Ethical Issues in the
Evolution of Corporate
Governance in China
ABSTRACT. China is establishing its corporate
governance structures by emulating the stylized
Anglo-American model. However, the country does
not yet have the necessary formal and informal
institutions, or the financial infrastructure to make
these structures work effectively. Corruption, stock
market manipulation, tax cheating, fraudulent dealing,
all manners of plundering of state assets and the lack
protection of shareholders’ rights are some of the
more conspicuous manifestations of the ethical issues
that have emerged in this mismatch. This study shows
how these issues arise in the context of the charac-
teristics of country’s economic and corporate gover-
nance development. It evaluates various potential
policy responses that may be implemented to improve
governance effectiveness and diminish the damage
from those problems.
KEY WORDS: China, corporate governance,
economic reform, shareholders rights, stock market
On Kit Tam is Professor of International Business, Faculty
of Business and Economics, Monash University,
Melbourne, Australia. He is currently Director of
International Programs of the Faculty of Business and
Economics, and Director of the China Research Centre,
Monash Asia Institute. Professor Tam has written exten-
sively on China’s economic and financial reform, and
corporate governance development. He organised and
chaired China’s first international conference on corpo-
rate governance in Shanghai in 1995. In addition to his
various academic appointments in Australia and overseas,
he has also served as a manager in the private sector, an
officer of the Treasury of the Australian Government,
and consultant to international corporations and organ-
isations. His present research focus is the comparative
evaluation of corporate governancne performance.
Journal of Business Ethics 37: 303–320, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
On Kit Tam
1. Introduction
During the last two decades, momentous changes
in China’s economic system and business envi-
ronment have occurred. The price mechanism
has been allowed to increasingly replace the
centralized system of resource allocation, and
there has also been a concomitant and funda-
mental transformation of how production, con-
sumption, investment and saving are organized.
Completely new forms of economic institutions
and organizations have emerged, both at the
macro and micro level. One of the most impor-
tant creations is in fact the firm as a business
entity. Replacing the workshop/production units
within the central input-output planning matrix,
business enterprises with independent legal status
(regardless of ownership composition) have now
become the primary form of productive organi-
zation.
The emergence of the firm as an independent
economic agent and the development of the
incorporated form of business organization have
profound implications for the shape and dynamics
of the society, polity and economy of China. In
a country where the state had owned and
operated work units that encompassed nearly
every aspect of the life of an individual, this
transformation changes the rules and incentives
governing the actions and interactions among all
economic agents including the state and its
instrumentalities at various levels. These changes
have produced the expected growth benefits and
improvements in living standard for the majority
of the population. However, it is clear that
elements of both the formal and informal
economic-social institutions from the past
continue to influence and sometimes obstruct the
304 On Kit Tam
way economic activities are conducted in the
fledging market-oriented business regime.
While facets of modern market institutions
and instruments have now been adopted exten-
sively from mature market economies, they have
to operate under an environment where the
social and economic preconditions for their
effective functioning are at times lacking or
underdeveloped.1 This may be an inevitable
consequence of China’s gradual approach to
economic reform, but the asymmetrical progress
has also paved the ground for the emergence of
a variety of issues in business ethics. Corruption,
stock market manipulation, tax cheating, fraud-
ulent dealings, all manners of plundering of state
assets and the lack of shareholders’ rights are
some of the more conspicuous manifestations. In
many ways, nowhere are such new ethical issues
brought into sharper focus than in the develop-
ment of corporate governance in China’s listed
companies, the country’s supposedly most
modern and market-oriented business organiza-
tions. This study will examine the key corpo-
rate governance and ethics issues associated with
this type of companies. Similar problems will
certainly be faced by participants in other areas
of the country’s transforming social-economic
landscape.
As a result of the more rapid pace of corpo-
ratization and de facto privatization of state owned
enterprises since the early 1990s, corporate
governance has assumed an increasing promi-
nence in the country’s reform agenda as the
Chinese government tried to promote enterprise
performance and to look after its ownership
stakes in various forms. The widespread and
persistent financial distress experienced by many
state owned enterprises has added to the urgency
of getting the country’s corporate governance
right.
This article shows that the business ethics
issues associated with China’s corporate gover-
nance arrangements are the product of several
interacting factors. They stem firstly from the
struggle between the desire to install “modern”
institutions and instruments, and the imbalanced
progress in the development of complementary
social, political, legal and economic infrastruc-
tures. Another equally important factor can be
attributed to the approach taken by the Chinese
government to establish a corporate governance
system based on the stylized Anglo-American
model. In investigating the key ethical issues in
the context of China’s corporate governance
development, the paper aims to examine how
they can be realistically addressed to produce
more desirable outcomes.
This paper is organized as follows. Section 2
examines what corporate governance develop-
ment in China is about and its salient features
and major trends. It will briefly outline the recent
history of the creation of corporations and
investigates the meaning of corporate governance
and its relevance for China’s reform and devel-
opment. Section 3 identifies and explains the
emerging ethical issues in the context of the
country’s evolving macro environment as well as
its corporate governance arrangements. Section 4
discusses the government’s policy responses to
resolving such issues and evaluates their effec-
tiveness. Some conclusions are also provided.
2. Challenges of corporate governance
II. development
2.1. Introduction – the birth of companies and
2.1. stock exchanges
Optimizing allocative efficiency and distribu-
tional equity, and the way these two goals may
be balanced are always basic issues of economic
policy in any country. In China’s economic
reform, the government has certainly tackled
these issues in a fundamental way but has also
persisted with a desire to preserve its perceived
essential trait of socialism by means of main-
taining the prominence state ownership in key
sectors of the economy. This state ownership
stricture has complicated economic policy
making and its outcomes. Many have argued that
it has hurt the effectiveness and pace of the
country’s economic reform.2
In reality, however, the ownership mix has
continued to shift towards a diminishing state
sector. The rising degree of marketisation and
openness in the economy, and the need to deal
with many financially distressed SOEs have
 Ethical Issues in the Evolution of Corporate Governance in China
contributed to a continuing process of redefining
the meaning of public ownership.3 The progres-
sively more liberal interpretation of the meaning
of state ownership, the de facto partial and
complete privatization of state enterprises, and
the vigorous growth of the non-state sectors have
led to the outcomes.
Since the Chinese government allowed pro-
ductive enterprises, including state owned ones,
to become separate legal person in 1987,4 the
substance of what constitutes corporate gover-
nance in the West has become increasingly
important in China although the notion of
corporate governance was little known then.
Under the central planning regime before the
reform, China’s industrial and commercial enter-
prises were not autonomous economic entity but
were really workshops and production units with
no independent decision making power. The
central plan replaced the function of the market
and the conditions for the existence of a firm as
is understood in market economies were absent.
All means of production are nominally owned by
the state, contracts and market transactions were
not needed for organizing production activities.
As Figure 1 show, the economic reform has
changed that system of resource allocation at the
firm level.
The emergence of the company as a basic
Figure 1. The emergence of company as a business
organisation.
305
economic entity was accompanied by a process
of financial reform that has turned the newly
created or reorganized state-owned banks into
the primary provider of finance for Chinese
enterprises, replacing the old system of state
budgetary grants. Shareholding companies were
soon formed when grass-root efforts to develop
China’s capital market began spontaneously in the
mid 1980s.5 Various forms of shares and bonds
were issued by state and collective enterprises to
raise funds and informal securities trading could
be found in most major Chinese cities. China’s
first securities and brokerage company was
established in Shenzhen in 1987. In the following
year, securities companies were set up in every
province under the auspices of the local branches
of China’s central bank. By 1991, China’s two
official stock exchanges in Shanghai and
Shenzhen were ready for full operation. The
country’s corporate finance and development
henceforth entered a new era.
Chinese listed companies, the focus of study
in this paper, are in the main partially privatized
state owned enterprises (SOEs). That is, their
major shareholder is the state in its various forms
including other state owned enterprises. Indeed,
at the end of 2000, of the 1088 companies listed
on the two stock exchanges (Table I), over 90
per cent were originally transformed from SOEs.
More significantly, over two thirds of the issued
shares of the listed companies are in fact held by
the state or state enterprises (Table II). Of the
851 listed companies in 1998, 75 per cent were
in fact majority owned and nominally controlled
by the state or state owned holding companies.7
It should be noted that all forms of state owned
shares7 are not allowed to be traded in the stock
exchanges, only shares held primarily by indi-
viduals can be traded.
Another important characteristic of China’s
listed companies is that, up to 2000, approval for
a company to obtain listing has been determined
by the government on the basis of an annual
quota broken down to each province and min-
istries which then select the companies to fill
their allocated quotas. Therefore the listing of a
company is usually decided not on commercial
merits but on political and sectional considera-
tions. Clearly this aspect alone has created fertile
306 On Kit Tam

TABLE I
Number of listed companies in Chinaa

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

A-Shares only 14 35 140 227 242 431 627 727 822 0955
B-Shares only 00 00 006 004 012 016 025 026 026 0028
A & H Shares 00 00 003 006 011 014 017 018 019 0019
A & B Shares 00 18 034 054 058 069 076 080 082 0086
Total 14 53 183 291 323 530 745 851 949 1088
a
A-shares are restricted to Chinese investors, B-shares were up to 2000 nominally restricted to foreign indi-
vidual investors and can only be bought and sold with foreign currency, H-shares are listed and traded in the
Hong Kong Stock Exchange. The total number of listed companies in the Table excludes Chinese companies
that are listed only on the Hong Kong Stock Exchange (as of the end of 2000, there were 33 companies issuing
H-shares only).
Source: China Securities Regulatory Commission.

TABLE II
Characteristics of China’s Stock Market (percentage)

1992 1993 1994 1995 1996 1997 1998 1999 2000

Number of investors (as %

of urban population) 00.7 02.3 03.1 03.6 06.4 09.0 09.7 11.5 NA
Market capitalisation/GDP 03.9 10.2 07.9 05.9 14.5 23.4 24.5 320. 500.
Value of tradeable shares/total
shares – – 26.1 27.0 29.1 29.7 29.5 31.0 33.5
Average number of investors/
company (in thousand) 40.9 42.5 36.4 38.5 43.5 44.7 45.6 47.2 53.3

Source: Chinese Statistical Yearbook various issues; China Securities Regulatory Commission.

grounds for many forms of rent-seeking activi-
ties that could give rise to significant ethical
issues.
In contrast to the privatization experiences in
former centrally planned economies such as
Russia and the Czech Republic, there was no
mass privatization in China. Indeed the Chinese
government has for ideological reason eschewed
the use of the terminology. Despite this, the
number of listed companies, many of which are
partially privatized SOEs, has grown quite
rapidly. Table I shows that the number of listed
companies has risen from 14 in the year when
China’s two stock exchanges commenced oper-
ation in 1991 to over 1000 by the year 2000. As
far as the de facto privatization process is con-
cerned, it is worth noting that over half of the
China’s 512 officially designated key SOEs have
now been listed and thus partially privatized. The
Russian and Czech experience of mass privati-
zation has resulted in the company insiders
gaining controlling equity interests,8 which were
then used as the means to expropriate and
plunder company assets for their private gains.
The partial privatization through listing of
state owned enterprises in China has produced
quite different outcomes of shareholder and
control profile. As Table II indicates, while the
number of investors has risen markedly over the
last nine years, the dominant shareholder group
remains the state and its SOEs, which together
hold over two third of the total issued shares. As
shown in another study by this author, despite
the negligible proportion of shares held by the
 Ethical Issues in the Evolution of Corporate Governance in China
insider managers of Chinese listed company, they
with the support of their Party-ministerial
associates hold the control of the companies.9
The nominal representatives of the dominant
shareholders often exercised little influence in the
governance of China’s listed companies.
Expropriation by the insider controlling
interest could and has led to the collapse of the
securities market as happened in the Czech
Republic and in Russia.10 It is argued that
managers and controlling shareholders tend to
steal more in bad times than in good times. In
China’s case, the country’s relative good fortune
in overall economic performance may have kept
such potential and actual plundering to a more
bearable level in the eye of the investors.
However, this does not mean an absence of
corporate governance issues and problems of
business ethics in China’s corporate development.
On the contrary, the way China has developed
its public companies and the approach by the
government to establish corporate governance
arrangement have contributed to the country’s
own set of issues. The Chinese authorities,
particularly the China Securities Regulatory
Commission (CSRC) have now taken some steps
to tackle them in a more determined manner that
is compatible with the market orientation of the
country’s reform. Before analyzing these issues in
Section 3, it is necessary to examine briefly
China’s approach to corporate governance devel-
opment so that the underlying fundamentals can
be identified and explained.
2.2. Chinese approach to corporate governance
2.2. development
There is no doubt that China’s economic and
business landscape was transformed within a short
span of a few years. This has resulted in new
economic and social relationships that necessi-
tated the development of new sets of the rules
of the game, property rights arrangements,
incentive system, and indeed the nature of work.
The quest of getting the prices right and
installing the right formal institutions must at the
same time be extended to getting the corporate
governance right. However, as will be discussed,
307
the equally important task of getting the informal
institutions right has hardly been started. The
characteristics of China’s corporate governance
can only be understood in the context of those
developments. The ethical issues that have
therefore arisen will be better handled on such
an understanding.
The Chinese notion of corporate governance
is closely linked to what is perceived by the
authorities to be the “modern” corporate system.
Since 1993, the Chinese government has made
the development of a modern corporate system
a focus of its SOE reform.11 The notion of
“modern” corporations in China is closely linked
to a perception of superior corporate perfor-
mance.12 A modern corporate system is generally
understood among Chinese policy makers and
commentators to possess the following attrib-
utes:13
• clearly clarified property rights;
• designated authorities and responsibilities;
• separated functions between government
and enterprise;
• scientific management.
The first three really reflect the transitional nature
of China’s reform from a centrally planned
economic system to a market oriented economy.
In practice, the modern corporate system is often
equated to the incorporated joint stock company
form, particularly companies that are publicly
listed. The joint stock company of course repre-
sents the most common form of business organ-
isation in the industrialised economies, and
public companies dominate the key economic
sectors there. Their corporate governance
arrangements, primarily in the form of the
stylised Anglo-American model, have accordingly
been held up as the governance paradigm.
China’s Company Law has indeed enshrined many
stylised features of the corporate governance
arrangements of that model14 As far as govern-
ment policies are concerned, the development of
corporate governance in China is guided by a
desire to install the stylised features of that
model,15 primarily through a prescriptive and
legalistic approach.16 It is interesting to note that
this approach is a significant departure from
China’s general approach to economic reform
308 On Kit Tam
that has been based on a decentralized process
of experimentation.
However, there have also been considerable
confusions over what corporate governance is in
the Chinese context. It is not uncommon to find
that corporate governance is understood by many
Chinese managers and officials as being just a
modern way of organisational management, or a
set of structures and procedures for regulators and
owners of enterprise to supervise managers.17
The reasons are multifaceted. Partly, the Chinese
translation for corporate governance, farenzhili-
jiegou, may convey a notion more focused on
administering and supervision.18 Another
problem may be the tendency among some com-
mentators and practitioners in China to simply
view corporate governance as one of the
“modern” management tools that could be
applied independent of the social-economic/
regulatory/financial context.
It is not the purpose of this paper to present
a complete taxonomy of the world’s major
systems of corporate governance, it is however
important to cast China’s attempt to develop its
corporate governance arrangements against the
model which it emulates. It is therefore instruc-
tive to contrast the salient features of the stylized
Anglo-American corporate governance models
with the characteristics of China’s present cor-
porate governance arrangements. The analysis of
these contrasting features provides a basis for
examining the questions of what and how key
ethical issues have been created or exasperated.
Table III presents a comparison between
Chinese corporate governance arrangements and
the stylized Anglo-American model on which
China’s system is based. To provide a broader
comparative perspective, the generalized features
of the insider-based models of Germany and
Japan are also summarized. The description of
the two stylized models in the table is meant to
be a simple and convenient reference for high-
lighting China’s approach and is not intended to
be an exhaustive account of all of their specific
differences and commonalities.19
The first five features in Table III basically
relate to the business, social and regulatory
environment under which each system of
governance operates. The way the banking
system and the securities market have developed
in the Anglo-American system has created a
highly liquid capital market that facilitates an
active market for corporate control to help
alleviate the agency problems created by the
separation of ownership and control. With the
dispersed share ownership that came with the
development of financial capitalism, the problem
of aligning the interest of the professional
managers to that of the company’s shareholders
has traditionally been a key governance issue in
this system. Because of the dispersion of
ownership, the numerous individual minority
shareholders do not have an economic incentive
to participate actively in the governance of the
company they invest in but can certainly exercise
their voting rights and as a last resort vote with
their feet by exiting through divestment. The
protection of minority shareholders’ interest is
accorded top priority in this system.
The current Chinese situation is that the state
is the major shareholder in the highly concen-
trated ownership pattern from the country’s
partial privatization. However, despite its
majority ownership, the state does not exercise
effective control over their companies. It has
been shown elsewhere by this author20 that
control of China’s companies rests primarily with
the insider-managers who are often in turn con-
trolled and supported in various forms by their
Communist Party and ministerial associates. The
state’s ownership interest is poorly represented
and monitored. Whereas the mass privatization
in other transitional economies such as Czech
Republic and Russia has led eventually to the
insider gaining control of the companies through
their success in raising their concentrated own-
ership stake,21 Chinese insiders normally have
insignificant share ownership.
Because shares owned by the state and by
state-owned enterprises are not permitted to be
traded, movements in stock price are generated
mainly by the trading of shares among individual
shareholders (as against state owned shares and
legal person shares). Because of the high rate of
saving and the very limited range of investment
instruments available in China, individual
investors in the stock market have from the
beginning exhibited a highly speculative
 Ethical Issues in the Evolution of Corporate Governance in China 309

TABLE III
Characteristics of corporate governance models

Anglo American model German-Japan models Chinese system

0(1) Dispersed ownership
0(2) Investors usually free riders
with little interest in the
exercise of control except for
some active institutional
investors
0(3) Investment horizon of
shareholders usually short
term
0(4) Shareholder as the primary
stakeholder in setting
company objective;
primacy of the protection of
minority shareholders’ rights
0(5) Reliance on securities market
financing
0(6) Active market for corporate
control, with highly liquid and
transparent securities market
0(7) Arms length transactions
0(8) Active market for senior
managerial manpower
0(9) Executive remuneration linked
to corporate performance
(10) Board with majority of
outside directors
(11) Active monitoring role of
professional organizations and
the mass media
Concentrated ownership with
cross shareholding among
investors
Investor, banks and employees
participate actively in the control
of companies
Investment horizon of
shareholders usually long term
Multiple stakeholders’ interests
represented in company
objectives that incorporate
social and employment goals
Reliance on bank credit for
corporate financing
Absence of active market for
corporate control
A greater extent of network
and alliance dealings
Less active market for senior
managerial manpower
Executive remuneration less
linked to corporate performance
Insider dominated board
Monitoring role performed
mainly by banks and cross
shareholders
Concentrated ownership with the
state as majority shareholder
Control primarily by insider
managers supported by their
Party-ministerial associates
Investment horizon of individual
shareholders usually short term
and highly speculative
Ineffective shareholder
representation but company
objectives subject to government
interventions
Reliance on bank credit from
state owned banks
Absence of active market for
corporate control
Rampant insider and government
directed transactions
Obstacles to development of
active market
Executive remuneration not
linked to corporate performance
Insider-manager dominated board
with appointments influenced
by the authorities
Weak or absence of monitoring
role by banks, professional
organizations and the mass media

tendency with very short investment horizon.
The average daily rate of share turnover was over
60% in 1997, and the average amplitude of
fluctuation of the Shanghai index was 170%
during the period 1992–1995.22
Listed companies in China, in spite of the fact
that they are independent legal entities subject to
the country’s Company Law, still operate under
the strong influence of the government. For
instance in the area of appointment to the
position of the board chairman and members,
chief executives and supervisory board, the
Chinese government and the Party organization
can exert a critical influence. Many company
310 On Kit Tam
executives may still have affiliation to their
previous state organizations. Although the idea
of offering stock options as executive compen-
sation has been the subject of debate in late 2000,
the conditions for this to take effect are not
available and managerial remuneration in China
is generally not linked to performance.
It is commonly accepted that the Anglo-
American model of corporate governance is
predicated on a number of conditions such as the
existence of active markets for corporate control,
managerial manpower and product markets; a
high degree of transparency and disclosure; arms
length transactions; independent board of direc-
tors, active and independent monitoring role of
the mass media and professional bodies such as
accounting and legal service providers. Without
these complementary factors, it is difficult to
imagine how the system can function effectively.
China has adopted the stylized features of the
Anglo-American model of corporate governance,
but it does not yet have an active market for
corporate control. There have been a few
sporadic episodes of takeover battles since the two
stock exchanges were established. There has even
been a recent spate of takeovers bids for ailing
companies. However, most of these takeover
attempts are by enterprises seeking a backdoor
listing to obtain the benefits of cashing in on the
buoyant market and China’s version of high tech
boom. China will not have an active market for
corporate control until more non-state controlled
enterprises are listed in the stock exchanges and
until full privatization is implemented.
For listed companies with the state as a
majority shareholder, the pool for appointment
to the positions of chief executive, most senior
managers and a high proportion of the directors
on the company board is restricted and subject
to government influence or direct intervention.23
The role of a competitive market for managerial
manpower to complement the function of an
active market for corporate control is not yet
available in China. There are few independent
directors in Chinese companies and in most cases
the company board is made up of executive
directors. In the absence of effective representa-
tion from the state as the majority shareholder,
the board of directors is dominated by the insider
managers. It should be noted that the ownership
interest of the state as the majority shareholder
is supposed to be expressed primarily through the
specifically delegated organisations such as the
State Administration of State Property. However,
the actual influence over the company would
more likely come from the Party organization
or the company’s previous supervising ministry.24
In the Chinese system, companies operating
under the country’s Company Law have a two-
tier board. In addition to the board of directors,
which in theory carries similar responsibilities as
a board in the Anglo-American system, Chinese
companies also have a supervisory board. The
supervisory board is small in size25 and usually
has labor union and major shareholder represen-
tation. However, it only has a loosely defined
monitoring role over the board of directors and
managers. Though being part of a two-tier board
structure, the establishment of Chinese supervi-
sory board shares no common social and philo-
sophical considerations that underlay the
supervisory board in the German codetermina-
tion model of corporate governance. The super-
visory board in China has so far not played any
effective governance role.
The rule of law and the principle of arms-
length transactions provide a cornerstone for the
Anglo-American model of corporate governance.
The legal system based on common law is often
considered to be superior to the more prescrip-
tive continental civil law system in governance
outcomes because the former is seen as more
efficient and enabling although such a belief is
not without challenge.26 In China, rampant
government interventions in commercial activi-
ties particularly at the sub-national level, and the
importance of personal network relationships in
business are well known. Corporate law and
securities law have only been introduced
recently.27 It is ironic that in a country where the
rule of law is generally regarded as rudimentary,
the approach to corporate governance develop-
ment has largely been a top-down legalistic one.
In addition to the effective enforcement of
laws and regulations, high standards in corporate
transparency and accountability in the Anglo-
American model are backed by a highly devel-
oped securities industry with independent
 Ethical Issues in the Evolution of Corporate Governance in China
professional organizations such as accounting
and brokerage firms as well as a watchful and
independent mass media sector. They help
reduce the cost of monitoring for shareholders
and put pressure on company directors and
managers to disclose timely and accurate infor-
mation on corporate performance. While there
has been progress in developing accounting
standards, professional organizations and media
reports on company activities in China, it is still
a long way from achieving the degree of effec-
tiveness and independence that is required for the
Anglo-American model to work.
In summary, China’s listed companies face a
very different ownership, business and financial
environment from the Anglo-American system.
The institutional conditions for the successful
operation of that model are either absent or
undeveloped. A cursory examination of Table III
may suggest that China’s corporate governance
has more in common with Germany and Japan
than with the Anglo-American model. The
business environment and the social and
economic conditions are seemingly similar. Yet
China has patterned its corporate governance
system primarily on the Anglo-American
system.18 Some may have argued that the Anglo-
American model is indeed the paradigm to which
all others corporate governance system will
converge.29 Nevertheless the differences between
the Chinese environment and the Anglo-
American conditions are substantive. The fol-
lowing section will examines the governance and
ethical implications of this mismatch in the
context of China’s approach to privatization and
corporate governance under the reform process
for the country’s industrial and financial sectors.
3. Ethical issues in China’s corporate
3. governance
In the West, under what terms companies should
be allowed to possess power is regarded as a non-
trivial question because of the enormous influ-
ence the corporate sector has on the life on
ordinary people.30 China’s attempt to develop a
modern corporate sector in the last decade has
been conducted under the government’s primary
311
goal of raising productivity and maintaining
political stability and economic growth. Despite
the fact that the traditional SOEs provided nearly
cradle-to-grave services to most urban workers
and their families, their transformation into
corporate entities to compete in open markets
has basically been a technical exercise of getting
the prices right and making the enterprises finan-
cially viable. Hence, the narrow instrumentalist
view of corporate governance is not a surprise.
In opting for the stylized features of the
Anglo-American model of corporate governance,
the Chinese government has not given priori-
ties to such “soft” issues as corporate culture or
business ethics. It has placed the Party organiza-
tion as the means to exercise influence over the
newly emerged corporations but the concern is
perhaps more with political power and control
than how a company should behave. The neglect
in developing the right informal institutions and
behavioural norms however raises the transaction
cost of all parties involved in the governance of
a company.
For instance the concept and obligations
associate with the fiduciary duties of directors
and executives are fundamental to the func-
tioning and governance of modern corporations
in the Anglo-American system. The notion of
fiduciary duties was quite alien to the newly
evolving corporate sector in China. It was only
when the Chinese government was preparing for
the listing of its SOEs on the Hong Kong Stock
Exchange that the notion was formally intro-
duced and given some meaning in late 1994.31
Carrying out such duties in practice is however
problematic and complex.
In the Anglo-American system, fiduciary
duties are not specified in complete details as
there could be an infinite repertoire of events and
responses, and because their fulfillment has to
rely on trust and judgments albeit on the basis
of an appropriate set of incentive and regulatory
mandates. China clearly does not yet have such
a corporate history, commercial environment and
business culture for such duties to be an integral
part of the governance routine and be effectively
performed. Moreover, the dominance of the state
as a major shareholder in the partial privatization,
coupled with the pervasive influence the gov-
312 On Kit Tam
ernment still holds over the listing of companies
and their business conduct and governance, has
not contributed to the clarification of what is
considered “proper” action for the members of
the company in the context of fiduciary duties.
As a result, opportunistic and strategic behav-
iour by directors and managers to advance their
interests at the expense of the company’s share-
holders and other stakeholders has been a major
governance and ethical issue. Such behaviour has
even taken the form of illegal activities such as
looting of company assets and various forms of
corruption within and outside the company.
Furthermore, as discussed in the preceding
section, the Anglo-American model of corporate
governance require certain conditions which
include for example a high level of transparency
and accountability, protection for minority
shareholders, an active market for corporate
control, and independent board of directors and
professional organizations. A key element of that
model is to protect shareholders wealth by
reducing the agency cost from having professional
managers by way of aligning their interest with
the company and by the threat of the conse-
quence of merger or takeover by another
company. The presence of these conditions in the
system does not by itself eliminate unethical and
fraudulent activities. However, their absence will
certainly raise serious concern over the system’s
efficacy to deal with such issues. This section of
the paper will examine through a number of
cases below some major ethical issues critical to
the development of effective corporate gover-
nance in China.
3.1. Protection of shareholders rights
The current ownership structure of China’s listed
companies, the constraints and interventions
exerted by the state on them, and the inability
of the government to effectively exercise its rights
as the majority shareholder combine to produce
a multitude of governance and ethical issues for
policy makers, investors as well as company board
chairman and chief executives. First, the state is
the majority shareholder but is not exercising its
ownership rights effectively. Instead the insider
managers and their Party-ministerial associates
who personally have negligible shareholding hold
the control of the company. Thus, in reality the
governance and the purpose of the firm are
determined by the insiders, often involving
government agencies other than the designated
holder of the state shares.
In the Czech and Russian privatization
process, the insiders rapidly gained concentrated
ownership. This has not happened in China.
However, the corporate regulatory regime in
China is in principle geared to accommodate
diverse share ownership as the Anglo-American
model is the object of emulation. Unfortunately,
it has been shown that the primary purpose for
Chinese state enterprises going public is to raise
capital, not to transfer ownership from state to
private citizens.32 Indeed raising capital from the
capital market can mean survival for many of the
SOEs that have been partially privatized in this
manner.
From an analytical perspective, the board of
directors can be interpreted as a security feature
in support of the contract for equity finance,33
but China’s partially privatized listed companies
are in a peculiar position as the individual
minority shareholders that actually provide much
of the equity finance are quite powerless in the
entire governance scheme. As the state share-
holders cannot manage their equity investment
because their shares are not tradeable on the
market, and because state budgetary constraint
means they will have little access to fiscal
resources to participate in capital augmentation
such as rights issues, their ownership stake is
highly constricted.
The result is that, even if there were no self-
serving strategic behavior on the part of direc-
tors and managers, there will be the difficult issue
of resolving the different interests and pursuits
of the central and sub-national levels of govern-
ment in setting the goal and direction of a
company’s business and governance aspirations.
Examples of such conflicting interests may
include employment creation and maintenance,
welfare for workers, social stability, and govern-
ment revenue collection. The actual reality in
China where the rights of the numerous indi-
vidual minority shareholders are often dis-
 Ethical Issues in the Evolution of Corporate Governance in China
regarded does not help in providing directors and
executives a basis for the resolution of this issue.
A conclusion that can be drawn from the above
discussion is that given the circumstances in
China, the protection of minority shareholders’
interest is ironically a precondition for the state
to better manage its own majority shareholder
interest.
3.2. Insider trading, self dealing and collusion in
3.2. market manipulation
It was after the Securities Law came into effect in
July 1999 that the Chinese authorities (notably
the China Securities Regulatory Commission
[CSRC]) began a more active campaign to
investigate cases of insider trading and market
manipulation.34 Although details are not always
readily available, such activities seem rampant and
persistent as evidenced by the revelations made
in recent prosecutions and by the popularity of
books on how individuals can take advantage of
such activities. The common practice seems to
involve a company, either acting on its own or
in collusion with others. Borrowed or own funds
are channelled through a large number of
factitious or personal investor accounts to engage
in buying and selling of its own shares (i.e., self
dealing) or other companies’ shares to influence
market prices and trading volume to attain
personal financial gains. Clearly such activities
would have been detected quite easily should
there be effective corporate governance arrange-
ments and regulatory surveillance and enforce-
ment mechanisms. Consider the following cases
as examples that highlight the nature if not the
extent of this issue.
[a] During a 9-month period from March
1997, a listed property development company in
Shanghai was reported in China’s premier
business newspaper to have utilized 46 individual
investor accounts (44 in personal names and 2
in legal persons name) to engage in self dealing
and insider trading in shares of a related
company.35 By December 1997, the company was
alleged to have employed over RMB 180 million
yuan to acquire 29% of target company’s stocks,
manipulating the latter’s share price from
313
RMB 9.50 per share at the beginning of this
period to RMB 18.97.
[b] A tourism development company in
Hunan Province, through its branch office in
Changsha City , set up 15 accounts (14 personal
accounts and 1 account in the name of the
Changsha branch) to make a series of purchases
of the company’s own shares on the market over
two and a half months (2 September–18
November 1996).36 After accumulating nearly
RMB 41 million yuan worth of shares and was
believed to have therefore pushed up the market
price, the company began unloading the shares
three days before the board of directors’
announcement of bonus share issue on 22
November. The company was reported to have
therefore made a profit of RMB 12 million yuan.
The Hunan Securities Exchange Centre was
alleged to have actually supplied 15 million yuan
to help finance these activities.
Market manipulation activities of this nature
would be difficult to succeed without the consent
or cooperation of securities investment firms or
brokerage companies. China’s fledging securities
industry is certainly under-developed and has on
many occasions not been able to deliver the
supporting governance role expected of them.
More significant is the fact that some of the
securities firms actually engaged on their own
in similar kind of activities on an even grander
scale. The recently reported case of the alleged
market manipulation and corruption by a provin-
cial branch head of a major securities and
brokerage firm is indicative of the problem.37 The
manager in question was alleged to have opened
900 factitious investor accounts in the name of
her associate to apply for new scribes from IPOs,
using company funds and unauthorized mortgage
credits. Since most IPOs in China are under-
priced,38 success in getting scribes is therefore
almost a certain way of making quick profits.
This may indeed be an important factor that has
contributed to the tendency of some companies
to falsify financial statements to gain new listing
or to expand share issues.
314 On Kit Tam
3.3. Falsification and fabrication of financial data
As discussed earlier, obtaining a public listing for
many companies can means survival. More
importantly, it is often regarded, quite accurately
under China’s current conditions, as a cheap way
of finance that will also bestow enormous
legitimate and illegitimate benefits to a company’s
managers and employees. Because the listing
procedures are based on a national quota system,
regional and sectional interests may dominate
commercial considerations in the selection of
companies. The standards and integrity of pro-
fessionals such as accounting, legal and securi-
ties firms are seriously compromised when
falsification of a company’s financial performance
occurs. China’s formal and informal institutions
needed to support its corporate governance
system are still at a very early stage of develop-
ment. Because of the asymmetrical nature of
these institutions to the needed development of
some of the prerequisites of the Anglo-American
corporate governance model, issues such as the
above are bound to inflict damages. Some
examples are given below.
[a] An established state owned television man-
ufacturer planned to modernise with new injec-
tion of funds and sought successfully to obtain
listing in May 1997. In its application for listing,
the company was alleged to have falsely reported
an annual profit of RMB 54 million yuan while
in fact it had incurred a loss of RMB 103 million
yuan.39 It raised RMB 410 million yuan in the
IPO. After its listing, it was reported that the
company had again falsified its income statements
by claiming a profit when there was a loss, and
reporting a much lower loss than was the actual
figure. The company was alleged to have utlilized
only 16.5% of the raised capital according to its
share prospectus, with 34% being diverted to
speculating on the stock market through 200
personal investor accounts. Misleading
accounting and legal opinions were said to have
been obtained from various major professional
firms in Chengdu City. Even the local bureau
responsible for state asset administration was
alleged to have for material gains fraudulently
backdated key documents to allow the company
to complete the procedures for its public listing.
[b] In its submission for listing (which was
successfully granted in May 1996), a company
in Shenyang city was alleged to have falsified the
amount of bank deposits by claiming a non-
existent increase in bank deposit of RMB 27
million during 1995 (the claimed amount was
equivalent to 62% of the company’s bank balance
at the end of 1995).40 It was alleged that in the
same submission, the company also inflated the
value of its assets by RMB 11 million yuan, and
had unilaterally reduced by 20 per cent the
number of shares in the company without ever
disclosing the change.
[c] A petrochemical company established in
Heihongjiang Province in 1996 sought to obtain
listing on the Shanghai Stock Exchange in 1997.
Because China’s listing requirement stipulated a
company must have a prior record of three years
of profit, the company simply fabricated a total
profit of RMB 162 million yuan for the years
1994–1996.41 Major professional organizations
(including accounting firms, law firms, securi-
ties companies, share underwriters) are reported
to have colluded in that exercise by providing
false audit report, legal opinions, and certificates
confirming the company’s fabricated share
capital, reserves and financial statements. The
company got its listing in May 1997. Because the
whole affair was also said to have involved over
officials from over 70 central and provincial
government departments and organizations as
well as Party cadres, the investigation of this
fraudulent case was reported to have been
conducted with direct participation by the
Disciplinary Committee of the Central
Committee of the Chinese Communist Party.
The above three examples show the strong
motivation of company executives under the
current business and social environment to gain
advantage from the most blatant unethical
activities. The formal governance structures have
been completely ignored. As the above case has
demonstrated, it is not just the company man-
agement but also a wide spectrum of professional
and government organizations that had colluded
in making such activities happen. This outcome
is perhaps not surprising as it really affirms the
weakness of the state as the majority shareholder
and controller of a company. The failure to
 Ethical Issues in the Evolution of Corporate Governance in China
delineate property rights and accountability for
the key participants has contributed to this
outcome. It is also the consequence from the
absence/ineffectiveness of the complementary
formal and informal institutions that are needed
to support the functioning of an Anglo-
American type of corporate governance system
geared towards the protection of minority share-
holders.
4. Policy responses and conclusion
If corporate governance is “the means by which
to infuse order, thereby to mitigate conflict and
realize mutual gains”,42 then the current arrange-
ments in China will need to undergo more
fundamental changes and development before
those very important and relevant objectives can
be achieved. Corporate governance structures in
the Anglo-American system are already highly
developed and the standards of practice and
enforcement are usually high. Corporate gover-
nance may not make much difference in corpo-
rate performance among firms operating in those
mature market economies under that system,43
but in times of corporate crisis, corporate gov-
ernance has mattered even there. For China,
given the severity of financial distress afflicting
many state firms and the problems discussed in
the preceding sections, getting the corporate
governance right is clearly critical.
The Chinese government has taken a variety
of responses and measures to counter some of the
major ethical and governance issues that have
emerged in recent years. Until recently, most of
the initiatives are reactive in nature to given
problems, or replicas of practices in the West that
are perceived to be modern and effective. These
included technical measures such as standardizing
disclosure requirements, extending the adminis-
trative network of CSRC to the whole country,
more efforts to monitor the activities of com-
panies and intermediaries serving the securities
industries, to the introduction of executive stock
options, and more detailed laws and regulations.
Even ignoring their actual viability in practice,
while all these measures may be necessary, they
are not sufficient conditions for China’s formal
315
corporate governance structures to accomplish
the desired outcomes. As argued earlier, there are
certain complementary formal and informal
institutions and market infrastructure that con-
stituted the functioning Anglo-American model
of corporate governance, and many of these are
yet to be developed in China. A particularly
encouraging recent sign is the willingness of the
CSRC to allow legal challenges to its decisions
as in the case of the widely reported case of a
company in Hainan taking the CSRC to court
over the latter’s treatment of the company’s
application for listing.45
Some of the measures of the Chinese govern-
ment have gone beyond the technical and
administrative to the more market oriented ini-
tiatives to induce systemic changes. For instance,
the idea of promoting the development of
institutional investors such as managed funds is
seen by many to provide not just a new vehicle
of investment but a catalyst for professionalism,
sophistication, efficiency and even increased
stability in the market and the industry. Irregular
and unethical practices are expected to diminish
with the growth of institutional investors who
will take an active governance role. After all,
institutional investors are now the dominant type
of shareholders in the world’s largest capital
market in the United States and some of them
have been active participants in the governance
of companies they have invested in. The rise of
shareholders activism is closely associated with
these institutional investors. They are therefore
regarded in China as a desirable symbol of
modernity and market maturity. Unfortunately
these expectations are yet to be realized in China.
Indeed, the relatively short experience of
Chinese individual investors in managed funds
has on the whole been less than inspiring.
The publication by a popular business
magazine at the end of 2000 detailing findings
from an internal report of the Shanghai Stock
Exchange alleging collusive stock market manip-
ulation activities by the country’s ten largest
licensed funds management companies has caused
serious concern and some heated debates.45 The
endemic disregard for shareholders’ rights,
whether they belong to the state as majority
owner or to the numerous individual minority
316 On Kit Tam
shareholders, is therefore reaffirmed if the alle-
gations were true.
Regardless of the validity of the specific claims
and counterclaims, a number of useful observa-
tions can be made. First, managed funds have
become an important investor in China’s stock
market.46 Two, contrary to the expectations by
many in China, this new form of institutional
investors have not been able to play the antici-
pated role in lifting corporate performance nor
instilling an element of stability in China’s often
volatile stock market activities. Third, the
Chinese mass media is increasingly showing that
it is willing and capable of utilising its potential
as an outside monitor on the corporate gover-
nance performance of listed companies, a role
that the Western counterpart has played to
support the viability of the Anglo-American
system of corporate governance.47
Another major development may be the recent
increase in merger and takeover activities (usually
categorized as capital reorganzation in China).
Certainly the existence of an active market for
corporate control is integral to the Anglo-
American model of corporate governance.
However, as discussed earlier, since full privati-
zation is not an immediate policy objective and
the state continues to hold majority shares that
are not allowed to be traded, the development
of a market for corporate control is inevitably
retarded.
Of the estimated 426 listed companies that
went through a capital reorganization between
1992 and November 2000, 140 of them occurred
during the months of October and November
2000. However, only about 4% of these activi-
ties actually involved a significant degree of
merging and exchange of company assets.48 Most
are paper exercises aimed at creating favourable
impressions and presentations for the purpose of
financial gains in the stock market. Indeed, such
activities have acted as the impetus for stock price
movements and for backdoor listings. Listed
companies that are poorly performing and facing
threats of delisting and bankruptcy are the
favorite target for merger and takeover.
It is interesting to note that the two stock
exchanges in China have created a “ST” board
(Special Treatment) and later “PT” (Particular
Transfer) for listed companies facing various
degrees of financial difficulties that would have
led to their suspension but were allowed to
remain listed under some restrictions.49 As of the
end of 2000, there were 58 companies with these
labels. The moral hazard problem created by such
concessions and special treatment for poorly
performing companies would have only added
fuel to the widespread opportunistic behavior of
the insiders at the expense of other stakeholders
specially the shareholders.
While irrational exuberance may not accu-
rately describe China’s stock market during the
last decade since wild fluctuations are frequent,
the sentiments of the ordinary individual
investors for much of that time are not far from
that description. As in other emerging markets
particular those in transition economies, a
company’s reputation of integrity and perfor-
mance is often not required to raise capital in
the stock exchange. Indeed, wild movements
generated by market manipulation may in fact
at times be applauded by some investors who
hope to profit from such speculative waves and
are eager to follow the “winners”. The result is
that the incentive for investors to take an interest
in corporate governance and monitor company
management performance would be lowered
further. Given the dominant nature of insider
control in Chinese companies, the weak pressure
exerted by shareholders on company manage-
ment would only exasperate the problems of
governance and ethics.
An encouraging sign in terms of new policy
development is perhaps the emerging redirection
in the Chinese government’s approach to regu-
latory administration and development of the
securities market, and in its focus on promoting
corporate governance standards. Various pro-
nouncements and actions by the CSRC in recent
months suggest that the Chinese government is
slowly moving away from a highly centralized
interventionist approach to one that puts more
emphasis on enhancing the protection of share-
holders rights, and installing and enforcing the
rules of the game for market participants.50
One of the most important new initiatives is
the planned discontinuation of the quota system
for selecting firms for listing on the stock
 Ethical Issues in the Evolution of Corporate Governance in China
exchanges. Provided the listing procedures to be
administered by the stock exchanges are trans-
parent and independent,51 this move will remove
much of the grounds for non-productive rent
seeking activities and will have a positive effect
on the quality of companies that will go public.
Equally significant is the broad intention that the
government will allow more private enterprises
to be listed on China’s stock exchanges. An
increasing proportion of non-state owned com-
panies will eventually help the development of a
more balanced and liquid securities market in
which property rights are more clearly delineated
and corporate governance practices can be more
standardized and market oriented. However,
unless state owned shareholdings can also be
freely traded on the market, the stranglehold on
such a development will remain for some time.
In conclusion it is clear that specific ethical
issues such as protection of shareholders and
other stakeholders rights, corruption, plundering
of state and company assets, and fraudulent
dealings are the product of weaknesses in China’s
corporate governance structures as well the
asymmetrical development in formal and
informal institutions under which all companies
have to operate. China has patterned its formal
corporate governance structures on the Anglo-
American model but lacks the required institu-
tional and market conditions. These institutions
will take some time to develop to suit the
country’s particular economic, financial and
political circumstances. Ethical issues that have
arisen in the process of the country’s reform and
development are path dependent and intertwined
with the formal and informal aspects of the
economy, society and polity.
To make the formal governance structures
work better, improving the effectiveness of the
regulatory regime by itself can deliver some
desirable outcomes. As the corporate governance
system has been developed in a prescriptive top-
down manner, a similar approach to induce more
long term and market-compatible changes and
development may indeed be needed to set the
process on the right course. However, it is also
true that merely relying on improving the formal
regulatory system will not be sufficient.
Effective corporate governance will require all
317
the complementary conditions to be in place,
conditions that are integral to the Anglo-
American model as well as those that are needed
for China’s own set of social and economic
circumstances. For the latter, they need to
include for example the resolution of the issue
of full privatization, a redefinition of the role of
the government and the Party as major stake-
holders, the establishment of truly independent
judiciary and professional framework and mech-
anisms, the balancing of equity and efficiency
concerns, and the fostering of a business culture
that is consistent with the demand of marketiza-
tion and internationalization. For instance, it is
not clear if the compensation for managers and
government official were significantly lifted,
would the kind of dysfunctional and unethical
behaviour now prevalent be vastly reduced? Or
is strengthening the formal disclosure and
accountability procedures a more effective and
immediate alternative? Obviously improving
shareholders rights protection and civil liberty
can also significantly reduce whatever negative
impacts from the ethical issues that have emerged
in the development of the country’s corporate
governance and economic systems. All these
represent areas that require more research to
come up with some answers.
Given China’s social, political and economic
conditions, it is necessary to continually assess
and reconsider what kind of corporate gover-
nance arrangements are best suited to achieve
which economic and social priorities. Before any
governance or its associated ethical issue can be
addressed properly, there is also a need to
examine the purpose of a firm and how it can
account for what its does and who it serves with
respect to its major stakeholders, including the
shareholders. Therefore the future development
of corporate governance in China presents many
economic, political and ethical issues for policy
makers, shareholders, managers, key stakeholders
and the community as a whole. The basically
strong performance of the Chinese economy and
the overall upward trend of its securities market
have combined to mask the severity and negative
impacts of the problems and issues discussed in
this paper. However, the expected further
opening up of the economy and the financial
318 On Kit Tam
sector, particularly after the expected entry into
the WTO, will no doubt increase the urgency
of resolving those problems. Only through a
better understanding of how they arise in the
proper context will effective policy response will
identified and formulated. This paper has
attempted to show why some of the key issues
have emerged in the hope that they can be
therefore better addressed.
Notes
1
Examples abound. For instance, China has created
a central bank based on features from the West and
is charged with a similar responsibility to conduct
market based monetary policy to promote stability.
However, it has to perform its role under a predom-
inantly state owned banking system with invasive
government interventions, and in the absence of
developed financial markets.
2
The retention of pervasive state ownership and role
of private property rights in China’s transformed
economic system have attracted much debates within
and outside the country.
3
The Fifteenth Congress of the Chinese Communist
Party held at the end of 1997 represented an impor-
tant milestone in that process. It adopted a more
liberal and open interpretation of the meaning of
public ownership reform. Public ownership was
officially recognised to include a mixture of state
ownership and collective (group) ownership.
Therefore, what would have been labelled as partially
privatised companies in the West could thus be
included as part of the public economic sector. A
perceived cornerstone of socialism would accordingly
be preserved.
4
Article 41, The General Civic Law of the People’s
Republic of China (effective 1 January 1987).
5
For discussion of these developments , see, On Kit
Tam (ed.), Financial Reform in China (London and
New York: Routledge, 1995), On Kit Tam, “Capital
Market Development in China”, World Development,
Vol. 19, No. 5, 1991, pp. 511–532.
6
China Securities Regulatory Commission, 1999
Report of Development of Securities Market in China (in
Chinese), Beijing, CSRC, p. 37.
7
There are two major types of shares in a listed
company that are not allowed to be traded on China’s
stock exchanges: state shares and “legal person shares”.
State shares are held by the Chinese government
through organisations such as the State Asset
Administration Commission or state owned holding
companies. Legal person shares are investment made
by other state owned enterprises. For detailed
discussion on these shares, see, Tam, On Kit, 1999,
The Development of Corporate Governance Development
in China. Cheltenham, U.K. and Northampton, MA,
U.S.A.
8
For discussion of the Russian experience, see,
Black, Bernard, Reinier Kraakman, and Anna
Tarassova, 2000, “Russian Privatization and Corporate
Governance: What Went Wrong?”, Stanford Law
Review, Vol. 52, pp. 1731–1808; Fox, Merritt B., and
Michael A. Heller, 1999, “Lessons from Fiascos in
Russian Corporate Governance”, University of
Michigan Law School William Davidson Institute Paper
#99-012.
9
Tam, On Kit, 1999.
10
Coffee, John C. Jr., 1999, “Privatization and
Corporate Governance: The Lessons from Securities
Market Failure”, Journal of Corporation Law, Vol. 25,
pp. 1–39
11
Third Plenum of the Fourteenth Congress of the
Chinese Communist Party, Decisions on Some Issues in
Establishing the Socialist Market Economic System,
November 1993.
12
This 1993 CCP Decisions called for the first time
the establishment of modern corporation as a key
enterprise reform measure, placing emphasis on reor-
ganising large and medium SOEs into legal entities
through corporatisation, and on the clarification of
property rights. The World Bank and some promi-
nent Chinese economists/policy makers (Wu and Xie,
1994; Zhou, 1994a) have advocated for the setting up
financial intermediaries as holding companies, or
some forms of debt equity swap between various
classes of SOEs according to their bank loan repay-
ment and profit performance. Experimental “modern
corporate” forms are being set up across the coun-
tries to provide experiences.
13
This definition was first adopted in the 1993 CCP
Decisions and reaffirmed in the 1999 Decisions.
14
For detailed discussion and relevant rules and reg-
ulations, see, Tam (1999).
15
Thus, corporate governance is often taken by
Chinese economists and policy makers to mean “the
organisational structure consisting the owner, board of direc-
tors and senior managers. A check and balance relationship
is formed within that structure, through which the owner
entrust its capital to the board of directors. The board of
directors is the highest level of decision making of the
company and has the power to appoint, reward and penalise,
and dismiss senior managers”. See for example, Wu,
Jinglian (1994), Xiandan Gongsi Yu Qiye Gaige
 Ethical Issues in the Evolution of Corporate Governance in China
(Modern Companies and Enterprise Reform).
Tianjin: Tianjin Renmin Chubanshe, p. 184.
In recent years, some of the “myths” of this stylised
model have come under increasing challenges. See for
example, Corporate Governance – An International
Review (Oxford: Blackwell), various issues.
16
Tam (1999).
17
Certainly the development of corporate gover-
nance arrangements in the external market based
Anglo-American economies and the role that corpo-
rate governance has played, and should serve, are
themselves the subjects of intense debates. Measures
to improve the function and effectiveness of the
corporate governance system in these countries are
premised on certain economic, commercial and social
norms and conditions, and are essentially the product
of market interactions and regulatory responses. For
instance, information disclosure requirement can be
expected to work if there are complementary factors
such as the existence of competitive markets and a
well functioning system of commercial and contract
law, and independent professional legal and
accounting services.
18
The Chinese term now commonly used in China
first appeared in 1994. In the 1999 Decisions, the
term, farenzhilijiegou, was officially adopted by the
central government. For discussion on alternative
Chinese terms, including this author’s, see, Tam
(1999). It is interesting to note that the Chinese term
(qiye dudao zhizi) created by this author in 1993, was
now regarded as superior by one of the creator of
the now official Chinese term and is adopted in his
recent article. Zhou Xiaochuan (1999), “The
Concept of Micro Institutions in Economics”,
Comparative Economic and Social System (Beijing), No.
4.
19
This is particularly relevant in the description of
the generalized German-Japan system in which sig-
nificant differences exist between the two. There is
now a rich literature on different governance systems.
See for example, Aoki, M., and H. Patrick (eds.),
1994, The Japanese Main Bank System (New York:
Oxford University Press); McCathery, J., S. Picciotto
and C. Scott (eds.), 1993, Corporate Control and
Accountability (Oxford: Clarendon Press); Dimsdale,
N. and M. Prevezer (eds.), 1994, Capital Markets and
Corporate Governance (Oxford: Clarendon Press); Roe,
M. J., 1994, “German ‘Populism’ and the Large
Public Corporation”, International Review of Law and
Economics, Vol. 14, pp. 187–202.
20
Tam, On Kit, 1999, The Development of Corporate
Governance Development in China. Cheltenham, U.K.
and Northampton, Mass, U.S.A.
319
21
Coffee, John C. Jr., 1999, “Privatization and
Corporate Governance: The Lessons from Securities
Market Failure”, Journal of Corporation Law, Vol. 25,
pp. 1–39.
22
China Securities Regulatory Commission, China
Securities and Futures Statistical Yearbook 1998. Beijing:
China Financial and Economic Publishing House, pp.
3 and 14
23
On Kit Tam (1999), Much of the discussion on
the actual Chinese corporate governance outcomes in
this section is based on findings presented in this
book.
24
On Kit Tam (1999).
25
The number of supervisors could be just one or
two for small limited liability companies, for listed
companies it is usually over three.
26
For discussion of the opposing views see, Coffee
(2000).
27
China’s Company Law, for certain types of com-
panies, came into effect in 1994; and the Securities Law
was introduced only in 1999.
28
Although the Chinese government initiated in
1996 a limited experiment with the introduction of
Japan’s main bank system o f governance in a few
selected enterprises.
29
Hansmann, Henry, 2000, “The End of History for
Corporate Law”, Yale Law School Working Paper No.
235.
30
See for example, Parkinson, J. E., 1994, Corporate
Power and Responsibility Issues in The Theory of
Company Law (Oxford: Clarendon Press); Monks,
R. A. G. and N. Minow, 1995, Corporate Governance
(Cambridge, MA: Basil Blackwell Inc.).
31
State Council of the People’s Republic of China,
Special Regulations for Offshore Share Placement and
Listing by Limited Liabilities Joint Stock Companies, 4
August 1994.
32
Su, Dongwei, 2000, Leverage, Insider Ownership,
and the Underpricing of IPOs in China. Department of
Economics, University of Akron, Ohio.
33
This is a transaction cost economics interpretation.
For discussion of this theoretical approach, see,
Williamson, Oliver E., 2000, “Why Law, Economics
and Organization ?”, UC Berkeley School of Law Public
Law and Legal Theory Working Paper No. 37.
34
China’s Securities Law (Section 71) describes several
types of market manipulations which include: (1)
Acting individually or in collusion with others in
using advantages in funding, shareholding or infor-
mation to continually or collectively buy and sell
stocks to manipulate prices (2) In conspiracy with
others, on pre-determined time, prices and methods
to trade shares with each other, or to trade shares
320 On Kit Tam
that the parties do not own, in order to influence
trading volume and market prices (3) Trading with
oneself, self buying and selling without changing
ownership of shares, to influence prices and trading
volume (4) Other means to manipulate market prices,
including spreading rumors and incorrect information
to raise or lower market prices.
35
Zhengjuan Shibao (Securities Times, Beijing), 4
June 1999.
36
This case was reported by Li Zhang (Office of
Economic System Reform, State Council of the
People’s Republic of China), “Exposing 39 Major
Illegal Incidences in the Stock Market”, Beijing
Qingnianbao (Beijing Youth Daily), 11 November
2000.
37
The case was reported by Zhongxinshe (China
News Agency) on China’s major website: sina.com.cn,
20 January 2001.
38
Su Dongwei, 2000.
39
Zhongxinshe (China News Agency), sina.com.cn,
20 January 2001; Zhongguo Jinyingbao (China Business
News), 5 December 2000.
40
Li Zhang, Beijing Qingnianbao (Beijing Youth
Daily), 11 November 2000.
41
Li Zhang, Beijing Qingnianbao (Beijing Youth
Daily), 11 November 2000; Zhongguo Jinyingbao
(China Business News), 5 December 2000.
42
O. E. Williamson, 2000, p. 12.
43
Black, Bernard, 2000, “Does Corporate
Governance Matter? A Crude Test Using Russian
Data”, Stanford Law School John M. Olin Program in
Law and Economics Working Paper No. 209, December.
44
China Youth Daily, 30 October 2000; Caijing
Shibao (Finance and Economics News), 1 December
2000. The CSRC has exhibited a more open and
market oriented approach to its regulatory functions
than other government organisations. It has appointed
the former Chairman of the Hong Kong Securities
and Investment Commission, Anthony Neoh as its
Chief Adviser, and is planning to appoint a Deputy
Chairperson from the same Hong Kong securities
watchdog, Laura Cha, as its Deputy Chairman (which
is understood to be at a vice ministerial rank). Both
appointments are a first in China because such senior
official posts had been filled only by local Chinese in
the past.
45
“The Dark Scandal of Managed Funds – The
Interpretation of The Research Report on the Behaviour
of Managed Fund”, Cai Jing [Finance and Economics,
Beijing], October 2000. The Research Report in
question was said to be an internal report produced
by the Shanghai Stock Exchange. The Research Report
investigated stock market dealings the 22 securities
investment and brokerage companies owned by
China’s ten funds management companies during the
period from August 1999 to April 2000.
46
By the end of 2001, the total 33 investment funds
totaled RMB 56 billion yuan. Zhengjuan Shibao
(Securities Times), 16 January 2001.
47
For discussion of this role of the mass media in the
Anglo-American system, see, Lowenstein, Louis 1999,
“Corporate Governance and the Voice of the
Paparazzi”, Columbia University School of Law, Center
for Law and Economics Studies Working Paper No. 132.
48
“Stop the fake capital reorganization”, Gongshang
Zaijing (Industry, Commerce, Finance and
Economics), Sohu.com, 5 December 2000.
Significant is defined as involving 70% or above of the
total assets.
49
Beijing Qingnianbao (Beijing Youth Daily), 16
December 2000.
50
Zhengjuan Shibao (Securities Times), 16 January
2001, 24 November 2000; China Securities
Regulatory Commission, China Securities and Futures
Statistical Yearbook 1998.
51
China’s two stock exchanges are supervised by and
administratively accountable to the CSRC.
Department of Management,
Faculty of Business and Economics,
Monash University,
Caulfield, Victoria 3145,
Australia,
E-mail: onkit.tam@buseco.monash.edu.au