SOE management given share approval
By Zhang Ran (China Daily)
Updated: 2006-01-23 05:44

China will lift the ban preventing the management of large-scale State-owned enterprises (SOE) from owning company shares, it was announced yesterday.

However, executive shareholders will not be able to hold controlling stakes in the company.

The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council announced the decision yesterday, saying that the rule was aiming to encourage executives to better manage enterprises.

Experts believed the new rule is a loosening of the former ban. Earlier in April 2005, the Ministry of Finance jointly issued rules to forbid existing management in large-scale SOEs from owning shares in case they bought out the company, the so-called management buy-out (MBO). The ban was aimed at containing losses of State-owned assets.

However, with the application of a new law on January 1 which permitted listed companies to reward existing management with bonus shares, the banning of executives from buying shares in SOEs seemed baseless.

"The new rule is aimed at motivating executives to better manage State-owned assets", an officer from SASAC said. "It shows the government's resolution to deepen SOE reforms."

However, some experts doubted that the rule could ever achieve the expected effect.

"Most large-scale SOEs gain profit from monopolizing the market instead of improving management efficiency," said Guan Weili, a former officer from SASAC.

To ease the public's worry that executives of large-scale SOEs holding shares may lead to insider control or loss of State-owned assets, SASAC issued detailed guidelines of the activities, such as banning executives who plan to buy shares from being involved in major proceedings like drafting reform plans and fixing prices of State-owned assets. Also, executives should provide certificates that can prove the validity of their capital sources.

"Even if the ban was lifted, SASAC would maintain a tough grip on executives who have State shares," said an official from the SASAC.

"Only those who won their positions through competition instead of government appointment, or who have made major contributions to the companies, can hold shares in SOEs. Those managerial members bearing direct accountability for the decline of their companies' performance cannot hold shares of the companies."

Loss of State-owned assets has been a public focus in recent years and has triggered debates about how large-scale SOEs should be reformed.

"Speed of SOE reform is fast, and a few MBO cases have appeared in some major SOEs," said Li Shuguang, member of the drafting committee on the State-own Assets Law and professor from China University of Political Science and Law.

"The rule could be seen as a response to public debate and a detailed guideline for how SOEs should conduct their ongoing reforms," Li said.

Li pointed out that the rule was more focused on 2,500 large SOEs, because China permitted small and medium-sized SOEs to perform MBOs in 2005.

Earlier in January, the China Securities Regulatory Commission issued measures to encourage public company managers to better run their companies by offering bonus shares as a reward.

The measure meant that directors, supervisors, top level managers, and key technology experts in a listed company are entitled to be rewarded with the company's shares if they contribute to increasing the company's profit, provided that those companies had not made fake financial statements or conducted illegal activities.

(China Daily 01/23/2006 page2)