The Study On The Governance Effect Of The Non-controlling Shareholders With Board Power In State-owned Enterprises Based On The Mixed Ownership Reform

As the pillar of China’s socialist market economy,the state-owned enterprises have long made a significant contribution to stimulating economic growth.Whether or not the state-owned enterprises can operate efficiently and effectively determines the future trend of China’s economic development.However,the efficiency of stateowned enterprises has been widely criticized.According to the existing literature(e.g.,Megginson and Netter,2001;Djankov and Murrel,2002;Sapienza,2004;Lu et al.,2014),SOEs are inefficient due to the politicians’ deliberate behavior of transferring resources to pursue their individual goals and the agency costs within government bureaucracy that can result in weak managerial incentives.To fundamentally stimulate the vitality and competitiveness of SOEs,it is necessary to introduce the market forces in SOEs.Through the market reform in governance mechanisms,the marketization of decision-making mechanisms in SOEs will be enhanced and then their operation efficiency will be improved.In the current SOEs’ "1+N" policy package,the mixed-ownership reform essentially constitutes the focus of market-oriented reform in state-owned enterprises,which can introduce the market forces to SOEs’ internal governance mechanism by adjusting the property rights structure.In this case,whether or not the mixed-ownership is beneficial for SOEs’ operation efficiency becomes an important topic in the process of SOEs’ reforms.Transferring partial equity and sharing governance participation ability are external means to carry out mixed-ownership reforms.As described by related policies,the mixed-ownership reforms are achieved by introducing other capitals that are independent of each other and have different interests and giving them the ability to “speak” and substantial influence on governance activities.When exerting the governance effect,the non-controlling shareholders could work as the market forces to help SOEs reshape their management system.Essentially,the expected result of the mixed-ownership reform would be realized through the non-controlling shareholders’ actively participation in the governance activities.Therefore,based on the policy logic of mixed-ownership reforms,this paper regards the non-controlling shareholder as representatives of market forces and examines the non-controlling shareholders’ governance effects so as to explore the relationship between the mixed-ownership reforms and operational efficiency in SOEs.It is true that there are other studies which investigate the governance effect of non-controlling shareholders based on the mixed-ownership reforms.However,these studies have some limitations on the understanding of both the definition of non-controlling shareholders and the governance effect of the non-controlling shareholders.On the one hand,researchers partially understand the mixedownership reform as introducing the private capital into the SOEs and then only investigate the governance effects of the non-state-owned non-controlling shareholders.Essentially,this is not in line with what is defined in the mixedownership reform policy,and neglects the potential governance effects of stateowned non-controlling shareholders.In fact,the mixed-ownership reform focuses on introducing other capital that has a differential interest with the controlling shareholder.In this process,regardless of this capital is owned by the state,private capital,the foreign investor,or the institutions,this capital has the motivation to participate in the governance activities,as long as he/she has a differential interest with the controlling shareholder.On the other hand,the previous studies,focusing on the monitoring effect,argue that the non-controlling shareholders can prevent the controlling shareholder and the manager from doing bad things.However,in practice,except for the monitoring effect,the non-controlling shareholders can exert a resource-supporting effect.That is,the non-controlling shareholders can provide firms with professional knowledge and advanced management skill to help them do better.Thus,in order to comprehensively deconstruct the governance effects of noncontrolling shareholders,based on the policy nature of mixed-ownership reform,this paper will redefine the non-controlling shareholders in SOEs from the perspectives of interests and adopt both monitoring and resource-supporting to construct an analytical framework to understand and examine the governance effect of the non-controlling shareholders in the SOEs.Overall,in the terms of the nature of mixed-ownership reform,this paper utilizes the board power to measure the non-controlling shareholder’s ability to participate in governance activities and explores whether and how the noncontrolling shareholder can act as the market forces to reduce political and agent cost,and thus improve the operational efficiency in SOEs.Specifically,this paper has two research contents.Firstly,given the importance of innovation-oriented compensation incentive for promoting technological innovation and the strong market reform need for managerial incentive in SOEs,this paper examines the resource-supporting effect of non-controlling shareholder on innovation-motivating incentive scheme.Secondly,given M&A and capital allocation are consistent with the slogan that make SOEs "stronger,better,and bigger" and at the same time are highly intervened by the government,this paper concentrates on M&A efficiency and capital allocation efficiency,and verifies both the monitoring and the resourcesupporting effect of non-controlling shareholder in these two settings respectively.Most notably,these two kinds of investment efficiency have its features: the former aims to evaluate the efficiency of external investment from the perspective of input and output and the latter focuses on whether the capital is allocated to the right internal investment projects.Based on the above research on the governance effect of the non-controlling shareholder,this paper gets the following research conclusions:Firstly,for the relationship between the board power of non-controlling shareholder and innovation-motivating incentive scheme,we find that when the non-controlling shareholder has board power,the change in innovation performance is more strongly and positively associated with the change in managers’ compensation.This result indicates that non-controlling shareholder can use its board power to play the role of resource-supporting and introduce innovationoriented executive compensation incentives into SOEs.We further find in the process of promoting innovation-motivating incentive scheme,(1)non-controlling shareholder can utilize “conditional model” to weigh financial performance and innovation performance;(2)non-controlling shareholder not only can balance incentive risk and incentive income,but also can identify the value contribution of different types of innovation and the value contribution of technological innovation in various types of enterprises.In addition,we also demonstrate that this positive relationship between the board power of non-controlling shareholder and innovation-motivating incentive scheme primarily exists in SOEs whose management mechanism is rigid,and managers have no means to participate governance.Secondly,for relationship between the board power of non-controlling shareholder and M&A efficiency,we find that SOEs with non-controlling shareholder’ board power have a lower probability of engaging in M&A activities but generate better M&A outcomes,which indicates that when non-controlling shareholder have board power,SOEs do less M&As but do them better.We further find this relationship primarily exists in SOEs whose non-controlling shareholder is owned by the government or SOEs whose controlling shareholder is controlled by the local government.In addition,we also find that the board power of noncontrolling shareholder could affect M&A efficiency by reducing invalid M&A activities and improving post-merger integration.And the implementation of mixedownership reform could enlarge governance effect of the non-controlling shareholder in strategic SOEs.Thirdly,for relationship between the board power of non-controlling shareholder and capital allocation efficiency,we find that the larger the noncontrolling shareholder’s board power is,the stronger the sensitivity of capital and investment opportunities will be.This result indicates that the non-controlling shareholder can utilize its board power to enhance SOE’s capital allocation efficiency.Further,we find this relationship concentrates on the SOEs with strong government intervention and weak external monitoring mechanisms and on the SOEs whose managers have poor management skills or are overconfident.The former verifies the monitoring effect of the non-controlling shareholder,and the latter provides support for the resource-supporting impact of the non-controlling shareholder.In addition,we also find when the non-controlling shareholder is controlled by the government or has more substantial shareholdings,the noncontrolling shareholder has the higher ability or incentive to participate in the governance activities and thus has a more significant influence on SOE’s capital allocation efficiency.Finally,we find that the non-controlling shareholder can utilize its board power to mitigate both overinvestments and under-investments in the SOEs.This paper contributes to the following aspects:First,based on the policy logic of mixed-ownership reform and the characteristics of state-owned assets management system in China,this paper provides a more accurate understanding of the nature of mixed-ownership reform from the perspectives of interest and emphasizes that it is a process of introducing other capitals who have a differential interest from the controlling shareholder.Regardless of whether these capitals are state-owned or non-state-owned,as long as they have a differential interest from the controlling shareholder,they will have the potential to exert the expected policy effects of mixed-ownership reform.Bases on this understanding,this paper redefines the non-controlling shareholders as the interest groups that have no relationship with the controlling shareholder and are independent of each other.Compared to the previous studies,this paper regard all the capitals,which have a differential interest from controlling shareholder,as the non-controlling shareholders.This understanding is more in line with the mixed ownership reform,and it could be more comprehensive and accurate to present the governance effects of the non-controlling shareholders by using this understanding to do research.Second,this paper is no longer limited to the monitoring analysis framework widely used in previous studies,but combines the monitoring and resourcesupporting to construct a comprehensive analysis framework.Totally,this paper emphasizes that the non-controlling shareholders can exert both the monitoring effect and the resource-supporting effect.The former can help to constrain the government controlling shareholder and manager for doing bad things,and the latter is conducive to assisting the SOEs to do better.This innovative perspective not only broadens the understanding of the governance effect of the non-controlling shareholder but also is more in line with the policy goal of mixed-ownership reform.Third,this paper creatively uses the board power to measure the governance participation ability of non-controlling shareholders.By virtue of the board power,the non-controlling shareholders are not only empowered to participate in the board meeting and then vote,but also have more opportunities to get access to firms’ private information.Therefore,compared to voting rights or control rights,the board power could take advantage of the “one person,one vote” mechanism and information advantage,which is conductive to avoiding the problems of "no governance participation channel" or "invalid governance participation ".Using board power,the governance participation ability of non-controlling shareholders could be more directly and accurately characterized.Fourth,in the context of innovation-driven development strategy,given the importance of innovation-oriented compensation incentive for promoting technological innovation in SOEs whose salaries are regulated by the government,this paper verifies the resource-supporting effect of non-controlling shareholder on innovation-motivating incentive scheme and confirms the effectiveness of this resource-supporting effect.Through this part of research,on the one hand,this paper broadens the governance effects of non-controlling shareholders from the perspectives of resource-supporting and provides new insight on how to promote innovation through the mixed-ownership reform.On the other hand,this paper bases on the innovation-driven development strategy to reconsider how to design effective compensation incentive contract,and puts forward the idea of designing innovationoriented compensation incentive contract in the context of the special governance environment in SOEs.Fifth,in the context of industrial transformation and upgrading,given the need to make the SOEs stronger,better,and bigger and the government intervention in the investments in SOEs,this paper concentrates on M&A efficiency and capital allocation efficiency,and confirms both the monitoring and the resource-supporting effect of non-controlling shareholder in these two settings respectively.In addition,this paper finds that it is the state-owned non-controlling shareholder that has strong ability and incentive to fully participate in the governance activities and exert the governance effects.Through this part of research,this paper not only can enrich the research on the governance effects of non-controlling shareholders,but also can provide an answer to the question of whether the market forces can effectively constraint the government shareholders’ behavior.