Research on Legal Issues of State-Owned Enterprise Governance

Author: Xu Xiaosong
Publisher:
Publish Date: 2006-09-01
Features: The fundamental proposition of this book is that, in the context of economic transformation, the core issue of the legal governance of state-owned enterprises in China is the protection of the interests of state investors. The fundamental approach to solving this problem lies in addressing the issue of insider control comprehensively and establishing a restraint system for the management team of enterprise operations. Specifically, it involves reforming and improving the system of state-owned asset investors, establishing and improving the restraint and incentive mechanisms for senior management of state-owned enterprises, while also mobilizing the enthusiasm of stakeholders to participate in governance and introducing supervision of senior management of state-owned enterprises by bank creditors and employees.
Around this fundamental proposition, the book is structured into the following five parts:
Part I. The Legal Framework of State-Owned Enterprise Governance. First, apart from appropriate adjustments in layout, there is no debate about the existence of state-owned enterprises in China. Therefore, the efficiency issues and asset leakage problems of state-owned enterprises cannot be solved simply by the exit of some state-owned enterprises. Second, as assets ultimately belonging to all the people, the special property relations arising during their operation determine that the efficiency and improvement of state-owned enterprises largely depend on the performance of their senior management. Thus, from a narrow perspective, the uniqueness of the "agency" problem remains the root cause of all issues in state-owned enterprises. In this sense, the current efficiency problems and asset leakage issues of state-owned enterprises are manifestations of governance problems. In other words, whether it is the efficiency problem or asset leakage problem of state-owned enterprises, it is all related to the loss of control by state investors over the enterprises. Third, although closely linked to corporate governance, state-owned enterprise governance differs from it. The special scope of state-owned enterprise governance includes: the reform of the state-owned asset investor system under the background of state-owned asset management system reform, the participation of banks in governance under special bank-enterprise relationships, and strict supervision of senior management. The above three points determine that, from a legal perspective, the approach to solving state-owned enterprise governance issues differs from general corporate governance: the foundation of the legal framework for state-owned enterprise governance is first the further reform and improvement of the state-owned asset investor system, and second the establishment of restraint and incentive mechanisms for senior management of state-owned enterprises. At the same time, considering the legal fictional nature of the state-owned asset investor of enterprise assets, to strengthen the supervision of senior management of state-owned enterprises, a multi-party governance model should be adopted, mobilizing the enthusiasm of employees and bank creditors to participate in governance.
Part II. The State-Owned Asset Investor System of Enterprise Assets and Its Improvement. First, the of the ownership subject determines that the effective operation of state-owned enterprise assets must rely on a sound system of state-owned asset investors. The core of this system is the mutual independence and restraint between the rights of state-owned asset investors and the operational autonomy or self-governance rights of enterprises. Therefore, the state-owned asset investor system is an important means for the state, as the owner, to control the management of state-owned assets, and it is a key guarantee for resolving conflicts of interest between the state and the management team of state-owned enterprises, preventing the leakage of state-owned assets, and advancing the property rights reform of state-owned enterprises. Second, in my opinion, under the current conditions of China, the improvement of the state-owned asset investor system is the key to the participation of state investors (state shareholders) in the governance of state-owned enterprises, and the key to improving the state-owned asset investor system lies in achieving effective supervision of state-owned assets. All of these must be based on a scientific positioning of the state-owned asset supervision agency and the specific stipulation of its rights, obligations, and responsibilities. Specifically, to address the widespread problem of managerial control in state-owned enterprises, the current legal system must be improved with the strengthening of the supervision power of state-owned asset investors as the core, to achieve effective supervision of state-owned assets. For state-owned enterprises in the midst of reform, effective supervision of state-owned assets should include two aspects: the improvement of routine supervision and the strengthening of special supervision. The former refers to the supervision of state-owned assets under the normal operation of enterprises, while the latter refers to the supervision of state-owned assets during property rights reform. Since China's state-owned economy has entered a stage of adjustment of layout and structure, the latter type of supervision is even more important for effective supervision of state-owned assets, and to some extent, its effectiveness determines the progress of reforms.
Part III. The Legal System of Employee Participation in the Governance of State-Owned Enterprises and Its Improvement. First, in China, due to differences in the social system and economic system, the interests of employees, as the masters of enterprises, have always been represented by the state. Therefore, in the original enterprise system, employee participation mechanisms were not well-developed. Although the economy is currently in a period of transformation, due to differences in legal status, even within a multi-party governance framework, the role of employee governance in the overall corporate governance remains relatively weak. However, under the current economic transformation in China, the greater human capital risks borne by employees of state-owned enterprises have determined the necessity and urgency of their participation in the governance of company-type state-owned enterprises. Driven by the desire to protect their investment in human capital and returns, as well as the motivation to avoid risks through monitoring, employees have an inherent incentive to participate in the governance of company-type state-owned enterprises. Second, in light of the current situation in China, under the "co-governance" mechanism where employees and other stakeholders participate, vigorously promoting the system of employee directors and employee supervisors is an effective choice for employee participation in governance. Third, although some existing laws and regulations have provided a certain legal guarantee for employee participation in the governance of company-type state-owned enterprises, these provisions have not clearly defined the legal status of employees as governance subjects, and are too simple and lack operability, making it difficult for them to truly play a role in the governance of company-type state-owned enterprises. These provisions need further modification and improvement to remove legal obstacles and enable employees to effectively participate in the governance of company-type state-owned enterprises, achieving true "co-governance."
Part IV. Research on the Legal Issues of Bank Participation in Internal Supervision of Companies. In the context of a transforming economy, China's special bank-enterprise relationships determine the important role of banks in the governance of state-owned enterprises. Therefore, it is necessary to strengthen the role of banks in the governance of state-owned enterprises through legislation. I propose that granting banks the right to internal supervision of companies through legislation is an effective way for them to participate in the governance of state-owned enterprises. The basic idea is as follows: First, in the context of a transforming economy, the special financing structure of Chinese companies, which gives rise to special bank-enterprise relationships, the virtual supervision of state-owned enterprise equity, the failure of external control market supervision, and the lack of a manager market, are all practical problems that cannot be solved in the short term. Therefore, allowing banks to participate in the governance of state-owned enterprises by exercising internal supervision rights through institutional reform is a realistic choice that suits China's conditions. Bank participation in internal supervision not only benefits the improvement of internal supervision mechanisms, restrains opportunistic behavior by managers, and enhances the corporate governance efficiency of state-owned single-shareholder companies and state-owned holding companies, but also protects the interests of banks and other creditors under current conditions in China and prevents financial risks. Second, I believe that the basic theories formed by the current academic circles in economics and law regarding the participation of corporate creditors in corporate governance have, in general terms, demonstrated the rationality and legitimacy of allowing banks to enter internal supervision bodies and participate in corporate governance from the perspective of institutional reform. Third, from the perspective of specific institutional design, the form of bank participation in the corporate governance of state-owned enterprises is the exercise of supervision rights; the means of participation is entering the supervisory board as a supervisor through negotiations; like the supervision rights of employee supervisors, the power of bank supervisors will also come from direct provisions in the "Company Law"; bank participation in the corporate governance of state-owned enterprises is theoretically sound and also fits the current actual situation in China; correspondingly, the legal framework for this should be established in the "Company Law" as an empowering regulation, while at the same time strengthening the power of supervisors.
Part V. The Improvement of the Restraint and Incentive System for Senior Management of State-Owned Enterprises. First, state-owned enterprises and general commercial enterprises have fundamentally different characteristics in terms of the principal-agent relationship, which will directly affect the construction and effective operation of incentive and restraint mechanisms for senior management of state-owned enterprises. This requires us to adopt a new perspective to understand and apply agency theory, that is, the solution to the incentive and restraint problems of senior management of state-owned enterprises in the current stage of China must be based on an analysis of the characteristics of state-owned enterprises. Second, from a legal perspective, discussing the incentive and restraint problems of senior management of state-owned enterprises limits our starting point for solving restraint problems to the unity of rights, obligations, and responsibilities, and establishes the rights and obligations relationship between principals and senior management of enterprises based on this, ultimately making the operational responsibility of state-owned assets attributable to specific individuals. Third, based on the unity of rights, obligations, and responsibilities of senior management of state-owned enterprises, and with restraint in place, it is necessary to explore and seek modern enterprise system-based incentive methods under the background of a market economy to correct the current misalignment of incentives for senior management of state-owned enterprises. Based on the above approach, I propose that fully utilizing existing legal resources, combining the particularity of Chinese state-owned enterprises, and establishing a trust responsibility system for senior management of state-owned enterprises to the state is the key to establishing an incentive and restraint mechanism for senior management of state-owned enterprises, and establishing a new property rights incentive system for senior management of state-owned enterprises through equity incentives is an important part of this mechanism. For this, it is necessary to reform the current relevant legal systems.