Archive for the ‘state-owned enterprises’ Tag
State-owned enterprises (SOEs) remain central to China’s economy. They include vast companies in the oil, telecoms, steel, finance, and other major sectors. In many cases a minority of their shares have been floated on the Hong Kong, Shenzen, or Shanghai stock exchanges.
The corporate governance of these enterprises has been significantly influenced by Western experience. For decades governance has been left to company’s boards of supervisors and boards of directors, under the supervision of the State-owned Assets Supervision and Administration Commission (SASAC) and the China Securities Regulatory Commission (CSRC). State involvement at a higher level had tended to be distant. Some felt that the Communist Party had been pushed aside and the party’s leadership undermined.
Not any longer. In October 2016, China’s President, Xi Jin Ping, asserted that ‘the ultimate bosses of China’s state-owned enterprises must be China’s Communist Party organs’, according to the South China Morning Post (12 October 2016). The President told a high-profile conference of top officials and SOE executives that ‘after decades of fading into the background, Communist Party’s leadership must be boosted in SOEs’. The message was clear: the party will reassert its grip on the state sector.
The two-day work conference concluded that the Communist Party must increase its role, especially in ideology, oversight of personnel, and key decisions in the country’s biggest industrial and financial enterprises.
‘Leadership by the party was the root and soul and a unique advantage of China’s state firms, and any weakening, fading, blurring or marginalization of party leadership in state firms will not be tolerated’, Xi is quoted as saying. ‘We must unswervingly uphold the party’s leadership in state-owned enterprises, and fully play the role of party organs in leadership and political affairs. We must ensure that wherever our enterprises go, party-building work will follow’.
This was the first time that the country’s leadership had addressed a meeting specifically on the Communist Party’s leadership in state businesses; the first time in fact that they had shown any interest in corporate governance. Xi said that China’s state firms had to remain loyal to the party’s course to be ‘a reliable force that the party and the nation can trust’ and ‘an important force in firm implementation of the central leadership’s decisions’.
Since the 18th party congress four years ago, the leadership has called for SOEs to be companies ‘with Chinese characteristics’, which means ultimate leadership by the party. In the published comments, the president did not specifically mention boards of directors. He said the Communist Party’s should be ‘embedded’ in corporate governance. He also said the leaders of China’s state firms should be seen as communist cadres, serving party interests in the economic realm.
Why has China’s leadership chosen to reassert their ultimate control over SOEs? A number of reasons come to mind:
- To reinforce the President’s sweeping anti-corruption campaign. Corrupt officials in SOEs, as well as the military and the government, have already been accused, but corruption remains endemic.
- To reverse the slide towards Western capitalist thinking and reassert Communist values.
- To improve performance of the SOEs and spur innovation as the country faces falling economic returns after many years of double digit growth. The government also launched a 200bn yuan (US$ 30bn) venture capital fund to foster SOE reform and spur innovation.
- To build party loyalty and improve control over a huge population, whose relatively affluent middle class now has aspirations to greater independent thought. The existing control over the media, the internet, and public discussion would be reinforced if SOE management supported party ideals. Calls for independence from young people in Hong Kong cannot have improved this challenge.
Bob Tricker October 2016.
 For more on the corporate governance system for SOEs see Tricker 3e pages 297-303.
Bob Tricker writes from the Hong Kong Special Administrative Region of China with some up-dated insights into the way the Chinese authorities govern China’s listed companies.
China’s economy continues to grow, albeit at a slower rate during the global financial crisis, and the importance of China to the economies of the rest of the world becomes ever more apparent. But how are major companies in China governed, by comparison with the rest of the world?
As I say in my book Corporate Governance – principles, policies and practices (OUP 2009): in a country with strong central control, in which the National People’s Congress, the State Council and the Communist Party play significant roles in the governance of enterprises, share ownership is not the obvious basis for governance power. Yet the Peoples’ Republic of China has developed an innovative corporate governance regime.
Originally, industrial state-owned enterprises (SOEs), which were in effect large bureaucracies, received production and distribution orders from state planners. SOE employees benefited from housing, medical care, and schooling for their children, and the government provided benefits for maternity, injury, disability and old age. Many SOEs were heavily subsidized, with the government giving them easy access to bank financing, partly to pay for the social welfare needs of the workers. The concept of company, legal entity or corporation did not figure in the Chinese language at that time.
Then, between 1984 and 1993, the government introduced a transitional model of governance for SOEs throughout China, giving them more autonomy. In 1994, a new Corporate Law provided for the restructuring of traditional large and medium-sized SOEs as legal entities. These laws transformed some SOEs into corporations clearly defining asset boundaries and ownership. A dual system of governance was designed with boards of directors to represent owners’ interests, plus a board of supervisors.
In 1988, the State Council of the People’s Republic of China, advised by OECD experts, produced a set of corporate governance directives for SOE reform. In September 1999, the Fourth Plenary session of the 15th.Chinese Communist Party’s Central Committee took a vital decision on enterprise reform, in what was termed a “strategic adjustment” of the state sector, agreeing that the state should be “withdrawing from what should be withdrawn”. Interestingly, corporate governance was recognised as being at the core of the modern enterprise system.
Some of the reformed corporate entities were floated on the two China stock markets in Shanghai and Shenzen (a city across the border from Hong Kong), which had been set up in 1991 and 1992 respectively. After due diligence studies on their financial standing, a few China companies were listed in Hong Kong and others on stock exchanges around the world. Some listed “through the back door” in Hong Kong, by acquiring a non-trading listed company and backing a China business into this shell.
In 2001, the China Securities Regulatory Commission (CSRC) formulated some basic norms of corporate governance, promoting the separation of listed companies from controlling shareholders. These guidelines called for at least one-third of the board to consist of independent directors, including at least one accounting professional, although initially suitable people were scarce.
In 2002, CSRC formulated a Code of Corporate Governance for listed companies. This included basic principles for the protection of investors’ rights, and basic standards of behaviour for members of the board and supervisory committee. A guidance note, issued by CSRC in 2002, required every listed company to have at least two independent directors and by June 2003 at least one third of the board should consist of independent directors. In 2005, CSRC allowed listed companies to remunerate managers with shares and stock options.
In 2006, a fundamental review of Chinese company law created two types of limited company – the limited liability company (LLC private companies) and the joint stock company (JSC public companies), bringing the legal context much in line with the company law of other countries. For example, the responsibilities of company (board) secretaries were established.
But the state maintains a significant ownership share and control at the national or provincial level.
Contemporary corporate governance in China
The regulatory structure does not appear to be significantly different from practices in the West, when presented simply:
But who are the ‘state regulators’ and what do they actually do? The lines of control from various state and provincial authorities can be numerous:
The People’s Bank of China, the tax offices, the ministry responsible for the industry in which the company operates, and other state and provincial officials all act in what they see as the interests of the state and the people. They can determine prices, regulate supplies, take action to avoid unacceptable economic or social stress such as unemployment, bankruptcy, corruption, or financial pressures on the state economy. They can stop undesirable competition between state enterprises.
On reflection, these are not activities that are often found in Western economies. Or are they? As the effects of the ongoing global economic crisis unfold, similar activities seem to be appearing.
The China Securities Regulatory Commission of the State Council (CSRC) is the Chinese Government’s corporate regulator. CSRC publishes the corporate governance code, other corporate governance regulations, and regular reports on corporate governance reform and performance in China. CSRC also liaises closely with the management of the stock exchanges in Shanghai and Shenzen, and with those exchanges overseas which list China stock. The CSRC is a regulatory body, with powers analogous to the SEC in the United States, with the prime aim of investor protection. It seeks to maintain a tight control over directors’ behaviour.
The China corporate governance code and many of the regulations mirror those in the West. Indeed, in some cases, in reporting for example, they are stricter. In some 15 years China has achieved what took countries in the west many times longer.
But things are not always what they seem. Xinhua, the national news agency recently let slip that although the published remuneration of some executive directors appears to be on a level with those in the West, actually these executives pay back significant sums so that their net pay is more in line with Chinese norms.
The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) holds the China Government’s shareholding in all China’s listed companies (other than those in the finance sector). In 2008, total assets were over US$1.56 trillion, with eight of the world’s top 500 companies in the Fortune list. So SASAC is the largest institutional shareholder in the world, surpassing the Government Pension Investment Fund in Japan, the Government of Singapore Investment Corporation and the California Public Employees’ Retirement System funds.
SASAC is a Commission of the State Council and wields considerable power over the SOEs. It ensures that the State’s interests are represented in the activities of China’s listed companies. This means that it is involved in the appointment and removal of directors and top executives. Recently, it has moved chief executives around between companies. Again, not an activity that one in the West would typically associate with the state, unless, of course, one remembered that the president of the United States recently removed the head of General Motors and the British Government are currently involved in the appointment of directors to various British banks they have nationalized.
Maybe convergence is a two-way street.