Período de recuperación de la Inversión 78,

When it is assumed as discussed above that the new laws concerning firms and their operational environment must lead to heterogeneity of corporate governance in China then the question remains how to differentiate between the different forms. The literature on comparative corporate governance offers a valuable starting point by identifying the main ideal type systems, the features of which are useful building blocks to determine the corporate governance practices to be used in the exploratory study. The approach is grounded in the dichotomy between insider control systems and outsider control systems, which was first advanced by Jenkinson and Mayer (1992), and Franks and Mayer (1997) and more recently synthesized by Garcia-Castro et al. (2013). Generally, outsider control systems aim to maximize shareholder value through board independence, high disclosure, dispersed ownership, a market for corporate control, strict rules of anti-self-dealing and the absence of a two-tier board. Insider control systems rely on a two-tier board as broker between stakeholders, including banks and employees, and exhibit highly concentrated ownership. In China as in most transition economies control and the allocation of decision making rights superimposes the ownership question. An exploration of the impact of political embeddedness on these models is thus also presented below.

Corporate governance was not the first international comparative research agenda to value firm level analysis. Hall and Soskice’s (2001: 6) theory on varieties of capitalism “regards companies as the crucial actors in a political economy”. It therefore seems particularly relevant to use insights from the comparative corporate governance literature to inform a study of firm level configurations. In their seminal theoretical analysis of the cross-national diversity of corporate governance, Aguilera and Jackson (2003) identify three dimensions that define the relations that capital providers entertain with the firm: financial VS strategic interests, commitment VS liquidity, and debt VS equity. In turn, these dimensions are influenced by three institutional domains: whether property rights favor small or large shareholders, whether the financial system is bank- or market-based, and whether inter-firm networks exhibit relationships multiplexity (Aguilera & Jackson, 2003). These terms help

characterizing the various typologies and models of corporate governance observable around the world.

Insider control system. Liu (2006b: 418) describes the dominant or typical corporate governance system observed in Chinese firms as a control-based model, which involves a “concentrated ownership structure, management-friendly boards, inadequate financial disclosure and inactive take-over markets”. The label “control” in this context should be understood as an insider-control system, also called insider-dominated model in Kim and Lee’s (2012) account of South Korean firms. Large block holders use internal monitoring mechanisms to discipline management (Aguilera & Jackson, 2010). Insider control systems typically rely on a strong supervisory board to balance the interests of powerful and informed stakeholders, like banks and employees, that play an active role in the governance structure and decision making process (Franks & Mayer, 1997). The complementarities between employee participation in decision making and a strong relationship with banks are exemplified by the Japanese case (Aoki, 2001, 2007). Such brokerage of interests between stakeholders is also necessary when corporate shareholders have a supplier-customer relationship or other forms of strong ties such as mutual cross- shareholding. These inter-firm networks refer to the multiplexity of relationships between firms. A tight web of stakeholders compels firms to favor long term commitment over exit options (Aguilera & Jackson, 2003). The Chinese market is known for the volume of related party transactions (Young et al., 2008), implying the presence of substantial multiplexity and suggesting a preference for commitment as the control mechanism. In a similar fashion, because Chinese firms are often politically embedded, the Party is positioned as a powerful and informed stakeholder.

Insider-control systems are likely to prevail when property rights, referring to the legal and formal allocation of decision making rights, are less clearly defined (Aguilera & Jackson, 2003). Where shareholder rights favor large investors, strategic interests and control via commitment tend to dominate. The Japanese system, which uses majority principles in voting rights and mandates little information disclosure, and the German system, which grants disproportionate power to block holders through the institution of two tier boards, both favor commitment and strategic interests. Such systems also typically rely on bank

based rather than equity market based systems (Aguilera & Jackson, 2003). In fact, strong ties with financial institutions can undermine the market for corporate control (Aoki, 1994; Baums, 1993). Banks convert household savings into investments using debt and rely on longer term relationships, which reinforce the commitment to internal monitoring. Owners are thus expected to display a high level of commitment instead of relying on market liquidity (exit options) as a control mechanism and prefer bank loans as a means of financing (Aguilera & Jackson, 2003). They also prefer a long term strategic orientation (Aguilera et al., 2008), which allows to pursue non-financial objectives such as gaining access to resources. As mentioned in the previous sections, state ownership in China may fall squarely into this category.

Finally, the opportunity cost of information disclosure is also higher when a block-holder has a majority stake, since strategic decision making is ultimately not shared (Aguilera et al., 2008). For instance, family firms have concentrated ownership and their internal control is steered by insiders with strong commitment to long term strategic interests (Dhnadirek & Tang, 2003). Such a tight kin network of insiders is typically reluctant to disclose strategic information to outsiders. Information disclosure is not a good fit with insider-dominated firms, since it is not complementary with concentrated ownership and internal control, especially in weak legal environments. The same preference is expected to prevail in highly politically connected firms. Yet, “state block holders may also require transparency to avoid claims of unfair competition in international markets” (Aguilera et al., 2008: 486). So SOEs might be forced against their will to provide high disclosure.

Outsider control system. The outsider-control system, which has also been labelled the standard shareholder-oriented model (Hansmann & Kraakman, 2001), rests on the primacy of shareholders in widely held corporations over other stakeholders. In such systems, thicker liquid markets can support a diversification strategy that allows for flatter ownership structures and securitized debt (obligations). Individual investors prioritize cash flow maximization and institutional investors, often dominated by pension funds, play an important role to diversify and maximize the financial interests of their investors (Aguilera & Jackson, 2003). Management discipline stems from liquidity and the market for corporate control because each individual shareholder, having diversified assets across firms to

manage risks, has little incentive to invest resources in monitoring activities (Aguilera & Jackson, 2010). In turn, this market for corporate control is highly dependent on high information disclosure and effective deterrence of insider trading (Franks & Mayer, 1997). So financial interests and market liquidity are predominant where the shareholder rights of small investors are legally well protected (Aguilera & Jackson, 2003). These laws are usually accompanied by strong anti-trust regulations that prevent extensive multiplexity.

The governance structures in outsider-control systems do not only rely on the investor’s exit option to discipline management. Shareholders rights are also meant to guarantee that investors can participate in the governance structure and voice their interests. For this purpose, a unitary board consisting of independent directors should monitor the firm to ensure shareholder wealth maximization (Franks & Mayer, 1997). The annual shareholder’s meeting should also allow minority investors to put forward proposals and nominate directors to the board. The textbook example of outsider-control systems is the Anglo-Saxon model used in the United States and the United Kingdom (Aguilera & Jackson, 2003). In this model, executive incentives meant to align the interests of managers with those of shareholders are complementary with board independence and the market for corporate control. In turn, this combination is only effective with information disclosure and rigorous auditing. Indeed, for a firm that relies on equity markets to raise capital, especially with foreign investors, the benefits of information disclosure related to greater transparency with potential shareholders outweigh the costs (Goyer, 2003).

There is evidence to suggest that the practices transplanted from the outsider-control system can be successful in the Chinese context. Liu (2006b: 418) demonstrates that companies that rely on features that diverge from the dominant control-based model, such as “dispersed ownership, active take-over market, independent board, high level of information disclosure and institutional investors”, are more likely to make decisions in the interest of minority shareholders, have better accounting standards, and provide higher stock returns.