Corporate Governance Structure: Law and Practice: Law and Practice

Author: Jianlin Ni
Publisher:
Publish Date: 2001-12-01
Features: Corporate governance structure is both a legal and an economic issue. This book argues that: implementing shareholders' rights, strengthening the duties of directors, and clearly defining the power boundaries between the shareholders' meeting and the board of directors are important aspects of achieving checks and balances between the two; implementing the independent director system, advocating the separation of the chairman and CEO positions, establishing subcommittees under the board of directors, and setting up a standardized board evaluation mechanism are effective ways to achieve internal checks and balances within the board; equity incentive plans for the management team must comply with the principle of reasonableness; the information disclosure mechanism and shareholder litigation mechanism should play a major role in constraining the management team; and the supervisory board models of common law and civil law should be integrated.
Corporate governance structure is both a legal and an economic issue. The starting point of this book is to explore the legal aspects of corporate governance structure from the perspective of interest balance mechanisms. This book argues that the essence of corporate governance structure is an internal interest balance mechanism within the company, specifically the balance of interests among stakeholders such as shareholders, the board of directors, and the management team. Accordingly, this book examines the interest balance between the shareholders' meeting and the board of directors, the interest balance within the board of directors, the interest balance of the management team, and the balance of the supervisory board.
To better understand the interest balance mechanism, this book first analyzes the property rights structure of the company and the agency problem. This book first points out that the corporate governance structure arises from the modern property rights structure of the company. The separation of ownership and management rights, more precisely, the separation of shareholders' stock ownership, corporate legal ownership, and management rights, necessitates the framework of corporate governance structure based on interest balance. For Chinese listed companies, optimizing the equity structure is actually an important prerequisite for improving corporate governance.
Secondly, from the perspective of agency theory, corporate governance structure is a mechanism to solve various agency problems within the company. For Chinese state-owned enterprises, analyzing corporate governance structure from the perspective of agency theory has practical significance. The primary issue in the interest balance mechanism of corporate governance is the interest balance between the shareholders' meeting and the board of directors. Protecting shareholder rights is the foundation for shareholders to control the board. Through a comparative analysis of common law and civil law, this book argues that to truly achieve shareholder democracy, strengthening the shareholder voting rights system is extremely important, while China's legislation in this regard is clearly lacking. Strengthening the duties of directors is another important aspect of shareholders' checks and balances on the board. Although the duties of care and loyalty primarily originate from common law, civil law has gradually improved in this regard in recent years, further highlighting the importance of strengthening director duties in constructing corporate governance mechanisms. The flexibility of common law in establishing the principles of director duties of care and loyalty, especially the application of the business judgment rule in U.S. law in regulating director duties of care, is more suitable for modern business practices and is worth.
The debate between "shareholder-centricism" and "board-centricism" touches on the core issue of power distribution between the shareholders' meeting and the board of directors. This book argues that the decline of "shareholder-centricism" and the rise of "board-centricism" do not mean excluding shareholders from having ultimate control over the board and management. The experiences of both common law and civil law tell us that while it is clear that the management power of the company belongs to the board of directors, it is also necessary to clearly delineate the decision-making power of the shareholders' meeting and the board of directors on certain major issues.
Regarding the internal checks and balances mechanism of the board of directors, its essence is an extension of shareholders' checks and balances on the board. This book discusses the internal checks and balances mechanism of the board of directors, focusing on the independent director system, the balanced structure of the board, and the board evaluation mechanism. Although the independent director system has played a positive role in improving the independence of the board, preventing insider control, and protecting shareholder interests in the corporate practices of the U.S. and the U.K., we also see that doubts still exist about whether the independent director system can truly be effective in improving corporate performance. This book argues that the independent director system is not perfect and that due to strict restrictions on "independence," the role of independent directors is limited, which is understandable. However, given the severe insider control in Chinese listed companies, implementing the independent director system undoubtedly has positive significance.
Due to the completeness of the U.S. independent director system, the practice of the chairmanCEO (Chief Executive Officer) has been widely supported by most people. However, analyzing the objections from other countries, if there is a lack of corresponding constraints, it is clearly unrealistic for the chairman toCEO. In China, the author agrees that the law should not support the chairmanCEO.
To better achieve internal checks and balances within the board, the subcommittee system of the board of directors has proven to be an effective method. Especially the establishment of audit committees, compensation committees, and nomination committees can better address internal control issues of the board. U.S. practice is that the above three committees are basically composed of independent directors, while other countries stipulate that they should be mostly composed of independent directors. From a more realistic perspective, this book agrees that China should stipulate the establishment of audit committees and allow the setting of other subcommittees to vary by company, with the composition of subcommittees requiring most to be independent directors.
Regarding the evaluation mechanism of the board of directors, U.S. practice emphasizes procedural regulation in evaluations, particularly the involvement of external advisors, which is worth.
The agency relationship between the management team and the board of directors determines that the management team must be guided and controlled by the board of directors. In terms of the source of the management team's power, common law provides more flexibility. Through a comparative analysis of the two legal systems, we find that although the management team has full operational execution power, its power is always directly limited by the board of directors. In this sense, it may not be appropriate for China's company law to directly stipulate the powers of the manager. The operational decision-making power and business execution power of the company should be exercised jointly by the board of directors and the management team.
Stock option-based incentive plans are the main way to incentivize the management team. This book points out that the incentive for the management team must adhere to the principle of reasonableness. Incentive plans that deviate from the principle of reasonableness will cause shareholders to give up more interests. Moreover, incentive plans and the growth of corporate performance do not necessarily have a positive correlation, so incentive plans should be handled with caution.
The constraint mechanism of the management team should mainly play the role of control by shareholders and the board of directors, as well as the role of the information disclosure mechanism and shareholder litigation mechanism. This book particularly points out that in China, only by truly initiating judicial practice of shareholder litigation can a deterrent effect on the management team be achieved.
Through a comparative analysis of common law and civil law, we find that the two have very different arrangements in the supervisory board system. Due to different capital structures and legal traditions, it is difficult to say whether the supervision model of the audit committee and external auditors combined in common law countries is better or the strong supervisory board supervision model of civil law countries. There is no need to simply criticize one model to adapt to another; the integration of the two supervisory board systems is the orientation of China's supervisory board system. For this reason, it is necessary to consider strengthening the power of the supervisory board, improving the appointment mechanism of supervisors, establishing an independent external supervisory board system, and establishing an audit committee system.