Legal Status And Role In Corporate Governance

Corporate governance is not only a legal issue, but also an economic issue. The main purpose of this paper is to examine the important role law has played in corporate governance, with the method called economic analysis of law. The author expects the analysis could make certain contribution to the improvement of the theoretical system in Chinese Company Law and corporate governance structure.The paper points out that the emergence of separation between ownership and control and the corporate governance issues is not only due to economy, but also the political, legal factors. The legal character of the company, limited liability of the shareholders, is an important reason for the separation of power. Therefore, law could and should act as an effective tool in solving corporate governance. In respect of the corporate governance objectives, the paper addresses the limitations of stakeholder theory, and claims that the shareholders are the key elements of corporate governance; maximization of shareholders' value is the fundamental objective of corporate. The paper argues the rights and obligation are the key elements of corporate governance, which represents the power allocation between the board of directors and managers, from imbalance to balance. Therefore, the paper gives more concern to the rights and obligation which shareholders, the board of directors and managers should have.Firstly, after investigating the protection policy of shareholders' rights under different corporate governance model, the paper draws several important conclusions. For example, companies with different corporate governance all tend to emphasize the protection of shareholder rights, especially the minority shareholders. Law has played a significant role in protecting shareholder rights. Therefore, it should be effectively enforced and carried out. Participation in governance is an effective way to protect the interests of shareholders. Based on the comparison between the amended Company Law and the older one, a detailed analysis was conducted on protecting Chinese shareholders' rights. Consequently, the paper raises some legislative proposals regarding further specifying the fiduciary duty among control shareholders, and lowering the threshold for derivative litigation.Secondly, the paper contends the board of directors is essential in corporate governance, and they streamline the communication between the managers and the owners of the companies. After reviewing the legislation response from various countries on how to improve the efficiency of the board of directors in corporate governance, the paper asserts that a legal framework could provide the board of directors with legitimate enforcement, and work as a strong and effective motivation distinguishing from other incentives. The paper looks into the implementation of independent directors in China, its power allocation with supervisory board and its developing relationship with committees, based on the board of directors and supervisory board reform experience. The positive results suggest that as introducing independent directors members has further strengthened the structure of supervisory board. On the one hand, it has avoided the excessive dependence on supervisory board; on the other hand, it has reduced volatility during the transition, which is suitable to Chinese character and the practical needs. However, further specification on the function of independent directors and supervisory board would be an impetus to good corporate governance.Thirdly, the paper claims that law has limited effect on managers, comparing with the role it plays on protection of shareholders' rights and improving the function of board of directors. There is a trend nowadays that the managers are gaining more ground and equipped with aggressive power to excise their judgment, and which are supported by the modern reform of law, for example, the complying with law in adjusting the stock option given to managers as incentives. To sum up, the paper highlights law has played vital roles in corporate governance, and it has provided basic guidelines and assurance to governance.However, different mechanism in each company, the complication in market, the obscure and abstract in law itself have inhibited its function. Nevertheless, corporate law always plays an important role on completing corporate governance. The alienation of corporate law is one important reason leads to the limitation in China.