Media Reports

2016
06.16

Manager Board Reform of Contracting Management

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[Source: June 13, 2016 Directors & Boards]


“We may encounter censures and doubt in the process of implementation. But I think that we need to look at the general trend: is it in line with the basic laws of enterprise development, corporate governance, the inherent objective law? We can not always think of the perfect practice and do not make the first step. It 's not easy for Shandong to get out of this step.”
Author: Yan Xuefeng
Stimulating the benefits is more difficult than touching the soul. The change of manager board of state-owned enterprises from the system to contracting management is undoubtedly stimulating the interest. On December 11, 2015, Shandong Energy Group Co., Ltd, the provincial-level state-owned enterprise held a meeting; Li Weimin, chairman and party secretary of the group issued the letter of appointment to the newly appointed manager and signed an employment agreement with the general manager, deputy general manager. "This marks a substantial step forward in the contracting management of the senior management of Shandong Energy Group, which is bound to have a great effect on the reform and development of enterprises," said Zhang Xinwen, director of SASAC in Shandong Province.
Decision of the Central Committee of the Communist Party of China on the Major Deepening Reform on the Third Plenary Session of the 18th National Congress of the Communist Party of China (CPC) proposed that the state-owned enterprises should "establish a professional manager system and make better use of the role of entrepreneurs" and "state-owned enterprises should reasonably increase the marketized employment proportion" in 2013. Since 2015, Shandong began to implement the contracting management of manager board of provincial state-owned enterprises, which is in the forefront of the country.
From the minister-level cadre to a common person
For various reasons, the executives of state-owned enterprises have been both official and commercial and their identity has not been marketized for a long time.

Decision of the Central Committee of the Communist Party of China (CPC) on Several Major Issues Concerning the Reform and Development of State-owned Enterprises on the Fourth Plenary Session of the 15th CPC Central Committee in 1999 put forward that it would no longer determine the administrative level of the enterprises and business leaders. In 2000, the State Economic and Trade Commission promulgated the Basic Norms for State-owned Large and Medium-sized Enterprises’ Establishment of A Modern Enterprise System and Strengthening of Management(Trial), provides that enterprises should no longer apply the administrative level of party and government organs, no longer determine the treatment of business managers according to the administrative level of party and government organs and carry out the enterprise manager management approach that adapt to the requirements of the modern enterprise system. However, these important stipulations have not been carried out; to set up the enterprise manager system in state-owned enterprises has not been truly seriously treated. Long-standing institutional inertia leads to a strong path dependence of state-owned enterprises’ executives: they have been accustomed to being both commercial and official, being in rather than out, being up rather than down and the salary should be increased rather than decreased. With the development of market economy, they hope to retain the "official" identity; at the same time, they want to enjoy the benefits of business, including the market-oriented incentive mechanism.
In accordance with North's view, the Nobel Prize winner in economics, if the path dependence is done badly, it will be locked in an inefficient state. Once they are in the locked state, it will become very difficult to get out of it; usually, they need to use external effects. For Shandong, this external effect is a state-owned enterprise reform that Shandong provincial government promotes under the background of comprehensive deepening of the reform.
Opinions of Shandong Party Committee and Shandong Provincial People's Government on the Deepening of the State-owned Enterprises’ Reform and Improvement of State-owned Assets Management System was issued in June 2014. “Provincial state-owned enterprises should have a reasonable increase of the marketized employment proportion, take appointment system, tenure system and management objective liability system as the main contents and gradually implement the contract management of the enterprise managerial staff. Strict tenure management and target assessment, regard the assessment results as the important basis for business management personnel training, use, rewards and punishments, establish the flexible mechanism of management personnel. Actively develop and use the professional manager market, establish the professional managers talent pool. Implement outstanding entrepreneurs cultivation project, optimize the entrepreneurial environment, and better play the role of entrepreneurs. In 2015, CPC Central Committee and State Council’s Guiding Opinions on Deepening the Reform of State-owned Enterprises indicates to “ implement professional manager system, combine internal training and external introduction, make smooth the existing identity conversion channel between managers and professional managers. The Board of Directors hires and manages the professional managers through the marketized mode, reasonably increase the proportion of marketized employment, accelerate the establishment of exit mechanism. Implement tenure system and contracting management of enterprise manager members, clarify responsibilities, rights, obligations, conduct strict term management and objective assessment.” Obviously, Shandong has been at the forefront.

In June 2015, Shandong started the state-owned enterprises management reform with "market selection, contract management" as the core. Shi Peiwei, Vice Minister of Shandong Provincial Party Committee Organization Department said that in accordance with the new regulations, the staff of manager board of Shandong State-owned Assets Investment Holdings Co., Ltd should be hired according to procedures by the board of directors through the implementation of contracting management; it is no longer included in the provincial management. In principle, under the age of 57, managers should choose the contracting management; if they do not choose to contract, they will withdraw from the business manager. For the manager board staff that work in the provincial-level enterprises, Shandong Provincial Party Committee Organization Department have listened to their choice of views. Among the first batch of 27 managers, 21 are under the age of 57, who chose the contracting management. As of January 2016, 19 pilot enterprises chose the contracting management. Zhang Xinwen, director of Shandong SASAC director said, “Among the 11 enterprises that are being promoted, there are 51 senior staff, 47 of whom chose contracting, thus leading to a greater ideological impact among the enterprise cadres and workers. It has laid the ideological foundation for changing the traditional cadre management philosophy and deepening the enterprise personnel system reform in the next step.”

Reform of the manager board: This is a huge interest touch. The senior managers who were originally in the system and conducted contracting management showed after employment that they said goodbye to the official system and carried out the contracting management, so they had the tenure objectives and contracting examination, leading to greater responsibilities and greater pressure, as well as the sense of insomnia. Ji Binchang, president of Luxin Group said that “in the process of reengineering (state-owned capital investment operating company), the company strengthened the central and provincial spirit of reforming the state-owned enterprises at the two levels of the group headquarters and the invested enterprises. Through holding multiple special conferences and issuing the relevant documents, they stressed to the whole staff that this round of reform would bring the profound adjustment of interest distribution pattern, related to each person's personal interests and career development.” Xiang Kaijin has been the general manager of Luxin Group for over 3 years. After reform, he became the general manager of contracting management of Luxin Group and signed the three-year contract with board of directors. He said that in the past, he was equal to a minister-level cadre, but now is a common person. “If I did badly in the past, the organization department may transfer me to somewhere else; but now, if I am not competent, I may be directly hired and no one will care.” The general deed at present is that the contracting management combines both annual assessment and tenure assessment. When the achievements are low, they will only get the basic salary. If lower, they will be exempted from the post but retain the labor relationship--if so, the party may not be willing to stay. In the past, an enterprise exempted the post of a senior manager of a branch company and allowed him to be a common staff. But the person just left.
“Prelude” of complete marketization
According to the rules and regulations of the contracting management of the state-owned enterprises in Shandong Province, the general manager of the enterprise is nominated by the chairman and the deputy general manager is nominated by the general manager. The board of directors and the manager of the company sign a contract respectively, including the appointment period, term objectives, assessment methods, pay composition, dismissal conditions and the rights and obligations of both parties. Wang Shujian, vice governor of Shandong Province holds that, under the authority of the contract, the manager board can give full play to autonomy, make decisions about their own specific business behaviors and make adjustments according to market dynamics, which will help to cultivate more state-owned enterprises operators with entrepreneurial spirits.

As mentioned above, in the 11 contracting management enterprises of the Shandong Provincial Party Committee Organization Department, general managers are not into the board. If they set up the Standing Committee, qualified general manager can serve as party members. Without the Standing Committee, the general manager does not enter the party committee. And in the SASAC management enterprises in Shandong Province, qualified general manager can enter the board or party committee, but they can only choose one, and are still the contract management cadres. In addition, the board secretary that acts as deputy general manager no longer enters the board or the party committee, but is managed as the contractual staff.
This arrangement has formed a "two-track system". Take the 7-member board of the mainstream model as an example. The three executive directors are cadres appointed by the organizational department; and contracting management is done to the manager board. The important role of chairman and party secretary is the identity within the system. Li Guangqing, chairman and party secretary of Shandong Provincial State-owned Assets Investment Holding Co., Ltd., said, “The important role of chairman and party secretary is the identity within the system, which can embody the benefit of the contributors. If the president is also totally under contracting management, he may be an insider; personal gains and contributor’s gains will conflict. In the state-owned enterprises,, if no one purely represents the country to exert rights, there may be some problems.” That the contracting management of manager board is utterly marketized and the president and other staff maintain the identity within the system may be the down-to-earth and steady act of promoting the reform in the current conditions. Relatively speaking, the viewpoint to marketize all the personnel status in the enterprises may be idealistic at present.
In practice, most of the state-owned enterprises managers in Shandong Province mostly change from incumbent business managers, which can be described as more secure and more operational and keep in line with the "making smooth the status conversion channel from the existing operation managers and professional managers." But in a sense, they are the professional managers in the real sense and have a gap to the substantive requirements of “market-based selection, contracting management”. In this regard, an official of Shandong SASAC said that the contracting management was a prelude to complete marketization and changed from the contract to the market.

And as for the professional managers, Shandong Governor Guo Shuqing said, "for professional managers, internal training and external introduction are indispensable, but the internal training is particularly important, because each enterprise has its own characteristics and proactive corporate culture, which is formed by many historical factors and also reflects the law of enterprise development. Enterprise culture is the soul of the enterprise and the inexhaustible motive to promote the development of enterprises. We do not easily undermine the corporate culture, so generally there is no need for a business management personnel to carry out large rotation.
It is worth mentioning that in 2015, Xinxing Cathay International Group Co., Ltd took the lead to carry out the rule that the board selects the general manager in the central enterprises. Yang Bin, as general manager, has served as deputy general manager for more than 10 years.
“Painfully” walk out of this step
Shandong Provincial Committee’s and Shandong Provincial People's Government’s Opinions on the Deepening of the State-owned Enterprises and Improving the Reform of State-owned Assets Management System proposed to make distinctions of the payment standard of selected staff between the market selection and organization, reasonably confirm and strictly standardize the staff salaries, job treatment, job consumption, business consumption of the leaders through strict selection.” After the contracting management, how to make the payment system reasonable has attracted much attention.
"We can take the same level of salary with the same industry." Li Wei, president of Zhongtai Securities said that in the past, Zhongtai Securities also issued a management index, but just signed the collective contract with the board, with less binding force. At present, the contract is directly with the individual, so the power and responsibility is more clear, and this mechanism also breaks the remuneration constraints of the industry competition. “The most precious in the securities industry is the high-end talent. Under the market mechanism, we can introduce and retain talents through salary in line with the industry level.” 
However, in practice, the development of a reasonable salary system is not overnight; it requires the negotiations of board of directors and managers, or a reasonable game. On the one hand, the board generally lacks the experience and ability of this aspect. On the other hand, in the early stages of reform, some executives who converted to contract management had higher expectations for pay, and there might be a contradiction. An official of Shandong Finance Committee said, “originally, the president and general manager have the same salary. Now, the general manager is outside the system, so he will have high expectations for salary. President will doubt that they had the same pay in the past, but now why the manager is worth so much after having a new status? And the president holds that he does much more than the manager and has bigger responsibilities. The board and general manager have the typical contracting relations. I think they should first negotiate with each other. Then SASAC and asocial security hold a forum to balance and negotiate it.”
Li Guangqing, chairman of the board of directors and long-term director in the state-owned enterprise said: “If you want to be a good president of the state-owned capital operation company, you should have a sense of mission, responsibility and dedication. Otherwise, if you want to make money and think that you can make money, you can go out to do other business.” In 2013, Wang Jianhua, president of Shandong Gold Group, the provincial-level state-owned enterprise in Shandong resigned and acted as the president of Zijin Mining [601899] in the headquarters of Fujian. His annual salary reached 4.06 million yuan in 2014, far higher than that in the system.
If you want to make money, think you can make a sense of mission, to the chairman of the state-owned capital investment and operation company. "Prior to 2013, Shandong Province, state-owned enterprises Shandong Gold Group Chairman Wang Jianhua left to the headquarters of Fujian Zijin Mining [601899] as president, 2014 annual salary of 4.06 million yuan, much higher than in the system Inside time.
"The problem of man is the fundamental problem of the enterprise. If the problem of man is solved, all the problems are not a problem." When the contracting management just began, some of the parties felt they had lost face. However, every manager has been contracted at present, so people adapt to it. When trend is formed, it will be better. We have psychological pain about this reform. In the implementation process, we may encounter criticism; some people may exaggerate the small problems. I think we should look at the general trend: is it in line with the basic law of business development and the inherent objective law of the corporate governance." said Li Guangqing, “we should not always think about the perfect practice and always cannot get out of the first step. It is not easy that Shandong can get out of this step.” Pei Wei, deputy minister of Shandong Provincial Party Committee Organization Department held that the marketized recruitment and contracting management have realized the objective of “going in and out, going up and down and the income being high and low” in the management board of provincial enterprises of Shandong Province, which can help to break the state-owned enterprises’ closure and solidification, bring living water to the state-owned enterprises and encourage the management personnel of state-owned enterprise to do pioneering business.

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