Chinese Entrepreneurs' Contributions and Reponsibilities to the World Economy - Special Topic Growth of Family Business and Professional Managers - Weiying Zhang, Executive Associate Dean of Guanghua School of Management of Peking University Nanjing, China - 17 September 2001 Enterprises owned by Chinese or those of Chinese origin are largely family buinesses. The enterprises established on China's mainland since the beginning of reform and opening up, especially the private ones, are more or less managed on a family basis. In another word, they are controlled by the bonds of blood and friends. Family-based management often encounters critisms from scholars or media institutions. If an enterprise of this nature is to grow and become market-competitive, it must go beyond the limits of the family-based management system and take advantage of the human and management resources in the market. Otherwise, it will get nowhere. However, one of the problems such enterprises encounter when they try to make the first step and introduce a modern management system that separates ownership from operating rights is that they cannot find trustworthy professional managers. After large amounts of assets are stolen, these enterprises eventually find from their bitter experience that using people ont heir merits is often less desirable than using people with blood relations. They find the managers recruited are not as trustworthy as "those of us". In the end, they return to the system of family-based management. This is an important or even a crucial issue to the growth of family businesses. Here I do not intend to dwell on the conceptual difference between an "enterpreneur" and a "professional manager". But I must point out that some people who are actually professional managers also claim to be entrepreneurs. An entrepreneur should be a starter-up, an explorer, an innovator, and someone who assumes the risks of business operations. An entrepreneur always wants to expand his enterprises and his market share. But he cannot do it all alone by himself. He must recruit more managers and more employees to help him manage the enterprise well. In this sense, the grwoth and expansion of an enterprise means a constant extension and expansion of the enterprise's principal-agent relationship. Here comes another cruicial question of how to control the behaviors of the agents. By definition, the term "agent" means that someone else works for you. If you want your employees and senior managers to accomplish what you wish in the way you want, you must give authorization to them to enable them to have access ot the core resources, clients and technologies of your enterprise adn you must place them on very important posts. However, after these employees and senior managers have had access tot he enterprise's core resources or know the channels to access to these core resources, they may wonder: Why should I work for you? Why cannot I utilize these technologies to work for myself, to start my own business and to compete with you? This is perhaps the cruelest reality that many of our non-governmental enterprises will have to face.  After an enterprise grows larger, it may find it has many "traitorous generals". More often than not, they are not just one person. A "traitorous general" has many people under his leadership. When a "traitorous general" leaves the enterpirse, he may take away many "traitorous soldiers". We all know that a grandson is closer to his father than to his grandfather. When a vice president or departmental manager leaves the enterprise, the president finds it very difficult to retain those under the vice president or departmental manager. This is not a problem peculiar to China; it exists int he West as well. The American Silicon Valley can offer many examples of this nature. For instance, Noyce and Moore, two starters-up of the famour Intel Co., had been repectively the general manager and R&D director of Fairchild. Before they left Fairchild, a technician invented an new chip, which later became the core technology of Intel. Today, we all know Intel is a company that enjoys monopoly on the chip market; few people still remember Fairchild. According to Inc statistics, 71 percent of the core technologies of the world's 500 fastest-growing enterprises originated from the people employed by their former enterprises. Therefore, there is an advice in theWestern business community: Never allow your employees to do what you did to your former employers. The problem confronting the Chinese enterprises has its own unigueness. In the West, there are relatively sound legal systems to protect the property rights of the entrepreneurs. In China, however, such legal protection is very weak. Not long ago, I learnt that six Chinese were convicted in Silicon Valley because they had stolen the technology of an enterprise in which they worked and then started their own business with the stolen technology. In an environment like this, one task for Chinese entrepreneurs is to make sure the people you recruit to help you create business are truly working for you, instead of leaving you and competing with you with the technologies and resources they acquire from you enterprises. In this context, legal protection of property rights is cost arisign from the stealing of your technologies. The stronger the protection of property rights is, the greater the cost of his leaving you will have to be. Only in this way can you minimize the possibility of your technologies being stolen and can your enterprises expand as much as possible. If the legal system fails to offer sound protection of the property rights of enterprises, their expansion would be unthinkable. There have been too many instances of this nature. In Italy, for example, most enterprises are small in scale, because Mafia activities are rampant there and the protection of property rights if very weak. The effectiveness of property right protection is also related tot he unique features of the assets of enterprises. Protecting an iron and steel complex is very easy. If you want to prevent someone from stealing steel products and machines from the complex, you only need to recruit two husky fellows and place them at the gate of the complex. However, if what you are operating is a knowledge-based enterprise and its core technologies must be stored, transmitted and reproduced through the braines of your engineers and managers, placing two husky men at the gate will not do any good in protecting your property rights. The more knowledge-intensive the enterprise is, the more difficult it is to protect its property rights. What is the most important resource to an entrepreneur? It is the ideas, the knowledge. We all know that many entrepreneurs have succeeded because they have had good ideas. Then they organized resources and manpower to turn their ideas into products and marketed them to make money. But if ideas cannot be effectively protected, entrepreneurs can hardly succeed. In fact, one of the reaons why an entrepreneur must become the owner of his enterprise is that there is no way to set a reasonable market price for his ideas. For example, you now have a very good idea, with which you can make money. Then you take your idea to the market for sale. You must explain your idea to a prospective purchaser. If he is unable to understand your idea, he certainly will not pay you. But when he understands you and thinks it is a good idea, naturally he has no need to pay you either. So you cannot directly turn your ideas into money. You must recruit people to turn your ideas into products. The revenue minus costs is your income, which is also the price of your idea. That is why it is very important to protect the right of entrepreneurs to claim the surplus. If you cannot stop the "traitors" from leaving your enterprise, you will have to bribe them so that they will not betray you. This means that you have to use stimulation mechanisms to convince them that staying in your enterprise can bring more benefits to them than leaving you and competing with you. This is why stimulation mechanisms are all the more important to a high-tech enterprise, to a knowledge-based enterprise. A knowledge-based enterprise, or even a non-knowledge-based enterprise, must have its senior employees become stockholders of the enterprise. What I would like to especially emphasize here is that the more difficult the protection of property rights is , the more important the sharing of proprerty rights is. I remember that when I was in the countryside, my famly had an apple tree, far away from my home but very close to another family. It was very difficult for us to protect this apple tree. So each autumn when we picked the fruit, we would send two baskets of apples to that family. As a result, they did not need to steal apples from our tree. This should be a truth to all enterprises. When your property rights cannot be effectively protected, you must send two baskets of apples to those who are most likely to steal your assets. That means letting these people also possess property rights in your enterprise. I know our entrepreneurs are often reluctant to share out their property rights. If so, not only there will be no apples to harvest, but also the apple tree will be taken away by others. Ann entrepreneur must have core employees to ensure the safe sailing of the enterprise. Who are the securest protectors? They are those around you, who are most likely to have access to your core technologies and core resources. When you can win over these people, you can easily deal with others. Initial contracts are also very important to the protection of property rights. When entrepreneurs start up their businesses, many of them pay little attention to the importance of innitial contracts. Several people just come together in a daze to start up a business, without thinking about initial contracts. One reason is that nobody knows for sure at the beginning that they can make lots of money. But when their enterprise grows bigger, disputes arise over their property rights. When the property rights of an enterprise is not clearly defined and when nobody can tell how many stockes he owns, naturally there is not question of so-called stealing and the court will find it hard to handle the case. I want to remind our business friends that you must think about post-marriage matters before getting married so as to minimize the conflicts arising from divorce. If it is difficult to prevent "generals" from betraying , how to prevent the betrayal of "soldiers" will become extremely important. That is to say, you must make sure that when your vice presidents or departmental mangers betray you, the people under them will stay. Of course, if you can succeed in this respect, your vice presidents and departmental mangers will be less likely to betray you. Here I want to give ou an example. The Beijing Huicong Company is a highly successful information enterprise in our country. Its annual revenue is many times as much as the combined revenue of the three most famous network companies in China. this enterprise by and large has "traitorous generals", but no "traitorous soldiers". One of its departmental managers ran away, but no one else followed him. Why? This enterprise had properly divided its property rights. As the people under that "traitorous general" had stocks in the enterprise, their stocks would become worthless if they had followed that general. Therefore, they preferred to stay. In addition to the issues of property rights and stimulation mechanisms, I wish to emphasize another issue: the professional ethics of professional managers. There will be no large enterprises without professional managers. But what are professional managers? First they have management expertise and second they have professional ethics. When we choose a person to work as a manager, we can trust him and are willing to give power to him.  It is not enough for a manager to just have ability; he must have a high standard of professional ethics and respect the principle of good faith. It is just like riding a train. You are an old lady, carrying a very heavy bag. Then you see a man, young and strong. Are you willing to hand over your bag to this young chap and ask him to carry it for you? Certainly you are not. This is because he is very strong and what worries you most is that he might run away with you bag and you are in no way to catch up with him. So in the West, the professional ethics of managers are very important. A person who cannot be trusted cannot become a manager. In China, there are even less trustworthy managers than capable ones. Once when I visited a Beijing suburban enterprise, I saw quite a few dogs there. I asked the boss why he kept so many dogs. He said that keeping dogs were much more cost-effective than hiring guards. Besides, he said, dogs were faithful, and they were unlikdly to steal your properties or take away customers. This was a joke, of course. But it explains how important the loyalty of a professional manager is to an enterprise. We already have had lots of such examples. Zhengbaiwen was one of them. As you all know, Zhengbaiwen was a listed company. It is now bankrupt and people are discussing how to reorganize it. There could be many causes of the company's failure, including personnel quality, operating strategy and government intervention. But i believe one important cause is the betrayal of its professional managers. Large Western companies have been dispatching people to establish subsidiaries in China and other developing countries. After a few years, the local subsidiary enterprises can be of considerable scale. We have seen the examples of Motorola and Nokia. We can imagine that when a Chinese enterprise intends to dispatch a manager to explore market or establish an enterprise elsewhere, your greatest risk will be that after a few years that enterprise will become one of his own instead of yours. Similar problems have also occurred to other companies, including Huicong as I just mentioned. Some regional managers even changed corporate registration and turned the companies into their own while keeping their Beijing superiors completely in the dark. Certainly they did it with the collaboration of our industrial and commerical administrative authorities. Otherwise, they could not succeed. Zhengbaiwen established several hundred subsidiary companies across China. Many of the managers of its subsidiaries were taking advantage Zhengbaiwen's marketing channels and investments to market their own products and make money for themselves. The revenues all fell into the pockets of these regional managers, whihle all the costs were booked into Zhengbaiwen's accounts. There is no way for such enterprises to succeed. Then why do we in China lack good managers? I don't think it is because we Chinese are poor in character or in professional expertise. The problem is with our systems. If professional managers must have a high standard of professional ethics, there must be market demand for professional ethics. Under the system of planned economy, a state-owned  enterprise only needed career officials; the professional ethics of managers were worth nothing. This is because our government departments do not appreciate professional ethics. In foreign countries, however, a manager with no good reputation in the market can hardly find a job. But in China, when our state-owned enterprises collaborate with corporate managers in stealing the assets of these enterprises. That is why I say the ethics of professional managers ar a system problem. The professional ethics of professional managers are nurtured by entrepreneurs and capitalists, just as the professional ethics of housemaids are nurtured by housewives. If we cannot change our system of property rights, it will be very difficult to foster the professional ethics of managers. The methods with which we are reforming the state-owned enterprises may bring about positive results in freeing the enterprises from government intervention. In the long run, however, these methods may have some negative impact on the nurturing of the professional ethics of managers. Many of the state-owned enterprises claim to have established modern enterprise systems. What are the indications? First, their property rights have been pluralized. They have both state-held and non-state-held stocks, and some of them have even been listed on the stock market. Second, they have established boards of directors, which in turn appointed general managers. Here we have to go one step further: why must their property rights be pluralized  and why must they have boards of directors? In the West, there are no more than two reaons to pluralize property rights. One is that the investment in a project is too large and nobody alone can afford it. Two is that even if somebody alone has enough money for the project, he is reluctant to take such a big risk. He prefers to share risks with other people. He would bear 10 or 20 percent of the total investment and invite other people to enter into partnership, or in another word, selling stocks to other people. then another problem immediately follows the pluralization of property rights - how to control the company, you will have to face the risk that the manager might embezzle the properties of the enterprise. When the stock rights are widely dispersed, it is impossible and unnecessary for each and every stock holder to exercise direct supervision over the manager. Then, how to exercise your right of ownership and how to control your manager? You have to go through a board of directors. Therefore, the board of directors is a method or a tool for the owners to exercise their right of ownership when the property rights are pluralized. This is not the case in our country. The above-said two reasons are untenable for the pluralization of the property rights of the state-owned enterprises. This is because the assets of these enterprises belong to the state, which happens to have plenty of money. The state already has had too many enterprises, and there is no need for it to disperse risks. Then why have we pluralized the property rights and established boards of directors? We do so just to rid ourselves of government intervention. If this logic develops into a culture, it will constitute a tremendous impediment to the formation of the professional ethics of our professional managers. The board of directors is not a tool for the owners to exercise their right of ownership; it is instead a toold to get rid of the control of owners. This, to me, is a very awesome culture. In this context, it would be easy to understand the predicament I mentioned before. Most of our private enterprises are managed by families. Many economists and management experts criticize this phenomenon. They believe that if an enterprise is to develop and operate well, it has to establish a modern enterprise system, to use able men, and to be managed by professional managers. This argument is undoubtedly correct. But most of our private entrepreneurs find it very difficult to do so. It is not that they are not willing to do so; it is because there are too few people who can be trusted. Without professional managers and without the professional ethics of professional managers, our private enterprises cannot but be managed on a family basis. In the past, you could expand a family business to a considerable scale, because you had seven or eight sons and the sons had grandsons. In all, a family could have a couple of hundreds of people, who could form an enterprise of considerable scale. Now, a couple can have only one child, and it will be extremely difficult for them to build a large family business. Here comes another question: the speed of corporate development. As I have said, our private enterprises can grow very fast if they receive government care and support. The private entrepreneurs also have the impulse to grow fast. But if they grow too fast, they would fall into a quagmire. The sustained development of an enterprise requires loyal and able professional managers, and the formation of such a force takes a long period of nurturing. It is impossible that one day you recruit 500 people from the market and your business will be as large as an enterprise of 500 people in the West. This is because the people recuirted from the market have yet to be mixed together with the existing people of the enterprise. When they do not have a very high level of correlation with the interests of the enterprise, they are the other people who are most likely to steal the assets and resources of your enterprise. So the development speed of an enterprise depends primarily on the degree of employee integation, instead of the number of people you have recruited or the amount of capital you have put in. On many occasions, I said, "Never add fresh earth before the lower layer is solidly rammed" I have analyzed the Chinese private enterprises established in the 1990s. They can be classified into two categories. One is that they rammed the earth solidly before adding a fresh layer. The speed was not fast, but the dam they built was unbreakable. The other category is that they used bulldozers to build a dam overnight. The lower layers were not solid, and they started ramming from the top. No matter how hard they worked, they could not build a solid dam. A small flood could destroy such a dam. Every peasant knows this truth. But our entrepreneurs and our newly buildt enterprises tended to forget it. So after a rapid growth, they collapsed. Another piece of my advice is that entrepreneurs should not adopt a hands-off attitude toward your business in its initial stage. You must directly control it. A mature enterprise must have a sound internal management system so that its resources will not be fully controlled by any single person. But the most important resource for a new enterprise is an idea, a market relationship. At this stage, you yourself must control it. If you are hands-off and leave your resources to the control of your manager, you will become redundant and the enterprise will become the manger's instead of yours. The government can give you resources, capital and loans, but it cannot give you the loyalty of your employees. Without employee loyalty, more lans could mean greater possibility of corporate bankruptcy. What shall be done then? In addition to the stimulation mechanisms I just discussed, an entrepreneur must have a very sound internal control system, namely the "load-bearing structure" of the corporate edifice. What is the purpose of designing an internal control system? It is designed to ensure that while a corporate business is expanding, its core resources will not be controlled by only a few people and they will not constitute a great threat to the entrepreneur. How high a buildign can rise depends on how solid the foundation is and how good the quality of the building materials is. A corporate organization can be either a towering pyramid of sectional and layer structure, or a flat level structure. If your property rights are very easy to be stolen, the more layers you have the greater your dangers will be. Inn that case, you need a relatively flat corporate structure, in which your "generals" will be less likely to betray you because they have very few soldiers under their control. If you company has many layers, that will be very dangerious because internal stock holding will not be effective. An enterprise must also design a very soundn financial and audit system. Under a modern enterprise system, ex-post audit is extremely important. In addition, relatively centralized financial control is also essential. An entrepreneur must also try to make some key posts more replaceable so as to reduce the bargaining power of the managers. This is just like the case of a theatrical company. If a drama has only one famous actor to play the leading role, the company leader will be vulnerable to the threat of this actor. The actor will press you for higher wages from time to time. And if you refuse his request, he will refuse to perform that evening right away. So the theatrical company must have two people to play one leading role in a drama in order to avoid something unexpected to happen and in order to reduce the bargaing power of each individual. Similarly, making some of your key posts more replaceable is very important for protecting your own business. Of course, here comes another issue, the conflict between stimulation and restraint. The more replaceable a post is, the stronger your control over him is. But the stimulation to him will be lower. As he knows you can replace him any time, he will be reluctant to introduce new expertise to your enterprise and to make his relations with you special. In addition, improving labor contracts is also very important. In the West, the labor contracts contain restritive provisions concerning the confidentiality of important assets and technologies to avoid industry competition. For example, if you leave my enterprise, you are not allowed for several years to work int he enterprises of my competitors. In China, we do not have this kind of stipulations, because the spirit of the Chinese contracts is different from that in the West. The Western contracts laws respect personal freedom to choice and contracting, while China's contract law reflects more government intents and makes the room for personal choice very small. Besides, moonlighting should be absolutely prohibited in some high-tech enterprises and in some departments directly involved in research and development and in marketing. This is because moonlighting is a very important channel of the insiders of an enterprise to steal its assets. If we do not have any methods to restrict or directly control the channels, we cannot but restrict you, forbidding you from moonlighting. | Back |

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