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

Ninghua Zhong, Shujing Wang, Ruidai Yang

Journal of Business Ethics 2015

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Should corporate governance only take into account the interests of shareholders who supply finance, or should it also be responsible for other stakeholders’ interests? 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.

About the author

Ninghua Zhong: School of Economics and Management, Tongji University. professor.
Shujing Wang: School of International Finance, Shanghai Finance University
Ruidai Yang: School of Economics, Peking University

Keywords

Corporate governance, Employees’ interests, Efficiency wage theory

Brief introduction

Corporate governance is ‘‘the design of institutions that induce or force management to internalize the welfare of stakeholders. Does corporate governance induce managers to internalize interests of the primary stakeholder group? Are managers in firms with certain governance structure working harder to pursue common interests of both shareholders and primary stakeholders, rather than only focusing on maximizing returns to shareholders? And does the presence of governance structure contribute to the maintenance of stakeholder relationships?

Using a unique dataset, this paper empirically examines these questions, exploring the relationships between corporate governance and employees’ interests. The test consists of five parts: (1) whether and how corporate governance affects the distribution of sales revenue among shareholders (in the form of profits) and employees (in the form of wage and welfare expenditures). For this, we compare the group of firms with and without certain governance structures by the shares of wage, welfare expenditures, and pretax profits in total sales. (2) Do governance structures have enhanced key interests of employees, namely, higher hourly wages or lower monthly working hours?(3)do governance structures lead to more expenditure on training? (4) Does governance contribute to the continuing participation of employees, preventing them from with-drawing from the corporate system? For this question, we examine the average tenures of workers and clerks in firms with and without governance. (5) Do governance structures improve fringe benefits for employees, such as various insurance coverage, a canteen or a clinic, and severance?

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 block holders superpower are negatively associated with employee’s 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.