China’s Company Law Reform: An Experiment in Stakeholder Governance?

Growing concerns about the externalities that companies may impose on stakeholders have placed the mainstream shareholder primacy model under intense scrutiny. ‘Stakeholderism’, or stakeholder governance, as an alternative approach that requires companies to take wider responsibilities beyond the narrow pursuit of shareholder interests, is increasingly accepted as a way to pursue the success of the company. Significant initiatives such as the British Academy’s Report on the Future of the Corporation (2018), the US 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 or ought to 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 Art.1833 of the French Civil Code to mandate that all French companies to 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.

Nevertheless, one of the principal criticisms of stakeholder governance remains its practicability and enforceability. In a recent article, I examine how China’s recent Company Law amendments operationalise stakeholder governance, offering important insights into its real-world application.

China’s newly amended Company Law (hereafter ‘new Company Law’) represents a significant step towards embedding stakeholder-oriented principles into corporate governance in the world’s second-largest economy and emerging global superpower. The new Art. 20 explicitly requires companies to fully consider stakeholder interests—including the interests of the company’s employees, consumers, environment and other public interests—when conducting business operations. 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 Section 172(1) of the UK Companies Act 2006. While English Company Law permits directors to consider other stakeholder interests in their pursuit of the success of the company, such consideration is qualified by the requirement to act ‘for the benefit of its members as a whole’. By contrast, under the new Chinese framework, directors are not legally restricted from prioritising stakeholder interests, even where this may come at the expense of shareholder returns.

The new Company Law further strengthens employee engagement mechanisms. 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 (Art. 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 (Arts. 68, 120). This requirement enables employees to be directly involved in corporate decision-making 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 the 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.

A significant recalibration of power between shareholders and directors also emerges under the new law. Historically, 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 domains. Moreover, the law intentionally omits the requirement for the board to be accountable to the shareholders’ meeting. Instead, Art. 180, and the provisions that follow, emphasise 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 prioritise 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.

Although China has been gradually shifting towards a more stakeholder-oriented approach, shareholders in Chinese companies continue to wield considerable influence, This paper therefore proposes five approaches for further advancing stakeholder governance in China:

1. Reducing shareholder power to create more space for stakeholder-oriented decision-making, building on the trajectory evident in recent amendments to the new Company Law.
2. Introducing ESG-based remuneration that links executive compensation to performance on stakeholder and sustainability metrics, particularly given the expanded managerial discretion afforded by the recent amendment.
3. Establishing a new state agency empowered to enforce directors’ and managers’ statutory duties, particularly stakeholder-oriented duties, under the new Company Law, thereby addressing enforcement challenges under the new legal regime.
4. Leveraging regulatory initiatives beyond company law to impose minimum standards for corporate behaviour, thus redefining corporate responsibilities beyond shareholder value maximisation and influence  broads’ decision-making matrix.
5. Enhancing transparency and public accountability by mandating comprehensive disclosures about companies’ stakeholder relationships and practices, thereby facilitating more effective market oversight and regulatory scrutiny.

These proposals would 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 future policy development elsewhere.

In conclusion, China’s evolving corporate governance model demonstrates that stakeholder governance can be more than an aspirational ideal; 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.

The author’s full article is available here.

An earlier version of this post was first published on the CLS Blue Sky Blog. 

Min Yan is a Reader in Law at The City Law School, University of London.