Jul 11, 2017
The Battle of Ownership in Chinese Enterprises: The Case of Vanke


By An Ran, PhD Candidate, School of Accountancy, CUHK Business School

VanKe, the largest real estate developer in China, is driven to revolt by a high-profile takeover by Baoneng Group. Facing the risk of being kicked out from VanKe, its founder Wang Shi and his entire management team have experienced the chilliest winter during VanKe’s 32 years of golden life. For all other entrepreneurs in China, this battle provides a free lesson about ownership arrangement in Chinese enterprises.

In China where capital market is still developing and lacking a competitive executive labor market, entrepreneurs need to protect their own interest through institutional arrangements such as the ownership structure. While representing the investment of human capital, they have to learn how to play the balancing game with funding capital.

Since August 2015, the spat between China's largest property developer Vanke and its current secondly-largest shareholder Baoneng Group, continued to heat up. For investors familiar with VanKe, it is well known that from 2000 to 2015, China Resource Vanguard (CRV), a state-owned enterprise (SOE), is the largest shareholder of Vanke. For decades, VanKe and its largest shareholder have shared a harmonious relationship in which CRV only participated in important investment decisions without intervening in the company’s operation and management. The growth and development of VanKe not only sat the company on the “throne” in China’s real estate industry, but also brought fat profits to CRV. However, the seemingly happy tale ended when Baoneng Group, a company running real estate, logistics and high-tech businesses, rushed out to acquire VanKe’s shares. From that time onwards, investors witnessed a thrilling war of ownership between VanKe’s current management team (represented by Wang Shi) and Baoneng Group. The battle has become a hot spot on China’s capital market from 2015 to 2016.

VanKe’s Ownership Structure Evolvement

Established in 1984, VanKe has made dramatic achievements enough to make its peers jealous while making its founder, Wang Shi, proud. However, VanKe’s history has gone through several important steps of ownership structure reform. Tracing these reforms can shed light on the current ownership battle.

The first reform began in 1988 when VanKe finished shareholding structure transformation. After this reform, state ownership accounted for 60 percent while employee ownership accounted for the remaining 40 percent. However, it was also in this reform that Wang Shi, the founder of VanKe, gave up his ownership of the firm and chose to be a professional manager, sowing the seeds of the current takeover. In 1991, VanKe went public through IPO as one of the first listed firms in China. The IPO diluted state and employee ownership totally by 68 percent.

The second stage went from 1993 to 2011 when several shareholders tried to remove Wang Shi and his management team. The threat was resolved successfully by Wang Shi. In 2000, VanKe introduced CRV as its largest shareholder. From then on, the shareholder and Wang Shi’s management team created a tacit coordination model which brought about Vanke’s spring.

However, soon the company entered the third ownership structure stage which we called the “ownership war” with the high-profile takeover by Baoneng, followed by the new acquirer’s proposal to terminate VanKe’s entire management team. After that, other parties such as Evergrande Real Estate Group also joined the battle by buying enough shares of VanKe to become a large shareholder.

The Tension Behind VanKe’s Ownership Structure

The curtain finally came down when Shenzhen Metro, another SOE, joined the game and has now become the largest shareholder of Vanke. However, no matter who owns VanKe in the end, Wang Shi, the founder and soul of VanKe, will inevitably pay a high price in the battle. The costly lesson is related to two important tensions in VanKe’s ownership structure: decentralized ownership and the founder’s vacancy in the ownership structure.

After three stages of ownership structure reforms, VanKe is known for its decentralized ownership structure. By the end of 2014, about 60 percent of the company’s shares was controlled by various small shareholders; even the largest shareholder, CRV, only held 15 percent of outstanding shares. The real estate giant has been having a dispersed ownership structure for many years with no controlling shareholders. And the downside of a dispersed ownership structure is that it makes the firm fragile when facing a takeover.

As Hua Sheng, an economist, also one of independent directors in VanKe, said in an interview by The Beijing News (新京报), “The defense employed by VanKe’s management team when they faced their flaws in ownership structure is very disappointing. If Wang Shi had introduced several complementary institutional investors as large shareholders earlier, VanKe wouldn’t have faced outside hostile acquirers suddenly.”

Furthermore, if we look closer into VanKe’s dispersed ownership, we would see a vacancy of founder in the ownership structure. It could be the fatal mistake by Wang Shi when he decided to give up his ownership from the initial ownership structure reform. Even though he seemed to realize the issue and introduced an employee partnership scheme in 2014, allowing employees to use their bonuses to buy Vanke shares as a way to fend off any takeover, the scheme only accounted for 4.14 percent of the company, not enough to block off any hostile bid.

Although he advertised himself as a professional manager, in reality, Wang Shi plays the role of VanKe’s founder. Indeed, VanKe’s operation philosophy, transparent culture and well-developed corporate governance should be largely attributed to Wang Shi’s initiation and efforts. There might be many reasons behind Wang Shi’s choice of giving up his ownership from the beginning; however, such choice led to his loss of protection from holding ownership when facing outsiders’ takeover. What’s more, Wang Shi failed to build alternative institutions to protect his own human capital investment in VanKe, resulted in his ultimate failure.

Does being a professional manager necessarily mean giving up one’s ownership?

"In modern corporations, it is true that a professional manager is often separated from the firm’s ownership. However, this can only be realized when there is a highly developed executive labor market such as in the United States. With a competitive executive labor market, the balance between supplies and demands will reduce the specific value of professional managers to an enterprise," says Prof. Zhang Tianyu, Director of  Center for Institutions and Governance, CUHK Business School. 

"On the contrary, in China where a well-developed executive labor market has not been established, a professional manager who plays the role of founder in essence represents a highly-specific value to the enterprise. In this situation, the manager actually needs to hold control in the enterprise and uses his ownership to protect his or her specific value. This might be what Wang Shi failed to recognize at the very beginning," he says.

A Game Between Human Capital and Funding Capital

The nature of VanKe-Baoneng ownership battle boils down to the balancing game between human capital and funding capital.

An enterprise needs more than one party’s investment if it wants to develop further. Some invest in funding capital, such as CRV or Baoneng Group, while others in human capital, such as the founders of the enterprises. Though the market mechanism can improve efficient allocation of capital resources, it cannot solve the conflict between human capital and funding capital. Rather, it magnifies the conflict when outside capital holders try to acquire an enterprise and expel its founders, as in the ownership war between VanKe and Baoneng. During industrial civilization, the priority was always given to funding capital with the sole emphasis on maximizing shareholders’ interests. As a result, the value of human capital was undervalued and overlooked.

However, we have now entered a new era of “knowledge economy” where human capital becomes more and more important. The growing contribution to firm value gives human capital a chance to seek for an equal status with funding capital. A more desirable situation will be seen when human capital and funding capital cooperate to create a “win-win” outcome.

In order to achieve such cooperation, human capital would first need institutional protection such as holding ownership. In the absence of ownership protection, human capital holders need alternative institutions to protect their investments in the firm. A good example would be Google’s two-tier ownership structure which vests power in its co-founders Sergey Brin and Larry Page. For the class of shares held by common shareholders, each share gets one vote, whereas for the class of shares held by its co-founders, each share gets 10 votes. Thus, even though more than fifty percent of Google’s shares are held by outside owners, the real voting power is still in the control of the founders. As Page said in the “2004 Founders’ IPO Letter”, it is "a dual class structure that is biased toward stability and independence and that requires investors to bet on the team, especially Sergey and me."

Sergey Brin and Larry Page are to Google as Wang Shi is to VanKe, but with a very different ending. Failing to recognize the nature of the game between human capital and funding capital has exposed Wang Shi’s weakness. And for all other entrepreneurs, how to protect their own investment while cooperating with funding capital will be one of the most important lessons to avoid falling into the same trap of Vanke.

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1. 华生: 宝万之争考验市场主体与市场生态, 《新京报》, 2016年1月18日. http://blog.sina.com.cn/s/blog_48e91e520102x80h.html

2. 恒大让渡表决权 万科之争曲终, 新浪网,2017年3月16日. http://finance.sina.com.cn/stock/s/2017-03-16/doc-ifycnikk0910681.shtml

3. 万科之争根源是人格分裂型股权结构 王石身份错位, 新浪网, 2016年8月18日. http://finance.sina.com.cn/stock/s/2016-08-18/doc-ifxvcsrm1795782.shtml

4. Alphabet Investor Relations, “2004 Founders’ IPO Letter”. https://abc.xyz/investor/founders-letters/2004/ipo-letter.html



Please add your comments, insight, questions to further discuss this topic



K. Si
8/21/2017 4:43:03 PM
I do not see why there should necessarily be a conflict between financial capital and human capital. I guess that in a healthy governance structure these two forms of capital should both be valued and work together in a good manner.
K. Si
8/21/2017 4:38:10 PM
I hope I can get more information from this article regarding why Wang Shi, the founder and key manager of the Vanke group, decided to give up his ownership from the beginning.
K. Si
8/21/2017 4:33:44 PM
Undoubtedly large real estate firms in China faces a lot of challenges and crisis, not only from the market but also from the legislation and government sides.
8/19/2017 4:43:34 PM
Instead of protecting talented managers by giving them ownership, it is more important to continue to develop market and legal institutions to constrain the large shareholders in China. Otherwise, predation still shows up since large shareholders' power is much stronger.
8/19/2017 4:37:57 PM
As a founder and treating VanKe as his child, Wang Shi successfully shows that he needs fewer shares to be motivated to run the company and this makes him able to diversify the ownership to gain more outside funding and lower transaction costs.How he balances the risk of being acquired?
8/19/2017 4:27:08 PM
It seems a bit hard to understand why without a highly developed executive labor market, the largest shareholder will not cherish the talented managers even more since there is no alternative.
7/20/2017 1:56:47 PM
Good narrative in the beginning, but lost me in the end.