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Improvement of Corporate Governance Structure and Establishment of Check-and-Balance between Owners and Managers
Wang Yuan & Li Zhaoxi
In accordance with the decision of the Bra Plenary Session of the 14th Party Congress on the establishment of modern enterprise systems, most of China's large and medium-sized state-owned enterprises have been transformed into companies since 1994 in keeping with the provisions of the Company Law of the People's Republic of China. However, the management and efficiency of these state-owned enterprises have not improved as expected. On the contrary, the operating efficiency of most of these enterprises has been down sliding in recent years. Even today, there is no ease in such deterioration. Last year continuously witnessed bankruptcies of some large state-owned enterprises, that sent shock waves across China and to the outside world. This year, the State Council dispatched special inspectors to audit the first batch of 22 large state-owned enterprises. The audit results indicate that all these enterprises had rather serious financial problems and some of them even violated the criminal law. Rash decision-making, extravagant spending of public funds, delinquency debts and fund transfers have been rampant in the operations of the state- owned enterprises. Solving these problems has become a matter of utmost urgency. In a situation where so many companies are in serious trouble, it is no use to simply blame the management personnel for their personal incompetence. The root causes have to be found from the existing enterprise systems.
I. The sticking point of the problems lies in the lack of an effective corporate governance structure
One striking feature of modern enterprises is the separation of the management from the ownership. On the one hand, as a modern enterprise has a wide scope of business and its internal structure is complex, it would be impossible for the enterprise to operate well if its management is not fully entrusted to specialists. On the other hand, as the operations of any enterprise are subject to the constraint of the property rights, it would also be impossible for the enterprise to operate well if the owners of the enterprise's property rights lose their final control over the enterprise and allow the managers to pursue their own interests that are independent from the interests of the owners and other stakeholders. Therefore, the core of a modern enterprise system is the corporate governance structure that can ensure the check-and-balance between the owners and the managers. According to the experience of the market economies in the world, whether a company can operate well depends first of all on whether it has established an effective corporate governance structure.
With a few exceptions, the following problems that seriously affect the establishment and operation of the corporate governance structure occurred in many Chinese state-owned enterprises when they were transformed into companies:
First, a batch of so-called "plaque-change companies" appeared.
Although some of the enterprises registered themselves in corporate capacities in the course of being transformed into companies, that was in fact a process of "plague change" for the units under the jurisdictions of the administrative leadership bodies. The administrative leadership bodies at higher levels continued to interfere in the decision-making of the enterprises in the areas of personnel, finance, materials supply, production and marketing. Most enterprises that have undergone the experiments on the establishment of modern enterprise systems were actually turned into the solely state-owned companies or solely state-owned groups that smack of strong administrative tint. Important corporate decisions, from personnel appointment and investment planning to the inter-enterprise mergers and reorganizations, still have to be made according to the instructions from many sources of the administrative departments. But these administrative departments refuse to bear any economic consequences of their false orders.
Second, the internal decision-making bodies of the enterprises are overlapped and there are several leading bodies to issue separate orders, which makes centralized and unified corporate decision-making virtually impossible.
A modern enterprise is normally characterized by its large scale, wide scope of business, fast rhythms of production and complex internal structure. Therefore, it is necessary to establish a management system that takes the wage-earning senior managers as its core and the Chief Executive Officer (CEO) as its leader, exercising centralized and unified leadership over the company-wide production and operating activities under the leadership and supervision of the board of directors. In a typical Chinese company established through transformation, its decision-making bodies include the "old three 'huis'" (the party committee, the trade union and the employees' congress) and the "three new 'huis'" (the general meeting of shareholders, the board of directors and the supervisory board) which co-exist and issue orders separately. In addition, they are characterized as "three hearts" (which means taking the factory director as the center and the party committee as the core and relying wholeheartedly on the working class) and "two minds" (which means the powers and responsibilities are not clearly defined). If these power organs are led by different people, they would counterbalance and wrangle each other. In normal times, everybody tries to grab decision-making powers; when some problems emerge, nobody takes the responsibility. Although the general manager of a company is the highest executive officer according to China's Company Law, his day-to-day operating decision-making faces interference from many sources and it is very difficult for him to exercise a centralized and unified leadership. However, if all these positions are assumed concurrently by one same person, the behaviors of the general manager will be free of the control of the owners and other stakeholders and it is very likely for a situation to emerge, in which "insiders control" and "everything is done in his own way".
Third, in the enterprises that enjoy a fairly high degree of autonomy, the phenomenon that "the control of insiders has gone out of control" is widespread.
In modern companies, although the senior managers enjoy a high degree of autonomy within their scope of authority, their operating activities are subject to the overall supervision of the shareholders and other stakeholders through the boards of directors, and receive material rewards from the board of directors in light of their performance. In China, decades of reform in "decentralizing powers and offering interest concessions" has made people widely believe that the highest principle of reform is to give the "enterprises" (actually their managers) the operating autonomy free from the control of the owners. As a result, the "authorized management of the state-owned assets", the general meeting of shareholders and the boards of directors exist in name only. Practices of this nature in violation of the basic principles of corporate transformation are rampant and virtually exclude the owners from the enterprises. The wage-earning senior managers inside the enterprises monopolize the final control right of the enterprises in their capacity as" representatives of the juridical persons". In fact, they are managing these state-owned assets with full powers and without internal or external supervision, hence the phenomenon that "the insiders' control has gone out of control". The decision of the State Council to dispatch special inspectors to audit the solely state-owned enterprises can help find some problems if these inspectors truly perform their duties. But as the position and roles of the state as the representative of shareholders in the corporate governance structure have not been clearly defined and as there is no regular supervision over the corporate operations, even the severe punishments meted out to those responsible after the external audit by the special inspectors are often proven to be too late to recover the losses.
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