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| The General Counsel System and Violation Governance in State-Owned Enterprises: Evidence from the Transmission of Financial Regulatory Pressure |
| LI Meixuan, MAO Xinshu, XU Xiaodong
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| School of Economics and Management,North China Electric Power University; Business School, Beijing Technology and Business University |
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Abstract Corporate misconduct has become a major concern in China's efforts to strengthen financial regulation, advance the rule of law, and modernize the governance of state-owned enterprises (SOEs). For SOEs, violations are not only firm-level governance failures; they may also undermine the value of state-owned assets, weaken regulatory effectiveness, and generate broader public governance risks. This raises an important question: whether and how internal legal governance mechanisms can reduce misconduct in Chinese SOEs?
This study focuses on the general counsel (GC) system, a key legal governance arrangement in Chinese SOEs. The GC is a senior executive responsible for legal affairs, compliance management, legal review of major business decisions, and risk prevention. Since the establishment of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council in 2003, the GC system has evolved from a pilot personnel arrangement into a formal governance mechanism embedded in SOE charters and decision-making procedures. Unlike the GC system in market-oriented economies, the GC system in Chinese SOEs has stronger policy orientation, public governance attributes, and external supervisory constraints. This institutional setting provides a distinctive context for examining how legal governance affects corporate misconduct.
The study examines whether the GC system reduces SOE violations and whether this effect is strengthened under strong financial regulation. Theoretically, the GC can embed legal review into major corporate decisions, including contract review, investment and financing arrangements, external guarantees, information disclosure, and other high-risk activities. By doing so, the GC can improve the firm’s ability to identify, prevent, and control legal risks. Meanwhile, strong financial regulation may increase SOEs’ compliance pressure and accountability risk through financing conditions, capital operations, debt financing, guarantee arrangements, and disclosure requirements, thereby activating the internal role of the GC.
Using a sample of Chinese A-share state-controlled listed firms from 2010 to 2023, this study manually collects data on whether firms have established a GC position and combines these data with information on corporate violations, financial characteristics, corporate governance, and regional institutional environments. The empirical results show that the appointment of a GC significantly reduces the probability of SOE violations, suggesting that the GC system is not merely a formal organizational arrangement but plays a substantive role in corporate risk governance. The study further finds that strong financial regulation significantly enhances the violation-reducing effect of the GC. This indicates that external regulation and internal legal governance are complementary: rather than crowding out internal governance mechanisms, external financial regulation increases firms’ demand for legal governance and amplifies the efficacy of the GC.
Mechanism tests indicate that the GC reduces violations mainly by improving firms’ internal awareness of legal risks and reducing firms’ external legal risk exposure. The GC encourages firms to incorporate legal risk considerations into board decision-making and internal governance procedures, and helps them better perceive regulatory pressure and legal liability risks. Heterogeneity analyses further reveal that the governance effect is stronger when the GC has greater professional expertise, stronger organizational authority, and longer tenure. The effect is also more pronounced in firms with weaker internal legal environments, higher legal risk exposure, and stronger external institutional constraints.
This study contributes to the literature in three ways. First, it extends research on corporate misconduct by incorporating the lens of internal rule-of-law governance in SOEs. Second, it identifies the distinctive governance effect of the GC system in China's SASAC-led institutional environment. Third, it reveals a transmission channel through which external financial regulation activates and strengthens internal legal governance. The findings suggest that regulators should promote the transformation of the GC system from formal establishment to substantive performance, with greater attention to whether the GC participates in major decisions, issues formal legal opinions, and maintains traceable records of legal review. As Chinese firms face increasing cross-border transactions, international arbitration, sanctions compliance, and data compliance challenges, SOEs should also strengthen their talent pools in cross-border legal affairs and international compliance talent.
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Received: 09 June 2025
Published: 17 September 2026
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