China is changing the governance of State-owned enterprises (SOEs). The ruling Communist Party of China has pledged to separate government from the market, and has announced for the first time that the market should play a "decisive" role in the economy. The pledge was vowed at the recently closed Third Plenary Session of the 18th CPC Central Committee, which maps out the country's direction for the next decade.
China's SOE system needs comprehensive reform. Various options have been debated, such as market access. One option, essential to the reform but missed in the debate, is reducing the concentrated power held by SOEs.
As early as 1993, China set the reform goal for SOEs as the "separation of government and enterprises." To achieve the goal, China created the State-owned Assets Supervision and Administration Commission (SASAC) in 2003. SASAC acts as the shareholder of SOEs while shepherding the reform across industrial sectors.
However, the structure of SASAC causes unintended problems. It not only has the power to control personnel and compensation on the corporate board, it also controls management. Meanwhile, in some SOEs, one executive calls all the shots.
Such concentrations of power result in waste and corruption in the management of State assets, and degrade democracy within SOEs.
The new Chinese leadership has called for further reform in all sectors including SOEs. A clear step, which is already underway, is the establishment of boards of directors in all central SOEs.
Central SOEs are those directly supervised by SASAC at the state level, compared with local SOEs supervised by SASAC at the provincial level. Central SOEs are considered a pillar of the Chinese economy.
The boards of directors are expected to replace the old hierarchy in corporate decision-making. Once that goal is met, the power to determine managerial personnel and compensation can be transferred from SASAC to the boards.
Compared with SASAC, corporate boards are in a better position to choose management. They are also willing to protect minority shareholders, which is of particular concern, as even more SOEs will be opened up to private and foreign investors following the plenum's decision. So far, 52 out of 113 central SOEs have already established boards of directors.
In order to solve the SOE problem, the government, as the dominant shareholder, should bear a fiduciary duty to minority shareholders. Otherwise, SASAC can abuse its power to advance political influence and administrative corruption. So restrictive rules against those non-economic purposes must be instituted, and minority shareholders should be able to sue for injunction and relief.
The government should also refrain from controlling share transfers of SOE subsidiaries. Chinese law has allowed SASAC to decide such trades so far. This contradicts a basic principle that the parent company, and no other entity, should control its subsidiaries. The current practice should be changed to return the power to the parent SOEs.
SASAC should segregate the assets and liabilities of an SOE from those of its own as the shareholder. Assets and liabilities between SOEs should also be separated. The enduring practice by SASAC to transfer the assets of one SOE of others suspiciously violates the foundation of the modern economy - the concept of a limited-liability company. As a backstop, an environment must be prepared that allows central SOEs to go bankrupt, since central SOEs are currently prevented from being insolvent.
China's SOE reform has been pragmatic, rather than radically privatizing overnight. The changes in SOE corporate governance will reduce government intervention in the daily management of SOEs.
SASAC is expected to formulate a comprehensive SOE reform plan, following the conclusion of the plenum. The plan should focus on improving SOE corporate governance, as this is the key to separating government from enterprises.
The author is a PhD in law at the University of International Business and Economics and a Fulbright scholar at Harvard Law School. opinion@globaltimes.com.cn