The New Challenge of Communist Corporate Governance
- The Chinese Communist Party (CCP or the “Party”) is currently strengthening the presence and powers of internal Party organizations located within Chinese companies to ensure greater oversight and influence over China’s commercial sector.
- In addition, as part of what it calls the “modern enterprise system with Chinese characteristics,”1 the CCP is requiring that companies codify a role for these Party organizations in their corporate charters.
- These new developments challenge traditional understandings of corporate autonomy, and by extension, how Chinese companies should be treated under existing international trade agreements and by the regulatory and investment review bodies of foreign governments. Because the CCP might well attempt to extend this push into foreign private companies operating in China, these new actions pose a very real threat to the operational independence of foreign-invested enterprises (FIEs).
- To formulate an effective response, companies and governments in market economies should increase their understanding of how the CCP operates at the grassroots level and work to ensure greater transparency and understanding of the overall level of Party influence within specific firms. To further this transparency, U.S. policymakers could consider requiring securities issuers in the United States provide enhanced disclosures relating to CCP activities within their firms. The U.S. government should also consider reviving open-source data collection initiatives to publish and translate key CCP regulations and Party documents in order to increase understanding and spur further analysis of the Party system.
The CCP is advancing a new model of corporate governance that seeks to insert the Party directly into certain corporate decisions and increase its overall supervision of the domestic economy. This move marks a significant step-change from the Party’s previous presence within domestic companies, which was more ad hoc and uncoordinated. The new approach provides the CCP with a more opaque mechanism for communicating official directives to commercial enterprises, strengthens its potential influence over company operations, and threatens the security of confidential business information. Because Chinese firms operate globally—including within the United States and other advanced economies—the implications from this development are of great importance to the international trading and investment system, which is largely predicated on clear demarcations between “public” and “private.”
This push to increase the authority of the Party within companies is occurring on two tracks. First, the Party is strengthening the role of internal Party organizations (党组织) established within companies. Although required since the 1993 PRC Company Law,2 these internal Party cells were relatively weak for many years and predominantly concerned with Party organizational issues such as education and recruitment.3 Since 2012, however, the Party has increased their presence in private companies and state-owned enterprises (SOEs), with media reports suggesting they are exercising a growing influence on management.4
Second, the CCP is promoting the “modern enterprise system with Chinese characteristics” (中国特色现代企业制度), a new form of corporate governance that calls for inserting certain “Party building” provisions directly into corporate charters,5 Although the specific amendments vary by company, in many SOEs—and even some private companies—these “party building” provisions include giving the company’s internal Party organization a voice in management decisions and ensuring that key personnel of the Party organization also serve in management or board positions.6,7 Already required for SOEs, the CCP has recently begun to extend this system to private enterprises.8
As the United States and other market economies assess the independence of Chinese companies from the Party-state, they must confront the varying and ever-evolving means by which Beijing influences key actors within companies and across society at large. This influence often comes not just from government laws requiring corporate or individual compliance with national security requests, but also from the formal and informal workings of firms’ internal Party organizations—and, in certain companies, from the overlap of key Party organization members with corporate management and the board of directors.
For example, in April 2018 a website run by the CCP Organization Department released an article about the Chinese internet giant Tencent, heralding the significant overlap between the company’s Party organization and its management. According to the article, Tencent’s information security management team, which also handles “public opinion guidance,” is led by a deputy secretary of the firm’s internal Party organization, and 80 percent of the team are Party members.9 The article also states that eleven members of the Tencent Party organization are company executives or heads of major business departments.10 This overlap between the Party organization and firm management suggests a deeper and more surreptitious influence on company operations than is commonly assumed,11 particularly as Xi Jinping has made clear that all Party members should “keep in mind that their first identity is as a Party member, and their first duty is to work for the Party.”12
As the United States and other market economies assess the independence of Chinese companies from the Party-state, they must confront the varying and ever-evolving means by which Beijing influences key actors within companies and across society at large.
The Role of Party Organizations within Commercial Enterprises
Under the 1993 PRC Company Law, all firms with three or more Party members are required to establish a Party organization.13 Yet for nearly two decades following this law’s passage, this requirement was only lightly enforced.14 In 2012, the CCP released a measure calling Party organizations the CCP’s “fighting bastion” within enterprises and setting out twenty specific provisions for strengthening their presence and their coverage in the private economy.15 This push appears to have worked: in 2018, the Organization Department reported that 73.1 percent of private companies had established a Party organization, up from 58.4 percent in 2013.16 That same year, the CCP Central Committee issued a decision calling on the Party to further “accelerate” the establishment of Party organizations in private companies to ensure that “Party organizations are in place anywhere the work of the Party extends.”17
What is this Party work? As set out in the CCP Constitution, Party organizations in private enterprises are instructed to implement the Party’s principles and policies within the enterprise, promote the overall development of the enterprise, and ensure that the enterprise closely follows state laws and regulations.18 In addition to these general requirements, in 2018 the CCP Central Committee promulgated a regulation defining the work of Party branches (党支部), which are the basic unit of the Party organization (see Table 1). Although this regulation covers Party branches in all non-Party organizations—including SOEs and government agencies—it also contains two provisions specifically targeting their work in private enterprises.19 The first of these (Art. 10) largely restates the requirements of the CCP Constitution, adding an additional line about “building an advanced enterprise culture.”20 The second (Art. 24) deals with personnel issues and calls for a private company’s Party branch to “generally” select their Party secretary from the management ranks of the business and to focus on ensuring this person is from the “backbone” of the business.21 This general push to ensure
overlap with company management is also evident in the case of SOEs, as will be discussed below.
The Party’s general promotion of Party organizations in the private sector has sparked its share of foreign complaints. In late 2017, two European trade groups began to push back against efforts by their SOE joint venture partners to write the internal Party organization into the company charter.22 In May 2018, the US-China Business Council noted that certain SOE joint venture companies had asked some of their foreign partners to “alter their articles of association to support Party groups within the joint venture, even going so far as to request that they be amended to allow critical matters to be approved by the party organization before they are presented to the board.”23 A 2018 analysis of the Party-state’s role in the domestic Chinese economy prepared by the European Commission notes that Party organizations in both SOEs and private companies “can potentially wield significant influence, and allow for the CCP to directly influence the business decisions of individual companies.”24
For SOEs, the role of the Party is better defined thanks to two recent regulations targeting the work of internal Party organizations in SOEs.
The first of these regulations defines the work of “leading Party members groups” (党组), a specific type of Party organization that serves as a “leadership core” within non-Party organizations.26 In the commercial sector, these groups are usually found within the central state-owned enterprises (SOEs), but they may technically be established in any non-Party organization.27
While certain elements of the work of leading Party members groups were touched upon in previous CCP regulations, until 2015, the Party lacked a comprehensive regulation addressing these groups and setting out their main roles and responsibilities.28 In 2015, the CCP Central Committee passed the “Regulations on the Work of CCP Leading Party Members Groups” (later amended in 2019),29 which requires these groups to:
- “Generally” ensure that their members have positions on the corporate board and in senior management—a system the Party calls “two-entry and cross-appointment” (双向进入,交叉任职).30
- Discuss and decide on certain “major issues” of the enterprise, including the implementation of higher-level CCP orders, as well as “business development strategies” and significant company investments.31
- Supervise and promote “the timely and full implementation of leading Party members group’s decisions by the leadership team of the work unit [i.e., company] in accordance with laws and the [company] charter.”32
Although these requirements are only binding on leading Party member groups (党组), in January 2020 the CCP Central Committee issued a second regulation targeting the work of SOE Party organizations (党组织) and calling for these organizations to exercise similar personnel and decision-making powers within all SOEs.33
As CCP regulations issued under the CCP Constitution, both of these measures exist in a separate legal sphere outside the state legal system set up under the PRC Constitution.34 While CCP regulations are binding on Party members and organizations, they are not binding on non-Party entities such as a commercial enterprise—which could explain the use of “generally” in the first bullet point and the “company charter” reference in the third, providing some leeway in interpretation. This poses an issue for the CCP, as more independently inclined companies may decide to push back against attempts to increase Party influence over their operations—given that they are, technically speaking, not legally required to accept such influence under the state legal system. To avoid this result, the Party is now pushing for legal codification of these CCP requirements within corporate charters. Because corporate charters are legally binding on the companies themselves, acceptance of such a proposal by Chinese enterprises would essentially legalize the Party requirements under state law.35
Building the Modern Enterprise System with Chinese Characteristics
The campaign to formalize the role of Party organizations in corporate governance was first focused on SOEs, with the goal of building the “modern state-owned enterprise system with Chinese characteristics” (中国特色现代国有企业制度).36 In 2016, Xi Jinping stated that:
The “characteristic” feature [“特”] of the system of modern state-owned enterprises with Chinese characteristics [“中国特色”] is that it integrates the leadership of the Party into all aspects of corporate governance, embeds the enterprise's Party organization [党组织] in the corporate governance structure, and clarifies and implements the legal status of the Party organization in the corporate governance structure.37
As the CCP promoted this system, numerous government and CCP measures were issued requiring various types of SOEs to codify an operational role for their internal Party organizations in their corporate charters.38 In 2017, the State-owned Assets and Supervision Commission (SASAC)—China’s chief SOE regulator and ultimate shareholder—announced that the country’s 100 largest SOEs had all formally amended their charters to give the Party group a role in corporate governance and that the head of the company’s Party group also served as board chairman in 74 SASAC-regulated companies.39 In January 2020, specific regulations for SOE Party organizations were released, reiterating that all SOEs must write the Party organization into their corporate charters in order to “implement [落实] the legal status of the Party organization in the company’s governance structure.”40
These requirements now appear to be extending to private companies. Over the last year, references to the “modern state-owned enterprise system with Chinese characteristics” have diminished in official discourse, with state officials and Party documents now preferring the term “modern enterprise system with Chinese characteristics.”41 This omission of the “state-owned” modifier suggests an expansion of the term beyond its original confines.
This reading is further confirmed by what appears to be the first application of the term to private companies. In September 2020, the CCP issued a regulation directing its United Front Work Departments (UFWDs) to “guide” private enterprises to “improve their corporate governance structure and explore the establishment of a modern enterprise system with Chinese characteristics.”42 Shortly after, the vice-chairman of the All-China Federation of Industry and Commerce—an enterprise-focused organization under the UFWD—gave a speech in which he called for internal Party organizations to clarify their role in the corporate governance structure of private companies, in order to build the “modern enterprise system with Chinese characteristics.”43
Examples of Party Organization Influence in Commercial Enterprises
Because of the UFWD measure’s recent issuance, there have so far been few media reports about its implementation. However, the measure appears to continue a trend of greater Party-corporate integration that has been occurring for the last few years and which has been widely reported on by Chinese media.
For example, a 2018 People’s Daily article extolling the benefits of “red [i.e., CCP] productivity” notes that in a Samsung subsidiary the “seven Chinese executives of the company are all Party members and 74 percent of middle managers and above are Party members.” 44 Another 2018 article on Nissan’s automotive joint venture Dongfeng Motor Co. notes that their Party organization has been written into the enterprise charter, with members of the Party organization playing a role in human resources decisions.45
A March 2018 article entitled “Our Country’s Internet Industry is in the Midst of a ‘Party Building Wave’” provides further macro-level insight into Party-building within the technology sector, highlighting then-recent efforts to form Party organizations in major Chinese internet companies. The article reports that in Sina Weibo a nine-member “public opinion research and judgment team” has been formed, consisting of five Party members and three applicant Party members, which holds weekly meetings to “timely detect and deal with negative public opinion” emanating from Sina’s 361 million average monthly users.46
Other news reports highlight the influence of Party organizations on management decisions. A commentary piece on Guancha.cn, one of China’s largest news and opinion websites, notes that Mercedes-Benz established a Party organization in its local joint venture in 2013. According to the author, “the secretary of the Party organization participates in the company’s economic management meetings through the entire process and has full authority to participate in the company’s major decision making.”47 Likewise, an August 2018 article in Zhejiang Daily notes that 39 listed companies in Taizhou had amended their articles of association to integrate the Party organization, including to ensure that the “Party organization participates in the decision-making of major issues within the enterprise.”48
While it is unclear how representative these reports are, they underscore that the policy aims described are more than just aspirational goals held by the Party—they are being implemented across society and popularized in official sources, as both a distinctive feature and a strength of the Chinese system.49
Conclusions and Advice for Policymakers
A commentary posted on the Party’s Qiushi (Seeking Truth) website has labeled this new system a “major innovation,” predicated on unique Chinese characteristics and benefitting enterprise development.50 But for the rest of the world, the prospect of a major national government exercising informal and formal control over its domestic companies (potentially including FIEs) raises legitimate concerns. Such actions not only blur traditional distinctions surrounding the independence of corporate actors but also provide a surreptitious means for the Party-state to make implicit and unofficial requests of private companies, be it through the internal Party organization or through the Party members employed by the company. This design also raises questions over whether a Party member’s “first duty” to work for the Party would require their compliance should a higher-level Party authority request that they carry out a given task within their company.
Such actions not only blur traditional distinctions surrounding the independence of corporate actors but also provide a surreptitious means for the Party-state to make implicit and unofficial requests of private companies, be it through the internal Party organization or through the Party members employed by the company.
To better respond to these efforts, policymakers should:
- Understand that the mere presence of an internal Party organization does not necessarily represent outright control by the CCP, but that it does represent the potential encroachment of politics on corporate decision-making. While one might think that the CCP seeks to control or approve all decisions made within China, in fact the Party’s conception of the “socialist market economy” includes a significant degree of market-oriented reforms and managerial independence.51 This independence is cabined, however, by the presence and power of the internal Party organization, which reserves the right to pressure decisions in line with CCP interests at any time. Thus, any assessment of the level of a Party organization’s influence on management must be determined on a case-by-case basis based on existing evidence and logical inferences.52
- Increase tracking and analysis of CCP regulations and other key policy documents. The strengthening of the CCP’s role in society under Xi Jinping has resulted in a rise in the number of importance of CCP regulations. The Xi Jinping administration strengthening the CCP’s role in society has resulted in a rise in the number and importance of CCP regulations. Often overlooked, better analysis of these regulations would help contribute to a more sophisticated understanding of how the CCP operates at every level of Chinese state and society. In particular, the U.S. government should consider resurrecting gov, or establishing a similar website, to provide increased availability and access to important and newly issued CCP and PRC regulations in their original language and, ideally, in English translation. Greater access to such documents would increase understanding of the Chinese system at the federal level and, if made available to the public, help increase the quality and depth of third-party research and analysis.
- Increase transparency and understanding of Party organization work. Policymakers should consider increasing public disclosures on Party organization activity within major Chinese companies listed on U.S. equity markets or involved with inbound investment funds. For such investments, greater understanding of how these Party organizations function could contribute to more directed information discovery in the course of the CFIUS review process. For example, this could include requiring detailed information on the Party membership of key executives and board members, a list of the members of the company’s internal Party organization, and disclosure of any reference to the Party organization or the CCP in the company’s articles of association (or its parent company’s).53
- Increase public and private efforts to defend against CCP influence in FIE operations. Efforts to increase the formal or informal role of Party organizations in FIEs must be met with a strong response from foreign governments, industry trade groups, and the companies themselves. In 2017, a consistent response from individual companies and foreign trade groups successfully pushed back against increasing efforts by Chinese SOEs to require their foreign joint venture partners to amend their articles of association to insert the Party in corporate governance.54 In 2018, a coordinated response to Chinese efforts to force global airlines to include Taiwan as a PRC territory fell apart when collective action on behalf of the airlines collapsed.55 These examples illustrate both the importance of a united approach in responding to Chinese state overreach and the practical limitations of such cooperation where individual interests differ. Greater awareness and illustration of the costs (reputational or otherwise) of continuously ceding operational autonomy to the CCP, particularly in strategic sectors, might help generate the will to coordinate efforts on industry pushback.
Scott Livingston is a former fellow for the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.
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