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A Comparative Research on Management Incentive Mechanism from Corporate Governance Perspective between Chinese SOEs and Western Public Corporations

Author: ZhaoXinJie
Tutor: PengLong
School: Beijing Foreign Studies University
Course: English Language and Literature
Keywords: corporate governance management incentive mechanisms western publiccorporations Chinese SOEs comparative research
CLC: F272.91
Type: PhD thesis
Year: 2013
Downloads: 17
Quote: 0
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Poor performance and severe loss of productivity in state-owned enterprises (SOEs) have long been bothering Chinese government and have been an issue in China’s economy. However, during the past decade, stated-owned enterprises (SOEs) have somehow turned into a synonym of high profit, high growth and high salary, and they have attracted more attention from the government and from society generally. Some scholars argue that such performance change is due to the establishment of Modern Enterprise Systems, including having the market monitoring and controlling of listed SOEs as well as vesting non-listed SOEs fourteen rights of management with SOE Law1. Meanwhile, some scholars claim that the introduction of management incentive mechanisms in SOEs is primarily responsible for the improved performance. The author does not agree with the above views. This research argues that there is not a clear explanation of how property rights in corporate governance impact the incentives of the management in SOEs. Therefore, this paper examines the characteristics of property rights, and studies SOEs management incentive mechanisms by comparing to the characteristics of western public corporations’ corporate governance.When selecting a reference for the SOEs’ corporate governance, western public corporations are chosen instead of western state-owned enterprises because the western public corporations share common features with SOEs in terms of their market status and financial targets; meanwhile the highly diversified equity structure of western public companies has given the management considerable rights of management, which resembles the status quo of SOEs in terms of the segregation of ownership and management.This research is constructed in the following way:firstly key elements in corporate governance for both western public corporations and Chinese SOEs, including corporate property rights, residual claims, residual rights of control, and the internal contractual arrangement, are introduced as the basis for comparing western public corporations and Chinese SOEs. The study discovers that the competition between various property rights, the consistency or inconsistency between residual claims and residual rights of control, as well as the arrangement of internal contracts have impacted on corporate governance. From the property rights structure perspective, wholly-government-owned companies have no ownership competition issue; and for state-owned listed companies competition exists within only a very limited domain due to the absolute dominance of government controlled ownership. In addition, the management rights of SOEs vested by SOE law has encouraged the segregation of its ownership and management. This segregation has no actual effect on the unification of residual claims and residual rights of control. Indeed, it even helps solidify the understanding of the segregation between the two rights (ownership and operation), In other words, the dynamic competitive relationship between the two rights has been viewed as a static one. Besides, residual claims and residual rights of control in SOEs remain separated whatever forms they are displayed in, and the corporate internal contracts are arranged based on fixed rights allocation. On the basis of findings from this research, all the above exert negative impact on SOEs’performance.Subsequently, the paper studies the main means of corporate governance mechanism, including the principal-agent mechanism, the exchange scheme of shareholders’rights and corporate stocks, stakeholders’co-operative governance scheme as well as the board of director mechanism. As discussed earlier, SOEs and western public corporations share similarities in terms of the segregation of ownership and management, the inconformity of residual claims and residual rights of control as well as internals control. Some scholars, therefore, argue that the experiences of corporate governance and management incentive mechanisms used in western Corporations can be used to help solve the corporate governance and incentive problems in SOEs. However, the comparative research discovers that SOEs cannot achieve their corporate governance truly through market competition mechanism no matter how many common features they share with western public companies since the corporate governance of western companies is based on competition between various rights; in other words, competition is the norm when rights allocation is concerned. Therefore the SOEs will not be able to benefit from the advantages generated by competitive contracts in regulating the management’s behavior.Next, the paper focuses on management incentive mechanisms. Although it is far from being perfect in western public corporations, their incentive mechanisms are established based on manager market competition. This type of competition is the precondition for effective enforcement of all incentive measures without which there will be a lack of interest consistency among stakeholders as well as a lack of an objective criterion to measure the value-adding potential of managers. Comparatively speaking, because of the absence of a competitive market in SOEs corporate governance, many fundamental signals fail to correctly reflect management value, thus fail to motivate managers. As for the SOE managers, whatever means are used in pricing value-adding potential of managers, the lack of market value will lead to controversy. Therefore, due to the absence of professional manager market the incentive scheme of SOEs cannot correctly demonstrate the true value of managers.The paper concludes that the consistency of residual claims and residual rights of control cannot be achieved in SOEs. The segregation of these two rights leads to the inconsistency between risk and return, responsibilities and obligations. Under such circumstances, an effective corporate governance structure would be impossible. The current performance of SOEs can be attributed to the favorable policies and laws so that some SOEs can enjoy a monopoly or oligopoly status, thus they gain substantive profits which private companies have no access to. Even in non-monopoly areas, SOEs can gain high profit, high growth and high salary though beneficial industrial policies enacted by government. In fact, some competition between rights of management and ownership as well as a more forceful administrative supervision are visible in SOEs, and to some degree they help to improve SOEs performance. However, these measures alone will never solve the problems of incentive failure caused by the fundamental problem of segregation of the two rights.To conclude, a series of contract arrangements based on competitive markets is the sole base for the establishment of the owner and stakeholders relations as well as the establishment of effective management incentive mechanisms.The paper suggests three ways to overcome the barriers in corporate governance and realize management incentive:firstly, share the residual claims with the agents so that the two parties have common goals and benefits; secondly, regulate managers’ behaviors within a market mechanism, including rights of control competition, take-over threat and pricing mechanism in a manager market; thirdly, establish effective incentive mechanism to guide managers to the long-term profits of the organization.

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