for elephants to hide behind trees”. With emerging Chinese economy in the world, it is inevitable that more and more world-class Chinese companies will exert greater influence in the development of global economic development and corporate governance model. Under this circumstance, it is a question must to answered about the positioning of Chinese corporate governance and how to choose a more applicable and competitive model. Global corporate governance convergence is a golden opportunity for the evolution of Chinese corporate legal system. We should respond to the demand of global economic integration, understand and grasp this opportunity, actively learn from advanced experience of foreign company law which can be related to our own situation based on the national reality in an open-mind, so as to make the current corporate legal system more applicable, effective and universal.
However, there might not be a corporate governance model suit for all countries and regions. In terms of global experience of company law, some corporate governance mechanism effective in early phase might gradually lose competitiveness with the economic and social development while those efficient in some countries and regions might create same effect in other areas. I don’t intend to describe a universally applicable “global corporate governance face” for it has never existed. Yet, we can’t deny that corporate governance is faced with common difficulties and challenges, and need to resolve many similar problems. This article mainly reviews the efforts made by major countries and regions to pursue development and enhance corporate governance faced with their own special situation and changing social and economic policies, seeks similarity of these efforts and development direction so as to find trend of corporate governance model against the backdrop economic globalization and explore a more universally applicable Chinese corporate governance value and basic order.
2. Centralized multi-polar co-governance
Given the current situation of Chinese corporate governance, to make a clear positioning of the value and basic order, we need to firstly reach consensus in terms of core stakeholders while adjust their mindset and behavioral model in participating governance and even make major adjustment for some. The core of adjustment is to have an appropriate positioning of each stakeholder in corporate rights and interests. The core competency of every organization always comes from within where also originate the biggest challenge and risk. As the interests of shareholders and management are more deeply and widely related to corporate governance, they can be called the core stakeholders. How to safeguard and coordinate the interests of core stakeholders especially among shareholders is always the biggest challenge of corporate governance. The core of corporate governance is to establish the “centralized multi-polar co-governance” value and order among core stakeholders and arrange and execute specific mechanism and rules accordingly so as to enhance core competency.
“Centralized’ doesn’t mean to let one party of stakeholder to dominate corporate governance but refers to that there is only one corporate governance order and supporting value system. “Multi-polar” refers to co- existence of many stakeholders in the centralized corporate governance order and value. “Co-governance” means the synergy most conducive to corporate core competency with the participation of all stakeholders including shareholders and management in governance within a widely recognized framework to preserve the centralized governance order and value system. The centralized corporate governance order and value system can be regarded as a balanced result from gaming of many stakeholders. In other words, it is a value fully acknowledged by all the stakeholders not forced upon by some to others nor actively pursued by some while passively participated or received by others.
Within the “centralized multi-polar co-governance”pattern, sustainable growth and sound financial indicator are the biggest goal of corporate governance and also the common interest of all shareholders which specifically explains corporate governance model with the conception of “centralized”. Firstly, for shareholders as the biggest stakeholder, the company is invested and established by shareholders, the alliance made up of all stakeholders(despite number of shares) is a polar in the company. Their joint participation of corporate governance is cogovernance. Although shareholders don’t have equal say in corporate governance as majority shareholders have more residual rights of control and rights of claim than minority shareholders, they are all entitled to participate in governance and the company also needs them to actively participate in governance. Whether multi-polar cogovernance among different shareholders can be achieved is the top topic for corporate governance. Secondly, management also serves as a “polar” in the company and need to co-govern with shareholders. If we say private companies don’t have vivid distinction between shareholders and management, in public companies especially where equity is relatively scattered, shareholders and management are two distinctively separated interest subjects and the agency cost is mainly caused among the two. So, to appropriately realize multi-polar co-governance between shareholder group and management is the second topic for corporate governance. Thirdly, on some occasions, employees are also one “polar” within the company with independent demand for interests and distinct participation mechanism. Multi-polar co-governance among employees, shareholders and management is the third topic for corporate governance. Finally, there are some other subjects outside the companies with close interest relations such as creditors who enjoy special interest on special occasions like corporate bond launching, liquidation and reorganization and they also have distinct governance participation mechanism. Whether they can achieve multi-polar co-governance with shareholders and management is another important question for corporate governance. The above is the” multi-polar” and co-governance at various levels and on many occasions. Of course, the core concept refers to the “multi-polar” and “co- governance” between the first two levels.
Although companies in different countries and regions have their specific situation while the relation structure among stakeholders differ enormously in terms of concentration of equity structure, independence of management and participation extent of employees. However, as a contracted organization, a for-profit organization and an economic entity with interests of various stakeholders in the social and economic life, its founding purpose and goal is definitely not extremely different from others. Thus, there can be a universally applicable basic value and order of corporate governance. Centralized multi-polar co-governance is not about replacing the current value system and governance model with a brand new value system and model but to learn from the current foundation and explore a more universally applicable corporate governance value and order according to current perception.
3. Why the centralized multi-polar co-governance?
(1) “Centralized”
Modern corporate legal system with internal unified spirit and value recognition is established and spread to all countries and regions. Companies pursue good corporate governance order which is called for by the whole society. With the promotion of global capital market, more and more companies began to realize a diversified and balanced equity, professional management and interestsharing mechanism at a wider range and level since their establishment and deviated from the “jungle rule” era in the development history of capitalism. They have avoided the dominance of corporate interest by one subject at the expense of others’ interest. Transparency, fairness, justice, equality and harmonious development have become common wish of more participants. A company is faced with lots of risks and changes in its development and needs a strong and steady common value to safeguard its enduring peaceful order. This value can be consensus of all or might be the common interests of all the stakeholders. Whatever it is, it should be the one and only, i.e. a centralized value and order.
Firstly, only a centralized value and order can eradicate completion for the control of the company to greater extent so as to save cost of internal gaming and avoid consuming internal resources. As an interest coordination mechanism between related parties in the company, a unified mechanism rules have provided guarantee for exchanges between all parties. All the parties will know how the other will act on specific occasions and also know the other understand this concept so it is easy to form a stable balance. Each one doesn’t need to spend too much energy to guess others’motivation so the competition of different interest orientation is removed and the possibility of conflicts has been reduced.
Second, centralized value and order can help late- comers’ development in the company. A company’s value and order is usually established, maintained and dominated by the founder, the first director and other first-comers. As long as the later-comers don’t challenge this value and order, they can easily get recognition of first-comers so that they can have more room and opportunities to develop themselves and also the company. A company’s development should be accompanied by more elites’ joining and happy working experience. Late-comers’ efforts are recognized by first-comers and their development room is effectively expanded. As their stories spread, more elites are attracted t the company. This is a virtuous circle which explains common stories of all the companies’ growth as a result of the centralized value and order.
Finally, centralized value and order is good for the company to contact with outside with the same value image. Company need to contact with the outside including with the competitors. Under the centralized value and order, each individual in the company voluntarily protect the unified value system and contact with the outside calmly. During this process, companies with good corporate governance should win while their excellent value system will gradually influence the whole industry, improve and integrate the moral and practice of other enterprises in the industry and region so as to win recognition and support of the outside world.
(2) “Multi-polar”
Firstly, there is no absolute and exclusive interest subject in the company. The company doesn’t belong to an individual or an interest group. It is many people’s enterprise from the beginning and no shareholder or interest group can shoulder complete responsibility of the company’s development and neither can they control the whole situation. Each shareholder, manager, employee and even creditor enjoys the right and opportunity to participate in governance and is responsible to contribute their wisdom and talent. The company is relevant to everyone’s interest though the extent differs.
Secondly, all the stakeholders have the wish and interest pursuit to participate in governance and should be respected. For the shareholders, no matter how much share they hold, they have the demand to participate in corporate government, enjoy the right to know and to be respected at different extent. For employees and creditors, as they have specific interest demand in certain affairs, it is necessary and conducive for them to participate in governance on this occasion. All the demand should be respected and be satisfied appropriately and this is what it means to participate in corporate governance.
Thirdly, multi-polar order doesn’t necessarily mean diverse separated governance. Just as discussed above, unified order is better than diversified one. Multi-polar forces can realize corporate co-governance just like many shareholders can coordinate with each other within the company as long as the participants have adequate wide common interest. It is possible to achieve “co-governance”among shareholders and management, management and employees and shareholders and employees.
Fourthly, from the perspective of management, to participate in multi-polar order is much better than fight alone or start all over again. In private companies, at least majority of the management are usually shareholders and there is no purely professional managers. Even so, we should admit that when shareholders act as managers to execute management right and fulfill management duty, they have distinct behavioral model and thinking as individual or group and they also have interest appeal different in the capacity of shareholders. Shareholders should acknowledge, understand and respect that. In public companies,“separation of two rights” can make corporate governance more professional, advanced and specialized, management as professional managers have no or little shares, it is a fact that their behavioral model, thinking and interest appeal are different or even opposite to that of shareholders. Compared with shareholders, most of time, management is at a disadvantageous position which determines that single individual can’t fight alone. Fight alone can easily be regarded as “hitchhiking” or irresponsible, and even be isolated from major decision-making in the company. Start all over again is to directly challenge the current corporate right landscape and interest order which is not tolerated by the biggest interest entity made up by shareholders. In fact, the interest of management can be extended at maximum because in the decision-making of most companies, the de facto “Board of Directors Centralism”enables management’s decision-making right become the core, with the development of operation scale and business diversification, the management’s decision-making right is actually expanded. It is necessary to point that the elevation of management’s status in decision-making doesn’t mean the decline of shareholders’ power. With the company’s growth, one major challenge for corporate governance is to guarantee shareholder’s status in major decision-makings and no force can challenge or replace the role of shareholder meetings in major decisions but the shareholder meeting is only significant when as many shareholders participate.
(3) Co-governance
Just as mentioned above, power division in the centralized multi-polar system should handle well the relationship between management as professional management team in professional decision-making and shareholder meeting as the supreme organ of right in decisions of most authority. It should not sacrifice management’s decision-making right in the changing market to lose competitiveness in the market and neither shareholder meetings should be put aside. In the legislation model of corporate right division, there is a difference between “Board of Directors Centralism” and “Shareholder Centralism” which still cause academic dispute about which one is better. Actually, behind the object orientation of right division is the difference of the goal of corporate governance between realizing shareholders’ interest and the interests of shareholders. In the UK and US model of shareholderorientation, shareholders are regarded to have right to claim corporate residue assets and shoulder the final risk therefore directors’ mission is to maximize shareholders’ interests, i.e. shareholders come first, thus it is advocated to stick to shareholder centralism in terms of right division. However, stakeholder-oriented model of the continental law believes shareholders’ interests are not equivalent to corporate interests and directors should also consider the interests of other participants. Therefore directors’ mission is not only to maximize shareholders’ interest and it is advocated to stick to Board of Shareholders Centralism while emphasizing that board of directors should have relatively independence or even stronger power compared with shareholder meetings.
Advocates of company law convergence hold that although countries differ widely in corporate governance, equity structure, capital market and corporate culture, the corporate legal system has unified greatly and might be converged further and advantage of efficiency of shareholder-orientation will finally win the stakeholderorientation and become the standard model of global corporate governance. The internal efficiency advantage of UK and US model of shareholder-orientation include: firstly, in most cases, to fully protect shareholders’ interest can’t solely rely on contract but shareholders should be granted with power to control the company. If the control right is exclusive and powerful, shareholders will have full incentive to pursue maximized corporate value. Second, interests of other stakeholders can usually be safeguarded by contract or governmental regulation, so when shareholders pursue maximized corporate value it is also good to other stakeholders. Thirdly, from practice, shareholder-oriented security market regulatory system has adopted relatively high standard of information disclosure which will directly reduce agency cost.
In terms of legislation model of corporate right division, Chinese company law has adopted shareholder centralism in form while in practice, there is huge dispute whether it is board of directors centralism or manager centralism. I believe, the relatively dispersed equity structure and shareholder-oriented interest and right structure have been widely accepted as the core feature of good corporate governance. We have to admit that in the revision and implementation of corporate legal system over the past decade, shareholders’ supreme interests have been universally acknowledged. To attract international investment and strengthen economic competitiveness, countries following stakeholders-orientation model like Germany, France, Italy, Japan, Korea and India have began to approach shareholder-orientation model in terms of directors’fiduciary duty, accounting principle, information disclose and insider trading regulation. It proves that the two major legal systems have reached consensus in core features and basic principle of corporate governance and have promoted global corporate governance model based on it. As China enjoys fast social and economic development while in the early phase of capital market, the choice of corporate governance basic value and order should stick to the primary principle and fundamental bottomline with shareholders’ interest as the core of corporate interests and shareholder meeting as the core of corporate right. It is of great significance and institutional value economically, politically and legally for both state-owned enterprises with large asset and vulnerable state-owned assets and fast-growing and vulnerable private or family companies. Corporate legal system designers and executors of relevant policies should be fully aware of it.
In this case, whether interest division in the centralized multi-polar system, management decision and self-interest appeal will be impeded by shareholders? The answer is yes. When management involve more deeply and actively in governance, or to shoulder more accountability, they should consider shareholders’ feeling and leave enough room for the latter to express voice and interest appeal. In interest-sharing, mostly, management and shareholders are cooperative but they do have conflicts or even confrontation. Cooperation will and must be main stream in centralized multi-polar co-governance. It is normal that both parties may disagree on some specific issues which are mainly based on different information and thinking model. Although they have disagreement, they will argue for the corporate interest while interest conflict is secondary in many cases. Even so, it is possible that resolution can’t be found for their conflicts but it would not turn to confrontation relations. Because highly interdependence has formed common interest which objectively make both parties to look at their disagreement in thinking and value in a more reasonable, practical and wise attitude to deal with interest conflicts.
Therefore, under the centralized multi-polar system, shareholders and management should work hard to reach consensus with the core to provide value and order for corporate governance. It is not only due responsibility of all parties but is also in line with their biggest interest. For management, to coordinate with shareholders’ interests doesn’t mean to five up their professional way of thinking, behavioral principle and interest appeal, in terms of formulation and execution of core interest like annual bonus, management have legitimate, reasonable and fair appeal and even it is necessary for them do express resolution. They should also be brave to promote reform of the unreasonable factors in corporate governance. But a fundamental principle concerning corporate strategic development is that management’s interest appeal is not to take away the share of shareholders but to work on interest increment. That is to say management is more like a partner in the centralized multi-polar co-governance, and should firstly become a constructive innovator responsible to increase incremental performance, creator of profit and then the interest sharer.
4. Towards centralized multi-polar cogovernance: path to form corporate governance model
Under the positioning of centralized multi-polar cogovernance, for shareholders and management no matter as an interest group or individual, to control their appropriate interest appeal and participation in governance is the key. Corporate governance convergence against the backdrop of global economic integration might be reflected in functional convergence or form convergence. When the current corporate governance system is adequately flexible and respond to changed environment without changing institutional features, functional convergence will occur. For instance, UK and US companies don’t establish board of supervisors inform while independent directors in the board of directors and special committee will play the role of regulatory management of board of supervisors in the continental law system. Form convergence means in some cases, the current corporate governance system must change its fundamental structure. Otherwise problems can’t be resolved effectively. For instance, many countries and regions have directly copies the form of US independent director system. Actually, the game between convergence of corporate governance and company law and reliance on approaches will co-exist for a long time. The functional applicability of company law rules and the reliance of forms are interactive which will determine whether convergence will be in form or functional. What is more often and valuable is functional convergence. For example, as long as management can be effectively regulated, any institutional arrangement can be effective. As for whether to rely on independent directors in board of directors or establishment of board of supervisors or direct supervision by shareholders in the concentrated equity structure doesn’t matter too much. What we pursue is recognition of institution function, idea, value and order not to unify legislation forms, provisions and organizational institution arrangement.
In general, what we really concern is to follow the centralized multi-polar co-governance value and order and require companies to handle the following relationships in designing and arranging specific corporate governance rules.
Firstly, internally, changes of interest structure by stakeholders should focus on “incremental reform” and try to avoid changing the current interest pattern especially the shareholders’ interest pattern. The equity structure at the beginning of its establishment is mainly based on each founding shareholder’s contribution in capital, management wisdom and other elements of resources including the expected contribution to the company. However, things are always changing. For instance, certain shareholder with high expectation hasn’t made the contribution matched to the original shares, another shareholder has made extraordinary contribution exceeding the original shares or late-comers have made outstanding contributions. How to deal with it? Transfer the former’s share to the latter? If it is a zero-sum game, everyone might feel insecure. However, the company needs to have interest arrangement mechanism to respond to the latter. How? An appropriate resolution is to share interest in incremental reform, i.e. to give short-term or medium and long-term interest in the area where they made big contribution. This concept of value distribution requires everyone to keep it in mind that the only way to enhance their value in the centralized system is to achieve in incremental reform.
Secondly, internally, to handle well the relations of two major interest groups namely shareholders and management. Shareholders and management are always two most importance sources of force dominating the company’s development. Meanwhile, they are also the two major interest groups with potential conflicts of interests. To avoid their conflict is only in line with the interests of companies, shareholders and management but also in the interest of other stakeholders.
Experience of numerous successful companies demonstrates that the two forces can cooperate well, share interests and grow together. What is important is the two forces can also protect centralized corporate governance together. In companies where management is granted with equity plan, management turns out to be shareholders. This unique equity structure is more conducive to realized centralized value goals so is also a good institutional arrangement.
Thirdly, externally, companies should actively assume social responsibility. Externally, companies will inevitably cooperate, compete or conflict with other individuals, organizations and governments. It is also an important topic as how to deal with interest relations in the development progress and among outsiders. In fact, shareholderorientated corporate governance doesn’t deny the existence of stakeholders’ interests and the necessity to safeguard it. World history and social experiences both demonstrate that with growth of a strong man, various forces inevitably become ordeal to push the growing strong man. In this case, institutional arrangement of corporate governance must deal with appropriate positioning of its external policy. To handle the conflict of interests between the company and external stakeholders, the key mechanism is in designing and execution of corporate social responsibility. The legitimate foundation for companies to shoulder corporate social responsibility is the recognition of the interests of external stakeholders like creditors, community and government. Up till now, no one can deny the public’s welcome and expectations to companies to fulfill social responsibility and most companies especially public companies’ close attention to corporate social responsibility. Although different companies should different forms of social responsibility, it is no doubt they also have some and to actively shoulder it should become the cornerstone of external policies of all corporate governance.
Fourthly, choose a positive evolvement path of corporate governance. Corporate governance level is different in real life while the specific rules and implementation also differ. In terms of making policy suggestions and reform plans to improve corporate governance of certain company, we need to fully consider the current situation, and make distinction between “ideal”and “reality”. “Ideal” means the perfect situation which needs long-term pursuit and gradual realization. “Reality”means almost the governance and management level of all the companies can’t meet the ideal situation of all the core stakeholders. A relatively practical choice is to follow the most suitable and the one can bring improvement. Of course, this will not influence our final goal which is to pursue perfect in corporate governance and management. In this process, in terms of practical value and significance, any constructive suggestions and plans are much better than ideal criticism. Only this path which will promote positive evolvement of corporate governance order can be efficient and harmonious at low cost.