Being a listed company sure is beneficial and puts on an immediate and direct effect on the different aspects of the company. But will these effects stay in the long run or is it just for temporary convenience? In this article, Ren Zhengfei, Huawei’s founder and spiritual leader, talks about how Huawei’s conviction and determination on staying as a private company led it to where it is today.
It is a trend that no one in China can deny: Chinese companies flocking to go public. In 2015, when stock prices were crashing, the Chinese government introduced an embargo on new initial public offerings (IPOS) for a period of four months. Ever since the lifting of this freezing period, IPOS are receiving faster approval to facilitate financial contributions to the Chinese economy. In fact, according to the Wall Street Journal, in 2017, Chinese companies made up about one-fourth of the companies listed across the world. Interestingly, many of these companies decided to go public in the US. Reasons for this are that many Chinese companies do not meet the more stringent Shanghai and Hong Kong listing standards and consider the US to be a much more international market. At the same time, however, many also believe that China is set to continue having positive GDP growth, which is reflected by the increasing number of Chinese companies debuting on the Shanghai and Shenzhen stock exchanges. Important to note in this respect is that when entering the competitive market in China it does help to have a big company behind you. For example, when Chinese Search engine Sogou (SOGO) went public, their debut became a “big thing”, mainly so because heavyweight Tencent owned about 39 percent of the company. One thing that is, however, very clear: the demand for Chinese IPOS is high and has caused somewhat of a herding behaviour – companies keep coming to go public.
Going public as the Holy Grail in China or maybe not?
Chinese examples like Tencent and Alibaba are inspiring as they were profitable when they went public. Right now, it is, however, acknowledged that these two companies are outliers and that in contrast, many smaller publicly listed companies have proven to be unprofitable. For example, Chinese education firm “Four Seasons Production” went public at the end of 2017 and immediately suffered a decline in value. This observation is slowly installing the feeling among companies that they do not necessarily have to rush to go public. As an example in case, Ant Financial Services Group has communicated to have no need to go public, despite being backed up by one of the two greats, that is, Alibaba.
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This decline for companies to go public is an interesting evolution, particularly since achieving IPO is still seen somewhat regarded as a vaunted prospect. Companies do realise that going public requires intense preparation and, even more importantly, after having gained public status may not always facilitate (but rather complicate) decision-making within the company when it comes down to innovation, vision and purpose. Therefore, populating your company with external shareholders may not be a holy grail after all. In line with this assumption, Vermeulen (2010, p.196), noted, “that the idea that the primary beneficiaries are the company’s shareholders is not a law of nature … it’s a choice.” Indeed, although going public have a number of benefits, it is not a written law that any company should obey to. Shareholders invest money once a company goes public but how to grow for example, in innovative and value-driven ways will nevertheless still depend on your employees. At the end of the day, the same organisational challenge as always stands: being a public company or not, it is imperative that you have motivating leadership and dedicated hard-working employees. As it is acknowledged nowadays that a focus away from your employees to a focus on investors may bring many challenges, it has become clear as well that discussions have come to the fore whether employees should maybe become the primary stakeholder. As a response, some companies take pride in being employee-owned.
In the Chinese market, the most famous company being employee-led is the telecom giant Huawei. This Chinese telecom giant employs more than 170,000 people and serves more than 3 billion customers. In the fiscal year of 2016 Huawei´s revenue reached CNY521.574 billion (US$75.103 billion) and CNY37.052 billion (US$5.335 billion) in net profit. Since its foundation by Ren Zhengfei in 1987 Huawei is and has always been a private company owned largely by its employees (about 98.5%). This employee-owned status has often been looked upon in both stifling as admiring ways by Huawei’s competitors. Despite these conflicting attitudes, so far, their employee-owned status has worked out in very beneficial ways for Huawei. In fact, in its early days, Ren Zhengfei noted during a private meeting that “If we do not go public, we might someday take over the world.” It is Huawei’s conviction that it has gotten where it is today, and has been able to overtake some of its Western counterparts, because it has a long-term vision. The idea is shared within Huawei, that the reason why they have been able to survive beyond, for example, Motorola, Acatel-Lucent, and Nortel, is because they are not a listed company, and as such are not greedy and more willing to persevere. In fact, the company makes 10-year plans, while its competitors struggle to follow near-term fluctuations of the capital market. In their view, the capital market, so to speak, is a cold-blooded and impatient animal.
Distinguishing direct from indirect influence
Of course, very good reasons exist to go public. The major advantage of being listed is that it gives access to money that does not have to be repaid. If your stock jumps by going public, a direct and immediate effect on the company’s performance will be achieved. An important question, however, is whether such immediate financial input effect really makes your company a more vital, resilient and thus a competitive organisation on the longer term?
One of the values that Huawei nowadays focuses on exactly concerns their desire to be a highly vital and dedicated work place (De Cremer, 2017). According to Ren Zhengfei, organisational vitality can be developed and maintained by installing a spiritual work culture. In his view, in such a type of culture, employees are provided freedom of work to demonstrate their entrepreneurial spirit by introducing changes, innovations and projects they would like to pursue. Rewarding this kind of dedication and entrepreneurial success within the company not only allows the company to be able to rely on dedicated and passionate employees but also to innovate in ways that serves the values and long-term perspective of the company. In this process, every employee is treated as a “hero” who can contribute to the long-term survival of the company. Or, as Ren Zhengfei, puts it: “We want engines big and small to drive our team forward.”
All of this makes clear that the sustainability and growth of Huawei is empowered by an internal force rather than an external one – a force which can make the difference between being a successful private versus listed company, respectively. Indeed, as Vermeulen (2010) mentioned when talking about going public as a source of money: “I would say this source comes at a cost” (p. 194). According to Vermeulen this cost includes that the top of the company will have less time to devote to the internal workings of the company and thus be less effective in leading employees in motivating and inspiring ways. He considers this to be an enormous indirect cost.
Not going public requires strong leadership
A consensus exists among management scholars that the tone of the top is extremely important in creating a work culture that can motivate, cultivate, inspire and facilitate innovative and dedicated teams of employees. Those leading the company are usually regarded as role-models and employees at lower levels of the organisation tend to emulate the behaviours and decisions of those at the top. Therefore, if top management turns out to be largely absent – because of an extensive focus on external shareholders – any company will suffer on the longer term. A problem is that such longer-term indirect costs are not observed easily and even more difficult to measure. And, this situation represents a problem in the contemporary business world. Indeed, if you cannot clearly measure something, then it does not exist.
For Huawei the indirect effects as discussed above are one of the main reasons for not being listed. In fact, one of the main responsibilities of Huawei leadership is to promote organisational vitality that encourages employees to work hard in passionate and enthusiastic ways. By not being listed, the focus of leadership is on feeding the vitality of the organisation. They achieve this by ensuring that the energy levels of employees are promoted and channeled in such a way that teams make decisions on the long-term. Such a long-term focus promotes dedication and identification with the important values of the organisation. Not experiencing the stress associated with short-term targets and pressures, it allows employees to focus on working towards the fulfillment of the organisation, which is to make the customer happy. As Ren Zhengfei notes, “Too many “pies” will eat away at the very essence of the organisation, which is the worst form of death for an organism.” If the company remains private and its remuneration is on par with global industry standards, plus yearly dividends, it will not only attract and retain talented people, but also serve to maintain their will to fight on the long-term for the values that Huawei stands for. Up to now, Huawei has struck a successful balance.
Of course, being able to get your employees aligned with such a long-term perspective requires strong leadership. More precisely, it needs a kind of leadership not afraid of sacrificing the immediate influx of external capital to the benefit of having more time at hand to build the right organisational culture. Huawei’s founder and spiritual leader Ren Zhengfei is someone who holds this leadership ambition dear to heart. According to Ren, in order to cultivate teams of spirited young people, senior managers have the responsibility to provide guidance to these young managers. And, this guidance should not simply be a part of their formal contract with the company but go beyond it. Specifically, Huawei urges its senior leadership to take responsibility for the mistakes young managers make and put in effort to correct and re-direct where necessary in active ways. In essence, top executives delegate operating authority to local managers, but they have to keep oversight as they remain responsible. Executives therefore need to be proactive. In other words, these executives need to be able to guide and reinvent people who failed in another job so that they can adapt to the demands of a competitive business setting Huawei operates in. As Ren indicates, “Our managers need to have in-depth understanding of people to fully unleash the potential of each employee.” The ambition should be that all the diamond mines underneath [i.e. the potential of their employees] will be ours.”
It is clear that the choice for not going public invites those in leadership positions to stand up and help improve capabilities of employees during training and practice to help them grow and develop. This kind of leadership is effortful and requires dedication to the development of one’s workforce, but according to Ren Zhengfei, this should be the motivation of every talented manager in the company. As Ren says, “Our outstanding employees have to build their aspirations as world leaders”. As the famous saying in China goes: “When heaven is about to place a great responsibility on a man, it always first frustrates his spirit and will, exhausts his muscles and bones, exposes him to starvation and poverty, harasses him by troubles and setbacks so as to stimulate his spirit, toughen his nature, and enhance its abilities” This should be the motto for leaders at Huawei.
Will Huawei go public?
In a speech during a market conference in 2017, Ren mentioned: “There is still a big gap between Huawei and Apple in terms of strategic insights. One reason is that we do not have as much capital of Apple”. As a response, Ren notes further that “a brand is a type of trust that a company’s management team brings to customers, we must gradually improve our capabilities and avoid a rush for quick results.” These statements make clear that Huawei sees most benefit for the growth of the company in further shaping and improving their work culture.
For Huawei the near future is to develop further spiritual leadership and an intrinsic sense of motivation to remain a vital organisation that survives (De Cremer, 2017). In the words of Ren Zhengfei: “We [Huawei] need to have the right values, and work hard to create value for society … We need to have the right spiritual pursuits.” In addition, Ren also points out that “but great as American companies are, their American strategists have to succumb to the will of the capital market”, thereby making clear his desire to remain a private company that controls its own faith and strategy on the long term. Therefore, it seems that an initial public offering for Huawei is not about to happen soon.
Featured Image: Team building at Huawei Kazakhstan Photo Source: http://www.huawei.com/en/press-events/media-kit/gallery
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About the Author
David De Cremer is the KPMG professor of management studies at the Judge Business School, University of Cambridge, UK, a co-founder and co-director of the One Belt One Road research platform at the University of Cambridge and a visiting professor at HSBC Peking University Business School. Before moving to the UK he was a professor of management at China Europe International Business School in Shanghai. He is the author of the book Pro-active Leadership: How to overcome procrastination and be a bold decision-maker and co-author of “Huawei: Leadership, culture and connectivity”.
References
1. De Cremer, D. (2017). Organisational vitality: The life line of your company. The European Business Review, November-December, 44-50.
2. Vermeulen, F. (2010). Business exposed: The naked truth about what really goes on in the world of business. Financial Times Prentice Hall.
