Abstract
Promoting the role of shareholders in corporate governance represents a regulatory concern of global significance. In 2010, the United Kingdom (UK) issued the world’s first Stewardship Code to transform institutional investors, who held the majority of shares in the UK listed companies, into actively engaged shareholders. Since then, regulatory reforms based on the UK Stewardship Code have been introduced in major economies through legal transplantation. However, recent research raises doubts about the effectiveness of the Stewardship Code in promoting shareholder engagement in the context of concentrated ownership. On the one hand, the Stewardship Code is essentially a soft law code of conduct with limited enforceability. On the other hand, almost all non-Anglo-American jurisdictions lack the context to make the Stewardship Code effective. In these jurisdictions, institutional investors are collective minority shareholders in most listed companies. Nevertheless, shareholder activism by minority shareholders remains an important corporate governance mechanism by creating a check and balance on controlling shareholders’ private benefit of control. An unresolved question is how regulatory design can be effective in promoting shareholder activism in a concentrated market if current regulatory reforms prove inadequate.This study aims to address this question by drawing on the Chinese experience. The study first explores the gap between global shareholder activism norms and divergent local practices. It identifies that current regulatory reforms tend to view shareholder activism as a single model based on a particular type of shareholder, rather than recognizing it as a collection of models based on diverse actors within shareholder networks operating in distinct institutional environments. To this end, the study applies and develops Gilson and Gordon’s framework to examine the case of a state-led non-profit investor protection institution in China and, explores how regulatory design can foster institutionalized shareholder activism in a jurisdiction with concentrated ownership. The emergence of shareholder activism in the United States (US) market was facilitated by the presence of adequate institutional ownership and a robust investor protection regime, creating the necessary incentives and capacities for hedge funds to influence corporate decision-making. In China, the implementation of shareholder activism has faced challenges stemming from concentrated ownership, a lack of legal and regulatory infrastructure, and prevalent state capitalism that has traditionally made state owners reluctant to share corporate power with activists. Despite these challenges, in recent years, a shareholder activist has emerged in the Chinese market - the China Securities Investor Services Center (CSISC).
This study provides a comprehensive examination of the institutional designs of CSISC’s shareholder activism through a comparative and empirical lens. It first reviews the specific arrangements for establishing CSISC as a vehicle for shareholder activism, which were greatly shaped by the state capitalist approach. This involved establishing a non-profit investor protection organization by regulatory authorities and granting it privileged shareholder governance rights under the existing regulatory rules. Due to the state-led non-profit organization (NPO)’s distinct features, its shareholder activism is motivated differently than market-driven ones. On the one hand, the non-profit nature of CSISC provides strong motivations for corporate governance without being disturbed by economic incentives that result in institutional investors’ passivity. On the other hand, the lack of financial incentives and cost-benefit analysis potentially gives rise to over- or selective-enforcement. In addition, due to stock exchanges and CSRC effectively controlling the CSISC’s finances and personnel, the legally independent NPO effectively functions as a public agent. The state-led nature of CSISC raises concerns about political influences that may interfere with corporate decision-making. To further understand the capacity and mechanism of CSISC to influence corporate governance in China, the study uses a comprehensive dataset of CSISC’s publicly available shareholder engagement records from 2016 to 2022, covering 1,332 corporate governance agendas of 605 Chinese listed companies. The empirical results indicate that, despite holding only a minimal stake in each company, CSISC receives state backing via collaboration with the court system and the securities regulators, enabling it to adopt various tactics to address a wide range of corporate governance agendas related to the infringement of public investors’ rights, such as legality review of the company’s articles of association, securities misrepresentation and related-party merge and acquisitions, etc. Additionally, there is no clear evidence of CSISC abusing its shareholder rights. Instead, it cautiously selects engagement targets and agendas, benchmarking to the requirement of regulatory principles and avoiding aggressive and confrontational tactics. Shareholder engagements are primarily conducted through communication, often behind the scenes, to avoid a reputation for destructive intervention. Nevertheless, concerns persist regarding CSISC serving state objectives. The actions of CSISC rely heavily on an ongoing public enforcement measure. Therefore, shareholder activism in China mainly plays a quasi-regulatory role in strengthening companies’ compliance with regulatory requirements.
The institutionalization process of shareholder activism in China demonstrates how state intervention can facilitate shareholder activism in the absence of necessary market mechanisms. China’s state intervention has shaped the unique incentives and capacity for localized shareholder activism that differ from international norms. Therefore, China’s experience provides a comparative reference for jurisdictions seeking to promote shareholder activism, particularly in the context of concentrated ownership. First, globally convergent regulatory principles may not yield the same results in all markets. Hence, regulatory reforms need to consider distinct institutional environments and alternative shareholder activism models embedded in domestic shareholder networks. Furthermore, in jurisdictions where the state traditionally exercises most regulatory powers, the government may be in a preferred position to shape shareholder activism and improve inefficient governance systems and practices. However, to generate positive effects, the government must first act within the rules of the market rather than above them.
| Date of Award | 16 Oct 2023 |
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| Original language | English |
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| Supervisor | Lauren Yu-Hsin LIN (Supervisor) |