Reining in the Behemoths for the Common Good? An Analysis of State Control of State-Owned Enterprises and the Pathway to Better Governance in China

Abstract The state-owned enterprise (SOE) is the most significant business form in China. In the planned economy era, the state employed SOEs to implement economic policy and to provide employment opportunities. After entering the marketization era, the state still expects SOEs to preserve the state assets and fulfill political goals, notwithstanding the governance issues facing SOEs. SOEs do not generally perform as well as private corporations worldwide and the existing literature attempts to explain the reasons for poor governance problems from many different perspectives. SOEs in China have many distinctive characteristics compared to their counterparts overseas. The ways in which the state exercises its control over SOEs are the primary reasons for creating the vital distinctive characteristics that invite SOEs’ poor governance problems in China. The three most significant problems are discussed here. First, over-politicization and bureaucracy lower SOEs’ operational efficiency. Second, the board of directors (BOD) fails to perform its traditional role in corporate governance in serving the corporate interests. Third, the comprehensive involvement of the Communist Party in China (CPC) needs to be regulated and the accountability of internal organs should be extended to the party committees within the companies. We submit that the existing SOE supervision and control methods need to be changed to clarify the for-profit purpose of SOEs. The BOD needs uninterrupted business management power and the party activities should follow party rules and company law to make party cadres accountable for their business decisions.