At the request of the Development Research Center of the State
Council/Enterprise Research Institute, the World Bank has examined
recent international experience in the governance of state-owned
enterprises (SOEs). Lessons for China may be grouped under five
themes:
A.
The need to focus on large SOEs;
B.
The need to focus on the efficient use of capital;
C.
The need to focus state ownership rights in a separate "first tier"
government agency and provide sufficient transparency;
D.
The need to focus authority and responsibility for SOE strategy and
operations in each SOE's board and management; and
E.
The need to provide an appropriate focus for "second tier"
shareholders.
A. Focus on Large SOEs
The world's most successful SOE governance regimes oversee
relatively small numbers of SOEs: e.g., 16 in New Zealand; 59 in
Sweden; and about 20 in Singapore. These countries have
well-developed legal and financial systems to support commercial
operations by either state-owned or private businesses. But
narrower "spans of control" have also facilitated good SOE
governance in these countries.
It
would make sense for the Government to focus only on China's large
SOEs. Successful governance of this portfolio would itself
represent a huge challenge. Meanwhile the near-term ownership
transformation of China's small/medium SOEs would be consistent
with the 4th Plenum Decision of the 15th Central Committee of the
Communist Party of China (CPC) in 1999 to "grasp" the large and
"let go" the small.
A
government focus on "grasping the large" would still allow for
equity structure diversification, as mandated by the 1999 4th
Plenum Decision. The Government has increasingly allowed for sales
of SOE shares to strategic investors or partners, institutional
financial investors, and the public. The Government should be ready
to reduce the State's share in many large SOEs to 51 percent -- or
even lower. Even with a minority State shareholding, methods to
protect vital strategic interests can be found or
developed1.
B. Efficient Use of Capital as the Central Objective
The world's best SOEs focus on the efficient use of capital. It is
natural for the Chinese government to pursue different political
and social objectives. But in exercising its ownership in large
SOEs, the State shareholder should focus on maximizing returns on
capital. This is best measured in terms of economic value-added
(EVA), which considers the risk-based opportunity cost of debt and
equity capital. A focus on maximizing returns on capital would
facilitate full commercialization of SOEs to prepare for post-WTO
competition.
To
support this emphasis on EVA, all large SOEs should be required to
improve their accounting practice so that Ownership Agencies can
calculate EVA for each large SOE and evaluate their performance
accordingly. In addition, all large SOEs should provide an Annual
Statement that specifies goals to be achieved in the following 1-3
years. This would facilitate SOE performance monitoring and
evaluation by the Ownership Agency. As in New Zealand, the Annual
Statement for each SOE could specify the nature and scope of
activities to be pursued; expected returns on state capital (e.g.,
EVA) and other performance targets for the next three years;
expected dividends; treatment of workers and suppliers; and
compliance with regulations (e.g., environmental, safety, fair
trade).
C. Creation of Ownership Agency to Exercise State Ownership
Rights
Establishment of Ownership Agencies will require decisions on the
following issues: (1) legal form; (2) scope of portfolio; (3)
mandate; (4) appropriate exercise of ownership rights; (5)
authority; and (6) financial management.
1 The Ownership Agency should be commercially-focused and
professional. It may be easier to cultivate these qualities if
the Ownership Agency is organized as a "public service unit" (PSU),
which reports to the State Council and whose work is reported to
the annual National People's Congress for its evaluation. The
Ownership Agency should be staffed with full-time professionals
whose compensation is market-based. Full-time staff are needed to
ensure that the Ownership Agency is "real," rather than "virtual"
as in some localities. Ownership Agency staff compensation should
be market-based in order to attract staff with the necessary skill
sets. Ownership Agency staff should have the business training
and/or experience to be able to make integrative assessments of an
SOE's marketing, production, financing, and other business plans
and results. Such general management skills are more readily
available in the non-state sector. To obtain a sufficient supply of
necessary general business management skills, the Ownership Agency
should have the ability and the readiness to match non-state
salaries.
2 The Ownership Agency's portfolio should include only
for-profit, non-financial SOEs. Establishing effective state
ownership over China's large number of for-profit non-financial
SOEs is a huge challenge. Assigning non-profit organizations, state
assets in government departments, and other public service units to
an Ownership Agency would be a major distraction. As for financial
SOEs, it would be a bad idea to assign these to an Ownership Agency
for non-financial SOEs. Assigning non-financial SOEs and financial
SOEs to the same Ownership Agency would create or increase
conflicts of interest -- e.g., pressures for directed lending,
avoidance of enterprise restructuring2.
3 The Ownership Agency's mandate should include both management
of state shares and sale of state shares (equity). In
performing its share management function, the Ownership Agency
would ultimately be responsible for the value of State shares in
SOEs. In organizing sales of state shares (equity), the Ownership
Agency's goals would include maximization of sale proceeds. There
is no inconsistency between the share management and share sale
functions. Indeed, since maximizing the value of state shares would
help maximize the proceeds from any share sale, it makes sense to
link these two functions3. Assuming that small/medium
SOEs are assigned to local Ownership Agencies (LOAs) and that the
4th Plenum Decision to "let go" is fully and expeditiously
implemented, the LOAs would assume major responsibility for the
sale of small/medium SOEs.
4 State shareholder interests should be exercised through normal
means, i.e., annual shareholder meetings and SOE board
appointments. "Shareholder interests" include seeing that the
company's business plan, capital investment, financing, financial
performance, risk management, key management appointments,
staffing, compensation, and other business practices combine to
produce positive EVA and a sufficiently robust balance sheet.
According to best international practice, the state shareholder's
right to pursue these shareholder interests is normally exercised
through annual shareholder meetings and board appointments. This
should also be the pattern for China's SOEs. The Government's other
non-shareholder interests (e.g., SOE fulfillment of contractual
obligations or SOE compliance with health, safety, labor,
competition, or environmental regulations) should be pursued
through the appropriate commercial or administrative law channels.
The "normal" exercise of shareholder rights will require the
Ownership Agency to focus on making good appointments to SOE boards
and on monitoring development and implementation of SOE business
plans. Proportional to its shareholding, the Ownership Agency would
appoint directors to 2nd tier enterprise group parent companies and
to 3rd tier SOEs that are not affiliated with an enterprise group.
Proportional to its shareholding, a 2nd tier enterprise group
parent company would appoint directors to 3rd tier subsidiaries
during annual shareholder meetings.
5 The Ownership Agency should have (i) broad authority to
perform its share management and share sale functions and (ii) sole
authority to vote the State's shares at SOE annual shareholder
meetings and to make SOE director appointments (proportional to the
State's shareholding). This would be consistent with a
non-political, commercial, and professional approach to the
management of state capital. The Ownership Agency director would be
responsible for liaising with the government and maintaining
political support for the Ownership Agency's share management/sale
mandate. The government would presumably provide financial
performance targets and other guidelines (e.g., on appointments,
conflicts, risk management) for the Ownership Agency. As long as it
conforms with these guidelines, the Ownership Agency should have
substantial autonomy to carry out its share management/sale mandate
in pursuit of agreed financial targets4. Consolidation
of shareholder rights and responsibilities in an Ownership Agency
is a major change from recent practice. The Ownership Agency must
have sufficient authority to perform its mandate in order to be
effective.
6 While seeking to maximize the efficient use of state capital,
the Ownership Agency should implement financial management
procedures that provide transparency and minimize risk. The
Ownership Agency's financial goals would presumably include both
dividend payments from 2nd tier shareholders and 3rd tier SOEs as
well as increases in the value of SOE equity. The Premier (or local
equivalent) and the Ownership Agency would need to agree on
"dividend policy" on whether SOE profits should be reinvested or
paid as dividends. Measurement of SOE equity value should be as
objective as possible -- e.g., market value for listed companies,
book value, EVA, or a valuation based on a multiple of dividend
yield or cash flow. The Ownership Agency should have the authority
to make additional equity investments in portfolio companies. But
the Ownership Agency should be prohibited from providing,
guaranteeing, or directing debt financing for 2nd tier shareholders
or 3rd tier SOEs. International experience (e.g., Italy's IRI and
Austria's OIAG) show how dangerous it can be for a state
shareholding fund or state shareholder to provide or facilitate SOE
debt financing. Lastly, the Ownership Agency should not invest in
or operate any other businesses. The Ownership Agency's sole
mandate should be to manage or sell shares in SOEs assigned to
it.
The Ownership Agency should focus on monitoring the performance of
its SOEs and SOE boards and on board appointments and the
development of SOE boards. The SOE governance framework outlined in
this policy note will require a substantially higher degree of
transparency in order to work -- especially given the emphasis on
more efficient use of state capital. All large SOEs should be
required to adopt the accounting and disclosure standards applied
to listed companies in a specified period of time, say three years.
Annual reports of large SOEs should be made available in the public
domain. All "second tier" shareholders (e.g., AMCs and the NSSF)
should also make their consolidated financial statement available
to the public. The Ownership Agency or the NPC may wish to mobilize
outside professionals such as investment bankers and accountants to
publicly evaluate the performance of certain SOEs and second tier
shareholders in terms of efficiency of their use of capital.
D. Empowering SOE Boards of Directors
Worldwide experience shows that a reasonably independent SOE board
can facilitate value creation. The composition of boards for
China's large SOEs should strike an appropriate balance between
independent perspectives and liaison with the State shareholder. It
would make sense for the Ownership Agency to appoint one or more
directors and for any second tier financial institution
shareholder(s) to have some proportional representation. To
reinforce the distinction between administrative power and
shareholder rights, civil servants should not be appointed as SOE
directors. If the Ownership Agency is constituted as a PSU, it
would be appropriate for Ownership Agency staff to serve as SOE
directors. Such directors should be supplemented with the
appointment of qualified individuals from business, other
professions, or academia. Such outsider directors would provide an
independent perspective. Demonstrated business management skills
should be the key criteria for all appointments of SOE directors.
The Ownership Agency should take extra care in appointing directors
who have spent most of their working life in government
administration. Additional "board empowerment" measures worth
consideration include the following:
- Setting a fixed term for SOE directors (e.g., 3-5 years);
- Making administration of SOEs subject to the same law as
applies to private companies;
- Encouraging further ownership diversification through SOE share
sales;
- Making SOE directors personally liable for any damage caused to
the SOE; and
- Codifying the fiduciary responsibility of SOE directors, toward
all shareholders, to show care in administering the SOE and to
avoid any conflict of interest.
The development of effective SOE boards will require careful
attention to board appointments and directors' training as well as
to board organization and procedures. Global best practices on
formation and use of board committees -- e.g., for audit and for
compensation -- should be considered. Annual adoption by SOE boards
of board rules of procedure also warrants consideration. Sweden and
Singapore provide useful models.
E. Focus for Second Tier Shareholders
In
the "second tier" of a streamlined configuration, there would be no
need for new asset management companies below the Ownership Agency.
Indeed, with the "letting go" of small/medium SOEs, it might be
possible to disestablish some existing second-tier asset
managers.
Most of the necessary second-tier asset management function could
be performed by transforming the parent companies of enterprise
groups. To begin to function effectively, these enterprise group
parent companies would need to transform their approach to
financial management of affiliated companies, internal controls,
accounting systems, and human resources skills mix. Transformed
parent companies of enterprise groups would be the main second tier
agent for governing "third tier" affiliated SOEs.
Institutional investors (e.g., the NSSF) could play a supplemental
governance role by appointing directors to the boards of SOEs --
enterprise group parent companies, group-affiliated companies, and
large unaffiliated companies. Board appointments would presumably
be proportional to shareholdings. For risk management purposes,
shareholdings by the NSSF or any pension fund should be limited
both in terms of each investors capital and shareholdings in any
single SOE. By pooling their votes, however, these investors might
be able to place one or more directors on the boards of SOEs in
which they hold shares.
As
for the four AMCs, global experience shows public AMCs are not
well-suited for turning around distressed enterprises. Thus,
China's AMCs should seek to sell their assets -- corporate equity
as well as unrestructured NPLs -- as soon as possible to investors
better-positioned to create value. But in the interim, while the
AMC still holds corporate equity, it should enjoy full shareholder
rights proportional to its shareholding.
Full text of the report is available in the website of www.worldbank.org.cn.
Notes
1 International examples include use of a blocking
minority shareholding (Austria), narrowly defined "golden share"
powers (U.K.), and development of domestic institutional investors
(e.g., South Korea).
2 State-owned commercial banks and other financial
institutions should be corporatized and assigned to a different
shareholder.
3 Share management and share sale functions are linked
in other countries, e.g., Austria's OIAG, Singapore's Temasek,
Sweden, and Norway.
4 In the case of particularly large share sales, the
government may wish to retain authority to review and approve.
(China.org.cn January 16, 2003)