Organisation for Economic Co-operation and Development Development Research Centre of the State Council of the PRC Asian Development Bank CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES IN CHINA Corporation Governance of the State-owned Enterprises with Participation of Foreign Corporations by Lu Weichuan Chairman of the Board of Directors and General Manager, North China Pharmaceutical Group BEIJING, 18-19 JANUARY 2000
I. Introduction of North China Pharmaceutical Group 1. General Introduction of the Group North China Pharmaceutical Group is a corporation with complete stateownership that has been reformed from the original North China Pharmaceutical Factory. Over the past 40 years, it has developed into a corporation with total asset of 11 billion yuan and 18000 staff. It has 27 affiliated companies, either completely owned or share-controlling, including North China Pharmaceutical limited liability stock company that has been listed among A shares in the stock market and 17 companies with foreign investment or foreign cooperation. North China Pharmaceutical Group is the largest pharmaceutical production enterprise in China, with over 300 products, including antibiotics, semi-synthetic antibiotics, vitamins, genetic engineering pharmaceutical, agricultural chemicals, veterinary pharmaceutical, medical intermediates and medical chemicals. The production of antibiotics is more than 10% of the national total output. The production capability of medical powders and injections is the biggest in China and the production of penicillin ranks 1 st in Asia and 2 nd in the world. North China Pharmaceutical Group has been listed among the first 55 national pilot enterprises, among China's 500 biggest industrial enterprises and 500 most profitable industries for years. It was chosen by the State Economic and Trade Commission as the first 6 national pilot enterprises of technical innovation. The trade mark of "Hua Bei" is an well-know one across the country. It is expected that the sales income of North China Pharmaceutical Group is 4.8 billion yuan, the profits and taxes surrendered is 420 million yuan and the profits 240 million yuan. 2. Establish Enterprises and Groups on the Basis of Ownership In the 90's, North China Pharmaceutical has transformed from complete stateownership into coexistence of multiple ownership. We have established 17 corporations with foreign investments and foreign cooperation, bought 12 enterprises. We set up a corporation to be listed in the stock market in 1992. There are altogether 27 affiliated corporations in which it has complete ownership or holding shares. North China Pharmaceutical Limited Liability Stock Corporation, which has been listed in the stock market, is the biggest among its affiliate corporations. There are 11 affiliated corporations under North China Pharmaceutical Limited Liability Stock Corporation with its complete ownership or holding shares. Each corporation has established standard legal person corporation governance that fulfills the shareholders' rights of effective control and encouragement and creates best profits for the shareholders. 3. Management System between the Parent Corporation and the Affiliated Corporations by the Principle of "Group Priority" The management structure and legal structure are separate in North China Pharmaceutical Group. Also, the production and management model is separate from the asset management model. We are currently restructuring the management system to transfer from functional management to business relations. In order to meet the request of specialization, we generally establish production and business departments without considering the affiliated corporation's subordinate status in ownership. In production and management, we emphasize the principle of "Group Priority", the aim of which is maximization of the Group's profits. We design reasonable operation and management model according to the characteristics of the Group's production management and the situation of its control over resources and we work out rational division of responsibilities and rights between the parent corporation and the affiliated 2
corporations. Being a member in the North China Pharmaceutical Group, every affiliated corporation must obey the strategic development plan of the group, which makes them a part of the whole value chain of the group. II. Corporation Governance of Two Corporations with Foreign Investment-- North China-Herst Corporation and Bei Da Corporation 1. North China-Herst Pharmaceutical Ltd. (1) Introduction North China-Herst Pharmaceutical Ltd. is a joint venture between North China Pharmaceutical Group and German Herst Investment Company (China). The gross investment is 38 million Deutsche Mark and the registered capital is 15.2 million Deutsche Mark. Both parties invest 50%. The designed production capability is the annual output of 10 million injections and 100 million tablets without shift. The current product is Caflown powder and injection. The joint investment contract was signed in 1994. In January 1998, the formal production started. In October 1998, the corporation passed the global GMP audit by Herst and it got China GMP in February 1999. (2) Corporation Governance Since each party invested 50% in the joint venture, the corporation governance reflected the equality of shares, authorities and management. North China-Herst Corporation does not have share-holders meeting. It implements the system that the general manager assuming full responsibility under the leadership of the board of directors. It implements one-vote veto system in the board of directors. Deputy general managers assist the general manager in their work. The structures, responsibilities and division of labor of the board of directors, general manager and senior managerial staffs are as follows. Board of Directors Chinese: 4 directors Foreign:4directors Chairman is from Chinese Depute Chairman is from foreign General Manager (Foreign) Deputy General Managers (Chinese) Chief Accountant (Chinese) Financial Department Production Department Quality Department Administration and Personnel Department (Foreign) (Foreign) (Chinese) (Chinese) Technical workshop Safety and Environment Protection The two sides of the North China -Herst Corporation are both big pharmaceutical corporations well-know home and abroad. Herst Company is among the top 500 corporations in the world and has advance technologies and management expertise. The advantages of the two sides are well reflected in the corporation governance and production and operation management of the North China -Herst Corporation: A: Corporation Management 3
(a): The board of directors is the top leading body of the Corporation. It is convened twice a year. The Corporation strictly implements the plans and strategies made by the board of directors. (b): At the beginning of the Corporation's establishment, we borrowed the management system from the Herst Company and drafted regulations for the Corporation, which makes the Corporation operates in line with the strict regulations from the beginning. (c): There is a clear division of labor and responsibility within the Corporation and we have set up a good system of information circulation and report in the Corporation. (d): The manager of the financial department are foreign, which makes the financial management of the Corporation be in line with international practice and relevant laws and regulations be abided by and implemented in financial operation. The Corporation also set up good budget management system and strictly implemented the budget plan approved by the board of directors, which makes the Corporation profitable in the second year of formal production. B: Mutual Cooperation and Steady Development For the smooth development of a joint venture with 50% shares from each side, it is especially important for the Chinese and foreign side to enhance mutual understanding, trust and cooperation. In the Corporation, the Chinese and foreign staffs overcome the language gap and cultural differences and established good cooperative relationship for the common interest of the Corporation. This enables the Corporation to achieve social fame and good profits. The Corporation started its production in 1998. In 1999, It has made profits of 9.2 million yuan and the profit per capita is 127,000 yuan. This shows the advantages of borrowing advance technology and management expertise from famous international companies. C: Technology and Equipment (a): The Herst Company dispatched experts to participate directly in the project design, which brings the factory arrangement and production technology to international advance standard. (b): German engineers participated in the whole process of construction and installment of equipment, making strict supervision over the quality of the project. (c): Equipment that has direct contact with pharmaceuticals are all imported, most of which are from Germany. The foreign factories sent their experts to install and adjust the equipment. (d): The Herst Company sent experts to help the Corporation's verification work, which transfers the internationally advanced verification technology to the Corporation and trains the verification staffs of the Corporation. D: Qualifications of the Staff (a): The Corporation's size of staff is small, but they are very capable. There are now 71 Chinese and foreign employees, 51 of which are in the production and production-related fields, 20 are engaged in administrative and personnel work. (b): The staffs are very qualified. The mid-level managerial staffs are not only qualified in their fields, but also speak fluent foreign language. (c): The Corporation attaches importance to the staff training. According to the request of their job, people from different posts are sent to foreign countries or related factories within China to study and receive training. There are often internal training programs within the Corporation. (3) Incentives Measures The Corporation implements relatively fixed salary system, with annual bonus. The 4
foreign general manager receives salary in accordance with the salary level of the foreign company he represents. Compared with the local state-owned enterprises in the field of pharmaceutical, the staff's salary is relatively high, but compared with other joint venture companies in China, the salary of our corporation is relatively low. 2. Bei Da Corporation Ltd. of North China Pharmaceutical Group (1) Introduction Bei Da Corporation Ltd. of North China Pharmaceutical Group is a joint venture between North China Pharmaceutical Group and Ri Mian Corporation, one of the 10 biggest enterprises in Japan. Bei Da Corporation Ltd. mainly engages in the production, marketing, research and development of semi-synthetic antibiotics and its related products. It is one of the biggest corporations producing semi-synthetic antibiotics. The Corporation is situated in the economic and technology development zone in Liang Village of Shi Jiazhuan City, capital of Hebei Province. It occupies more than 13 hectares land. The gross investment is 60 million US Dollars. With the advantage of technology and human resources of North China Pharmaceutical Group and the global sales network of Ri Mian Corporation, aiming at high standard, high technology and high quality, the Bei Da Corporation Ltd. employs the modern management system, advanced foreign technology and equipment, highly qualified staff, rich technological resources and complete quality guarantee system. It organizes productions strictly in accordance with the international high standard so as to guarantee good products and service that can satisfy the customers' need. (2) Corporation Governance A. Structure of Share-holders The registered capital of Bei Da Corporation is 24 million US Dollars, in which the Chinese side invested 15.84 million, 66% of the total shares and the Japanese side invested 8.15 million, 34% of the total shares. B. Corporation Governance There is no share-holders meeting in Bei Da Corporation. It implements the system that the general manager assumes full responsibility under the leadership of the board of directors. There are 6 directors in the board of directors, 4 from the Chinese side and 2 from the Japanese side. The chairman of the board of directors is from the Chinese side and the vice chairman of the board of directors is from the Japanese side. There is one general manager, whom is recommended by the Chinese side. The general manager is responsible for the implementation of all the decisions made in the meetings of the board of directors, organizing and leading the daily operation and management in the joint venture corporation and mainly the management of product quality and the operation of the Corporation. There are 3 deputy general managers assisting the work of the general manager, 2 recommended by the Chinese side, in which one is responsible for production and technology development, the other is responsible for administration, including management of energy, equipment, environment protection and corporation management; 1 recommended by the Japanese side, who is responsible for marketing. There is 1 chief accountant responsible for the financial operations. There are 7 functional departments in the Corporation: Comprehensive Department, Technology Development Department, Final Accounting and Auditing Department, Quality Verification Department, Equipment and Power Department, Production Technology Department and Financial Department. There are 5 workshops. The managers of the above mentioned departments and the directors of the workshops are from the Chinese side. 5
C. Operation and Management of the Corporation The Bei Da Corporation works hard to achieve standard, meticulous and flat operation management network. The Corporation has formulated management system, management flow and management report, which clarify every post and rationalize the management flow so as to improve the management efficiency. The Bei Da Corporation makes full use of computer technologies, management technologies and network technologies and established its CIMS (Computer Intensive Management System), which has 3 parts: 1. ERP( Enterprise Resources Plan) 2. OA (Office Automation) 3. DCS (Diversified Control System). The successful implementation of this system greatly improved the production and management standard of the Corporation. The Japanese vice general manager is responsible for marketing. The Joint Venture Corporation makes full use of the global marketing network of Ri Mian Corporation and makes effort to expand its export and becomes the big foreign exchange contributor in Heibe Province. In 1999, just one year after its trial production, Bei Da Corporation makes a profit of more than 10 million yuan. (4) Incentive Measures Bei Da Corporation implements a flexible salary and bonus system. 50% of the total salary is based on the evaluation of the employee's performance and the work done. Bei Da Corporation also conducts reforms in its ownership structure and it is the pilot enterprise in Hebei Province to allow Chinese and foreign employees to own shares of the Corporation. This method has greatly aroused the staffs' enthusiasm. III. Evaluation of the Corporation Governance of Joint Venture Corporation, Its Problems and Ways of Improvement 1. Evaluation of the Corporation Governance of Joint Venture Corporation There are 17 corporations with foreign investment and foreign cooperation in North China Pharmaceutical Group. They mainly operate make pharmaceutical and chemical products and trade. The corporation governance of them are quite well and successfully implemented. Corporations with foreign investment and foreign cooperation are making good profits and now they become the new factors of economic growth of North China Pharmaceutical Group. North China-Herst Corporation and Bei Da Corporation are both joint ventures of North China Pharmaceutical Group and the international famous corporations. The joint ventures fully absorbed the advantages of the two sides and got rid of their shortcomings. North China Pharmaceutical Group is the biggest enterprise in China's pharmaceutical industry. It has the advantages in scale, technology and human resources and its strength is very powerful. It fully absorbed the pharmaceutical production technology of the foreign investors the advanced modern enterprise management expertise. Most of the joint ventures have made profits shortly after the trial production. They are showing speedy increase in their profit and becomes a very important part of North China Pharmaceutical Group's future profits. At the same time, the structures of these joint venture corporations have actively promoted the establishment of standard corporation governance for the whole Group. 2. Problems Existed and Ways of Improvement North China Pharmaceutical Group has achieved good result in the process of actively promoting cooperation with foreign investors and pushing forward the reform and development of the Corporations. But there are also some problems that need to be explored and improved in future practice. (1) With the influence of the traditional concept and restrictions from the government, we always emphasize the share-controlling status on the 6
Chinese side in cooperation with foreign investors, just as we always emphasize share-controlling status of the state-ownership in the reform into stock corporation system. It is proved by practice that this mode is not conducive to the promotion of foreign investor's advantage and their enthusiasm. This kind of enterprises usually retains many problems of the state-owned enterprises, which is not conducive to the reform and development of the enterprises. Thus, we should liberate our mind, refresh our concept and stick to the theory that "development is of overriding importance". In order to better promote the restructuring of state-owned enterprises and speed development, the restriction of share-controlling status by the Chinese side should be broken in cooperation with foreign investors and the percentage of foreign share can be reasonably increased according to the actual need. (2) Because of historical reasons, there has appeared the phenomenon of competition within the same industry among some affiliated corporations of North China Pharmaceutical Group that produce same type of products in the development process of the Group. This includes some joint venture corporations and corporations with foreign cooperation. Driven by interest, these affiliated corporations competed with each other for resources and market, which was a negative-sum game within the group and affected the Group's competitiveness as a whole. In view of this problem, the Group implemented measures like unified sales, capital restructuring and establishing business department. The Group formed a sales company responsible for selling the medical products by all the affiliated corporations, which avoided a civil war in the market. It also merged and restructured some affiliated corporations along with the restructuring of products and optimizing the resources. It implemented the system of business department along with the reform of the Group's marketing structure and a business department is responsible for all the affiliated corporations with same products, which formed a interest center. The above-mentioned measures are effective in solving the problem of competition within the same industry. (3) In cooperation with foreign investors, we usually focus on bringing in the investment and technology and retain too many problems of the state-owned enterprises in the management system. This is especially serious in the systems of employment, personnel and distribution. The problems of stateowned enterprises, such as lacking of power to fire or demote staffs and the egalitarian practice of "everyone taking food from the same big pot" in salary system, though somewhat improved, are still existent in different degree. These problems make the enterprises lacking necessary vitality and hard to adapt to the competitions in the market. The root of the problems are two parts: For enterprises, they should deepen reforms, learn more from the foreign experience and expertise and bring in the competitive systems. For the government, it should implement the separation of government from enterprise and create more favorable conditions for enterprises. For this problem, North China Pharmaceutical Group is making more efforts to deepen the reform of "three systems" and taking effective measures to enhance the incentive and restriction system. The affiliated corporations with foreign investment or foreign cooperation, such as Bei Da Corporation, has taken the lead to made strides and achieved good results. 7