Interview with Zhou Fangsheng: Let private entrepreneurs become external directors of state-owned enterprises

The Economic Observer reporter Wang Yajie There are less than two months before the "Company Law of the People's Republic of China" (hereinafter referred to as the "New Company Law") comes into effect on July 1.

Article 173 of the New Company Law stipulates that "more than half of the board members of a wholly state-owned company shall be outside directors and shall have employee representatives of the company".

Some state-owned enterprises are still struggling to meet the requirements. The head of legal affairs at a local state-owned enterprise once told the Economic Observer that his state-owned enterprise does not have a single outside director, and that all directors are appointed by the regulator and all hold positions in the state-owned enterprise, which is inconsistent with the provisions of the new company law.

In the view of Zhou Fangsheng, an expert in enterprise research, this is actually an old problem of "no separation between government and enterprise".

In order to solve the real problems of SOE reform, from 2005 to 2008, the State-owned Assets Supervision and Administration Commission of the State Council organized the directors of the pilot enterprises of the central enterprises to go to Singapore in nine groups to inspect the operation of the boards of directors of Temasek and a number of large "dillied enterprises".

Zhou Fangsheng also went to Temasek, Singapore to study with the delegation. He found that Temasek's success lies in the fact that it has a well-structured board. In contrast, China's state-owned enterprises have long been indistinguishable from government and enterprises, and there are many problems in the construction of board of directors.

Temasek directors are generally divided into three types: shareholder directors, independent directors and executive directors. Shareholder directors are representatives of contributors from the Ministry of Finance and senior civil servants of the government. In order to guarantee impartiality and neutrality. They are not paid by Temasek, but by the government. The executive directors and independent directors are mainly composed of outstanding entrepreneurs.

Zhou Fangsheng said that the vast majority of these entrepreneurs are private entrepreneurs, they do not have a stake in Temasek, they only participate in the major decisions of the Temasek board as directors, and they represent the power of market.

In the context of the imminent implementation of the new company law and the promotion of a new round of state-owned enterprise reform, Zhou Fangsheng put forward a bold idea: a large number of private entrepreneurs can become external directors of state-owned enterprises.

Zhou Fangsheng said: "I put forward three key points: first, private entrepreneurs serve as external directors, second, employee directors cannot be held by administrative leaders, and third, enterprises must have operational autonomy. One of the conspicuous problems we have now is that leaders at all levels are approving and approving all procedures, but in the end they fail, and no one is responsible, and no one is responsible. ”

Economic Observer: Why has the establishment of the outside director system been promoted for so many years, but some state-owned enterprises still have not formed a mature institutional framework? Where is the resistance?

Zhou Fangsheng: The answer to this question can be found in the past reforms. Reform involves a complex chain of interests, and no one wants to move it.

In the 90s of the 20th century, the reform of state-owned enterprises was very vigorous, and it can be said that without the drastic reform of that year, there would have been no "golden decade" later.

At the beginning of the 21st century, during the reigns of Li Rongrong (former director of the State-owned Assets Supervision and Administration Commission of the State Council) and Shao Ning (former deputy director of the State-owned Assets Supervision and Administration Commission of the State Council), there was significant progress in the reform of state-owned enterprises, the most influential of which was the promotion of the establishment of boards of directors of state-owned enterprises. Previously, state-owned enterprises were leaders of the "hall of words", and there was no talk of corporate governance, so problems continued to emerge, such as corruption and major decision-making mistakes. In essence, it is also due to the fact that our state-owned enterprises have not separated government from enterprises for a long time.

At that time, Li Rongrong and Shao Ning believed that Singapore's Temasek experience was worth learning from, so they organized many cadres of the State-owned Assets Supervision and Administration Commission of the State Council and leaders of central enterprises to learn from them, and I participated in one of them.

During my studies, I discovered that although Temasek is a state-owned enterprise, its investment and capital appreciation operations are very successful. I think one of the most important reasons for Temasek's success is that it has a very good board. Temasek's Board is represented by representatives from the Ministry of Finance, as well as representatives from government professional bodies, but the vast majority are private entrepreneurs. These private venture directors do not have a stake in Temasek and only participate in the major decisions of the Temasek Board as external directors, and they represent the power of market.

Such a board structure respects the opinions of shareholders and does not allow shareholders to decide everything, forming a good balance relationship.

Temasek's private sector directors are well-known local entrepreneurs with billions, tens of billions of dollars, or more. At the same time, they have rich experience in the market economy and an international vision, and their own enterprises are very successful and know how to run a business. They're entrepreneurs by nature, so it's very reasonable for them to be on the board. In addition, they are well-known in society and subject to social scrutiny, and they value their family's credit assets, so they can also be responsible to the people and the country.

Entrepreneurs have proven to be the most authoritative and professional people in the market economy, and the opinions they expressed at the conference have played a crucial role in Temasek's success.

The Economic Observer: These experiences later inspired the reform of corporate governance in China's state-owned enterprises?

Zhou Fangsheng: Yes, I think Temasek's corporate governance structure is very good. It also has an unwritten rule that the general manager cannot be transferred to the chairman on the spot, which is also very innovative.

The Economic Observer: Why not?

Zhou Fangsheng: At that time, I told them that the general manager of a Chinese state-owned enterprise is equivalent to the second-in-command, and after the chairman retires, the general manager can naturally be transferred to the chairman. But Temasek doesn't allow it, and Temasek thinks that if this is the case, then the general manager will be thinking about being the chairman all day long, and it will be difficult for the two sides to get along.

What Temasek allows is that if you do a good job, you can change companies and become the chairman, but you can't be promoted on the spot. After returning from his studies, the most significant change in China's state-owned enterprise reform around 2005 was the beginning of the establishment of a board of directors for wholly state-owned companies.

Economic Observer: Prior to this, more than 20 wholly state-owned central enterprises had set up boards of directors.

Zhou Fangsheng: In the past, the board of directors and the management team were "one set of people and two brands", and this kind of board of directors led itself without any meaning.

After returning from Temasek, the board reform was renewed, requiring the majority of foreign directors to be appointed by SOE group companies. In the process, some companies have achieved one-third of outside directors at first, and then gradually increased the proportion until the majority was reached.

Unlike Temasek, the outside directors invited by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council are almost all retired leaders of state-owned enterprises. First, after being found to be free of corruption, secondly, they are healthy enough to continue working, and thirdly, they have performed well in office, and after satisfying these three points, the State-owned Assets Supervision and Administration Commission of the State Council appointed them as external directors of central enterprises.

This is an important change, because these outside directors are real outside directors, they have a wealth of practical experience in the company, they have a lot of say in major decisions on the board of directors, they are more senior than the current leaders, they have a high level of theory and practical experience, and they are particularly confident in speaking.

Since then, it has truly changed the situation in which the board of directors of central enterprises has the final say in major decisions, and has formed a relationship of checks and balances between internal directors and external directors, so that external directors can speak freely and be responsible for the decisions of the board of directors, without having to obey the opinions of the leaders or act according to the eyes of the leaders.

Practice has proved that in the reform at that time, many major decisions of central enterprises were rejected by the board of directors. In the past, as long as the meeting was held, it was approved by the chairman, and it was impossible to be denied. In my opinion, this is the embodiment of marketization, and it is also a very big progress.

The board of directors also includes lawyers and professionals from accounting firms, but most of them are retired CEOs of state-owned enterprises. Every year, these outside directors will report on their work, and the State-owned Assets Supervision and Administration Commission of the State Council will pay them a certain allowance. This major reform has continued to this day, and the results have been good.

Economic Observer: With the reform advancing to this day, what are the new problems facing corporate governance?

Zhou Fangsheng: I think the biggest problem facing state-owned enterprises in terms of corporate governance is that they do not invite private entrepreneurs to serve as outside directors.

After returning from Temasek, we invited experienced retired corporate leaders to serve as external directors, but they were not private entrepreneurs after all.

I believe that it is now necessary to invite private entrepreneurs to serve as outside directors. There is a view that the State-owned Assets Supervision and Administration Commission of the State Council invited entrepreneurs are also entrepreneurs, but these experienced retired CEOs of state-owned enterprises are not completely equivalent to entrepreneurs, and the essence of entrepreneurs lies in taking the risks of investment and operation.

Economic Observer: What does it mean for private entrepreneurs to serve as external directors for state-owned enterprises?

Zhou Fangsheng: The room for further improvement of this reform lies in private entrepreneurs, who are the ones who really have a personal sense of assets. They have successful experiences and painful lessons. They will put forward opinions according to the laws of the market, and will not listen to a certain person, because he has to sign and be responsible, and he cares about social credibility.

The appointment of well-known private entrepreneurs as outside directors of state-owned enterprises will certainly play a great role, and if this policy is implemented, it will become a major reform measure.

The core of modern corporate governance is, first of all, marketization, and there can be no modernization without marketization.

Private entrepreneurs are excellent representatives of real marketization, and they also meet the requirements of the central government for emphasizing the role of private entrepreneurs and carrying forward the entrepreneurial spirit. Compared with 40 years ago, we have a richer pool of entrepreneurs, who can make greater contributions to society by participating in the board of directors of state-owned enterprises.

From this point of view, there is also a lot of room for improvement in the reform of mixed ownership equity diversification that state-owned listed companies are promoting. When a private entrepreneur enters a wholly state-owned enterprise as an external director, he does not hold shares at first, but after a period of time he can hold shares through investment, which is also fully in line with the requirements of the current mixed ownership reform.

I once went to a state-owned enterprise to investigate, this enterprise was seriously losing money, and in order to fight its way out, it decided to find private capital to promote the reform of mixed ownership. After the reform of mixed ownership, state-owned enterprises hold 51% of the shares, private enterprises hold 49% of the shares, and the state-owned shares are still absolutely controlled. However, the private enterprise put forward a condition, to send someone to serve as the general manager of the mixed reform company, the company has the right to operate autonomously, in accordance with the principle of marketization, independent operation, and self-responsibility. It has its own voice in the right to personnel, assessment, salary, procurement, and sales, and it has proved that the state-owned enterprise's reform attempt has been very successful and has successfully turned losses into profits.

The board of directors of this company is also composed of directors from private enterprises and directors from state-owned enterprises, and the governance structure is similar to Temasek's, which is exactly what I just suggested "inviting private enterprises in".

However, it is a pity that the reform of this state-owned enterprise was not promoted at that time, and many enterprises came to this state-owned enterprise to study, and after learning, they said that they could not replicate the reform experience, which has more complex reasons behind it.

China Unicom is also a typical case. China Unicom has brought in strategic investors, including well-known private enterprises, and these entrepreneurs have entered their boards of directors through capital increases and share expansions.

Even if a wholly state-owned company does not carry out mixed reform, it is entirely possible to bring in private entrepreneurs as external directors.

Economic Observer: Some state-owned enterprises have said that they are worried that the outside directors are busy with business and that collective decision-making will be difficult, which will affect the efficiency of meetings?

Zhou Fangsheng: This is normal, what they are now calling "high efficiency" is that there are many mistakes behind it. High efficiency is likely to become the chairman of the board of directors alone. The key to the board's decision-making is not efficiency, but whether the decision is correct or not, and the result of the decision.

Economic Observer: Some state-owned enterprises say that they now not only have no outside directors, but also no employee directors.

Zhou Fangsheng: This is an old question. At present, many employee directors of state-owned enterprises are the chairman of the trade union, that is, members of the administrative team, and have dual status, which is not in line with the original intent of the new company law, and is not "employee representatives".

Drawing on foreign experience, German law stipulates that the proportion of employee directors in an enterprise must reach 50%, and they have the right to speak in the company's major decisions and employee benefits.

The Economic Observer: How to clarify the boundaries of the powers, responsibilities and interests of outside directors?

Zhou Fangsheng: At present, the State-owned Assets Supervision and Administration Commission of the State Council gives some allowances to outside directors, but the amount is not much. In the future, to let private entrepreneurs come in as outside directors, it is not by financial incentives, but by their personal "honor driven", private entrepreneurs are financially free, and they will cherish their feathers as outside directors.

Many of Temasek's directors are billionaires who take risks primarily for their personal and family reputations. As for the evaluation of outside directors, the main purpose is to pursue decision-making responsibilities and bear corresponding legal risks. The State-owned Assets Supervision and Administration Commission of the State Council has clearly stipulated that after the directors sign the decision, if there is a problem in the future, they will be held accountable according to the signature.

To sum up, I would like to put forward three key points: first, private entrepreneurs serve as external directors, second, employee directors cannot be held by administrative leaders, and third, enterprises must have operational autonomy. One of the conspicuous problems we have now is that leaders at all levels are approving and approving all procedures, but in the end they fail, and no one is responsible, and no one is responsible.

Therefore, the general manager should assume operational responsibility and realize the unity of rights, responsibilities and interests. Actually, these are all reforms that we pushed decades ago, and now they are back.