SEATTLE UNIVERSITY LAW REVIEWVolume 37, No. 2, Winter 2014
"Quack Corporate Governance" As Traditional Chinese Medicine-The Securities Regulation Cannibalization of China's Corporate Law and a State Regulator's Battle Against Party State Political Economic Power
Nicholas Calcina Howson(fn*)
ABSTRACT
From the start of the People's Republic of China's (PRC) "corporatiza-tion" project in the late 1980s, a Chinese corporate governance regime subject to increasingly enabling legal norms has been determined by mandatory regulations imposed by the PRC securities regulator, the China Securities Regulatory Commission (CSRC). Indeed, the Chinese corporate law system has been cannibalized by all-encompassing securities regulation directed at corporate governance, at least for companies with listed stock. This Article traces the path of that sustained intervention and makes a case-wholly contrary to the "quack corporate governance " critique much aired in the United States-that for the PRC this phenomenon is necessary, appropriate, and benign. That analysis, in turn, reveals a great deal about the following: the development of Chinese law and legal institutions after 1979; China's contemporary political economy; the true identity of the firm under the PRC "corporatiza-tion without privatization" program; the normative character and function of corporate law across increasingly globalized capital markets; and the ways in which state intervention may protect against state abuse of power and enable greater private autonomy. For analysts of China's contemporary political system, this Article uncovers a new identity of the Chinese party state 's horizontally oriented "fragmented authoritarianism, " where a central government agency has instituted pre-enforcement designs that systemically constrain the economic and directorial power of the PRC's most powerful, formally non-governmental, political economic actors.After a decade of experimentation and experience, effectively-implemented supervision systems and methods [for Chinese listed companies] are in place. However, these supervisory systems and methods stop in large part at the level of administrative regulation and policy, resulting in too large a gap for effective enforcement [between such administrative regulation and] national laws like the Company Law, the Securities Law, etc., and a lack of required coherence [in the legal-regulatory system].
- State Council of the PRC, Legal
Affairs Office, September 7, 2007(fn1)
I. INTRODUCTION
From the start of its "corporatization" project in the late 1980s and early 1990s, corporate law and corporate governance in the People's Republic of China (PRC or China) have been determined by China's securities regulator acting far beyond the bounds of parallel structures with which the terms "corporate" and "law" are associated. Indeed, the broad extent of China's securities regulation incursion into the notionally separate domain of PRC corporate law should cause purveyors of a "quack corporate governance" complaint in the United States the deepest alarm.
The received "quack corporate governance" wisdom directed at recent U.S. legal and regulatory reforms has been well publicized. In this Article, after briefly taking note of that critique, I analyze the trajectory witnessed in China over the last two decades: the veritable cannibaliza-tion of corporate law norms by securities agency regulation which solely determines the governance of China-domiciled companies with listed stock. This analysis serves several functions: First, it allows for a better understanding, generally, regarding the development of Chinese law and legal institutions in the post-1979 reform era and, specifically, key legal institutions operating at the heart of China's corporate system during the establishment and rapid expansion of domestic capital markets. Second, this study helps elaborate the true identity of the modern Chinese firm under the PRC's "corporatization" program and in that nation's special political economy, and how it differs from business organizations in other developed and developing world jurisdictions. Third, this Article aids us in pondering the very nature of corporate law itself and how its norms function on firms and shareholders situated in vastly different political economic circumstances and even across globalized capital markets. Fourth, I hope that the analysis here will prod serious thinking about how private autonomy can be protected in the corporate commercial spheres of different political economies and the perhaps counterintuitive role state-enforced mandatory provisions can play in remedying structurally determined exploitation of minority shareholders in what is presented as a neutral and autonomy-conferring legal architecture. Fifth and finally, I believe that this Article reveals a highly complex, and horizontally oriented, identity of what political scientists have called the PRC party state's "fragmented authoritarianism"-or how vertically arranged silo-systems of power in what is understood as a unitary party state are permitted to compete and constrain horizontally situated, short-term focused, political economic power in the service of long-term economic system and development policy goals.
II. THE "QUACK CORPORATE GOVERNANCE" CRITIQUE
The last ten years in the United States have seen a volley of critiques directed at high profile corporate law and governance reforms implemented through federal securities law and agency regulatory action. This criticism originated with U.S. law academics,(fn2) who were profoundly offended by the incursion of U.S. federal regulation into the domain of U.S. state regulation principally through the July 2002 and July 2010 legislative enactments known as the Sarbanes-Oxley Act of 2002 (SOX)(fn3) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)(fn4) respectively, but also other Securities and Exchange Commission (SEC) regulatory initiatives pre-dating SOX.(fn5) Indeed, the push back is not simply academic, as even sitting state-level judges openly lament these developments,(fn6) and U.S. federal courts almost casually invalidate regulatory action perfectly consistent with the spirit of the SEC's mission or explicitly sourced in such statutory enactments, and pursuant to an incorrect standard of review for rule-makings by independent agencies.(fn7)
A good number of the substantive provisions of SOX and Dodd- Frank-many resulting in amendments to the 1934 Securities and Exchange Act (1934 Act)-have attracted academic and judicial fire.(fn8) The rationales supporting sharp criticism of these law-making efforts and associated regulatory actions are equally numerous, with what I believe to be the primary ones summarized as follows:* In the U.S. federal system, the individual states have exclusive jurisdiction over corporate law mandates, and thus, the national legislature (the U.S. Congress) has no authority to pass legislation in the same area, much less pass legislative directives mandating federal agency regulation in the same areas; any attempt to change this allocation represents a usurping transfer of power from the states to the federal government (the "state jurisdiction" critique). * In the words of Roberta Romano, "[T]he more efficacious corporate and securities law regimes are the product of competitive legal systems, which permit legal innovations to percolate from the bottom up by trial and error, rather than being imposed from the top down by regulators or corporate governance entrepreneurs, who are far removed from the day-to-day operations of firms"(fn9) (the "legal systems market/laboratories of federalism" critique). * The reform mandates operate so as to eat away at the allegedly beneficial norms (for organizational decision making) of director primacy/board centrism and thus frustrate the governance efficiencies promised by thoroughgoing separation of ownership and management (the "director primacy" critique). * The packaging of what could have been conventional securities regulatory disclosure mandates as substantive corporate governance mandates is more costly (the "choice of regulatory approach cost" critique). * Compliance with reform mandates is a new cost incurred by regulated firms, and is in absolute terms pretty expensive, with no or little benefit (the "costs of new compliance/cost-benefit" critique). * The prospect of burdensome compliance with reform mandates applied through national securities law and regulation causes externally domiciled issuers to avoid the reform-regulated capital markets or flee from the reform-regulated market to less burdensome capital markets (the "unattractive to securities issuers" critique). * Many of the federal corporate governance legislative initiatives carried by the likes of SOX and Dodd-Frank are long-standing ideas advocated unsuccessfully by "corporate governance entrepreneurs" acting for allegedly undeserving constituencies and thus are not appropriate responses to, or remedies for, the alleged triggering events (Enron, WorldCom, the Global Financial Crisis, etc.) (the "opportunistic packaging of spurious preventatives" critique). * Empirical studies demonstrate that the proposed substantive reforms do not "work" (e.g., reduce wrongdoing, make fiduciaries more independent, improve fiduciaries' or firm performance, increase firm value, benefit investors generally, allow...
