Ownership Performance and Executive Turnover组织设计与人力资源清华大学王一江.docx

1、Ownership Performance and Executive Turnover组织设计与人力资源清华大学王一江Ownership, Performance and Executive TurnoverWei ChiSchool of Economics and ManagementTsinghua Univeresity, andKansas State UniversityYijiang WangCarlson School of ManagementUniversity of MinnesotaJuly 2006Abstract:This paper studies the ef

2、fect of state ownership on executive job stability. Data of listed companies in China provide evidence that executive turnover in response to improved performance is significantly different in companies with state ownership shares than in those without, and in companies where the state is the larges

3、t owner than in those where nonstate is. Under state ownership, better performance leads to more frequent executive turnovers. The negative effect of performance on executive job stability is larger when the state has a larger ownership share. These findings suggest an ultimate disincentive for stat

4、e enterprise managers, which is that, to promote their private benefit rather than efficiency, politicians do not make executive appointments based on performance. These findings shift the focus from previous (fruitful) work on managers agency problem to politicians incentive problem. They have impo

5、rtant theoretical and policy implications. 1. Introduction When a competent executive is doing a good job in making profit for the firm, is her employment at the firm more likely to continue or discontinue? In this paper, we use data of listed companies in China to study how the answer to this quest

6、ion is affected by state ownership, including its presence, its share, and its place (i.e, if the state is the largest owner) in a firm. The answer to the above question on executive job stability is not straightforward because it involves two considerations with likely opposite implications: consid

7、eration for efficiency and that for private benefit through control. Although in many cases continued employment of a proven competent executive is best for a firms future performance, it is not necessarily best for the private interest of the party making executive appointment decisions. To advance

8、 his private benefit, the decision maker may want to appoint a confidant instead to control the firm.A firms ownership structure is one of the most important factors in determining which one of these two considerations will prevail. Strong profit motivation in nonstate firms (firms with private inve

9、stors as owners) suggests that these firms will likely want a proven competent executive to stay and continue the good work. In contrast, the desire to control is likely to prevail in state-owned enterprises (SOEs) where politicians decide on executive appointments. This is so because, officially an

10、d legally, the residual benefit of SOEs must go to the citizens. So, although incentive contracts tying compensation to performance are frequently used to motivate SOE managers, similar contracts for politicians have never been used because it would be legally and ideologically not justifiable. Not

11、being able to benefit from an SOEs success through explicit contracting, self-interested politicians can only choose to benefit through control and make executive appointment decisions accordingly. Politicians ability to control a firm is likely to increase with the share of state ownership and be t

12、he strongest when the state is the dominant shareholder. Furthermore, politicians desire to control a firm is likely to grow with the firms profitability, as more profit means more room for private benefit obtainable from the firm. Combining these observations, an answer to the question raised at th

13、e beginning of this paper emerges: state ownership is likely to lead to a negative relationship between performance and executive job stability. In other words, in a firm with significant state ownership, more frequent executive turnover is expected when the firm is more profitable. This negative ef

14、fect of performance on executive turnover is stronger when the state ownership share is larger. As we will show in this study, data of listed companies in Chinas two stock exchanges provide convincing evidence of a negative effect of better performance on executive job stability in firms with state

15、ownership. The effect is indeed stronger when states ownership share is more significant. Empirical studies of the impact of state ownership on managerial turnover are relatively scarce. In the relatively small literature, Tam (1999) and Tenev and Zhang (2002) find that SOE managers are less likely

16、to be removed for poor performance. However, Groves et al. (1995) and Chang and Wong (2004) find that poor performance does result in increased managerial turnover in SOEs. Clearly, these studies have focused on what happens to SOE managers when the firm is not performing well to address the questio

17、n of managerial disciplining. Our work complements previous research by studying what happens to SOE managers when the firm is performing well. This shift of focus helps to address a long-time puzzle noted by Laffont and Tirole (1993): Why cannot SOEs replicate incentives used in the private sector

18、for their managers and thus become equally efficient? The findings of this study emphasize the importance of scrutinizing the behavior of politicians to solve the puzzle. They suggest that, in designing incentives in SOEs, the difficulty is not so much with the agent, i.e., the manager, than with th

19、e principal, i.e., the politician with an eye on private benefit. The evidence we find in this study is consistent with the grabbing-hand theory of government as in Shleifer and Vishny (1994, 1999) and Frye and Shleifer (1997), although the evidence is not from a direct test of their theory. Paralle

20、l to the literature of state ownership is that of implications of concentrated ownership. In this literature, Shleifer and Vishny (1986) study the positive role of large shareholders in alleviating the free-riding problem in monitoring managers. Johnson et al (2000), however, point out the problem o

21、f “tunneling”, i.e., “the transfer of resources out of a company to its controlling shareholder”, which has a detrimental effect on efficiency. Bebchuk (1999) develops a “rent-protection” theory to explain large shareholders lock on control for private benefit. Many authors have empirically studied

22、the effects of large shareholders. Our study is also related to this literature. As already explained, to study the effect of state ownership on executive turnover when the firm is performing well, we do need to consider and incorporate the effect of ownership concentration into the study. Before us

23、, Franks and Meyers (2001) and Gorton and Schmid (2000) have studied the effect of ownership considering simultaneously both dimensions of ownership, i.e., who owns the firm (e.g., bank or other institutions versus family) and how concentrated the ownership is. To our best knowledge, our study is th

24、e first to simultaneously consider these two dimensions in the context of state versus nonstate ownership. Our study has direct and important policy implications. Among countries in transition towards market, China adopted the strategy of slow privatization and focused on designing incentives for SO

25、E managers. Eastern European countries, Russia and other former Soviet states, on the other hand, mostly adopted the strategy of fast privatization. Nowadays, state ownership still dominates in many important industries in China, such as energy, banking, transportation and telecommunication. Believi

26、ng that, with right incentives for managers, SOEs can do as well as any other types of firms, many in China insist that the right strategy for economic reform and development is a strong state sector alongside with the nonstate sector. By providing evidence that an executive is actually less secure

27、in her job when the firm is performing well, our work points out an ultimate disincentive for SOE executives who want to better secure their current jobs. It points out the limitation of focusing only on managerial incentives and highlights a main merit of privatization: freeing SOEs from executive

28、appointment decisions made by those who cannot explicitly benefit from the success of the firms.The plan for the rest of the paper is as follows. Section 2 summarizes Chinas experience in SOE reform so that the historical and institutional background of our study is clear. Section 3 introduces the e

29、mpirical models used in our study. Section 4 describes the data. Section 5 presents the results of our study. Section 6 concludes the paper. 2. State enterprise reform in China.China started the effort to reform SOEs in the late 1970s when economic reform was started. In the 1980s, the effort focuse

30、d mainly on providing incentives for SOE managers (see Groves et al, 1995; and Groves 1994). In the 1990s, to deepen the reform, a greater effort is made to restructure governance in SOEs. One of the most important measures in this regard is the enactment of Company Law in 1993. The Law was later am

31、ended three times, most recently in 2005. The Company Law grants SOE managers the right to run SOEs without governmental interference. It also encourages the SOEs to corporatize so that they can have a formal governance structure similar to that in modern corporations in the west. Since then, many S

32、OEs, including many of the largest and most important ones, have been corporatized and listed in Shanghai or Shenzhen Stock Exchange. The effort of corporatization over more than a decades time has turned China into the eighth largest stock market in the world with more than 1300 listed companies an

33、d a total of issued capital over $90 billion by May 2006. The continuous reform effort and measures introduced in both the 1980s and the 1990s injected strong momentum into many SOEs, speeding up their growth. From 1980 to 2003, the total fixed assets of Chinas state enterprises grew from RMB 345 billion yuan to 2009 b