By letting staff share Huawei’s stock and profit, Ren Zhengfei instils kinship and unleashes telecom giant’s ‘wolf culture’
- In the second instalment of our eight-part series on Huawei, Peggy Sito examines the unique shareholding structure of China’s largest producer of telecom gear
- Huawei is 100 per cent owned by 104,572 eligible employees, including founder Ren Zhengfei, out of a total staff of 194,000 at the end of 2019
For his initiative, Wang was granted the right to buy tens of thousands of Huawei’s virtual shares, each valued at 7.85 yuan (US$1.10). Wang declined to divulge his exact stake.
The reward for Wang’s exceptional initiative offers a glimpse into an unusual corporate and shareholding structure found in very few places in business: Huawei is 100 per cent owned by 104,572 of the company’s employees, including Ren, out of a total staff size of 194,000 at the end of 2019. The staff shareholding structure, most famously practised by the UK department store chain the John Lewis Partnership, turns eligible employees into stakeholders, engendering the kind of kinship and shared responsibility that contribute to Huawei’s “wolf culture”.
Huawei is owned by a holding company called Huawei Investment & Holding, with two shareholders: Ren with 0.94 per cent, and an entity called the Union of Huawei Investment & Holding, which holds the remaining 99.06 per cent on behalf of eligible employees.
Huawei enacted its Employee Stock Ownership Plan (ESOP) in 1987 at its establishment, and implemented it in 2003 two years after Shenzhen’s local authorities laid the rules for it. Managers recommend the shares entitled by their team members as part of their pay, based on performance.
The shares are not granted freely, but must be bought for a price calculated from Huawei’s asset value per share from the preceding year. The shares cannot be traded among staff, but can be sold back to the union, according to the rules. Retired employees also own stakes, but those who leave Huawei’s employment must sell their shares back if they’ve worked at the company for less than eight years.
With their stock, staff share the company’s annual profit as dividends, which rose 3 per cent to 1.05 yuan in 2018. Huawei’s dividend yield of 13.3 per cent was comparable with the fifth-highest payer on the S&P 500 index, surpassing the 2.3 per cent average on the benchmark. The constituents of Hang Seng Index paid 3.9 per cent on average.
“Huawei is privately owned by employees, governed by employees and funded by employees,” said Jiang Xisheng chief secretary of the board of Huawei Holding and one of the first employees to join Ren.
Huawei was one of a few companies that tried staff shareholding. Ping An Insurance, China Vanke the property developer, and Lenovo Group the personal computer maker, all experimented with similar structures before ultimately deciding to sell shares to the public, Jiang said.
At Huawei’s archive in a low-rise building surrounded by verdant greenery and a pond with black swans, a custodian with a headmistress’ mien stands guard over printed records of every eligible employee’s latest shareholding, available only for the staff’s own perusal.
Ren, estimated by Forbes to be worth US$1.1 billion – number 276 on the China Rich List 2019 – also partakes in Huawei’s options, bringing his total 2019 stake to 1.04 per cent, according to the data. Meng, his daughter, is there too, and is very well compensated. Shenzhen’s local authorities, the Communist Party and the Chinese government don’t own shares in Huawei, according to the data.
The Party does make it a habit to recruit the elite of Chinese society, which means that Huawei, with its army of PhDs and Ivy League post-doctorate researchers, probably has a higher-than-average share of communists among its staff. One in every three employees has a Master’s degree, or higher.
“Whether an employee shareholder is a Communist Party member is not our concern really,” because it has no bearing on Huawei’s operations, Jiang said, adding that the company doesn’t ask staff about their political affiliation anywhere in the 170 countries it operates in.
The inception of Huawei’s ownership traces back to the company’s establishment, when Ren started selling telephone switchboards with 21,000 yuan (US$5,630 in 1987) in his pocket. Short on equity capital and without access to loans from state-owned banks that favoured their state-owned brethren, Ren paid the handful of staff in his budding company with stock, in lieu of salaries and bonuses.
“There weren’t many private enterprises in China during the late 1980s, so we didn’t really know how capitalist ownership worked,” Jiang said. “Plus, Mr Ren didn’t have much money, so he could not pay his staff in cash, only with promises of future earnings and dividends.”
Employee shareholders also provide checks and balances in the company. Ultimate authority rests in the 115-member Representatives’ Commission elected by eligible staff shareholders from nine business divisions, on the basis of one vote per share. Ren, with his 1.04 per cent stake, is also entitled to vote. Retired staff, while enjoying Huawei’s dividends, don’t get to vote.
The commission in turn elects 17 directors to sit on Huawei’s board, responsible for corporate strategy, operations and management.
That means Huawei has three leaders at any one time: Liang, one of the three Rotating Chairmen, and the founder. Ren, with his veto power – yet to be exercised, his publicists said – remains the boss, mentor-in-chief and the company’s moral compass. Still, the former military man, who turns 76 in October, made light of his place in the world.
“I only play a symbolic role, like a clay idol in a temple. Without it, the temple would look empty, but in truth, the idol doesn’t really do anything,” he said in Mandarin, thick with an accent from his native Guizhou province. “I don’t manage any specific things. I’m not even involved in management appointments. Whether I’m at Huawei has no real impact. I’ve been a puppet for a while, and I’ll continue to be one in the future. I’m just a clay idol, getting smaller and smaller every day. One day, I’ll disappear.”
“We make our audit reports publicly available so that customers can trust us,” Ren said. “We aren’t just publishing our financial statements, we are showing the world that we are open. This is something we need to do. We are not a listed company, but it doesn’t mean we have more freedom or can relax.”
The combination of Huawei’s unique structure, and its previous aversion to publicity, have raised suspicions among outsiders, said Xiao Zhixing, Distinguished Fellow at the INSEAD Business School in Singapore.
“Listing the company, or at least part of the company, somewhere outside China is a possibility” to instil confidence, Xiao said. “Another possibility is to cut the company into two: one remaining in China; and the other – which will engage in infrastructure business with the rest of the world – that follows Western rules completely.”
But for Wang, whose letter a year ago unlocked Huawei’s gates and ushered in an unprecedented period of openness, his dilemma is more practical: should he buy more Huawei shares, or place a down payment on a Shenzhen apartment?
“It is the first year I’m getting the shares and I have no plan to sell them,” Wang said. “For colleagues who have been receiving dividends for several years, they could consider cashing in on the shares as they now face mortgage pressures in Shenzhen.”
With additional reporting by Jodi Xu Klein in New York, Robert Delaney in Washington DC
Read more from this series on Huawei, China and the US.
(Corrects story to say that 21,000 yuan = US$5,630 in 1987, not US$78,330 )
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