We are the (national) champions: understanding the mechanisms of state capitalism in China.

• Author: Lin, Li-Wen
• Position: III. The Party-State as Controlling Shareholder through Conclusion, with footnotes, p. 734-759

3. THE PARTY-STATE AS CONTROLLING SHAREHOLDER

   Atop the national groups is SASAC, ostensibly "the world's largest controlling shareholder." (100) Controlling-shareholder regimes are prevalent throughout the world, (101) and, in this sense, China's variety of capitalism shares an important trait with corporate capitalism in many other developing and recently developed countries. In contrast to state control in China, however, the controlling shareholder in other countries is often the founder or members of his family. (102) But as one scholar recently argued, "it is easy to overstate the extent to which the interests of the government as a controlling shareholder differ from those of private controlling shareholders." (103) This is because, regardless of identity, all controlling shareholders face similar incentives. The size of their ownership stakes provides incentives to monitor managerial performance more closely than do shareholders in dispersed ownership systems. But controlling shareholders also have unique incentives to maximize "private benefits of control" by engaging in transactions that expropriate wealth from minority shareholders. (104)

   Macro-level generalizations and comparisons with other controlling-shareholder regimes, however, are likely to mislead, because several aspects of China's regime make it highly distinctive. First, it is uniquely encompassing in scope. In no other country is a single shareholder--private or public--so pervasively invested in the leading firms in the national economy. SASAC directly or indirectly controls a majority stake in virtually every leading firm in every critical industry in China, from telecom to energy and autos to steel. (105) More importantly, as we explain below, it is misleading to attribute to SASAC the same bundle of control rights associated with controlling shareholders in other regimes.

   1. SASAC as Controller

      The complexity of SASAC's control rights in the national champions cannot be understood without at least a thumbnail sketch of the agency's origins. The national SOEs were carved out of central-government ministries in the corporatization process, which transformed governmental organs into joint stock companies. Initially, control shares in the SOEs were held by the ministries from which they had been created, which led to predictably negative results. (106) The State Council experimented with different control structures for national SOEs, eventually leading to the creation of SASAC.

      SASAC, established under the State Council in 2003, represents a second attempt to consolidate control rights over the national SOEs. SASAC has a long list of formal functions and responsibilities, including preserving and enhancing the value of state-owned assets, restructuring central SOEs, appointing and removing top SOL executives, and drafting regulations on the management of SOL assets. (107) It has a staff of about 800 employees organized into diverse bureaus ranging from enterprise restructuring to foreign affairs. (108) But despite outward appearances of consolidated control over the SOEs it formally supervises, SASAC is a work in progress, and the SOEs' legacy of shared control rights was not overcome simply by SASAC's establishment. This is particularly true given SASAC's location in the government organizational chart: although SASAC is a ministry-level agency, so are fifty-three of the most important SOEs under its supervision. (109) SASAC faces potential resistance not only from the firms it supervises but also from the competing agendas pursued by other important ministries, such as the Ministry of Finance. (110) As one commentator notes, "In practice, SASAC has faced an uphill struggle to establish its authority over the SOEs that it supposedly controls as a representative of the state owner." (111)

      Until recently, there was no overarching legal authority governing SASAC in its role as controlling shareholder. In 2008--tellingly, after an arduous process of interest group balancing that began in 1993 (112)--the Law of the People's Republic of China on State-Owned Assets of Enterprises (SOE Asset Law) was enacted to "safeguard[] the basic economic system of China ..., giving full play to the leading role of the State-owned economy in the national economy." (113) In essence, the law formally recognizes SASAC as an investor--a shareholder in the national SOEs, with the ordinary rights and duties of a shareholder. Ostensibly, the law confines SASAC to this role (114) and governs the agency's performance of its functions as an investor. (115) But there are no formal mechanisms in the law to enforce SASAC's responsibilities, and in reality, the law grants SASAC powers greater than those available to it as a shareholder under China's Corporate Law.

      In short, SASAC has both less and more power as a controlling shareholder than meets the eye.

      1. Control rights in management

         As with controlling shareholders everywhere, one of SASAC's main powers with respect to the national champions is the selection and compensation of top managers. But SASAC exercises this power in the shadow of party control. As just noted, various party organs held appointment power in the central SOEs prior to the establishment of SASAC and retained this practice even after its establishment. "Political qualities," including party membership, are among the major criteria against which managerial performance in the national champions is evaluated. (116)

         There are two parallel personnel systems in all Chinese SOEs: the regular corporate management system and the party system. (117) In the corporate management system, positions are similar to those commonly found in firms elsewhere and include CEO, Vice-CEO, chief accountant, and if the company has a board of directors, a chairman and independent board members. A leadership team in the party system includes the secretary of the Party Committee, several deputy secretaries, and a secretary of the Discipline Inspection Commission (an anticorruption office), along with other members of the Party Committee. Institutionalizing party penetration of corporate roles is formal policy, and overlaps between the two systems appear rather uniform, such that a corporate manager of a given rank typically holds a position of equivalent rank in the party system. (118)

         Party and corporate leadership appointments take place in a highly institutionalized sharing arrangement between the Party and SASAC. In fifty-three central enterprises, the occupants of top positions, including board chairmen, CEOs, and party secretaries, are appointed and evaluated by the Organization Department of the Party's Central Committee. This is a legacy of the appointment practice prior to the establishment of SASAC. Some of these positions hold ministerial rank equivalent to provincial governors and members of the State Council; others hold vice-ministerial rank. Deputy positions in these enterprises are appointed by the Party Building Bureau of SASAC (the Party's organization department within SASAC). A separate division of SASAC, the First Bureau for the Administration of Corporate Executives, assists in this appointment process. Appointments and evaluations of top executives in the remaining central enterprises are made by yet another division of SASAC, the Second Bureau for the Administration of Corporate Executives. While the appointments power formally resides with SASAC, appointments are made with input from various party organs and ministries supervising relevant business operations, and are subject to approval by the State Council. (119)

         The appointment and evaluation process for top managers of the national SOEs is supported in two ways: ministry recommendations and party leadership training. The Party's Organization Department and SASAC compensate for information asymmetries about talent and suitability of individual SOL managers by obtaining input from the ministries overseeing the industries in which SOEs operate. Moreover, SOL managers are trained in the Party school system, which serves as a think tank and midcareer training center for cadres. The Central Party School in Beijing, the most important and prestigious of these schools, offers specialized training classes for SOL managers. (120) While little information is available about the content of this training, the Party school system appears to provide an excellent opportunity for Party leadership to evaluate the intelligence, skills, and commitment of those who pass through its programs.

         The standard corporate mechanism for the appointment and evaluation of senior executives--the board of directors--is missing entirely from this process. Indeed, only 51 of the core companies of the 117 national business groups even had boards of directors as of December 31, 2012. (121) Although SASAC and the Party have begun to bring boards of directors into the appointment process and to create boards for those core companies that do not yet have them, the steps taken thus far leave little doubt that the Party does not intend to relinquish appointment authority over the most important enterprises and the highest-level appointments. (122)

         To understand how the party-state manages executives of the national champions, we collected data on appointments and removals of "leaders" of the enterprises under SASAC supervision from 2003 to 2009. SASAC uses the term "leaders" to refer to holders of top positions in both corporations and the Party. These data include a limited number of high-level corporate appointments for which SASAC runs a public recruitment process. (123)

         Table 2 shows that from one-third to three-quarters of the national SOEs experienced at least one appointment or removal of a leader by SASAC in the covered years. SASAC does not explain why the number of appointments systematically exceeds the number of removals. But the most likely explanations are that (1) some appointments are actually reappointments...