In China, though relevant policies in as early as 2010 regulated that the decision-making of important matters, appointment and removal of critical personnel, necessary project arrangement, and the use of large amounts of funds (‘three important and one large’ for short) should be determined by the collective. The collective here is the Party committee, the board of directors, the general managers’ meeting, the joint meeting of the Party leadership, etc. The specific decision-making procedures can be chaotic, with different enterprises adopting various procedures and even one enterprise often shifting its decision-making procedure. In addition, past lessons taught us that the key role of the Party organization was weakened after the restructuring of some SOEs. For example, the production and operation of enterprises are believed to be the sole responsibility of the chairman and general manager (Tsang, 2002). Similarly, the simultaneous holding of the chairman and the secretary of the Party committee may lead to functional conflicts between the Party committee and the company’s board of directors, even if the committee’s functions are replaced by the board (Leutert, 2016). The actual absence of the Party organization is likely to trigger ‘the absence of the owner’, causing strong self-interest motive of senior executives of enterprises, which will not only influence the transparency of information due to non-disclosure and under-disclosure but also lead to hidden corruption through capitalized accounting, thus lowering the quality of accounting information.
The scope and quality of information disclosure are determined by how well-established corporate governance is. The better the governance is, the higher-level information disclosure is because there is limited space for the management to use private information for rent-seeking (Millar et al., 2005; Mete and Belgin, 2021). Much of the current literature on corporate governance revolves around the principal-agent theory, viewing corporate governance as the institutional arrangements that must be made among shareholders, the board of directors, and management due to the separation of ownership and control (Ezzeddine and Jarboui, 2017). However, as the products of China’s unique institution, SOEs feature both economic and public functions, where corporate governance sees a high level of administration, with relatively complicated information disclosure that cannot be well interpreted by the principal-agent theory. A significant number of studies have shown that in countries that witnessed economic transition, administrative governance can serve as an alternative mechanism to safeguard investors’ interests due to the incomplete legal system, which can alleviate the serious information-related problems facing investors and regulators (e.g., Pistor and Xu, 2005; Chen Donghua, Zhang Tiesheng, et al., 2008; Peigong and Yifeng, 2010). The corporate governance model with Chinese characteristics, as an administrative governance method, adds the leading role of the Party committee (Party leading group) to the traditional ‘3 + 1’ corporate governance structure, in order to strengthen the separation of powers, check and balance, lift the level of corporate governance, and exert influence on accounting information disclosure from various aspects. Therefore, the present paper discusses the impact of China’s new distinctive corporate governance model on accounting information disclosure, based on the decision-usefulness theory and Stewardship theory, respectively.
i. Based on the Decision-usefulness Theory
In the decision-usefulness theory, the goal of accounting is deemed to provide useful information for stakeholders (Hitz, 2007). The focus should be placed on the relevance and usefulness of accounting itself to avoid the problem of adverse selection caused by information asymmetry. Thus, the management should disclose as much information as possible regardless of the subjectivity of accounting information (Georgiou et al., 2021; Williams and Ravenscroft, 2015). According to the proprietary cost hypothesis, in a competitive industry, though a company’s information disclosure facilitates the market’s accurate assessment of its value, such disclosure also provides information for rivals who may act against the company (Wagenhofer, 1990). Therefore, management tends to choose a low disclosure policy to avoid the high proprietary costs related to information disclosure in the Chinese market which relies its transactions on relations (Cheng Xinsheng et al., 2012).
Moreover, in the context of a long agency chain and deeply-rooted principal-agent relationship in SOEs, the management may, for the purpose of using disclosure as a signal to display, disclose information selectively, concealing adverse information to enjoy private benefits easily. However, in the previous 3 + 1 decision-making mechanism of SOEs, the board of directors and management enjoy such intense power that the supervision of the Party organization can barely come into force. In other words, senior executives have more discretion regarding information disclosure. They are likely to reduce the disclosure as much as possible, considering costs and self-interest. For sensitive information such as accounting, senior executives have weaker motives. A new decision-making relation of 4 + 1 has been formed in the new distinctive governance model in China, not only enabling Party organizations to have a better understanding of the enterprises and the management, inhibiting senior executives’ motives to disclose information selectively, but also adding top-level supervision to the previous governance structure to impose a stronger warning effect on managers and restrain them from non-disclosure and under-disclosure.
Rational investment decisions depend on adequate information disclosure. Management concealment of information or corruption cannot only seriously harm the interests of investors and jeopardize the development of the company, but also increase the level of public debt (Baklouti and Boujelbene, 2018; Baklouti and Boujelbene, 2021), destabilize society, and even affect the image of the country. In terms of the political attributes of SOEs, the Party organization is responsible for organizing and supervising the implementation of guidelines and policies of the Party and the country in the enterprise and supporting the subject of corporate governance in exercising power in accordance with laws (Wang, 2014; Chouaibi, 2021). In contrast, the economic attributes of SOEs lie in safeguarding the shareholders’ interests and maintenance and appreciation of state-owned assets (Liu Fuguang et al., 2019). The critical point of the SOE system is the board of directors and its selected management, which leads to the fact that the political key role of the Party organization is not allowed full play in practice. However, the establishment of the 4 + 1 decision-making mechanism has strengthened the leading role of the Party organization. To protect investors’ interests, safeguard SOEs’ images, and ensure social stability, Party organizations’ political awareness of ‘serve the people wholeheartedly,’ ‘the interests of the Party and the people are above everything,’ and ‘Party members should play an exemplary role’ pioneers and comes into play. Financial affairs that have taken place and are of great concern to investors and important matters that the management previously considered unnecessary or wanted to conceal from the Party organization should now go through the discussion of the latter, which diminishes the possibility of the management’s non-disclosure or under-disclosure and urges it to disclose as much accounting information as possible.
Bushman et al. (2004) believed that corporate transparency is the broad accessibility of specific information about a listed company for outsiders of the company. Thus, based on the decision-usefulness theory, the corporate governance model with Chinese characteristics can improve stakeholders’ accessibility of information by increasing the amount of accounting information to be disclosed, thus making the enterprise’s accounting information more transparent, based on which this paper proposes the following hypothesis.
H1: The corporate governance model with Chinese characteristics can improve the transparency of accounting information for Chinese SOEs.
ii. Based on the Stewardship Theory
The corporate governance framework is the most comprehensive internal and external control mechanism for encouraging intelligent use of corporate resources and accountability for their stewardship. Corporate governance aims to align the interests of stakeholders, firms, and society to fulfill the corporations’ long-term strategic priorities and maximize shareholder value. Corporate governance procedures that are strong lessen agency difficulties and help firms achieve their value maximization goals. According to empirical research, principal-agent agency conflicts are less common in organizations with concentrated ownership, as concentrated ownership increases corporate governance’s monitoring role and, as a result, improves the performance of the firm (Ahsan et al., 2020).
Modern corporate governance should address the core issue of insider control and moral risk arising under the condition of separation of ownership and operation. The Stewardship theory is generated from the separation, in which the operators of enterprises (i.e., the management) are responsible for providing valid and reliable information for the owners to avoid the problem of moral risks triggered by information asymmetry. The Party committee (The Party leading group) plays an independent supervisory role in SOEs, which can regulate the chairman and general manager’ exercise of power, free from the constraints of business performance, check, balance, and coordinate in the process of decision-making, operation, and supervision, and play a positive role in regulating corporate governance.
First, the corporate governance model with Chinese characteristics realized the transition from 3 + 1 to 4 + 1. This new decision-making relationship allows the Party organization to play a stronger supervisory role before, during, and after the event, restraining the management’s opportunistic behavior and reducing its discretionary power in the selection of accounting policy and other aspects (Cheng Haiyan et al., 2020). Second, it is found that under the new decision-making mechanism, the board of directors and the management are more likely to share the same goal and cooperate, inducing a cooperative effect (Naciti et al., 2021). Furthermore, it becomes possible that the board of directors and the management have the same goal of preventing financial cheating when the Party organization’s role in the board of directors and the management is of great magnitude (Liu Fuguang et al., 2019). In addition, the Party organization’s full embedding in the corporate governance structure can:
give full play to the political core and leadership role of the Party organization (Tenev et al., 2002).
promote the establishment of an honest and trustworthy corporate culture in SOEs (Bu, 2015).
develop a concept of law-abiding operation (Lin, 2013).
actively guide the management and employees from the ideological perspective (Tenev et al., 2002).
facilitate the building of a healthy outlook of performance (Davies, 2016).
reduce opportunistic behaviors that wander on the edge of the rules in blind pursuit of profits (Reyes, 2018).
Embedding the Party organization in the corporate governance structure is a complementary administrative means to the market tools (Ma Lianfu et al., 2012), which can be comprehensively adopted in corporate governance to avoid moral risks caused by information asymmetry. The corporate governance model with Chinese characteristics has specified the decision-making procedure of ‘the Party committee goes first, then the management committee’. A proposal rejected by the former cannot enter the decision-making stage of the latter. This means that the Party committee (the Party leading group) and the management of SOEs share the decision-making power of ‘three important and one large’, having the right to decide what not to do, in the 4 + 1 decision-making mechanism. If a proposal is rejected at the primary stage, it prevents the management from utilizing its authority to do something that harms the interests of SOEs. Even for proposals passed by the Party committee and enter the implementation process, there is the supervision of the Party organization, which serves as a deterrent to the management. It can restrain the administration from opportunistic behaviors, prevent finance-related regulation violations, and urge leadership to disclose accurate and reliable information to the public, thus positively influencing the quality of accounting information. The above arguments lead to the following hypothesis:
H2: The corporate governance model with Chinese characteristics can improve the quality of accounting information for SOEs.
However, there might be some obstacles in the implementation of the corporate governance model with Chinese characteristics. Though it has been specified in the policy that important matters should go through the discussion of Party organizations, there is no specific list of matters, which may lead to the chaotic implementation in SOEs. Some enterprises submit everything to the Party committee for discussion and regard the Party organization as a protective umbrella. In other cases, the board of directors or management selectively submit matters to be discussed, which leaves the management some room for financial fraud and makes this new mode a mere formality, failing to play a fundamental supervisory role. In addition, studies argue that giving companies certain democratic rights leads to their economic growth (e.g., Ghardallou and Sridi, 2020). Still, the new corporate governance model in China has weakened the democratic rights of companies to some extent, which may put financial pressure on companies and force them to reduce the quality of accounting information. Thus, a hypothesis has been made as follows:
H3: The corporate governance model with Chinese characteristics cannot improve the transparency of accounting information for SOEs (the quality of accounting information).