Gome saga shines light on mainland way of business
A bitter boardroom fight inside Gome Electrical Appliances serves as a rare window into the way business is sometimes done on the mainland. The battle pits its jailed founder Wong Kwong-yu against Chen Xiao, the current chairman. It's often believed that mainland business practices are becoming more like those of capitalist economies elsewhere; but a very different picture has emerged from the extraordinary rise and fall of Wong - once considered the mainland's richest man - and his continuing ability to wage a war from behind bars against those running the company.
As Gome's majority shareholder, Wong - known on the mainland as Huang Guangyu - has forced the Hong Kong-listed company to call a special general meeting on September 28. Its main purpose is to enable shareholders to vote on Wong's proposal to replace Chen and another top Gome executive with his sister Huang Yanhong and lawyer Zou Xiaochun. The choice should not be a difficult one to make for minority or independent shareholders. The fight, after all, is between the current management and a convicted criminal serving a 14-year jail sentence for illegal business dealings, insider trading and corporate bribery. With backing from US private equity group Bain Capital, Gome's second-largest shareholder, Chen and his management team have launched a plan to revive Gome's fortunes, once China's biggest consumer electronics chain. Wong claims shareholder value has suffered as a result of Chen's poor management. That is a bit rich, seeing as most of the plunge in Gome's share price can be attributed to his disappearance in February 2008 and his reappearance less than a year later to face charges of 'economic crimes'. Share prices have since stabilised.
Wong still has many supporters and sympathisers on the mainland. His rags-to-riches story has inspired many; his crimes appear to be no worse than those of other corrupt officials, princelings and well-connected businesspeople who have enjoyed their wealth with impunity. Nationalist sentiment has also been stirred because of Bain's growing influence and involvement in one of the few authentic mainland brands. This is despite the fact that Huang and close relatives had first sold large quantities of shares to foreign investors when he was still Gome's chairman.
For all that, some of Wong's proposals have merit. He has offered to inject 376 privately owned stores into the listed company. The stores generate hundreds of millions in management fees each year for Gome. If Wong's proposals are voted down, their commercial relations will be severed.
More importantly, Wong wants to revoke a general mandate that Chen, with Bain's backing, has obtained to issue new shares for cash without first offering them to existing shareholders. Clearly, he is right that shareholders will suffer dilution if the mandate is carried out. His proposal may well force Gome management to limit issuing the numbers of new shares to avoid significant dilution. Unlike the offer of asset injection, shareholders can have their cake and eat it by supporting Wong's proposal to revoke the mandate while rejecting all his other proposals.
But whatever its outcome, this boardroom battle shows how investors cannot ignore such potential imponderables as corruption, nationalism and politically motivated prosecution while doing business on the mainland. It certainly provides an insight into capitalism with Chinese characteristics.