The Creditor’s Participation In Corporate Governance

The goal of corporate governance is to maximize the value of corporate safeguarding the stakeholders’interests. As a crucial stakeholder, the creditor shouldn’t be excluded from the corporate governance system. This thesis analyzes the creditor’ s participation in the corporate governance with legal and economic methods. It includes the foundational theory, structural theory, operational theory and safeguard theory of creditor’s participation in corporate governance.In chapter 1, I analyze the foundational theory of creditor’ s participation in corporate governance. First of all, I define the corporate governance as the allocation and exercise system of control rights. The control rights include the residual control rights and specific control rights, which are dividable and transferable. This is the foundation of creditor’s participation in corporate governance. Based on stakeholder theory, contingent governance theory and rethinking of shareholder primacy theory, I argue that the creditor’s participation in corporate governance is necessary to mitigate the agent cost. Then I define the creditor’s participation of in corporate governance as the system that the creditor get and exercise the control rights of corporate. The principles of this system include self-rule principle, limit principle, transferrable principle, etc.In chapter 2, I discuss the structure of creditor’s participation in corporate governance. Based on the difference of share and credit, I analyze the interest conflict of creditors and shareholders, such as claim dilution, underinvestment, asset substitution, risky investment and so on. Then I explore the relationship of creditor and shareholders using Black-Scholes option pricing model, and find the factors which influence their relationship including debt amounts, assets fluctuation, debt term and other factors. I compare the German-Japan corporate governance model with the US-UK corporate governance model, and suggest the best model of China, which is the system based on contracts of creditors and corporate. Then I define the boundary of creditor’s control rights in corporate governance. The creditor may become liable to other creditors or its debtor for assuming what is found to be inordinate control or an improper exercise of control over a debtor’s business affairs.In chapter 3, I focus on the operational process of creditors’ control rights in corporate governance. The creditors can be classified into contract-creditor and bondholder. The contract-creditor control rights are based on protective covenants in contract, through these covenants the control rights of shareholder are transferred to creditors. The protective covenants include the positive covenants and negative covenants. The purpose of negative covenants is to restrict the act of corporate which is harmful to creditor, such as debt raising, paying dividend, merger, disposition of assets and so on. Because the bondholders are disperse, how to organize them to form the unified idea is the main problem to exercise the control rights of bondholder. Firstly, they can form a bondholder meeting. Secondly, the issuer should employ the bond trustee to act for the bondholder’s rights. When the corporate is insolvent, the control rights will be transferred from shareholder to creditor. The bankruptcy process can be viewed as special corporate governance.In chapter 4, I discuss the factors which safeguard the control rights of creditor in corporate governance. The creditor’s control rights are transferred by shareholder through contract, so the judicial protection is crucial to creditor’s rights. When the corporate breach the protective covenants, the creditor can sue the corporate in the court for the nonperformance. The development of bond market is important to bondholder to participate the corporate governance. As well known, Chinese bond market is under-developed; I suggest the measures to promote the development of the market. The commercial bank is the prominent creditor to corporate, because it offers finance to corporate. To exercise the control rights of bank, the ability of governance of the bank should be improved. Lastly, I conclude that the opinion which the corporate is owned by shareholders is out of date, and the creditor’s participation is the integrant part of corporate governance. The credit is often limited and unstable, so the creditor participation through inner organization is costly. So the creditor’s participation should depend on the contract through protective covenants. The control rights are reallocated between creditors and shareholders through the contract. The protective covenants can restrict the act of corporate shareholder and management. The contract is as important as law in corporate governance. And the bankruptcy procedure should be reformed with the direction of the corporate governance theory.