Liang Hongfu

SOE reform will hurt if workers are not flexible

By Liang Hongfu (China Daily)
Updated: 2006-01-10 07:30

In a recent talk show hosted by CCTV, a group of top mainland executives and government regulators were invited to express their views on one of the most pressing business issues in China State-owned enterprise restructuring. The speakers quickly zeroed in what they unanimously considered to be the crux of the problem, which was the lack of checks and balances at the top.

As many economists and management experts have been saying for a long time, this particular problem arises from the common practice of appointing the most senior executives of a State-owned enterprise to be members of the board of directors. As a result, the chief executive of a State-owned enterprise is usually chairman of the board. In such a position, he or she can rule the enterprise with little accountability.

For that reason, the reform of State-owned enterprise has set its focus on changes at the top, calling for, among other things, the re-constitution of the boards of directors. In some cases, the enterprises are instructed to recruit their chairmen from outside the organization.

Much was said on the show about the role and responsibilities of the chairman of a typical privately owned company. The emphasis is on vision and accountability to shareholders.

The effectiveness of the restructuring of an enterprise is being measured by profit attributable to shareholders, return on shareholders' funds, return on sales and cash flow. These criteria were purportedly established to ascertain the efficiency in the use of capital by a particular enterprise. As one speaker said, the efficient use of capital is what really matters in any restructuring.

But a change at the top, no matter how thorough, does not necessarily guarantee an improvement in the bottom line. In a typical corporate restructuring, many painful and, at times, protracted steps will have to be taken to achieve the established goals.

And therein lies the rub. The case-study files of many business school students are filled with stories of successful corporate rescues mounted by company doctors more adapt at wielding a hatchet than a scalpel. In any one of these typical restructurings, unprofitable businesses were dumped, inefficient plants closed and non-productive assets sold in rapid succession to stop the erosion of value and profit.

This process would invariably lead to wave after wave of layoffs as the company struggled to control its fixed costs. The social cost in such a corporate restructuring in China could be magnified by the lack of a comprehensive social security net that could provide temporary relief to the newly unemployed.

To be sure, corporate restructuring can also create new jobs for people with the appropriate skill set. But many more workers who are either unable or unwilling to acquire those skills will stand to lose their jobs.

In the pursuit of corporate restructuring, it must be recognized that some hard decisions leading to painful adjustments must be made. A new board of directors and, perhaps, a fresh management team will have to be allowed to make such decisions as they see fit to rescue the enterprise from certain failure. Indeed, some of these enterprises would have already gone bankrupted if it had not been for the constant infusion of fresh capital from the State.

To avoid layoffs, or to ensure that they can find alternate employment quickly, workers will have to broaden their knowledge and upgrade their skills to meet the demands of the fast changing business world. In Hong Kong, for example, the wholesale relocation of the manufacturing industry to the Pearl River Delta region in the 1980s had resulted in the loss of almost all manufacturing jobs. But Hong Kong people adapted to the change as the fast growing services sector rapidly absorbed most of the laid-off workers.

The mainland economy and social structure are, of course, infinitely more complex than that of Hong Kong. But the underlying principle of adjustment and adaptation to rapidly changing market conditions is not entirely dissimilar. The will and capability of the managers and workers of many mainland State-owned enterprises should not be in doubt because it is clear that they recognize the need for reform.

Email: jamesleung@chinadaily.com.cn

(China Daily 01/10/2006 page4)