China

Huaneng
Group

DELA CRUZ, Kimberly A.

DELOS REYES, Mary Rose B.

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 TABLE OF CONTENTS

Introduction………………………………………………………………………. 3

A. Problem and Issues………………………………………….……….. 3

B. Objective……………………………………………………………..…. 3

Background Statement…………………………..…………………….………. 3

A. Company Overview…………………..…..………………….…..…… 3

B. Relevant Facts and Issues…………..…..………………….………. 3

Alternative Course of Action………………………………………………….. 5

A. Control of Subsidiary………………………………………………… 5

B. Current Performance Evaluation System………………………… 6

C. Current Incentive System…………………………………………… 6

Recommendations……………………………………………………………… 8

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 INTRODUCTION
A. Problem and Issues

China has focused considerable attention on the reform of its state-owned enterprises. Chinese
firms started to realize that they need modern management accounting techniques to provide
management with relevant, timely, and accurate information to improve enterprise
performance. However, few such findings have been published on the progress Chinese firms
have made toward this goal.

B. Objective

This case study is to describe and evaluate the China Huaneng Group (CHNG) with respect to
their: Control of Subsidiaries, Current Performance Evaluation, and Current Incentive System.

BACKGROUND STATEMENT
A. Company Overview

China Huaneng Group (CHNG) is one of the five largest state-owned electricity generation
enterprises in China, administrated by the State Council. It engages in the investment,
construction, operation, and management of power generation assets and the production and
sale of electricity.

B. Relevant Facts and Issues

China Huaneng Group (CHNG) was established in August 1988. The Company’s core
business is power generation. At present, CHNG consists of its core enterprise (China
Huaneng Group Corporation), nine other member corporations, and about 400 subsidiary
companies throughout China. In addition, it directly controls about 30 overseas branches and
companies. CHNG’s mission in 1985 was to address the national shortage of power. Now the
mission is to increase profits. The government primarily appoints its board of directors. The
goal is “slow steady growth in profits.” The Chinese government is not very strict; it doesn’t look
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at how much profits have improved each year. Hence, there are no sanctions by the
government if no increase in profit is reported.

The overall control, performance evaluation, and incentive system improved CHNG’s
managing style and system for the whole group. CHNG’s inner management system is
established based on investment capital control. The evaluation results are the basis for
exercising the shareholders’ rights of making decisions, selecting managers, and
enjoying the earnings.

The set of evaluating criteria is to standardize the entire company’s behaviors. To make
evaluating criteria better reflect the subsidiary companies’ operating conditions, CHNG’s
top management also decided to standardize and improve all subsidiary companies’
financial management and assets management.

For example, the Equity Method is used in its long-term investments; interest payable is
recorded as Financial Expenses; estimated or unrealized gains or losses should not be
included in a subsidiary company's Income Statement as realized profits or losses; bad
debt expenses must be recognized.

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 ALTERNATIVE COURSE OF ACTION
A. Control of Subsidiary

China Huaneng Group (CHNG) believes that the decentralization philosophy will speed up
decision making and that way of managing the low-level managers can focus on their particular
scope of work since it gives them the freedom to make decisions. Decentralization makes the
decision reasonably accurate, wiser, and timely because they are well aware of the realities of
the decisions. Second, the managers will improve their managerial ability which leads to an
increase in their morale, and this results in higher productivity.

Strengths and Weaknesses:

Strengths Weaknesses
a) Greater transparency and a) Chance of free-rider e.g. Top
accountability Management may take credit
b) Great participation between team b) Dysfunctional decision making e.g.
members Based on own dept benefit
c) More focus on a particular scope of c) Uniform policies are not allowed
work d) More financial burdens e.g. need
d) Motivated to achieve the goal more expertise
e) Effective e) More procedure in terms of business
f) The parent company maintains control transactions (approval and consent for
in three areas even though top management) e.g. Business
decentralized Transaction
g) Diversifies business
h) Continuously adding value to the
state’s assets

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B. Current Performance Evaluation System

China Huaneng Group’s (CHNG) performance evaluation system adopts the Return of Equity
Method as the basis of organizational performance measurement. With this ROE approach,
investors can look and measure past revenue, and see how effective this organization is in
generating interest returns for its shareholders. At the same time, gains in return of equity will
be an indicator for shareholders to determine whether their money will continue to generate
returns and decide to continue investing. The ROE method also gives an overview to creditors
to find out whether teams can pay off debts if they will lend to them.

Strengths and Weaknesses:

Strengths Weaknesses
a) Greater efficiency as it pays attention a) Penalties for underachievement
to the production process e.g. b) The indicator used does not indicate
Independent accurately the production e.g. profits
b) Reflect and change the high debt ratio
to a lower risk e.g. By changing
increase in equity with return on total
assets
c) Individual indicators are used for the
different industries as compared to
stage 2

C. Current Incentive System

China Huaneng Group’s (CHNG) incentive system for its subsidiaries is based directly on the
performance evaluation of the four criteria, which are: (a) ethics, (b) effort, (c) capability, and
(d) performance based on its performance evaluation system. If a company obtains a
performance score of 100 points the total company bonus amount is probably 50% of the Total
Company’s Wages and Salaries. For every performance point over 100 points, it adds 0.5% of
the total company’s wages and salaries to the bonus amount. On the other hand, for every

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performance points less than 100 points, it deducts 0.5% of the total company’s wages and
salaries from the bonus a month. According to CHNG’s current formula, the maximum bonus
amount for a subsidiary company is 65% of the total company’s wages and salaries.

Strengths and Weaknesses:

Strengths Weaknesses
a) Motivate the team to do a better job a) Not that transparent e.g. Ethics cannot
b) Clear guidelines as to evaluating their be rated
work b) Low compensation for workers e.g.
c) An employee will be loyal to the the payment not worth the works
company c) Does not motivate employees to
perform better in the company
because of low bonuses

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 RECOMMENDATIONS
AREA PROBLEM
Control of Subsidiaries Chance of free-rider
Dysfunctional decision-making Stricter rules and regulations
Uniforms policies are not
allowed
Performance Evaluation Adopted balance score card
System concept
Incentive system Not that transparent
Low compensation for
workers
Does not motivate employees
to perform better in the
company because of low
bonuses
RECOMMENDATIONS
Recognition from Top
Management
Stricter rules and regulations
Balances the use of the
financial, non-financial,
internal and external, short
and long term, leading and
lagging, objective and
subjective performance
measures to evaluate the
performance
Penalty for unethical behavior
Individual staff recognition
Individual performance
instead of team performance