China is engaged in a vast socio-economic experiment – the transformation of an authoitarian state owned economy into something resembling western capitalism. The restructuring and privatization of state-owned enterprises, or SOE’s, is a central feature of this process. This paper examines the creation of PetroChina, one of China’s largest oil companies. When PetroChina conducted its IPO in the spring of 2000 it sparked significant controversy and institutional investors in the U.S. boycotted the listing. Now the SEC requires special attention by issuers of securities when human rights concerns are raised. The paper was published in the Journal of Corporation Law earlier this year.
Here is the URL: PetroChina Syndrome
And here is my abstract of the article:
This article argues that the process of globalization has generated a legitimation deficit that can be the source of wasteful, even destructive, social and political conflict. I stylize this outcome as “the PetroChina Syndrome,” after a leading example of the kind of activity generated in response to globalization, the PetroChina Campaign, where a coalition of labor, human rights, environmental, anti-slavery and religious groups worked together to oppose the initial public offering of a major Chinese oil company led by Goldman Sachs. The article begins with a discussion of this important but largely unexplored dimension of the anti-globalization era triggered by the 1999 demonstrations in Seattle against the World Trade Organization. The Campaign and its impact are discussed in detail. I then examine three possible arguments that shed some light on this development, including traditional securities law approaches, the broader political context and, finally, structural changes in corporate finance. These three arguments, I argue, are helpful but not sufficient. Recent work by the economist Massimo De Angelis on John Maynard Keynes and Milton Friedman helps us shape an alternative explanation rooted in understanding changes in the institutional mechanisms of the global labor and capital markets. The displacement of the trade union and collective bargaining by globalization has pushed organized labor and other groups to look to political intervention in the capital markets as an alternative means to establish legitimacy. This intervention should be encouraged to develop new institutions to respond to the growing legitimation crisis of global capitalism.
At the heart of modern capitalism is a fundamental structural divide: between senior inside managers responsible for the day to day operations of the corporation, on the one hand, and outside investors who own shares in a large number of corporations. According to standard corporate law theory this creates an inevitable conflict between shareholders, the principal, and managers, the agent.
Seen this way, managers should serve at the behest of shareholders – if, indeed, shareholders are principals. But to watch the counter-attack on post-Enron corporate reform now taking place in Washington, D.C., it appears as if the managers have overthrown the principals.
Of course, in reality this principal-agent model radically misstates the structure of modern capitalism. Managers are capitalists – they earn their income from the profits of the corporation; and shareholders are capitalists – they also earn their income from corporate profits. So managers, in the form of their representatives at the U.S. Chamber of Commerce and Business Roundtable, ought to be able to understand the value of reforms such as expensing of stock options and allowing shareholders opportunities to place their nominees for corporate boards on corporate proxy statements. These reforms should improve the ability of the market as a whole to function more efficiently.
A conference next month in Delaware could help turn the corner in this debate. The International Corporate Governance Network is bringing together representatives from various corporate constituencies, including managers and institutional investors, to discuss potential reforms in Delaware law with members of the Delaware judiciary that might make it easier for shareholder nominees to get elected to corporate boards. Here is a link to a recent story in the Financial Times on the conference and on the new agenda of the ICGN.
The Financial Acccounting Standards Board has finally stepped up to the plate and issued a new rule requiring public companies to expense stock options. FASB faced an intense lobbying campaign on Capitol Hill to block the proposed change. One Wall Street figure told me the campaign against expensing stock options was more intense than the campaign in favor of the North American Free Trade Agreement! Nonetheless, FASB has done the right thing.
Here is a link to a story on the change, a link to the FASB site where the full text of the new rule can be found, and a link to the testimony I delivered to a U.S. Senate Committee last spring supporting the FASB proposal.
FASB Issues New Rule on Stock Options
Diamond testimony: There is no free lunch
This blog aims to be an information hub for people interested in new developments in corporate law, securities law, and corporate finance with an emphasis on the impact of globalization on business.