Recently, Huang Shuhe, deputy director of the State-owned Assets Supervision and Administration Commission of the State Council, said that the state will improve the assessment methods for central enterprises, and that in the past, only the assessment of the total profit of enterprises and the return on net assets will be replaced by the assessment of capital costs. Experts believe that this is a change in the state's assessment of central enterprises from the most important to the internal, and from the short-term benefits to the long-term benefits.
Pursuing Short-term Benefits Constraining Business Innovation
What kind of company is a good company? Is the current profitable company a good one? Many people will answer "yes". However, many people do not know that there may be a contradiction between short-term profits and long-term development. The government has been considering how to enable state-owned enterprises to achieve sustainable development. It is an important means to set up reasonable assessment and incentive mechanisms for companies and their leaders.
Although the sum of profits and return on net assets can explain the performance of a company to some extent, companies with profits do not necessarily create value. “In the past one year, some business leaders in the final year of their tenure, in order to pursue the profits of the year, even equipment has been sold, which also talk about long-term development and create value?†Huabo Consulting partner Yue Jinping told reporters.
As a veteran of state-owned enterprises, many people have personal experience with the shortcomings of this assessment system. Yin Jiaxu, general manager of Southern Automotive, told reporters that the evaluation system for state-owned enterprise leaders is not yet the most effective incentive for independent innovation. He said: "Now the assessment of profit growth every year is as good as possible. But in China's "Accounting Law for Industrial Enterprises," if there are many funds invested in the development of new products, there will be less profit included in the current period. The assessment system only looks at profits. I think that in addition to profits, we must also look at the development and investment of new products so that the innovation power of state-owned enterprises can be stronger."
Zuo Yanan, chairman of Jianghuai Automobile, also shared his deep feelings. During the “two sessions†this year, he suggested that the R&D expenses invested by the company should be regarded as the target for completing profits. The company’s R&D capacity, independent innovation, and independent research and development of products are listed as Important performance assessment indicators.
The "complaints" of these outstanding state-owned enterprise leaders all derive from the fact that just assessing the profits of the year will easily result in the pursuit of short-term profits at the expense of destroying long-term profits. In other words, some capitals can be used in places where long-term benefits can be created, but they are now being used. This is the opportunity cost of capital.
Economic value added will become an assessment indicator
The economic increase value index proposed this time is to truly reflect the actual business situation of the company and guide the company to have a continuously growing business plan. The economic value added, or EVA (Economic Value Added), comes from the Nobel Prize winners Merton Miller and Franco Modigliani. In the mid-1980s, a group of US companies such as Coca-Cola began to try to use economic value added as a measure of performance, and to introduce the company's internal management, and maximize the index as a company's target. In the mid-1990s, many large companies also joined the ranks.
The economic value added refers to the income after the company's net operating profit after deducting the opportunity cost of all invested capital including equity and debt. It emphasizes that the capital and debt used by business operations are costly, and its essence is economic profit, not traditional accounting profits. This indicator combines the opportunity cost with the actual cost and strengthens the goal of improving the efficiency of capital use.
“EVA emphasizes the concept of capital appreciation for managers. The lack of the concept of equity capital costs is a common phenomenon in the management of state-owned companies, but equity capital is financially flexible for companies. The shareholders’ investments must be rewarded and they are responsible for the There is a project investment that gives up the opportunity cost of investing in other income, and accounting profit does not confirm and measure this opportunity cost,†an economic expert told reporters.
Because the cost of equity capital is higher than the cost of debt capital, if the after-tax net operating profit of a company invested by shareholders is lower than the minimum return of similar ventures with other risks, then this investment will not only be unprofitable for shareholders, but will also suffer losses. Economic value added emphasizes that capital will only increase if the actual income from capital investment in existing assets is greater than that from capital suppliers.
Therefore, this indicator not only emphasizes that corporate leaders should pay attention to the long-term interests of the company, but also strives to improve their internal strength. It also emphasizes the awareness of return to shareholders and the awareness of capital costs. For state-owned enterprises, the largest shareholder is the state, which is closely related to each taxpayer.
Assessment methods do not cut across the board
Some people think that a good assessment method can enable all state-owned enterprises to quickly improve their operating standards. However, Yue Jinping believes that there is no way to master key, because the state of development of state-owned enterprises is very uneven, the specific assessment of state-owned enterprises should be analyzed.
“To introduce new indicators now does not mean that the past indicators are incorrect. There are three levels of assessment methods for state-owned enterprise leaders. The first is to pay for them according to work, and the second is to guide them to manage their profits from profit indicators. Well, finally, for enterprises that have developed to a certain degree, they must evaluate the entrepreneurial spirit of their leaders.†Yue Jinping said. He believes that at present, some enterprises still struggling on the brink of survival are still unable to assess with higher-level indicators such as economic value added.
The SASAC is also aware of this. According to an official of the performance assessment bureau of the SASAC, according to last year’s results, more than half of the central enterprises’ economic growth has been positive. The timing of the introduction of the economic value-added indicator in the assessment of the central enterprises has basically matured. Starting with the central enterprises, it is a reflection of the "step by step" approach. Even so, we can still judge that with the continuous development of other state-owned enterprises and the continuous maturity of the appraisal system, the application scope of this appraisal index will become wider and wider.
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