State-owned enterprise reform

Author: Wang Jianmo et al. / Country:
Publisher:
Publishing Date: 2003-05-01
Features: For a long time, the government's focus has been on creating conditions for enterprise development, while giving less consideration to establishing market exit channels for enterprises that fail to compete. Since the mid-1990s, the economic and institutional environment has undergone rapid changes, leading to the swift formation of a dynamic where enterprises rise and fall. The inability of failing enterprises to exit the market in a timely manner has allowed problems and conflicts to accumulate, becoming a significant issue affecting economic development and social stability. The biggest obstacle to enterprises exiting the market is the "unemployed state-owned workers." For a long time, we lacked a sound social security system, and state-owned enterprises bore the responsibility of providing livelihood support for state-owned workers, which led to a series of problems: 1. Workers were actually receiving "enterprise-based security," making them inseparable from the enterprise. Enterprises found it difficult to dismiss workers, and the relationship between enterprises and workers was not based on voluntary choice. 2. Enterprises undertook substantial social functions, continuously bearing additional, substantial, and immeasurable policy-related costs. 3. The multiplicity of corporate goals weakened the profit motives of managers, softened financial constraints, and made it difficult to accurately assess corporate performance. 4. The rigidization of the labor structure also made capital mobility, restructuring, and corporate adjustments as well as market exits more challenging. Due to the lack of a social security system, state-owned workers could not move, and once enterprises entered inefficient operations, they could not improve the situation through labor structure adjustments or corporate restructuring. Even if the enterprise completely lost its competitiveness, it could not exit the market through bankruptcy. At this point, the government, to preserve the "social support" of state-owned workers, continuously bled money into enterprises that were clearly hopeless through fiscal means or state-owned banks. This practice did not improve the inefficiency of the state sector but maintained the long-term losses of 30% to 50% of state-owned enterprises. The social cost of this was inefficient allocation of economic resources, the rapid growth of bad bank loans, and the continuous accumulation of implicit government liabilities. The immobility of state-owned workers has become the biggest challenge in the deepening reform and restructuring of state-owned enterprises. Labor mobility involves a series of institutional developments, which must be accelerated based on the existing foundation. 1. Improve the construction of the social security system, implementing social management for workers' pensions, medical care, and unemployment benefits. 2. Gradually transfer social service institutions run by enterprises out of enterprises, either by making them independent or by having the government oversee and manage them. 3. Implement monetized employee benefits and advance housing reforms. 4. Strengthen the labor market, develop employment intermediation services, and provide reemployment training.
IV. Improving Corporate Governance Structures and Enhancing Their Effectiveness
After China's entry into the WTO, the challenges to industries and enterprises were fundamentally issues of competitiveness. An important foundation for international competitiveness is effective corporate governance. In the late 1990s, many state-owned enterprises were gradually reformed into corporate entities, with an increasing number being listed. However, the establishment of effective corporate governance structures did not receive sufficient attention. To this day, many companies, including a significant number of listed ones, suffer from varying degrees of governance defects. 1. The principal-agent system for state-owned equity is unclear, with coexistence of government intervention and absentee owners, as well as a certain degree of "insider control." 2. The inefficiency of the principal-agent system for state-owned equity, combined with the distortion of behavior by dominant state shareholders, has led listed companies to lose their independence in commercial interests. Some have become tools for dominant shareholders to raise funds in the capital markets, leaving minority shareholders' rights unprotected. 3. Government intervention outside the company, coupled with cross-appointments between dominant shareholders and senior executives of listed companies, has resulted in two consequences: first, a lack of independence in the board of directors, and second, blurred corporate objectives. 4. Corporate transparency is generally low, and the authenticity and timeliness of information disclosure are frequently questioned by investors. 5. Deficiencies in corporate compensation systems leave senior executives without effective oversight or incentives. 6. Most shares of listed companies do not participate in market transactions, and there is no threat of corporate control transfers through capital markets, weakening the supervisory role of the stock market over management.
The key to improving corporate governance is protecting shareholder rights, and the driving force comes from shareholders. If shareholders do not actively participate in corporate governance to protect their interests, insiders are more likely to maintain their control over the company. If dominant shareholders can control the company through means such as related-party transactions and cross-appointments of executives, and obtain benefits through abnormal channels, they will intentionally distort corporate governance. For some companies, the motivation and power to distort corporate governance always exist. Therefore, establishing an effective principal-agent system for state-owned equity is crucial to making the state owner of holding enterprises a "true owner" rather than a "puppet owner," thereby encouraging normal shareholder behavior rather than abnormal behavior. This means that in the process of establishing a market economy system, we must not only reshape market competitors but also face the task of reshaping "state owners."
As marketization advances, investment aimed at profit will gradually shift from government allocation to market allocation. The state will regulate capital markets through policy, and institutional and individual investors will select projects and owners through capital markets, bearing risks themselves. This will become the main channel for commercial investment. However, institutional and individual investors, including international investment institutions, have no intention of ordering commands or directly intervening in the companies they invest in. They hope to establish connections with companies through capital markets and maintain their ultimate control over the company through a standardized and effective corporate governance structure to maximize their legitimate interests in the separation of ownership and management. Therefore, investors in capital markets place great emphasis on the effectiveness of corporate governance. Generally, they must bear losses caused by operational errors, but they absolutely reject risks brought about by distorted corporate governance structures or behind-the-scenes manipulation. Some promising companies, on the one hand, urgently seek financing support from domestic and foreign capital markets, but on the other hand, are reluctant to establish effective corporate governance, attempting to establish new mechanisms without fundamentally touching the old system, lacking enthusiasm and persistent effort to improve corporate governance. Some dominant shareholders tend to artificially distort corporate governance, siphoning money from listed companies through underground channels. Some enterprises, meanwhile, cling to insider control, showing indifference to corporate governance, believing that as long as they get the money, they are still in charge. As a result, even if companies, they can only raise funds at a high cost; for some, going public becomes a "one-time deal."
The resources for improving corporate governance are not entirely within the company, so it is necessary for the government to take the lead, with regulatory agencies, investors, and intermediaries making joint and continuous efforts to achieve substantive progress. 1. Enhance the effectiveness of the principal-agent system for state-owned equity, focusing the goals of state-owned holding institutions on the economic performance of the companies they invest in, encouraging normal shareholder behavior. 2. Improve the equity structure, changing the situation where state-owned equity dominates. 3. Dominant shareholders and senior executives of listed companies should, in principle, be separated to maintain the independence of both dominant shareholders and listed companies. 4. Board members and managers should, in principle, be separated, with a higher proportion of external and independent directors to maintain the independence of the board and enable effective supervision of managers. 5. Improve information disclosure to increase corporate transparency. 6. Revise executive compensation systems, introducing stock option plans where feasible, aligning the efforts of senior executives with shareholder interests.
China is in the stage of rapid economic growth and industrialization. Only by continuously transforming social funds into funds for production development can economic stability and growth be maintained, and corporate governance plays a central and key role in this transformation. Whether from the perspective of sustainable economic growth, the utilization of international capital, or the enhancement of corporate competitiveness, China must accelerate the process of awakening to corporate governance, making the protection of shareholder rights, including fair treatment of minority shareholders, a widely accepted consensus and dominant tendency in society, opening channels for social funds, funds, and international capital to flow smoothly and continuously into production development. This is one of the most important foundations for China's sustainable and stable economic growth. In this sense, the level of corporate governance determines economic growth.
Privatization involves the sale of public assets to private owners in a market environment. However, privatization is also an economic process, and it should be understood in the same way as other economic processes. I would like to start by elaborating on three views that I believe apply to all privatization processes. , privatization is for efficiency. But privatization alone cannot improve efficiency; it must be combined with orderly competition. The formation of competition is not always spontaneous; it must be based on the establishment of sound institutions and the development of free markets. However, at many times, to ensure that the outcomes of competition benefit society as a whole, we must regulate it. In other words, during the development of a market economy, the privatization process is always closely linked with the cultivation of competition and the regulation mechanisms to make competition effective and beneficial. Second, privatization is for productivity. The productivity of an economic system is closely related to its incentives. Private enterprises can only achieve higher productivity than state-owned enterprises under effective incentives. Effective incentives for private enterprises require a solid and reliable legal system and a solid, effective, and clear property rights system to guarantee them. The property rights system strengthens the role of strong protection systems, clear market rules, fair rule enforcement systems, and reliable judicial systems. Additionally, economic and political stability is essential. When market mechanisms are fully developed in the national economy, the timing for the privatization process is ripe. Typically, in a country's development process, market mechanisms develop along with the growth of gross domestic product. The efficiency and productivity gains from privatization depend on the development of at least three markets. 1. Fully develop transparent commodity markets. In other words, the price mechanism must be in place to ensure the efficient allocation of economic resources. 2. Fully develop financial markets. To ensure the smooth progress of privatization, a well-functioning banking system must be established. 3. The rational allocation of human resources is a key factor in the success of privatization. Therefore, labor markets and social welfare systems must be fully developed. The development of markets is closely linked to the progress of national education. Although theoretically there are many aspects, in practice, the development of market culture is decisively influenced by a culture of contracts and trustworthiness, legal procedures that hold violators of contracts accountable, clear and transparent market entry prices, and trust in the credibility of commercial and economic activities. Therefore, privatization must develop sound market mechanisms and systems as well as an excellent market culture.