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The widely disputed CAO incident sounded the alarm for some State-owned enterprises to adopt more suitable corporate structures and to improve property rights administration, said an editorial in Nanfang Metropolis Daily. An excerpt follows:
The China Aviation Oil (Singapore) Corp (CAO) and its scandal-hit chief, Chen Jiulin, were thrown under a storm of accusations after a disclosure of the loss of US$554 million in derivatives trading. According to the analysis of Xinhua News Agency, three fatal acts of misconduct account for the company's loss. First, CAO has done something that State law bans; second, the poorly regulated over-the-counter oil derivatives market is also responsible for its sudden collapse; finally, its dealings exceeded the permitted total amount of spot transactions.
The grave consequences of this incident imply that CAO suffers from serious defects in its internal control mechanism. The collapse of CAO demonstrates a lack of a risk control systems.
CAO's supervision and regulation mechanisms are also a failure. China's State-owned enterprises are banned from entering the futures market, for fear of its high risks and their incompetence. However, the ban was not effective.
In a joint-stock company with clear property rights administration, the board of directors who represents the unanimous interest of all shareholders will take cautious steps when making decisions. In this way, some imprudent decisions are avoided.
For ages, some big State-owned enterprises have not made admirable breakthroughs in property rights reform. The country is usually the only or biggest shareholder of an enterprise, while the State-owned Assets Supervision and Administration Commission represents the nation to execute ownership. The loss and gains of the Commission bear no relationship with the operation of the enterprise.
As a result, their decision may not fit well with the enterprise itself. In a stock company who keeps ownership and management separately, the absence of a genuine owner will result in risky investment.
Company managers only care about the profitability of his term.
CAO's stubborn investment in the speculative futures market has revealed its weakness in corporate administrative structure. If they had formal regulations to abide by when making important decisions, the grave loss of US$554 million would be avoided.
(China Daily December 13, 2004)
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