The Politicization of Corporate Governance - A Viable Alternative?
American Journal of Comparative Law, Forthcoming
67 Pages Posted: 17 Jun 2020 Last revised: 10 Mar 2021
Date Written: June 1, 2019
It is now well-established that different markets may develop different growth-supporting institutions that can give rise to public firms and set capital markets in motion. Yet, the paradigm view still holds local alternatives as merely stepping-stones, a transitional passage toward achieving a deeper and more advanced market, at which point conventional legal and market institutions — modeled on Anglo-American corporate capitalism — are still held necessary.
Four decades of economic development in China challenge these conventions. With modern firms with global prominence and a capital market that is the second largest in the world, corporate governance in China seems to have passed the point of an “adjust or perish” prognostic. The system that governs these Chinese firms, and the ways in which capital markets function, sustain strong governance attributes that go against many fundamentals in economics and legal thought. Political involvement and state ownership, both assumed to stand in the way of capital market growth, remain prevalent while the market continues to advance.
Most strikingly, harmonization with conventional corporate governance has been pushed aside as the Chinese Communist Party decided to exercise an ever more expansive and direct role in market activity. Public firms in present-day China are increasingly being governed by a “politicized corporate governance.” Political institutions with corporate governance capacities have been deployed both inside and outside firms. These institutions now buttress or even replace weaker traditional corporate governance mechanisms in the Chinese market.
The implications are striking.
First, despite justified reasons for alarm, a politicized corporate governance system in China can perform the main functions of corporate governance elsewhere, thereby offering relative benefits for public firms and their stockholders.
Second, these developments show how path-dependent institutional substitutes, here political institutions, reject convergence predictions yet have enough plasticity to evolve and to support modern firms and prosperous markets beyond assumed thresholds and developmental milestones. In so doing, China’s politicized corporate governance casts doubts on law and development conventions as well as on both sides of a long-standing convergence debate.
Finally, the politicization of corporate governance offers a new direction in comparative corporate governance scholarship, providing evidence of an instituted reversal from outwardly conventional corporate governance toward a new form of a planned economy.
Keywords: comparative corporate governance, state capitalism, law and development, Chinese corporations, Chinese capital markets, economic growth, political economy, convergence, path-dependence, national champions
JEL Classification: K22, O10, O12, P10, P16, P26, P37, P48, P52
Suggested Citation: Suggested Citation