Economy

Board games

Telecoms scandal shows how Beijing catches corrupt state executives

Problem with inflation: Zhang

Imagine a situation in which – by government diktat – Richard Branson was sent to run British Airways, and Michael O’Leary was told to take over Virgin. Steve Jobs was assigned to Microsoft and Jeff Bezos was moved over to take charge at Barnes & Noble.

For a fund manager in Europe or the US, this would be a pretty implausible scenario. Quite aside from the individuals involved, it would raise some stunning corporate governance concerns. Such a reshuffle would mean each firm’s strategies leaking fairly immediately to their direct competitors. Each company would feel exposed by the knowledge their former bosses might share with their new subordinates.

Yet such a scenario happens in China with remarkable frequency.

For the country’s large state-controlled firms – even those with a listing in Hong Kong – it is not unusual for top executives to be shuffled from one firm to a close rival. The moves often seem to be as politically-inspired as a cabinet reshuffle ordered by a British prime minister.

If all this may look odd from a minority shareholder perspective, you can see its logic for the controlling shareholder – the Chinese government. A recent case is illustrative.

In 2003, Zhang Chunjiang was chairman of China Netcom, then the country’s second largest fixed line telephone operator. Over the next five years he allegedly inflated the firm’s earnings to the tune of Rmb20 billion ($2.92 billion), reports Caijing. His logic was simple. It had been flagged far in advance that Netcom would merge with Unicom – the second biggest mobile phone operator – and Zhang wanted to lead the combined entity, according to the South China Morning Post.

However, Zhang was instead ‘reshuffled’ and posted by the government to China Mobile as its vice-chairman. Removed from his previous powerbase, it is reported that Zhang was no longer able to keep falsifying Netcom’s accounts. With Netcom now merged into Unicom, the new management detected the fraud. In late December the 51 year-old was detained for ‘financial irregularities’.

Perhaps Zhang’s case is evidence that the system works – albeit expensively, given Rmb20 billion had already been lost. Crude though it may be (China Netcom would have benefitted rather more immediately from a thorough audit), this check-and-balance has a long history. The old trading Hongs of Victorian Hong Kong established similar systems – rotating their country managers regularly to limit fraud. And in China’s provinces, the government has long relocated administrators from one territory to another to prevent them from establishing patronage-fed powerbases.

It may seem like a game of musical chairs, but with so much money pumping through the Chinese economy, the opportunities for graft are huge. Last Friday the China Daily ran the front page headline: “SOE execs under graft scanner”, citing the example of not just Zhang but Chen Tonghai (formerly chairman of Sinopec, and convicted of taking Rmb200 million in bribes), and Kang Rixin (former general manager of China National Nuclear Corporation, who allegedly masterminded a Rmb1.8 billion fraud).

In fact, a report by Faren Magazine – overseen by the Ministry of Justice – says 31 executives from state-owned enterprises (SOEs) were involved in criminal activity last year. The Nanfang Metropolis Daily also estimates that at least 4,000 crooked officials have fled the country in the past 30 years, taking $50 billion with them.

Apart from periodic reshuffles, what else can be done to stop SOE bosses behaving improperly?

An official from Sasac (see Talking Point) told state media that it has launched a pilot programme to give board directors a bigger say in decisionmaking. “Bosses in these [pilot] companies cannot make major decisions without the board’s nod, and the majority of board members are hired by Sasac.”


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