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Editorial: Lessons from China Steel

China Steel Corp (中鋼) Chairman Lin Wen-yuan (林文淵) announced on Saturday night that he is stepping down after nearly three years at the helm of the nation's largest steelmaker, as controversy concerning his "unreasonably high" stock bonus raged on.

Lin, a government representative on China Steel's board, amassed 1.5 million company shares, valued at nearly NT$44 million (US$1.32 million), since he took over the chairmanship in late 2002. Over the last few days, however, the media has been full of stories about Lin's bonus, and whether a government-appointed executive should be eligible for bonuses.

Although China Steel was privatized in 1995, the government still holds a controlling stake in the firm. In order to boost employee morale, the company began offering 1 percent of its profit to executives and employees as a bonus following privatization. As it recovered from a steel industry slump in 2003, the board approved a shareholder resolution to raise the ratio to 3 percent and further to 5 percent if the company's annual revenue exceeded NT$32 billion.

Benefiting from a surge in demand worldwide, China Steel has reported record sales over the last three years, with net income reaching NT$51.6 billion last year. For the first nine months through September this year, it reported pretax income of NT$58.675 billion.

In his resignation statement, Lin said that his salary and benefits were all paid in accordance with company rules. As for the bonus, he has decided to donate all of it to charitable organizations in the hope that this decision would relieve the pressure on him.

But the controversy shouldn't end here. Lin's stepping down should be a good opportunity to review some long-term problems with state-run companies: Should the government continue using its own people, instead of market professionals? And should the government split the roles of chairman and chief executive, as far as corporate governance is concerned? In China Steel's case, Lin also served as chief executive and was thus entitled to the bonus.

For a government that has constantly faced difficulties in filling top jobs at state-run companies, recent debate has put less focus on the fact that certain appointees like Lin could learn the ropes of an industry so quickly, and were better able to grasp the need for action and change than others, given the company's top concern of profit growth.

The issue has also failed to highlight the consequences of splitting the roles of chairman and chief executive. While many are generally in favor of a separation of these duties, to ensure better corporate governance, little has been heard from the recent debate about how to create successful governance structures.

Therefore, what should be asked is not whether government appointees at state-run companies should get bonuses, or whether the government should regulate pay for its appointed chief executives, but how should executives be compensated on a competitive basis? If government appointees are expected to help improve operational efficiency and contribute more to the state coffers, how should the issue of incentives be dealt with? Or in that case, how should the needs of other constituents, such as employees and shareholders, be balanced?

If something constructive cannot be learned from this issue, then it is not only a loss for Lin, but a loss for everyone.
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