The Janus Head: the double-faced nature of China’s state owned enterprises

By Tabasum van Til LL.M.*

The lack of transparency in corporate structure of PetroChina and CNPC causes great difficulties in establishing responsibility and accountability for human rights abuses.

In the light of the complaint against PetroChina, which will be discussed at the Global Compact Board meeting on July 24, 2009, it is important to understand the intricate nature of China's state owned enterprises (SOEs). In the communications between the group of civil organizations that filed the complaint and the Global Compact Board it has been questioned whether PetroChina and its parent company CNPC are separate corporate entities. This fundamental question needs to be answered before any responsibility or accountability for misconduct can be established.

The centerpiece in China’s economic reforms has been the separation of State ownership and governance. Although in 2005 a separate legal personality has been granted to Chinese SOEs, behind the scenes strings are still attached (See Human Rights, Chinese Business, p. 54-55). Due to their public-private dichotomy, SOEs can either be used in governmental or in private commercial activities. Since resources are a matter of national interest, the enterprises in the extractive sector are state-controlled. It is therefore likely to assume a highly involved participation by the Chinese government in privatized SOEs or private enterprises. This influence can be deducted from the practice of corporate policies, indirect funding, the appointment of board members, supervisor or management and the prerogative of Communist Party members on key positions. All these indications might add up to the conclusion of the State being the owner of an enterprise.

This leads us to another hurdle, the lifting of the "corporate veil": China needs to establish a separate legal personality, through the partition of parent and subsidiary shares. In the case of PetroChina, a subsidiary of CNPC, this partition is questionable. The distinction is interesting when it comes to liability. The possibility of direct liability of CNPC is an option due to the ascertaining of the lack of due care through the control over PetroChina's policies on and corporate conduct. An indirect joint liability of CNPC and PetroChina can be established on the base of the use of common officers (CEOs). Even though PetroChina is a legally independent enterprise on paper, the possibility of joint action in human rights violations with the Sudanese government remains, in spite of CNPC's defense that only CNPC, which is not a participant in the Global Compact, is operating in Sudan. It can therefore be questioned to what extent a key enterprise such as PetroChina is operating independently, without an indirect connection to a State actor such as an SOE (CNPC) or the Chinese government by means of a State organ (SASAC).

Corporate power obliges. It is in the hands of the parent company CNPC to provide for transparency regarding its corporate structure. It is up to PetroChina to make amends as a mature and worthy member of the Global Compact, in the light of the Communication on Progress Policy. Moreover, the company should provide for information on corporate ownership, its objective, the nexus with its parent and governmental financial and policy aid and in addition to allow independent performance audits. It is up to the People’s Republic to wisely monitor its state agents and other business actors, at the least in the light of pure corporate governance, national CSR standards, and agreed upon international treaties. (See chapter 3 of Human Rights, Chinese Business). The lack of transparency of the corporate structure of both PetroChina and CNPC needs to be edified by the Chinese government as CNPC's largest stakeholder and therefore owner of PetroChina. In the light of China’s current improvements on CSR and corporate governance this is not an intrusive request. China’s on the whole non-responsive attitude is cumbersome and in the long run not beneficial to its private sector. As a potential leading nation here to stay, China should clearly define its goals as to what level of state responsibility it is willing and necessary to live up to.

However, with regard to established human rights bodies and initiatives such as the Global Compact, current corporate conduct demonstrates it is time to grow some teeth. For that reason, understanding the limited means and scope of the Global Compact and bearing in mind the delicate nature of consultations with different stakeholders, it is of importance not to let this opportunity to steer the course of abusive companies slip through its fingers. It should be possible as mature and equal players in the same international arena to come to an understanding, however delicate the matter might be. Any outcome of the Global Compact Board meeting might lead to a ripple effect: in case this current complaint is acknowledged, chances are that allegations against other oil companies will follow and misconduct and complicity will be rightly addressed. If however this complaint will insufficiently be dealt with, chances are the abuse will unfetteredly remain. It should no longer be tolerated to partake in window-dressing by supporting CSR initiatives while conducting business activities otherwise. Chinese state owned enterprises, however double-natured, should show their real face.

* This article is based on Ms. Tabasum van Til's master's thesis Human rights, Chinese business: how China's state-owned enterprises fit into international human rights law. The thesis is available here.