Corporate Governance of Chinese State-controlled Listed Companies: A Revisit Through the Lens of Venture Capital

Abstract

In China, state-controlled listed companies (SCLCs) refer to a type of Chinese domestically listed companies half of whose voting shares are held by Chinese governments or their wholly owned companies, or the resolutions of whose shareholder meetings can be substantially influenced by Chinese governments or their wholly owned companies despite the fact that the voting shares held by them account for less than half of all the outstanding voting shares issued by these listed companies. For example, they are able to have non-negligible impacts on the motions of shareholder meetings by holding only one third of the voting shares whereas two thirds supermajority voting is always required. The existing literature primarily scrutinises the corporate governance of SCLCs through the perspective of agency costs. Little attention is paid to its adaptive efficiency through the lens of venture capital. This article attempts to fill this gap on the basis of evidence from the incentive mechanisms in the operation of Chinese domestic venture capital, as compared to American venture capital experience. The template of American venture capital contains five incentive mechanisms useful for China: limited partnerships, staged financing, board representation, convertible preferred stock and stock options. Unfortunately, partly due to the institutional barriers imposed by the control-based model of SCLCs, these five mechanisms are still underdeveloped in Chinese domestic venture capital. The study shows that adaptive efficiency and agency costs are equally important factors which ought to be considered when proposing reforms of the corporate governance of SCLCs. Neglecting either of them would jeopardise the overall efficiency of the economy.