Constitutional Monarchy at a Chinese Agrobusiness

From Nation, page 11, issue 401, Jan 5, 2009
Translated by Zuo Maohong
Original article: [Chinese]

On Dec 18, employees from Dawu Group gathered in the auditorium of Xushui Middle School to elect the company's new board of directors.

This was already the third such board election since Sun Dawu, the firm's founder, created a "constitutional monarchy" to manage his diversified agrobusiness in 2004.

After a brief stint in prison that left his firm without an adept at the helm, Sun, a former peasant, sought to model his growing firm's corporate governance in a way that would guarantee smart leadership and stable growth well into the future.

Return of the King
Sun started his farming business with his wife in their hometown of Xushui county, Hebei province, in 1985. With his applications for credit declined by local banks, he raised funds from locals and promised them a better interest rate than banks. A safe work environment and good profits gained the company creditability among locals, whose deposits helped it grow to a diversified business in farming, processing, education, tourism and more.

In 2003, Sun and his two brothers were put behind bars for illegally holding public deposits. Sun then appointed his 25-year-old son Sun Meng as the new board chairman.

The son was apparently not ready to be a successor. The previous year, Dawu Group made a profit of 9.8 million yuan. That year, they lost 5.8 million yuan.

This provoked Sun into thinking how he should select and train the right successor. His wife had the same worry. "Is it possible to design a system that can keep the company developing and our kids safe at the same time, a system that allows them to participate in business if they have the ability and still enjoy a happy life if not?" she asked.

That was the original intention of his "constitutional monarchy" system, Sun told the EO.

Unlike other companies, the board of directors of Dawu Group was not made up of shareholders. To Sun, the share-holding system meant splitting up the firm.

"But absolute rule leads to over-dependence on one person's ability. What I can do well is not necessarily my son's strong point. He can inherit my wealth, but not my ability. That's why 80% of family businesses collapsed after they are passed down to the third or even second generation," he said.

Separation of Powers
Under Sun's "constitutional monarchy", the company's ownership, decision-making and operational powers were separate but mutually restricted.

The board of directors and the executive board were respectively responsible for decision-making and operations. The two boards were under supervision of the supervisory committee, which was chaired by the owner of the company.

The executive board was made up of subsidiary company chiefs. The board chairman, elected by all staff, was also the company's general manager.

The supervisory committee was made up of Sun's family members. The ownership would be inherited by his offspring, and the corresponding property would not be divided.

The election of the board of directors was similar to the representative democracy in western countries.

Before the election, there would be two preliminary votes to select candidates. In the first round, all employees of the company were divided into six groups to recommend candidates. In the second round, employees with a length of service of over three months would cast anonymous votes for a fixed number of candidates who had won the first round.

Senior employees – depending on their length of work and work type – would elect the final members of the board after the two preliminary votes. To maintain stability in the company, two thirds of the former members would remain in office. Those who won the fewest votes would step down.

The board chairman, with a renewable four-year term of office, would be elected by the new board and the chairman and vice chairman of the supervisory committee.

Democracy is Reliable
Unlike other companies, Dawu Group had strict restrictions on the power of its board chairman.

For one thing, funds available to the chairman was limited below the previous year's total profit after depreciation. For another, the board chairman not only received supervision from the supervisory committee, but should respect the general manger's operating power and did not have the power to dismiss him.

Since Sun became the chairman of the supervisory committee in 2005, he has stayed out of the board of directors.

He admitted that tough restrictions on the board chairman could limit the exertion of his business acumen. But this also eliminated the possibility of big mistakes, he said, adding that stable growth was the company's goal instead of "great leaps".

However, without equity, how would the board chairman work for the company's interest instead of seeking personal profit through his power?

When asked this by the EO, Sun said a good incentive mechanism could help the board chairman to make right decisions for a company that didn't belong to him.

As for how to ensure the board chairman's continued devotion to the company's interests, Sun answered, "the supervisory committee conducts audits. And more importantly, the board chairman makes promises to the staff workers and company when he runs for election. The more he promise, the bigger the possibility of winning the election. So the democratic mechanism itself is a guarantee of the company's interests."

In his speech before this year's election, Sun summed up his reform of the company during these years as a development of constitutional democracy. Its achievement, he said, was that none of the 15 members of the board of directors to be replaced had done a poor job or been corrupted.

"We have conducted audits for three years, and in that time we haven't found a single problem. The company is growing healthily and vigorously... I think such democracy is reliable," he said.