Party Building or Noisy Signaling? The Contours of Political Conformity in Chinese Corporate Governance
In 2015, the Chinese Communist Party embarked on an unprecedented policy: writing itself into the corporate charters of many of the country’s largest and most powerful firms to influence their corporate governance. Pursuant to this “party building” (dangjian) policy, high-level party and state organs issued guidelines requiring its state-owned enterprises (SOEs) to expressly give the party’s leadership formal legal status inside the company. To implement the party building program, a template of model corporate charter amendments was publicly circulated. The template contains ten provisions ranging from purely symbolic (such as mentioning the Chinese Communist Party Constitution in the corporate charter) to highly substantive and in tension with universal corporate governance principles (such as requiring that major decisions be considered by the firm’s internal Communist Party Committee before they are taken up by the Board of Directors).
In an attempt to clarify the contours of political conformity in Chinese corporate governance, in a recent paper available here https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3510342, we empirically examine the patterns of “party-building” (dangjian) charter amendments adopted in response to this policy by all listed nonfinancial Chinese firms in the four-year period from 2015-18.
Our findings highlight the porousness of the boundary between SOEs and privately owned enterprises (POEs) in the Chinese political economy first analyzed by Milhaupt and Zheng (2015). As of the end of 2018 (four years into the campaign), ten percent of SOEs had still not abided by the dangjian policy, despite the fact that it was initiated at the highest levels of the party-state. And although POEs were not subject to the Guiding Opinions, about six percent of listed POEs also amended their charters to add party-building provisions. Revealingly, our analysis shows that all else being equal, politically connected POEs were more likely than other POEs to amend their charters to add dangjian provisions.
We also find wide substantive variation in the provisions actually adopted by firms, both within and across ownership types. We used principal component analysis to group the template for charter amendments circulated pursuant to the Guiding Opinions into symbolic, decision-oriented, and personnel-oriented provisions. SOEs did not uniformly adopt the entire panoply of recommended provisions. In particular, SOEs that cross-list on Hong Kong and non-mainland stock exchanges adopted less substantively intrusive provisions than other SOEs, suggesting that markets constrained political intrusions into their corporate governance. Similarly, SOEs with large non-state shareholders were less likely to adopt substantively intrusive charter amendments, suggesting that they feared resistance from their private shareholders (a highly relevant concern since charter amendments require two-thirds’ shareholder approval). POEs that amended their charters to include party-building provisions were far more likely to adopt symbolic provisions than decision-oriented and personnel-oriented provisions, suggesting that the amendments were undertaken to signal fealty to the Chinese Communist Party without changing their substantive corporate governance practices.
Close observation of the party-building campaign provides insights into the complex terrain the Chinese party-state must navigate to achieve its policy objectives via corporations it ostensibly controls. For the past several decades, Chinese economic strategists have relied heavily on “corporatization without privatization” to restructure the SOE sector without relinquishing control over the enterprises (Howson 2017). Thus, as Milhaupt (2017) observes, Chinese state capitalism is a distinctive species of corporate capitalism. But our research reveals that the corporate form embeds a system of organizational governance norms that are in considerable tension with control by a political party. Particularly because many of China’s most important SOEs are publicly listed companies with substantial non-state shareholdings, the party-state’s demand for political conformity is constrained not only by agency problems but also by market discipline and the dictates of the corporate law.
Our research on responses to the dangjian policy raises a number of important legal and policy questions for China’s domestic economy and external economic relations. Domestically, it remains to be seen whether mandated political involvement in corporate governance will affect firm performance and economic dynamism. This will depend on how assiduously the party-building charter amendments are complied with and enforced, a question it is still too early to answer. Externally, the question is whether this effort to formalize the role of the Communist Party in corporate governance will exacerbate suspicions of Chinese foreign direct investment around the world.