The Shanxi Banks

25 Pages Posted: 25 Apr 2010

See all articles by Randall Morck

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Fan Yang

University of Saskatchewan

Multiple version iconThere are 2 versions of this paper

Date Written: March 30, 2010

Abstract

The remote inland province of Shanxi was late Qing dynasty China’s paramount banking center. Its remoteness and China’s almost complete isolation from foreign influence at the time lead historians to posit a Chinese invention of modern banking. However, Shanxi merchants ran a tea trade north into Siberia, travelled to Moscow and St. Petersburg, and may well have observed Western banking there. Nonetheless, the Shanxi banks were unique. Their dual class shares let owners vote only on insiders’ retention and compensation every three or four years. Insiders shares had the same dividend plus votes in meetings advising the general manager on lending or other business decisions, and were swapped upon death or retirement for a third inheritable non‐voting equity class, dead shares, with a fixed expiry date. Augmented by contracts permitting the enslavement of insiders’ wives and children, and their relative’s services as hostages, these governance mechanisms prevented insider fraud and propelled the banks to empire‐wide dominance. Modern civil libertarians might question some of these governance innovations, but others provide lessons to modern corporations, regulators, and lawmakers.

Keywords: Chinese native banks, tea road, executive compensation, corporate governance, banking and finance, financial history, slavery

JEL Classification: G3, G21, N2, N25

Suggested Citation

Morck, Randall K. and Yang, Fan, The Shanxi Banks (March 30, 2010). Available at SSRN: https://ssrn.com/abstract=1594335 or http://dx.doi.org/10.2139/ssrn.1594335

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governence Institute ( email )

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Asian Bureau of Finance and Economic Research ( email )

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Fan Yang

University of Saskatchewan ( email )

College of Education
Saskatoon, Saskatchewan S7N 5A7
Canada

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