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Why should emphasize professional manager system

The following contents were exacted from Professor Li Yining’s speech on the 17th Peking University Guanghua New Year Forum, December 19, 2015. Professor Li Yining serves as the  Honorary Dean of Guanghua School of Management, and the Chairman of Advisory Committee of NCFR.

Corporate responsibility: chairman supervises general manager in business operation

Today, I am going to talk about the reasons to emphasize professional manager system.

The first point I would like you to pay attention to is that the main business operating authority goes with the general manager not the chairman. The chairman of the board and other board members act as the agents of the shareholders, and are responsible for enterprise strategic decision and supervision of managers. Chairman is merely the convener of the board and the corporate supervisor, but not the intervener in business. This corporate inter-relationship must be clear. The general manager’s authority and responsibility have to be empowered. Thus, China needs to speed up construction of professional manager market, so companies can hire general managers through this market.

The second point is that the board of directors is responsible for choosing general manager. According to the corporate law, shareholders, including controlling shareholders, have no authority in appointing mangers represented by the General Manager. The general manager is appointed by the board of directors only. Therefore, it is not legitimate for a chairman to directly interfere with corporate operation. Since hiring managers, including the general manager is the responsibility of chairman and the board of directors, can they select managers for the state-owned enterprises from the private sector? There are examples abroad. The state-owned enterprises in France are able to hire manager from private company. This manager then acts as an employed person to work for state-owned company, instead of in the name of private entrepreneur. It helps France to improve the state-owned corporation governance in some way.

Remove administrative ranking to clear the way for talents to enter into leadership

We should differentiate competitive and noncompetitive industries. Noncompetitive industry may have its own pattern. For competitive industry, it is possible for the board of directors to find a suitable talent in the professional manager market, who understands business and can be responsible for company operation. Hence, no matter where to find the talent, from private firms or internal applicants, the administrative ranking has to be removed in the first place. Otherwise, it can be a hurdle for selecting the right person, especially in mixed ownership enterprises.

The State Council recently announced “Guidelines on deepening the state-owned enterprise”, in which the government allows competitive enterprise to transform to mixed ownership enterprises. Moreover, the guidelines point out that there is no boundary for state-owned capital. Only in noncompetitive industries, the so-called “key industries”, the state needs to have the holding power. In competitive industries, the state holding is not necessary. The administrative ranking has hampered talents to enter into the leadership of mixed ownership enterprise and we need to take this issue seriously.

Three conditions to form the professional manager market

The professional manager market has been existed for many years, but not in China. Western developed countries began to adopt it in the late 19th century. The Great Depression in 30’s had accelerated this process. Comparing to China, western countries have much more historical experience. China is now in great needs for the professional manager market, and three conditions have to be met before the market taking shape. We need to prepare for them.

First, existing state-owned enterprises executives who are willing to serve as professional managers must resign from their current positions. They can no longer use their administrative titles to participate in the professional manager competition.

Second, enterprise manager can apply for a job through consulting company or HR company, whether for the current working industry or other ones. Once getting hired, he needs to resign from the original administrative position to leave room for others to join in.

Third, a large number of young people are waiting to be brought up. Given a period of training, they can make up for lacking of practical experience. After training, with a degree of bachelor, Master or PhD, young people can then join the professional manager market. They can start working as manager assistant or relatively low level of managers, then gradually climbing the ladder after accumulating enough working experience. By this way, a professional manager market can be fostered, and would make contribute to China’s economic development.

Professional manager’s transfer, assessment and incentive

To accelerate development of professional manager market in China, it requires the development of business consulting industry. With the certain social status, a business executive may not be willing to carry his resume running around for a job. The specialized business consulting firm can help him to find the suitable position with all necessary information.

In addition, assessment of professional manager’s past performance can build up a solid base. If the firm he used to work with was in debt, then the company he is working now is finically in red again, though many things can be blamed on, still, he needs to take certain responsible of that. Thus, working experience is very important. Furthermore, people who cheat on his resume cannot enter into this market. Credibility and integrity create a successful professional manager market.

Third, pay attention to ownership incentives. A professional manager should be able to be promoted as a business partner, after working in the company for a certain period of time. This is the experience that we can learn from the western company. The executives’ ownership incentive is a hot issue. Of course, it needs to be thoroughly tested. In addition, the central government’s “no egalitarianism” principle receives a round of applause. Regarding to ownership incentive and stock right, the government policy advocates “shares change with changing position”. Incentive system is definitely not a tenure system that can last in lifetime long.

Sharing economy: material and human capital investors should both participate in dividends

Why not egalitarianism? China had engaged in egalitarian equity sharing in the last 90s.The results was that people only cared for stock price, and sold it right after the price was up. This practice is not good for stock market in China. On the other hand, the ownership incentive system is suitable for the "sharing economy" principle. Most economists agree that the social wealth was created by both material capital investment and human capital investment.  Material capital investment cannot produce social wealth in its won, Vice versa.

Now it is the time to ask this question: since everyone admits that wealth is created by both material and labor, then according to the current enterprise system, why profit only belongs to material investors. I buy stocks, have shares, and enjoy dividends. On the other hand, people who invest in human capital can only be paid by wages, counted as a partial of labor cost. Is it reasonable? Since material and labor create wealth together, according to the “sharing economy” principle, the investors for those two should equally enjoy the dividends and interests. This distribution method could largely arouse the enthusiasm of human capital investment.

In conclusion, the following points should be quite clear now: the professional manager system can be put in pilot in China, then slowly become mature after summing up enough experiences. We don't have to give it too much hope, but proceed it in an orderly way - gradually institute rules and then follow it uncompromisingly. With deepening joint-stock system reform, the “sharing economy” may see the twilight.