Tami Groswald Ozery is a co-editor of the Forum and Fellow at the Harvard Law School Program on Corporate Governance. This post is based on her recent paper, forthcoming in the American Journal of Comparative Law.
It is accepted almost as a truism that without robust and efficiency-driven legal institutions, markets are limited in their ability to sustain capital market growth. Beyond early stages of market development, local alternatives are expected to give way to certain traits of corporate capitalism if further growth is to be achieved. This prevailing expectation is shared among development theorists, law and finance researchers, and comparative corporate governance scholars and has been the basis of rich academic writing and international policy.
Four decades of economic development in China challenge these conventions. In my paper The Politicization of Corporate Governance—A Viable Alternative?, forthcoming in the American Journal of Comparative Law, I contrast the prevailing approach above with the role played by political institutions in the governance of Chinese firms. Despite their apparent similarities, Chinese public firms, and the domestic capital markets within which they operate, sustain strong idiosyncrasies that go against many fundamentals in economics and legal thought. China’s public firms continue to rely on political influence as a substitute for conventional notions of sound corporate governance. With modern firms with global prominence and a capital market that is the second largest in the world, corporate governance in China seems to have passed the point of an “adjust or perish” prognostic.
Perhaps most strikingly, as the market continues to develop, the use of political substitutes not only has not receded, but has expanded and become more overt over time (with respect to firms with and without state ownership, and notwithstanding the locations of their listings). At its current inflection point, when the domestic demand for growth and the regime’s ability to sustain growth encounter great challenges, the Chinese government and specifically the Chinese Communist Party (CCP) have moved to exercise an even more direct and transparent role in market activity. Public firms in present-day China are increasingly governed by a politicized corporate governance in which political institutions with corporate governance capacities are deployed both inside and outside firms. In my paper, I shed light on this process, which I term the “politicization of corporate governance”; evaluate the viability of political governance for the Chinese capital market; and consider its practical and theoretical implications to the global corporate governance discourse.
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