COMPARATIVE CORPORATE GOVERNANCE

Comparative Corporate Governance

Comparative Corporate Governance

Introduction

Transition economies are formerly planned economies that are moving toward a market-oriented system, which entails economic liberalization and enterprise reform (Hoskisson, Eden, Lau, & Wright, 2000). In essence, the transition involves a shift from one “institutional template” to another (Johnson, Smith, & Codling, 2000; Spicer, McDermott, & Kogut, 2002). One of the most critical aspects of the transition is the reform of corporate governance (Dharwadkar, George, & Brandes, 2000; Wright, Filatotchev, Hoskisson, & Peng, 2005). Corporate governance reflects both the institutional environment external to firms, such as courts and regulations, as well as the institutional environment internal to firms, such as boards of directors, incentive systems and transparency (Roth & Kostova, 2003).

Thus in this study, we utilize agency theory and neo-institutional theory to examine corporate governance in the early-to-mid stages of corporate governance reform in a major transition economy. We structure the study around the following questions: (1) is corporate governance effective during early-to-mid stages of transition and (2) what factors drive corporate governance at this time? We choose China, the largest of the transition economies, as the subject of the study. The time period chosen is 1998-2003, approximately 10 years after the reform process began in earnest. During this time period there was institutional upheaval, and it is not clear which factors were driving the corporate governance of China's former state-owned enterprises (SOEs).

Because there are two questions in the study, we use a two-step process. In the first step, we simply examine whether corporate governance was effective during this time period. In the second step, we examine whether governance effectiveness was related to the newly imposed governance structure. On one hand, conventional agency theory suggests that if the newly imposed governance system was effective, we would expect to see more CEO turnover when there are more outsiders on the board (Peng, 2004), when the CEO has less formal influence (Buchholtz, Young, & Powell, 1998), when there is more stock liquidity (Holmstrom & Tirole, 1993) and when there is a dominant owner (Demsetz & Lehn, 1985).

Corporate governance effectiveness during transition

The first question we address concerns the effectiveness of corporate governance at early-to-mid stages of an economy's transition from central planning to market. Following Gibson (2003), we first examine the outcomes of corporate governance—the extent to which poor-performing CEOs are likely to leave or be dismissed. In a study of 1200 firms in eight emerging economies (not including China), Gibson found that poor firm performance was associated with increased CEO turnover. This is a standard corporate governance issue; when organizations are not performing well, this is a cause for discipline or removal of the CEO (Barker, Patterson, & Mueller, 2001; Boeker, 1992; Dahya, McConnell, & Travlos, 2002; Walsh & Seward, 1990) and empirical studies have found a negative relationship between firm performance and CEO turnover. For example, Barro and Barro (1990) found that poor-performing CEOs are more likely to leave the organization. Other studies have also found negative relationships between CEO turnover and firm performance ...