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Independent Boards for Chinese State-owned Firms

From News, page 4, issue no. 406, Feb 16, 2009
Translated by Lin Li
Original article
: [Chinese]

Corporate governance over China's state-owned companies (SOEs) is gradually being freed from the grips of communist party cadres following four years of management reform, the Economic Observer has learned.

Granting more power to the companies' board of directors for independent decision-making would be one of the key missions of this year's SOE restructuring, according to a government circular distributed to over 100 central SOEs recently.

The circular was sent to companies involved in a pilot project to set up their own boards of directors. The EO learned that the document was jointly issued by the Party's Central Organization Department and the State Administration of State-Owned Assets Commission (SASAC).

Modelled after Temasek
In recent years, China has been reforming the business leadership at SOEs to be more compatible with modern corporations, such as creating boards of directors to look after shareholder interests.

As a result, two parallel-ranking groups of top decision makers emerged - commonly known as the "three-new" and "three-old".

The "new" referred to the board of directors, the supervision committee, and the shareholders committee; while the "old" referred to the Chinese Communist Party Committee, the employees representative Committee and the union.

Previously, this complex management structure and the over-powering presence of Party cadres in nailing top decisions remained a challenge for SOE reform.

The latest circular, the EO learned, would re-organize the jurisdictions of each leadership group.

"The biggest challenge now is how to ensure the independence of the board of directors, and allow the board to have the biggest say in business decisions," said one top executive of a state-owned firm.

The pilot project, initiated in 2004 by the SASAC, has been modelled after the Temasek Holdings, a state investment arm of the Singapore government. All business and commercial decisions in Temasek are made by its board and management team.

Since then, 17 central SOEs have set up respective boards of directors. The number was below expectations, as the country has over 150 such central SOEs.

Empowering Board of Directors
"What we have now is still far from the 'real' board of directors. If the board can't even decide on top management personnel hiring matters, their job evaluation and remuneration package, it has no real power," said one SOE's "external" director.

"External" director is a top management personnel brought in from outside the organization, instead of from official appointment.

An official with the SASAC said: "The existence of a Party committee, with jurisdiction and power overlapping with the board, alone poses the biggest setback. As the Chinese saying goes -- you can't keep two big tigers in one cage."

Another external director from an SOE illustrated the conflict by saying: "Whenever we call for a meeting, staffers always ask 'who's calling the meeting, the board or the party commitee'?"

The latest government circular sought to draw the boundary. For the first time, it was clearly stated that boards of directors would have jurisdiction over hiring matters concerning top management personnel.

The EO learned that the circular stated that the boards could hire and fire in accordance to corporate charters, though prior to appointing the selected candidates, the SASAC must be informed.

Previously, the SASAC and the Party Organization Department would appoint both the board and the management team.

However, there was also an exception clause in the circular, which stated that the appointment of the president for 53 super-scale central SOE's was beyond the purview of boards of directors.

Double-Track Mechanism
Unlike SOE executives and some SASAC officials, Chinese scholars held less optimistic views on how the latest circular would change the balance of power in SOE top management.

The circular mostly touched on procedural issues concerning the power of boards in recruiting top executives, analyzed An Lin, CEO of Beijing Truth United Management Consulting, a think tank that specialized in corporate governance.

"The procedures described are complex, and in various stages, the decision making still involves the company's party committee, the SASAC, the Party Organization Department and so on.

"It gives the impression that it is still the Party that rules over who to be appoint as top executives, the board is merely there to carry out the procedure legally," said An.

Echoing such views was Zhang Wenkui, deputy director of Corporate Studies Institute under the State Council Development Research Center.

Zhang said in the decision making process at SOEs, the Party's decisions represented political correctness and endorsement, while the board's decision was for legal formalities. To deliver an effective decision that could be followed through politically and legally, nods from both sides are necessary, he added.

"This (double-track decision making mechanism) has been applied for a long time and would not change in the short-term," Zhang stressed.

Law professor Li Shuguang, from China University of Political Science and Law, related an incident in Shenyang, Liaoning province, to illustrate the power balance at SOEs.

He recounted that the city's local branch of SASAC had all along appointed board members until a visit by central officials from the Party Organization Department (Party organ).

The party officials deemed the practice as against the norm, and since then, the final say in the board appointment was shifted to the Party's committee in the local government.

"Having a co-existence of the board and the Party committee is not a problem, the problem lies in not having a clear definition of their respective jurisdictions," said Li.

If the latest directive was carried out smoothly, the Party committee would be reassigned to a supervisory role instead of a decision making one, said one SASAC official.


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