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Running head: Ownership Structure and Corporate Governance 1

Ownership Structure and Corporate Governance

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Ownership Structure and Corporate Governance 11

Introduction

The competitive nature of China in terms of economy proves it is has the best economy in

the World. The analysis is to research on the corporate management and the capital market

environment of different firms in China. According to the Shanghai Stock Exchange, it is easy to

access the performance of various firms using the data provided. The corporate management and

the ownership structure are the main drive to China’s economic stability.

According to the current economic analysis of the World, China has undergone a speed

economic growth for decades. More so, the country has undertaken a fast-developing step and

emerged with successful businesses and one of the best economies in the world. The Asian

countries have suffered a great loss in the financial system over the years, this factor should not

be neglected during a period of an economic boom. Every successful economy leads to a

successful business in a country, with China has had problems with investment efficiency over

the years, the capital market inefficiency and the ineffectiveness of corporate governance has

been the main problem over the years which if not controlled will lead to a hard landing of the

economic growth and more so this will just a waste of resources that could be utilized properly.

The current state of China’s Corporate governance has been demanding over the years,

the lack of proper efficiencies and the practical shortcomings of the system has been the main

concern in the specific capital market environment. The national economy of China faces future

threats because of the corporate governance and the capital investment efficiency which proves a

great to the sustainability of the national economy. Any economy can only sustain to sustain its

growth with the right utilization of resources and the right governance in the corporate market.

More so, the split share of the equity market is an inaccurate institutional setting left over from

the history of China’s SOE’s partial privatization. The political factors have also affected

Ownership Structure and Corporate Governance 11

China’s growth of the economy, because of the implementation of factors such as the split share

structure, there is interference from the government with a weak legal and accounting system

which limits its role in the China economy Li, 2012).

Corporate Governance in China

There are different theories that are related to the Corporate governance in China, these

theories include traditional, theoretical and the empirical analysis which were shown from

different firms in China. These theories help understand the current status Corporate governance

in China. According to Berle and Means, the problem to corporate management was between

managers and the stakeholders, this did raise concerns about the conflicts between the two that

affected the performance and the functioning of the corporation. Most scholars blame the Asian

financial crisis on the inferior Cooperative governance system.

Internal Governance

The internal governance included the board of directors and the managerial incentives.

The board of directors were to control firms through there given responsibilities to minimize the

cost expenditure. The main responsibilities that the board of directors have in the corporate

institute are to hire, fire and compensate management. The determination of the board and the

structure are so sensitive to how the financial governance will be accounted. According to Liang,

the higher rate of returns on investment can only be decided outside directors. This is because

with external directors there will be less engagement in fraud activities. Fraud activities are the

ones that have destroyed China’s Cooperative governance due to combinations of CEO and the

chair, therefore the Chinese stock market had to come up with new rules which will improve the

performance of the cooperative management and more so, handling of the financial department

(LI, 2012).

Ownership Structure and Corporate Governance 11

The ownership and the performance of the firm go hand in hand, reports show that in

most corporates the insiders do control the ownership of the firm which is mainly focused on

developing economies. In China, a majority of publicly traded companies are controlled by the

state. If companies are controlled by the state it means that the politicians and the state owner

will have control over the firm. They will find a way to be part of the board and control the

decisions to be made by the firm. Therefore, the politician influences the firms and the market

with their connections with the people, studies prove that the Chinese economy is still

relationship based and firms can end up benefiting from these services from state representatives

who have fame and control of the people (Choi, 2011).

The shareholding is an activity that is so unique to the Chinese corporate governance.

The shareholders invest in large institutional where the institutional shares are divided into two,

that is, the state person shares and the legal person shares. These shares are divided so as to be

easily controlled. The state legal individual shares are controlled by the countries organizations

while legal person shares are controlled by the non-state organizations. The private legal persons

are always focused and motivated with the concerns of the financial presentations of the

company. The Chinese stock establishments also have members shares, managing shares and

foreign shares. These shares are not considered by many companies because they cannot account

for a very small percentage of the total share outstanding. China lacks an active occupation

market in China, whole the mergers and the acquisitions are engineered by the state (Zhou,

2015).

Moreover, there is another issue with the corporate governance and that is the process

that determines how the compensation of the senior management teams work. In a corporate

society, it is good to give out the correct details so the financial and performance of a business

Ownership Structure and Corporate Governance 11

can be easily monitored. This will avoid cases of fraud among the board and other departments.

In an institution the managers are required to obtain their reward in different ways which are to

be documented for monitoring. The sensitivity of payment has increased over time, this because

with no trace of how the payment takes place it is not easy to account for the transactions.

Chinese businesses should be stimulated to come up with ways in which they can be able to

make the management compensation effective because most of the management bonuses are not

clearly defined.

External Governance of Organization

External governance is so important because it does facilitate the presence of mergers and

the listed companies. When there is a high competition for a high productivity in the market it

will lead to an efficient economy. This will force companies to use better technology to produce

better services to the people, also there will be a minimization of cost and better approach to the

market, therefore, the economy will grow. The moving of ownership from non-tradable to

tradable will result in a more active market corporate control and this will, therefore, improve

effective corporate governance practice.

Chinese Legal System

The legal system is the main drive to solve the corporate governance problem. According

to Dennis and McConnel, a safer legal safety to investor’s interests has completed the diffuse

ownership practicable under the mutual legal handling. When the legal system is under control,

the main aim is always to find men to develop the economy of the country. This is different

from China as the legal system is based on La Porta et al, who describes the legal system of

countries who do not take a major role in the valuation of protection of minority shareholders.

China has a poor record of law enforcement and more is known for engagement in corruption

Ownership Structure and Corporate Governance 11

which has even put the country on the bottom list of countries analyzed with corruption cases.

Although, China is still having one of the most growing economies in the world, and with this

shows that the development can still occur without the legal system factor. But the legal system

is important because without the strict implementation, there will be lack of regulations to follow

and therefore the domestic market will credible representations from the government (Zetao,

2012).

Chinese Financial System

The Chinese financial system has been an important role to the country to support the

growth of the economy. In the last two decades, the financial system has undergone a change in

the economy of the country. In 1950 to 1978 China had only one Bank services known as the

People’s Bank of China which was responsible for all government credit loans. There came the

establishment of the state-owned banks which did take over the commercial bank services. The

current banking system is dominated by mainly four sectors. The banking system is so important

in the Corporate governance in China. The bank is more directly involved in cooperative

governance and the monitoring of the financial records and reports. To date, the banking systems

are still controlled by the government. This means that the country has a low level of per capita

income because the countries which the government has ownership control over the bank system

then there is a conclusion of low capita per income (Hasan, 2013).

The Chinese banking sector has a problem which is really affecting the stability of

investments. The bank systems do not offer loans to the four banks. And therefore, when the

money can’t circulate to the economy, therefore, the low investors who still need support with

developing their businesses will lack an opportunity to do so. The non-performing loans are one

of a poor lending money strategy, that the country has to its economy. The lack of commercial

Ownership Structure and Corporate Governance 11

credit culture in the Chinese banking sector, the major businesses, infrastructures and even social

welfare are always under the mandate of government, and therefore, profitability is not

associated with decision making. China financial system is dominated by the large but inefficient

banking sector.

Issues in Current Corporate Governance

The ownership structure of Corporate companies in China has been a problem in the

performance of the organizations. The Companies with a widely dispersed ownership structure

where the controlling shares are not owned by any individual are practically non-existence. The

efficiency of the market and market liquidity have reduced over time. The country does not

protect the individual shareholder's interest, which is the main problem to their interests of an

individual. Investors with large investments may not care much about the individual’s interests

but only their own interests. There will be less distribution of resources in the country the rich

will benefit more while the poor won't benefit much from an investment. Lack of a way to

monitor issues in organizations by directors leads to poor governance of corporate institutes. The

monitoring of activities improves better work and performance of services in a company. When

there is keen access to financial records it creates honesty in work and easy rectification when a

problem occurs.

China Worrying Debt

China’s credit growth has grown so fast over the years, this has been a concerning issue.

The GDP of the country cannot depend on the external demand which is the main problem

because of the Global Financial Crisis. The China people argue that there is a high domestic

saving which has been directed to investments. The corporate sector has had fewer profits over

the years, as you know investments generate growth in the economy and profits. The corporate

Ownership Structure and Corporate Governance 11

sector is the most affected area concerning the growth in debt. In China the credit debt was

directly mainly in the large constructions, this led to overstocking in the real estate which has

really been a cost to the countries financial welfare. The fast credit growth rate risks the future of

the country’s economic growth rate. The national departments associated with the credit

recognize the problem but are hesitant to solve the issue, they seem to be looking for a more

strategic solution to it. (Conmon. 2011).

There should be ways to deal with the corporate debt issue. There should be government

intervention to reduce the growing debt rate should be fast before the problem becomes systemic.

The debtor and the creditor should solve their problems according to each other’s economic

status. Clearing of banks and other financial assets would not be a good way to solve the

problem. Th governance problem in the corporate sector has been the main concern to the

growing debt. Moreover, the banks have been on the forefront to the growth of the debt in the

country. The Corporate management and the bank should be addressed and cautioned heavily for

the poor decisions and the poor handling of services to avoid the re-emergence of a malicious

credit cycle (Jiang, 2015).

The worrying debt and the poor management of cooperate governance can be solved if a

comprehensive strategy is used. The key elements to consider to solve the issues is the having an

effective decision to stop financing the weak organizations, this decision should be there to

strengthen cooperate governance and more so, due to the recent the decisions should make firms

accept a lower growth in the near future. Secondly, having an assessment to locate companies

with financial difficulties and helping them have a different approach to rectify the issue.

Thirdly, the Burden of sharing the problem will allow the problem to solved faster. Moreover,

the reconstructing of the corporate sector will be a great help to prevent the earlier issue from

Ownership Structure and Corporate Governance 11

ever happening again. This will improve the management sector, the decisions made by the

board will a good one and the investments of the organization will be to maximize on profit.

The poor corporate governance has led to high credit debts. The correct strategies if put

in place am sure the country will resolve the current issues. The activities that have led to the

issues should be monitored by the legal system and heavy decisions to be made on them.

Corporate governance requires focus and assists from the government to be more effective.

Ownership Structure and Corporate Governance 11

Reference

Jiang, F., & Kim, K. A. (2015). Corporate governance in China: A modern perspective.

Li, Y., & Wu, F. (2012). The transformation of regional governance in China: The rescaling of

statehood. Progress in Planning, 78(2), 55-99.

Zhou, K. Z., & Xu, D. (2012). How foreign firms curtail local supplier opportunism in China:

Detailed contracts, centralized control, and relational governance. Journal of

International Business Studies, 43(7), Jianxing, Y., & Zetao, R. (2012). Collaborative

Governance in Contemporary Chinese Social Development——An Analysis Framework

[J]. Academic Monthly, 8, 006.

Economy, E. (2014). Environmental governance in China: State control to crisis

management. Daedalus, 143(2), 184-197.

Choi, S. B., Lee, S. H., & Williams, C. (2011). Ownership and firm innovation in a transition

economy: Evidence from China. Research Policy, 40(3), 441-452.

Tsui, A. S., & Lau, C. M. (Eds.). (2012). The management of enterprises in the People’s

Republic of China. Springer Science & Business Media.

Firth, M., Lin, C., & Zou, H. (2010). Friend or foe? The role of state and mutual fund ownership

in the split share structure reform in China. Journal of Financial and Quantitative

Analysis, 45(3), 685-706.

Hasan, I., & Xie, R. (2013). Foreign bank entry and bank corporate governance in

China. Emerging Markets Finance and Trade, 49(2), 4-18.

Conyon, M. J., & He, L. (2011). Executive compensation and corporate governance in

China. Journal of Corporate Finance, 17(4), 1158-1175.

Ownership Structure and Corporate Governance 11

Lo, A. W., Wong, R. M., & Firth, M. (2010). Can corporate governance deter management from

manipulating earnings? Evidence from related-party sales transactions in China. Journal

of Corporate Finance, 16(2), 225-235.

Estrin, S., & Prevezer, M. (2011). The role of informal institutions in corporate governance:

Brazil, Russia, India, and China compared. Asia Pacific journal of management, 28(1),

41-67.

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