Archive for August, 2019|Monthly archive page

Update to Tricker Corporate Governance 4e

In some copies of the fourth edition of Bob Tricker’s Corporate Governance – Principles, Policies, and Practices, Figure 2.1 is incomplete.

This diagram shows the complete text.

Figure 2.1 CG4E FINAL

 

 

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The Corporate Governance of Huawei

When the Huawei case was written last year, for the fourth edition of Corporate Governance – Principles, Polices, and Practices, we did not anticipate the headlines that the company was about to attract. The original case was short, setting the scene for some interesting questions about corporate governance in China.

 

Case study 6.3 The Huawei Group

Huawei was founded in 1987 by Ren Zhengfei, a former electronics engineer in the People’s Liberation Army (PLA). During the 1980s and ’90s, the Chinese government saw the need to modernize telecommunications thought the country. Telephone exchange equipment needed electronics. Some companies in the industry negotiated joint ventures to link with foreign companies that had the technology: but they proved reluctant to divulge the latest technology. Ren took a different approach: his company obtained foreign hardware with its software, and then reverse engineered it to discover its secrets and replicate them.

In 1994, Huawei agreed to build a telecommunication system for the PLA; a relatively small project but crucial in political connections. Ren Zhengfei met Premier Jiang Zemin and convinced him that electronic switching-equipment technology was related to national security and that a nation that did not have its own switching equipment was like one that lacked its own military. Jiang agreed. In 1996, the government decided to support domestic telecommunications manufacturers and restrict access to foreign investors. The Huawei Group thrived and became a leading force in China’s creation of ‘smart cities’, bypassing the personal computer experience of Western nations and adopting smart phone technology as the basis for internet transactions and communication. Huawei became the largest manufacturer of telecommunications equipment in the world, overtaking the US-based Ericsson in 2012.[1]

Huawei was also expanding outside mainland China. In 1997, it signed a contract with Hong Kong’s Hutchinson Whampoa to provide a fixed-line network. In 1999, it opened an R&D centre in Bangalore, India, and in 2001 it opened four R&D centres in the USA. By 2005, Huawei’s international contracts exceeded domestic sales.

Huawei refers to itself as a private company and calls itself a ‘collective’, being owned by its employees. The nature of that ownership and the government’s continuing relationship with the company remain unclear.

 

Subsequent developments

Huawei is installing its technology in countries around the world. But concerns have been raised about the security of such systems, which could include software to obtain information and might prove a security risk. The fear was that since every Chinese company was subject to the Chinese judiciary system, which is not independent of the state, companies could be given orders by government officials.

In the United States, President Trump issued an order prohibiting Huawei from selling its systems in America. He subsequently prohibited US companies from supplying Huawei with electronic components. However, the British Prime Minister, Teresa May, approved the use of Huawei technology in the UK’s 5g network, having been advised that Britain had the counter-intelligence capability to meet any subversive interference in telecommunications.

In another issue of international interest, Huawei’s Deputy Chair and Finance Director, Meng Wanzhou, was arrested in Canada on a United States extradition warrant, which alleged that Huawei had broken various US laws. Meng is the daughter of Huawei founder Ren Zhengfei.

In an interview with CNN, Ren Zhengfei, speaking in Putonghua,[2] defended his company’s record, claiming that the United States boycott was because Huawei was now the largest telecommunications company in the world and its technology had outstripped American rivals. He claimed that Huawei was independent of the Chinese Government and made decisions on a commercial basis. Asked about his daughter, still under arrest in Canada, he said, that she was under house arrest and studying for her PhD. He claimed that the Canadian arrest was unlawful.

 

Comment

Viewing corporate governance as the way power is exercised over corporate entities, the Huawei case emphasizes the significance of the cultural context. Huawei is subject to Chinese company law and must provide information to relevant government authorities, in the same way that companies in the West must meet similar obligations. However, Chinese law and its law courts are not independent of the state but exist to ‘serve the people,’ which typically means the interests of the governing authorities, ultimately the Politburo of the Communist Party of China.

Nevertheless, although China is a one-party state, its economy is market-based, producing prodigious economic growth over the past twenty years. This has enabled the building of a major rail and motorway system; the creation of large new ‘smart cities based on information technology; and the launch of a ‘belt and road’ strategy to link China with trading partners throughout the Middle East and Europe.

Contrary to classical Communist doctrine, China permits the creation of corporate entities, recognizes private property, and has two highly successful stock exchanges (three if you include Hong Kong). A few Chinese companies are quoted in New York. Moreover, China now has an affluent, car-owning middle class.

Despite being the world’s largest telecommunications company, Huawei is privately owned. So it is not required publicly to disclose its ownership, which remains obscure. The company describes itself as a ‘collective;’ suggesting that employees own shares, although there is no evidence that they have any shareholder rights. The probability is that ownership is in the hands of the founder, his family and friends, senior executives, and possibly government agencies which have provided funding, including the People’s Liberation Army. In a recent interview, Ren said that the company had a management succession plan, which recognizes the need to provide for succession beyond the founder.

To appreciate the corporate governance of large private companies in China, the cultural context[3] is fundamental. It is different from the West. Since opening its economy to market forces, China has published a Companies Act, liaised with Western advisers on corporate governance, and produced a governance regime which reflects some aspects of Western approaches but includes aspects that are uniquely Chinese. Corporate governance with Chinese characteristics reflects the way business is done in China. Responsibility for decisions is often unclear, so is subsequent accountability. Personal relationships are very important. No one should lose face, even though everyone knows the situation. Control by the authorities is exercised less by clear mandated instruction, more by influence exercised quietly ‘through the window.’ The lack of clear job descriptions, with little written down, can be anathema to Westerners. Yet the incredible growth of the Chinese economy suggests that it works.

The Chinese Government recognized, when they launched the market-driven reforms, that corporate governance was vital. But unlike the West, where corporate governance tends to be seen as the means of regulating companies and controlling unacceptable behaviour, the Chinese see corporate governance as a means to economic growth and long-term success.

 

[1] www.forbes.com/sites/moorinsights/2017/12/04/ericsson-vs-huawei-whos-winning-the-5g-   race/#6821666a8aa5

[2] Putonghua is the official language of China, a version of classical Mandarin. The Chinese have many different dialects. In Hong Kong, for example, Cantonese is spoken, which is virtually unintelligible to Mandarin speakers; although written script is common to all.

[3] To delve more deeply into the cultural context see Tricker, Bob and Gregg L ,(2019), Understanding Corporate Governance in China, Hong Kong University Press, Hong Kong