August 28,2009

SOE Corporate Governance: the Party Comes First

By CSC staff, Shanghai

You are a country with assets that might be for sale, mineral wealth, for example, or with companies, of some strategic value with valuable proprietary technology, that could use or even badly need some extra cash. Along comes a Chinese

state-owned enterprise (SOE), more than willing to pay even a premium price for said assets or companies.  But who, or what, are you dealing with, you might wonder.


As more state-owned enterprises (SOEs) go abroad to acquire resources, assets, and other companies, and an increasing number of state-owned or state-held enterprises are listing in Hong Kong, New York, London, and Singapore, the corporate governance of these enterprises still remains distinctly a "Chinese characteristic," and the party dominates SOE corporate governance.


With the global financial crisis, the light of the capitalist system as practiced in the US and American-style corporate governance has dimmed, for the moment at least, while the Chinese enterprise system is feeling a bit smug about itself.


All is not entirely well, though, in Dragon Land. Many of China's industries are utterly fragmented, and the central government has been promoting consolidation for greater efficiency. That move is not finding much welcome among all the various companies and factories.


In early August, the consolidation process received a jolt. A new CEO, sent to Tonghua Iron & Steel Group, a provincially-owned firm in Northeast China, to oversee its sale to a larger company, was beaten to death by rioting workers after informing them of the sale and, foolishly, that thousands of jobs would be lost. The sale was immediately postponed, as was another last Sunday, this time in Henan Province, when workers at a plant the province was trying to unload ran wild at the news and took an official hostage 


The People's Daily, The Chinese Communist Party's mouthpiece, published a front-page commentary titled Unswervingly Upholding the Party's Core Political Status in State-owned Enterprises.

"To firmly establish the party's core political status in corporate governance in SOEs is a valuable experience, drawing on the practice of reform and development over the past 30 years, and also an important principle which should be firmly grasped to strengthen and improve party building work in SOEs, which reflects the distinctive characteristics and requirements of the modern state-owned enterprise system with Chinese characteristics."


So, who has the final say in making decisions in SOEs, the board of directors, or the party committee? The answer is obvious. In a state-owned or held enterprise, the party committee controls the corporate governance through its control of the board and CEO.


 The piece goes on.


"The party committee in enterprises should seriously study, discuss, and put forward opinions and suggestions for such issues as the overall development of the enterprise, important personnel appointments and removals, as well as the vital interests of workers and staff members. The unified decision-making power of the board of directors on major issues should be supported, while the views of party committee should also be respected and reflected. The decision making of both the party and the board should be well united."


 "The key is that the party should play a leading role in the talent selection and appointment. The leading role is reflected in determining employment standards, recommending candidates, as well as improving the evaluation system, strengthening supervision and management, and training back-up human resources and so on. Adhere to the combination of principles of managing cadres by party committee and selecting managers by the board of directors in accordance with law, as well the employment right by managers."


Between national policies and the interests of shareholders, the former is plainly more important, especially as the stability of the SOE workers become more prominent.


"The fundamental requirement for playing the core political role is to ensure the implementation of principles and policies from the party and state. The party committee in enterprises should focus not only on supervising human resources, finance and materials as well as responsible persons and key positions, but also on monitoring the implementation of the scientific concepts of development and national policies, to promote enterprises to play a leading role in carrying out political and social responsibility. At the same time it must also balance relationships between the state, the enterprise, and the workers, actively coordinate various conflicts of interest, earnestly safeguard the legitimate rights and interests of the state and workers, maintain the ideological stability of workers, and promote the harmonious development of enterprises. "


Leadership of party committees is considered an advantage for SOEs.

"To really implement the core political status of party committee in the corporate governance of SOEs...Playing a central role by party committee in enterprises is a unique advantage of SOEs. Only continuously improving the leadership and organizational management system in SOEs can well combine the two advantages and turn the party's ideological, political, and mass work advantage into the core competitiveness of SOEs, which can consolidate the core political status of the party, make party-building work a key part in the enterprise value chain, and make the party committee an integral part in the modern state-owned enterprise system with Chinese characteristics."


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