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Does Corporate Governance Enhance Common Interests of Shareholders and Primary Stakeholders?

Journal of Business Ethics volume 141, pages 411–431 (2017)Cite this article

An Erratum to this article was published on 17 October 2016

Abstract

Employing a unique dataset of Chinese non-listed firms, this paper investigates the effects of the presence of 19 governance structures on 20 employees’ interest indicators. In general, we find that firms with the governance structures pay workers higher hourly wages, require less monthly working hours, and have a smaller chance of wage arrears. Meanwhile, the shares of total wage and welfare expenditures in total sales revenue are lower in these firms, which results in higher profitability. Moreover, firms with the governance structures invest significantly more into training and provide employees with better fringe benefits. Considering the low labor protection standard and the weak external regulations of China’s labor market, we explain the positive findings thusly: corporate governance structures induce managers to adjust wage payments to the “efficiency wage” level, which is the best balance point for the interests of both shareholders and employees and, therefore, for maintaining the stakeholder relationships. We also find the governance structures that give blockholders superpower are negatively associated with employees interests. These results highlight the importance of giving enough discretion to managers in order to successfully find the common ground for creating mutual values for shareholders and employees.

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Notes

  1. Blau’s model of exchange hypothesizes that there will be equivalent rewards net of costs on both sides of an exchange.

  2. The survey asked managers about the average monthly wages of white-collar and blue-collar workers and their monthly working hours. We obtain average hourly wages by dividing average monthly wages by monthly working hours. In this paper, we only report the wages and working hours of the blue-collar workers because they consist of the bulk of the employees. The average wage of blue-collar workers and that of white-collar workers are highly correlated. Their correlation is 76.4 %, with 1232 observations and at the 1 % significance level.

  3. This high number is not abnormal. Chan and Siu (2010) conducted a survey in 2006 in a toy factory and a garment factory that provided supplies to Wal-Mart Stores Inc. and found that the average monthly working hours of their sample workers were 302 h.

  4. This is a smelting plant in Jining. It is not like an idle plant because its monthly wage is 900 yuan per worker, which is 85 % of the average monthly wage in the sample.

  5. They argue that corporate law in Europe makes it more difficult and costly for “close corporations”—a smaller corporation whose shareholders and directors are able to operate much like a partnership—to avoid onerous legal requirements as compared to the United States. But they continue to argue that the proliferation of close corporations suggests that ultimately, firms are able to sidestep these difficulties with relative ease so that corporate law is, in this context, trivial (p. 32).

  6. Zhong (2015) presents and tests seven hypotheses regarding the differences of governance between domestic private firms (DPEs) that were transformed from SOEs and DPEs that have not experienced privatization, thereby providing detailed discussions on the factors affecting governance development of Chinese non-listed firms.

  7. Here is the website of a previous version: http://www.lepp.zju.edu.cn/upload/2013-05/13053119175200.pdf.

  8. Note that this argument may well apply only to non-listed firms that generally have concentrated ownership structure. Some studies on listed firms reach the opposite conclusion. For example, based on qualitative case studies on seven UK listed companies, Deakin et al. (2002) claim that “prevailing patterns of dispersed share ownership and rules of corporate governance appear to constrain the ability of managers to make credible, long-term commitments to employees of the kind needed to foster effective labor-management partnerships” (p. 335).

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Acknowledgments

We thank the Section Editor Thomas Clarke, two anonymous referees, Sudipto Dasgupta, Vidhan Goyal, Mark Seasholes, and seminar participants at Hong Kong University of Science and Technology for helpful comments. We are also grateful to the research fund provided by Natural Science Foundation of China (with Grant number 71402123), the National Social Science Foundation of China (with grant number 13&ZD015), Shanghai Pujiang Program (with Grant number 14PJC104), the Fundamental Research Funds for the Central Universities (with Grant number 1200219243), and Shanghai Institute for National Economy at Shanghai Jiaotong University.

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Authors and Affiliations

  1. School of Economics and Management, Tongji University, 1239 Siping Road, Shanghai, 200092, People’s Republic of China

    Ninghua Zhong

  2. School of International Finance, Shanghai Finance University, Shanghai, 200092, People’s Republic of China

    Shujing Wang

  3. School of Economics, Peking University, Beijing, People’s Republic of China

    Rudai Yang

Authors
  1. Ninghua Zhong
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  2. Shujing Wang
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  3. Rudai Yang
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Correspondence to Shujing Wang.

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An erratum to this article is available at http://dx.doi.org/10.1007/s10551-016-3347-8.

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Zhong, N., Wang, S. & Yang, R. Does Corporate Governance Enhance Common Interests of Shareholders and Primary Stakeholders?. J Bus Ethics 141, 411–431 (2017). https://doi.org/10.1007/s10551-015-2702-5

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Keywords

  • Corporate governance
  • Employees’ interests
  • Efficiency wage theory