Does “guanxi” Work?

Under the background of transition of economy and society, rootedness of traditional ‘guanxi’ culture, informal regulations such as relation network and trust, influence commercial activity of organizations and individuals. Informal relational governance is regarded as a characteristic corporate governance method in China. In the establishing, growing-up, developing periods, private enterprises are filled with the social resources of entrepreneurs, such as reputation, social networks. Some entrepreneurs even pay more attention to informal relational governance than formal contractual governance. However, there has not been study discussing the prerequisites for the success of founding shareholder’s relational governance or how relational governance affects corporation value when it is successful or failed. Through analyzing the process from success to failure of NVC founding shareholder’s relational governance in the three battles for corporate control based on the relational contract theories and incomplete contract theories, this article finds that there are four prerequisites for the success of founding shareholder’s relational governance: role integrity of centralized contractual agent, personal reputation, reciprocity and affect communication between stakeholders. When losing the role of centralized contractual agent because of equity dilution, personal reputation is damaged by behavior out of constrain, chain of reciprocity is broken, founding shareholder’s relational governance will turn to failure and the appeal of emotion is overwhelmed by that of interest. When founding shareholder’s relational governance is successful, it has a positive influence on corporation value, and when it is failed or improper, it has a negative effect. The conclusion of this case study indicates that even in an emerging market dominated by relational contracts like our country, relational governance of private enterprise’s founding shareholder once consolidated corporate control in the condition of unstable control right, there still be some prerequisites in using relational governance to the stakeholders, and founding shareholder of private enterprises should pay attention to these prerequisites.