The Way Ahead for State-owned Enterprise Reform

By EO Editorial Team
Published: 2009-08-25

Cover Editorial - EO print edition no. 433
Translated by Zhou Yuning
Original article:

Though the process of reforming state-owned enterprises (SOE) has been taking place in China for over a decade, the recent violent incidents that took place at both the Jilin Tonghua Steel & Iron Group and Henan Linzhou Steel & Iron Group, are an important reminder that such reform is a complicated and sensitive issue.

The complexity of the issue is reflected in the fact that although on the one hand, we have to condemn the use of violence in protests, we also have to realise that employees, as one of the main stakeholders whose interests are tied up in the issue of industry reform, ability to stand up and express their concerns does, to a certain extent, reflect on China’s political development.

We have to admit that China must continue to reform its national industries, they are inefficient and amount to a costly and wasteful use of social resources.

But one thing we need to keep in mind is that the inefficiency of SOE is something that is caused by the inflexible system itself. The workers should not be held accountable for the failure of SOE, rather, they deserve recognition and compensation on the basis of the contribution they have made.

As a result, when handling these kinds of complex negotiations, authorities should work to the best of their ability to ensure that reform continues to takes place in a way that is beneficial to all.

Over the past few years, resistance to the reform of state industries has led to mass protests. The opposition of the participants of such protests to reform is based on a fundamental mistrust in the legitimacy of the reform process. Part of the reason for this distrust is the fact that the employees' rights to both know  and also their right to participate in the negotiations have been ignored.

The only way to reduce resistance to and the cost of reform is to communicate with all the players, to conduct comprehensive negotiations before making any moves and to strictly follow a legal process that acknowledges the rights of all stakeholders, including ordinary workers.

Reform will not gain genuine support if those who are in charge simply transform the whole system overnight without consulting all the interested stakeholders. This kind of shock therapy will only bring about resentment and resistance, which amplifies the social cost of reform and often results in a lose-lose situation for all involved.

Finally, even if “shock-therapy” is successfully used to transform a business, it will soon become obvious that it is impossible to run an enterprise smoothly in a social and business environment that is full of resentment.

Moreover, the proper allocation of company equity is an even trickier problem than the procedural justice we have discussed above.

Usually, state-owned or collectively-owned enterprises imagine themselves as a communal partnership between the enterprise as a whole and individual employees, with everyone being a collective “owner of the enterprise.”

After the reform however, this changes into a pure employee-employer kind of relationship, a huge historical leap that deprives employees of their former sense of ownership. It's legitimate, acceptable and feasible that enterprise should be expected to properly compensate their loyal employees who once represented the entire people in serving the state-owned enterprises.

Some restructured enterprises settle this problem by offering employees stock in the newly formed private enterprise. But if we take a closer look at the situation in most cases of reform, we find that most of the proposed plans for providing for workers effected by reform ignore the long-term sustainability of compensation. That's why the solution of one-off severance packages have always been met with so much resistance.

What is more, the enterprises that improve efficiency by reducing their workforce and listing on the stock market, might well make more profit after streamlining their company but this kind of behaviour will also intensify a sense of injustice among laid-off workers and the general public who believe that the enterprises earned its money at the expense of the laid-off workers. This in turn, will lead to more resentment and future resistance against the restructuring of other SOE.

In fact, we maintain that it is feasible to grant employees shares in the restructured enterprise, this can be done in a variety of ways that might include adding them to worker's pension accounts or into a trust fund. We believe that by experimenting with these kind of share holding schemes, companies will be able to guarantee their stability after reform has been carried out.

We should continue with the reforms of national industries, but in order to ensure that reforms go smoothly, attention needs to be paid to the interests of all parties involved and the game needs to be played according to the rules. 

We should also make sure that no stakeholder is a passive player forced to accept the decisions of others without having their own say.