Transformation and Institutional Change of Corporate Governance

Abstract

In this chapter the editor provides his overview of China’s corporate governance institution changes with the development of capital market. Since the reform and opening up in 1970s, China economy has commenced the transformation from planned economy to market economy. The institutional change of China’s listed companies is intertwined with government’s external rule selection and social members’ internal rule selection. On the one hand, the institutional change of corporate governance of China’s listed companies results from the externally mandatory institutional arrangement of government. On the other hand, the institutional change of corporate governance of China’s listed companies results from stakeholders’ selection of internal rules in the premise of external rules established by government. Before the equity division reform at the end of 2006, China’s listed companies adopted the equity division of state-owned shares, legal person shares and individual shares. The governance mechanism of listed companies was mainly government-oriented institutional arrangement. After the equity reform at the end of 2006, uncirculated shares were gradually traded and the market mechanism gradually played its role. The ensuing change that the listed company’s shareholders, executives and external directors can trade stocks as per company’s value or performance was a result of induced institutional change. Induced factors and mandatory factors have jointly advanced the reform of listed company governance mechanism.