Although the Chinese of the word company is self-produced in China, the systematic company system and corporate governance ideas are all foreign affairs. China has not had an important influence on the modern corporate system and corporate governance thinking. The fundamental reason is that China’s market economy system has not yet fully developed. Specifically, there are two important reasons: one is that under the traditional Chinese culture of benevolence, there is no strict unlimited liability system, and the demand for limited liability is not so strong; the second is that under the tradition of Chinese patriarchy, the collective board of directors Decision-making is difficult to implement, or even not get the correct understanding and real attention.
As Chinese companies move to the world, some corporate governance practices with Chinese genes will gradually take shape and have an international impact. When these practices are summarized and labeled with Chinese characteristics, corporate governance with Chinese characteristics will take shape. But this should not be something we ourselves need to worry about or even pay too much attention to. Japanese characteristics of corporate management and corporate governance are actually summed up by Americans. Before we deeply understand, correctly grasp and effectively use the modern corporate governance system to truly strengthen our company and become a global leader in a number of important industries, and truly dominate the world, we overemphasize Chinese characteristics and make a difference in the modern corporate ideology system. Contribution, it is possible that haste will not be achieved.
The company system has sprouted from the Netherlands, formed in the United Kingdom, developed in the United States, and spread and developed in Germany, Japan, Italy and other countries. It itself is an open and globalized system of thought and system. We must also face the modern corporate system and corporate governance ideas with an open mind and a global perspective.
Classified share system, not “same share with different rights”
The hierarchical shareholding system is to set up company shares into different levels and give voting rights with different weights. Initially, this voting rights classification was used in preferred stocks, and the classification of common stocks only began to be used in 1917. The common practice of grading common shares is divided into two categories: 10 voting rights per share and 1 voting right per share, so it is also called a dual share structure. There are also companies that have issued common stocks without voting rights.
Tiered share structures are common in Denmark, Norway and Sweden. In the Netherlands and the United Kingdom, there are special shares, which carry special director nomination rights. German law requires companies to issue up to 50% of non-voting shares, and Porsche has used this policy. There are many well-known companies in European countries that implement a hierarchical shareholding system, such as LVMH, AstraZeneca, Volvo, ABB, Ericsson, Electrolux, etc. There are no restrictions on the proportion of non-voting shares and voting shares in the UK.
U.S. law does not prohibit companies from implementing dual share structure, but the proportion of U.S. companies implementing dual share structure is relatively low. This is mainly due to the fact that from 1926 until 1986, the NYSE refused to list companies with dual share structure on the exchange. . The American Stock Exchange and Nasdaq did not have such restrictions, which made the New York Stock Exchange eventually abandon this practice.
In 1994, among the 100 dual stock companies in the United States, at least one level of stock was listed and traded. In 2001, there were 215 such companies. The usual voting power ratio is 1:10, but in many cases this ratio can be higher. Well-known US dual stock companies include: Berkshire Hathaway, Weikang, Ford Motor Company, Wrigley and Hershey Foods.
Since the 21st century, the hierarchical shareholding system, as the privilege of the European rich (the descendants of the founding family can continue to maintain control of the company with a minority share), has been used by American high-tech companies to protect the founders of the company. The company’s founder team retains a share with a higher proportion of voting rights, and shares with a lower proportion of voting rights are publicly issued, such as Google and Facebook. Some Chinese companies listed in the United States, such as JD.com, have also implemented this kind of setup.
Similar to the voting trust system, the hierarchical shareholding system has a clear contract binding mechanism. The hierarchical share system makes it clear at the time of the IPO that the proportion of voting rights attached to the newly issued shares is lower than the shares reserved by the company’s founder team and existing shareholders. New subscribers can weigh the potential risks here before deciding whether to participate.
Under the hierarchical share system, the relevant person with more voting rights depends on the number of shares he holds, that is, the logic of having more shares and greater voice is not fundamentally changed. Graded stock companies follow the principle of “shares at the same level with the same rights”, and do not violate the principle of “same shares with the same rights”. It cannot be said that graded shares are “same shares with different rights.”
We can completely regard the hierarchical shareholding system as a modern version of a partnership. The two types of shares issued by the partnership are unlimited liability shares and limited liability shares. The former has management power and the latter has no management power. Graded stock companies issue two types of shares: shares with higher voting rights and shares with lower voting rights. The former has higher voting rights and the latter has lower voting rights.
In order to maintain control, company founders often use both the hierarchical share system and voting trust. Voting trust has nothing to do with the company in essence, and is entirely a contractual act between related parties. If trust or payment of a certain consideration is obtained, the corresponding voting commission will be obtained; if the trust is not obtained or the consideration paid insufficiently, the corresponding voting commission will not be obtained. The contractual governance of the signatories can control this power derived from voting trusts.
Article 43 of the Chinese Company Law stipulates that “shareholders shall exercise their voting rights at the shareholders’ meeting in proportion to their capital contributions; except as otherwise provided in the company’s articles of association”, which actually provides a basis for the classification of shares based on voting rights. But in reality, only a few non-listed companies have actually implemented it. Among the listed companies, the actual implementation of the company started from the Science and Technology Innovation Board. On September 27, 2019, the company passed the review of the China Securities Regulatory Commission and may become the first listed company in China to implement the hierarchical share system.
In summary, the following three points need to be emphasized: 1. Grading shares are neutral, used by American media and high-tech company founders, and also used by traditional European rich families. Golden shares and non-voting shares are the two poles; 2. Grading Shares have not changed the principle of the same share with the same rights in similar shares; 3. A single share, one share, one vote, is just the most simplified version of the company’s shareholding system, a hundred years ago and now.
Classified directors, cumulative voting and online shareholder meetings
The classified director system divides the members of the board of directors into categories, gives them different identity attributes, and gives them different terms of office and even different legal rights.
The most common practice is to divide the directors into three groups according to the term of office, staggering the expiration time, and the general meeting of shareholders elections cannot replace all directors. For example, only one third of the directors who have expired can be replaced in one year. There are also directors categorized by shareholder or share class, a certain number of director seats are given to a certain class of shares, and such directors can be given voting power different from ordinary directors (more or less than 1 vote). The nomination, appointment and dismissal of these types of directors are subject to the decisions of these types of shareholders.
For classified directors, the dismissal before the expiration of their tenure requires reasons, not like ordinary directors, shareholders can use the principle of “majority consent” at the shareholders meeting where directors are elected without reason. This makes classified directors an important way to maintain the independence and relative stability of the board, because even if the acquirer holds controlling shares, he cannot immediately control the board.