Reports on Corporate Governance
Problems, Causes, Suggestions on Standardizing the Construction of the Board of Directors of Central SOEs (CSOEs)
CHEN Qing, AN Lin
PartⅠProblems In the Practice of Pilot Project
Through our meticulous research on following up the implementation of a lot of CSOEs’ pilot projects, we discover that the following eight problems remain unresolved in terms of standardizing the construction of board of directors of SOEs:
In addition, we discover through the investigation that lack of detailed materials, information, research for directors (external) of some pilot SOEs before participating in the board of directors’ conference have also caused the consequence of disjointing the resolutions and its actual operational status, which further weaken the authority of board of directors.
ⅡResponsibilities for board of directors and management executives is unclear
Despite that the pilot enterprises established the modern governance structure featuring division of the functions of three powers-in the upper level of the corporation: board of directors, board of supervisor committee and the upper managers ) in accordance with Notice on the establishment and improvement of the pilot project for board of directors of solely state-owned enterprises of the CSOEs, the structure has not fallen far short of what the SASAC expects of ,that is, the goal of scientific governance with the function where everyone fulfills their own responsibilities with check and balance, and fosters a more standardized and healthy mechanism.
In spite of the vey theoretically clear responsibilities of board of directors who is responsible for making decisions in strategy, major investment and financing and the appointment, dismissal and evaluation of the personnel affairs, etc. and executives responsible for the execution of resolutions from board of directors and daily operation, the pilot SOEs in the practical operation through our study have not specifically defined what tasks the daily operation covers. Additionally, board of directors and executives more often differ from each other on understanding of their responsibilities, therefore these reasons gave rise to the coexistence of power overlapping, conflicts and vacuum on some businesses between them.
We also find through the investigation that the board of directors of some pilot SOEs, on the one hand, would have normally supervised over some issues in the business operation, but the general managers consider board of directors are interfering with the executives’ work, on the other, the phenomenon of unclear responsibilities and power offsiding between Chairman of board of directors and general managers at the executives’ level often occurred.
Ⅲ Chairman was put in an awkward position
As a result of the investment subject’s special status and monotonous share holding structure, the solely SOEs are often not able to build the same balanced governance and ownership structure as state-owned holding and joint-stock companies with diversified ownership structure does. So it is very difficult for Chairman of the board who are at the central position of power and also especially serving as the legal representative of such type of company to play his parts very well in the pilot SOEs.
We noticed through the investigation that though too much interference with the daily operation was not allowed for Chairman of solely SOE, but it is impossible for the chairman who is also the legal representative of the company, just convene and preside over the Board of Directors’ meeting simply. Because he has to be fully responsible for all the business performance and supervise the executives over the process of executing its strategy and resolutions board of directors made. It is the reason and the unclear definition of responsibilities and rights between board of directors and executives that make it hard for Chairman to handle the scale of the daily work appropriately in the practical work. So if Chairman fulfills his or her duties by doing something, it is inevitable to make other executives think he is interfering with executives’ duties (even just to check the implementation of board resolutions), but if neglecting his duties by not doing anything, he probably can not be burdened with so big responsibilities (often designated as the first person in charge who bears most of the responsibilities.
ⅣGeneral Manager may feel uncomfortable about working with Chairman of the Board.
In the case of other person taking the position of Chairman of the Board, General Manager of the pilot SOEs may feel strongly uncomfortable about working with the board Chairman. Chairman has been accustomed to unconsciously doing what the general manager should think and do, which may trigger the conflicts easily at work with General Manager. Especially when Chairman of the Board want to defend his status as the first person in charge or his predominant position by the effects of his role as Legal Representative and the Secretary of Party Committee, the General Manager is more easily put in the awkward position of the first Deputy General Manager or Executive Deputy General Manager
Furthermore, as a result of the inadequate rights and responsilities conferred by the relevant authorities, General Manager of the pilot SOEs can not own and fulfill the same deserved rights as their counterparts under the supervision of the board of directors in the real sense do in accordance with Company Law of P.R.C. , for example the right to suggest the nomination of appointment and dismissal of Deputy General Manager, Chief Accountant and middle-level management.
ⅤExternal directors’ role needs to be given into play
The introduction of the external directors is critical to the success of the pilot project, which can enhance the independence and effectiveness of board of directors. As most of external directors have many years’ rich experience in business operation and management and take no positions at the work, they, general speaking, can play a strong role of checking and balancing the executives.
Through the study, we find that many external directors are able to actively devote themselves to making the real contribution to the development of their enterprises by expressing their independent opinions and probing into the enterprise. Meanwhile, however a few of external directors are indeed not concerned with their enterprises due to the limit of their time, energy and subjective conception. They just consider it as a matter of routine when they attend the meeting of board of directors. So the board of directors and the executive levels have not recognized the external directors like these very naturally. What concerns us most is that the executive are not really persuaded and convinced due to those external directors’ badly performance, which influence the enforcement of the resolutions psychologically.
ⅥChallenges in manifesting its core political leadership role facing the CPC Party committee
No rules and regulations in the Company Law are involved with how Party organization actually run its business and play its functions in companies, but only article 19 of general provision of the law stipulates that in companies, Communist Party organizations shall, in accordance with the provisions of the Constitution of the Communist Party of China, be set up to carry out activities of the Party. And companies shall provide the necessary conditions for the Party organizations to carry out their activities. In fact, the core political (leading) role of the party organization is mainly achieved through the participation in the key and personnel decisions at the joint conference between the Party and the government for the enterprises who have not implemented corporate system and or have done the system but mere posturing to the public.
However, for pilot SOEs, under the situation of standing out board of directors’ status and role and enhancing and improving the construction of board of directors, the fact that how party organization and CPC committee define itself, and adapt to the requirements of the reform of the pilot project has become a new challenge in the new period. Through the study, some conflicts occurred in the pilot SOEs between party committee, board of directors and managerial levels, both at the meeting and off the meeting, not only in the phase of formulating its Company constitution but in the period of trial operation. Most of those conflicts are concerned with how party committee manages the cadre and personnel, with the problem of selecting and recruiting their subordinates of the board of directors and managerial levels, party committee’s participation in making decisions, fulfilling the rights of working process based on the resolution of "Three-importance and One-large" (Collective decision-making) and board of directors’ right to make decisions, etc.
The challenge is often inevitable especially when both party organization and boar of directors in the pilot SOEs where it sets up the party organization and board of directors have the rights to make the major decisions of the enterprises.
Ⅶ The Boards of Supervisors nearly stuck in the predicament of being examined but no supervised
In terms of the investigation of the pilot SOEs, the board of supervisors’ role is still far from bringing into full play, which had further impact on the results of pilot project. As a result, the board of supervisors has become an important factor in influencing the success of board of directors. Through the study, we know that directors and General Manager of a pilot SOEs did not execute the resolutions from the board of directors, and even implemented the policy different from others, which have influenced the business performance of the enterprise. For this, many dispatched supervisors appointed by the board of directors of SOEs of the State Council have a clear and agreed understanding on this, and make a lot of complaints. However, through the investigation, we find that the board of supervisors did not exercise their rights of adopting the measures to correct the directors’ behavior according to the relevant law timely, but not appropriately offered their suggestions for dismissing the director and general manager.
ⅧMismatch between its capabilities or functions and responsibilities of SASAC
Through the study, we find that SASAC has not been well prepared for this pilot project and standardizing the construction of board of directors. Many pilot SOEs reflect that SASAC administrates them in the same way as it did basically enterprise with ownership system by the entire/whole people in the past. The measures of administrating those enterprises SASAC took-like Red Heading Documents generally issued, direct administration of SOEs, state-owned assets and managers, are not meeting far away from the requirements for the relations between shareholders and board of directors of solely sate-owned companies according to the company law. SASAC is facing with the restructuring of the functions of its organizations.
Part Ⅱ Analysis of Causing the Above Problems Existed in the pilot project
Generally speaking, the occurrence of the above problems actually manifests the dilemma facing the SASAC and central SOEs in pushing forward the pilot project and standardizing the construction of board of directors at present. So we are trying to analyze the causes of the above problems as below based on the combination of our investigation and judgment, modern theories on corporate governance and the relevant laws and regulations.
ⅠWeak conception(limited knowledge) of corporate governance philosophy
Through the investigation we find that both the members of SASAC and board of directors and the executives still have a vague and confused understanding of some core conceptions related corporate governance, resulting in the frequent occurrence for absence and exceeding their respective powers and rights or conflicts and frictions when those authorities exercising their rights.
Especially for enterprises owned by the whole people (ownership structure most of SOEs have at present) that carried out the system under which the factory director and manager assumes full responsibilities in the past, and those company system CSOEs now that is carrying out the system under which the managers assumes responsibilities authorized by board of directors, will be facing huge ideological re-recognition about the newly philosophy of corporate governance philosophy. Actually, under the system of enterprises owned by the whole people, general manger assumes the responsibility for the business performance, but board of directors assumes the responsibility for the business performance under the company system. Appointed and dismissed by the board of directors, general manager assumes the responsibilities for the board of directors by managing the daily operation of the enterprise.
In addition, for the SOEs who implements the company system, their chairman, who is actually not in a relationship of leading and being led between its general manager and him, cant not also replace or make the decisions the board of directors should make by himself, but chairman board have rights to check and supervise the general manger for his execution of resolutions from board of directors.
ⅡMissing key functional capabilities of board of directors
One of the most important rights for board of directors is to supervise the executives and select the candidates for managers who can work best and to dismiss them when they don’t perform well. When board of directors has those rights, board of directors can push the executives to abide by what they wish. Some problems inevitably appear when board of directors is essentially not able to enjoy the rights of appointing and dismissing the executives as a result of too many aspects involved in the major personnel issues of central SOEs.
Appointed by SASAC (even the central committee of CPC) directly, so the general manager and current members of board of directors should be directly responsible to the SASAC and the Central Committee on the principle of assuming the responsibility for the authority that have rights to appoint the person. As a consequence, the principle strikes a fundamental conflict with the principles in the corporate governance that general manager should be responsible to the board of directors by operating and managing daily affairs of their enterprises through the authorization of board of directors.
ⅢThe definition of Chairman’s rights and responsilities are inconformity with the actual condition of solely SOEs
Chairman of the board occupies a very important position in the corporate governance structure. According to relatively mature corporate governance institution of other nations, chairman has been positioned as the convener of meeting of board of directors, having right to vote once like other directors in voting the resolutions of board of directors. However, in the case of not only considering chairman as the legal representative mostly, but as the employee who works for the regular hours in the solely central SOE, it is impractical to only see the chairman just as the one who convenes and presides over the meeting of board of directors.
According to the Company Law, the article about chairman board being regarded as the supposed legal representative have been deleted and there is no specified regulations for the rights of board of directors besides convening and presiding over the meeting of general manager for Chairman of directors. All these make it difficult to define the rights and responsibilities of chairman of board of directors based on the actual situation of the enterprise in the practice.
ⅣImperfect mechanism for selecting, recruiting and evaluating the outside directors
The introduction of external directors’ system and fully exerting their effects is critical to the construction of board of directors of solely SOEs. Poor execution of the construction of external director system will directly impact on whether board of directors undertakes the mission and important responsibilities included in the Company Law and the pilot project. Despite the fact that the SASAC has formulated The Administrative Measures for the External Directors of Pilot Solely SOEs for the Work on the Board of Directors (for Trial Implementation), it is not enough to effectively motivate and constrain external directors and guarantee that external directors really know what to do in terms of their status. In particular, the implementation of the mechanism for evaluating and supervising the external directors needs further improvement.
ⅤParty organization’s policy for excising its powers is far too principled to effectively combine with modern corporate governance
The author interviewed the members of party committee of some SOEs in terms of exerting the effects of political functions of party committee or organizations. Most of them reflected that for one thing the documents and policy in this respect issued by the central committee is just a few, for another, the regulations of its contents are too principled. Such is the case in terms of three major law documents abided by current party committee or organization including The Constitution of the Communist Party of China (CPC), the Company Law and Opinions of the Organization Department of the CPC Central Committee and SASAC On Enhancing and Improving the Party Building of Central SOEs. Despite relatively specified regulations for exerting the effects of its political functions of the CPC committee given in the Opinions, those regulations and articles seems not to be definite for the practical operation of SOEs. We think that the fundamental reason is that those regulations can not effectively combine with the requirements for standardizing the construction of board of directors of CSOEs. Besides, some regulations themselves are worthy of being discussed.
ⅥTrapped in the board of supervisors’ dual identity
Why board of supervisors has just been examined but not supervised? We find through the research that board of supervisors and its members have their own respective difficulties, that is, the relevant authority don’t endow supervisor of board with the right title so that their words has been ineffective. The supervisors should be appointed by SASAC according to Company Law, but the external supervisor at present are basically composed of original members of board of supervisors of the State Council. Therefore, the supervisors may become confused about regarding current board of supervisors as just one part of enterprises or the board of supervisors who is dispatched by the State Council to supervise the major large-sized enterprises. If preferring to be regarded as the former one, so supervisors and the relevant authorities together should have to abolish the Interim Regulations on the Boards of Supervisors in State-owned Enterprises and issue new management methods. Consequently, the supervisors may feel at a loss when they exercise their rights.
Ⅶ Switching its role to be the shareholders and investor not effectively
According to the special regulations about solely SOEs stipulated in the Company Law, a solely state-owned company shall not set up the shareholders' meeting, and the functions of the shareholders' meeting shall be exercised by the state-owned assets supervision and administration institution, namely the acts of being shareholder of SASAC who can be seen as the acts of the shareholders' meeting. Thus, for the pilot CSOEs who carried out the company-system, SASAC shall shift its role to position itself as shareholders (or shareholders' meeting) when exercising its functions and act according to its new role as shareholders (or shareholders' meeting). But if not doing this, it will truly affect the practical evolvement of the pilot SOEs when building the effective board of directors’ institution.
Part Ⅲ. Suggestions and Countermeasures
Through the analysis for problems disclosed and their causes, we can find that the construction of board of directors with
ⅠPractically safeguard the board of directors of CSOEs to exercise their rights and powers according to law
The main problem of the pilot project and standardized construction of board of directors is to consolidate the board of directors by conferring the board of directors with its supposed rights and powers, like rights to make decisions of the appointment and dismissal, evaluation, and compensation of general manager, and of the important investment and financing. Among those rights, returning the rights of appointing and dismissing general manager to board of directors is the most critical to the enhancement of authoritative board of directors.
Although the article about the fact that board of directors decides to hire or dismiss the manager was specified in the article 50 of Company Law, but the law also seems to have failed in terms of central SOEs. The real situation is that neither the 53 key central SOEs whose executives in charge have been directly appointed and dismissed by the central committee nor 64 central SOEs whose executives in charge by SASAC, have substantial rights to hire or dismiss the general manager.
Therefore, here we wish to remind, the central committee and the departments of its organizations, and the state council, of attaching great importance to giving back to these rights. Objectively speaking, the success of the pilot reform of board of directors and reform direction and the progress of China’s SOEs depends on whether board of directors have rights to appoint and dismiss the mangers according to law.
ⅡExplore the innovative ways of carrying out the party-building inside the SOEs
In terms of the pilot project of board of directors of CSOEs at present, the topic about defining, treating properly and exerting the effects of political core role of party organization has aroused wide public concern inevitably in the field of corporate governance of
We especially anticipate to pay close attention to the research as below: firstly, how can we understand the concept of the management between the party’s management of cadres and talents and how can we distinguish the scope of “the cadres” and “talents”; Secondly, how can we exert the effects in an innovative way so as to be involved in the resolutions particularly about "Three-importance and One-large" decisions (Collective decision-making) of board of directors in the aspect of party committee’s participation in decision-making of the major issues
ⅢUrgently specify the identity of board of supervisors, its subordination and the ambiguous status of the applicable law
The article 57 of Company Law stipulates that the expenses necessary for the board of supervisors or the supervisor of a company with no board of supervisors to perform its (his) duties shall be borne by the company. On the contrary, the articles 20 of Interim Regulations on the Boards of Supervisors in State-owned Enterprises stipulates that the expenditure for the board of supervisors on the launch of the examination and supervision of its work should be appropriated by the central financial budget, the authority of supervising responsible for disbursing uniformly. So we can conclude that the board of supervisors in the Company Law should not have the same meaning as the board of supervisors in the Interim Regulations on the Boards of Supervisors in State-owned Enterprises. However, in real situation, both the board of directors and its members are all confused about their identity stipulated in the Law and Regulations. The National People’s Congress, State Council and its state-owned assets supervision and administration commissions should clarify and define immediately a series of problems as below: Who should be directly responsible for the board of directors? the State Council, its SASAC, or the SOEs where they work for? And is it applicable to implement the Interim Regulations on the Boards of Supervisors in State-owned Enterprises
ⅣEstablish and promote the scientific evaluation mechanism for selecting and recruiting the external directors
Firstly, establish the market-oriented mechanism for selecting the external directors.
After defining the number of board of directors, the responsibilities of different directors and qualifications and other conditions necessary for the director candidate we can start to recruit the suitable ones openly to the public. Then we can publicize the final selection results and receive public supervision. To avoid the inadequate subjective initiative of the external directors as a result of administrative appointment, we can utilize the market-oriented selection mechanism to resolve the problem of external directors’ active willing.
Secondly, promote the marketization and professionalization of external directors by establishing the association of external directors. It is suggested to establish external directors’ association to manage the independent directors of listed companies at present. The association of independent directors, for one thing, can manage the independent directors on a daily basis through its industrial self-discipline, and for another, they can organize experts to improve and perfect the mechanism for supervising and regulating the listed companies. In view of this, we suggest that SASAC can promote the marketization and professionalization of external directors by referring to the methods on administrating the independent directors of listed companies and establishing the association with the same functions as the methods mentions.
Thirdly, establish the effective incentive mechanism for external directors. Above all, we can vigorously create a talent pool of directors by establishing the competitive job market for directors. Then secondly, establish the social system for evaluating the external directors’ reputation. We can entrust the social intermediary organization to build the system for evaluating external directors’ reputation and establish a fair incentive mechanism for external directors. Finally, adept at motivating others by paying honor or giving official recognition, we can motivate the external directors with outstanding performance by paying more honors to them and make their names known to the public through news media on a regular basis.
ⅤDefine the responsibilities and rights of Chairman Board combined with the actual condition of the enterprise, avoiding to simplify and weaken his or her rights.
Coinciding with legislative spirit of Company Law, the sprit for the pilot project of the board of director stresses the effects and status of board of directors, while weaken the responsibilities and rights of Chairman Board. However, for those chairmen of board of directors who are also serving as “legal representative”, especially not only legal representative, secretary of the CPC Committee, but the first person in charge reporting to SASAC, it is not unfavorable in terms of the current operation of the pilot SOEs just to weaken their status and effects. The situation will become worse especially in the case that board of directors can not appoint and dismiss the general manager. Besides, the Company Law stipulates that the legal representative shall assume the legal responsibilities, but no articles about what rights they shall have, so in such case, no one seems to have courage and willing to hold the position of chairman of board of directors who also work as legal representative only during regular working hours. Thus, we suggest The National People’s Congress, State Council and the different organizations and enterprises under the supervision of SASAC of the P.R.C. should consider and discuss avoiding the simple weakening of responsibilities and rights of chairman of the board of directors and define the rights and responsibilities based on the actual condition of those enterprises by conferring solely SOEs with more space and revising the relevant articles of Company Law under the framework of law in the process of pushing forward the pilot project of central SOEs and standardizing the construction of board of directors.
Ⅵ Endeavor to pushing forward the organizational restructuring of SASAC simultaneously
With the intention of building the relationship of shareholders and board of directors between SASAC and its SOEs, we can explore the transformation from SASAC’s functions and roles to shareholders’ by launching a research on the organizational restructuring of investor agency. SASAC can carry out the institution of general board of directors organizationally by restructuring its organization and functions, and can give an emphasis on the management of capital, not assets, on the management of power, not non-power, on the management of directors and supervisors, not person-in-charge of those enterprises, on managing those enterprises by their articles of constitution, not by administrative methods by reshaping its philosophy and methods of management mechanismly.
PartⅣConclusion of this thesis
Standardizing the construction of board of directors with