Corporate governance in Chinese SOEs: explaining and evaluating the reliance on “administrative governance”

Abstract

Scholarly inquiry into China's state-owned enterprises (SOEs) frequently views the substantial administrative mechanisms imposed by the state shareholder on SOE governance as inherent “institutional defects” within the framework of Chinese SOE governance. This perception is rooted in the belief that these administrative mechanisms serve to impede the economic efficiency of Chinese SOEs. Intriguingly, the state shareholder not only exhibits tolerance towards but also actively promotes these “institutional defects” within SOE governance on a large scale and for an extended duration. This thesis looks at this administration-centred corporate governance paradigm in Chinese SOEs. It tries to make a breakthrough in theory for understanding the rationales for and mechanics of administrative governance in Chinese SOEs, which goes beyond the simplified economic efficiency-political control dichotomy that has been primarily followed in the existing literature.
The thesis advances an original claim that SOE administrative mechanisms result from a state shareholder's strategic decision to lower SOE agency costs. In this context, these administrative mechanisms contribute to offsetting a portion of the costs associated with state ownership. Specifically, Chinese SOEs, like any other corporate organisation, are driven to reduce their agency costs. However, SOE monitors are more costly and less effective in monitoring agents, resulting in heightened concerns for the state shareholder regarding the reduction of agency costs within Chinese SOEs. As a result, the state shareholder is compelled to actively explore strategies for reducing SOE agency costs, which serves as the primary analytical clue in this thesis. Initially, using strategies within the established corporate legal framework may be deemed the most appropriate strategy of action for the state shareholder to effectively reduce SOE agency costs. Nevertheless, certain pivotal strategies, such as agent constraints and incentives, have not yielded the expected outcomes within the context of Chinese SOEs. Then, the state shareholder adopts an “insider strategy” characterised by a trusteeship-based approach, tackling agency costs by strategically placing insider agents in key positions at firms. These insider agents are presumed to exhibit greater loyalty to principals. This assumption primarily stems from the principal's inclination to regard insider-agents as more trustworthy, aligning with the three-stage model of trust development within organisational structures, namely, calculus-based trust, knowledge-based trust, and identity-based trust. It is worth noting that this strategy is a frequently observed practice in family firms. When employing the “insider strategy” in SOE governance, the state shareholder could find that bureaucratic insiders within the state system possess the necessary qualifications to act as insider-agents for SOE governance. The state shareholder has taken various measures to effectively facilitate the implementation of the “insider strategy" within Chinese SOEs. Throughout this process, essential administrative mechanisms for SOE governance have been established and maintained.