Constructing the corporate governance system within the regime of corporate law from the perspective of a revised mechanism design theory : the shareholder primacy model versus the stakeholder theory model

The theoretical debate on the shareholder primacy model and the stakeholder theory model can be traced back to at least the well-known Berle-Dodd debate in 1932. The debate has not stopped since then. It has been observed that most of the arguments from both camps rely on a homeostatic approach based on a being ontology. Therefore in this thesis, a constructive approach based on a moderate becoming ontology is adopted to describe and explain diverse corporate governance structures that are dynamic and heterogeneous in nature. It may not settle this longstanding debate, but it leads to further study from a fresh perspective – the revised mechanism design theory. This theory is grounded on institutional design theories and the mechanism design theory. It provides an approach to define the context in which an institution is embedded, and establishes three criteria for a sound mechanism: efficient allocation, informational efficiency and incentive compatibility. From a perspective of substantive rationality, the issue of corporate goal has been addressed through a historical and sociological investigation into the relation between corporate law and its embedded political and economic context. It has been found that business utility and political legitimacy are the two determinants of the objective and structure of corporate governance within the regime of corporate law. The process and result of the evolution of corporate law are thus determined by the tension between the businessmen’s desire for business utility and the public’s expectation or even requirement of political legitimacy. From a perspective of instrumental rationality and based on the three criteria above, the cost-benefit and incentive effects of the choice between the two stylized models have been examined to address the issue concerning the allocation of control within the corporation. It has been found that the choice between the two models is not only a trade-off between transaction costs and coordination costs but also a trade-off between administration costs and governance costs. The former defines the boundary between the market and the corporation, while the latter defines the boundary between the corporation and the state. The result of the investigation into the incentive compatibility of the two models shows that the success or failure of a specific model depends on a balance of the counteracting effects of two factors. One is the increased incentive for stakeholders’ firm-specific input and coordination. The other is the decreased incentive for shareholders’ investment, managerial autonomy and stakeholders’ efforts created by market competition. In summary, any corporate governance system is shaped by its embedded economic and political context, and constructed by a variety of incentive and constraint mechanisms. These findings have broad applications for the interpretation, evaluation and design of specific corporate governance systems in various jurisdictions. In applying these findings to China, it is suggested that a shareholder primacy model with great attention to the benefit-sharing among stakeholders should be adopted as a dominant corporate governance model for Chinese listed companies. A variety of specific mechanisms to construct this model are presented as well.published_or_final_versionLawDoctoralDoctor of Philosoph