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Pascoe, Janine --- "Challenges for a developing legal system" [2007] MonashBusRw 49; (2007) 3(3) Monash Business Review 42

Challenges for a developing legal system

The OECD White Paper on Corporate Governance (2003) highlighted a number of measures that all Asian governments should introduce or consider strengthening as a matter of priority. The Paper pointed to the need to address such matters as disclosure and transparency, director self-dealing, strengthening regulatory capacity and enhancing the fiduciary duties of directors.

Significantly, however, the White Paper also referred generally to a number of features of the Asian business landscape that are pertinent to the process of legal and regulatory change. The historical, cultural and social traditions of country, as well as the interplay between the political and legal systems all come to mind in this context. The People’s Republic of China (PRC) has recently undertaken a comprehensive corporate law program to reinforce corporate governance measures applying to its listed sector.

This paper maps out the background and historical context in which the corporate law framework has developed and provides an overview of recent developments in corporate law reform, indicating scope for further research to identify potential ‘rule of law’ barriers and impediments to the effective implementation of the PRC’s corporate law reform programs. The paper considers whether the recent corporate law reforms implemented after China’s accession to the World Trade Organisation (WTO) represent early progress towards ‘rule of law’ or strategic window dressing.

The conclusions drawn from this study were that many leading Western experts on the Sino legal system believe that even in the long-term, substantial progress towards rule of law is not foreseeable. Others argue more optimistically that the PRC is in transition from rule by law to a ‘thin’ version of rule of law. Presently, however, there are powerful structural and cultural impediments to real progress towards rule of law in terms of public governance, even applying a ‘thin theory’ of rule of law. Meaningful restraints on government power are not yet in evidence.

However, while it is fair to say that reform initiatives in the corporate sphere have been compliance-driven for the purposes of international trade obligations following China’s accession to the WTO, they show some promise as early examples of stage one commercial law reform in terms of the ‘rule of law’ framework (outlined in the full paper).

The Code of Corporate Governance provides at least symbolic expression of best internationally bench-marked principles of corporate law, with the Chinese Securities Regulatory Commission (CSRC) being more proactive recently in enforcement and providing guidelines to facilitate compliance. The 2006 law is a surprisingly well-developed law considering the transitional difficulties facing PRC in moving to a market-oriented economy. Nevertheless, some significant gaps and deficiencies are evident, particularly from an investor protection perspective. Directors and managers are not subject to an objective duty of care and whether the ‘duty of loyalty’ equates to a full-blown fiduciary duty is unclear, as are the rules for shareholder suits and related party transactions with the company.

In practice much more is to be done. Below the surface, rule of law progress, other than so-called commercial rule of law, is slow. Rule of law scholars and practitioners would have been encouraged, however, by the recent decision of the National People’s Congress (March 2007) to develop detailed laws for the protection of private property. This is seen as significant to reinforce the symbolic recognition of property rights provided by the PRC Constitutional amendment of 2004.

Further empirical research is necessary to identify specific mechanisms which might be failing shareholders and investors in this regard. Factors which impact on disclosure and investor protection, such as the role of whistleblowers, minority shareholder groups and the financial press warrant further evaluation. Finally, and perhaps most importantly, some follow up research into the implementation of the 2006 Company Law will be necessary, looking particularly at the adequacy of shareholder suits and of regulatory tools and powers.

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About the author

Janine Pascoe

Janine Pascoe is Senior Lecturer, Corporate Law and Accountability Research Group, Department of Business Law and Taxation, Monash University.