Chinese Company Shareholders Revolt Against Communist Control

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Tianjin Realty vote shows need for new oversight mechanisms at state companies

By Prof. Zhang Tianyu, School of Accountancy and Director of the Center for Institutions and Governance, CUHK Business School

Shareholders of low-profile Chinese property developer Tianjin Realty Development recently made news by voting to keep party politics out of the Shanghai-listed company's organizational structure. Such action has never been heard of before at any State-Owned Enterprise (SOE) in the history of China's economic modernization.

What actually happened was that shareholders holding more than 36% of the company’s stock rejected a motion to establish a Chinese Communist Party committee within the company. For the motion to pass, it needed two-thirds support, so the proposal failed by only a few percentage points.

The motion was proposed based on guidance from the party and the agency that supervises state assets. While party committees have existed within SOEs since they came into being, the fervor to include them in corporate governance structures was renewed in 2015 based on President Xi Jinping's wish to tighten supervision over state-owned companies, improve their efficiency and reduce corrupt practices within them.

What happened at Tianjin Realty appears to amount to a "rebellion" against this mandate to strengthen the party’s grip on state-owned groups. For those of us used to Western-style corporate governance, well-established company law and self-regulated markets, the mere presence of a political entity within a company may sound threatening or even terrifying. But in China, as well as in other one-party states, it is commonplace.

What we see in Tianjin Realty's case is the rise of an alternative voice that does not toe the party line. This is perceived as a bold move because going against the grain in China's political environment is inherently risky. In fact, no one knows how this unprecedented move will cost the company going forward.

Shareholder Confidence

Why was there a shift in the typical lopsided, sure-fire, pro-government voting pattern all of a sudden? It is unknown who voted for and against the motion. But looking at shareholders with equity stakes of less than 5%, a whopping 90% voted against the proposal.

These minority shareholders include professional money managers: UBS, the company’s second-biggest shareholder, has a 4.03% stake; a mainland private property developer has 2.81%; and a private individual owns 2.32%.

Professional investors tend to believe that they can efficiently monitor company performance and management activities without the interference of party committees. To them, the presence of a political body may post a threat to their autonomy in guiding the enterprise the way they want to, possibly in ways the Communist Party may not approve of.

On the other hand, the Chinese government's quest to tighten control over SOEs is a result of rampant corruption in these companies. It is no secret that many SOE managers and chairmen have been involved in squeezing resources from state assets, so political interference is the government's way of righting wrongs.

It is easy to fall under the assumption that this kind of conflict between market forces and political control is unique to China. But even in a free-market economy like the U.S., such conflicts have always existed. Rather than party control, political interference comes in the form of legal regulations on private business activities. The question is how to reduce conflict and make both sides happy.

The Chinese authorities could employ experts who are knowledgeable in modern economics to monitor SOE activities. The government should understand that modern companies are increasingly sensitive to political intervention as they become more exposed to Western-style corporate governance, especially those who have professional investors among their shareholders.

The best way to mitigate conflict and strengthen trust would be to hire professional bodies to represent the state, such as a high-quality auditor to look after the accounting numbers, and put professionals on the board of directors to monitor executives on behalf of Beijing. This would not only increase the state's credibility in its monitoring work, but also improve lines of communication between the state and SOEs.

Having said that, it is hard to see what happened at Tianjin Realty becoming a trend. However, it is helpful to ponder how the relationship between the Communist Party and modern enterprises can develop in a constructive way rather than escalate into deeper conflicts.

This article has been published on Nikkei Asian Review.

 

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12 COMMENTS

TONG Dandan
5/1/2017 5:23:10 PM
Many may wait to see what would happen to Tianjin Realty. The operation of SOEs usually rely heavily on preferential policies and easier access to local governments. It's hard to say whether Tianjin Realty would encounter implicit penalties.
TONG Dandan
5/1/2017 5:20:13 PM
The common sense of the presence of a political body in SOE is not about efficiency or preventing corruption; instead, its primary function might be guaranteeing political correctness at the cost of profitability.
TONG Dandan
5/1/2017 5:15:44 PM
In many SOEs, the secretary of the party committee and the CEO who is in charge of the operation are the same person, who is appointed by the party central committee. Thus, a political body has multiple functions in a SOE.
Xiji
4/28/2017 3:42:50 PM
However, the interest conflicts between private shareholders and state-owned shareholders will still exist. Maybe we should focus on how to align the interests rather than decrease the conflicts.
Xiji
4/28/2017 3:42:36 PM
The suggestion that the authorities could employ experts who are knowledgeable in modern economics to monitor SOE activities is feasible.
Xiji
4/28/2017 3:34:01 PM
I do think that this kind of conflict between market forces and political control is a trend. This case is a little special as the structure of the share of the companies is very divergent.
Qin
4/22/2017 11:12:23 PM
Why the interests of private shareholders and state-owned shareholder have to be conflicting? If they all want to develop the company, their interests should be consistent, and they could find a way to cooperate.
Qin
4/22/2017 11:11:52 PM
If the market is working effectively and the state-owned property could be protected, whether to establish the committee is not critical. But as we know, when shareholders are not fully represented, their benefits are more likely to be harmed.
Qin
4/22/2017 11:11:28 PM
The issue is not just about the conflict between the Community Party and the modern enterprises. The assumption is that the market is undergoing efficiently under the control of law. But this is not the reality in China.
K. Si
4/21/2017 3:04:18 PM
It is also possible that a stronger party committee can enhance the performance of the corporation if the committee is composed of professionals and technicians. With greater power and authority, the efficiency of such elite committee can be high.
K. Si
4/21/2017 2:58:57 PM
I guess many people are looking forward to see what consequences it may bring. It can be allowed if it shows positive consequences on the performance of the corporation, and at the same time helps to reduce the prevalence of corruption.
K. Si
4/21/2017 2:50:23 PM
If the purpose of strengthening control over the SOEs is to reduce corruption or other wrongdoings, then it may be achieved not by setting a stronger party committee but by introducing some better corporate governance structure or knowledge.
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