Alter corporate leadership selection to curb graft

Despite a modern governance structure, top dogs often avoid scrutiny

China's high-profile anti-corruption investigations targeted at state-owned enterprises are set to help cleanse the commercial giants. But to prevent corruption in those enterprises in the long term, a sounder modern corporate governance regime must be put into place.

The anti-corruption authorities have said they will start a new round of "inspections" in some central ministries and major SOEs. Previous inspections have led to investigations and arrests of a number of senior corporate executives. There is a long list of high-ranking executives of major SOEs in sectors including oil, steel, power and telecommunications, aviation and transportation who have been detained or arrested since 2012.

The latest announcement by the anti-corruption authorities shows that the country's self-purification drive will continue and, apart from government officials, senior managers of SOEs have become the new target of the drive. This reflects the authorities' resolve to root out corruption across the board. Also, it is a response to the public call to solve problems, from unchecked spending to insider control of corporate interests, in some major SOEs.

China's major SOEs suffered severe losses in the 1990s, but thanks to generous capital injection from the state and forceful corporate reforms, many of them have overcome the difficulties and expanded rapidly since the beginning of this century. Several of them have become influential players in the global arena.

But the success has been accompanied by scandals involving waste of corporate funds or dubious business deals that benefited corporate managers but jeopardized the interest of the state. The corruption cases exposed recently have triggered public anger and prompted the authorities to dig deeper into the muddy waters. The latest investigations are set to identify more corrupt senior executives of SOEs and help cleanse China's business environment.

However, policymakers need to conduct a serious soul-searching to figure out why there is so much corruption in the corporate sector and what systematic measures they can take to root it out.

China's major SOEs have indeed made headway in building a modern corporate governance regime modeled on Western practice. They have largely established the modern corporate board system, something that was new in China even in the 1990s. Supervisory boards, too, are in place to supervise corporate activities and decision-making.

Yet such changes have been rather superficial, because modern corporate governance has not played its due role in supervising corporate affairs. In many corruption cases exposed by the media, board chairmen dominated corporate decision-making, leaving little room for the supervisory body.

Apart from strengthening the anti-corruption campaign, therefore, the authorities need to find a way to reform the current appointment-based mechanism. Changes should make the top leaders of SOEs subject to more effective supervision by supervisory boards and auditors. This is the real long-term solution.

Moreover, the authorities have to expedite market reforms in SOEs to attract more investors, which will not only improve the competitiveness of state companies but subject corporate activities to supervision by more investors. The authorities have vowed to develop a diversified ownership economy and allow more mixed-ownership in SOEs by inviting non-state investors into projects traditionally controlled by state capital.

Sinopec, China's top oil refiner, has taken the lead in restructuring its distribution business, allowing private capital to take up to 30 percent of its shares, with some other state giants deciding to follow in its footsteps. Such a reform has been rightly interpreted as a move to diversify corporate ownership to improve the long-term operational efficiency of the state sector. Attracting more investors will also make such SOEs more accountable to the market and thus curb corruption.

The author is a senior writer with China Daily. Contact the writer at xinzhiming@chinadaily.com.cn