Chen Xiaohong

Ⅰ.The problem of absence from the representation of state capital ownership is yet to be completely solved.

The reform of the management system of state capital in China made a major step forward along with the institutional reform in central government organs in 1998. The reform this time had three unique features. One, government functions have been separated from capital management, which means that the industrial administrative departments no longer perform the function of representing the owner of state capital. Two, the past simple practice of decentralization has been changed and, in accordance with the principles of establishing ownership discipline, the Commission of Special Inspectors under the State Council have dispatched special inspectors to audit the accounts of the key solely state-owned enterprises. Three, the Party Working Committee for Large Enterprises has been established to be in charge of the appointment and dismissal of the principal leaders of the key state-owned enterprises.

The direction of the above reform has proven to be correct. The new system has helped achieve some results. For example, the audit conducted by the first group of special inspectors discovered serious problems in many enterprises, which were originally believed to be problem-free. As a result, a batch of corporate leaders has been dismissed for violating laws and disciplines. It also indicates that the normal operations of the enterprises can not be guaranteed if the owners fail to exercise constant supervision over the managers through the internal permanent bodies such as the board of directors of these enterprises. Also, in most solely state-owned enterprises or state holding companies, the problem of "boss absence", namely the ownership representation within enterprises is not clearly-defined, is yet to be thoroughly solved.

Ⅱ.The existing system and its shortcomings

One of the indispensable conditions for the smooth operations of an enterprise in a market economy is the control over the enterprise by its owners. Even if the ownership of an enterprise is properly separated from the operating rights and the owners do not directly interfere in the enterprise's day-to-day operating decision making under the modern enterprise system, the owners of the corporation, namely the shareholders, still must maintain an eventual control over the enterprise. This eventual control right (or the residue control right) is mainly manifested in their voting rights at the general meeting of shareholders over the appointment of the directors and supervisors, over profit distribution and over decisions on other major matters; their rights to make decision on the authorized powers of the board of directors and their right to learn the truth about the operating and financial information. Only by exercising these rights can the owners, through the board of directors, exercise their whole-process supervision and control over the enterprise's operations and give stimulation to the senior managers that is compatible with the goals of the owners.

Not until the 3rd Plenary Session of the 14th Party Congress in 1993 had we realized that in the reform of the state-owned enterprises, not only the government functions should be separated from enterprise management but also necessary ownership discipline should be established. Establishing necessary ownership discipline requires, first of all, that the representing body of the state capital ownership (equity rights) must be clearly defined. At present, however, the functions of the capital ownership representing bodies in the solely state-owned enterprises and the state holding companies are performed concurrently by different government administrative bodies. Take the large state-owned enterprises for example, the Party Working Committee for Large Enterprises appoint and dismiss the party committee secretaries, board chairmen and general managers in those enterprises. The Ministry of Finance controls the distribution of capital and profit of the enterprises. The State Planning Commission examines and approves the enterprises' investments. The Commission of Special Inspectors under the State Council conducts financial audit on the enterprises, and the Ministry of Personnel and the Ministry of Labor control the labor and wages of the enterprises, As the State Economic and Trade Commission is in charge of the reform, transformation, reorganization and strengthened management of the enterprises, the Commission also performs some of the powers and functions of the owners (for example, the Commission has a department of enterprise supervision, and the transformation of the state-owned enterprises into joint-stock companies has to be approved by the Commission and the audit reports must also be submitted to the Commission).

The problems arising from this kind of system are as follows:

1. Too many administrative bodies issue orders to the enterprises but none of them is accountable for the decision-making consequences. This is because each body has only partial powers and can only be accountable for partial consequences. The right of ownership includes the right of use, the right to dispose assets, the right to the profits and the right to appoint senior managers, all of which are inter-related. Dividing these powers and functions to different departments actually renders the right of ownership to an empty shell, The partial powers and functions of the owners performed by each department actually become the department's own powers and functions and serve the department's own objectives because they are divorced from the other powers and functions of the owners.

2. The system runs counter to the basic principles of management science. Under this system, the managers who are entrusted to manage corporate properties are unable to exercise the entrusted rights in a unified manner and accordingly are free from the entrusted responsibilities.

3. The system of dispatching special inspectors is an important system designed to exercise the ownership discipline over the solely state-owned enterprises. But the actual state of the Commission of Special Inspectors is "solid at the bottom" and "empty on the top". "Being solid at the bottom" here refers to the fact that the audit tasks are solid and involve huge workloads and that the number of the enterprises that need to be audited is constantly increasing. "Being empty on the top" refers to the fact that the Commission of Special Inspectors is independent from other bodies that exercise the owner's powers and functions and finds it difficult to handle the growing number of audit reports. At present, the audit reports must be submitted to the State Economic and Trade Commission, but the rights and responsibilities of the State Economic and Trade Commission in making decisions based on the audit reports are not clearly-defined. Besides, the practice that the state directly dispatches special inspectors applies only to the solely state-owned companies. With the corporate transformation of the state-owned enterprises, most of them will become multiple stock holding companies. In this context, the practice that the government dispatches special inspectors will be in conflict with the principles of the Company Law on the protection of the interests of small shareholders.

4. If the leadership of the State Council directly assumes the responsibility to represent the state capital, its tasks will be too heavy and it is hard to improve the efficiency of work. Under the existing system, state capital representation being assumed by the leading officials of the State Council is not just a legal provision but also a fact. At present, more than 4,000 industrial enterprises are directly controlled by the central government, of them more than 600 being the large enterprises or groups enjoying priority support from the state. The daily schedules of the leading officials of the State Council are so tight that they are unable to hear the reports of all the functional departments separately performing the owner's powers and functions or to make correct judgments and decisions. It is unnecessary too. In the developed market economies, the governments generally control only a limited number of state- owned enterprises. Although different countries have different state capital management systems, the owner's powers and responsibilities of the state capital are performed, without exception, by specific bodies in a unified manner (for example, the existing Treasury Ministry or the earlier State Participation Ministry in Italy, and the Board Director Appointment Committee in the Singapore Cabinet).

In short, the ownership representing bodies of the state capital in the state-owned enterprises used to be the competent administrative departments that mingled government functions with capital management. Although this state of affairs caused lots of problems, the competent departments did play a "funnel" role and could send the decisions of different functional ministries and commissions down to the enterprises in a unified way after such decisions were coordinated. The institutional reform in the central government in 1998 solved the problem of "mingling government functions with capital management" at the ministerial level. But after the "funnel" role of the competent departments in coordinating different ministries and commissions was abolished, the enterprises now have to directly face the leadership from multiple departments through multiple channels. This is too much for the enterprises to cope with and at the same time leaves loopholes for the enterprises to avoid the supervision and control of the owners.

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