Special Legal Person: Public Enterprise Research

Author: Qian Jin / Country: Mainland China
Publisher:
Publish Date: 2000-09-01
Features: Public enterprises under special regulation differ from other legal entities such as private or proprietary enterprises. Special regulations define public enterprises as special legal entities, while general company law or commercial law defines private or proprietary enterprises as general legal entities. General legal entities are subject only to government social management, whereas special legal entities, in addition to accepting government social management, are also subject to government control over their operations. Therefore, the relationship between general legal entities and the government is relatively straightforward: enterprises comply with tax obligations and administrative regulations, while the government is solely responsible for social management and has no authority over asset operations. In contrast, the relationship between special legal entities and the government is far more complex. Although not part of the government, public enterprises are the practical embodiment of the government's economic functions, existing in corporate form to sustain the government's power demands and fulfill its regulatory role in the economy. Public enterprises must comply with the general social management of all enterprises, adhere to tax laws, and serve as effective tools for the government's economic regulation. In terms of operational decision-making and personnel management, they must align with the government to safeguard both enterprise and government interests.
General legal entities, particularly private or proprietary ones, are primarily active in competitive industries, while the basic activities of special legal entities are confined to non-competitive sectors. In the national economy, competitive industries account for approximately 80% of the gross national product, and the economic activity of non-competitive industries is far smaller than that of competitive ones. General legal entities operate in competitive industries, and they form the main pillars of the national economy. While public enterprises, as government-controlled entities, are indispensable components of the national economy, they do not represent the core pillars. Therefore, emphasizing the development of public enterprises is an important task in modern market economy construction, but it should not replace the need for competitive industry development or be treated as the backbone of economic growth.
The difference in operational domains can serve as an external marker distinguishing general legal entities from special legal entities. Compared to the non-competitive sectors where special legal entities operate, general legal entities thrive in broader competitive domains, which constitute the primary feature of the market. The competitiveness of enterprises is a fundamental condition for their survival. In fact, competition among enterprises primarily manifests as competition between general legal entities. Competition between special legal entities or between special and general legal entities is largely absent. The operational capabilities of special legal entities should not be measured or evaluated using the competitive standards of general legal entities. Although some countries allow special legal entities to engage in competitive industries in practice, these cases should be viewed as flexible manifestations rather than blurring the distinction between special and general legal entities.
The operational principle of general legal entities is to maximize profits, whereas the primary role of special legal entities is to stabilize market order, achieving only average profits. If special legal entities pursued profit maximization like general legal entities, the entire market would fall into chaos. Public enterprises in non-competitive sectors exhibit characteristics of industry monopoly or natural monopoly in operations. If they unilaterally raise profit demands, competitive industry enterprises would be forced to accept the inflated price levels, disrupting and undermining the market's price formation mechanism and causing market disorder. Therefore, general legal entities can achieve profit maximization through market competition, while special legal entities cannot adopt the same operational principle or leverage their special status to demand profits above the average level.
As special legal entities, public enterprises must maintain price stability in the national economy, ensuring the stability of the general price level through the stability of their own product prices. In this price equilibrium, their profit realization follows the principle of averaging. For most general legal entities in the market, the pursuit of profit maximization should be the primary goal, and a significant portion should be able to achieve this objective, as it is a necessary condition for the prosperity of the market economy. However, this operational principle for general legal entities should not be imposed on special legal entities. The distinction between general and special legal entities must be clear: special legal entities in non-competitive sectors cannot pursue profit maximization like general legal entities. Special legal entities are the organizational form through which the government regulates the economy and must adhere to market stability as their fundamental operational principle.
In the organizational structure of general legal entities, laws explicitly prohibit government officials from serving as legal representatives or in other management positions. Any general legal entity that violates this regulation by appointing government officials faces severe penalties, and the officials involved also bear corresponding responsibilities. In contrast, laws permit government officials to hold senior positions in special legal entities, with some enterprises legally requiring government officials to serve as directors or chairpersons. Thus, whether government officials can enter the corporate structure and become operational managers is another distinction between general and special legal entities, a clear external one. Only special legal entities can accept government officials in their employ, and any enterprise where government officials legally hold positions is necessarily a special legal entity. This is a common legal regulation for enterprises across countries under market economy conditions, serving to clearly distinguish government-owned from non-government-owned enterprises.
Therefore, for all general legal entities that are subject only to administrative constraints from the government, their organizational legitimacy must exclude the entry of government officials, at least superficially severing the human relationship between the enterprise and the government. Special legal entities, however, are the opposite—they achieve direct or indirect government control over enterprises through the appointment of government officials in their internal ranks, whether full-time or part-time. Compared to general legal entities, another significant difference for special legal entities is that their establishment requires approval from the legislative body, not the government, reflecting the legislative body's constraint on government actions and the legal recognition or adjustment of the government's economic functions. This legal compulsion does not exist for general legal entities, which only require government approval for establishment. Although the basis for government approval remains laws formulated by the legislative body, this differs from the direct legislative approval and special legal adjustments required for special legal entities. Thus, the establishment process of enterprises clearly demonstrates the difference between special and general legal entities.
Public enterprises, as government-owned entities, do not determine their establishment solely through the government's decision but are regulated by the economic system, a sign of highly legalized social management. The resulting constraints on government economic behavior are essential. Drawing on the experience and management models of other countries, China must also establish legislative approval authority for public enterprises to effectively place government management of special legal entities under legal control.
After establishment, public enterprises are managed by the board of directors. The board represents the enterprise, a role more pronounced in public enterprises than in private ones. However, due to the unique nature of public enterprises—different from private enterprises and other economic entities—their board's formation and status are special, with clear legal provisions across countries. This makes the board of directors in public enterprises a key research topic in their study. How to summarize authoritative points from the board compositions of public enterprises in different countries, how to understand the status of the board in public enterprises and its differences from that in private enterprises, and how to determine the nature of the chairman of the board and their role must be thoroughly explored. Existing practices are abundant, but rational understanding requires summarizing these practices.
Researching these issues is essential for deepening China's reforms of public enterprises and appropriately developing them. Additionally, we must further study the balancing mechanisms beyond the board of directors.
I. The Composition of the Board
The Austria Industrial Holding Company is the parent company of Austria's public industrial conglomerate. Austrian law stipulates that the members of its board of directors are determined by the company's supervisory board, which consists of 14 members: three government representatives (two from the Public Economy and Transport Ministry and one from the Finance Ministry), two representatives of the Austrian Trade Union, and the rest are experts in economic and technical management, entrepreneurs, including foreign entrepreneurs. Supervisory board members are nominated by the Minister of Public Economy and Transport and approved by the parliament. All supervisory board positions are part-time, with meetings held four times a year to discuss and approve major corporate decisions. The Austria Industrial Holding Company's bylaws specify that the board of directors consists of 2 to 6 members, with one serving as chairman. The board is responsible for the company's operations.
The of the IRI Company (Italian Industrial Reconstruction Company) stipulates that its board of directors includes: the chairman, deputy chairman, three experts in financial and industrial affairs, a government auditor, the director of the Treasury Department, the director of the State Participation Department, the director of the Industry and Trade Department, a representative of the Post and Telecommunications Department, the director of the Naval Commerce Department, the director of the Employment Affairs Department of the Ministry of Labor and Social Security, the director of the Defense Department, and a representative of the Budget and Economic Planning Department. The chairman and deputy chairman are nominated by the Council of Ministers and appointed by the President, while the three financial and industrial affairs experts are appointed by the Minister of State Participation. The supervisory board and the board of directors jointly oversee the work of the manager, a crucial aspect of public enterprise supervision.
In daily operations, the manager holds significant power over personnel, finances, and resources, and the survival of the enterprise depends on them. Incentivizing the manager is appropriate, but supervision is equally necessary. Supervising the manager is not a lack of trust—it is precisely because of trust that supervision is implemented. However, this supervision should neither be vague nor overly rigid. Specific procedures must be established to achieve effective results with minimal complexity. Implementing supervision according to established procedures is a fundamental requirement for standardized management. Thus, the formulation of these procedures is essential.
From the perspective of the supervisory board and the board of directors, supervising the manager is not without authority. Their supervision should focus on key aspects: whether the manager implements board resolutions, the quality of implementation, any violations of factory rules or discipline by the manager, the appropriateness of the manager's management of subordinates, and the manager's competence in external negotiations, and so on. Supervision must be recorded in the regulations, with at least monthly summaries, even if no incidents occur. Problems must be addressed promptly if they arise, and the results must be documented.
Employees and employee organizations also have the right and responsibility to supervise the board of directors, the supervisory board, the manager, and all levels of management. In China, supervision by employees must be included in the management of public enterprises. Regardless of whether other countries have such provisions, China should adopt this system. It is a mechanism that grants every employee the power to supervise, embodying a spirit of democracy and achieving the best results.
Externally, government intervention also provides supervision, but that is a separate matter. Internally, the supervisory power of employees and employee organizations is significant and unavoidable. The establishment of this supervisory system indicates that the enterprise's management level has reached a high standard, with supervision becoming all-encompassing and pervasive. This is not a war of the masses or constant vigilance but rather the empowerment of every employee, aligning their interests with those of the enterprise.
However, this supervision only serves to prevent malicious behavior—it is not comprehensive supervision that can be handled by everyone as a full-time task. Comprehensive enterprise supervision still relies on specialized supervisory bodies like the supervisory board.