The State As The Controlling Shareholder And Corporate Governance

Corporate governance, viewed as the mechanism, which deals with the separation of ownership and control, has recently become an important issue in the world, and has been identified by the Chinese government as the core element of the modern enterprise system. Much of literature on the role and functioning of corporate governance is based on the assumption of widely dispersed ownership. A more recent line of the literature shows, however, that some concentration of ownership exists in other developed and developing countries. Some concentration of ownership exists even among the largest American and England corporations. In the corporations with the concentrated ownership, the fundamental agency problem is not the conflict between outside investors and managers, but rather that between outside investors and controlling shareholders who have nearly full control over the managers. The literature on ownership argues that there are some differences between the efficiency of public and private ownership due to the intervention of government. The direct evidences on the efficiency of concentration are most based on the private ownership. However, the state-owned enterprises and state-controlled corporations are still popular in developing countries, even in some developed countries, so it is significant to investigate the efficiency of the state ownership. China listed companies have provided us fruitful evidence to investigate the role of state shareholders. Today's ownership and governance characteristics of listed companies in China are largely shaped by the past incentives structure of the listing process. The government introduced stock market partly as a means of reforming the state sector, and under the quota system, local governments were responsible for selecting which companies were to be listed. Local governments tended to give preference to companies that were under their control, urgently needed capital infusion, or were otherwise socially or economically important. Such criteria created a bias against private sector companies, and thus the companies that are listed on China's stock exchanges are mostly State-owned enterprises. Over the more than two decades market-oriented states enterprises reform, the government has given the managers some authority to manage the companies. However, the most important implication of the dominant role of state ownership in China's listed companies is the control the government can exert over management appointments and incentives, and thereby over companies'behavior. The existing literature indicates two strategies to assess the effectiveness of a corporate governance system. The first one is to test whether executive turnover increases as a firm's performance declines. The second one is to analyze the firm's performance in relation with similar companies. Accordingly, this paper tests the effect of the large shareholder and board of directors on the efficiency of corporate governance. Based on the 355 china's listed companies which were listed before 1997 and whose control didn't changed during 1998 and 2001, we find that turnover of the chairman of board is negatively the firm performance, however doesn't lead to improved firm performance. The results suggest that there is better governance, as measured by a strong sensitivity of turnover to performance and a superior accounting performance when the controlling shareholders are government bureaus. On the other hand, we find evidence of higher efficiency of corporate governance in firms with higher cash flow ownership by the controlling shareholder and the control ownership by the second large shareholder. However the evidences on the board of directors are mixed. Contrary to the negative correlation between board size and profitability in West countries, we found that board size doesn't mater to the efficiency of corporate governance in China's listed companies. Interestingly, the results show that accounting performance for firms, which combine the titles of chairman of the listed company, and the legal presents of the controlling shareholder is significant superior than that for other kind of firms. Based on the above findings, we discuss some important issues about the reform of corporate governance in china in the last, such as the system of state assets management, the ownership structure of listed companies, and the composition of board of directors.