transparency and opaqueness in the chinese ict sector: a ...€¦ · regulatory commission (csrc)...

Asian Journal of Comparative Law 12 (2017) pp 41ndash80doi101017asjcl20178copy National University of Singapore 2017First published online 8 May 2017

Transparency and Opaqueness in the ChineseICT Sector A Critique of Chinese andInternational Corporate Governance Norms

Colin HAWESUniversity Technology of Sydney Australiacolinhawesutseduau

Grace LIUniversity Technology of Sydney Australiagraceliutseduau

AbstractThis article critiques the current Chinese corporate governance framework and the OECDPrinciples of Corporate Governance (OECD Principles) on which the Chinese frameworkis largely based through detailed analysis of public disclosures by four prominent Chineseinternet and communications technology (ICT) firms These include State-controlled firms(China TelecomampChinaMobile) mixed ownership (ZTE) and privately-controlled firms(Huawei Technologies) The article argues that neither Chinese nor internationalcorporate governance norms deal adequately with the complex group structures that areso common among large Chinese firms It also reveals deficiencies in the rules onindependent directors supervisory committees and Chinese Communist Party committeesas they are applied by Chinese ICT firms The article concludes with reform proposals thatwould provide more useful information and better protection to outside investors andpublic stakeholders in the unique Chinese corporate environment

i setting the contextAmong Western policymakers and in media commentaries confusion generally reignssupreme when it comes to discussing Chinese corporations Private Chinese firms arefrequently conflated with Chinese government entities despite the lack of convincingevidence and Chinese State-controlled business groups are often assumed to be nodifferent from State organs blindly following the Chinese governmentrsquos orders with littleconcern for their own interests1This confusion partly stems from the complex ownership

Dr Colin Hawes Associate Professor Faculty of Law University of Technology Sydney Australia Dr Grace Li Associate Professor Faculty of Law University of Technology Sydney Australia1 The most high profile statements of this kind were made in a report published by the Permanent Select

Committee on Intelligence of the United States Congress in 2012 see Mike Rodgers and DutchRuppersberger lsquoInvestigative Report on the US National Security Issues Posed by Chinese

httpswwwcambridgeorgcoreterms httpsdoiorg101017asjcl20178Downloaded from httpswwwcambridgeorgcore IP address 5439106173 on 22 Jul 2020 at 120017 subject to the Cambridge Core terms of use available at

and corporate governance structures of most largeChinese firms which developedwithina rapidly changing political and legal environment necessitating constant adaptation andpragmatic compromise2 But it also results from a lack of detailed analysis of howindividual Chinese firms apply corporate governance rules to their specific situations

There are certainly numerous books and articles on Chinese corporate governancebut most focus on the general laws regulations and problems of implementation orengage in broad statistical surveys of large numbers of firms without analyzing andcomparing the ways that selected individual firms have structured their governancewithin or beyond the legal framework3 Most previous studies also share the tendencyof comparative corporate governance research to restrict their focus to public listedcompanies or in the case of China the listed arms of large mainly State-controlledcorporate groups4 Certainly listed corporations are subject to stricter corporategovernance regimes due to the fact that they issue shares to retail investors but to focusonly on listed companies overlooks some of the more innovative ways that privateChinese firms have structured their governance systems5 It also downplays the fact

Telecommunications Companies Huawei and ZTErsquo (US House of Representatives 8 October 2012)lthttpsintelligencehousegovsitesintelligencehousegovfilesdocumentshuawei-zte20investigative20report20(final)pdfgt accessed 1March 2017 (PSC Report) See also Evan SMedeiros Roger CliffKeith Crane and James C Mulvenon lsquoA New Direction for Chinarsquos Defense Industryrsquo (RANDCorporation 2005) ltwwwrandorgcontentdamrandpubsmonographs2005RAND_MG334pdfgtaccessed 1 March 2017 on which the PSC Report heavily relied Popular accounts of the ChineseCommunist Party (CCP) also give this impression Rowan Callick Party Time Who Runs China andHow (Black Inc 2013) Callick states that the CCP has lsquoultimate approval over every investment andbranches in all state-owned enterprises and 85 of private enterprisesrsquo at 142-43 He also quotes ChengLi an American expert on Chinese politics as saying lsquoAll the statersquos assets are the Partyrsquos in reality if notin theoryrsquo at 43

2 For a good introduction to this ownership complexity see CurtisMilhaupt andWentong Zhang lsquoBeyondOwnership State Capitalism and the Chinese Firmrsquo (2015) 103 Georgetown Law Journal 665

3 The literature on Chinese corporate governance is too extensive to cite comprehensively here but for afew relatively recent monographs and edited collections see Benjamin L Liebman and Curtis J Milhaupt(eds) Regulating the Visible Hand The Institutional Implications of Chinese State Capitalism (OxfordUniversity Press 2015) Jean Jinghan Chen A Primer on Corporate Governance China (Business ExpertPress 2015) Ding Chen Corporate Governance Enforcement and Financial Development The ChineseExperience (Edward Elgar 2013) Michael Tan Corporate Governance and Banking in China(Routledge 2013) Lin Zhang Venture Capital and the Corporate Governance of Chinese ListedCompanies (Springer 2012) Jing Leng Corporate Governance and Financial Reform in ChinarsquosTransition Economy (Hong Kong University Press 2009) Chun Liao The Governance Structures ofChinese Firms Innovation Competitiveness and Growth in a Dual Economy (Springer-Verlag 2009)Yuwa Wei Securities Markets and Corporate Governance A Chinese Experience (Ashgate 2009)Masao Nakamura (ed) Changing Corporate Governance Practices in China and Japan Adaptations ofAnglo-American Practices (Palgrave Macmillan 2008) Guanghua Yu Comparative CorporateGovernance in China Political Economy and Legal Infrastructure (Routledge 2007) Ross Garnaut(ed) Chinarsquos Ownership Transformation Process Outcomes Prospects (World Bank 2005)

4 For example Lin (n 3) Jing (n 3) Wei (n 3) Nakamura (n 3) Yu (n 3) Other studies focus exclusively onlarge state-owned enterprises (SOEs) such as Liebman and Milhaupt (n 3) or downplay the distinctionsbetween SOEs and private firms for example Milhaupt and Zhang (n 2)

5 There are certainly some excellent studies on the privatization of Chinese business firms but only fewexamine the corporate governance structures of individual private firms in detail See for exampleNicholas R Lardy Markets Over Mao (Peterson Institute for International Economics 2014) Zeng JinState-Led Privatization in China (Routledge 2013) Jie Chen and Bruce Dickson Allies of the StateChinarsquos Private Entrepreneurs and Democratic Change (Harvard University Press 2010) Bruce DicksonWealth into Power The Communist Partyrsquos Embrace of Chinarsquos Private Sector (Cambridge UniversityPress 2008) Kellee S Tsai Capitalism Without Democracy The Private Sector in Contemporary China(Cornell University Press 2007) Shahid Yusuf et al Under New Ownership Privatizing Chinarsquos State-Owned Enterprises (Stanford University Press 2006)

42 as i an journal of comparat i v e law


that many listed Chinese firms are controlled by unlisted parent corporations that donot follow the same corporate governance rules6 In other words many of the uniquecorporate governance practices that differentiate Chinese from non-Chinese firms areonly visible among private firms and powerful unlisted State enterprise groups

This article seeks to unravel the structures of four large Chinese internet andcommunications technology (ICT) firms in an effort to bring more clarity to why thesefirms chose their governance structures and what problems have resulted from theirchoices It also considers whether these corporate governance structures comply withinternational corporate governance principles and Chinese regulations and if sowhether those principles and regulations provide the optimal framework to ensure thatlarge corporations are appropriately governed in China

We take the OECD Principles of Corporate Governance (OECD Principles) issuedin 1999 and revised in 2004 as the basis of our analysis of the four selectedcorporationsrsquo governance frameworks7 The OECD Principles have been particularlyinfluential in prompting governments to update their corporate governanceframeworks including in China For example in 2011 the China SecuritiesRegulatory Commission (CSRC) published a self-assessment report on the extent towhich Chinarsquos corporate governance framework for listed companies complied withthe OECD Principles8 The CSRC Report set out the relevant Chinese corporate lawsregulations and listing rules in great detail giving the impression that all the OECDPrinciples have been addressed While noting that lsquoenforcementrsquo will remain a majorchallenge the report suggested that there are no longer any significant deficiencies inthe Chinese legal framework when measured against the OECD benchmarks9

Drawing from the key OECD Principles we focus on four issues The first is theownership structures of these corporations and the rights of their shareholders based onthe principle that lsquothe corporate governance framework should protect and facilitate theexercise of shareholdersrsquo rightsrsquo10 Second we explore the role of the board of directorsin relation to the senior executive and other governance bodies within each corporationreflecting the principle that good corporate governance should involve lsquoeffectivemonitoring of management by the boardrsquo and accountability of the board to thecompany and shareholders11 Third given the fact that a Chinese Communist Party(CCP) BranchCommittee is present in the majority of large Chinese corporations

6 For a description of this typical structure see Li-Wen Lin and Curtis J Milhaupt lsquoWe Are The (National)Champions Understanding the Mechanisms of State Capitalism in Chinarsquo 65 Stanford Law Review 697716-21

7 OECD lsquoOECD Principles of Corporate Governancersquo (OECD 30 November 2015) ltwwwoecdorgdafcaprinciples-corporate-governancehtmgt accessed 1 March 2017 (OECD Principles) There are alsomodified principles for state-owned enterprises the lsquoOECD Guidelines on Corporate Governance ofState-Owned Enterprisesrsquo (OECD 19 November 2015) ltwwwoecdorgdafcaguidelines-corporate-governance-SOEshtmgt accessed 1 March 2017 (OECD SOE Guidelines)

8 OECD-China Policy Dialogue on Corporate Governance lsquoCorporate Governance of Listed Companiesin China Self-Assessment by the China Securities Regulatory Commissionrsquo (OECD 9 September 2011)ltwwwoecdorgchinacorporategovernanceoflistedcompaniesinchinahtmgt accessed 1 March 2017(CSRC Report)

9 ibid 410 OECD Principles (n 7) II and III11 OECD Principles (n 7) VI

transparency and opaqueness in the chinese ict sector 43


regardless of their ownership structure we give particular attention to the role of theCCP within each corporation and its interaction with corporate management andorshareholders Finally disclosure and transparency regarding corporate finances andmanagement policies is a key principle of effective corporate governance12 and in ourdiscussion we note the availability (or otherwise) of public information about eachcorporation and the consequences that can follow from the failure of Chinesecorporations to clarify their ownership control and governance structures

In our conclusion we suggest ways in which each corporation could better complywith the OECD Principles and note the disjunctions between the current Chineseregulatory framework and those Principles Where there are differences between thepractices of the selected corporations and the OECD Principles we explain whetherthose differences are due to the unique features of the PRCCompany Law and the PRCCode of Corporate Governance of Listed Companies (or in the case of Hong Kong-listed corporations the Corporate Governance Code as set out in Appendix 14 to theHong Kong Securities Exchange Listing Rules) or whether they result fromthe individual corporationrsquos own choices13 Finally we propose a modification of thecurrent Chinese corporate governance system to account for the unique features of theChinese business environment

This article focuses only on ICT firms ICT is an umbrella term that includes anycommunication device or application as well as the various services and applicationsassociated with them It is an expansive term that stresses the role of unifiedcommunications and the integration of telecommunications computers and audio-visual systems which enable users to access store transmit and manipulateinformation14 ICT firms include both telecom service providers and internetcommunications equipment manufacturers

We have chosen to focus on ICT firms for several reasons First the telecom industry isone that has expanded dramatically over the past two decades To give some briefstatistics the number of mobile phone users in China grew from around 47000 in 1991to over 12 billion by late 2013 and the number of internet users grew from effectivelyzero in the early 1990s to around 632 million by 201415 The corresponding expansion

12 OECD Principles (n 7) V13 China Securities Regulatory Commission (CSRC) lsquoCode of Corporate Governance for Listed Companies

in Chinarsquo (CSRC 7 January 2001) ltwwwcsrcgovcnpubcsrc_ennewsfactsrelease200708t20070810_69223htmlgt accessed 1 March 2017 (PRC Code of Corporate Governance) Hong KongSecurities Exchange lsquoCorporate Governance Codersquo (HKEX 1 April 2003) ltwwwhkexcomhkengrulesreglistrulesmbrulesdocumentsappendix_14pdfgt accessed 1 March 2017

14 Roger Silverstrong et al lsquoListening to a long conversation an ethnographic approach to the study ofinformation and communication technologies in the homersquo (1991) 5(2) Cultural Studies 204

15 Statistics for internet users are available at China Internet Network Information Center lsquo34th StatisticalSurvey on Internet Development in Chinarsquo (Cyberspace Administration of China July 2014) ltwwwcacgovcnfilespdfhlwtjbghlwlfzzktjbg034pdfgt accessed 15 January 2015 For recent mobile phonefigures see Xinhua lsquoChinarsquos Mobile Phone Users Hit 122 Billionrsquo Xinhua Online (China 21November2013) lthttpnewsxinhuanetcomenglishchina2013-1121c_132907784htmgt accessed 15 January2015The same report notes that fixed line phones declined to 269million in 2013 For earlier statistics onmobile phone users see Ministry of Industry and Information Technology (MIIT) lsquoThe Development ofMobile Communications Prior to 2000 [2000 nian qian yidong tongxin fazhan qingkuang]rsquo(MIIT 10 January 2001) ltwwwmiitgovcnn1146312n1146904n1648372c3484163contenthtmlgtaccessed 15 January 2015



and restructuring of ICT firms provides an excellent case study of the need to create moresophisticated corporate governance processes and structures as a business developsSecond the industry contains a mix of ownership forms with telecominternetservice providers remaining under majority State ownership but equipmenthardwareproducers now dominated by private or mixed ownership businesses Third theUS and other governments have been particularly vociferous in declaring their suspicionsabout Chinese telecom and internet hardware manufacturers such as HuaweiTechnologies and ZTE which are two of the firms discussed in this article16 Yet thesesuspicions are based on unsound evidence and speculation rather than solid analysisof these firmsrsquo corporate governance structures and activities By comparing thesetwo purportedly private firms with two State-controlled telecom firms the majordifferences in their ownership and control should become immediately apparent toobjective observers Finally limiting the discussion to one industry brings focus to thetopic rather than rashly trying to cover several industries with diverse histories andregulatory environments

ii corporate governance of state-ownedtelecom firms

In this part we examine two major Chinese State-owned telecommunicationscorporations in detail ndash China Telecom and China Mobile We focus on the four keyareas of corporate governance identified in the introduction namely share ownershipand rights board composition and senior executive appointments Communist Partycommittees within firms and disclosure of corporate information to the public

A Brief History of China Telecom and China Mobile

China Telecom originated as the telephone service arm of the PRC Ministry of Postand Telecommunications (MPT) but was spun off from the MPT as a State-ownedenterprise (SOE) in 199417 This was the first stage in a gradual process that separatedthe governmentrsquos regulator MPT from telecom service providers created several newservice providers and increasingly encouraged commercialization and marketcompetition between these providers As the discussion below demonstrateshowever after twenty years of reform there are still close links between thegovernment and the three biggest telecom corporations

During the first stage China Unicom was formed as a competitor to China Telecombut initially struggled to make headway due to the strong personal links between theMPT and China Telecomrsquos management18 However in 1997 the MPT was mergedwith the former Ministry of Electronic Industry (MEI) to form a new regulator the

16 PSC Report (n 1) vi-vii17 Angus Young et al lsquoRegulatory Multiplicities in Telecommunications Reforms in Indonesia and Chinarsquo

(2005) 2 Macquarie Journal of Business Law 13518 Grace Li lsquoMoving Towards Unsustainability A Study of the Chinese Telecommunications Regulationrsquo

(2008) 1 International Journal of Private Law 47



Ministry of Information Industries (MII)19 MEI had been closely associated with ChinaUnicom and influenced by the new balance of power the newly merged Ministry soonbegan to promote more vigorous competition by breaking up China Telecom into fourseparate companies in 1999-2000 a smaller China Telecom (focusing on fixed lineservices) ChinaMobile (for mobile phone services) China Satellite (for satellite services)and ChinaNetcom (for internet and paging services) A further company China Tietongwas formed by Chinarsquos Ministry of Railways to focus on internet services20

However this restructuring did not noticeably increase competition as most of thenew companies were operating effective monopolies in different subsectors of thetelecom industry The situation was partly remedied in 2002 when the new ChinaTelecom was further divided into two separate corporations ndash China Telecom Northand China Telecom South Then through a process of asset sales and opening up ofmarket sectors all seven telecom firms began to actively compete for customers21

Ironically the fierce competition between these new firms coupled with a moreliberalized mergers and acquisitions environment resulted in consolidation of thetelecom market back to three major corporations by 2008 China Netcom took overChina Telecom North and was then absorbed into China Unicom China Tietong wastaken over by China Mobile and China Telecom continued to capture much of thetelecom and internet market in the south22

Despite this complex deregulation and commercialization process all three of theremaining telecom service providers in China are still majority controlled by the Chinesegovernment At the same time they have all listed their shares on public securitiesmarkets either in China or overseas and they claim to have adopted the standards ofcorporate governance required for listed companies Yet as we will argue continuinggovernment ownership and control has led to anomalies in the way that these telecomcorporations structure and manage themselves which detract from their assertions thatthey are complying with international corporate governance norms Due to scope andlength considerations we will focus on the corporate governance practices of the twolargest telecom service providers China Telecom and China Mobile23

B China Telecom Corporation Ownership Structure

As noted above China Telecom has a long history but in its current incarnation it wasregistered as China Telecommunications Group Corporation (CT Group) on May 17200024 As an integrated information service provider China Telecom provides

19 ibid20 China Tietong lsquoCorporate Profile [Gongsi jieshao]rsquo (China Tietong) ltwwwchinatietongcomWeb

Aboutusa20160907143009shtmlgt accessed 30 March 201521 Li (n 18)22 ibid China Satcom now a subsidiary of China Aerospace Science and Technology Corporation focuses

mainly on satellite communications and broadcasting rather than providing telecom and internet servicesto consumers China Satellite Communications Co Ltd lsquoCompany Profilersquo (China Satcom) lthttpenglishcsatspacechinacomn931656n931661indexhtmlgt accessed 1 March 2017

23 Young et al (n 17)24 China Telecom lsquoAbout China Telecomrsquo (China Telecom 2015) ltwwwchinatelecomcomcncorp01

indexhtmlgt accessed 18 January 2015



customers with broadband internet access mobile communications informationtechnology applications and fixed-line telephone services CT Group has subsidiarydivisions in all of Chinarsquos provinces and regions but it has divided its core and secondarybusinesses between two major listed subsidiaries China Telecom Corporation Limited(CT Corporation) and China Communications Services Corporation Limited (CCS) CTCorporation listed lsquoHrsquo shares in Hong Kong and American Depositary Receipts in NewYork in 2002 whilst CCS listed lsquoHrsquo shares on the Hong Kong Stock Market in 200625

CT Corporation claims to be the worldrsquos largest fixed line telecom and broadbandservices provider By the end of 2013 the company had about 156million fixed accesslines in service over 100 million fixed line broadband subscribers and approximately186 million mobile subscribers26

By contrast CCS provides integrated telecom infrastructure services includingplanning consulting design engineering construction and project supervisionbusiness process outsourcing services including maintenance and distribution oftelecommunications services and products and facilities management and othersystems and internet integration services It is interesting to see that both ChinaMobileand China Unicom are CCSrsquos customers and minority shareholders This creates anunusual situation where these two companies are using services provided by their directcompetitor in the same market which certainly does not appear very often in telecomindustries elsewhere in the world In addition CCS also provides services to otherdomestic Chinese customers including government agencies industrial customerssmall and medium enterprises as well as overseas customers27

Even though CT Corporation and CCS are listed companies CT Group maintainsmajority control over both of them It holds 7089 of the shares of CT Corporationshares and 5139of the shares of CCS Only 1715of CTCorporationrsquos shares and3453 of CCSrsquos shares are held by members of the public The balance of shares inthese two subsidiaries are held by various Chinese State-owned institutional investorsand in the case of CCS China Mobile holds 878 and China Unicom holds 34128

Figures 1 and 2 show the distribution of shareholdings for CT Corporation and CCSCT Group itself is a 100 SOE directly under the PRC State Council and it is

administered by the State-Owned Assets Supervision and Administration Commission(SASAC)29 Though it is the holding company for the two listed corporations CCS andCT Corporation CT Group is not a listed company so publicly available informationregarding CT Group is limited to what it chooses to post on its website along withsome indirect information disclosed by its listed subsidiaries This is a common issue

25 ibid26 China Telecom lsquoCompanyOverviewrsquo (China Telecom 2014)ltwwwchinatelecom-hcomengcompany

company_overviewhtmgt accessed 18 August 201427 China Communications Services Corporation Limited lsquoBusiness Overviewrsquo (China Communication

Services Corporation Limited) ltwwwchinaccscomhkenaboutprofilephpgt accessed 18 August 201428 China Telecom Corporation lsquoAnnual Report 2013rsquo (China Telecom 2013) 47 ltwwwchinatelecom-h

comenirreportannual2013pdfgt accessed 1 March 2017 and CCS Corporation lsquoAnnualReport 2013rsquo (China Comservice 2013) 51 ltwwwchinaccscomhkenirreportsar2013ar2013pdfgtaccessed 1 March 2017

29 The full list of SASAC-administered enterprises is available at SASAC lsquoList of Corporationsrsquo (SASAC20 December 2016) ltwwwsasacgovcnn86114n86137indexhtmlgt accessed 1 March 2017



with State-controlled Chinese corporate groups their listed subsidiaries comply withexchange disclosure requirements to the letter but the ultimate controlling entityremains partly hidden in the background obscuring the true locus of control fromordinary public investors30

The complex overlap between CT Group and its subsidiaries affects its wholecorporate governance framework most notably the board structures of each companyin the group and the appointment of senior executives in the major subsidiaries as wewill demonstrate below

Figure 1 CT Corporationrsquos Shareholders

Figure 2 CCS Corporationrsquos Shareholders

30 See Lin and Milhaupt (n 6) section II



C China Mobile Ownership Structure

After meteoric growth China Mobile currently has the worldrsquos largest mobile phonenetwork and the worldrsquos largest mobile customer base China Mobile originated as aHong Kong and New York-listed corporation in 199731 The controlling shareholderis a company registered in the British Virgin Islands (BVI) which in turn is wholly-owned by China Mobile Communications Group Corporation (CMCC) a mainlandChinese SOE Through the BVI subsidiary CMCC controls 7407 of the listedcompany China Mobile Limited (referred to as CM Ltd below) The other 2593 ofCM Ltdrsquos shares are held by members of the public32 CM Ltd in turn controls 38telecom service subsidiaries throughout mainland China and Hong Kong33 Figure 3gives a schematic diagram of CM Ltdrsquos share structure

Figure 3 CM Ltd Share Structure

31 Its shares were listed in Hong Kong and then partially sold on the New York Stock Exchange in the formof American Depositary Receipts

32 ibid China Mobile lsquoAbout China Mobile Overviewrsquo (China Mobile Limited) ltwwwchinamobileltdcomenaboutoverviewphpgt accessed 29 August 2014 When the company was first formed in 1997both CMCC and China Telecom held large stakes of its shares but in 2000 as part of the Chinesegovernmentrsquos attempt to promote competition in the telecom industry China Telecomrsquos shares weretransferred to CMCCChina Telecom (Hong Kong) Limited lsquoAnnouncementrsquo (China MobileLimited 12 May 2000) ltwwwchinamobileltdcomenirannouncements20000514pdfgt accessed 28August 2014

33 lsquo2013Annual Report on Form 20-Frsquo (ChinaMobile Limited 25April 2014) ltwwwchinamobileltdcomenirreportsar20132013_20fpdfgt accessed 28 September 2014



Despite the greater complexity of the corporate structure ndash with an interposed BVIcorporation that was probably necessary to allow the company to list its shares onthe NYSE ndashwe see again a listed Hong Kong subsidiary controlled by a large mainlandChinese SOE group

D Boards of Directors at the Major Subsidiaries of China Telecom andChina Mobile

There is a great deal of overlap between the senior management of these two firmsrsquoparent companies and the Boards of their major subsidiaries Looking first atChina Telecom Grouprsquos two listed subsidiaries CT Corporation has established aboard of directors which currently includes 12 members Of these seven are executivedirectors one is a non-executive director and the other four are lsquoindependentrsquodirectors34 This means that CT Corporation complies with the CSRCrsquos requirementthat at least one-third of a listed Chinese companyrsquos directors be independent35

CT Corporationrsquos independent directors appear to be highly experienced businessleaders or business academics although one of them Madam Laura ChaMay Lung isa Hong Kong Delegate to the 12th National Peoplersquos Congress of the PRC and aMember of the Executive Council of the Government of the Hong Kong SpecialAdministrative Region This may create a conflict of interest when China Telecomdeals with regulatory issues in Hong Kong36 The non-executive director is Zhu Weiwho is currently the Chairman of Guangdong Rising Assets Management (a State-owned financial services firm that is one of the domestic shareholders of CTCorporation) This shareholding relationship means that Zhu Wei is notindependent of CT Corporation but he has never been an employee or manager ofCT Corporation37

However the majority of CT Corporationrsquos Board are executive directors servingsimultaneously as senior managers of the company There is no separation between theCEO and the Chairman of the Board with both roles currently occupied by WangXiaochu something that is not recommended by the OECD Principles as it limits theability of the Board to monitor the executives38 There is no doubt that all the executivedirectors have been appointed by CT Group as they all concurrently have seniorexecutive positions in CT Group as well Wang Xiaochu is Chairman of CT Groupand the other 6 directors are either President or Vice Presidents of CT Group39

34 China Telecom lsquoManagement Team [Guanli tuandui]rsquo (China Telecom) ltwwwchinatelecomcomcncorpldcycsindexhtmlgt accessed 28 October 2014

35 CSRC lsquoGuidelines for Introducing Independent Directors to the Board of Directors of Listed Companiesrsquo(Zhengjianfa [2001] No 102 CSRC 2001) ltwwwcsrcgovcnpubcsrc_ennewsfactsrelease200708t20070810_69191htmlgt accessed 1 March 2017 Donald C Clarke lsquoThe Independent Director inChinese Corporate Governancersquo (2006) 31 Delaware Journal of Corporate Law 125

36 China Telecom lsquoCompany Directorsrsquo (China Telecom) ltwwwchinatelecom-hcomencompanydirectorsphpgt accessed 28 October 2014

37 ibid38 OECD Principles (n 7) 63-63 (annotation to VIE)39 China Telecom lsquoCompany Executivesrsquo (China Telecom) ltwwwchinatelecomcomcncorpldcycsindex

htmlgt accessed 28 October 2014



The situation at CCS is a bit more complex The CCS Board of Directors has ninemembers of whom three are listed as executive directors two as non-executives andfour as independent directors This means that CCS does appear to have a majority ofnon-executive directors and the independent directors can in theory outvote theexecutives by four votes to three However two details cast doubt on the trueindependence of the CCS Board from management and from CT Grouprsquos controlFirst one of the lsquoindependentrsquo directors Wei Leping was formerly an executive vice-president at CT Corporation and senior engineer at CT Group and is currentlyChairman of the Science and Technology Advisory Committee of CT Group With thisbackground and present position it is not clear why he is listed as an independent directoras he clearly has very close ties to the majority shareholder CT Group Second CCS alsolistsWangXiaochu the current Chair of CTGroup andChairCEOofCTCorporation aslsquoHonorary Chairrsquo of the CCS Board While the website notes that Wang is not a lsquomemberof the Boardrsquo and does not have any power or right to vote onmatters discussed by theCCSBoard it is highly likely that the actual Board members (except possibly the two non-executives from other companies) will defer to his opinion The fact that Wangrsquos name isplaced at the top of the list of CCS lsquoDirectors Supervisors and Managementrsquo on thecompanyrsquos website suggests that his role will be more than purely ornamental40

Clearly there is a great deal of overlap between the management of CTCorporation CCS and CT Group with the parent corporation exerting acontrolling influence Although formal annual general meetings are held by both CTCorporation and CCS for their shareholders to elect board members and in theoryminority shareholders with 3 of the votes could propose candidates for the Board41

in practice it is certain that all the directors are nominated by CT Group The onlyexceptions are two non-executive directors at CCS and one at CT Corporation whoare nominated by large minority shareholders

Turning to CMCC the Board of Directors of its main subsidiary CM Ltd currentlycomprises 10 directors including six executive directors and four independent directors42

All six executive directors are concurrently senior executives of the SOE parent CMCCexcept forHuangWenlin who ceased to be a director of CMCC in June 2014 Xi GuohuatheChairman and executive director of CMLtd is Chairman of the Board ofDirectors andCommunist Party Secretary of CMCC and Li Yue the CEO of CM Ltd is President andDirector of CMCC The three other Vice Presidents of CM Ltd are also Vice Presidents ofCMCC43 While CM Ltdrsquos four independent directors are all highly distinguished andexperienced business leaders they are clearly in the minority on the Board

40 CCS Corporation lsquoDirectors Supervisors and Managementrsquo (China Comservice) ltwwwchinaccscomhkencgmanagementphpgt accessed 28 October 2014

41 Zhong Hua Ren Min Gong He Guo Gongsi Fa (中华人民共和国公司法) [PRC Company Law](promulgated by the Peoplersquos Congress Standing Committee 28 December 2013) Order No 18 (PRCCompany Law) art 102

42 China Mobile lsquoCorporate Governance Report 2014rsquo (China Mobile Limited) ltwwwchinamobileltdcomenaboutcgphpgt accessed 1 September 2014

43 China Mobile lsquoBoard of Directorsrsquo (China Mobile Limited) ltwwwchinamobileltdcomenaboutdirectorsphpgt accessed 1 September 2014 ChinaMobile lsquoCorporate executive structurersquo (ChinaMobileLimited) ltwwwchinamobileltdcomenaboutlistofdirectorsphpscroll2title=1gt accessed 1 September2014



E Boards of Directors at Parent Companies of China Telecom andChina Mobile

Since most of the directors of the major subsidiaries of both CT Group and CMCC areappointed by their parent companies it is relevant to ask how these two parentcompanies appoint their own senior management and what their Board structures areUnlike the listed subsidiaries this information is much harder to locate and it is notclear whether the two firms comply with either the OECD Principles or even the PRCCompany Law

Though it calls itself a lsquogroup companyrsquo (jituan gongsi) it is not clear whether CTGroup is registered as either a limited liability or joint stock company under the PRCCompany Law Certainly it does not comply with the requirement of the PRCCompany Law to have a board of directors of at least three for a limited liabilitycompany (or at least five for a joint stock company)44 CT Group only lists twodirectors (dongshi) on its website ndash Wang Xiaochu the Chair and Yang Jie GroupPresident The other eight members of CT Grouprsquos lsquomanagement teamrsquo are listed asVice-Presidents but are not directors45 The PRC Company Law does contain aseparate chapter of provisions for lsquowholly State-owned companiesrsquo (Arts 65-71) butthese do not state that a company can dispense with a board of directors only that theboard members should be elected by SASAC rather than at a shareholdersrsquo meeting(Article 68) This lack of a full board of directors probably stems from CT Grouprsquoshistory as a SOE Many of Chinarsquos SOEs were originally formed before the PRCCompany Law required all corporations to establish boards and even now they havenot all set up modern corporate governance structures46 SASAC itself passed aprovisional regulation in 2004 which states that boards of directors would beintroduced in centrally administered SOEs on an experimental basis and all SOEsshould have established boards by 200747 The provisional regulation also states thatlsquoat least tworsquo of the directors on these SOE boards should be lsquoexternal directorsrsquo inother words not employees of the company CT Group seems to have ignored thisrequirement as well as both of its current directors are longstanding employees of CTGroup and its subsidiaries48

44 PRC Company Law art 7545 China Telecom lsquoManagement Team [Guanli tuandui]rsquo (China Telecom) ltwwwchinatelecomcomcn

corpldcycsindexhtmlgt accessed 21 September 201446 One official report from 2008 stated that among business enterprises controlled by the central

government only 642had restructured into corporations This was an improvement since 2002 whenjust 304 of state enterprises had become corporations Wang Zheng lsquoReforming state enterprisesTackling difficulties head on will pave the way [Guoqi gaige gongjian ponan lu geng kuan]rsquo (ThePeoplersquos Daily [Renmin ribao] 3 October 2008) lthttpfinancepeoplecomcnGB713648127083htmlgt accessed 30 March 2015

47 SASAC Guanyu Zhongyang Qiye Jianli he Wanshan Guoyou Duzi Gongsi Dongshihui ShidianGongzuo de Tongzhi (关于中央企业建立和完善国有独资公司董事会试点工作的通知) [A Notice onExperimenting with Establishing and Further Developing Boards of Directors in Central Wholly State-Owned Enterprises] (promulgated by SASAC 7 June 2004) Order No 229 and Guanyu Guoyou DuziGongsi Dongshihui Jianshe de Zhidao Yijian (Shixing) (关于国有独资公司董事会建设的指导意见(试行)) [Provisional Guiding Opinion on Developing Boards of Directors in Wholly State-OwnedEnterprises] (promulgated by SASAC 10 June 2004) Order No 229

48 Information on Xiaochu Wang and Jie Yang is available at China Telecom lsquoCompany Directorsrsquo (n 36)



In terms of the appointment process for CT Grouprsquos directors and senior executiveswhile the PRC Company Law states that SASAC has the power to appoint SOErsquos boardmembers the senior executives are supposed to be appointed by the board of directorsitself49 However there is no information on CT Grouprsquos website on how its directors orsenior executives were appointed We will return to this issue in the analysis section below

By contrast China Mobilersquos parent company CMCC does have a full board ofdirectors with seven members including four non-executives and one employee-electeddirector50 Assuming the non-executives are independent from the companythis would comply with both SASACrsquos provisional rules on SOE boards of directorsand with the OECD Principles which is a promising development However apartfrom listing the names and positions of these executives there is no other informationon CMCCrsquos website or in its Annual Reports about the background and qualificationsof the non-executives or when and how they were appointed51 Further transparencywould be helpful to demonstrate that the firm is accountable to public stakeholders

F Sub-committees under the Boards of Directors

The listed subsidiaries of China Telecom and ChinaMobile have all established Board sub-committees including the standard audit remuneration and nomination committeesThese committees are all staffed by a majority of independent directors in compliance withOECD and other international corporate governance best practices However it isnoteworthy that in all of these companies three independent directors take on virtually allthe sub-committee work which begs the question as to why there are several differentcommittees rather than simply one52 Are these companies just adopting a lsquotick-the-boxrsquoapproach to corporate governance without actually considering whether each director isbest qualified for each subcommittee or are there simply not enough independent directorsto cover all the positions How can these directors deal with such a heavy workload whenthey are all acting as independent directors for several other major companies and runningtheir own businesses or acting as government representatives too53

G Supervisory Committees

As Chinese-registered companies both CT Corporation and CCS are required under thePRC Company Law to establish a Supervisory Committee to monitor the performance of

49 PRC Company Law art 68-6950 China Mobile lsquoIntroduction to the Board Membersrsquo (China Mobile Limited) ltwwwchinamobileltd

comenaboutdirectorsphpgt accessed 30 March 2015 By contrast CT Group only has two directorsboth of them executives

51 China Mobile lsquoAnnual Report 2015rsquo (China Mobile Limited) ltwwwchinamobileltdcomenirreportsar2015pdfgt accessed 30 March 2015

52 See Board of Directors (n 43) and Corporate Governance Report (n 42)53 For example Mr Lo Ka Shui is Chair andManaging Director of one company non-executive Chair of another

company non-executive director of three other companies besides CM Ltd and has senior positions in severalHong Kong non-governmental organizations and government advisory committees See also the profiles ofindependent directors at China Telecomrsquos subsidiaries onlineltwwwchinatelecom-hcomencompanydirectorsphpgt and ltwwwchinaccscomhkenggovernancemanagementhtmgt accessed 31 October 2014 (Authorsrsquonote This information no longer exists publicly on the Internet but it was current when accessed back in 2014)



the board of directors and other senior managers and prevent them from abusing theirpowers The Supervisory Committee is independently accountable to the ShareholdersrsquoMeeting and has the power to bring representative lawsuits on behalf of the company andits shareholders when directors have not fulfilled their duties to the company54

CT Corporationrsquos Supervisory Committee currently has five members with itsChairman as the head of the Discipline Inspection Division of CT Corporation This isa lower level appointment than the executives on the companyrsquos board of directorsThe four other supervisors are also lower level employees of the company one is theVice Chairman of the Labour Union one is Deputy Managing Director of the LegalDepartment another is a senior economist and the last is from the audit department ofthe company55 The situation is similar at CCS where the Supervisory Committeeconsists of three members two of whom are lower level employees of the company56

The obvious question is how can lower level employees effectively supervise theirsuperiors in the company and expect to keep their jobs As we will discuss in theconclusion this is not the fault of these corporations who are following the PRCCompany Law requirements for Supervisory Committees to the letter but rather alongstanding defect within the existing Chinese legal framework

The parent company CT Group does not appear to have a Supervisory Committeedespite the requirement to establish one for wholly State-owned companies in Article 71of the PRC Company Law At China Mobile CM Ltd is a Hong Kong-incorporatedcompany so it is not required to establish a Supervisory Committee However ChinaMobilersquos parent companyCMCChas not set up a Supervisory Committee either despitebeing registered in mainland China Instead it has substituted an Advisory Committeefor Development of Strategy (ACDS) The role of ACDS in China Mobile is to providerecommendations and suggestions for further development of the company to assist thedecision-making of company executives57 Members of the ACDS are appointed bycompany executives and their appointment is for a term of four years There are 20committee members currently sitting on the ACDS The lsquohonorary directorrsquo is WuJichuan the former Minister of Information Industry and the executive director isZhang Ligui the former CEO of CM Ltd Seven committee members have extensiveexperience working in senior roles in the State Administration and six members areprofessors at various major Chinese universities who specialize in the telecom field58

This is a very interesting innovation and even though it has no formal power tosupervise the Board or management clearly the range of contacts and expertise of theACDS would make it potentially an excellent source of advice for CMCCrsquos Board and

54 PRC Company Law art 52-655 CCS Corporation lsquoCorporate governancersquo (China Comservice) ltwwwchinaccscomhkencgcgphpgt

accessed 24 October 2014 China Telecom lsquoSupervisory Committeersquo (China Telecom 2014) ltwwwchinatelecom-hcomencgsupervisoryphpgt accessed 1 March 2017

56 CCS Corporation lsquoDirectors Supervisors and Managementrsquo (China Comservice) ltwwwchinaccscomhkenirreportsar2007ar2007_11pdfgt accessed 1 March 2017

57 China Mobile lsquoAdvisory Committee Profile [Weiyuanhui jianjie]rsquo (CMCC) ltwww10086cnaboutusculturecmacdsindexhtmgt accessed 31 October 2014 (Authorsrsquo note This information no longer existspublicly on the Internet but it was current when accessed back in 2014)

58 ibid



management and probably more useful than the weak Supervisory Committees inmany Chinese companies

H Party Presence and Government Influence

Given the fact that China Telecom and China Mobile are majority State-ownedcorporations the Communist Party plays an important role in these firmsrsquo operationsand management There are comprehensive Chinese language links on CT Grouprsquoswebsite detailing the Partyrsquos activities within the firm although unlike other parts of thewebsite there is no equivalent English language version available59 Within ChinaTelecom there are about 10000 Communist Party Offices established in all the localdivisions 1000 Party Committees (a level higher than Party Offices) and altogetherabout 200000 Party members in the firm which comprises around 25 of the totalnumber of employees60 In-house PartyNewsletters and Journals are published regularlytogether with stories of exemplary Party Member employees praising their dedication tothe Party and their hard work for the firm61 Within the large structure of the PartyCommittees there are separate divisions looking after detailed Party-related operationsincluding Party research and publications Party promotional activities Party corporateculture youth-related work and a separate lsquored letter boxrsquo which is an email address forany Party-related communications62 China Telecom Workersrsquo Union is also part of theParty structure63 The impression is that all of the firmrsquos main in-house publications andsocialcultural activities are organized by Party-affiliated groups and through thememployees are constantly exposed to the latest Party policies and campaigns

For China Mobile there is no information on its corporate website about the numberof Party Committees and Offices in the firm or how many employees are Partymembers64 However the authorsrsquo Google search located several websites describingCMCCrsquos Party activities in mind-numbing detail including a 2015 report which statedthat the China Mobile Group had established over 8000 Party organizations at variouslevels and over 133000 of the firmrsquos 570000 plus employees were Party members65

There is an obvious overlap between the management of these two firms and thePartyWang Xiaochu the ChairmanCEO of CT Corporation and Chair of CTGroup

59 China Telecom lsquoEthics Web [Sixiang zhengzhi gongzuo wang]rsquo (China Telecom) ltwwwchinatelecomcomcnsxgzgt accessed 24 October 2014

60 China Telecom lsquoDevelopment of the Partyrsquos Work [Dangjian gongzuo]rsquo (China Telecom) ltwwwchinatelecomcomcnsxgz01gt accessed 24 October 2014

61 China Telecom lsquoTypical Experiences of Building the Communist Partyrsquos Capacity in China Telecom[Zhongguo dianxin dangjian dianxing jingyan]rsquo (China Telecom) ltwwwchinatelecomcomcnsxgz0103indexhtmlgt accessed 24 October 2014

62 China Telecom lsquoDevelopment of the Partyrsquos Workrsquo (n 60)63 China Telecom lsquoNews for China Telecomrsquo (China Telecom) ltwwwchinatelecomcomcnsxgznews03gt

accessed 24 October 201464 China Mobile lsquoIntroduction to Corporate Culturersquo (China Mobile Limited) ltwwwchinatelecom-hcom

encompanyculturephpgt accessed 31 October 201465 China Mobile lsquoNotice on the Inspection and Rectification of Issues by the Chinese Communist Party

Branch at China Mobile Group [Zhonggong zhongguo yidong tongxin jituan gongsi dangzu guanyuxunshi zhenggai qingkuang de tongbao]rsquo (China Mobile) ltwww10086cnaboutusnewsGroupNews201509t20150914_59650htmgt accessed 16 March 2017



also serves as the Secretary of CT Grouprsquos Party Leadership Group (PLG) and all ofCT Grouprsquos other top executives are also members of the PLG Likewise all theexecutives of CMCC and CM Ltd are members of CMCCrsquos Communist Party LeadingGroup This information is specified clearly in the executivesrsquo online profiles

It is therefore fair to infer that the Communist Partyrsquos presence in these two firms isvital and exerts a powerful influence over their operations However there is no clearexplanation in the articles of these firmsrsquo listed subsidiaries about the role of the Partyand how it interacts with their Boards of Directors and Supervisory Committees andtheir annual corporate governance reports do not mention Party activities at all It isalso not clear from the firmsrsquo various websites what role the Party plays in appointingthe parent corporationsrsquo senior executives though presumably it must be closelyinvolved since all of them are ranking Party members

I Analysis China Telecom China Mobile and the OECD CorporateGovernance Principles

Yukyung Yeorsquos study of the relationship between SASAC and Chinese State-ownedtelecom firms stated that the Communist Partyrsquos Central Organization Department(zhongzubu) is the body that selects suitable candidates for senior positions in SOEs inconsultation with bureaucrats at SASAC and while management talent is certainly onefactor the top executives are essentially political appointees rather than simplybusiness professionals66 This explains why virtually all the senior executives in CTGroup and China Mobile have extensive past experience as government officials in theStatersquos telecom administration It also explains why it is common for senior telecomexecutives to be transferred from one firm to a directly competing firm and thenoccasionally back again within a short period of time the Organization Departmentregularly shuffles executives in this way to discourage them from building networks ofpatronage that might tempt them to engage in corruption and the executives have littlechoice but to accept these moves67 For example Wang Xiaochu was previouslyDirector General of the Hangzhou Telecommunications Bureau in Zhejiang provinceand Director General of the Tianjin Posts and Telecommunications Administration(both government positions) He was then appointed Chairman and CEO of ChinaMobilersquos listed arm and Vice President of ChinaMobilersquos parent company before beingtransferred in 2004 to become President and then ChairmanCEO of China Mobilersquosmain competitor CT Corporation68

During the same period Zhang Chunjiang former vice-minister of MII becameCEO of China Netcom (in 2003) Wang Jianzhou Chairman and President of ChinaUnicom became Chairman and President of China Mobile and Chang Xiaobing

66 Yukyung Yeo lsquoBetween Owner and Regulator Governing the Business of Chinarsquos TelecommunicationsService Industryrsquo (2009) 200 The China Quarterly 1013 1021

67 ibid 102668 China Telecom lsquoCompany Directorsrsquo (n 36) CT Corporation lsquoAnnouncementrsquo (CT Corporation

2 November 2004) ltwwwchinatelecom-hcomenannouncementsannouncementsa041102pdfgtaccessed 20 January 2015 (Authorsrsquo note This information no longer exists publicly on the Internetbut it was current when accessed back in 2015)



Vice-President of China Telecom became Chairman of China Unicom (both in2004)69 All the senior executives of CMCC and CM Ltd were insenior positions in the State telecom administration before joining China MobileFor example Xi Guohua the current Chairman of the group served as Vice Ministerat the MII the telecom regulator Xue Taohai Vice President and Chief FinancialOfficer of CM Ltd served as Deputy Director General in MII The fact that WuJichuan former Minister of Information Industry is honorary chair of CMCCrsquosadvisory committee also emphasizes China Mobilersquos strong ties with the Chinesegovernment bureaucracy

Are there any conflicts of interest created by this shuffling of telecom executives andregulatory officials such as confidential information being leaked to competitors andare the various moves really in the best interests of shareholders It is not clear that theParty is considering these issues or the interests of minority public shareholders of listedsubsidiaries when it engages in these sudden reshuffles and no information is publiclydisclosed about the Partyrsquos decision-making process

China Telecom has won several awards for its corporate governance including thelsquoOverall Best Managed Company in Asiarsquo and lsquoNo 1 Best Corporate Governance inAsiarsquo by Euromoney for five consecutive years and lsquoThe Best of Asia ndash Icon ofCorporate Governancersquo award from Corporate Governance Asia in 2013 But theseawards were given to the listed subsidiary CT Corporation not to the parent CTGroup As we have shown the listed subsidiaries of China Telecom China Mobileand many other centrally-controlled SOEs superficially disclose large amounts ofinformation to shareholders and the public about their management operations andfinances but their controlling parent corporations remain quite opaque both in termsof corporate governance structures and financial information

The OECD has acknowledged that SOEs should be subject to a modified set ofprinciples due to their majority State ownership70 Yet even these modified principlesstrongly recommend a clear separation between the Statersquos role as regulator and its roleas owner of enterprises They also recommend hiring independent Boards of Directorswith transparent recruitment processes to ensure that the most qualified candidates arechosen to run the businesses And they state that even if SOEs are not listed on asecurities exchange as lsquopublic bodiesrsquo they should provide detailed disclosure of theirfinances and governance structures so that opportunities for lsquorent-seekingrsquo by managersand bureaucrats are reduced and so that members of the public (ie taxpayers) can seethat the State is investing their money efficiently and monitoring its public servantsclosely71 It would be more in line with the OECD Principles and the SOE Guidelines tomake the selection process for CT Group and China Mobilersquos leadership moretransparent to clarify the role of the Party in that process and its interaction with theother governing bodies of each firm in the group and to publish detailed financialreports as if these SOE holding companies were also listed corporations

69 Yukyung Yeo lsquoRegulating Chinarsquos Industrial Economy A Comparative Case Study of Auto and TelecomService Sectorsrsquo (PhD thesis University of Maryland College Park 2007) 160

70 OECD SOE Guidelines (n 7)71 ibid 13-17



While CT Group and its subsidiaries have managed to avoid major public scandals upto now neither CT Group nor China Mobile have fully complied with the OECDPrinciples as they relate to SOEs and the PRC Company Law The risks of failing tocomply are apparent when we look at the recent history of China Mobile Based onChinese and international media reports at least 16 senior executives of CMCC and itssubsidiaries have been sentenced to lengthy jail terms since 2009 for taking bribes in returnfor influencing China Mobilersquos purchasing decisions or guiding business to favouredsuppliers72These executives have even included directors of CMLtd andCMCC such asZhang Chunjiang (Deputy Chairman of CM Ltd and Vice PresidentParty Secretary ofCMCC from 2008-9) given a suspended death sentence in 2011 Lu Xiangdong (VicePresident and Director of CMCC) sentenced to life imprisonment in 2013 and Xu Long(Executive Director of CMCC and ChairParty Secretary of China Mobilersquos GuangdongDivision) expelled from the Communist Party in early 2014 and currently awaiting trialfor commercial corruption73 The lack of transparency surrounding CMCCrsquos financeshiring practices and internal controls has clearly allowed numerous senior executives toengage in corrupt activities without being detected for several years

There is an incongruity between the apparently comprehensive corporate governanceframework of CM Ltd and the systemic corruption revealed by these ongoing criminalprosecutions of senior executives Reading the lsquoCorporate Governance Reportrsquo fromCM Ltdrsquos 2008 Annual Report when both Zhang Chunjiang and Lu Xiangdong weredirectors of the company we find language such as lsquowe have established good corporategovernance practices following the principles of sincerity transparency openness andefficiencyrsquo lsquowe have conducted a variety of anti-corruption disciplinary activitiesrsquo andlsquoa corporate culture that emphasizes honesty and integrityrsquo74But the companyrsquos internalcontrols apparently failed to spot the enormous bribes received by Zhang Lu andvarious other executives and Lu was not removed as a director until 2012 havingreceived over RMB 25million in bribes between 2003 and 2011 The investigation thatrevealed the corruption was carried out mainly by the Chinese governmentrsquos NationalAudit Office not by the company itself75

It should be no surprise that executives of a large SOEwith a privileged market positionin a massively expanding industry would be tempted to take large kickbacks whenchoosing between suppliers But the fact that CM Ltd failed to put in place propermonitoring systems to spot these corrupt practices despite its lsquobest practicersquo corporategovernance framework suggests that it has been merely engaging in a lsquotick-the-boxrsquo

72 Jiehua Liao Yong Chen and Qiaofa Wu lsquoUnfinished Business China Mobilersquos Corruption WoesRoll Onrsquo (The Economic Observer 2 September 2013) ltwwweeocomcnens20130902249285shtmlgt accessed 20 January 2015 Yi Chi lsquoChina Mobile Corruption Scandal Continues to Unfoldrsquo (TheEconomic Observer 26 April 2013) ltwwweeocomcnens20130426243169shtmlgt accessed20 January 2015 Sophie Song lsquoTwo Former China Mobile Ltd Executives Sentenced for $67 millionin Bribes Involving an Acquisition by Australian Firm Telstra Corporation Ltdrsquo (International BusinessTimes 8 April 2014) ltwwwibtimescomtwo-former-china-mobile-ltd-chl-executives-sentenced-67-million-bribes-involving-1568845gt accessed 20 January 2015

73 ibid74 China Mobile lsquoAnnual Report 2008rsquo (China Mobile Limited 2008) 42-3 ltwwwchinamobileltdcom

enirreportsar2008pdfgt accessed 1 March 201775 Chi (n 72)



approach rather than encouraging its independent directors audit committees supervisorsand external auditors to vigorously uncover financial and operational irregularities

iii private and mixed ownership ict firmsHow does the corporate governance framework of State-controlled ICT firms comparewith privately-controlled firms We will now turn to two of Chinarsquos largest and mostinternationally successful telecom equipment manufacturers to examine the impact ofsignificant private control over corporate governance practices

A Unlisted Private ICT Firm Huawei Technologies (Huawei)76

Huawei is a highly successful communications technology firm with its core businessfocused on internet and telephone network hardware It has business operations or salesin over 170 countries supplying some of the worldrsquos largest telecom and internet serviceproviders and over half of its annual USD 39 billion revenue come from outsideChina77 Huaweirsquos founder and CEO Ren Zhengfei was once a relatively low-rankingofficer in the Chinese military engineering corps78 However he left the army in 1983and a few years later in 1987 he set up a private business selling simple telephoneexchange switches imported from Hong Kong which later grew into Huawei79

1 Huaweirsquos ownership structureOriginally Huawei had six investors including Ren Zhengfei who together investedRMB 21000 as Huaweirsquos initial capital but the other five investors were soon boughtout80 From the early 1990s Huawei was run as an employee-owned collectiveenterprise with Ren and the other founding employees holding the majority of theshares According to Chinese accounts of the firmrsquos development in its early stagesHuaweirsquos employees were all given the opportunity to buy shares in the firm and thereturns on their investment were extremely high as Huawei expanded rapidly soonmaking its employees the highest paid in the telecom industry81However Huawei wasnot registered as a company until 1997 and its employee shares were not typical of aregistered Chinese companyrsquos shares they were not transferable carried no votes andcould not be retained if employees ceased to work at the firm82 Control of Huaweirsquos

76 The full name of the firm is Huawei Investment Holding Co Ltd (Huawei touzi konggu youxian gongsi华为投资控股有限公司)

77 See information about the company and its revenues on Huaweirsquos website Huawei lsquoCorporate Informationrsquo(Huawei Technologies 2015) ltwwwhuaweicomenabout-huaweigt accessed 1March 2017

78 PSC Report (n 1) 2479 Guanjing ZhangHuawei Si Zhang Lian [The Four Faces of Huawei] (Jingji Chubanshe 2007) 23-4 135

223-480 PSC Report (n 1) 24-581 Yongde Wang Langxing Guanli zai Huawei [Wolf-style Management at Huawei] (Wuhan University

Press 2007) 100-182 Dongsheng Chen and Lili Liu Huawei Zhenxiang [The Truth about Huawei] (Dangdai Zhongguo

Chubanshe 2004) 116



management and finances remained with the incumbent CEO and a small circle ofsenior managers and there were no formal board of directors or supervisorycommittees and no shareholdersrsquo meetings83

Interestingly during the 1990s Huawei also set up various subsidiaries and jointventures ndash some accounts put the number at over 30 ndash in partnership with localbranches of China Telecom and China Unicom in which officials and employees ofthese State telecom service providers were encouraged to buy shares84 This was themain way Huawei was able to build up a lsquocommunity of mutual interestsrsquowith its mainChinese customers the telecom service providers despite being a private enterpriseand to compete with State-controlled equipment suppliers Telecom officials werehappy to purchase Huaweirsquos switching hardware on behalf of their firms knowing thatthe more equipment they purchased the more profits they would make personally Itwas not unusual for annual returns on their shares in these joint ventures to reach7085 The telecom officials and employees never owned shares in HuaweiTechnologies itself they only had ownership interests in Huaweirsquos subsidiary jointventures and companies Despite the obvious conflicts of interest involved in officialsprofiting from their firmsrsquo purchases this kind of arrangement was not illegal back inthe 1990s it was a legal grey area86 But in the late 1990s the government restructuredthe State telecom firms and discouraged officials from running businesses on the sideso Huawei had to buy out all the joint ventures and find more orthodox ways to attractcustomers87

Another reason for Huaweirsquos restructuring was to comply with the PRC CompanyLaw which had been implemented in 1994 Huawei registered as acompany called Huawei Investment amp Holding Co Ltd in 1997 and the PRCCompany Law requires a company with more than 50 shareholders to give eachshareholder one vote per share88 Huawei expanded rapidly during the 1990s hiringthousands of employees and paying them partly in shares and senior management didnot own sufficient shares to retain control over voting under the PRC CompanyLaw rules

So as part of Huaweirsquos restructuring in the late 1990s the firm set up anemployee investment fund called the Union of Huawei Investment amp HoldingCo to acquire Huaweirsquos shares from its employees and become the

83 Huawei did have regular meetings of all employees to engage in what it called lsquoself-criticismrsquo but noformal voting occurred at these meetings See Colin Hawes The Chinese Transformation of CorporateCulture (Routledge 2012) 38-9

84 Cheng and Liu (n 82) 76-8 104-9 and for further details see Wang (n 81) 283-685 Wang (n 81) 285-686 Jin Zeng State-Led Privatization in China (Routledge 2013) 2787 Grace Li lsquoCan the PRCrsquos New Anti-Monopoly Law Stop Monopolistic Activities Let the PRCrsquos

Telecommunications Industry Tell You the Answerrsquo (2009) 33(7) Telecommunications Policy 360 361Zhang (n 79) 8 38 and 55

88 With more than 50 shareholders a company must normally be formed into a joint stock company whichstipulates one vote per share see PRC Company Law arts 79 and 104 With less than 50 shareholders acompany can be formed as a limited liability company (LLC) which allows flexibility in the way votingrights are divided up among shareholders PRC Company Law arts 24 and 43 The PRC Company Law(n 41) was first introduced in 1994 andHuawei was restructured from an employee-owned collective to aregistered limited liability company in 1997 see PSC Report (n 1)15-16



controlling shareholder89 In return the employees were allotted units in the investmentfund instead of shares which did not give them direct voting power but allowed themto share in the companyrsquos profits90 Huawei refers to these employee units as lsquovirtualrestricted sharesrsquo (xuni shouxian gu) but this is misleading because the registeredshareholder is the Union91 Figure 4 gives a schematic diagram of Huaweirsquos currentownership structure

Since 2010 the investment fund has been governed by an employeesrsquo representativecommission which casts votes in shareholder meetings on behalf of the employeeselecting directors and approving profit distributions capital increases and companyby-law amendments92 There are 51 regular employee representatives on thiscommission and nine alternates all of whom were elected by Huaweirsquos employees in2010 for five-year terms But the CEO Ren Zhengfei has always had veto power overany decisions made by the commission including appointments to Huaweirsquos Board93

This is the firmrsquos current ownership structure and it means that even though there areabout 84000 Huawei employees who hold units in the investment fund that ownsHuaweirsquos shares the firm is still effectively controlled by its senior management94

Huaweirsquos ownership structure is certainly unorthodox designed to get around theinflexible rules on share voting in the PRCCompany Law and to avoid the firm having toorganize regularmeetings of all 84000 employee shareholders95Many foreign observers

Figure 4 Huaweirsquos Ownership Structure

89 Huawei currently has two shareholders which are the Union investment fund (986) and Ren Zhengfei(14) See Huawei lsquo2013Annual Reportrsquo (Huawei Technologies 2013) 108 ltwwwhuaweicomucmfgroupspublicdocumentsattachmentshw_u_323372pdfgt accessed 1 March 2015

90 The PSC Report gives a very useful detailed summary of Huaweirsquos employee share ownership programbased on information provided by the firm PSC Report (n 1)15-20

91 See Wang (n 81) 102 and PSC Report (n 1) 15-20 The process of transferring employee shares to theUnion investment fund began in the late 1990s but Wang notes that it was not completed until 2001

92 Huawei lsquo2013 Annual Reportrsquo (n 89) 10993 Renrsquos veto will last until 31 December 2018 PSC Report (n 1) 2094 The number of unit holders is taken from Huawei lsquo2013 Annual Reportrsquo (n 89) 10895 Huawei gave this explanation in materials cited in the PSC Report PSC Report (n 1)15-16



have erroneously assumed that somewhere in this structure lurks Chinese government ormilitary control but the facts do not support such a conclusion96

Having said this there were serious irregularities in the way this gradualrestructuring process was carried out During the 1990s employee shareholders hadnever been given share certificates recording how many Huawei shares theyheld and even those employees who kept their own records had no idea how theirproportion of shares corresponded to Huaweirsquos total issued share capital97

Former employees have even claimed that they were told to sign blank sheets ofpaper to which the firm later added the text of the agreement to transfer theirshares to the employee investment fund98 Several employees left Huawei around thetime of the restructuring some even bringing lawsuits against the firm alleging thattheir shares were being redeemed by Huawei at a value much lower than the firmrsquosmarket value per share and that they had not been notified that the valuationformula was changed when the shares were transferred to the fund99 ClearlyHuaweirsquos senior management did not view employee shareholders as the true ownersor controllers of the firm

One reason for Huaweirsquos lack of transparency towards employees is that thefirmrsquos senior management wants to maintain flexibility in how they rewardemployees and to raise or lower distributions to employees based on theirperformance100 If employees knew what proportion of units they held incomparison to Huaweirsquos total capital they would easily calculate their expectedreturn based on Huaweirsquos end of year profits and they might be tempted to behavelike passive investors free-riding on the work of other employees rather thanactively seeking to maximize the firmrsquos profits

Whether this motive justifies Huaweirsquos lack of transparency towards employees isdebatable but one major consequence of adopting this unorthodox system hasbeen to delay the firmrsquos listing on a securities exchange101 Listing would require fullpublic disclosure of the firmrsquos share structure and the formulas for distributing profitsto unit holders each year to allow outside investors to assess the potential future returnon shares that they purchase Huaweirsquos failure to list means that it has been forced torely on raising money from its own employees telecom firms investing in itssubsidiaries and bank loans rather than from the broader investing public102

2 Board of directorsWith Huaweirsquos restructuring as a company it has established a Board of Directors andSupervisory Committee based on the requirements in the PRC Company Law It is notclear when these were first set up but Huawei has listed the members of the Board and

96 PSC Report (n 1) 14 21-297 Zhang (n 79) 2098 Cheng and Liu (n 82) 112-11399 Cheng and Liu (n 82) 109 115100 Wang (n 81) 102101 Cheng and Liu (n 82) 120102 Zhang (n 79)19-21 Cheng and Liu (n 82) 104-6



Supervisory Committee in its annual reports since 2010 and the most recent reportsalso include brief profiles of their background and qualifications103

The Huawei Board of Directors currently consists of seventeen directors with SunYafang as Chairman and Ren Zhengfei as one of four Deputy Chairman along withGuo Ping Xu Zhijun andHuHoukun104These last three are currently taking turns toserve as Huaweirsquos lsquorotating CEOrsquo every six months a unique system that will bediscussed below However Ren Zhengfei appears to have retained his position asCEO so it would be more accurate to refer to the rotating CEOs as deputy CEOs105

None of Huaweirsquos directors are independent as they are all current or former seniorexecutives or full-time senior managers at Huawei106

The Board of Directors is elected by Huaweirsquos Representative Commission and thisCommission is in turn elected by all the firmrsquos Chinese employees107 TheRepresentative Commission currently consists of 51 members and these membersattend Huaweirsquos annual shareholders meeting where Board elections and otherdecisions requiring shareholder approval take place While this process appears to givethe employee lsquoownersrsquo indirect control over Board composition there are three featuresof the current system that significantly restrict this First the companyrsquos articles statethat Ren Zhengfei holds veto power over any decisions made at shareholder meetingsand it appears that all candidates for the Board of Directors are actually selectedby Ren in consultation with his senior executive team and then approved by theshareholders meeting108 Second the composition of the Representative Commission isheavily weighted towards senior managers (who are also investors in the employee Unionfund) It is not clear how these representatives were nominated or whether rank and fileemployees were given any choice of candidates but at least 27 of the 51 currentRepresentative Commission members (comprising 529) are either Huawei directorssupervisors or seniormanagers109 Finally there does not appear to be a fixed term for thedirectors and it is not clear how they might be removed or replaced110

In other words despite Huaweirsquos restructuring into a company that appears to havemajority employee union control the firm is still effectively controlled by its seniormanagement Having said this it is possible that a broader cross-section of

103 See Huawei 2010 and 2013 Annual Reports Huawei lsquo2010 Annual Reportrsquo (Huawei Technologies2010) 55 ltwwwhuaweicomucmfgroupspublicdocumentsannual_report092576pdfgt accessed1 March 2017 Huawei lsquo2013 Annual Reportrsquo (n 89)

104 Huawei lsquo2013 Annual Reportrsquo (n 89) 110105 For Renrsquos full position title which is deputy chairman of the Board and CEO see Huawei lsquoMr Ren

Zhengfeirsquo (Huawei Technologies 2017) lthttpprhuaweicomenexecutivesboard-of-directorsren-zhengfeiindexhtmVFKQffIcTVIgt accessed 1 March 2017

106 Profiles of all directors are given in Huawei 2013 Annual Report (n 89) 117-9107 See Huawei lsquo2013 Annual Reportrsquo (n 89) 109 Non-Chinese employees of Huawei in other countries do

not directly participate in the Chinese employee investment fund but they are given units in employeeinvestment funds managed by Huaweirsquos regional divisions overseas This information comes from aconversation with a senior executive at Huaweirsquos Australian subsidiary

108 PSC Report (n 1) 16 20109 Based on the authorsrsquo comparison of names on the list of Representative Commission members and

information about Huaweirsquos boards and senior managers on its website110 Four new directors were elected by the representative commission in December 2013 to increase the size

of the Board to its current 17 members but no directors have been removed or resigned since 2010



Huaweirsquos employees will gain influence over Board elections after Renrsquos veto powerexpires in 2018111

3 Sub-committees under the board of directorsHuawei is a private company not a public listed company so it is not required tofollow the requirements for board committees in the PRC Code of CorporateGovernance of Listed Companies or similar rules issued by overseas securitiesexchanges Nevertheless the firm has established various Board committees includinghuman resources finance strategy and development and audit which appear to coverthe main areas recommended by the OECD Principles and the PRC Code Thefunctions and membership of each committee are listed in Huaweirsquos Annual ReportsHowever there is no attempt to comply with Chinese or international best practicesthat would require a significant proportion of directors on each committee to beindependent As noted above none of Huaweirsquos directors is independent and all themembers of these various committees are full-time senior managers of Huawei

4 Supervisory CommitteeAs a PRC-registered limited liability company Huawei is required to have at least onesupervisor112 and the firm has established a Supervisory Committee consisting of fivemembers The current Supervisory Committee was elected by the shareholdersRepresentative Commission in 2010113 The PRC Company Law states that acompanyrsquos Supervisory Committee must include both shareholder and employeerepresentatives but as Huawei has no shareholders who are not also employees iteffectively meets this requirement by default As with the Board of Directors there is noinformation in Huaweirsquos Annual Reports on how long its supervisors may serve beforeseeking re-election However Article 53 of the PRC Company Law states thatsupervisors must seek re-election every three years It is not clear whether Huawei heldthe required re-election of the 2010 Supervisory Committee in 2013

One of the main functions of the Supervisory Committee is to monitor the board ofdirectors and senior executives of the company to ensure they are acting in thecompanyrsquos interests114 which is why Article 52 of the PRC Company Law states thatlsquono director or senior manager may concurrently work as a supervisorrsquo HuaweirsquosSupervisory Committee does not include any directors but the members all appear tobe senior managers in the company based on their profiles even if they are not on theexecutive team115 It is not clear how they would effectively monitor their superiors inthe management hierarchy This is a problem common to many Chinese corporationsand we will discuss the awkward role of Supervisory Committees in our final analysissection below

111 PSC Report (n 1) 20112 PRC Company Law art 52113 Huawei lsquo2010 Annual Reportrsquo (n 103) 55114 See the functions set out in PRC Company Law art 54115 Huawei lsquo2013 Annual Reportrsquo (n 89) 120



5 Senior executivesIn theory Huaweirsquos CEO is appointed by the Board of Directors but in practice RenZhengfei has been Huaweirsquos CEO since 1988 and as the founder and guiding force ofthe company it is highly unlikely that the Board would challenge his position116

However Ren is already over 70 years old and has suffered various health problems so herecently selected three potential successors as lsquoRotating andActing CEOsrsquo Since late 2012each Rotating CEO has served for six months at a time to give them experience in the topjob in preparation for Renrsquos eventual retirement117 This is an interesting experiment as itallows the company to test out the candidates without committing to them in the longterm On the other hand it means that when Ren retires Huawei is virtually certain toreplace him with an internal appointment rather than hiring from the broader executivemarket All of the current Rotating CEOs have worked at Huawei since the late 1980s orearly 1990s118 The other potential problem with this system is that it is not clear how theRotating CEOs interact with Ren Zhengfei who still retains his CEO title are they reallyCEOs or just deputy CEOs lacking ultimate decision-making power

Besides the Rotating CEOs Huawei has also established an Executive Committee ofthe Board of Directors whose role is to run the company on a day-to-day basis ThisCommittee includes the three Rotating CEOs and four other directors119 Selection ofcandidates for senior executive positions ismade by theHumanResources Committee andappointments are then approved by the Board of Directors but it is likely that in practiceRen Zhengfei plays a central role in approving the choice of senior executives120

It should be no surprise that like many other privately-controlled Chinesecorporations some family members of Huaweirsquos founder have risen to seniorpositions in the firm Ren Zhengfeirsquos daughter Cathy Meng (Chinese name MengWanzhou) was appointed as Chief Financial Officer of Huawei in 2011 and is also onthe Board of Directors his brother Ren Shulu is on Huaweirsquos Supervisory Committeeand acts as Chair of the firmrsquos internal management committee However Ren haspublicly stated that none of his family members will become the next CEO of thecompany and none of the current Rotating CEOs is related to Ren121

6 Huaweirsquos Communist Party branchIt is clear from the above analysis that Huawei is a private firm owned by its employeesthrough an investment fund but controlled by its senior management While employeeshave in recent years been given more say in elections to the Board of Directors

116 ibid 110 118117 ibid 115118 ibid 117119 ibid 110120 ibid 110-11121 One of Renrsquos sons and several of his six brothers and sisters also work at Huawei in less senior positions

See Fierce Wireless lsquoCathy Meng CFO Huawei 2013 Women in Wirelessrsquo (Fierce Wireless 21 August2013) ltwwwfiercewirelesscomspecial-reportmeet-2013-influential-women-wirelessgt accessed 6December 2014 Lee Chyen Yee lsquoHuaweirsquos CEO says successor wonrsquot be from family no listingplans yetrsquo (Reuters 29 April 2013) ltwwwreuterscomarticle20130429us-huawei-succession-idUSBRE93S0A020130429gt accessed 6 December 2014



Ren Zhengfei has still not relinquished control over the nomination and selectionprocess though this may change in 2018when his veto expires There is no governmentcontrol or direct influence over Huaweirsquos business or management decisions andno present or former government officials sit on Huaweirsquos Board or SupervisoryCommittee Unlike State-controlled firms the selection of Huaweirsquos senior managersdoes not go through the Communist Partyrsquos Central Organization Department

Like the majority of other medium to large Chinese companies Huawei has establisheda Communist Party branch office with one of its executives acting as Party Secretary inaddition to his role as Chief Ethics and ComplianceOfficer122Ren Zhengfei is also a CCPmember but does not lead Huaweirsquos Party branch123 However there is no evidence thatthe Party branch acts as a conduit for government interference in the firmrsquos businessdecisions and it likely plays a role similar to Party branches in other private firms helpingto motivate employees organizing social and cultural activities to improve employeesrsquolsquospiritual welfarersquo and to remind them how much the Party cares for them and creatingawareness among employees of the governmentrsquos latest policy campaigns124

7 Evaluating Huaweirsquos corporate governance systemWhile Huawei has clearly made efforts to overcome its slapdash treatment of employeeshareholders in the past sought to improve the transparency of its corporategovernance structure and open up its financial performance to public scrutiny withthe assistance of international audit firms some obvious defects remain In particularthere is insufficient transparency with respect to share distributions and too muchconcentration of control with senior managers rather than the broad majority ofemployee shareholders These defects are the result of business decisions made byHuaweirsquos management they are not designed to conceal government or militaryinfluence as some foreign lawmakers have alleged125 But it should be possible todesign an employee remuneration system that allows for complete transparency ratherthan using the current lsquoclosed boxrsquo of a Union investment fund Likewise Huaweishould include more open discussion in its Annual Reports about the role andmembership of its Communist Party branch to prove that there is no interference byChinese government institutions in the firmrsquos business management

Still despite these defects Huawei has managed to produce remarkably high growthand exceptional returns to its employee investors year after year making them among

122 PSC Report (n 1) 13 22-4 Chinese reports have stated that Huaweirsquos Communist Party Branch Secretaryis Daiqi Zhou who is currently listed in Huaweirsquos 2013 Annual Report as Chief Ethics and ComplianceOfficer and a member of the Audit Committee See Sun Jin lsquoHuaweirsquos Party Secretary Daiqi Zhoudeclares Internationalization has pushed Shenzhenrsquos business firms to increase their competitiveness[Huawei dangwei shuji Zhou Daiqi guojihua tuishen qi tisheng jingzhengli]rsquo Shenzhen Tequ bao(Shenzhen 23 November 2011) lthttptechsouthcncomt2011-1123content_33696313htmgtaccessed 16 January 2015 Zhoursquos role as Communist Branch Secretary is not mentioned in HuaweirsquosAnnual Reports or on its Chinese or English-language websites

123 PSC Report (n 1) 23124 For further discussion of Communist Party branches in large Chinese firms including private firms see

Colin Hawes lsquoInterpreting the PRC Company Law through the Lens of Chinese Political and CorporateCulturersquo (2007) 30 UNSW Law Journal 813 816-19

125 PSC Report (n 1)14 21-2



the highest paid employees in the telecomelectronics industry As long as this situationcontinues an employee-shareholder rebellion against senior management is highlyunlikely However it will be interesting to see whether the next election to theshareholders Representative Commission will allow for broader nomination of candidatesby lower level employees and lead to a truly lsquorepresentativersquo membership balance If thefirm wishes to expand its sources of funding by listing on a securities exchange especiallyoverseas or in Hong Kong it will need to further open up its business to monitoring byoutside investors and this may require changes to its employee investment fundremuneration system to avoid discriminating against non-employee shareholders At thesame time listing would require Huawei to hire independent directors to fulfil a moreobjective monitoring function over the senior management Interestingly though RenZhengfei publicly declared in 2013 that Huawei has no plans to list in the next 5 to 10years as it would not be conducive to the firmrsquos development126

B ZTE Corporation A Listed PrivateMixed Ownership ICT Firm127

ZTE is Huaweirsquos main Chinese competitor in the telecom and internet hardwarebusiness Like Huawei it is based in Shenzhen and while it cannot match Huaweirsquosmarket share it is currently ranked second in the world for sales of optical networkproducts and has sold its products or services in over 160 countries with reportedrevenues in 2013 of over RMB 75 billion (USD 121 billion) Over 50 of its revenuecome from its overseas operations128 Unlike Huawei ZTE is listed on both theShenzhen and Hong Kong Securities Exchanges and is therefore subject tothe corporate governance and public disclosure rules of those market operators andthe PRC Code of Corporate Governance of Listed Companies129

Along with Huawei ZTE was investigated by the US Congress in 2012 and thecongressional committeersquos report concluded lsquoThe history and structure of ZTE hellip

reveal a company that has current and historical ties to the Chinese government andkey military research institutesrsquo130 But does this characterization fairly reflect ZTErsquosownership and corporate governance structure

1 ZTErsquos ownershipZTEwas first established as a joint stock company in 1997 and in the same year offeredits shares to the public on the Shenzhen Securities Exchange In 2004 it increased itscapital by issuing new shares and listing them on the Hong Kong Securities ExchangeThis means that 1828of the companyrsquos shares are owned by Hong Kong or foreigninvestors and 8172 of the shares are currently owned by investors based in

126 Lee (n 121)127 ZTErsquos Chinese name is Zhongxing Tongxun Gufen Youxian Gongsi中兴通讯股份有限公司128 ZTE lsquoAnnual Report 2013rsquo (ZTE 2013) 8 14 18 lthttpwwwenztecomcnenaboutinvestor_

relationscorporate_reportannual_report201404P020140408599365909862pdfgt accessed 1 March2017

129 ibid 8 which notes that ZTErsquos Shenzhen listing was in 1997 and its Hong Kong listing was in 2004130 PSC Report (n 1) 38



mainland China131 Although it is a public listed company ZTE is effectivelycontrolled by its parent company Zhongxingxin132 which owns 3078 of ZTErsquosshares Zhongxingxin is able to maintain control because no other shareholders ownmore than 169 of ZTErsquos shares133

To fully understand ZTErsquos ownership structure we need to go further back into thehistory of its controlling shareholder Zhongxingxin This was originally a privateenterprise called Shenzhen Zhongxing Semiconductor Limited Liability Companyestablished by ZTErsquos current Chairman Hou Weigui and six engineers in 1985 toproduce telephone exchange switches134 In 1993 under a new government policyallowing so-called mixed ownership enterprises Zhongxingxin was permitted to seekinvestment from State enterprises to assist its capital needs and this appears to be thetime when Xirsquoan Microelectronics a State research institute and Aerospace Guangyua wholly-owned subsidiary of the State-controlled aerospace conglomerate CASICpurchased 34 and 17 of Zhongxingxinrsquos shares respectively135

In 1997 in preparation for listing on the Shenzhen Exchange Zhongxingxinrsquosbusiness was restructured ZTE was registered as a joint stock company withZhongxingxin transferring most of its business assets and undertaking to ZTE whileretaining a controlling stake in ZTErsquos shares and the rest of ZTErsquos shares were sold onthe market to a mix of retail and institutional investors136 In 2004 with the listing ofapproximately 18 of ZTErsquos shares in Hong Kong ZTErsquos current ownershipstructure was basically fixed Figure 5 gives a schematic representation of ZTErsquoscontrolling shareholders

ThoughZhongxingxin does have two large State-controlled shareholders its third andlargest shareholder is a private company called ZhongxingWXT137which owns 49ofZhongxingxinrsquos shares Zhongxing WXT appears to be an investment vehicle for ZTErsquosChairman Hou Weigui and several dozen senior officers of ZTE most of whom werefounders and longstanding employees of Zhongxingxin prior to its restructuring138

131 ZTE lsquo2013 Annual Reportrsquo (n 128) 159-60132 Full name Shenzhen Zhongxingxin Telecommunications Equipment Limited Liability Co (Shenzhenshi

Zhongxingxin Tongxun Shebei Youxian Gongsi)133 Zhongxingxinrsquos status as controlling shareholder is clearly stated in ZTE lsquo2013 Annual Reportrsquo (n 128)

94 and other major shareholders are listed at 92134 For ZTErsquos origins as a private enterprise see Zhu Jinyun lsquoTestimony to the US Permanent Select

Committee on Intelligencersquo (Permanent Select Committee on Intelligence 11 September 2012) lthttpintelligencehousegovsitesintelligencehousegovfilesdocuments091112ztetestimonypdfgt accessed 1March 2017 That account however glosses over the fact that ZTE itself was not registered until 1997Zhongxingxinrsquos website makes it clear that the company formed in 1985 was actually Zhongxingxinunder its former name of Zhongxing Semiconductor see ZTE lsquoFazhan lichen [Development History]rsquo(ZTE Holdings) ltwwwztecomcncnaboutcorporate_informationhistorygt accessed 1 March 2017

135 ZTE lsquo2013 Annual Reportrsquo (n 128) 94 Neither ZTErsquos annual reportswebsite nor Zhongxingxinrsquoswebsite make it clear how many outside investors bought shares in Zhongxingxin in 1993 but these twostate-controlled investors are currently the only other shareholders in Zhongxingxin besides ZhongxingWXT discussed below

136 ZTE lsquo2013 Annual Reportrsquo (n 128) 159137 The full Chinese name of ZhongxingWXT is Zhongxing Weixiantong138 Allegedly 38 of ZTErsquos founders and senior managers who have interests in Zhongxing WXT See the

detailed analysis of ZTE ZhongxingWXT and various affiliated companies in Xie Lirong andWei SonglsquoSeeking the root causes of ZTErsquos losses the problems lie deeper than commercial miscalculations



While Zhongxing WXT does not own a majority of Zhongxingxinrsquos shares it is able tonominate four of Zhongxingxinrsquos nine directors which means that it only needs thesupport of one other director to exert control over Zhongxingxinrsquos Board and byextension control elections to ZTErsquos Board139

From this analysis of ZTErsquos ownership structure it is clear that despite significantequity investment from the public and from State-controlled institutions its seniorofficers have a disproportionate influence over the companyrsquos management and profitseven if not to the same extent as the privately-owned Huawei Technologies

2 ZTErsquos Board of DirectorsAs a listed company in both Shenzhen and Hong Kong ZTE publishes much moredetailed information on its corporate governance structures and procedures than HuaweiBesides lengthy annual reports running to several hundred pages the company also postsits Articles of Association and various other interim announcements and company rulesregulations on its website in both English and Chinese140 From these documents onereceives the initial impression of a company run according to a combination of Chineseand international corporate governance best practices and public disclosure procedures

Unlike Huawei elections to ZTErsquos Board of Directors do not require the preliminaryselection of a lsquoshareholders representative committeersquo but are conducted at thecompanyrsquos annual meeting with all shareholders entitled to vote Shareholders with an

Figure 5 ZTE Ownership Structure

[Zhongxing kuisun tanyuan you bi shangye shisuan geng shenchen de bingyin]rsquo (Caijing 27May 2013)ltwwwiceocomcnguanli201320130527267335shtmlgt accessed 15 January 2015

139 ZTE lsquo2013 Annual Reportrsquo (n 128) 94140 For English versions see ZTE lsquoInvestor Relationsrsquo (ZTE 2017) ltwwwztecomcncnaboutinvestor_

relations201208t20120831_338757htmlgt accessed 1 March 2017 and for Chinese versions seelsquoTouzizhe Guanxi [Investor Relations]rsquo (ZTE 2017) ltwwwztecomcnchinaaboutinvestorrelationsgtaccessed 1 March 2017



aggregate of 3 of the votes can propose directors for nomination to the Board andother motions to be considered at company meetings and the company has adopted acumulative voting system for director elections to give minority shareholders theoption to cast all their votes for a single candidate141 Again unlike Huawei ZTEcomplies with the requirement for listed Chinese companies to have at least one-thirdof its Board consisting of independent non-executive directors who have nomanagement employment or significant shareholding relationship with ZTE Of its14 Board members five are currently independent mostly drawn from the businessand legal faculties of Chinese universities142 Independent directors form a majority onZTErsquos Board committees as discussed below

Yet when we look more closely at the incumbents on ZTErsquos Board it is clear thatthey are effectively representatives of the companyrsquos controlling shareholderZhongxingxin All nine of ZTErsquos Board members who are not classified asindependent are either concurrently on the Board of Zhongxingxin or previouslyworked at Zhongxingxin in senior managerial positions before ZTE was established in1997 While ZTErsquos articles do state that the companyrsquos independent directors maypropose motions for discussion by the Board or the shareholders and the companyrsquosAnnual Report does refer in vague terms to suggestions of the independent directorsthat the company adopted in 2013 the fact that the independent directors are in aminority means that as in other Chinese listed companies their influence onsubstantive management decisions will be extremely limited143 Since theindependent directors are not shareholders they will have little incentive to proposechanges to the companyrsquos management that would maximize benefits to the minorityshareholders at the expense of the controlling shareholder With 3078 of votescontrolled by Zhongxingxin and another 1828 of shares owned by foreignshareholders it would be virtually impossible for a Chinese minority shareholder tosolicit sufficient votes to pass a company resolution to replace directors with candidatesnot approved by Zhongxingxin As discussed below this may explain why nosignificant changes to the companyrsquos Board or senior executives occurred following thecompanyrsquos massive RMB 284 billion loss declared in the 2012 financial year whichthe companyrsquos Chairman admitted was due to various management errors144

3 Sub-committees under the Board of DirectorsZTE has established the standard Board committees for listed companies includingaudit nomination and remuneration committees and these are chaired by independentdirectors with a majority of committee members also being independent directors145

141 ZTE lsquoArticles of Association (revised June 2014)rsquo (ZTE 2014) art 78 ltwwwztecomcnmi_imgsglobalinvestor_relations388857P020130307622508487099pdfgt accessed 1 March 2017

142 ZTE lsquo2013 Annual Reportrsquo (n 128) 100-1143 For discussion of the role of ZTErsquos independent directors see ZTE lsquo2013 Annual Reportrsquo (n 128) 120-1144 See ZTE lsquoAnnual Report 2012rsquo (ZTE 2012) 14 lthttpwwwenztecomcnenaboutinvestor_relations

corporate_reportannual_report201304P020130414667427851218pdfgt accessed 1March 2017 Xieand Song (n 138)

145 ZTE lsquo2013 Annual Reportrsquo (n 128) 117 121-3 gives detailed information about the different Boardcommittees and their members



However there are two details revealed by the companyrsquos public disclosures that castdoubt on the effectiveness of these committees in monitoring the Board First HouWeigui ZTErsquos Chairman and founder is a member of all three Board committees Thiswould presumably constrain frank discussion among the independent directors aboutissues relating to remuneration executive hiring and internal group financing that affectHoursquos interests and the interests of ZTErsquos controlling shareholder Zhongxingxin in whichHou has a very large personal stake through Zhongxing WXT Second the attendancerecord of some independent directors at these committee meetings in 2013was quite poorFor example Wei Wei who is Chair of the remuneration and evaluation committee onlyattended five out of nine committee meetingsWei is also a member of the nomination andaudit committees but only attended two out of four and three out of seven meetings ofthose committees respectively146 Though ZTErsquos articles allow committee members toappoint a proxy to vote at meetings and Wei did so for all the meetings that he missedthe main reason for having independent directors is to provide advice and guidance to theexecutive directors based on their professional expertise ndash which in Weirsquos case is businessmanagement147 ndash and merely voting via proxy falls far short of that intended role Eventhose independent directors who attended ZTErsquos committee and Board meetings may nothave had time to sufficiently digest all of the relevant information about ZTErsquos businessoperations and make fully informed and independent decisions This is because three ofZTErsquos five directors are full-time senior university academics and also concurrently serveon the boards of at least four other large Chinese corporations148

4 Supervisory CommitteeZTE has established a Supervisory Committee with five members two of whom areelected by the shareholders and the other three by employees in a lsquodemocraticrsquoprocess149 As with directors the shareholder-elected supervisors can in theory benominated by shareholders with an aggregate of 3 of votes The employee-electedsupervisors are actually elected by ZTErsquos lsquostaff representativesrsquo and it is not clear howthose staff representatives were chosen150 ZTErsquos articles also make it clear that nodirector or senior officer can serve concurrently as a supervisor151

It is interesting to look at the background of the current supervisors to see whetherthis complex appointment system results in a Supervisory Committee that is trulyindependent of ZTErsquos management152 Not surprisingly the two shareholderrepresentatives on the Supervisory Committee both have longstanding ties to thecontrolling shareholder Zhongxingxin Xu Weiyan worked at Zhongxingxin from1989 and then transferred to ZTE upon its founding in 1997 where she held various

146 ZTE lsquo2013 Annual Reportrsquo (n 128) 130-137147 For WEIrsquos profile see ZTE 2013 Annual Report p100 and see Art 171148 For these directorsrsquo other positions see ZTE lsquoArticles of Associationrsquo (n 141) 100-1 109149 ZTE lsquoArticles of Associationrsquo (n 141) art 191150 ZTE lsquo2013 Annual Reportrsquo (n 128) 108 n 2151 ZTE lsquoArticles of Associationrsquo (n 141) art 192152 Information about the supervisors in this paragraph is drawn from ZTE lsquo2013 Annual Reportrsquo (n 128)

101-2 107-11



positions including lsquoHeadrsquo of the Tender Department Chang Qing was a senior officerat Zhongxingxin and ZhongxingWXT during the 1990s and he is still the assistant tothe general manager and chair of the workersrsquo union of Zhongxingxin as well as adirector of a Zhongxingxin affiliate called Shaanxi Zhongxing More concerning isthat among the three lsquoemployeersquo representatives on the Supervisory Committee theChair Xie Daxiong worked at Zhongxingxin for many years in the 1990s and thenserved as ZTErsquos Executive Vice President until 14 January 2013 when he resigned hisposition and was elected as Chair of the Supervisory Committee in February 2013 Xieis still a director of six subsidiaries of ZTE Clearly he is more of a managementappointee rather than a representative of ZTErsquos rank and file employees The other twoemployee-elected supervisors appear to be more representative of the regularemployees He Xuemei is chair of ZTErsquos labour union and does not appear to holdany officer positions in Zhongxingxin or ZTErsquos affiliates Zhou Huidong is the head ofZTErsquos financial control department and a qualified accountant which should makehim a good supervisor over ZTErsquos financial affairs However with a majority ofsupervisors having such close ties to Zhongxingxin and ZTErsquos senior management it isdifficult to see how the Supervisory Committee can objectively monitor and challengedecisions of ZTErsquos Board of Directors

5 Senior executivesZTErsquos President (equivalent to the CEO) and other senior executives are appointed by theBoard of Directors with the assistance of the nomination committee153 As noted aboveZTErsquos Board is heavily stacked with Zhongxingxin nominees and this influence of thecontrolling shareholder is also clear in the background and connections of ZTErsquos seniorexecutives154ZTE has three executive directors including the president Shi Lirong plus sixexecutive vice presidents All except one of these nine executives were already working in amanagement position at Zhongxingxin during the 1990s and then transferred to ZTErsquosmanagement when the company was registered in 1997 Wei Zaisheng ZTErsquos ExecutiveVice President and Chief Financial Officer is currently still a director of Zhongxingxin Thethree executive directors of ZTE and Wei Zaisheng are all concurrently directors orsupervisors of ZhongxingWXT the 49shareholder of Zhongxingxin Clearly there is alot of overlap between the most senior figures in ZTE the companyrsquos controllingshareholder Zhongxingxin and Zhongxing WXT According to one report 38 of ZTErsquosmost senior current and former managers are beneficial owners of shares in ZhongxingWXT155 We will discuss the consequences of this arrangement further below

6 ZTErsquos Communist Party branchThere is no information about ZTErsquos Communist Party branch on the companyrsquosEnglish or Chinese websites or in its annual reports However the company did

153 ZTE lsquoArticles of Associationrsquo (n 141) arts 179 163(2)154 Information on ZTErsquos senior executive in this paragraph is drawn from ZTE lsquo2013 Annual Reportrsquo (n

128) 99 102-6 109-11155 Xie and Song (n 138)



provide some information in its testimony to the US Congress in 2012 From thatevidence it is clear that like other large Chinese companies ZTE does have aCommunist Party branch with a committee of 19members and two of ZTErsquos directorsconcurrently hold leading positions in the Party branch committee as do some of thelsquomajor shareholders in ZTE entitiesrsquo156 Though ZTE provided the names of thecommittee members to the US congressional commission it requested that the namesbe kept confidential lsquofor fear that the company or the individuals might face retaliationby the Chinese government or Communist Partyrsquo157

We are not aware of any Chinese law that requires the names of companiesrsquoCommunist Party branch members to be kept confidential and after a brief internetsearch we were able to find out that the Party Secretary (dangwei shuji) of ZTErsquosCommunist Party branch committee is Zhang Taifeng whom we noted above is alsoChair of the companyrsquos Supervisory Committee and former Chairman of ZTE and HeXuemei another Supervisor and chair of ZTErsquos workersrsquo union is the director ofZTErsquos Party Office (dangban zhuren)158

This unnecessary secrecy about the membership of the Communist Party branch andits role within the company contrasts dramatically with ZTErsquos transparency in mostother aspects of its corporate governance It may also have negative commercialconsequences as ZTErsquos failure to clearly describe the role of its Communist Partybranch was one of the factors that led the US congressional committee to suspect ZTEof having government and military ties and to recommend blocking US governmentand private institutions from buying its products159

7 Evaluating ZTErsquos corporate governance systemCompared to Huawei ZTE is much more transparent about its corporate governancepractices and has adopted a more orthodox system of shareholder elections andnominations of directors and senior executives Nevertheless it is clear from a carefulreading of its public disclosures that despite the companyrsquos claims to be an independentlegal entity it is overwhelmingly controlled by Zhongxingxin and especially byZhongxingxinrsquos 49 shareholder Zhongxing WXT and most of ZTErsquos directorssupervisors and top executives have close ties to the much more opaque privatecorporationZhongxingWXTConsidering that ZhongxingWXTonly owns an indirect1539stake in ZTErsquos shares this degree of control should be of concern to the 6022majority of ZTErsquos smaller outside investors and possibly also to ZTErsquos employees

Unlike Huawei which does not have any outside shareholders and has generouslyshared its profits with the vast majority of employees through its employee unioninvestment fund ZTErsquos returns to shareholders have been quite weak in the past fewyears and in 2012 it suffered a huge RMB 284 billion loss Likewise ZTErsquos employees

156 PSC Report (n 1) 40157 ibid158 See for example Lina Ta lsquoJiangyoursquos industrial school the Zhongxing Earthquake Resistant Spring Bud

School is completed [Jiangyou gongye xuexiao lsquoZhongxing kangzhen chunlei xuexiaorsquo luocheng]rsquo (SohuNews 14 July 2008) lthttpnewssohucom20080714n258131653shtmlgt accessed 15 January 2015

159 PSC Report (n 1) vi-vii amp 42



currently receive lower salaries on average than those at Huawei and very few of themare permitted to participate in ZTErsquos share-based incentive system160 ZTErsquos ChairmanHouWeigui has declared that share incentives are not necessary to motivate employeesto work hard for the firm161 Yet while ZTErsquos outside shareholders saw the value oftheir shares drop in 2012 and employees were told to tighten their belts Hou and mostZTErsquos senior executives still managed to profit handsomely from their shares inZTE-affiliated companies To give just two examples ZTE reported spending RMB 278million in 2012 and RMB 426 million in 2013 purchasing lsquoraw materialsrsquo from aCayman Islands registered company called Mobi Antenna which is controlled throughan intermediary company by Zhongxing WXT and a group of current and former ZTEsenior executives162 Likewise a company called Zhongxing Energy (Zhongxingnengyuan) whichwas contracted to set up amajor solar power farm in Tianjin reportednet profits of RMB 203million in 2012 ZTE only has a 2326 interest in ZhongxingEnergy and the rest of the shares are held by Zhongxing WXT and two of its affiliatedcompanies in which ZTE has no shareholdings163 It is not clear why ZTE was onlygiven a minority holding in Zhongxing Energy

ZTErsquos controlling shareholder Zhongxingxin and its two State-controlled investorshave not missed out on the opportunity to profit from supplying ZTE as ZTE alsopurchased RMB 235 million of lsquoraw materialsrsquo from Zhongxingxin in 2012 andanother RMB 227 million in 2013164

It is true that ZTErsquos annual reports do disclose these related party transactions butthey do not make it clear how extensive the personal interests of ZTErsquos executives are inmost of the affiliated companies Outside investors would need to laboriously trawlthrough the public disclosures of several other companies to find out the complexinterconnections between them Though ZTErsquos annual reports declared that thesevarious purchases and related party transactions were all conducted at lsquomarket valuersquoand were approved by ZTErsquos independent directors and shareholders there appears tobe a major conflict of interest when such large amounts of money are being diverted toaffiliated companies in a way that directly benefits the de facto controlling shareholdersand senior executives at the expense of ZTErsquos public shareholders If ZTE had notexperienced major losses in 2012 leading to intense media scrutiny its opaquecorporate structure might never have been exposed to the public165

The suspicions of the US congressional committee that ZTE is somehow alliedwith theChinese government and military and therefore its products pose a risk to US nationalsecurity appear overblown While it is true that two of Zhongxingxinrsquos threeshareholders are State-controlled entities ndash one being a research institute and the other a

160 Xie and Song (n 138)161 ibid162 See ZTE lsquo2013 Annual Reportrsquo (n 128) 259 and for Mobi Developmentrsquos tortuous ownership structure

see HKEX lsquoMobi Development Co Ltd Prospectusrsquo (HKEX) 58 and 70 lthttpwwwenztecomcnenaboutinvestor_relationscorporate_reportannual_report201404P020140408599365909862pdfgtaccessed 15 January 2015

163 Xie and Song (n 138)164 ZTE lsquo2013 Annual Reportrsquo (n 128) 259165 Xie and Song (n 138)



State-controlled business enterprise ndash the largest shareholder of Zhongxingxin is a privatecompany ZhongxingWXT which is controlled by HouWeigui and several other seniorZTE executives And based on their passive behavior over the past 17 years since ZTEwas set up it appears that the motives of the two State-controlled investors are purelycommercial rather than political in other words to maximize their profits from ZTE andZhongxingxinrsquos other business ventures

Nevertheless to allay foreign government suspicions about potential Chinesegovernment influence over ZTE the company should be much more transparent inexplaining the role and leadership of ZTErsquos Communist Party branch how it interactswith ZTErsquos Board and senior executives and where it fits into the companyrsquos corporategovernance structure It should also explain what role the two State-controlledshareholders of Zhongxingxin play in managing ZTE (if any) and rationalize itsbusiness structure to ensure that any profits from affiliated companies go through ZTErather than being diverted to its parent company or to ZhongxingWXT at the expenseof ZTErsquos retail shareholders

iv analysis of current chinese and internationalcorporate governance disclosure rules as applied by

chinese ict firmsIn its 2011 self-assessment report on Chinese corporate governance the CSRC claimedthat there are no longer any significant deficiencies in the Chinese corporate legalframework when measured against the benchmarks set out in the OECD Principles166

The problem with this claim is that it assumes the OECD Principles provide aneffective basis for creating a corporate governance framework and are appropriate forthe Chinese business and political environment But as we saw with the fourcorporations discussed above they manage to sidestep many of the rules by setting upstructures with ultimate controlling corporations that are much less transparent thantheir listed subsidiaries or in the case of Huawei they are unlisted and therefore are notsubject to many of the corporate governance disclosure rules in the first place As a resultwhile the listed arms of these corporations appear to disclose large amounts of informationabout their businesses and have created corporate governance structures that tick all of thecompliance boxes some key details are missing such as how their parent corporations aregoverned and how the senior executives of the parent corporations are appointed Thisinformation is material for investors because of the overlap between the parentcorporationsrsquo executives and board members of the listed subsidiaries

This problem is certainly not unique to China In many East Asian countries largeconglomerates either state- or family- controlled often with listed subsidiaries play amajor role in local and regional economies ndash South Korean chaebol and Japanesekeiretsu being the most famous examples167

166 CSRC Report (n 8) 4167 See Hideki Kanda Kon-Sik Kim Curtis J Milhaupt (eds) Transforming Corporate Governance in East

Asia (Routledge 2008)



The obvious solution to this problem is to require the controlling corporateshareholders to disclose information to the same extent as their listed subsidiaries Thismay seem draconian but in the case of State-owned parent corporations the OECDhas itself recommended that they publish audited financial statements and informationabout how their senior managers are appointed so that they will be accountable to thetaxpayers who ultimately fund them This recommendation appears in the OECDrsquosseparate set of SOE Guidelines drafted in 2005 specifically to address the uniquegovernance challenges in countries like China with significant state ownership ofbusiness entities168 However the Chinese State-controlled corporations that wediscussed have not responded to this recommendation and the CSRCrsquos self-assessmentdoes not refer to the OECDrsquos SOE Guidelines at all This is a curious omissionconsidering the large number of Chinese listed corporations that are controlledby SOEs

In the case of mixed ownership listed corporations like ZTE if SOEs own asignificant minority of their shares the same public interest factor would make itdesirable to require detailed disclosure by these corporate shareholders in the listedcompaniesrsquo reports Even when the majority or ultimate controlling shareholder of thelisted company is a private corporation detailed disclosure would be desirable Itwould discourage individual shareholders from hiding behind corporate vehicles todisguise their ownership as happened with ZTE and its ultimate controller ZhongxingWXT If a major shareholder of the parent corporation is controlled by the seniorexecutives of the listed company this fact should be disclosed to outside shareholdersin the listed companyrsquos reports so they do not have to engage in extensive investigationof corporate registration files in mainland China or opaque offshore jurisdictions likethe British Virgin Islands and Cayman Islands169

For private corporations like Huawei which have never been listed there arecurrently no mandatory public disclosure requirements and there are only minimalrules on board structure and shareholder participation in the PRC Company Law It istrue that Huawei has recently made an effort to increase transparency by publishingaudited financial statements and details on its employee shareholding fund and boardappointment process Yet this is entirely voluntary and other Chinese private firmsmay not be so forthcoming There are also questions about whether Huaweirsquosemployee representative commission truly complies with the shareholder votingprinciples in the PRC Company Law which stipulate that shareholders with moreshares should receive more votes This is particularly important when it comes toelecting Huaweirsquos Board of Directors It is likely that many other large private Chinesefirms have engaged in even more unorthodox corporate governance practices but dueto lack of disclosure they remain under the radar Even though they are private entitiesthere may be significant social disruption if such firms suddenly collapse due to corrupt

168 OECD SOE Guidelines (n 7) 16 23-4 43-4169 Milhaupt and Zhang (n 2) after noting the complexities of corporate ownership in SOEs and hidden state

influence in supposedly private firms also suggest that regulatory reform needs to take account of thesecomplexities yet they do not propose specific corporate governance reformmeasures that would solve theproblems such as increased disclosure requirements



or fraudulent behaviour by their executives impacting not only thousands ofemployees but also suppliers and local communities

One solution would be for the Chinese government to introduce a graduated systemof disclosure for unlisted corporations similar to countries like AustraliaSmall unlisted (or proprietary) corporations would be exempt from public disclosurebut large unlisted corporations would be required to publish detailed annual andquarterly reports and audited financial statements just like listed corporationsThe only difference is that unlisted corporations would not need to do continuousdisclosure whenever a material change occurs as their share prices are notsubject to fluctuation on a public securities market The definition of a large unlistedcorporation would be based on whether the corporation meets two out of threeconditions relating to the total value of its assets the number of employees and itsannual revenue170

The Chinese government appears to be heading in the direction of greater disclosurerequirements for all Chinese corporations In 2014 the Legislative Office of the StateCouncil issued a set of regulations entitled lsquoProvisional Rules for Public Disclosure ofInformation by Enterprisesrsquo171 These Rules require government regulators to publiclydisclose various kinds of information submitted to them by all business enterprises inChina including all registered limited liability and joint stock companies In particularSAIC must publicly disclose details of all companiesrsquo shareholders and share transfersany registered personal property security agreements and any administrative penaltiesexacted against companies172 Companies also have a legal duty to publicly discloseinformation about their shareholders173 Finally SAIC has the power to place businessenterprises that do not comply with these disclosure duties on a publicly available list oflsquoabnormally operatedrsquo businesses for up to three years and if the non-compliancecontinues after three years or if SAIC has suspended its business license for non-compliance the enterprise will be placed on a list of lsquoenterprises that have seriouslybreached the lawrsquo174 Potential creditors and investors will see this as a warning to keeptheir distance from enterprises on these name-and-shame lists and governmentinstitutions will be discouraged from granting them tenders or procurementcontracts175

170 In Australia if a corporation (including entities that it controls) meets two out of the following threeconditions it will be defined as a lsquolarge proprietary companyrsquo subject to the stricter disclosurerequirements (1) consolidated revenue exceeds AUD25 million (2) consolidated gross assets valueexceeds $125 million and (3) 50 or more employees see Corporations Act (Commonwealth 2001)s 45A(3)

171 Qiye Xinxi Gongshi Zanxing Tiaoli [Provisional Rules for Public Disclosure of Information byEnterprises] (promulgated by the PRC State Council effective 1 October 2014) (Disclosure Rules)

172 Disclosure Rules r 1 and 7 Other relevant government institutions would be required to publicly disclosedetails of any licences granted to business enterprises and any administrative sanctions ordered againstthem (Rule 8) All business enterprises would be required to submit annual reports to SAIC containingdetailed information about their business including assets liabilities sales business revenues net profitstax amounts paid and capital amounts Under the rules however companies may elect not to allow SAICto publicly disclose the detailed financial figures associated with their enterprise Disclosure Rules r 9-10

173 ibid r 11174 ibid r 18-20175 ibid r 22



This new disclosure system appears to be much broader than those in place in mostother jurisdictions176 If properly enforced these rules should create a more market-based system for protecting creditors and investors than the previous system which haseffectively allowed unlisted corporations to remain completely opaque However evenin their current form they include amajor loophole that allows companies to opt out ofhaving much of their detailed financial information disclosed to the public177

A graduated disclosure system with no such loopholes focusing on larger unlistedcorporations would be more manageable and would provide greater protection topotential investors employees and members of the public

Another key issue that emerged from our analysis of Chinese ICT corporations wasthe lack of clear guidelines for disclosing the role and composition of corporationsrsquoCCPCommittees ChinaMobile and China Telecomrsquos listed armsmake no secret of thefact that all their senior executives are concurrently leaders of the parent corporationsrsquoCCP Committees But while they provide plenty of information on how CCP policiesare being promoted within their firms and describe various social and culturalactivities organized by their CCP Committees they do not clearly explain how the CCPCommittees interact with the board of directors of the listed corporations or what rolethe CCP plays in appointing senior personnel of those corporations There is no doubtthat the CCP has a major influence on such appointments as we saw with the suddenreshuffle of CEOs of several State telecom firms in 2004 But if this is the case for allState-controlled firms the PRC Company Law or Code of Corporate Governanceshould introduce specific rules to regularize the CCPrsquos executive appointment functionand to require companies to explain why the CCPrsquos choice of executives is in the bestinterests of the corporation and its shareholders The PRC Company Law should alsoset out in more detail the functions of the CCP Committees within business firms andthe limitations on their powers as currently occurs with the board of directorssupervisory committee and shareholders assembly178

The CCPrsquos role in State-controlled corporations is no secret even if it is oftenomitted in the public disclosures of their listed arms But as we saw with Huawei andZTE privately-controlled or mixed ownership firms are often reluctant to publicize therole or existence of their CCP Committees for fear of lsquorevealing State secretsrsquo This fearmay be exaggerated as some private firms have disclosed this information withoutrepercussions Yet it vividly demonstrates the need for explicit guidance in the PRCCompany Law or other regulations If private firms are required to establish CCPCommittees they should be encouraged or required to publicly reveal the leadership of

176 In most other jurisdictions such as the UK US Canada and Australia only public companies largeunlisted companies or reporting issuers need to publicly disclose information about their finances andshareholders small private companies generally need only provide minimal information to their relevantcorporate regulator such as company registered office and details of shareholders directors andcompany secretary Having said this most jurisdictions also have a personal property registry wherepotential creditors can conduct searches for prior secured interests registered against the company

177 Disclosure Rules (n 170) r 106 Companies can opt out of publicly disclosing their total assets andliabilities total sales business revenues gross and net profits total taxes paid and shareholdersrsquo equity

178 PRC Company Law art 19 only states that companies must allow the CCP to set up a branch within thefirm but does not specify what the CCP branch should do and what powers it has in relation to the otherorgans of the company



those Committees how they interact with the firmrsquos management and how their rolediffers from that of the managers As with financial disclosures this requirement couldbe waived for small unlisted corporations becoming mandatory for larger unlisted andpublic listed corporations There is no reason why the CCP Committees should remainin the shadows as they are an integral part of Chinese firmsrsquo corporate governancestructures

v creating a more effective synthesis ofinternational and chinese corporate governance

practicesThe unclear role of the CCP in business firms relates to a broader problem with thecurrent Chinese corporate governance framework The attempt by Chinese regulatorsto import international corporate governance approaches that comply with the OECDPrinciples and graft them onto an existing partly State-dominated industrialstructure has resulted in an over-complex hybrid system where authority is dispersedover many different organs without a careful consideration of how those organsshould interact with each other For example the OECD Principles recommendindependent directors so the CSRC requires each listed firm to have independentdirectors but being in a minority on the board they have no real power to demandchanges from the executive directors Unlike supervisors independent directors do nothave the right to bring a lawsuit against other directors for breaching the PRCCompany Law179

By contrast supervisors do have various powers granted under the PRC CompanyLaw including calling shareholder meetings and bringing representative lawsuitsagainst directors but as we saw earlier most supervisors are full-time employees offirms with a lower rank than the directors they are supposed to supervise If they wantto keep their jobs they will have no incentive to offend wayward directors bychallenging their decisions or threatening lawsuits against them

Due to a shortage of qualified candidates it may not be possible to have a majorityof independent directors on Chinese boards but rather than maintaining the currentineffective approach it would be more sensible to replace the independent directorsystem with an lsquoindependent supervisorsrsquo system The selection criteria for independentsupervisors could be similar to those for independent directors ndash experienced businesspeople with no material ties to the company ndash but by appointing them as supervisorsthey would have much greater powers to monitor executive behaviour and enforcecompliance and unlike current supervisors they would not be concerned about losingtheir jobs in the firm180

This recommended change to the independent director system along with theproposals for expanded disclosure by unlisted and parent corporations discussed

179 See PRC Company Law arts 53 151180 The supervisory board could still include representatives of shareholders and employees as it does

currently so long as a significant proportion of the other supervisors are independent of those ties



above would make corporations more transparent and accountable to bothshareholders and the general public They would take account of the unique featuresof the Chinese business and political environment in a way that lsquotick-the-boxrsquoadherence to the OECD Principles does not They would also help to reduce theincidence of corrupt behaviour and opaque related party transactions that haveplagued so many large Chinese corporations over the past decades including ICTfirms Such changes would support the development of the kind of rule of law societythat the current Chinese leadership has strongly advocated for



Transparency and Opaqueness in the Chinese ICT Sector A Critique of Chinese and International Corporate GovernanceNorms

ISETTING THE CONTEXT

IICORPORATE GOVERNANCE OF STATE-OWNED TELECOM FIRMS

ABrief History of China Telecom and China Mobile

BChina Telecom Corporation Ownership Structure

Figure 1CT Corporationampx2019s Shareholders

Figure 2CCS Corporationampx2019s Shareholders

CChina Mobile Ownership Structure

Figure 3CM Ltd

DBoards of Directors at the Major Subsidiaries of China Telecom and China Mobile

EBoards of Directors at Parent Companies of China Telecom and China Mobile

FSub-committees under the Boards of Directors

GSupervisory Committees

HParty Presence and Government Influence

IAnalysis China Telecom China Mobile and the OECD Corporate Governance Principles

IIIPRIVATE AND MIXED OWNERSHIP ICT FIRMS

AUnlisted Private ICT Firm Huawei Technologies (Huawei)76

1Huaweiampx2019s ownership structure

Figure 4Huaweiampx2019s Ownership Structure

Outline placeholder

2Board of directors

3Sub-committees under the board of directors

4Supervisory Committee

5Senior executives

6Huaweiampx2019s Communist Party branch

7Evaluating Huaweiampx2019s corporate governance system

BZTE Corporation A Listed Privateampx002FMixed Ownership ICT Firm127

1ZTEampx2019s ownership

2ZTEampx2019s Board of Directors

Figure 5ZTE Ownership Structure

Outline placeholder

3Sub-committees under the Board of Directors


5Senior executives

6ZTEampx2019s Communist Party branch

7Evaluating ZTEampx2019s corporate governance system

IVANALYSIS OF CURRENT CHINESE AND INTERNATIONAL CORPORATE GOVERNANCE DISCLOSURE RULES AS APPLIED BY CHINESE ICT FIRMS

VCREATING A MORE EFFECTIVE SYNTHESIS OF INTERNATIONAL AND CHINESE CORPORATE GOVERNANCE PRACTICES

and corporate governance structures of most largeChinese firms which developedwithina rapidly changing political and legal environment necessitating constant adaptation andpragmatic compromise2 But it also results from a lack of detailed analysis of howindividual Chinese firms apply corporate governance rules to their specific situations

There are certainly numerous books and articles on Chinese corporate governancebut most focus on the general laws regulations and problems of implementation orengage in broad statistical surveys of large numbers of firms without analyzing andcomparing the ways that selected individual firms have structured their governancewithin or beyond the legal framework3 Most previous studies also share the tendencyof comparative corporate governance research to restrict their focus to public listedcompanies or in the case of China the listed arms of large mainly State-controlledcorporate groups4 Certainly listed corporations are subject to stricter corporategovernance regimes due to the fact that they issue shares to retail investors but to focusonly on listed companies overlooks some of the more innovative ways that privateChinese firms have structured their governance systems5 It also downplays the fact

Telecommunications Companies Huawei and ZTErsquo (US House of Representatives 8 October 2012)lthttpsintelligencehousegovsitesintelligencehousegovfilesdocumentshuawei-zte20investigative20report20(final)pdfgt accessed 1March 2017 (PSC Report) See also Evan SMedeiros Roger CliffKeith Crane and James C Mulvenon lsquoA New Direction for Chinarsquos Defense Industryrsquo (RANDCorporation 2005) ltwwwrandorgcontentdamrandpubsmonographs2005RAND_MG334pdfgtaccessed 1 March 2017 on which the PSC Report heavily relied Popular accounts of the ChineseCommunist Party (CCP) also give this impression Rowan Callick Party Time Who Runs China andHow (Black Inc 2013) Callick states that the CCP has lsquoultimate approval over every investment andbranches in all state-owned enterprises and 85 of private enterprisesrsquo at 142-43 He also quotes ChengLi an American expert on Chinese politics as saying lsquoAll the statersquos assets are the Partyrsquos in reality if notin theoryrsquo at 43

2 For a good introduction to this ownership complexity see CurtisMilhaupt andWentong Zhang lsquoBeyondOwnership State Capitalism and the Chinese Firmrsquo (2015) 103 Georgetown Law Journal 665

3 The literature on Chinese corporate governance is too extensive to cite comprehensively here but for afew relatively recent monographs and edited collections see Benjamin L Liebman and Curtis J Milhaupt(eds) Regulating the Visible Hand The Institutional Implications of Chinese State Capitalism (OxfordUniversity Press 2015) Jean Jinghan Chen A Primer on Corporate Governance China (Business ExpertPress 2015) Ding Chen Corporate Governance Enforcement and Financial Development The ChineseExperience (Edward Elgar 2013) Michael Tan Corporate Governance and Banking in China(Routledge 2013) Lin Zhang Venture Capital and the Corporate Governance of Chinese ListedCompanies (Springer 2012) Jing Leng Corporate Governance and Financial Reform in ChinarsquosTransition Economy (Hong Kong University Press 2009) Chun Liao The Governance Structures ofChinese Firms Innovation Competitiveness and Growth in a Dual Economy (Springer-Verlag 2009)Yuwa Wei Securities Markets and Corporate Governance A Chinese Experience (Ashgate 2009)Masao Nakamura (ed) Changing Corporate Governance Practices in China and Japan Adaptations ofAnglo-American Practices (Palgrave Macmillan 2008) Guanghua Yu Comparative CorporateGovernance in China Political Economy and Legal Infrastructure (Routledge 2007) Ross Garnaut(ed) Chinarsquos Ownership Transformation Process Outcomes Prospects (World Bank 2005)

4 For example Lin (n 3) Jing (n 3) Wei (n 3) Nakamura (n 3) Yu (n 3) Other studies focus exclusively onlarge state-owned enterprises (SOEs) such as Liebman and Milhaupt (n 3) or downplay the distinctionsbetween SOEs and private firms for example Milhaupt and Zhang (n 2)

5 There are certainly some excellent studies on the privatization of Chinese business firms but only fewexamine the corporate governance structures of individual private firms in detail See for exampleNicholas R Lardy Markets Over Mao (Peterson Institute for International Economics 2014) Zeng JinState-Led Privatization in China (Routledge 2013) Jie Chen and Bruce Dickson Allies of the StateChinarsquos Private Entrepreneurs and Democratic Change (Harvard University Press 2010) Bruce DicksonWealth into Power The Communist Partyrsquos Embrace of Chinarsquos Private Sector (Cambridge UniversityPress 2008) Kellee S Tsai Capitalism Without Democracy The Private Sector in Contemporary China(Cornell University Press 2007) Shahid Yusuf et al Under New Ownership Privatizing Chinarsquos State-Owned Enterprises (Stanford University Press 2006)


































































































































58 ibid





















































Chubanshe 2004) 116







































































125 PSC Report (n 1)14 21-2


















































101-2 107-11







128) 99 102-6 109-11155 Xie and Song (n 138)














































































Figure 3CM Ltd











Outline placeholder

2Board of directors



5Senior executives







Outline placeholder



5Senior executives




































































































































58 ibid





















































Chubanshe 2004) 116







































































125 PSC Report (n 1)14 21-2


















































101-2 107-11







128) 99 102-6 109-11155 Xie and Song (n 138)














































































Figure 3CM Ltd











Outline placeholder

2Board of directors



5Senior executives







Outline placeholder



5Senior executives























































Chubanshe 2004) 116







































































125 PSC Report (n 1)14 21-2


















































101-2 107-11







128) 99 102-6 109-11155 Xie and Song (n 138)














































































Figure 3CM Ltd











Outline placeholder

2Board of directors



5Senior executives







Outline placeholder



5Senior executives









































































125 PSC Report (n 1)14 21-2


















































101-2 107-11







128) 99 102-6 109-11155 Xie and Song (n 138)














































































Figure 3CM Ltd











Outline placeholder

2Board of directors



5Senior executives







Outline placeholder



5Senior executives




















































101-2 107-11







128) 99 102-6 109-11155 Xie and Song (n 138)














































































Figure 3CM Ltd











Outline placeholder

2Board of directors



5Senior executives







Outline placeholder



5Senior executives









128) 99 102-6 109-11155 Xie and Song (n 138)














































































Figure 3CM Ltd











Outline placeholder

2Board of directors



5Senior executives







Outline placeholder



5Senior executives
















































































Figure 3CM Ltd











Outline placeholder

2Board of directors



5Senior executives







Outline placeholder



5Senior executives





transparency and opaqueness in the chinese ict sector: a ...€¦ · regulatory commission (csrc)...

Documents