Case Study Chinese Milk Scandal 2008

1

The 2008 China Milk Scandal and the Role of the Government

in Corporate Governance in China

Abstract1

The close association between the Chinese state and the Chinese state-controlled companies

has been identified by a number of commentators. Through a case study on the exposure of the

2008 Chinese tainted milk scandal and the handling of the aftermath of the scandal by the

Chinese central and local governments, this paper establishes substantial evidence of

government intervention in China’s large private corporations.

The paper argues that in the tainted milk scandal, the roles played by the local Hebei

government and the central food safety authority have had a negative impact on

establishing/maintaining adequate internal controls and encouraging socially responsible

behaviour among the dairy companies. Similarly, the equally protective approach adopted by

the central and local governments in handling the aftermath of the scandal may have only

addressed the symptoms but not the root cause of the fundamental failure in the corporate

governance of the dairy companies.

The intervention in business by government at various levels may find its justification in the

common goal of promoting economic growth. Although this is one important policy objective

particularly with the global economic downturn, the paper suggests that this policy has had

some unintended effects upon governance of the Chinese companies.

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Jenny Fu, LLB (Canberra), BA (Beijing), MLS (Canberra), Lecturer, Faculty of Law, University of Canberra,

PhD-in-Law Candidate, College of Law, the Australia National University . The

author would like to thank Professor Peta Spender of the Australian National University for her valuable

comments on an earlier version of this paper.2

Part 1: Introduction

The role of government in corporate governance seems to have increased with each round of

corporate collapses and scandals.2

Major corporate collapses in...