Growing concerns about the externalities that companies may impose on stakeholders have placed the mainstream shareholder primacy model under intense scrutiny. Stakeholderism, or stakeholder model, is an alternative approach that requires companies to consider interests beyond those of shareholders, is an increasingly accepted way for companies around the world to pursue success. In a new article, I examine China’s recent Company Law amendments to shed light on ways to put stakeholder governance into practice.
Significant initiatives such as the British Academy’s Report on the Future of the Corporation (2018), the U.S. Business Roundtable’s Statement on the Purpose of a Corporation (2019), and the World Economic Forum’s Davos Manifesto(2020) have all highlighted that companies serve not only shareholders but also employees, customers, suppliers, local communities and society at large. Policymakers and legislators around the world are also working to ensure that companies can create value for all its stakeholders. For instance, France’s 2019 Loi Pacte amended article 1833 of the French Civil Code to mandate that all French companies be managed “in the corporate interest, taking into account the social and environmental concerns linked to its activity.” In the United States, the American Law Institute’s Restatement of the Law of Corporate Governance restates the objective of a company with a strong emphasis on stakeholder interests. Against this backdrop, there is growing support for the view that company law should intervene more robustly to safeguard stakeholder interests.
China’s amended Company Law 2024 (hereafter, “new Company Law”) represents a significant step towards embedding stakeholder-oriented principles into corporate governance in the world’s second-largest economy. New article 20 explicitly requires companies to fully consider stakeholder interests – including those of a company’s employees, consumers, and environment – when conducting business. This development marks a notable advance beyond the traditional corporate social responsibility (CSR) framework and offers a more comprehensive approach than the enlightened shareholder value model enshrined in section172(1) of the UK Companies Act 2006.
While English Company Law permits directors to consider other stakeholder interests, they must act “for the benefit of its members as a whole.” By contrast, under the new Chinese framework, directors are not legally restricted from giving stakeholder interests priority, even where this may come at the expense of shareholder returns.
The new Company Law further strengthens employee engagement. It mandates consultation with labour unions and requires the solicitation of employee opinions before decisions are made regarding major corporate events such as restructuring, dissolution, or bankruptcy (article 17). Additionally, for companies with over 300 employees that do not have a supervisory board, the inclusion of employee representatives on the board of directors is now mandatory (articles 68, 120). This requirement enables employees to be directly involved in corporate decisions and ensures that workforce perspectives are brought into boardroom discussions, thus challenging the traditional shareholder-centric governance model.
Compared with employee representation on supervisory boards, mandatory representation on a board of directors – the main managerial body – offers a significant improvement. It addresses longstanding criticisms regarding the supervisory board’s limited powers to fulfil its functions effectively. By providing a direct channel for representing employee interests at the managerial level, this reform offers a more practical and robust approach to stakeholder governance, allowing employee representatives to actively participate in decision-making processes.
The new law also implements a significant recalibration of power between shareholders and directors. Since the enactment of China’s first modern Company Law in 1993, shareholders wielded significant authority over important managerial decisions, such as operational policies, investment plans, and budget approvals. The new Company Law shifts these powers to the board of directors, removing shareholders’ direct decision-making authority in these areas. Moreover, the law omits the requirement that the board be accountable to the shareholders’ meeting. Instead, article 180 and the provisions that follow emphasize that directors’ duties – specifically duties of loyalty and diligence – are owed to the company as an independent legal entity rather than to its shareholders. This shift enhances the autonomy of the board and strengthens directors’ capacity to prioritize stakeholder interests. The changes become even more significant when considered alongside the explicit statutory requirement for directors to consider stakeholder interests and the removal of mandatory board accountability to shareholders. Together, these reforms mark a material move away from shareholder primacy and towards a model of governance that better balances diverse stakeholder interests.
Beyond analyzing the shift from the shareholder primacy model as it was traditionally dominant in China, my paper proposes five approaches to further advancing stakeholder governance in China:
- Reducing shareholder power to create more space for stakeholder-oriented decision-making.
- Implementing ESG-based remuneration that links executive compensation to performance on stakeholder and sustainability metrics.
- Establishing a new state agency to enforce directors’ and managers’ statutory duties, particularly stakeholder-oriented duties, under the new Company Law.
- Leveraging regulatory initiatives beyond company law to impose minimum standards for corporate behaviour, thus redefining corporate responsibilities beyond shareholder value and decision-making.
- Enhancing transparency and public accountability by mandating comprehensive disclosures about companies’ stakeholder relationships and practices.
These proposals not only offer a roadmap for deepening stakeholder governance in China but also provide valuable lessons for other jurisdictions seeking to develop their own stakeholder-oriented frameworks. Reforms such as the general requirement to consider stakeholder interests in decision-making, mandatory employee engagement, workforce board representation, constraints on shareholder authority, and the use of broader regulatory instruments could serve as important reference points for policy development elsewhere.
China’s evolving corporate governance model demonstrates that stakeholder governance can be more than an aspiration; it can be embedded into law and practice. The lessons emerging from China’s experience may help shape the global conversation on building more sustainable and inclusive corporate structures
This post comes to us from Min Yan, a reader in law and deputy associate dean for research at The City Law School, University of London. It is based on his recent article, “Operationalising Stakeholder Governance: Some Lessons from China’s New Company Law,” available here.