Board room coup

Will a new round of reforms shake up state firms?


Pilot’s licence: COFCO’s Frank Ning is entrusted with reform agenda

When China Merchants Group was founded in 1872, it was instructed by its Qing Dynasty creators to learn from and take on Western business interests. The shipping firm was supposed to be backed by government officials but run by private entrepreneurs. But the businessman never had much say. In fact its investors had to wait until 1909 for their first shareholder meeting – five years after the Qing government had introduced China’s inaugural company legislation. At this AGM they got to pick a board of directors – the first time that this had happened in China.

Two years later the Qing regime collapsed and Wu Tingfang – the first Chinese barrister in Hong Kong and the drafter of Qing’s company law across the border in China – was elected China Merchants’ chairman. The company renamed itself “Commercially-Run China Merchants” when the board of directors assumed full control between 1912 and 1926, an era that French historian Marie-Claire Bergere describes as the “golden age of the Chinese bourgeoisie”.

The honeymoon didn’t last long. China Merchants was subsequently nationalised twice (first by the Kuomintang government of Chiang Kai-shek, and later by Mao’s Communists).

The shipping conglomerate is now one of the 113 centrally-controlled state-owned enterprises (SOEs) under the State-Owned Assets Supervision and Administration Commission (Sasac). Now that body has just unveiled a blueprint that aims to reignite the unfinished revolution that China Merchants began over a century ago. The latest measure will attempt to allow directors at SOEs fuller control of their companies regardless of the whims of the state.

Last week Sasac picked six large SOEs to pilot the proposed reforms, and announced a policy package that sets out specific areas, such as attracting private investment and improving corporate governance, for each candidate to work on.

For instance, China National Building Materials (CNBM), a maker of cement and other building materials, and the healthcare heavyweight Sinopharm were chosen as test cases for further privatisation. The two firms will now look to bring in private capital at holding company level, rather than just for their operating units, a move which takes the experiment in mixed ownership (see WiC230) a stage further.

Separately, State Development and Investment Corp (SDIC), which builds large-scale infrastructure projects, and food giant COFCO have been chosen for a separate scheme designed to improve their productivity, albeit in their cases without privatisation. SDIC and COFCO are being promised greater independence over their investment decisions, including whether to take strategic stakes in other SOEs. It is good news for the acquisitive COFCO. Between 2005 and 2013, it undertook 50 takeovers with a total investment of $2.35 billion, according to China Daily.

CNBM and Sinopharm, together with China Energy Conservation and Environment Protection (the biggest “green” SOE) and Xinxing Cathay International (a heavy equipment manufacturer previously controlled by the military), have also been earmarked for a management overhaul. Their boards of directors are set to be granted more freedom in choosing three company executives (deputy CEO, CFO and company secretary), as well as more scope to decide executive remuneration.

Since the Party’s Third Plenum last year, talk of mixed ownership has dominated the debate about how best to reform some of the least productive state firms. Several local governments have also announced plans to sell stakes in SOEs they control (see WiC234). But the announcement by Sasac last week has established another roadmap for change at the most powerful state enterprises.

Many think it is an overdue step. Since 2008 the productivity gap between SOEs and private companies has widened, with the average return on assets for the former sinking to about 4.6%, compared with 9.1% for China’s private sector, according to the Financial Times. Acknowledging as much, Sasac had to slash its 2014 profit growth forecasts for SOEs by half to 5% from its targets in 2013. But many of the central SOEs could still find it a tall order to meet the reduced goal, given that their combined net profits grew 3.7% (way off the 10% target) last year. Nearly two thirds of the firms suffer from overcapacity in their industries, according to the Economic Observer.

However, the hope of seeing the candidate firms run in a more market-oriented manner soon had investors buzzing. Most of the 21 listed A-share firms that sit beneath the six ‘pilot’ SOEs on the Sasac list registered strong stock gains following the announcement.

Traditionally, those in key management positions at state firms have tended to be chosen by Sasac, usually following the personnel recommendations of the Party’s powerful Organisation Department. They are often political choices rather than commercial ones. That’s why observers are particularly excited over the planned reforms for board seats. “The boards of directors at most SOEs are just decorative vases. They are all fake and act more like an advisory committee. The reform could make them a real decisionmaking body,” said Zhang Wenkui, a research fellow who specialises in how to sharpen up state firms at the State Council’s Development Research Centre.

But because of the track records of previous efforts to transform the state firms, many need more convincing that the influence of state capitalism will be curtailed. The South China Morning Post, for instance, noted that Sasac has made multiple attempts since 2003 to open recruitment at state firms for senior managerial jobs – with an eye to lure foreign talent. But most of the jobs were filled instead by SOE stalwarts and the scheme was quietly dropped in 2011.

“Given the tendency of the apparatchiks to meddle, there’s serious doubt as to how real the promised autonomy will be as appointments and pay are to be vetted by the Party,” the newspaper suggested.

Sasac says the pilot programme will be expanded to more SOEs, although it hasn’t given a timetable for when this might happen. The last major round of reforms took place in the late 1990s when a brutal shakeout saw a lot of the most inefficient firms go bankrupt, leading to massive redundancies. Where smaller or more attractive SOEs were sold off to the private sector, the state often got a duff deal (with local officials, SOE executives and their cronies the major beneficiaries). Sasac is wary that its latest efforts don’t produce similar outcomes. Accordingly it will station disciplinary teams at the companies involved. No doubt these inspectors will keep a watchful eye over the new boards of directors too…

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.