Western corporate governance outdated

By Cao Heping Source:Global Times Published: 2019/8/27 19:22:12

Western corporate governance mechanism outdated, looks to Chinese approach

Illustration: Luo Xuan/GT

Last week, a group of US business leaders, including chief executives of Apple, Pepsi, Walmart and JPMorgan Chase, held a Business Roundtable meeting before issuing a statement on "the purpose of a corporation." To redefine the role of business in society, the statement said that a company should have a broader responsibility to society instead of caring only about shareholders' interests. The new statement was signed by more than 180 chief executive officers.

The New York Times noted that, "The shift reflected a moment of soul-searching in corporate America." In the second half of the 20th century, Western economic liberalism became the overwhelming ideology, which deems that the sole purpose of a corporation is to maximize profit returns under given resources and conditions. So, has such a criterion of corporate behavior been changed by the new Business Roundtable statement? These companies are "responding to something in the zeitgeist," Nancy Koehn, a historian at Harvard Business School was quoted to have said. "They perceive that business as usual is no longer acceptable. It's an open question whether any of these companies will change the way they do business."

The joint statement from the management of the US' most influential companies resulted from the pressure of growing social discontent during the campaign season. Senators Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts both recently pointed out that large companies do a lot of superficial work when it comes to major social issues, but are actually indifferent toward social environment changes, gun control, immigration and other problems.

French economic and social theorist Jacques Attali believes that an era in which majority of the world population feels extremely angry is about to come. According to his forecast, if wealth is excessively concentrated, for example, the total salary package of top operators in US companies will exceed other employees' incomes by 200 times the median. Such a path of growth and distribution will be unsustainable.

Over the past 500 years, the world's economy was first dominated by family businesses, with owners, workers, and managers belonging to the same strata. Social human resources and capital resources cannot enter those family businesses. 

Their upgrading was the emergence of family holding companies, but this brought a new problem - the separation of owners and workers. During the socialist movement, Western capitalism, especially American capitalism, saw corresponding changes which led to the emergence of listed companies. Management is no longer the owner of a business, but is a third type of human resource, in addition to workers and owners. While conflicts between workers and owners were eased to a certain extent, executives wearing their golden handcuffs still faced the conflicts of a company's long-term and short-term interests. In this context, the interests of minority shareholders could not be protected and the management focused on short-term benefits without paying attention to social responsibility.

In the past 20 years, a new type of company management, one which utilizes partnerships, has become popular. If there are three to seven people running a company, they can be owners, managers and workers at the same time. 

A typical example of this is Huawei's employee-shareholding program. Capital in the traditional sense has now become fund-like institutional investment. Theoretically speaking, any team with an innovative nature is likely to have equal opportunities for innovation. If joint-stock listed companies don't do anything to change their governance methods, they may lose to the challenges posed by such partnership companies.

It seems that China has a comparative advantage to pass on and develop such a partnership model, given its historical emphasis on public goods. The always-superior, Western corporate mechanism theory is now more inclined to the China approach. The turning point for mutual studying between Eastern and Western corporate systems is approaching.

The author is a professor with the School of Economics of Peking University. bizopinion@globaltimes.com.cn
Newspaper headline: Western corporate governance mechanism outdated, looks to Chinese approach


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