For Curtis Milhaupt, professor of law at Stanford, Chinese companies present a fascinating puzzle. Until fairly recently, most scholarship on Chinese corporate governance, including the governance of its huge, publicly listed state-owned enterprises, “tended to stay close to the law on the books and was framed almost exclusively in comparison to Western companies, which I felt missed the intricacies of how the system actually operates,” he says.

A leading scholar of comparative corporate governance who began his career as a specialist in Japanese law,
Milhaupt has, over the past 10 years, delved into researching Chinese state capitalism, in particular, the functioning and governance of companies and their complex relationship with the Communist Party. Also a senior fellow by courtesy at the Freeman Spogli Institute for International Studies at Stanford, Milhaupt contributed a chapter titled “The Governance Ecology of China’s State-Owned Enterprises” to The Oxford Handbook of Corporate Law and Governance, published last year. Milhaupt also recently co-authored an article with Jeffrey Gordon of Columbia Law School advocating a multilateral regime for cross-border mergers and acquisitions to complement national-level screening systems. Creating a multilateral regime is highly consistent with G20 principles on investment transparency adopted when China held the G20 presidency, says Milhaupt, adding that it could address concerns that foreign investments by a buyer susceptible to home-country government influence may be motivated by non-commercial considerations.

Outsiders often think of China’s so-called state-owned enterprises as completely owned by the government and insulated from standard Western corporate practices, says Milhaupt. But those firms, whether China Mobile or Sinopec, are actually “mixed-ownership” enterprises with both government and private shareholders. “They’re a hybrid entity, neither completely state-owned nor completely private,” says Milhaupt, who arrived at Stanford last year after a nearly 20-year career at Columbia Law School, where he held endowed chairs in comparative corporate law and Japanese law.

Chinese companies fall along a wide spectrum of degrees of state ownership and influence. Toward one side, some may be heavily influenced by the government, with top executives simultaneously holding leadership positions in party organizations internal to the firm. Still, those same companies, in a bid to raise efficiency and increase market discipline, also seek private capital, have a board of directors and hold shareholders meetings, and follow other standard corporate practices of publicly listed companies. “It’s in the state’s interest for these firms to be profitable,” says Milhaupt. “But at the same time, party officials don’t want to lose control over them. It’s a constant tightrope walk between the markets and political control.”

Toward the other end of the range, many companies, especially those in newer industries such as e-commerce, operate under far less state influence in part because the government hasn’t traditionally owned firms in those sectors and has no existing structures to manage them. “These private companies are pioneers, so there’s more space for them and more of a hands-off attitude by the government,” says Milhaupt.

But even large companies that are ostensibly privately owned may have state shareholders to some degree. And like their counterparts at other companies, executives of these private firms know that to succeed, they have to stay in the good graces of party officials in addition to satisfying their investors.

The importance of understanding the governance and structure of Chinese companies is on the rise. Milhaupt notes that the matter is increasingly coming up in the U.S. legal system: For instance, in one current court case, a large group of U.S. consumers brought a product-liability suit against several Chinese companies that are members of a state-owned business group. The case raises questions about whether courts should treat an individual company that’s a member of such a business group as part of the larger entity, thereby possibly extending the court’s jurisdiction to the other members of the group and exposing the entire group to liability. And, under principles of foreign sovereign immunity, which shield foreign governments from suits in the U.S., should the law presumptively treat these firms as extensions of the Chinese government or as commercial enterprises?

Milhaupt’s research sheds light on questions such as these stemming from Chinese companies’ dual corporate and political governance structures and the larger linkages between the corporate sector and the institutions of Chinese state capitalism. Early to the field, Milhaupt has already lent his expertise in federal court litigation, as well as to U.S. and foreign policymakers. Several years ago, he was co-commissioned by a foreign stock exchange to examine the corporate governance of mixed-ownership enterprises around the world, as the first step in the stock exchange’s effort to create special listing standards for such firms.

A better understanding of Chinese companies could also help governments better assess proposed transactions when these companies seek to invest abroad. Governments around the world are increasingly concerned about investments by Chinese companies because they may have suspicions about the motivation for the deal, says Milhaupt. “Is there a purely commercial motivation, or is this company’s investment part of Chinese industrial policy or an attempt to acquire sensitive technology?” he asks. “It can be hard to discern.”

The U.S., for instance, citing security concerns, has banned equipment from Chinese telecommunications firm Huawei in the construction of new 5G networks and is pressuring other countries to do the same. Banning Huawei, Milhaupt says, reflects U.S. concerns about possible links between Chinese companies and the Communist Party. It’s difficult to say whether apprehensions about Huawei are justified or whether more Chinese companies will be blocked from various markets. Still, governments around the world are looking at the issue. The European Commission, for example, just published a paper calling China a “systemic rival,” Milhaupt adds.

Concerned that Chinese firms wanting to invest in American companies may gain access to sensitive data or intellectual property, the U.S. interagency committee that evaluates investments by other countries recently tightened its restrictions. The screening process, for instance, is now triggered when a foreign investor aims to acquire any stake, even a non-controlling one, that gives it access to sensitive technology or data. Previous rules required screening only when a foreign investor sought a controlling stake. But there is a downside. Already, Chinese investment into the U.S. has dramatically declined following the tightening of the investment screening process and other tensions in the bilateral relationship.

It’s possible that the U.S. and other countries may be overreacting due to their lack of understanding of the complexities of Chinese companies and their goals. Treating all Chinese companies as homogeneous actors working on behalf of their government isn’t helpful, Milhaupt cautions. “We need to drill down deeply and understand how individual firms are actually governed,” he adds.

Governments need to find more-nuanced ways of evaluating potential investments by Chinese companies to avoid overreaction, which only hurts domestic economies. After all, if screening is too tight, Milhaupt notes, “we’re likely to be shutting out investments that could be very beneficial to our economy.”

Louise Lee was a staff writer for The Wall Street Journal and is now a freelance writer and frequent contributor to the WSJ and the GSB’s Stanford Business magazine.