Corporate Governance in China: A Meta‐Analysis

• Author: Marc Van Essen,Canan C. Mutlu,Patricio Duran,Sabrina F. Saleh,Mike W. Peng
• DOI: http://doi.org/10.1111/joms.12331
• Date: 01 September 2018
• Published date: 01 September 2018

Corporate Governance in China: A Meta-Analysis

Canan C. Mutlu

a

, Marc Van Essen

b,c

, Mike W. Peng

d

,

Sabrina F. Saleh

b

and Patricio Duran

e

a

Coles College of Business, Kennesaw State University;

b

Darla Moore School of Business, University of

South Carolina;

c

EM LYON Business School;

d

Jindal School of Management, University of Texas at

Dallas;

e

Universidad Adolfo Iba~nez

ABSTRACT How has the impact of ‘good corporate governance’ principles on firm

performance changed over time in China? Amassing a database of 84 studies, 684 effect sizes,

and 547,622 firm observations, we explore this important question by conducting a meta-

analysis on the corporate governance literature on China. The weight of evidence

demonstrates that two major ‘good corporate governance’ principles advocating board

independence and managerial incentives are indeed associated with better firm performance.

However, we cannot find strong support for the criticisms against CEO duality. In addition,

we go beyond a static perspective (such as certain governance mechanisms are effective or

ineffective) by investigating the temporal hypotheses. We reveal that over time, with the

improvement in the quality of market institutions and development of financial markets, the

monitoring mechanisms of the board and state ownership become more strongly related to

firm performance, whereas the incentive mechanisms lose their significance. Overall, our

findings advance a dynamic institution-based view by substantiating the case that institutional

transitions matter for the relationship between governance mechanisms and firm performance

in the second largest economy in the world.

Keywords: board independence, CEO duality, China, corporate governance, financial

market development, institutional change, institution-based view, managerial incentives,

meta-analysis, state ownership

INTRODUCTION

Since market reforms started in the 1980s, China has not only restructured state-owned

enterprises (SOEs), but also adopted a series of corporate governance mechanisms cen-

tred on monitoring and alignment principles from Western economies in an effort to

enhance firm performance. Outside of China, there is a tradition of research arguing

Address for reprints: Canan C. Mutlu, Coles College of Business, Kennesaw State University, Kennesaw,

GA 30144, USA (cmutlu@kennesaw.edu).

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Journal of Management Studies

doi: 10.1111/joms.12331

55:6 September 2018

that board composition, leadership structure, and incentive mechanisms can influence

organizational outcomes (Dalton et al., 1998, 2007). Given the significant institutional

differences between China and developed economies, an important debate continues to

rage over the impact of standard governance mechanisms on firm performance in China

(Li et al., 2016; Peng, 2004; Tsui, 2007). Standard monitoring and alignment mecha-

nisms are hinged upon the assumptions of self-orientation (Bruce et al., 2005; Davis,

2005) and market maturity (Young et al., 2008), which may not be a natural fit for

economies characterized by relationship-based regimes and underdeveloped market

institutions (Sundaramurthy and Lewis, 2003). Scholars, therefore, recommend invoking

an institution-based view by incorporating institutional factors to better understand the

contextual nature of corporate governance problems (Haxhi and Aguilera, 2017; Meyer

and Peng, 2016; Peng and Jiang, 2010).

The institution-based view focuses not only on how institutions affect firm behaviour,

but also on how changes in institutions over time shape firm strategic choices and perform-

ance (Meyer and Peng, 2016; North, 1990; Peng, 2003). This temporal dimension war-

rants a temporal lens to explore the impact of changing institutions on corporate

governance mechanisms across firms, resulting in a dynamic institution-based view

(Banalieva et al., 2015; Kim et al., 2010). China is a prime context in which a dynamic

institution-based view of corporate governance can be advanced. First, it represents an

‘important counterexample to the findings in the law, institutions, finance, and growth

literature’ (Allen et al., 2005, p. 57) by accomplishing strong economic growth despite

having relatively underdeveloped formal institutions. Although agency theory underpins

much of the corporate governance literature (Shleifer and Vishny, 1997), whether (and

how) standard corporate governance mechanisms that are largely based on agency

theory prescriptions play a role in China remains to be clarified. Second, due to the

gradual improvement of market institutions, China is considered as a ‘hybrid’ (1)

between central planning and market competition (Allen et al., 2005) and (2) between

relationship-based and rule-based regimes (Luen et al., 2013). Gradual market reforms

play a crucial role as they alter the institutional framework to improve the functioning

of product, capital, and labour markets. In turn, improvements in these external gover-

nance mechanisms help the functioning of internal governance mechanisms by empha-

sizing arm’s-length monitoring, which may reduce agency costs and ultimately help firm

performance (Cuervo-Cazurra and Dau, 2009; Peng, 2003, 2004). This hybrid form of

institutional change and gradual corporate governance reforms in China lead to our

question: How has the impact of (1) board independence, (2) board leader-ship struc-

ture, (3) managerial incentives, and (4) state ownership on firm performance changed

over time?

We focus on these widely used and important internal governance elements in Chi-

nese firms for scholarly and practical reasons. Scholarly, board independence and man-

agerial incentives are widely viewed as two key elements of internal corporate

governance mechanisms to deter managerial self-interest and encourage shareholder

orientation (Dalton et al., 1998, Tosi et al., 2000). State ownership has also intrigued

scholarly attention, as Chinese SOEs have been pivotal in implementing corporate gov-

ernance reforms (Peng et al., 2016; Ralston et al., 2006). From a practical standpoint,

these mechanisms are the key initiatives of Chinese corporate governance reforms to

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establish modern enterprise systems (Jiang and Kim, 2015; Peng, 2004). The most nota-

ble reforms in China have included appointing outside directors, separating the posi-

tions of board chair and chief executive officer (CEO), and providing executive

compensation packages that include contingent forms of pay – underpinned by what are

generally viewed as ‘good’ or standard corporate governance principles (Chen et al.,

2011b). These reforms and their impact on firm outcomes has therefore provoked

increasing scholarly attention in the context of China, making them the most widely

studied forms of internal corporate governance (Li et al., 2016; Tsui, 2007).

However, there are two problems in the scholarly work on corporate governance in

China. First, evidence from numerous studies using data from China remains mixed

(Buck et al., 2008; Peng, 2004). Such mixed results call for efforts to weigh different and

conflicting evidence. Second, although the corporate governance literature has started

to embrace the ‘context matters’ perspective, it is relatively silent about the temporal

dimension that requires a closer analysis of the role of space and time together (Ancona

et al., 2001; Kim et al., 2010; Shi et al., 2012). Therefore, we address our question in

two steps. In our first step, we explore the overall strength of the relationship between

internal corporate governance mechanisms and firm performance by using advanced

meta-analysis techniques. Second, we go beyond a static approach and explore how

these relationships change over time as Chinese market institutions improve. Employing

a temporal lens is crucial given the gradual reforms in China that, unlike rapid transi-

tions in Central and Eastern Europe, provide a dynamic yet relatively predictable plat-

form that allows firms time to adapt (Newman, 2000). Therefore, we incorporate an

objective view of time such that we rely upon it as a proxy for gradual market reforms

(Mosakowski and Earley, 2000). Ignoring the effect of time and the related changes in

the complementary governance mechanisms may lead to an incomplete understanding

of the relationship between internal governance principles and firm outcomes (Lawrence

et al., 2001). Using time as a moderator, therefore, enables us to have a finer-grained

understanding of the role of time, which provides new opportunities for explanation and

prediction of institutional dynamism and firm outcomes (Ancona et al., 2001; Shi et al.,

2012).

This study endeavours to make two contributions. First, we provide a comprehensive

account of the impact of corporate governance mechanisms in China. Despite relatively

efficient market institutions in developed economies, meta-analyses find little evidence of

a significant positive effect of board monitoring (Dalton et al., 1998; Wagner et al.,

1998) and alignment mechanisms (Tosi et al., 2000; Van Essen et al., 2012a) on firm

performance. Therefore, it is not clear if such standard governance mechanisms would

have an impact in China (Chen et al., 2011b; Peng, 2004). Through our meta-analysis,

we contribute to this debate in the Chinese context with quantitative evidence. The lit-

erature on corporate governance in China has featured a few narrative reviews (Clarke,

2003; Guo et al., 2013; Jiang and Kim, 2015; Yang et al., 2011). By complementing the

qualitative review literature, our meta-analytic investigation provides a quantitative

assessment of the vast amount of empirical studies (Eden, 2002).

Second, we extend the corporate governance literature by exploring the temporal

effect of internal corporate governance mechanisms on firm performance, rather than

reporting a static perspective or a snapshot. We benefit from the growing amount of

3Corporate Governance in China

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