A Study On Legal System Of Board Of Directors In State-owned Company

The board of directors, as a connecting link between shareholders assembly and management, lies at the key position in company governance mechanisms. The functions, personnel composition, incentive and restraint mechanism of board of directors determine a company's performance. Under the background that company system is the direction of the reform of state-owned enterprises, the system of board of directors is naturally critical for state-owned companies'successful operations.Since the implementation of PRC Company Law in 1994, the system of board of directors in state-owned company has been gradually established. However, it is difficult to achieve the original intention of establishing board of directors. The operation mechanism's dissimilation and the"quasi-official"personnel composition make the state-owned company's governance existed in name only. State-owned Assets Supervision and Administration Commission of the State Council (SASAC) took central state-owned enterprises as the point of penetration to promote experimental work on board of directors in 2004. This reflected the government's desire of perfecting governance mechanisms of state-owned companies. One time, "the reform of Board of Directors in State-owned Companies" has become a classic reflection of the reform of state-owned companies. However, the 5-year experimental work did not reach the expected target. There are no satisfactory answers to a series of questions, such as how to design the authority of the board of directors, allocate personnel, build assessment mechanism, and perfect incentive and restraint mechanism. This dissertation chooses legal system of board of directors in state-owned company as its object of study, combining principles of company law with our state-owned companies'features, rethinking and reconstructing related regulation. It is desirable that this dissertation could bring much better ideas for the development of the legal system of board of directors in state-owned company.In accordance with the logic sequence, this dissertation puts forward basic theory, role theory, structural theory, performance theory, incentive theory and liability theory. Taking the state-owned company system as the point of penetration, this dissertation explores the role of the board of directors, designs an internal structure from the perspective of functionalism, and sets up assessment mechanism. Based on incentive and restraint mechanism's perfection, this paper proposes that evaluation results as rewards and punishments standard could press directors to work diligently and do their best to achieve original goals of director system.Chapter One:"On Basic Viewpoint: Analysis of the regulations on the State-owned Company and its Board of Directors in General". This chapter is the logical starting point of the dissertation which mainly carries out a reclassification of state-owned companies and a basic analysis of the regulations on state-owned company's board of directors. The reclassification of stated-owned companies system, the key of this chapter, plays a guiding role in this dissertation. The current study and legal practice about building the legal system of board of directors which is based on capital structure pay attention to category design (there are different legal systems of the board of directors in wholly state-owned companies and in state-owned holding companies), neglecting the field which stated-owned companies belong to and the state-owned assets supervision and administration system which shall be taken into consideration about the stated-owned company governance structure. Therefore, the government office regulating on state-owned companies hesitates between "empowerment" and "constraining". This dissertation doesn't follow the beaten track of the traditional theoretical framework and puts a crisscross thought on the types of stated-owned companies and bases the study on the system of board of directors. As for "crosswise" classification, our stated-owned companies are classified as stated-owned companies in non-competitive areas and stated-owned companies in competitive areas. The former play an "extension of the political functions" role and are not-for-profit service supplies. The former whose essential feature is sociality belongs to Special Corporation and its operation is normally interfered by the government. While the latter is based on the special consideration about the national conditions of China. According to the classic theories of economics, the state-owned companies should completely withdraw from competitive areas. But it can not be accomplished overnight in China and needs to go through a gradual process. During this period, it also has the problem of company governance. The government should keep"the distance of an arm"from the state-owned companies because they are commercial company. As for"vertical" classification, the current state-owned assets supervision and administration system should take three-level management model as"government—the state-owned assets management company—enterprise entity". The state-owned assets management companies as an intermediate platform play the most crucial role and relate to the success of the whole management model. They dissever direct contact between government and enterprise entity. Therefore, enterprise entity is little affected by government intervention. In contrast, the state-owned assets management companies which face the government directly are affected by over-intervention by government. Protecting its'independence becomes one of core contents of the state-owned assets management system."Crosswise"and"vertical"types intersecting with each other form the crisscross model of the state-owned companies, which is"state-owned assets management companies v. ordinary stated-owned companies in non-competitive areas"and"state-owned assets management companies v. ordinary stated-owned companies in competitive areas."Of course, due to the inherent vacancy of"state-owned"investor, the special position of the government, as well as the complexity of principle-agent relationship, no matter for which type of state-owned companies, to build the legal system of boards of directors should reflect independence, profession, as well as strict liability of board of directors on the basis of the state-owned characteristics.Chapter two:"On Role: Authority of board of Directors in State-owned Company". The authority of board of directors is the primary issue in studying the legal system of board of directors. From law and economic analysis viewpoint, basing on pursuit of efficiency and the special need to protect state-owned assets, this dissertation agrees to the legislative mode of centralization of board of directors in state-owned companies and recommends the expansion of board of directors'decision-making powers and guarantee its supervision powers. This dissertation pays more attention to decision-making powers and designs different powers to board of directors of various state-owned companies. The stated-owned companies in competitive areas should take the model of commercial operation. In view of those non-competitive companies'sociality, the authority of their board of directors should be limited in the field of changing dominant business, altering investment direction and adjusting product price. Since the independence of board of directors is the guarantee of legitimate operation of authority of the board of directors, this dissertation respectively defines the relationship between board of directors and SASAC, party committee, manager's layer which play an important role to avoid the government over intervention and to prohibit"insider control". The author of the paper puts forward that relationship between SASAC and board of directors should be changed from authorization relationship to supervision relationship. At the same time, relationship between board of directors and party committee should distinguish the different meanings of"management decision center"and"political core". As for the relationship between board of directors and managers, the board should strengthen supervision of managers and managers should assist the board.Chapter three:"On Structure: the Internal Structure of Board of Directors in State-owned Company". Authority design, no matter how superb it is, can only be achieved through good organizational mechanisms. Therefore, the organizational structure of board of directors is the basis of effective functioning of board of directors. In this part, the dissertation thoroughly discusses the size, the structure, the professional committee as well as the selection mechanism of personnel and the chairman of board of directors. In the dissertation, the author thinks that the structure of the board of directors should be designed differently due to different functions of state-owned companies in different fields : board of directors of state-owned companies in non-competitive areas should set up the "333" pattern of check and balance, that is, one-third of government directors, one-third of independent directors as well as one-third of internal directors(executive directors and employee directors). The state-owned company's board of directors in competitive areas should adopt the mechanism mainly based on independent directors. In addition, in this part, the dissertation pays more attention to detailed analysis about the government director system, the outside director system as well as the employee director system. As for government directors that should be assumed by government officials, the article thinks that the connection between government director and company is a kind of service contract with some political factors which means that government director not only has fiduciary duties to companies but also has specific reporting duties and communicating information duties to the government. As for outside directors, at present the biggest problem is that this kind of directors is simply independent of managers but still dependent on the government,which plays a worse role in achieving the goal of separating governments from enterprises. Although it is beneficial to the inhibition phenomenon of"insider control", it should evolve in the direction of the independent director system. For employee directors, it is urgent for them to go out of the embarrassment of"amphibious identity"and to make their decision-making based on companies'benefits. Of course, in order to achieve the original design of the system the specific configuration should highlight the characteristics of employee directors to be sure that they can reflect the employee interests on the platform of board of directors.Chapter four:"On Performance: the Construction for Assessment Mechanism of Board of Directors in State-owned Company". The series of questions whether or not the authority design of the board of directors is reasonable, the organizational structure is scientific, the directors elected is suitable and the right configuration is appropriate must be answered with the facts,which are determined fairly to rely on assessment mechanism. Normative and scientific assessment mechanism is not only the guarantee of the effective functioning of the board of directors but also the important parameters of the selection of the directors of state-owned companies. At the same time it is also the criterion of implementing incentives and restraints. Through establishing the assessment system of board of directors in line with the state-owned companies'characteristics, we could guide and correct behavior of directors, improve their ability to perform their duties in order to achieve effective governance and preserve and increase the value of state-owned assets. The current ways of assessing board of directors include the self-assessment, the assessment by the society, as well as the assessment by the investors. Based on the characteristics of state-owned assets, the dissertation especially emphasizes on the latter, and argues that SASAC has more power to assess. For the assessment content, the author of this paper considers, for an overall assessment of the board of directors, we should pay attention to three aspects, that is, the reasonability of board structure, the responsibility of the board as well as the development and performance of companies; and for the assessment of individual director, we should mainly stress on common criteria and personal standards. The so-called common standard is the fiduciary duty; and the so-called personal standard is the specific obligations based on their origins of system designed for executive director, independent director, government director and staff director.Chapter five:"On Incentive: The Defects and Corrections of the State-owned Company Directors'Incentive Mechanism". Based on the results of the assessment, the company should inspire the directors to perform their duties better. This is a kind of recognition for "human capital". Therefore, improving the incentive mechanism is one of the key aspects to build the legal mechanism of board of directors. The complexity of principle-agent relationship of the state-owned companies makes the agent opportunism and adverse selection more obvious, so the incentive mechanism of director of the state-owned company is bound to be different from private companies. Such differences are mainly reflected in the following three points: Firstly, the government has the power of supervision and decision-making for the incentive mechanism of directors of the state-owned company. Even though we establish a different decision-making procedure of director compensation for the executive directors, independent director and employee director, investors always have the power of final decision. For the government director, on the basis of the relative system of state-owned companies from abroad, they could not be paid by the company, and their incentive way may be a"well-done and promotion"model. Secondly, the incentive mechanism should be designed to reflect distributive justice of the law. As for the current sensitive problem that the managers of state-owned enterprises are paid more salary, the author of this paper thinks we should not take one-size-fits-all measures, but treat them differently: for state-owned companies in the competitive field, the government should not interfere unduly, and in order to attract managers with ability to work for state-owned companies the incentive should be decided by the market and reflect external equity of the incentive mechanism; as for the state-owned companies in the non-competitive field, the"multiples"management could be adopted, because the performance of the company relies on not only business managers'ability, but also its status of monopoly or national resources. Finally, to protect the fairness of an incentive mechanism, the article considers that we should set up and perfect the limited Judicial Review System, the full Information Disclosure System and special Economic Responsibility Auditing System for the state-owned companies to prevent abnormally high inspiration of the directors of the company to "nibble" company's interests.Chapter six:"On Liability: Perfection of Legal liability Mechanism of Directors of State-owned Company". Giving substantial and expected rewards to better players in performance, and effective and expected punishment to business losers should be useful measures of reducing proxy costs. At this point, liability mechanism becomes a guarantee of effective functioning of the board of directors. The author of this paper puts forward related recommendations about the perfection of legal liability mechanism of directors of state-owned companies from three aspects: civil liability, administrative liability as well as criminal liability. As for civil liability, the dissertation, from the perspective of the directors'responsibility to company, put forward measures to improve system concerned. The dissertation specially discussed in detail about the application of business judgment rule to state-owned companies, the feasibility of the first application of the restriction mechanism of directors'civil liability for government directors as well as employee directors, and so on. As for administrative liability, the dissertation mainly questions"unified"approaches of the current system, and thinks that administrative disciplinary measures and administrative penalties should be separately applied on the base of the identity difference between government directors and non-government directors while administrative disciplinary measures should not be taken only because of the company's"state-owned"status. As for criminal liability, the dissertation mainly analyses"differentiated protection"between state-owned companies and non-state-owned companies, and thinks that equal treatment should be taken in relation to the question of crime and non-crime and formal equality should be also reflected except government directors who still apply to current rules(that is, they should be convicted as public officials), but in the aspect of setting up of specific penalty, on the base of the spirit of criminal law, the directors of state-owned companies should be "severely" punished and the state-owned assets should be given"differentiated protection"in order to realize the substantive justice. In addition, the dissertation also sets forth views about the introduction of the crime of breach of trust into our system and thinks that, in legislation, the introduction of the crime of ordinary breach of trust should be considered and the crime of ordinary breach of trust should be combined with the existing crime of particular breach of trust in order to build a legislative model reflecting the legal principle and flexibility, and safeguard the interests of clients.