On Shareholder Democracy

In the fiels of corporate law, the corporate contract theory and community theory seem to be overwhelmingly superior to the traditional corporate theory. The confusion of the base of corporate theory led the declination of shareholder democracy. Recovering the essetional nature of a thing and seeking truth need restudy shareholder democracy, analyze on the existing problems and find the relevant solutions. One of the main reasons for the financial crisis in2007is the malfunction of shareholder democracy and corporate governance, as loss by shareholders of final control of companies and reckless acts of management lead to risk accumulation, which is also inseparable from centralism of board of directors or management. The corporate governance reform undertaken in different countries focuses on resumption of shareholder democracy and the normal functions of the general meeting of shareholders and board of directors with a view to supervising operators to better service the benefits of shareholders. In recent years, shareholder democracy movement has risen in companies, constructive to improvement of corporate governance and protection of shareholders’ interests. In China, however, weak shareholder democracy has severely affected corporate governance and damaged shareholders’ interests. Based on the basic principles of shareholder democracy, review of and reference to shareholder democracy practices and institutional creation in other legal units are of key theoretical significance and practice value for improvement of and innovation in China’s shareholder democracy system.1. Proper definition of the meaning and value of shareholder democracy as the premiseTo practice democracy, one shall define what democracy is first and comprehend the basic principles of democracy to avoid partial and absolute understanding of competitive election and representation system. Shareholder democracy may be read from static and dynamic levels, which respectively highlights the sovereign status of shareholders in a company and exercise by shareholders of their rights. Shareholder democracy mainly contains the following contents:first, shareholders have the sovereignty over a company. Second, shareholder democracy in a modern sense is a kind of capital democracy. Third, shareholder democracy means equality among shareholders, i.e. equal legal protection to major and minor shareholders, practice of majority rule and safeguarding of the legitimate rights and interests of minors. Fourth, shareholder democracy manifests the self-determination of owners or shareholder autonomy. Fifth, freedom of shareholders may not be excluded. Shareholder democracy may be better understood by analogy with political democracy.In practice, shareholder democracy has undisputedly become a global phenomenon. It may be able to eliminate inaction of shareholders, increase corporate value, exert positive influence on company business and prevent company from being used as a tool for private interests of certain interest group at the expense of due interests of stakeholders.2. Construction and improvement of shareholder democracy system based on basic theories of shareholder democracyThe deepest understanding of a matter is to capture its essence. Shareholder democracy is no exception. The essence of shareholder democracy is determined by the essence of a company, the understanding of which shall be based on proper judgment from economic and social perspective rather than legal provisions, as the drives behind "legal rules" are critical. The traditional legal person theory fails to help one to get knowledge of essence, as it focuses too much on existence of a "legal person". There are three typical theories on corporate essence, namely, the traditional corporate theory, the corporate contract theory and community theory or stakeholder theory. As to the capability to construction of corporate essence, those theories are at different levels. The most forceful, persuasive and active one shall be more close to the essence. Though the contract theory and the community theory play positive roles, they are irrelevant to corporate essence. The traditional corporate theory is most workable in this regard. According to this theory, shareholders are owners of a company and the company is the investment and profit-making tool of its shareholders. The purpose of a company is to earn profits for its shareholders and directors must endeavor to maximize the benefits of shareholders in management and operation. Such theory has been widely accepted in practice. Can corporate essence be changed? The answer may be that such essence as well as the status of shareholders as corporate owners will not be changed as ownership cannot be abolished and the roots for "capital-hiring-labor" have not been eliminated.In essence, shareholders’ right is an ownership right, including property right, control right, right to be informed and action right. As to property right, the right to transfer shares is most important; for control right, the right to elect directors is the key. The right to be informed and the action right are a kind of supplementary rights, as the former is constructive to exercise of property right and control right and the latter represents a capability to enforce other statutory rights. The rights to elect directors and transfer shares are most critical and other rights are supplements.Shareholders have the ownership of corporate properties while board of directors enjoys the operation right. The practice of letting directors to manage a company does not aim to taking away the control right from shareholders, but delivers the management responsibilities to those who are excellent and dedicated in operation. Separation of ownership and operation rights does not go against shareholders’interests. Hence, the controversy on centralism of general meeting of shareholders and that of board of directors does reflect the inaccuracy understanding ot the essence of corporate.The general meeting of shareholders is a place and a mechanism where the willing of all shareholders can be expressed, which is only used to make resolution to issues pertain to the ultimate interests of all shareholders. The authority of the general meeting of shareholders is derived from provisions of laws, regulations and articles of association and is determined by self-limitation by shareholders of exercise of their ownership right. Operation by expert is a necessary choice for raise of corporate efficiency. The distribution of rights between general meeting of shareholders and board of directors mainly focuses on distribution of the rights to operate and manage the company. The main manifestation of full enjoyment of the rights to operate and manage by the board of directors is that except the rights and authorities expressly granted by laws and the articles of association to the general meeting of shareholders, all issues are subject to decision by the board of directors at its sole discretion. In practice, it is the role of business judgment rule. From shareholder democracy perspective, the mechanism to balance the authorities of the general meeting of shareholders and the board of directors is the articles of association rather than the state legislations. In addition, enhancement of shareholders’right is constructive for shareholders to give play to their supervision ability. Shareholders’proposal right and right to nominate are the best proofs. Democracy implies values of equality and freedom, so as shareholder democracy. From the perspective of the capital enterprise essence of a modern company, exercise and actualization of shareholders’rights shall be based on the principles of equality among shareholders and free transference of shares. Except direct and indirect democracy, there are other paths to realize shareholders’democratic rights, for example, deliberative democracy.3. Study and discussion of causes for alienation of shareholder democracy useful for correction of shareholder democracy systemIn corporate operation, shareholders’democratic rights are difficult or failed to be exercised and there is no guarantee for shareholders’legitimate interests. As such, theoretical and legal owners of a company become a disadvantaged "object" and shareholders’sovereign status is weakened or even lost. This is called alienation of shareholder democracy. It is in large part because the shareholder democracy system is just left in paper. In addition, obstacles for individual shareholders, especially the minorities to exercise their rights as well as lack of the form of shareholder democracy may also lead to alienation of shareholder democracy. Similar to other matters, such alienation is relevant to the overall environment, where such factors as theories, economy and culture exert a subtle influence.The general meeting of shareholders represents the organization form of direct shareholder democracy, though individual shareholders may directly exercise his/her rights. Operation in form of meeting, however, is likely to make the general meeting of shareholders a mere formality, the main causes of which include the alienation of majority rule, poor definition of the authorities of the general meeting of shareholders and lack of provisions on quorum.Indirect democracy has unique advantages, but contains inherent contradictions and conflicts, which may cause anti-democratic results. In real practice, practice of indirect democracy by shareholders is seriously affected and constrained by many factors, especially skeleton or failed operation of board of directors, which is mainly manifested by the following two phenomena:(1) the board of directors is controlled by majority shareholders and hence shareholder democracy becomes democracy of majority (or controlling) shareholders;(2) the board of directors is controlled by members of management; therefore, even the operation of company is deviated from original objectives, let alone shareholders’ democratic right. In China, the skeleton of board of directors roots in autocracy of management or chairman. As to the causes for such phenomena, it mainly include control by insiders; information incompleteness or asymmetry, which disable the board of directors to make objective judgment on business decisions; interlocking directors and excessive part-time jobs of directors; incentive incompatibility; and unreasonable of the size and structure of board of directors. There are legal reasons accounted for malfunction or inefficient functioning of board of directors, which are even dominant factors. Why board of directors fails to work normally is due to:insufficient internal supervision in board of directors; form of meeting causing board of directors susceptible to be controlled by management, unable to play supervision role; defects of director appointment system and lack of positive qualification; sole legal representative being likely to lead to power concentration and abuse; staggered board of directors detrimental to protection of minority shareholders’interests; ambiguous definition or lack of duty of care of directors detrimental to performance by directors of their duties and obligations.Currently, the board of supervisors as well as its members does not function. Lack of independence may be the ultimate or main reason, legal causes for which are as follows: first, without strict qualification requirements, supervisors may be unqualified for performance of their duties; second, provisions on constitution and the approval and dismissal of supervisors are simple, which is unhelpful to perform their supervision duty; third, the board of supervisors has unclear authorities and rights, without institutional supports when exercising its right to supervise; fourth, there are no sound incentive and responsibility mechanisms for board of supervisors; fifth, the internal work system in board of supervisors is unsound; and sixth, there is no provision on independent supervision system for each supervisor. Moreover, overlapping of supervising organs disables the board of supervisors and independent directors to well discharge their duties.Shortages and defects regarding systems convenient for shareholders to exercise their rights are mainly as follows:in terms of the right to call general meeting of shareholders in a limited liabilities company, too stringent requirements on qualification for shareholding; unsound system of shareholders’right to make a motion; lack of definite legal provisions on shareholder nomination system causing minority shareholders to be passive in participation in corporate governance; unsound system of collection of power of attorney for general meeting of shareholders; shareholder derivative acting system being more simple; lack or unsoundness of systems convenient for shareholders to exercise their rights in network environment, mainly related to the systems of online collection of power of attorney, shareholders’e-forum, online shareholder voting and web general meeting of shareholders.Political and institutional factors may also impact the operation of shareholder democracy and negative factors may give rise to alienation of such democracy. Economic factors such as ownership and shareholding structure are bond to be influenced by political factors, which is typically seen in the impacts of European social democracy system and US’s individualism political system on shareholding structure and corporate governance mode. In China, the socialism system leads to equity concentration and enhanced protection of employees’rights and interests by the Company Law, while negative political factors, including the officer standards, direct appointment of managers and operators by CPC party committees and governments and mix-up of functions of governments and enterprises, boost alienation of shareholder democracy, paralyze the system of check and balance of rights and hence bring harms to shareholder democracy.The main impacts of shareholding structure on shareholder democracy are manifested in two aspects:on one hand, due to equity concentration, the shareholding structure featuring by a single dominant shareholder results in skeleton of general meeting of shareholders, severe abuse of power by majority shareholder or manipulation by majority shareholder of board of directors and passive participation in corporate business by minority shareholders; consequently, there is no shareholder democracy. On the other hand, companies with dispersed shareholdings are likely to be controlled by insiders and the board of directors may become a self-perpetuating tool of management. In China, the phenomenon of "board of directors as a vacant shell" is typically manifested by autocracy of managers or chairman. The economic causes for malfunction of board of supervisors are also closely related to shareholding structure. The non-market-oriented distribution system in Chinese companies is mainly featured by single and twisted incentive mechanism, which unlinks incentives with company performance while pays compensation to officers by reference to civil servants. Without definite owner of state-owned shares, shareholders inevitably become the victim. Furthermore, common issues in collective actions, i.e."rational apathy" and "free rider", may also affect shareholders’rights, especially detrimental to minority shareholders’ rights.Ideological and cultural factors also play a role in operation of corporate governance and realization of shareholder democracy. Due to weak sense of right, strong petty-farmer consciousness, dependence psychology and certain servile culture color as traditional Chinese culture lays stress on collective interests and individual morals, duties and responsibilities, shareholders are unaware to use law to safeguard their interests. Impacted by traditional family culture, chairman or general manager always practice autocracy, which paralyzes the right check and balance mechanism of a modern company. In the cultural atmosphere of rule of man, without sense of rule, supervision organs and supervisors may not even have the intent of supervision. They are accustomed to following orders from superiors and fear to make any supervision. The concepts of "interpersonal relationship" and "face" resulted from illogical thinking may be also obstacles for supervision organs to discharge their duties.4. Implications and reference from review of practices and legislation reforms concerning shareholder democracyShareholder democracy practices are rising throughout the world and some countries and regions have given guidance and support to and promote shareholder democracy through legislation. Typically, such practices include:nomination of director candidates through company’s power of attorney mechanism; cancellation of staggered board of directors; re-adoption of the one-share-one-vote rule; absolute majority of votes for election of directors; control of compensation for officers by shareholders through votes; and innovation and practice in systems convenient for shareholders to exercise their rights under network environment (including systems of online collection of power of attorney, shareholders’e-forum, online shareholder voting and web general meeting of shareholders). Practices and legislation reform of shareholder democracy in other countries have implications for China and can be referred to in China.5. Improvement and innovation in shareholder democracy system in ChinaWith respect to improvement of the system of general meeting of shareholders, legislative provisions on the scope of authorities of and quorum for such meeting shall be clarified and ambiguity shall be avoided, and say-on-pay regime should also be established in Company Law of P.R.China.In terms of improvement and reform of the board of directors, efforts shall be made to define the board’s supervision functions and way to discharge its duties,establish subcommittee with the boad of directors, perfect the director qualification system, set up director appointment and election systems, abolish the legal representative system and improve the system of duty of care of directors.Regarding improvement and reform of the board of supervisors, endeavors shall be made to improve the systems for supervisor qualification and constitution, approval and dismissal of supervisors, define and strengthen the board’s supervision functions, set up support systems for the board of supervisors to perform its functions, create a sound incentive and responsibility mechanism, improve the internal work system of the board, and establish the system of independent supervision right of supervisors.As to overlapping of supervision functions, a company may either choose independent directors or board of supervisors as an applicable organ.In regard of innovation in and improvement of systems convenient for minority shareholders to exercise their rights, the requirements on qualifications of shareholders for calling general meeting of shareholders shall be loosen, the systems of shareholders’ right to make a motion and collection of power of attorney for general meeting of shareholders shall be improved, the system of shareholders’right to nominate director nominee shall be established,and the shareholder derivative action system should be improved. In addition, special attention shall be paid to improvement of and innovation in systems convenient for minority shareholders to exercise their rights, including systems of online collection of power of attorney, shareholders’ e-forum, online shareholder voting and web general meeting of shareholders.