The issue of enforcement in Chinese corporate governance

The purpose of this paper is to discuss two important aspects of enforcement of ethical standards: indirect enforcement, that is the Confucian approach, and common law enforcement. In the context of Confucianism, one must adopt the ethical teachings in a moderate or “middle” way. We should not be too attached to the liberal interpretation of the Confucian texts but must have the wisdom to apply the concepts case-by-case. The issue then is if there are no legal consequences or punishment, then how we can ensure that someone will continue to comply with the standards.

The authors analyze the Confucian texts in relation to the enforcement of the ethical standards. The authors investigate the Entity Maximization and Sustainability Model by referring to the exit option, the voice option, the influence exerted on the board of directors, the sending of the Confucian representatives to sit on the board of directors, the oppression remedy and statutory derivative actions. The authors adopt a comparative study approach and argue that the Confucian enforcement of ethics can fill in the gap where common law rules of procedure cannot reach in the context of Chinese corporate governance system.

By referring to the Confucian teaching, there are several ways to encourage the superior to follow the ethical standards, namely, education, fear of punishment by society, peer pressure, intrinsic value, continuing education and codification of Confucian value/moral standards. In addition, there are several enforcement options based on the Entity Maximization and Sustainability Model, which is highly relevant to the enforcement model of Confucianism.

It is the first of its kind in strengthening the enforcement of Chinese business ethics by adopting the Confucian approach and common law approach. The two are not mutually exclusive but complementary with each other to bring the enforcement of Chinese business ethics to the next level.