How Private Chinese Companies Can Signal Party Fealty

CHINA HAS A unique model of corporate governance. It is one in which the ruling party has formal standing not only in state-owned enterprises (SOEs), as is to be expected, but also in privately owned companies.

Formalising and strengthening that standing has been an official policy since 2015. Research by Lauren Yu-Hsin Lin and Curtis Milhaupt from the law schools of the City University of Hong Kong and Stanford University, respectively, that recently crossed this Bystander’s desk shows that the policy has been less rigorously adopted by SOEs than might have been expected.

However, the authors also find that one in 16 stock-market-listed private companies had also taken it up, mainly, they conclude, as a way of signalling their fealty as compliance is not mandatory in the private sector. 

The research covers the period from 2015, when the party-building policy was launched, to 2018. It does not cover the ‘rectification’ campaign against privately owned technology companies to ensure their alignment with national goals, which will likely have spurred more compliance with the policy.

Among SOEs, adoption ranged from token changes to substantive accession of corporate control to the Party, for example, by combining the roles of company chairman and secretary general of the Party unit within the company, with the appointment being made jointly by the Party and the company.

The more politically connected an SOE is, the more compliant with party-building it tends to be. The authors identify a similar effect among private companies, with adoptions of the policy most prevalent among firms with politically-connected directors or chief executive officers.

The study covers all 3,446 A-share listed nonfinancial Chinese companies, which were grouped into three categories:

  • those with more symbolic provisions, such as simply referencing the Party constitution in the firm’s corporate charter; 
  • provisions that allow the Party to appoint, manage or supervise corporate personnel; and 
  • provisions concerning the party’s decision-making powers within the firms.

Nine out of ten private companies that voluntarily amended their charters only adopted symbolic or less material provisions. This implies a broad reluctance to allow party intervention in day-to-day corporate management.

Even among those that did accede in allowing more Party intervention, there was a notably low adoption rate for provisions such as management’s prior consultation with the party committee, the dual appointment of the chairman as also the party secretary, and the appointment of a full-time deputy party secretary.

As with SOEs, these three provisions proved to be the least popular among private companies, the researchers suggest, because they allow the Party to monitor and intervene in daily management. 

That, in turn, suggests that the party’s demand for political conformity on the part of the business sector is constrained not only by agency problems but also by market discipline and corporate law to a greater extent than is commonly assumed. 

Nonetheless, as the authors observe, all Chinese firms, regardless of state or private ownership, must remain in the Party’s good graces to grow and prosper. 

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