Monday, February 9, 2009

What Motivates SOE Chief Executives?

We all know the standard neo-classical economic theory of how state-owned businesses cannot outperform privately-owned businesses. (Or if we don't know it explicitly, we in the West have all heard it in some form for most of our lives.)

There are several key reasons for the theoretical lack of competitiveness of state-owned enterprises (SOEs), one of which is that the state's objectives are conflicted between the economic and the political. This makes it difficult for the state to provide the proper incentives to the chief executives of these SOEs.

The recent story on the attempt by Chinalco, a central SOE, to increase its controlling stake in Rio Tinto, a publicly traded Australian iron-ore producer, has received a lot of press as of late. (See stories here, here and here for a little background.)

Of related interest is yesterday's news that Xiao Yaqing, Chairman and CEO of Chinalco (as well as its listed subsidiary Chalco) is resigning right in the middle of negotiations over the Rio Tinto stake. While the timing of this resignation seems a little strange, I think it illustrates very well what drives these guys.

According to this SCMP story, Xiao, who until now has been an alternate member of the Communist Party's Central Committee, will apparently take up an important position in China's cabinet, also known as the State Council. I spoke with someone in Beijing today, and the rumor going around -- and I stress that this is just a rumor -- is that Xiao will become Deputy Secretary General of the State Council under Ma Kai.

While probably not as high profile a position as CEO of Chinalco, this position is considered to be a reward for Xiao's work, and is not surprising. These kinds of political appointments are not at all unusual for those who run SOEs in China.

Another recent example is Li Xiaopeng (son of former Premier, Li Peng, not to be confused with gymnast Li Xiaopeng) who last year vacated the position of Chairman of Huaneng Power to become Vice-Governor of Shanxi Province.

An interesting related question I cannot answer is whether the performance of an SOE under a given Chief Executive affects his chances of political promotion.

And if it does matter, I wonder whether those analyzing performance are able to distinguish between brilliant leadership and a merely coincidental intersection between a CEO's turn at the helm and a bull market.

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UPDATE: Confirmation of the rumor. Looks like Xiao Yaqing will take up the post of Deputy Secretary General of the State Council.