Governance Structure, Firm Performance, and Strategic Change in Chinese Firms

Abstract

Corporate governance has become a major research topic in modern strategic management research. Since the concept of 'corporate governance' emerged in the process of solving the agency problem caused by the special relationship between 'ownership' and 'management', it has created a wide and broad range of research areas: control mechanisms (e.g., agency theory and stewardship theory) based on the attitudes and characteristics of principal governance agents and the causal relationship with various corporate performance variables. In particular, since the proliferation of globalization and free trade began in the late 20th century, it has spurred the movement toward governance improvements by increasing the necessity for individual countries and enterprises to form their corporate governance to meet international standards. China is no exception to this trend. As the influence of Chinese enterprises increases, the improvement of their governance in line with international standards has become their major challenge. The Chinese government finalized the "Equity Division Reform" at the end of 2006, beginning with the amendment of the <Corporate Law> and the <Securities Law> at a Plenary Session of the 15th Central Committee of the Communist Party of China (CPC) in September 1999. As a result, the government-centered unitary structure, "ownership-management," has been separated, and an institutional basis close to international standards has been established. Therefore, we have presumed that the Equity Division Reform' has a great influence on the improvement of the governance of the listed enterprises in China. In the study, we have focused on verifying the causal relationship between corporate governance characteristics and firm performance and strategic variables in Chinese enterprises after the reform. First, in Study 1, we have explored the relationship between the characteristics of corporate principal management' agents and corporate financial performance. We have sampled listed state-owned enterprises (SOEs) and private-owned enterprises (POEs) in China in a period of corporate governance stabilization from 2007 to 2015. Among the corporate governance variables, we have postulated the characteristics of the principal management' agents (BOD and CEO) as independent variables to analyze their effects on the financial performance. The earlier studies on enterprises in China were not enough to identify the longitudinal relationship between principal management' agents in corporate governance and financial performance. Therefore, we have made an attempt to fill the gap. In addition, we have focused on enhancing the differentiation of research by considering 'political connections' as one of the main characteristics of principal management agents and examining the causal relationship with the dependent variable. In Study 2, only listed state-owned enterprises in China are subject to the study, and they are classified into the categories (state-owned share and state-owned legal person share) with legal and institutional grounds to identify the causal relationship between the characteristics of corporate governance and the strategic change. In the study, the following have been taken into account: So far, there has been very little research on the relationship between corporate governance and strategic change in Chinese enterprises. Even if the scope of this study is extended beyond China, there is a need for a study on the relationship between the 'ownership' holders and the strategic change to consider the characteristics of 'ownership' holders because the governance factors are concentrated on the principal management agents. Among the state-owned enterprises listed on the Shanghai Stock Exchange (SSE), we have finally selected 270 firms observable for nine years from 2007 to 2015 and have used a fixed effect model to analyze them. In Studies 1 and 2 mentioned above, there are the following implications. The causal relationship of each corporate governance factor with the corporate performance and strategies have been analyzed from the existing contractual viewpoint. In addition, the behavioral approach to principal governance agents and the institutional and environmental uniqueness embraced by Chinese enterprises have been considered.