Wednesday, May 1, 2019

Who controls Huawei? Chinese telecom leader’s ownership structure explained in more detail

01 May, 2019

HONG KONG — A research paper questioning the independence of Huawei Technologies put the world’s biggest telecoms network gear maker back on the offensive last week, as it held a press conference to rebut the paper’s central assertion that it may ultimately be controlled by the government.

The paper, jointly written by Dr Donald Clarke of George Washington University and Dr Christopher Balding of Fulbright University Vietnam, said that Huawei’s controlling holding company – 99 per cent of which is held by an entity called a “trade union committee” – could mean Huawei is owned and controlled by the government, if the committee functions like similar organisations in China.

Huawei dismissed this claim at a press conference in Shenzhen on Thursday (April 25), saying the trade union committee had been established to meet legal requirements and that it only had oversight of after-hours staff activities, such as badminton and hiking.

The latest spat over ownership and control marks another twist in the road as Huawei seeks to fight off US accusations that its gear poses a national security risk and that countries should reconsider including the Chinese giant in their 5G network infrastructure plans. Here’s what you need to know about Huawei’s trade union committee and ownership structure:

1. Why does the research paper take issue with Huawei’s relationship to the trade union committee?

The research paper finds that Huawei Investment & Holding Co., the parent company of Huawei Technologies and its other subsidiaries, is 98.99 per cent owned by Huawei’s trade union committee and 1.01 per cent owned by Huawei’s founder and chief executive Ren Zhengfei.

In China, company trade unions report up into more senior trade union organisations, theoretically all the way up to the All-China Federation of Trade Unions, which is controlled by the Communist Party of China. Therefore, the paper deems the telecoms equipment giant could be considered as owned and controlled by the government.

Huawei’s relationship with the Chinese government has been a crucial point of contention amid US efforts to persuade its allies to ban the use of Huawei equipment in next-generation telecoms network infrastructure on the grounds that the Chinese company could be manipulated by China's Communist government to spy on other countries and disrupt critical communications.

Huawei has repeatedly and vehemently denied these US assertions. Although Huawei’s founder Ren Zhengfei joined the People’s Liberation Army in his youth and the ruling Chinese Communist Party, he has also said he would “never do anything to harm any other nation”.

Last week, UK newspaper The Times reported that the CIA had told spy chiefs that Huawei has taken money from the People’s Liberation Army, China’s National Security Commission and a third branch of the nation’s state intelligence network, citing an anonymous UK source. Huawei described the report’s claims as completely groundless.

2. What role does Huawei’s trade union play in the company?

China’s Trade Union Law forms the legal basis for trade union organisation in the country and it requires that a company with 25 or more employees forms an Enterprise Trade Union, with the aim of protecting the legal rights and interests of employees.

Huawei’s trade union is an organisation registered under Shenzhen’s Federation of Trade Unions. Huawei’s trade union committee, which manages the trade union in Huawei, consists of seven members, none of whom are on the board of directors. The committee members are elected by the members of the trade union in accordance with China’s Trade Union Law, rather than appointed by the administratively superior trade union, according to the company.

Huawei said that it makes certain payments to its superior union association in Shenzhen, as required, but does not discuss or disclose any of its business operations with the more senior union entity.

As with other trade unions in the country, one of the main tasks of Huawei’s trade union is to organise after-work activities that promote their health and well-being. The union is not involved in any decisions connected to Huawei’s business and operations, Jiang Xisheng, chief secretary of Huawei’s Board of Directors, told international media during Thursday’s briefing.

3. Why does Huawei’s trade union own nearly 99 per cent of shares in the company?

Unlike many large-scale enterprises in China, Huawei has long promoted itself as a company owned by its current and former employees only.

Huawei employees own the company through an Employee Stock Ownership Program (ESOP) that has been in place since the company’s early days. As of 2018, there were 96,768 employee shareholders, and no-one can own a share of the company without working there, the company insists.

Huawei is not able to register the hundreds of thousands of employee shareholders due to limits on shareholder numbers. A limited liability company in China can have up to 50 registered shareholders while a non-listed stock corporation can have up to 200 registered shareholders, according to China’s Company Law.

Privately-owned Huawei is a limited liability company and as such, its trade union has acted as a platform through which employees can hold shares, according to the company.

Registering a trade union as a shareholder is not rare as the Provisions of Shenzhen City on Employee Stock Option Plans, released by the Shenzhen Municipal Government in 2001, allows the shares of employees to be registered and held in the name of its trade union. Shenzhen-based enterprises including Ping An and Vanke both adopted similar plans in their early days.

4. Who really controls Huawei?

Unlike Huawei’s trade union, which has no say in day-to-day operations, Huawei’s Representatives’ Commission – formed to exercise shareholder rights on behalf of employee shareholders – is the ultimate authority in the company.

Members of the Commission are elected by employee shareholders on a one-vote-per-share basis. The Commission currently has 115 members, and it is involved in a range of business decisions including implementing the employee shareholding scheme and fulfilling shareholder responsibilities. The Commission also elects the 17-member board of directors through one person, one vote.

Apart from the 1.01 per cent of shares directly owned by Ren, he also owns 0.13 per cent of shares via the company’s employee stock ownership program, meaning he has an overall shareholding of 1.14 per cent and making him the largest individual shareholder in the company.

Huawei’s Articles of Governance give Ren the power to exercise his veto authority, which has been limited to certain areas. These include increases in capital, adjustments to capital structure, amendments to the company’s major governance regulations and documents, as well as the nomination of candidates to the Board of Directors and the Supervisory Board, Jiang said during the press conference, added that Ren would not use his veto authority unless he has to. 

[This is all well and good. And completely irrelevant. Huawei, as a Chinese company is required by law to accede to the requests for information by the Chinese Communist Party. So it doesn't matter who nominally controls Huawei. 


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