After decades of researching in global corporate governance evolution, Prof. Bob Tricker witnessed the challenges of reconciling shareholders’ ownership and corresponding power with other stakeholders’ interests, corporate social responsibility and sustainability due to the unsolvable weakness of current joint-stock limited liability company formality. In his most recent publication “The Future of Corporate Governance – a personal odyssey, Part 3”, Prof. Tricker suggests a new “corporate entity enterprise” that will be governed by stakeholders under a different enterprise law system, in contrast with the current joint-stock limited liability company arrangement that is governed by shareholders under current company law. Of course, the stakeholder enterprise model will have a unique ownership concept, governance structure, and board oversight process. 

In addition, Prof. Tricker points out the closely-related concepts of the Chinese state-owned enterprises (SOEs) governance model and the proposed future stakeholder enterprise model. I think it will be interesting to share a few highlights regarding Chinese SOEs’ governance model to prompt further discussion:

“The China Puzzle” – This concept refers to two distinct phenomena regarding China’s economic growth:

• China’s fast economic growth over the past several decades along with the country’s lagging regulation system, both of which are contrary to Western countries’ law-finance-growth economic philosophy.
• China’s fast economic growth that has been highly reliant on Chinese SOEs’ growth, despite the fact that many SOEs are well-known for their operation inefficiency and governance weakness according to Western standards. 

Key Characteristics of Current Chinese SOEs’ Governance Model

• Two-tier boards and government intervention: Chinese SOEs are required to have supervisory and executive boards. Supervisory boards consist of employee and shareholder representatives, while the chairperson and most shareholder representatives are assigned by government authorities. Chinese SOEs are also required to have Party Committees as the communication channel between government and a business.
• CEO nomination, succession planning, and compensation: Unlike US companies, whose boards of directors make decisions regarding CEO recruitment, succession planning, and compensation, Chinese SOEs’ CEOs and most executives are appointed and required by the government to rotate among different SOEs. A company’s board does not have this authority. Moreover, these government-assigned CEOs and executives rank in the hierarchy within the government, and their compensation must align with government officials of the same rank, which makes most Chinese SOE CEOs’ compensation only a fraction of US companies’ CEOs.
• Government’s controlling structure, government’s support, and SOEs’ obligations: Statistical data shows that the Chinese government is the largest shareholder, owning approximately 40% of Chinese SOEs’ shares. However, the government’s controlling structure ensures SOEs have access to funding and resources. Conversely, SOEs undertake assorted social responsibilities on behalf of the government for example; They create additional job opportunities to reduce the unemployment rate to sustain social stability, donate to the local community’s infrastructure projects, and participate in other philanthropic ventures.
• Limited shareholder influences: According to a 2019 OECD report, on average, institutional investors own 9% of Chinese companies, in contrast to 72% share-ownership of US companies, 38% of European companies, and 41% as the global average. Consequently, China’s low- share percentage limits investors’ influence on Chinese SOEs.

SOEs in China’s Future Economic Growth

• SOEs continued dominant role in China’s future growth won’t change. The success of the current “China model” has proved SOEs’ effectiveness of the model. Moreover, with China’s aggressive commitment to a carbon neutrality goal by 2060, the country’s economic growth will focus on environmental protection, technology independence, and green transformation. Fortunately, the majority of the SOEs in these industries have large capital inventories, which are necessary to be sustainable. . Moreover, statistical data shows the percentage growth of top Chinese SOEs will outperform China’s GDP percentage growth in 2021.
• Chinese SOEs’ corporate governance (CG) reform trend: Chinese SOEs’ CG reform started in the 1980s and progressed through numerous stages. Future SOE reforms will focus on ESG performance improvements to align with the international ESG movement, concurrent with China’s commitment to a higher standard regulation system. In order for Chinese SOEs to become global industrial leaders, future SOEs CG reforms will also concentrate on improvements in shareholder interest protection, information transparency, infusing their corporate social responsibility within the global market, and proactively making a social impact on the global community. 

China’s SOE governance model has been one of the top concerns within the global business community mainly due to the government controlling structure and government intervention. However, after four decades of consistent and cogent reforms, SOEs have been spearheading the country’s fast economic growth, despite perceived governance model weaknesses according to Western standards. While pioneering scholars in advanced countries are searching for new governance models for their societies’ futures, Chinese SOE models may exhibit some advantages worthy of further research and study, possibly abetting the “Reinvention of the Future Corporate Entity”.