In a capitalist democracy economy, achieving the top executive of one of the world’s largest companies might be the ultimate goal of a corporate career. But in China, heads of central state-owned enterprises (SOEs) are part of a larger career structure integrated by the Communist Party. A 2012 article we considered last year looked at mechanism through which the Party controls appointments of top SOE executives.
Another 2012 article, published in Chinese by Ruilong YANG, Yuan WANG, Huihua NIE (“The Political Promotion for Quasi-Government Officers: Evidence from Central State-Owned Enterprises in China”) provides an even closer look at the careers of top SOE executives, by looking at factors that led to their promotion. In the case of a successful SOE head, promotion may mean becoming a provincial governor or party secretary, a Government Minister, or even (eventually) a spot on the Politburo.
This is because SOEs are part of a personnel system that encompasses every important position in China. While the State-Owned Assets Supervision and Administration Commission (SASAC) acts on behalf of the central government as owner of central SOEs, the right to appoint management is shared with the Party. This makes SOE leaders ‘quasi-officials’, in the terms of this paper.
SASAC’s First Bureau for the Administration of Corporate Executives ‘shares’ the power to appoint the leadership of the most important 53 central SOEs with the Party’s Central Organization Department. This gives those leaders ‘Vice-Ministerial’ ranking, equivalent to a Deputy Minister of a department, or a Deputy Governor of a Province. Leaders of the remaining SOEs are formally appointed by SASAC’s Second Bureau for the Administration of Corporate Executives, subject to Organization department approval. These are bureau level appointments, giving their leaders the same rank the mayor of a third-tier city.
The organization department’s intimate involvement in this process places SOE leaders in the same career structure as other government officials. This is an area that is already widely studied. According to work cited in this paper, performance indicators for local government officials include morality (得), capacity (能), hard work (勤), results (绩), and integrity (廉). The results measure is the part in which GDP growth famously plays a role. But some research suggests that after controlling for a local official’s own personal political connections, the performance measure is no longer significant. This could be because politically connected officials are more likely to be assigned to faster-growing areas.
Assessing the performance of local officials is difficult – there are social as well as economic metrics that the Party values, in both cases local results are influenced by factors outside the control of leadership, and in many cases local statistical reporting may be either manipulated (for the purpose of improving promotion prospects) or downright unreliable.
Judging the performance of SOE leaders has fewer confounding factors. The formal method by which SASAC assesses performance of SOE executives (“Interim Measures for Assessment of the Operational Performance of Persons in Charge of Central Enterprises”) has been in place since 2004. (Key SOE executives are remunerated based on an annual letter grade from A to E). They now have limited political or social obligations, which means straight financial measures for performance can be appropriate on the basis of their audited financial statements. Finally, the SOE head has more control over the enterprise than a local official has over his local area.
The authors linked annual financial data of central SOEs to biographical information on the SOE’s top two leaders gleaned from corporate and official websites. The top two leaders are usually the Party Secretary and the CEO. (In a company with a board, the Chairman of the Board tends to be Party Secretary). After excluding observations for which financial or leadership information is not publicly available (typically defence-related SOEs), the authors used a database of 87 companies and 189 leaders, giving 589 observations from 2008-2011.
A promotion is observed if an SOE leader moves to a higher ranked position, either amongst SOEs (for example, from a Bureau level SOE to a Vice-ministerial level SOE) or elsewhere in the system (for example, becoming a government Minister or Provincial Governor). A move from being second-in-charge to first-in-charge of an SOE is also a promotion (for example, if the CEO becomes Chairman of the Board). The move into a Party organ at the same level is also considered a promotion.
To judge SOE performance, the authors look at growth in operating revenue. (Operating revenue is the basis of the Fortune 500, and also Chinese measures of leading companies). This departs from the official SASAC assessment, which uses profit rate (net profits divided by average net assets), which the authors argue is unreliable (and also often negative), and economic value added (which was not published before 2010).
To measure the political connections of SOE leaders, they identify whether leaders are members or alternate members of the Central Party Committee or the Central Disciplinary Inspection Committee (8% of sample), whether leaders are members of the National People’s Congress (11% of sample), whether they have previous work experience in central government or party organs (25% of sample), and whether the SOE’s headquarters is located in Beijing (75% of sample). All these factors give SOE leaders better access to national leaders.
Controlling factors include the leader’s tenure at the firm (average 4 years), his age (average 54), whether he is over 60 (relevant for retirement, 13% are), whether he holds a PhD (21% do), whether the SOE is Vice-Ministerial or Bureau level, and the size of the firm as measured by the log of revenue in the previous year.
The authors find growth in revenue to be a significant determinant of promotion prospects (growing the value of state capital by comparison is not significant). In terms of political connections, being a member of one of the central committees is significant, but a role on the National People’s Congress, central-government work experience and being in Beijing is not. Leaders with doctoral degrees are more likely to be promoted, but their performance ranking (linked to their salary) does not relate to promotion.
The last point is particularly interesting. The authors interpret to argue that SOE leaders resemble government officials (concerned about building empires and future promotions) than professional managers (concerned about their own compensation from the firm)