Corporate Governance in China: Research and Evaluation

CHAPTER 1

The Design of a Corporate Governance Evaluation System

Taking the description of corporate governance evaluation theory as the foundation and the environment of corporate governance in China as the background, we design the system of corporate governance evaluating criteria, establish corresponding evaluating rules, and establish the evaluation model of the Chinese corporate governance index with a combination of subjective and objective weights. We also test the stability and the reliability of the model, using the method of non-parameter examination.

The rationale of corporate governance evaluation

The rationale of corporate governance evaluation plays a key role in its practice, which should be established on the foundation of the latter.

Agency theory and corporate governance evaluation

The rising up of agency problems is attributed to the separation of controlling rights from ownership. There are layers of principal–agent (request–act) relationships, of which the most critical two are the agent relationship between shareholders and the board of directors, and the board of directors and the top managers. The deviation of the principal's goal from the agent's and information asymmetry lead to the problem of “moral hazard” and “adverse selection,” which will reduce the benefit to principals. To solve these two problems, a power check-and-balance system is necessary—such as an incentive and restraint system—to guide the agent's behavior as well as to force him to make ...