101
102 company to members of the core technical and management team.27 In 2009, the parent company NNIIG transferred its 80% share of KeyGen from Nanjing Pharmaceutical Group Co., Ltd., to Nanjing CoreTech Biomedical Co. Ltd., another wholly owned NNIIG subsidiary.
Faced with difficulties of funding operations and maintaining talent in the company, Nanjing municipal SASAC, NNIIG and KeyGen itself decided to initiate MOR on October 18, 2014 (Appendix I; interview 1). The timing was right with the recent push for MOR from the State Council. The goal was to preserve and appreciate state assets and improve company performance. The Nanjing SASAC identified KeyGen as a key pilot for the MOR implementation in Nanjing as well as a pilot in creating equity incentive schemes in enterprises controlled by Nanjing SASAC (Appendix I; interview 4). The MOR in KeyGen was implemented in several steps:
First, Guangzhou Yuexiu Emerging Industry Venture Capital Partnership (“Yuexiu Ventures”) was identified as a new strategic investor in KeyGen. On January 19, 2015, Nanjing CoreTech Biomedical Co., Ltd. transferred 45.52% of KeyGen equity to Yuexiu Ventures, which in turn transferred 1.32% of KeyGen equity to Fang Jiachun (President of Guangzhou Yuexiu Industrial Investment Fund – main new investor in Yuexiu Ventures), and 3.16% to Lin Guochun (Vice President of Yuexiu Ventures). In line with the MOR policies discussed above, Yuexiu Ventures is a state-owned investment company controlled by Guangzhou SASAC through a long chain of subsidiaries and holding companies (see Figure 2).
Second, on May 15, 2015, it was agreed to increase the KeyGen’s registered capital by 1.45 million RMB, which was paid in full on May 28, 2015 by Nanjing Kailai Investment Management Co., Ltd. (“Kailai Investments”), a consortium of individual private investors, most of whom were senior KeyGen managers (including Wang Xuegen, Chairman and Party Secretary in KeyGen, and Ye Qing, Chief Scientist and Director in KeyGen).
27 Wang Xuegen (7.5%), Chen Wuling (2.50%), Feng Ying (1.5%), Liu Hui (1.5%), Wei Ce (1.5%), and Sheng Caiting (1.5%). On March 2, 2012, shareholders Chen Wuling, Feng Ying, Liu Hui, and Wei Ce transferred all their shares in the company to back to Ye Qing, who held an 11.25% ownership share after the transfer.
103 Third, on January 13, 2016, the company was officially listed on the NEEQ Exchange (新三板).
The valuation of KeyGen was based on 39 US-listed and 9 Hong Kong-listed companies with similar price-to-earnings, price-to-sales and price-to-book ratios (KeyGen, 2016). Wang Xuegen and Ye Qing held shares directly in KeyGen through an equity incentive program set up during the listing, as well as through Kailai Investments. Furthermore, state-owned institutional investors bought shares of KeyGen (see Figure 2).
The resulting ownership structure (see Figure 2 and Table 2) reflects continued state control through a pyramid structure of state ownership, which is an increasingly prominent feature of Chinese SOEs (Sutherland & Ning, 2015).
Table 2: Shareholding as of June 2018
Name of shareholder % of
outstanding shares
Ownership nature Guangzhou Yuexiu Emerging Industry Venture Capital
Partnership
(广州越秀新兴产业创业投资合伙企业（有限合 伙）)
31.94 State-controlled
Nanjing Kailai Investments (南京凯莱投资管理有限 公司)
25.07 Private
Nanjing CoreTech Biomedical
(南京艾德凯腾生物医药有限责任公司)
21.05 State-controlled
Ye Qing (叶青) 7.89 Private
Wang Xuegen (王雪根) 5.26 Private
Sheng Caiting (盛彩亭) 0.88 Private
Lin Guochun (林国春) 2.22 Private
Fang Jiachun (方加春) 0.93 Private
Institutional investors; GF Securities (广发证券股份 有限公司) and Huatai Securities (华泰证券股份有限 公司)
4.76 State-controlled
Source: KeyGen, 2018, p. 59.
104
105 Looking at Table 3, we see that both NNIIG and new investor Guangzhou Yuexue held two board seats, giving state investors control of 80% of the board seats (4 out of 5) after reform.
Kailai Investments – representing a large part of the KeyGen management – held the last seat.
We can also observe that Wang Xuegen held the most important positions in KeyGen as Chairman and Party Secretary, and simultaneously held positions as Party Secretary, Chairman and Deputy General Manager in the holding group, NNIIG. This effectively creates a strong vertical interlock between NNIIG and KeyGen, as well as horizontal within-firm interlocks, which is a prevalent structure in Chinese SOEs, and recently strengthened with new regulations (Arnoldi et al., 2019; CCP, 2020).
Table 3: Corporate governance structure of KeyGen, June 2018
Name Board of
Directors in KeyGen
Board of Supervisors in KeyGen
Management position in KeyGen
Position in NNIIG, Kailai, or Yuexiu
Wang Xuegen (王雪根)
Chairman Party Secretary, NNIIG
Chairman, NNIIG Deputy General Manager, NNIIG
Li Hongqin (李红琴)
Director Director dispatched by
NNIG Ye Qing
(叶青)
Director Chief Scientist Chairman/investor, Kailai
Chen Yanping (陈艳萍)
Director Deputy General Manager,
Yuexiu Ventures Yang Yiming
(杨一鸣)
Director Assistant to General
Manager, Yuexiu Ventures Chen Ding
(陈锭)
Chairman of the Supervisory Board
Investor, Kailai Li Xin
(李鑫)
Supervisor General Manager and
investor, Kailai Hu Jian
(胡建)
Supervisor Supervisor dispatched by
NNIIG Lu Huimin
(吕惠敏)
General Manager Investor, Kailai Feng Ying
(冯莹)
Deputy General Manager
Investor, Kailai Sun Yijun
(孙益军)
Deputy General Manager
Investor, Kailai Chen Xinian
(陈西年)
Chief Financial Officer Huang Ying
(黄莺)
Secretary to the Board of Directors
Deputy General Manager
Investor, Kailai
Source: Jiangsu KeyGen Biotech Annual report 2018 and enterprise registration databases.
106 How has MOR influenced changes in KeyGen’s governance and performance? Yuexiu was represented on the board with two seats, increased transparency and standards through the stock exchange listing process, and equity incentive programs for the top management team (partly through Kailai Investments). According to the management, corporate performance improved after MOR. They have registered two diagnostic reagents, R&D investments have doubled, annual revenue has grown by 30%, and new employees with foreign experience have entered the technical team (Appendix I; interview 1). The state-owned assets originally invested in 2000 to set up KeyGen had increased 10-fold by 2018. How much of these operational improvements can be attributed directly to MOR is hard to tell, but there is a clear temporal correlation between the improvements and changes in ownership and corporate governance structures of the company.
The KeyGen case is an illustration of a number of the main tendencies in local MOR implementation. First, the local-state stays in control of the enterprise after MOR. In the KeyGen case, the new investor, Yuexiu, looks on the surface like a private investment fund, but tracing the ownership structures reveals that the Guangzhou SASAC controls it. While the local state (Nanjing SASAC) controlled 80% of KeyGen before MOR, “it” (i.e., Nanjing and Guangzhou SASACs and institutional investors) now controls 57.75% of the shares but still holds 80% of the board seats, effectively remaining in absolute control. In addition, even though NNIIG is now the second-largest shareholder, it still appoints and approves important management positions in the company (Appendix I; interview 1).
Second, the case highlights the government strategy of going from “management of assets” to
“management of capital”, and using SAIOCs actively in MOR implementation (see regulatory reforms, above). Yuexiu’s investment in KeyGen is an example of simultaneous investing in biotechnology as a strategic emerging industry, and supporting the MOR program.
Third, shareholding by management and board members is creating financial incentives for the top management. Both Wang Xuegen and Ye Qing hold shares in KeyGen, directly as well as indirectly through the employee “Kailai Investments” vehicle. The high level of management shareholding is a good example of “exploring the implementation of employee ownership in mixed-ownership enterprises” in order to create a “market-oriented operating mechanism”, as stipulated goals in Jiangsu government reform documents (Jiangsu Government, 2016). The
107 management shareholding reform states that it gives “priority to supporting the transformation of research institutes, high-tech enterprises and technology service enterprises with high capital and technical factors”, such as KeyGen (Jiangsu Government, 2016).
Fourth, we can observe strong horizontal interlocks in NNIIG (holding group) between the Party Committee and the Board of Directors in according Party regulations (“bidirectional entry and cross appointment”) (CCP, 2015). Wang Xuegen is the Chairman of the Board in KeyGen (vertical interlock), and Chairman of the Board, Deputy General Manager and Party Secretary of NNIIG (horizontal interlock in NNIIG).
In the case of KeyGen, the “impossible trinity” of reform seems not very problematic because the reforms focus more on increasing firm autonomy and incentive schemes than on increasing administrative oversight and assigning developmental objectives. According to management interviews, Party-building and institutionalization within KeyGen is more a cultural unifying factor than a disturbance to effective governance: “Party building is the soul (灵魂) of the company. It can organically unify corporate governance” (Appendix I; interview 1). In this case, it seems that an arms-length developmental Party-state, or “investor state”, can coexist and integrate with market mechanisms.