China's Management Transition in a Shifting Economy

Introduction

As China's economy slowly transitions towards a more market-oriented structure, Chinese management is also undergoing significant change. Part of this process is spurred by increased interaction with Western business leaders and the subsequent exposure to Western styles of management. Legal and structural changes, too, have had a profound impact. The concept of corporate governance, for example, has shifted in China, bringing with it changes to management styles. Yet the transitional nature of these changes mirrors the nature of the economy overall, as the government still maintains strong control over China's major businesses. This paper examines the changes to China's management and corporate governance techniques that have resulted from the nation's economic shift.

Changes in the System

When Deng Xiaoping set out in 1978 to restructure China's economy into what became known as a "socialist market economy with Chinese characteristics" (Zhu, 2005), the nation took a series of incremental steps. By the 1990s and early 2000s, China's government-owned firms were allowed to sell a one-third ownership stake to private investors. The rationale was that the economy would benefit from the increased efficiency attributed to private enterprise while allowing the government to maintain control. However, the efficiency gains failed to materialize (Green, 2003).

As a consequence, China's economic reforms moved further, to what became known as two-thirds privatization. Changes to economic incentives reduced the ability of state shareholders to profit from manipulating share prices and stripping assets from their holdings, so these shareholders increasingly began selling their shares to private investors—a group that increasingly includes foreign investors (Green, 2003).

These changes are profound in that they shift the balance of power in some Chinese companies from state control to investor control. This has significant ramifications for the way these companies are managed. Traditionally, throughout the course of the economic reforms, the Chinese government considered growth and maintaining high levels of employment as priorities even above profits. This remains the case with many state-owned enterprises today, as the example of Asia Aluminum bonds illustrates (Foley & Beales, 2009). When investors control the company, however, the profit motive becomes paramount. This shifts the time frames under which managers work, their priorities, and the role of building viable long-term strategies in the business model.

The Asia Aluminum example—wherein a firm with falling demand maintained production levels to the detriment of bondholders who received pennies on the dollar—shows how the Chinese economic system must continue to restructure in order to maintain the confidence of potential foreign investors. The country has been successful in attracting investors, but when faced with these types of losses, investors will increasingly demand better protections. These protections will come in a variety of forms, including the installation of the profit motive and the improvement of corporate governance.

There are encouraging signs. Many private firms in China are well-capitalized, efficient, and able to compete globally (Gang, 2005). Recognizing this value, the government is moving to allow trading in more shares of Chinese firms. This would allow for takeovers—which is not presently the case—and would open the door to an increasing acceptance of the profit motive. The current situation, however, has some private firms operating strictly on the profit motive while others are still run by the government with an entirely different set of priorities.

Impacts on Management

The good news for Chinese companies is that managers from the state-run system appear to be adaptable to private-sector management (Gang, 2005). The shift towards a profit motive creates changes in management in several areas, placing emphasis on competition and efficiency. Additionally, these changes shift the power structure of companies, yet thus far this shift has not moved entirely towards a Western-style power structure.

The value of the profit motive is not lost on the new breed of Chinese managers. As they have become increasingly freed from the constraints of state ownership, they have been able to raise capital, forge alliances and joint ventures, and compete globally. As Gang notes, Chinese managers have in many cases found little difficulty with the transition between state-run companies and private enterprises. The traditional management style was paternalistic, often centered around traditional Confucian values mixed with Communist doctrine. Even the concept of leadership was relatively unknown prior to the onset of economic reforms (Tsui et al., 2004). As leaders emerged, they adopted some Western traits—such as increased risk-taking and greater development and leverage of personal capital—but often retained traditional Chinese authoritative, paternalistic leadership styles.

Thus, power still derives from formal authority, despite a slight increase in recognition of personal achievement. In state-controlled enterprises, substantial power can only be acquired through formal means, and it is the state that makes those appointments. The shift to the profit motive allows room for performance to become a source of power: one can reach positions of authority by leading, motivating, and otherwise succeeding.

China has backed up these moves with strong shareholders' rights legislation. While this move in theory protects state interests in majority-private firms, it also has implications for management. Shareholders have the legal right to participate in major decision-making and in the selection of managers (Yi, 2006). As a result, managers respond to shareholders much as they previously responded to the state. A performance incentive exists, with the key difference being that profit has become the most important metric.

Conclusion

As China continues with its economic reforms, there is a continuous impact on management and on corporate governance. In some ways, private enterprise—particularly those firms that are partially privatized, such as the two-thirds firms—operates with shareholders as surrogates for the role that the government once played. Yet the fully private companies are developing an entirely new style of management. Upcoming reforms promise to bring fully private companies into the same legal realm as the partially private firms. This will change the dynamic for managers who have until now been motivated almost entirely by the need to generate retained earnings. Management in China is thus being pulled in different directions by the needs of government, private enterprise, and foreign investors. Ultimately, management and governance in China will settle on a system that is very much a socialist market system with Chinese characteristics.

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