Struggling ZTE must rework its business operations

Various corporate system designs will lead to different business operations, and even lead to distinct corporate performances that define their future. Such a view is currently proved by the performance report of two giant and leading technology companies, Huawei Technologies Co Ltd and ZTE Corp. The former gained and the latter lost in their annual profits, says an editorial in Beijing News Daily. Excerpts:

According to current data, Huawei earned a 15.4 billion yuan profit with 33 percent growth in 2012 compared with last year, while ZTE predicted a decline in net income with a 2.5 to 2.9 billion yuan loss.

Some believe that the success of Huawei is probably gained from its employee stock-ownership plan, while ZTE's huge loss also may be related to its shareholding plan and connected transaction inside the company since the larger shareholders are all management. Such a comparison is difficult because Huawei is not a listed company, yet without comprehensive information disclosure to the public, such financial information still shows that different corporate system designs will lead to different business operation results.

If you check the ownership structure in Huawei, the company is owned by all staff, so the operators are the owners. To some extent, it solved the problem of separating the ownership and operational rights. Such a system design is not the best choice, and is usually applied to newly established companies as the founders would accept share dilution, but too many shareholders may influence control of the company.

However, separating the ownership and operational rights may lead to two results. Either the operators and all staff don't try their best to work for the company; or the enterprise is controlled by the management and goes against the owners' benefits. The former result can be seen in some state-owned companies where the efficiency is low and corruption is rampant. While the latter one can be found in some multinational corporations, to avoid the management hurting the interests of owners, the shareholders usually offer the executives big salaries and a benefits package that includes a golden parachute. In some extreme cases, some management eventually can take over the company with minor capital.

Therefore, governance structure issues should be carefully designed with the reality of the company and balance fairness and efficiency. The success of Huawei during the economic slowdown showed the right balance, while for ZTE, it need to figure out the operation issue together with the adjustment of system design, like making a reasonable division of shareholdings at the management level.