Successful Metamorphosis or Not? —A Case Study of the Bankruptcy Reorganization of Northeast Special Steel

On October 10, 2016, Fushun Special Steel issued a notice announcing that its controlling shareholder, Northeast Special Steel, entered the bankruptcy reorganization process due to nine consecutive defaults and nearly 5.8 billion RMB in liabilities. Bankruptcy reorganization can help solve the debt problems faced by such inefficient zombie firms, and restore their ability of sus-tainable operation and profitability. However, since reorganization effects only a change in debt structure and of stakeholder composition, whether the newborn entity has the ability to manage and operate the firm is critical. Therefore, the reorganization can only solve the institutional problems but not the managerial problems; that is, institutional reorganization cannot be automatically converted into behavioral change. Thus, when analyzing the implementation process of reorganization from the perspective of firm management, several questions arise: who should take control in the process of reorganization? How should the organizational structure of the restructuring firm be reorganized? How to reconfigure the internal human resources of the firm? Whether the former industry leader can properly handle these problems in the reorganization process is worthy of further discussion.

due to irredeemable bonds, nine consecutive substantial defaults, nearly 5.8 billion RMB in liabilities, and its creditors' disagreement with the "debt-to-equity swap". The entities subject to bankruptcy reorganization include Northeast Special Steel Group and its two subsidiaries, Dalian Special Steel Co., Ltd. and Dalian High Alloy Rod and Wire Co., Ltd.. Northeast Special Steel is a state-owned large-scale special steel production firm, as well as a leading firm in China's special steel industry. In history, it has created many firsts: it produced China's first furnace stainless steel, first furnace high-strength steel and first ultra-high-strength steel; it provided important raw materials for the development of China's first spacecraft, first artificial satellite, and first missile. Northeast Special Steel has developed and supplied a large number of new special steel materials for the development of China's nuclear power and wind power industry, high-speed rail, domestic automobile production, and the renewal of oil extraction equipment. At the same time, Northeast Special Steel has been responsible for more than half of the research projects on China's development of new ferrous metallurgy materials. Although the reorganization system is considered by many researchers as an effective means to save the "zombie firm" in distress, and a helpful solution to their debt problem, reorganization is only one of the many important aspects of firm management. Therefore, it still may not work, possibly because other management problems or process problems are ignored, even though firm structure is reorganized. In reality, the implementation of the reorganization must happen in the various links, institutions or departments of firm management. The process of bankruptcy reorganization involves all the levels and all the management chains, from top to bottom, from the strategic layer to the executive layer, from the organizational structure to human resources management. If these problems are not properly handled during the integration process, integration problems may occur easily in aspects such as business operations, firm organization, firm culture, and management flow.
The purpose of this paper is to demonstrate that reorganization can only solve institutional problems but not management problems. Since reorganization effects only a change in the debt structure and stakeholder composition of the firm, it is critical that the new entity has the ability to manage and operate the firm, that is, the institutional change cannot be automatically converted into management behavior. Who should take control of the new entity? How should the organizational structure of the restructuring firm be reorganized? How to reconfigure the internal labor resources of the firm? Excessive levels in the property right structure and the hierarchical management system will lead to an overlong management chain, and the resulting difficulty in decision-making will greatly reduce the efficiency of firm restructuring. Therefore, it is necessary to bring attention and discussion to the micro perspective of firm management and operation. status of the bankruptcy reorganization from a literature view prospective. With this brief background in mind, Section 3 analyses the problem concerns of the scrambling of firm's control system over the reorganization. Section 4 introduces the problems concern of organizational restructuring and human resources reconfiguration. Finally, Section 5 presents our conclusions.

Literature Review
The analysis of the debt crisis in state-owned firms began in the early 1980s with the reform of the fiscal and taxation systems. At that time, the funding sources of state-owned firms were changed from direct grants to bank loans, and the government would no longer directly invest in state-owned firms, as a result of which, bank loans became the sole funding sources for state-owned firms.
Therefore, Tang (1992) believes that under this system, the debt crisis faced by state-owned firms is quite understandable [1], and solving the debt crisis of state-owned firms should start with the improvement of institutional mechanisms. Li (1996) believes that the debt crisis of state-owned firms is a major obstacle to the deepening of firm reform and banking reform due to the high implicit social cost, and has become a major problem in the current Chinese economy. Therefore, the solution should be found in China's economic system [2]. Zhang (1996) analyzes the institutional causes for the debt problem from the perspective of the asset-liability ratio and financing system of state-owned firms, and concludes it is necessary to carry out reforms to optimize the asset structure as a means to solve the debt problem. He believes that firm restructuring is the most important part in the whole clean-up process of distressed debt, and it is also the core part that determines the success or failure of this reform [3].
With regard to the bankruptcy reorganization system, China passed the new Firm Bankruptcy Law in 2006, which not only regulates the bankruptcy procedures of firms, but more importantly, constructs creatively the legal system for firm restructuring. This legal system not only follows the modern enterprise practices and international standards, but also conforms to China's specific national conditions and is conducive to achieving a virtuous circle of the market ecology [4]. Xu (1994) points out that firm restructuring is a legal act that firms in financial crisis are re-consolidated and resurrected in accordance with legal procedures (ruled by the court) [5]. Zhu (2016) believes that, with the bankruptcy reorganization system, a firm can reorganize and clean up debts by means of negotiation or forced adoption of reorganization plans by relevant stakeholders, and adjust the structures of its ownership, management and assets, in order to get rid of the various difficulties, restore their profitability and continue their business operations [6]. Therefore, bankruptcy reorganization is a series of restructuring activities concerning the asset, debt, operation, organization and other aspects of the firms for the purpose of firm revival.
Bankruptcy reorganization is considered by many researchers an effective means to save the "zombie firms" in trouble. Xu (1995) believes that the reor-ganization of state-owned firms will inevitably lead to divestiture, diversion of firm personnel, debt restructuring, merger, and the restructuring and adjustment of production technologies, among which the debt restructuring is the core content of firm reorganization. Debt restructuring can usually take the form of "debt-to-equity swap", that is, debt is directly converted to firm equity, thus the creditor's credit becomes the equity of shareholders (owners). Other forms it may take include changes in creditor's rights and the conversion of bank claims and equity. Luan (2011) finds empirically from the perspective of accounting treatment that, if firms go with the bankruptcy reorganization procedure and obtain actual gains from debt restructuring, as a result of which they truly recover their vitality and are able to continue their operation normally, contribution will be made to the welfare of the society as a whole [7]. Chen (2016) discussed the issue of "debt-to-equity swap" in the current bankruptcy reorganization procedure from the perspective of deleveraging. As a policy measure that can help firms to recover in crisis while preventing financial risks, "debt-to-equity swap" takes into account the interests of banks, firms, shareholders, etc., and the original debtor-creditor relationship are converted to an investee-investor relationship (debt are repaid by investment dividends and share withdrawal can happen). However, this process is prone to moral hazard.
Thus the restructuring may fall short to its expected goal, and the "debt-to-equity swap" may become essentially a palliative measure to delay the outbreak of risk [8].
Regarding the system and mechanism construction of bankruptcy reorganization, Liang (2007) considers the bankruptcy system as an incentive mechanism encouraging contract fulfillment that help maintaining a healthy ecology in credit market. Bankruptcy reorganization subjects the behavior of market entities to institutional incentives and constraints, which is conducive to the optimization of market mechanism [9]. Gong (2012) uses a game-theoretic approach to analyze the selection mechanism in the bankruptcy and reorganization of public companies with financial difficulties. It is believed that in the Chinese market for corporate control, public companies have a first-in advantage in the formulation of reorganization plans and the administrative approval of reorganization projects, and inequality in profit distribution widely exists, as a result of which further strengthening of the system construction is demanded [10]. Zhu (2016) implements a Logit model on 2443 public companies during the period of 2012-2014 to analyze the formation factors of Chinese zombie firms, and compares between debt restructuring and bankruptcy reorganization. The paper finds that the high-debt zombie firms perform well under debt restructuring, while for the zombie firms with efficiency problems, bankruptcy reorganization or bankruptcy liquidation should be adopted. Xiong (2016) [11] summarizes the practices of the United States and Japan in dealing with zombie companies, and analyzes comparatively the practices of China (including merger and acquisition, custody management, development support, and, bankruptcy and exit). It con-

The Control over Reorganization
When bankruptcy reorganization occurs, the first issue faced by the firm is the competition for corporate control. Although bankruptcy reorganization is an important integrating form of firm development and upgrade, which is responsible for a series of important missions such as opening up new business, optimizing firm resources, and helping firms to get out of the predicament, the reorganization process involves many stakeholders: restructuring companies, shareholders, creditors, bankruptcy administrators, courts, and local governments. The competition for corporate control is essentially a game played between shareholders and creditors. Shareholders want to retain control of the company in order to retain their rights, while creditors want to implement creditor autonomy to maximize their financial interests. In this case, both sides of the game want to choose an action that is more favorable to their side, that is, they want the control rights to remain in their own hands. However, the reality is usually that neither the partial optimality nor the Pareto optimality can be achieved.
Therefore, in the reorganization process, the choices faced by shareholders and creditors can only be sub-optimal choices under the leadership of the judiciary administration [12], that is, the control rights gradually shifted from the hands of shareholders to the hands of creditors. From the perspective of managerial decision-making, according to Herbert Simon's point of view [13], the essence of management is decision-making, and the difficulty level of management depends on the degree that the decision-making is programmed. Decision-making for the more common, fixed and conventional problems are called programmed decision-making. Conversely, decision-making for infrequent, exceptional and unstructured problems are called non-programmed decision-making. When the creditor, who is the owner of the input asset, has at the same time control over the firm, the managerial decision-making faced by them is largely non-programmed decision-making. Due to the lack of specific professional knowledge, auxiliary skills and relevant experience in business management and operation, invalid decision-making, lengthy management flow, rigid management system, backwardness in operation and product development, or other inefficiencies and financial losses caused by the lack of sensitivity to the industry market may occur in the actual enterprise management.
On the other hand, the cause of the bankruptcy of Northeast Special Steel was originally the financial distress brought by debt defaults. In this case, to get rid of the financial problems, the primary issue is to restore the broken capital chain, accelerate the cash flow to reduce the asset-liability ratio and relieve the debt burden. For some creditors, it is easy for them to ignore the importance of reor-ganization activities from the perspective of scientific management and decision-making within the firm. Instead, they often choose to reduce the asset-liability ratio by direct capital investment. This short-sighted behavior of reducing the ratio by increasing the value of the denominator is just a temporary solution, which not only wastes the capital, but also brings no benefits to the firm's efficiency for its management and reorganization.
In order to solve the above-mentioned problems concerning the reorganiza-

Organizational Restructuring and Human Resources Reconfiguration
As state-owned firms undertake many policy objectives and social functions such as, stabilizing social employment and increasing employment opportunities, maintaining social stability, promoting social equity, realizing national development strategies, and improving social welfare and security, this series of burdens has led the human resources management in state-owned firms to take on the "social person" hypothesis, rather than the "economic man" hypothesis of private interest pursuit. Therefore, after participating in the market, obvious incompatibility is likely to occur, and it is difficult to achieve competitive advantages compared to private firms in the market competition. Private firms, assuming sole responsibility for their profits or losses, always focus on economic profit and guide their HR management practices with cost control and efficiency priority principles. Therefore, agency theory considers state ownership the biggest obstacle to the smooth operation of the market economy.
Compared with private firms, state-owned firms have different characteristics in their HR management, such as politicization tendency and bureaucratic mode of thinking, disregard for HR management, scarce HR input, personnel redundancy, serious talent loss, lack of professional skills in management and production, and the focus on using administrative power to manage the employees. If the reorganization process does not treat these issues correctly, problems like organizational redundancy, over-complicated management chain, and overstaffing, may still surface, which are not helpful for the bankruptcy reorganization.
One problem concerns the practices of HR management in state-owned firms.
Due to the bureaucratic mode of thinking in state-owned firms, they tend to recruit highly educated and high-graded talents, with particular emphasis on po- For the second problem, the enterprise organizational structure reflects essentially the division of labor and cooperation between the members of the organization [16]. In order to form an effective and flexible organizational structure, and to archive consistency between the objective of the organization and the objective of the firm, the firm needs to make necessary adjustments to the organizational structure. The reorganization of the firm's organizational structure is not simply a random or even disorderly rearrangement, but a rearrangement of its elements, resources, and personnel according to certain organizational purposes. It involves the organizational function, the organizational level, the decision-making power, the management scope, the inter-departmental communicating flexibility, and the close correspondence between rights and responsibilities within the organization. These factors play a pivotal role in the operational activities of the firm.
Because the organizational structure of the reorganizing firm is often charac-terized by redundancy, rigidity, and occlusion, it is still necessary to take the market-centered principle in the process of organizational restructuring, and give full play to the fundamental role of competition mechanism in adjusting the organizational structure and optimizing the allocation of resources. It is necessary to reorganize the firm leadership structure in a timely manner, optimize the setting-up process of the organizational structure according to the functions and the purpose of the organization. To avoid overstaffing, it requires, firstly, a clear definition of the functions of each organizational level and department, an accurate determination of the number and standards of the jobs and positions, and the ensuring of the close correspondence between rights and responsibilities.
The organizational structure should not be too rigid, otherwise there would be a lack of communication between the departments, and, inefficiency in the management chain. The firm should formulate a feasible and reasonable organizational adjustment plan, and at the same time adhere to the step-by-step adjustment strategy. If the organizational structure is completely reorganized all-at-once, it is difficult for the firm to adapt to this change immediately with the current business conditions and the skill structure of the employees.

Conclusions
It is very important for firms to construct new management entities and operating mechanisms in the process of reorganization. In terms of the arrangement of control rights, the treatment of the problems of large state-owned firms like Northeast Special Steel that have lost their survival ability, attention must be paid to the issue of control rights arrangements, and the separation of ownership and control (or agency rights). According to the requirements of corporate governance structure, scientific evaluation and recruitment of professional directors and professional managers with relevant experience should be carried out, to improve the degree of managerial specialization.
In terms of the reconfiguration of human resources, the reorganizing firm must proceed in accordance with the laws and principles of market economy. It should increase its human capital development and investment, establish a demand-oriented recruitment mechanism, adhere to the efficiency-prioritized human resource allocation principle, and avoid administrative intervention and cronyism. The internal human resource management should be based on objective assessment and measurement of the employees' abilities and skills, and different adjustment methods should be adopted for different employees and positions to achieve demand-based recruitment.
In terms of organizational restructuring, it is still necessary to take the market-centered principle in the restructuring process, give full play to the fundamental role of competition mechanism in adjusting the organizational structure and optimizing the allocation of resources, and rearrange the elements, resources and personnel within the organization according to certain organizational purposes, in order to create a more efficient and flexible organization, and, to make the goals of the organization and the firm more consistent with each other. The firm should acquire a better grasp of the functional definition and the hierarchical division, the arrangement of the decision-making power, the management scope, the inter-departmental communicating flexibility, and the close correspondence between rights and responsibilities within the organization.