Master Thesis for International Business and Management 2011 – 2012
Corporate Governance, Interlocking Directorates and Regulatory
Influence of Chinese Listed Companies
by Ye CHEN
Supervisor: Dr. Kees van Veen
Corporate Governance, Interlocking Directorates and Regulatory
Influence of Chinese Listed Companies
Ye Chen
TABLE OF CONTENTS
ABSTRACT--- 4
LIST OF ABBREVIATIONS--- 5
1. INTRODUCTION--- 6
1.1 Corporate Governance and the Studies in China--- 6
1.2 The Status Quo of Interlocking Studies in China--- 7
1.3 Theoretical Tension--- 9
1.4 Motivation of the Study--- 10
1.5 Research Questions--- 10
2. TOWARDS A BETTER DEFINED FRAMEWORK OF CORPORATE GOVERNANCE IN CHINA--- 11
2.1 Misinterpretations in the Past and Research Obstacles in China--- 12
2.2 Utilizing More Direct Information Channels for the Study--- 14
3. CORPORATE GOVERNANCE INFRUSTRUCTURE IN CHINA--- 15
3.1 Formation of the Boards in the Process of Corporatization and Ownership Reform--- 15
3.2 The Board Structure in China--- 17
4. WHERE ARE THE INTERLOCKERS--- 19
4.1 Different Interlocker Percentage in SOEs and Private Companies--- 19
4.1.1 Recruitment Regulation and Practice of SOEs and Private Companies--- 20
4.1.2 The Direct Constraint Forming Interlockers on the Non-executive board of SOEs--- 22
4.1.3 Limited General Recruitment Channels Breeding More Interlockers in SOEs--- 22
4.1.4 Company Ownership Status in China--- 23
4.2 Different Interlocker Positions in the Board Segments between SOEs and Private Companies--- 24
4.2.1 Interlockers of SOEs Represent Ownership Control on all Board Seats--- 24
4.2.3 Interlockers of Private Companies Represent Resource Requirements on Non-executive Board
and Independent Boards--- 25
4.3 Interlocking Ties between SOE-SOE, Private-Private and SOE-Private--- 28
4.4 Geographic Interlocking Ties and the Geographic Distribution of Interlockers--- 30
4.4.1 Within-Province and Cross-Province Interlocking Ties--- 30
4.4.2 The Provincial Marketization Influence on Interlocking Directorates--- 31
5. WHO ARE THE INTERLOCKERS--- 32
5.1 The Systematic Variation on Individual Expertise--- 32
6. DATA & METHODOLOGY--- 34
6.1 Study Populations, Data Collection and Selection--- 34
6.2 Variable Definitions, Measurements and Coding in the Dataset--- 35
6.3 Considerations of Complications Regarding Included Samples and Implemented Solutions--- 37
6.3.1 Company Size and Company Age--- 37
6.3.2 Definition of State-ownership--- 38
6.3.3 Overlaps of Chinese Names--- 39
6.4 Data Analysis Methods--- 39
6.4.1 Statistical Analyses and Modeling--- 39
6.4.2 Software--- 41
7. RESULTS--- 41
8. CONCLUSION & DISCUSSION--- 54
8.1 Conclusion--- 54
8.2 Contribution--- 55
8.2.1 A Clearer Outline of Board Structure in China--- 55
8.2.2 The Importance of Corporate Governance and Regulator Frame in China--- 56
8.3 Discussion--- 56
8.3.2 The Core Issue of Recruitment Practice--- 57
8.3.3 The Applicability of Western Theories--- 58
8.3.4 The Changing Pattern of Interlocking Directorates--- 58
8.3.5 Research Methods in Developing Countries--- 59
8.3.6 Capturing a More Representative Interlocking Pattern in China--- 59
REFERENCES--- 61
APPENDIX--- 68
Appendix A: An Interview with a former SASAC officer in China--- 68
Appendix B: Interviews of Board of Directors in China--- 81
Appendix C: The Typical Corporate Governance Structure and Board Characteristics in a Wholly State-owned Company in China--- 94
Appendix D: Coding System of Variables--- 95
Appendix E: Results of Statistical Test in SPSS for Hypothesis 1--- 98
Appendix F: Results of Statistical Test in SPSS for Hypothesis 2--- 100
Appendix G: Results of Statistical Test in SPSS for Hypothesis 3--- 104
Appendix H-I: Results of Network Modeling and Statistical Test in SPSS for Hypothesis 4a--- 105
Appendix J-K: Results of Statistical Test in SPSS for Hypothesis 4b--- 108
ABSTRACT
This study focuses on the general patterns and characteristics of interlocking directorates in Chinese listed firms in the context of corporate governance system and regulatory frame in China. It straightens out some misunderstandings of the Chinese corporate governance system in the past studies, identified the structural differences of interlockers as well as interlocking ties between state-owned enterprises and private companies, and made careful attempts to apply resource dependence theory to explain the interlocking phenomena. The results show the pronounced influence of the regulatory framework in shaping inter-organizational ties, for which the resource dependence theory, frequently applied to explain interlocking directorate phenomena in the West, can only partially shed light on the dynamics of the formation of interlocks in China.
LIST OF ABBREVIATIONS
CASS - Chinese Academy of Social Sciences CBD - Chinese Board of Directors
CCGLC - Code of Corporate Governance for Listed Companies CEDA - China Enterprise Directors Association
CEC - China Enterprise Confederation
CLPRC - The Company Law of the Peoples Republic of China CPES - Center for Private Economic Studies
CSB - Chinese Supervisory Board
CSLPRC - Civil Servant Law of the People‟s Republic of China CSRC - China Regulatory Commission
DRCSC - Development Research Center of the State Council
GIIDBDLC - Guidelines for Introducing Independent Directors to the Board of Directors of listed Companies
IDN - Interlocking Directorate Networking
IMCP - Index of Marketization of China‟s Provinces
IECASS – Institute of Economics Chinese Academy of Social Science
MCPC - the Municipal Committee of People‟s Congress NBSC - National Bureau of Statistics of China
NERI - National Economic Research Institute
PB - the Personal Bureau
SEZ - Special Economic Zone
SOE - State-owned Enterprise
1. INTRODUCTION
1.1 Corporate Governance and the Studies in China
Corporate governance differs across multiple explicit dimensions in ways that yield diverse forms of firms, industries and countries evolving in a dynamic and historical fashion (Aguilera & Jackson, 2010). Country laws and regulations, as the external corporate governance mechanisms, influences two crucial internal governance mechanisms: the ownership structure and the composition of boards (Jenkinson & Mayer, 1992). Board characteristics cast by corporate governance regimes have been dominating the research agenda covering the topics of board structures (Allen, Chui, & Maddaloni, 2008; Franks & Mayer, 1992), board size (Goodstein, Gautam, & Boeker, 1994; Judge & Zeithaml, 1992), board independence (Adams, Hermalin, & Weisbach, 2010; Barnes, 2009), CEO duration (Finkelstein & Hambrick, 1989; Jensen, 1993), but vast debates of these subjects has been directed to few geographic areas, mostly in the United States and in Europe.
corporate governance are often in a universalistic fashion neglecting the institutional, legal and cultural environment in which organizations and decisions are embedded.
1.2 The Status Quo of Interlocking Studies in China
In the vast body of literature with research focusing on the board of directors, the phenomenon of interlocking directorates, defined as a person affiliated with one organization sits on the board of directors of another organization (Mizruchi, 1996), is one of the inter-organizational relations that has been interpreted through organizational behavior embedded in corporate governance regimes. Governance through regulation, via rule making and rule enforcement is at the same time both constraining and encouraging the formation of interlocks. That is, ownership features and corporate governance codes that root in the various historical and economic backgrounds, characterize the structural differences of interlocking directorates networking (IDNs) within western countries. For instance, in a continental European corporate governance system, typically found in Germany, in which ownership of firms is, in general, concentrated within families and banks and where stakeholder wealth and cooperative, bank based market conditions are advocated, a two-tier board structure is placed and more dense interlocking ties are found in relation with a more concentrated ownership structure. While at the same time, in an Anglo-Saxon corporate governance system, where ownership is dispersed among numerous institutional owners and individuals imbedded in a competitive market based economy, such as in the U.S. and in Britain, a one tier board system is employed and less dense IDNs are found in relation with a more dispersed ownership structure (Allen et al., 2008; Franks & Mayer, 1992; Stockman, Ziegler, & Scott, 1985; Stokman, Ziegler, & Scott, 1985; Veen & Kratzer, 2011; Windolf & Beyer, 1996).
Early in 1998, Keister identified interlock formation dynamics through a data set of 40 companies, where he found interlocks were the consequence of industrial reform and privatization of Chinese companies during the 1980s. The later studies focus on knowledge transfer through network ties in the very early stage of globalization, in which technology oriented foreign-invested enterprises in China are found to be more likely to create managerial ties with other firms than with government officials, and entrepreneurial firms are more inclined to establish government ties (Ho & Chiu, 2011; Li, 2005). Bing Ren documented the first overall structural features of interlocks in China. She studied the pattern of interlocking directorates by employing a data set of 949 public listed companies in 1999, which revealed general IDNs features in China to be having a lower density, no integrated or nation wide network center, being regionally fragmented, having more industrial ties than financial ties and having a dominant government ownership due to a less developed market-oriented economy (Ren, Qu, & Lin, 2001; Ren, Qu, & Peng, 2004).
1.3 Theoretical Tensions
When denser IDNs are found to be positively related to concentrated ownerships in the west, resource dependence theory argues that companies with dispersed ownership should have more dense interlocking networks as companies are dependent on the resource environment in which the companies operate (Burt, 1983; Pfeffer & Salancik, 1978). From the resource dependence perspective, companies that have a more dispersed ownership, in which shareholders are not influential enough to control or contribute to capture the key resources that the company needs, the management board of these companies would have more incentive to seek these resources by implementing other strategies such as interlocking directorates. However, the ownership ties and resource dependence networks are both empirically supported while isolating each other in the previous studies (Casciaro & Piskorski, 2005; Heinze, 2004; Pennings, 1980; Windolf, 2002). The two theories are, as a matter of fact, not completely contradictory. The argument behind the ownership concentration can be justified from the resource dependence view; a more concentrated ownership in a cooperative environment, which is known to have dominance and provides easier access to certain resources the company depends on, meaning the ownership itself captures resource supplies. China, as other transition societies, carries the institutional imprints of a long lasting experience with state socialism and developed into a mixed economy characterized by hybrid organizational and property forms (Nee & Matthews, 1996). A paradigm shift from being a centered economy captured by central resource planning on state-owned enterprises 1 (SOEs) to a market inclined society with more private ownerships, entails a national wide transformation involving interdependent changes in state policy, regulation and social
1 The definition of SOE varies in China, this study define SOEs as enterprises that have state share in the companies, that
networks. Considering the ownership decentralization process during the last two decades, China is moving towards an economy that has more decentralized and dispersed ownerships, yet the main body still consists of concentrated ownerships, in which the dynamics of interlocking directorates may be influenced both from ownership perspectives and resource dependence perspectives. This study thus intends to apply both perspectives to capture a clearer picture of the interlocking phenomenon in China.
1.4 Motivation of the Study
Although the scattered studies on corporate governance and interlocking directorates in China were formulated with seemingly sound logic and legit lines of reasoning, all of them masked or skipped out on the nature of corporate governance. More precisely, the regulatory framework and the explicit make-up of the boards remain far from clear. In addition, the rapid process of globalization is incorporating Chinese firms into the global economy. Laws and regulations are being adapted, corporate governance codes are evolving in accordance with the transitioning economy, and ownership structure is gradually changing. Interlocking directorates that sprout in the background of Chinese regulatory framework and corporate governance system therefore deserve more empirical attention.
1.5 Research Questions
ownership structures and board structures which account for the formation and the characteristics of interlocking directorates. This study first reviews key misinterpretations of board structures in China in past studies, followed by the introduction of major topics of interest regarding corporate governance in China, such as ownership changes and board structure, to provide a background for the discussion of interlocking directorates. The implication of ownership structure and institutional environment will then be accounted for in hypotheses that explain the characteristics of interlocks on company level and individual level. Hypotheses on the variations between SOEs and private owned firms will be developed considering both the effect of the regulatory framework as well as the potential influence of resource dependence demands that has a fundamental power in explaining the interlocks in the west.
2. TOWARDS A BETTER DEFINED FRAMEWORK OF CORPORATE GOVERNANCE IN CHINA
Company goals and behaviors are predominantly influenced by its ownership structure and the nature of corporate governance, which shape the composition, and motivation of senior management and boards (Porter, 1990). Unlike what one might expect, the understanding of the transition of ownership in the Chinese economy, the Chinese corporate governance system and the board structure that is associated with it are extremely limited and unclearly defined. Tam‟s (1999) work, outdated and rudimentary, is by far the only book that provides a most complete overview of corporate governance in China, yet the China Journal criticizes it firmly:“ First, he fails to sufficiently analyze the role that
Researchers have always taken western theories for granted. Studies on organizational phenomena in China such as corporate performance (Yu, 2003), market valuation (Bai, Liu, Lu, Song, & Zhang, 2004), earnings (Firth et al., 2007), and disclosure practice (Fang & Yuan, 2007) were conducted employing variables which included CEO duality, board independence, board size. Arguments of these variables were developed in the context of the board structures and corporate governance systems in the west, ignoring the common understanding that corporate governance systems are embedded in different national, historical, political, cultural, economic and legal contexts (Aguilera & Jackson, 2010; Denis & McConnell, 2003; Roe, 1990). In these studies, the boundary and definition of the two-tier board system, comprised of supervisory boards and non-executive boards, the corporate governance dynamics were assumed to be similar with those in western countries, leaving the board structure in China as a whole remaining in a mist, and eventually resulting in the questionable applicability of western theories in this regard.
2.1 Misinterpretations in the Past and Research Obstacles in China
formalizes the Guidelines for Introducing Independent Directors to the Board of Directors of listed Companies (GIIDBDLC) and incorporates the independent board into the board system, however, only listed companies are obliged to comply with it.
2.2 Utilizing More Direct Information Channels for the Study
3. CORPORATE GOVERNANCE INFRASTRUCTURE IN CHINA
3.1 Formation of the Boards in the Process of Corporatization and Ownership Reform
The gradual restructuring of government ownership in China roots in the economic reform, which began with the „Open Door Policies‟ in 1978. It introduced a capitalist-inclined economic system and committed China into the foreign trade and international investments. The economic zones that enjoy economic and other laws which are more free-market-oriented than the country‟s typical national laws, and among other things, the privatization of small SOEs at county (village) level, the mass lay-off of SOE workers at city level have been well described in previous studies (Cao, Qian, & Weingast, 1999; Chen et al., 2006). In spite of the seemingly „reform in all fields‟ and „a rapid shift‟, that was frequently mentioned by scholars, the experimental reform on city level was geographically limited to 3 cities only, and until 1993, over 80% entities were still wholly state-owned factories in which „ the Factory Director (production leader)‟ was designated to undertake responsibility by following the strict orders from the central or local government. Self-evidently, the concept of board structure was not in place in the pre-corporatization era, and no board members existed (Table 1).
concept of the board of directors, the supervisory board and management team came forth. The emergence of these agents, although predominantly supervised by the government at the beginning, started to reduce the management control from the state in a moderate way.
Benefited by these series changes of policies, non-government sectors expanded precipitately, while state-owned companies had more acute organizational issues than ever, accompanied with worse firm performance (Zou, 2008). From the late 90s, big state-owned firms started to list on Chinese stock markets, however, most of them were still wholly owned by the state. In year 2003, SASAC was formally constituted, taking charge of the operation of all state-owned companies, and it embarked on a mission of privatization of SOEs, which should be completed in 2006. Hereafter, a much less centralized economy surfaced. The percentage of government investment in the economy dropped from 81.88% to 28.18% from year 1980 to 20082. Consequently, the corporate governance system and board structure have been adjusting meanwhile to these ownership changes.
Table 1: Institutional and regulatory transitions of the board structure in China Key events board structure
1978 – late 1980s establishment of economic zones factory leaders directly supervised by the government, do not have boards of directors. 1990 Shanghai and Shenzhen Stock joint stock raise the appeal of board structure Exchanges established
1993 Company Law enforced Board of Directors and Supervisory Board formed 2001-2002 Guidelines for Introducing all listed companies require to have independent
Independent Directors to the Board directors occupying at least 1/3 of board seats of Directors of listed Companies (2001)
& Code of Corporate Governance for Listed Companies in China
2008 SASAC Regulation (soft regulation) Government officers‟ official titles need to be removed after being appointed to full time director
positions in SOEs
3.2 The Board Structure in China
With the purpose of investigating the interlocking phenomena that are embedded in the Chinese board system, the board structure in a wholly state-owned company is to be introduced in the first place. Although boards of the companies can have differences across regions due to the undetailed board system defined in CLPRC and diverse ownership structures in China, the board structure (figure 1) that is present in the wholly state-owned companies still represents the typical Chinese board system of the majority of big Chinese companies.
In a wholly state-owned company, the board of directors and supervisory board are the key bodies of management (figure 1). The board of directors consists of three segments; 1) the executive board segment, 2) the non-executive board segment and 3) the independent board segment. In the
Executive Board Non-executive Board Independent Board Inside Supervisors Employee Representatives Outside Supervisors
The Board of Directors The Supervisory Board
Employee Representatives
executive board segment, employee representatives sometimes occupy some board seats3. Non-executive board members have their principal positions out of the company, that is, the non-Non-executive position is a part time position. For wholly state-owned firms, all the non-executive board members are SASAC officers, whose main function is to represent state ownerships, monitor the executive board and protect the interests of the government. Unlike non-executive board members, independent board members cannot have shares in the company for non-state owned companies, and it primarily consists of people who have expertise in law, finance and accounting. Constructed as a combination of the executive, nonexecutive and independent board segments, the board of directors is indeed structurally different from an Anglo-Saxon 1-tier board.
The supervisory board, as an extra monitoring organ, which more than 1/3 of its members required to be employee representatives, is composed of inside and outside supervisory segments. The installment of outside supervisors is to enhance the independence of its‟ supervisory function similar as that of the independent board in the board of directors. The necessity of setting up multiple supervisory functions may originate from the issues raised by state ownership concentration, where non-executive boards and independent boards supervising the executive board members by their government identity and by their expertise, aim at mitigating principle agency problems between state owners and directors. The inside and outside supervisors are here then set to balance the conflicts between big shareholders and small shareholders or sometimes stakeholders.
In private companies, the ultimate power is in the hands of the general shareholders‟ meeting. When companies have concentrated ownerships, where ownership and control are not separated, the dynamics of reporting system in the supervisory board looses its meanings. The reporting system would only have a chance to work when the ownership and control are detached, most likely in companies that have dispersed ownerships, but dispersed ownerships are extremely few in China. Private companies set up supervisory boards only because it is legally required in the CLPRC. Without voting rights, the supervisory „board‟ in China, therefore, is fundamentally different from what it is in a continental 2-tier board and it only has a purpose when a company is state owned.
General features of the board structure and board characteristics of SOEs in China are presented briefly in Appendix C, including the recruitment channels, and some features of the board members. The interlocking directorates that rise within the corporate governance system and board structure will be further discussed in the next chapter.
4. WHERE ARE THE INTERLOCKERS
4.1 Different Interlocker Percentage in SOEs and Private Companies
these studies suggests that the institutional structure of ownership creates the context for the rise and fall of networks.
4.1.1 Recruitment Regulation and Practice of SOEs and Private Companies
Why the ownership variation in China would influence the configuration of interlockers? Before anything else, it is necessary to have a constructive overview of who are in charge of the nomination, appointment and removal of the board members，and who are the people appointed to
executive, non-executive, independent and supervisory board segments. In a wholly state-owned company, three parties are responsible for different board positions; 1) The government (local or central) nominates, appoints and removes the chair of the board of directors and the chair of the supervisory board, and the Municipal Committee of People‟s Congress (MCPC) approves the decisions; 2) SASAC, the government organ that supervises state assets, which also functions as the general shareholders‟ meeting of SOEs, takes charge of the rest of the board seats except employee representatives, for which however the decisions are required to be permitted by the local government ; 3) Employee representatives both in the board of directors and supervisory board are elected from the Workers Congress in the SOEs and accepted by SASAC.
companies tend to recruit candidates that at the vicinity of the company‟s network and are more inclined to use public recruitment agencies to access broader public targets than SOEs.
Different board segments are associated with people having different backgrounds. For instance in wholly state-owned companies, 1) the executive board segment in which the board members‟ main responsibilities are determining the companies‟ business and investment plans, is frequently filled in by people with stronger management and industry experience such as former government officers that worked in financial related bureaus, former factory directors or upper management members of state owned units. These people are officially detached from their government rank after being appointed to full time board positions if they were government officers, but all of them are under government administration by SASAC. 2) Current SASAC officers occupy the non-executive board segment, and their main function is to supervise the executive board members as official government representatives, and to assure that the executive board members properly implement government policies and regulations. 3) The independent board segment, in general, is composed of people with advanced education or individuals equipped with financial, accounting and law backgrounds. These independent board members supervise the executive and non-executive board segments by providing expertise. 4) The supervisory board itself, as a parallel organ of board of directors, defined in CLPRC, carries a supervision function only. It consists of insider and outsider supervisors who have different backgrounds such as in management, financial, accounting, law, and industry expertise.
noteworthy to mention that the supervisory board, which is an extra supervision organ, where a higher percentage of employee representatives is required compared with CBD.
4.1.2 The Direct Constraint Forming Interlockers on the Non-executive board of SOEs
One established practice in SOEs aforementioned is expressively influential to the formation of interlockers in SOEs, that is, current SASAC officers occupying the non-executive board segment. Local SASAC consists of a limited number of officers. For example, in the city of Jiaxing, the size of SASAC is 20 officers, among whom half of them are qualified enough to be sent to the boards of SOEs. Consequently, these few SASAC officers are likely to sit on multiple boards of different SOEs in the same city. In state holding companies and state participation companies, government and SASAC fill in board positions according to the percentage of state share in the companies, and these government appointed positions employ the same mechanism as in wholly state-owned companies.
4.1.3 Limited General Recruitment Channels Breeding More Interlockers in SOEs
result from three reasons: 1) the PB keeps a detailed profile track of every single candidate in the talent pool with standardized performance indicates, it is thus a more convenient and credible a resource than public supplies. 2) Government officers as well as some upper management members who work for the government affiliated units receive exceptional welfares and other benefits from the government, including but not limited to management training, human resource training, and academic education. The government perceives them as invested human capitals that should be utilized for state functions in time of need. 3) The dissimilarity of working in SOEs and private companies are believed to be substantially evident, therefore experience and understanding of the working mechanisms in government related units are considered to be critical for future board members. In the unlikely event that a non-government affiliated candidate is recommended through the recruitment agencies that under PB, SASAC tends to test the person first by putting him (her) on an operational management position rather than on the board directly.
Unlike SOEs, in private companies, the shareholders‟ meeting selects all board members and they tend to use much boarder recruitment channels targeting the mass public. One might argue that private owners, such as family owners might favor nepotism, which would result a much smaller talent pool that could create rooms for more interlockers. However, most private companies in China have been developing only for less than 20 years4, and very few private owners would have accumulated enough capital to invest in multiple big corporations to create ownership ties that are comparable to the degree of multiple investments SASAC is representing in the Chinese economy.
4.1.4 Company Ownership Status in China
In China, regardless of the acceleration of foreign trades and a decrease of state ownership in the 30-year economic reform, the predominant characteristics of ownership structure in China is still
featured as concentrated, centralized, and having high percentage of state or family ownerships (Allen et al., 2008; Hall, Jiang, Loscocco, & Allen, 1993a; Liu, Tian, & Wang, 2011). By year-end 2011, a survey done by Development Research Center of the State Council (DRCSC) shows that 1% of state-owned companies are listed, while listed non-state-state-owned companies only represent 0.01% of their group5. Besides, 80% of companies on the Top 500 Chinese enterprises of 2011 are state-owned firms, ranked by the China Enterprise Confederation (CEC). Considering the concentrated state-ownership that still exists, the interlock ties are expected to represent proprietary relations in Chinese listed companies. Additionally, since SOEs have a larger likelihood of interlocks than private companies, since they are subjected to more regulations and constraints that provide the conditions for this.
H1: SOEs have more interlockers than private companies
4.2 Different Interlocker Positions in the Board Segments between SOEs and Private Companies Besides the conventional practice of SASAC officers being appointed in positions in the non-executive boards of SOEs that have obvious power to explain the higher chances of creating interlockers in the non-executive board segment, in what other board segments are there any likelihoods of creating a position for interlockers in SOEs and private companies?
4.2.1 Interlockers of SOEs Represent Ownership Control in all Board Segments
employee representatives in SOEs according to the percentage of state share, therefore the board members‟ primary relationship is with the company‟s ownership, that is the government, and governance is a downward extension of ownership. Consequently, the government has the incentive to purse and safeguard the interests of the state-ownership by appointing government-affiliated candidates from the talent tank in to all board segments of CBD and CSB.
H2a: SOEs establish interlockers in all board segments
4.2.2 Regulatory Influences on Interlockers in Different board Segments of SOEs
Under the constraints of the limited talent pool of the PB that the government prefers to use, interlocking directorates are expected to appear on all of these boards. Nevertheless, this does not mean similar percentages of interlockers are to be found in all these boards of SOEs, since some boards would have less room for state representatives due to CLPRC specifications. For example, the percentage of representatives of employees shall account for no less than 1/3 of all the supervisors6, and if a limited liability company established by 2 or more owned enterprises or other state-owned investors, the board of directors shall include representatives of employees of the companies7.
H2b: In SOEs, independent board shall exhibit higher percentage of interlockers than executive and
non-executive board followed by supervisory board due to different specifics of regulatory constraints
4.2.3 Interlockers of Private Companies Represent Resource Requirements on Non-executive Boards and Independent Boards
Other than enterprises owned by the state, companies in China are mainly owned by groups of people in the form of collectives or owned by private citizens, that is firms are owned by an individual, usually the founder; by a small set of individuals, usually the founder and other family members or
close friends or partners; by banks and other financial institutions; or through the issuance of public stock (Hall, Jiang, Loscocco, & Allen, 1993b). Researchers argue that principle agency problems are smaller in family owned firms due to the combination of ownerships and control and the interests of families can be more easily identified by the power and influence that family owners can have on the board (Ali, Chen, & Radhakrishnan, 2007; Demsetz & Lehn, 1985; Jensen & Meckling, 1976). Therefore, family owned firms, similar to state-owned companies, tend to monitor and control the firms by placing owner representatives on the boards. Private companies in China thus are expected to exhibit the same behavior; the makeup of the board would likely present the composition of ownership that is owners would maximally take up board seats with voting rights. However, Chinese private companies are not yet large enough to interlock with each other due to a substantial share of representatives. If any interlockers exist in private companies in China, what would then be the potential positions for them to reside in?
probability that firms will reconstitute their connection (Palmer, Friedland, & Singh, 1986). Pennings (1980) found pervasive use of financial interlocks and financial organizations appear more frequently at the center of interlock networks than non-financial firms (Mintz & Schwartz, 1981). SOEs in China enjoy the convenient resources that are embedded in the ownership structure, having easier financial access, sitting on soft government budgets, living on favorable regulations and policies (Huang, 2005), while private companies might encounter difficulties of financing, as they have no such convenient access to resources. It is thus likely for private companies to create financial ties to create similar access to financing. In other words, people who do not have share or have non-ownership representing share but equipped with financial resources such as bankers could be potentially present on the non-executive board. Resource Dependence Theory also suggests that interlockers are utilized to integrate and legitimate the firms in its external environment (Allen, 1974; Casciaro & Piskorski, 2005; Dooley, 1969). Additionally, the Management Control Model believes that the essential business decisions are almost always made by a management team which uses the board only for advice, criticism, prestige, and to minor extent for business contacts (Koenig, Gogel, & Sonquist, 1979). These arguments provide a plausible reason for private companies to have interlocks on the independent board. Private companies would be motivated to hire people with advanced education, or professionals have expertise in financial, accounting and law practice in the aim of seeking advice, gaining reputation. A small number of respected academics, famous lawyers, reputable accountants and auditors are, as a result, likely to sit on multiple independent boards of private companies.
H2c: SOEs have more interlockers in executive, non-executive and supervisory board segments than
private companies have, and private companies have interlockers mostly in their independent board
4.3 Interlocking Ties between SOE-SOE, Private-Private and SOE-Private
In the arenas of inter-organizational relations, studies have focused on resource procurement and allocation, on power dependency and the problems of overcoming environmental uncertainty (Galaskiewicz, 1985). Interlocking directorates are one of the important elements in organization theory (Allen, 1974; Fombrun, 1982) which is utilized to restructure these companies‟ dependencies (Allen, 1974; Casciaro & Piskorski, 2005; Dooley, 1969; Finkelstein, 1997; Pfeffer, 1972). In the case of China, considering the resource convenience SOEs enjoy and the social capital board members of SOEs accumulated, private companies would have incentive to interlock with SOEs from a resource dependence perspective. However, the premise of these theories and studies is set in free market economy of developed capitalist countries. When they are applied to a less free market, would these principles still stand? What types of companies are interlocked? Do ownership distinction and regulatory constrains would be more influential? The arguments made in chapter 4.1 and 4.2 suggest that SOEs are interlocked with SOEs on all board seats, and private companies would most likely to have interlockers in their independent board segment, which leaves two unresolved questions; do SOEs and private companies interlock with each other, and what board positions would those be for?
companies at maximum”. Although the regulatory framework in China does not dictate the maximum number of interlocking positions on other boards, the implications of the Guidelines are faithfulness and dedication of the board members to their principal position. Faithfulness and diligence repeatedly appear also in CLPRC8, CCGLC9, and SASAC recruitment and assessment criteria10. Despite the detachment of government rank after being appointed to SOEs as executive board members or supervisors, which liberates these directors and supervisors from the constraint of not serving on other companies without permission in CSLPRC, these people are still under the supervision and administration of SASAC. In the hypothetical case of a government-affiliated director of SOEs serving on the boards of private companies, the assessment team of SASAC would easily perceive this person as not fully dedicated to the political party, tend to be money oriented, less stable personality that would unquestionably lower the assessment score, which consequently reduces the chance of future promotion within SOEs. Besides this, Hofstede (1983) argues that collectivist countries such as Asian countries are characterized by collectivism rather than individualism, larger power distance, higher uncertainty avoidance which all reduce the possibility of interlocking ties between SOEs and private companies on government affiliated board member positions. The only board positions in SOEs that do not consist of government-affiliated directors are in the independent boards, which are mainly filled by prestigious professionals in law, financial and accounting, and respected professors from universities or research centers. These people have their part-time positions in big companies as independent director while have their principal function in academia or professional firms, thus they are not conditioned by CSLPRC nor are they confined by the concept of faithfulness and dedication on the part-time positions.
8
Article 148: the directors, supervisors and senior managers shall comply with the laws, administrative regulations and bylaw; they shall bear the obligations of fidelity and diligence to the company.
9 Article 33: Directors shall faithfully, honestly and diligently perform their duties for the best interests of the company and all the shareholders
In other words, SOEs are not likely interlock with private companies other than in the independent board segments.
H3: The likely interlocking ties between SOEs and privates companies exhibit mostly in the
independent board segments of the two types of companies
4.4 Geographic Interlocking Ties and the Geographic Distribution of Interlockers
The location of companies cluster on the basis of unevenly distributed industry resources and other resources that a region is likely to attract and retain (Romanelli & Khessina, 2005), such as financial and political convenience. Insofar as a region‟s economic prosperity depends on these resources, it makes sense to regard regional differentiation, as a standpoint of the interlock phenomenon, which would manifest some dissimilarity across regions. For example, the IDN variation of the banking industry in Japan was closely related to regional operation differences (Okazaki, Sawada, & Yokoyama, 2005) and the difference of local financial institutions in regions exert influence on the IDNs of the regions (Galaskiewicz & Wasserman, 1981).
4.4.1 Within-Province and Cross-Province Interlocking Ties
constrained by local government arrangements, the regional clustering effect on independent board would be less likely to occur.
H4a: There are more within-province interlocking ties than cross-province ones on all board except in independent board segment
4.4.2 The Provincial Marketization Influence on Interlocking Directorates
Geographical variation in privatization in China is a result of the reform policy unconformities in regions, and spatial dissimilarities that emerged with distinctive economic opportunities. The presence of autonomous regions, special economic zones as well as various geographic idiosyncrasies framed vast regional differences in the ownerships and vitality of Chinese firms. Besides, state influence varies extraordinarily from province to province, and even city to city. Such diversity was documented in Han and Pannell‟s (1999) case study, which shows that the distribution of private businesses and enterprises among Chinese provinces are extremely uneven. A province such as Guangdong, where the Special Economic Zone were first established, maintained to be most privatized province On the other hand, the north and southwest of China exhibited a weak private sector and some provinces overlapped in their relative strength private urban sector and staff strength of state-owned commercial sector (Han & Pannell, 1999). Additionally, also the Index of Marketization of China‟s Provinces (IMCP) published by the National Economic Research Institute (NERI) since 2001 depicts a picture of the regional differences, for example, Jiangsu province scores 11.54 and Tibet grades 0.38 in 2009 (Fan, Wang, & Zhu, 2011).
interlocks that would be otherwise created by concentrated ownership, especially created by the restrain of government ownerships.
H4b: The less market oriented a province is, the more interlockers a province has
5. WHO ARE THE INTERLOCKERS
5.1 The Systematic Variation on Individual Expertise
Moshe Farjoun (1994) suggests that the types of human skills and expertise exhibit in different groups of firms are related to the distinct resources these firms depend on. Interlocking directorates, as one of the organizational tactics to restructure the outside resource dependence thus are expected to display systematic variation on an individual level between SOEs and private companies.
Consequently, unlike private companies that might establish more interlockers with financial background to reconstruct their financial requirements, SOEs have less incentive to do so.
H5a: The proportion of interlockers with financial background of SOEs is smaller than that of private
companies
The primary industry sector11 is bigger in scale and is more exposed to resource dependence issues, which are likely to have more political interference and regulation, that is, SOEs would have established their majority in the business of a sector for a considerable time. The conducted interviews also reveal that current interlockers of SOEs are, in general, individuals with considerable management experience in big SOEs, with profound industrial expertise, or previous high position in business and financial related government bureaus. On the other hand, private companies tend to engage in the smaller scale and less capital-intensive secondary sector and some tertiary sectors due to lack of capital and to avoid the competition with national conglomerate confirmed by surveys conducted by Center for Private Economic Studies, Chinese Academy of Social Sciences (CPES), and they are younger companies as a result of the historical reasons described in chapter 4.1. Besides that, the tertiary sector itself is a young developing sector that does not yet have a long historical establishment, of which the growth over the world has been documented in several studies (Bhattacharya & Mitra, 1997; Ghosh, 1991; Mazumdar & Sarkar, 2007). As a result, a political affiliation, industry and management expertise as well as general working experience of interlockers in private companies are expected to be lower.
11
H5b: The proportion of interlockers with political background of SOEs is larger than that of private
companies
H5c: The mean age of interlockers of SOEs are older than that of private companies
H5d: The proportion of interlockers with industrial expertise of SOEs is larger than that of private
companies
H5e: The proportion of interlockers with management experience of SOEs is larger than that of private
companies
Arguments made in Chapter 4.2 suggest that private companies tend to employ interlocking directorates with prestigious academic background to legitimate themselves, so that the dissimilarity of educational backgrounds between SOEs and private should be observable.
H5f: The proportion of interlockers with academic background of SOEs is smaller than that of private
companies
H5g: The average education level of interlockers of SOEs is lower than that of private companies
6. DATA & METHODOLOGY
6.1 Study Population, Data Collection and Selection
annual reports from 2011 provided by Chinese financial websites12. Board data consists of combined information from annual reports and online resources13.
6.2 Variable Definitions, Measurements and Coding in the Dataset
SOEs and Private Companies are distinguished using 0% state ownership cutoff, meaning
companies are defined as private companies when having 0% state ownership, and SOEs are defined as companies having more than 0% state ownership. Considering the majority of Chinese private companies were the result of ownership decentralization in the last 20 years, they are former SOEs that in essence would be likely to have organizational inertia and might carry on some behavioral characteristics of SOEs. Using 0% rather than 10%14, 33.3% 15or 50%16 would be able to capture more pronounced characteristics within these two groups of firms. Using this classification, the sample yields 56 private companies and 227 SOEs, representing 19.79% and 80.21% of the total sample respectively.
Interlocking Directorates are defined in line with Mizruchi (1996), according to which an
Interlocking Directorate is defined as a person affiliated with one organization sits on the board of
directors of another organization. In this case, I included the CBD and CSB. Not all the ARs
distinguish executive and non-executive board segment, neither do they identify inside and outside supervisory board segments that depicted in the figure 1, thus I categorized the board composition as non-independent board of directors (executive and non-executive board of directors), independent board of directors and supervisors.
12 http://finance.sina.com.cn/, http://www.eastmoney.com/
13 http://finance.china.com.cn, http://finance.sina.com.cn/, http://search.10jqka.com.cn/, http://baidu.com
14 Conventionally, western scholars use 10% cutoff to distinguish ownership concentration, this frame does not seem to be applicable in China. 4 out of 283 in the sample has dispersed ownership according the western concept. Furthermore, 3 out of the 4 companies have their biggest share in the hand of the government still.
15 According to Article 104 of Company Law, “When the shareholders‟ assembly makes a decision to modify the bylaw, or to increase or reduce the registered capital, or a resolution about the merger, split up, dissolution or change of the company form, such a decision shall be adopted by shareholders representing 2/3 or more of the voting rights of the shareholders in presence”, that is, a shareholder that has share exceed 1/3 of total share in the company has veto rights, and the shareholder is considered to be a relative holding shareholder of the company. If the shareholder is the government, then the company is a relative state-holding company“.
Interlocking Directorates Ratio. Since companies have different board sizes, depending for
example on the size of the company itself, it is likely that larger boards have more interlocking directors and smaller boards have less interlocking directors. In order to be able to compare differences in number of interlockers, the number of interlockers is weighed by the total board size of a company. The Interlocking Directorates Ratio is therefore operationalized as the total amount of interlockers per company, divided by its total board size.
Financial background is operationalized as whether or not individuals have previous working
experience in financial department, financial sector or has financial educational background including economics and accounting background, and is coded as 0 or 1 in the dataset (Appendix D), where 0 indicates the interlocking director has no financial background, and 1 indicates having financial background. Academic background is defined as whether or not those individuals occupy formal positions of authority in prestigious universities, recognized national research centers, and is coded as 0 or 1 in the dataset, where 0 indicates the interlocking director has no academic background, and 1 indicates having academic background. I do not include visiting professors. Education background is defined as the highest level of academic education those individuals reach and is divided into 4 different ordinal ranks. Rank 0 represents whether an interlocking director is having a degree below Bachelor level, rank 1 represents having a Bachelor degree, rank 2 represent having a Master degree, and rank 3 represents having a PhD degree or above. These categories are similar coded in the dataset (0, 1, 2 or 3). Management experience is defined as whether or not the individual has previous management position in big companies, and is coded as 0 or 1 in the dataset, where 0 indicates the interlocking director has no management experience, and 1 indicates having management experience.
Industrial Expertise is defined as whether or not individuals have previous industry-specific managerial
indicates the interlocking director has no industrial expertise, and 1 indicates having industrial expertise.
Marketization is operationalized using NERI Index of Marketization of China‟s Provinces 2011
Report. The index represents the most updated marketization status of year 2009, and it is based on multi-year comparability since 2001. Previous studies (Allen, 1974; Burt et al., 1980; Peng, 2001; Pennings, 1980; Pfeffer, 1972; Veen & Kratzer, 2011) have shown that board size, firm age, IPO age, region, capital requirements, company size, foreign sales and industry are influential factors in relation with interlocks, and I included these variables as control variables. Board size is the total number of board members on CBD and CSB. Firm age uses the year of incorporation. IPO age is the year of listing of a company on A share. Region Capital requirement is counted as the debt-equity ratio.
Company size use total assets in Chinese currency (RMB). Foreign sales are the percentage of foreign
sales of total sales. Province and industry are dummy variables and coded as 1 when applicable to a company, otherwise coded as 0 in the dataset. Industry is coded according to the classification standardized by the National Bureau of Statistics of China (NBSC).
6.3 Considerations of Complications Regarding Included Samples and Implemented Solutions
6.3.1 Company Size and Company Age
companies in China. However, not many companies in the Chinese ranked Top 500 provide accessible data. Within the Chinese Top 500, only 5.8% of the companies are on the list of Fortune China 500. The disparity roots in the historical context of the ownership reform. An interview I held with one particular company, well illustrated the typical formation and transition of a decentralized listed company in China.
Minfeng Special Paper is a public listed company listed in on Shanghai Stock Exchange from 2000 on. Its 51% share is in the hands of the Minfeng Group whose 40% share is directly owned by the local government. Before 2000, Minfeng Paper was a subsidiary of the original Minfeng Group, which includes schools, hospitals and other entities. In 1999, Minfeng Paper, the only well performing asset under the Minfeng Group by that time, was separated from other assets as an individual liability company. In 2000, Minfeng Paper listed in Shanghai Stock Market as a wholly state-owned company. In 2006, stock reform took place, and government ownership reduced drastically. Consequently, companies as the Minfeng Group are likely to be present in the Chinese Top 500 list and enterprises like Minfeng Special Paper made it possible to appear on Fortune China 500. Besides the company size issue, it is obvious that the time of incorporation of SOEs mostly appears to be around the year 2000, when most of the pre-SOEs reincorporated to be listed on A Share. Thus for these listed companies , the company age should be similar and therefore maybe a less of an explanatory variable.
6.3.2 Definition of State-ownership
in this study a 0% cut-off has been applied to distinguish SOEs and private companies so as to maximally reduce the effect of organizational inertia present in SOEs, as mentioned in 6.2, on the here defined private companies.
6.3.3 Overlaps of Chinese Names
The majority of Chinese names consist of 2-3 Chinese characters, and the top 20 most popular Chinese surnames represent 50% of the nation‟s surname according to the 6th census in 201017. As a result, name overlaps of board members are highly likely to occur in the sample. To avoid the overlaps and identify true interlocking directorates, I track down the age, background, experience, and education levels of all the individuals that have reappearing names. The sample presents 55 cases of name overlaps on 125 board positions, and the overlaps increased to 122 overlapping names on 266 board positions after translating the Chinese names into English.
6.4 Data Analysis Methods
6.4.1 Statistical Analyses and Modeling
Hypothesis 1. In order to investigate whether SOEs have more interlockers than private companies, first a ratio of total interlockers divided by the total board size was calculated for each company so as to weigh in board size. Subsequently, a one-way ANOVA was performed to test whether the mean interlocker ratio for SOEs was differed significantly from that of private companies.
Hypothesis 2. In similar way, to determine difference of the mean number of interlockers within different board categories, between SOEs and private companies, one-way ANOVA was performed on the ratio of interlockers per board category (i.e. Executive and non-executive -, supervisory-, and independent boards, divided by the total board size).
Hypothesis 3. To illustrate the differential ways in which SOEs and private companies interlock depending on board segments, interlock networks based on board segments were modeled and visualized using Cytoscape, supported by a statistical analysis to determine whether the differences between proportions of interlockers in SOE-Private ties versus SOE-SOE and Private-Private ties were significantly different, in the form of a Fisher‟s Exact Test.
Hypothesis 4a. For examining whether there are more within-province interlocking ties than cross-province ones on all board except on independent boards, descriptive summary statistics were used, quantifying the interlocking cross- and intra-provincial ties between SOEs and private companies combined, separated by the different board segmentations. Additionally, to determine whether these differences between interlocker proportions for different board segments between within- and cross-provincial and intra- and inter-regional interlocking ties were significantly different, a Fisher‟s Exact Test was performed.
Hypothesis 4b. Multiple linear regression was used to determine presence and size of the effect of the marketization (M) level according to the NERI Index 2009 on interlocker percentage (P), adjusted for, state ownership (O), capital requirements (C), foreign sales (F), firm size (S), firm age (A), IPO (listing) age (L), board size (B), industry (I), and region (R), being potential confounding factors. The linear regression model has therefore been defined in the following way:
P = c + β1 M + β2 O + β3 C + β4 F + β5 S + β6 A + β7 L + β8 B + β (9-21) Industry + β (22-49) R + ε
these variables, a Mann-Whitney tests were used in case of education level of interlockers where variables had 4 ranked categorical variables were tested to determine whether the mean education level between interlocking directorates from SOEs and private companies. ANOVA was used in case distributions of continuous data (age of interlockers) were tested to determine significant differences between the means of a variable between SOEs and private companies.
6.4.2 Software
All statistical calculations were done using SPSS version 19, all interlocking directorate networks were modeled and visualized using Cytoscape version 2.8.3 (http://www.cytoscape.org/).
7. RESULTS
Within the 4,198 board seats generated from 283 domestically listed Chinese companies, 129 interlockers occupying 277 board seats created 164 direct inter-organizational ties among 159 companies. 21 companies out of the 159 interlocking companies are private enterprises occupying 7.4% of the total sample (which is 283), and 138 interlocking companies are SOEs taking up 48.8% of the total sample. These interlockers are scattered around in 27 out of 34 total provinces and autonomous regions in China.
difference between SOEs and private. The higher level of regulatory constraints on SOEs therefore may serve as a valid explanation of the disparity between the two groups.
Table 2: Mean Ratios and Standard Deviation of Amount of Interlockers Per Board
Board Segments Private Companies SOEs
Mean Ratio S.D. Mean Ratio S.D.
Total Board (CBD+CSB) .0369 .05640 .0722 .07963
Executive and Non-executive Board .0022 .01226 .0172 .04059
Supervisory Board .0000 .00000 .00080 .02562
Independent Board .0347 .05252 .0468 .05913
Hypothesis 2. Table 2 also presents the different interlocker positions in the board segments between SOEs and private companies. SOEs have interlockers in all board segments, and higher mean ratios are correlated with the segments that have less regulatory constraints as Hypothesis 2a and 2b predicted. On the contrary, private companies exhibit no interlockers on supervisory board, very low ratio on executive or non-executive board, but the ratio of interlockers on independent board reaches a similar level compared with that of SOEs, Hypothesis 2c is supported. A one-way ANOVA is performed separately on the different board segments and the result shows that the within group differences on non-independent board and supervisory board are significantly different (Appendix F), however the means of interlockers on independent board in SOEs and private companies appear not too much different in size.
sacrificing ownership control on executive and non-executive board. Furthermore, the only case of interlocking position on non-independent board of private company appears to be a special case. Mr. Kaiguo WANG is a director in private company Shenzhen Development Bank and the chairman of the board of directors in SOE Haitong Securities Company. He is also a researcher in the Institute of Economics Chinese Academy of Social Science (IECASS), and had been a professor in several universities. His background shows that he was recruited into SASAC in 1990 to do researches on economic reform in China due to his previous academic achievements. As mentioned in 6.2 executive and non-executive board members are not disclosed in the ARs, besides, unlike in the West that, Chairmen are not necessarily executives in Chinese companies, therefore his profile represents more similar interlocking dynamic as in non-executive board and independent board. However, the resource dependence view used in 4.2.2 to address the possibility of interlocker positions on non-executive board might still be relevant since the Shenzhen Development Bank exhibits an extremely high capital requirement (debt-equity ratio) of 15.69, which is 6.1 times higher than the mean ratio of capital requirements of the 283 companies.
analysis. The proportion of interlocks in the independent board segments for SOE-Private amounted to 26.7% whereas for all other board segments this amount to 6.8%. A one tailed Fisher‟s Exact Test (Appendix G) showed that the proportions of independent-independent interlocks being SOE-Private is significantly larger than the proportion of all other board having SOE-Private interlocks (P=0.001, α=0.05). Hypothesis 3 is supported. Restrained by law and culture norm it is unlikely for interlocking ties to emerge among non-independent boards of SOEs and private companies. It also suggests that SOEs and private companies are two different business groups probably operate in different business environments, restrained by different levels of regulatory frame and are likely to subject to different resource demands.
Table 3: Summary of Inter-organizational Ties Among SOEs and Private Companies
Type of Interlocking Ties (positions) SOE-SOE Private-Private SOE-Private Total b/t. Non-independent and Non-independent CBDs 23 0 1 24 b/t. Non-independent and Independent CBDs 11 0 2 13 b/t. Non-independent CBD and CSB 7 0 0 7 b/t. Independent CBD and CSB 6 0 1 7 b/t. Independent and Independent CBDs 75 2 28 105 b/t. CSB and CSB 8 0 0 8
Summary Non-SOE-Private Ties SOE-Private Ties Total
Independent and Independent CBD Ties 77 28 105
Note:
1) A-F: different board segments
2) The node shapes distinguish private companies (squares) and SOEs (circles).
3) The node sizes in each sub-figure are proportional to relative company size in a particular network on a log10 scale size of total assets of a company.
4) The colors of the nodes stand for provinces in companies located (see legend). Provinces are colored based on geographical distance: the smaller the distance, the more similar in color grade a province is.
Legend: Province
Guangdong Liaoning Sichuan Anhui Guangxi Jilin Hubei Yunnan Jiangsu Gansu Zhejiang Beijing Hebei Heilongjiang Guizhou Hunan Shaanxi Fujian Shanxi
Qinghai Shandong Inner Mongolia Jiangxi Shanghai Tianjin Chongqing Henan
A) Executive, non-executive board with Executive, non-executive board
B) Executive and non-executive board with Independent board
F) Supervisory Board with Supervisory Board E) Independent Board with Independent Board
C) Executive, non-executive board with Supervisory Board
D) Independent board with Supervisory Board
Figure 3: Interlocking Ties Among Different Board Segments Note:
Hypothesis 4a. The geographical demonstration of within-province and cross-province interlocking ties is displayed in Table 4. Non-independent CBD and CSB show a generally pattern of establishing more interlocking ties within province than cross province. Independent boards, on the other hand, show much less geographic constraints than other boards. The results stay consistent and display more prominent geographic endogeneity using region18 boundaries (Appendix H). To further testify that the within province cluster of ties are influenced by SASAC policies, the interlocks were divided into 2 groups as being Independent-Independent or “other board segment” ties in a similar manner as for testing hypothesis 3, and grouped according to being intra- or inter provincial and regional, as shown in Table 4. The proportion of independent-independent interlocks within-province amounted to 40% whereas cross-province this amounted to 60%, for “other board segment” ties this was 64% and 36% respectively. A one tailed Fisher‟s Exact Test in this case (Appendix I) was performed, showing that the proportions of independent-independent interlocks occurring cross-province is significantly smaller than the proportion occurring within cross-provinces (P=0.002, α=0.05) for all boards compared to independent boards. In similar fashion, Fisher Exact Test results show that the proportion of other board segment interlocks occurring inter-regionally is smaller (P < 0.001, α=0.05) than for independent-independent interlocks (54% cross-region ties and 46% within region for independent-independent, versus 20% and 80% for “other board segment” ties respectively). Hypothesis 4a is supported.
Table 4: Summary of Geographical Interlocking Ties
Type of Interlocking Ties (positions) w/in P cross P w/in R cross R Total b/t. Non-independent and Non-independent CBDs 18 75% 6 25% 20 83% 4 17% 24 b/t. Non-independent and Independent CBDs 7 54% 6 46% 8 62% 5 48% 13 b/t. Non-independent CBD and CSB 3 43% 4 67% 6 86% 1 14% 7 b/t. Independent CBD and CSB 4 57% 3 43% 5 71% 2 29% 7 b/t. Independent and Independent CBDs 42 40% 63 60% 48 46% 57 54% 105 b/t. CSB and CSB 5 63% 3 37% 8 100% 0 0% 8
Summary w/in P cross P w/in R cross R Total
b/t. Independent and Independent CBDs 42 40% 63 60% 48 46% 57 54% 105 Among Non-independent Board Total 37 63% 22 37% 47 80% 12 20% 59 Note: P stands for province, R stands for region
