A novel power structure for China Inc.

HAN WOO-DUK
The author is a senior reporter of the China Lab.

A company’s reason for existence is the pursuit of profits. The CEO takes the lead to chase money. What would happen if a company had a command system other than a CEO? It is something unimaginable for Koreans. But it’s a different story in China.

On Dec. 29, China revised the Company Law. The revision contains the clause, “A corporation with more than 300 employees must include an employee representative in its board of directors.” In the process of major decision-making, the representative of employees should be included. Foreign companies are no exception. That’s why Korean conglomerates operating their large-scale factories in China — such as Samsung, SK and Hyundai — are increasingly nervous.

The problem is that the employee representative actually represents a trade union that represents the Communist Party of China (CPC). The union oversees all employee-related issues, including the selection of the “employee representative.” The revision means that the CPC will be directly involved in corporate decision-making processes on investments, restructuring and business withdrawals.

The project has been in progress for a long time. Starting his second term in office in 2017, Chinese President Xi Jinping stressed the need to “build a party organization wherever party members are” to pressure Chinese private companies and large foreign companies.

As companies, private or public, had to be wary of the authorities and follow the direction, state control over the corporate sector grew even stronger. The revised Company Law signifies the completion of the project, effectively showing how the state capitalism of China works.

The trade union is a body spreading party lines to companies. The constitution of the CPC defines the role of the trade union as “fulfillment of party lines and policies” and “supervision and control of companies’ compliance with the law.” The clause helps the CPC closely monitor whether companies follow the party lines. CEOs must care about it as the results of board meetings will be reported to the CPC through the trade union, and the party’s orders will be delivered through the trade union.

Not all unions are hostile. They have little presence in small companies and often play positive roles like cleaning up trash and creating a healthy work culture. Nevertheless, it is a burden for companies because a separate power structure apart from the CEO line exists within them.

Lately, the Xi Jinping leadership emphasizes expanded openness to keep foreign investors from leaving China. At the same time, Beijing seeks to control business activities with the “Anti-spy Law” and intervenes in management with the Company Law. Who would regard Chinese government’s promise to improve the environment for foreign-invested companies under such conditions as being sincere?