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Employee Shareholding and Its Nuclear Power Effects

Commenting on the United States in the 1940s, Winston Churchill said, “The United States is like a giant boiler. Once the fire is lit under it, there’s no limit to the power it can generate.”

It is true. More than 300 years ago, the Mayflower brought a group of people with courage and dreams to the new continent. These forefa- thers of the United States have culminated in a sound social system of democracy, the spirit of contract, and the rule of law, which was based on Puritanism and valued individual gain and personal value. This system includes all necessary incentives for the country’s growth and prosperity. For example, they have introduced a variety of employee-reward schemes, including stock options, which have played a significant role in the rapid growth of hi-tech companies in the United States. There is now general agreement that Silicon Valley has been driven by two engines: One is the stock option scheme, and the other is its innovative culture; one provides material force, and the other provides spiritual force.

The whole world is learning from the United States, and now China’s hi-tech, financial, and cultural companies are learning from their American counterparts.

Since its establishment, Huawei has placed a silver handcuff on its employees—the Employee Shareholding Scheme. It is called the silver handcuff because it is different from the stock option arrangement, termed the golden handcuff. To be honest, however, Huawei did not borrow its shareholding scheme from the West. This scheme was designed and implemented because it was the only choice for the company.

In an article titled “The Spring River Flows East,” Ren Zhengfei explained why and how Huawei developed its employee shareholding scheme:

I designed the employee shareholding scheme soon after I founded Huawei. I had intended to knit all my colleagues together by a certain means of ben- efit sharing. At that time I had no idea about stock options. I did not know that this had been a popular form of incentive for employees in the West, and there are a lot of variations. The frustrations in my life made me feel that I had to share both responsibilities and benefits with my colleagues. I dis- cussed this with my father who had learned economics in the 1930s. He was very supportive. But no one had expected that this shareholding scheme,

which came into being by chance more than by design, would have played such a big role in making the company a success.

The scheme was the only choice for Huawei, or its only source of power to compete with international giants and Chinese SOEs. It had no con- nections or resources as a private company and lacked funding. Everyone had to fight arm in arm with each other. Everyone must act like the boss. Ren Zhengfei said:

Please don’t assume that I was a sage or a saint. If I had started a real estate business, I would have taken it for granted that everything was mine because I got the land and loans through my own connections. Why should I share anything with anyone else? I should enjoy all the benefits as I assumed all the risk. But my company, Huawei, was established as a technology company. I needed more smart people, more people with lofty ideals, to work hand-in- hand and to share wealth and woes. Everyone had to take their own share of duty, particularly for the older generation and the senior managers. Only when they diluted their equity can more people be engaged in the battle. Ren Zhengfei is the largest shareholder of Huawei, but he has only 1.42 percent of the total equity. The rest is held by its employees. According to an internal source, after an upcoming round of share dilution, his share will probably be further reduced. At the end of 2011, among the 146,000 employees of Huawei, 65,596 had a stake in the company. This is the most scattered share structure in the world and a rare phenomenon in commercial history.

Dedicated employees are much valued at Huawei, which is an essen- tial part of its corporate culture. In 2007, this value proposition was stated as follows: “We will continue to reward high-performing employees, and everyone will be evaluated by their duty and contribution.” In the early years, Ren Zhengfei repeated time and again that the company must not “let Lei Feng wear worn-out socks.” Lei Feng was a special hero during the Red Era of China and the spiritual totem of a whole generation. He was portrayed as a cow that eats grass and produces milk. Almost the entire nation, 800 million Chinese at the time, had been moved by his diary and altruistic deeds. They were fervent about helping other people, cherished extremely pure hearts, and had committed themselves to a lofty communist cause.

But that proved to be a utopian dream. History, in fact, is a drama where desire is strong and immense. Dreams are beautiful but short

and false. The real story is about explosion, satisfaction, and the restraint of desire.

Having served as a soldier in the 1970s, Ren Zhengfei has many labels for Lei Feng: dedicated, passionate, self-disciplined, and perseverant. But he knew at the same time that, without continued fire, water does not keep boiling in the pot. It is especially true in the age of the market economy.

Ren is more of a conscious thinker than a rebel against the old times. He said,

We must dare to break away from old practices and customs. We must have the courage to favor high-performing people with dedication and successful track record. For those of them who have a sense of mission and who are truly capable, we must set the stage to let them run a bit faster.

Huawei, therefore, is committed to letting every worker have a stake in the company. Of course, it is just a parlance easier to communicate, but most people at Huawei do have a certain share of the company’s equity. Yet this scheme is not the communistic Big Pot in the age of the market economy, because only those who perform well enough qualify to partici- pate. Ren Zhengfei said:

Difference creates motive. There would be no wind if there was no tem- perature difference, and there is no stream if water is at the exact same level. We do not tolerate seniority, inaction, playing it safe, or any once-and-for- all value distribution. We must organize our 100,000 talented employees into a dynamic and ambitious team. We must let dedicated people share the fruits of our success and slack managers feel the pressure of dropping out of the race.

It is difficult enough for an individual or an organization to stay dynamic and motivated for even three years. So it is nearly impossible to remain the same for 20 years or longer. The statement “customer centricity and dedication is the key to our success” has not gone empty and alone. It is substantiated by a set of practical approaches to motivate its employees. This is definitely no easy task, and the human resources department of Huawei has done a tremendous job.

Lao Zi, the founder of Taoism and author of Tao Te Ching, the Taoist bible, said, “All things are produced by the Tao and nourished by its out- flowing operation. They receive their forms according to the nature of each and are completed according to the circumstances of their condition.”

Huawei’s 150,000 employees are all solitary fighters with burning desire and passion. Together, they form a great army of collective heroes. They have tried to make a decent life for themselves and their families, but indeed they are making great contributions to the company and even to the country. They are dedicated fighters and are entitled to the bene fits of dedication.

Why Won’t Huawei Go Public?

At a luncheon in a famous club in New York, Ren Zhengfei met with a dozen top American businessmen, including Maurice Greenberg, the former chairman of AIG, and Vincent Mai, chairman and CEO of AEA Investors. He was asked why Huawei had not gone public. Ren answered:

… Technology companies need motivated employees. If a company goes public, a bunch of its employees will instantly get very rich. They will become millionaires or even billionaires. And then they will most likely lose their motivation. This is not good for Huawei; this is not good for our employees, either. The company will stop growing at such a pace, and the people will lose their collective drive. If employees get rich too young they will become lazy, which is a curse to their personal development.

Huawei advocates that in an organization top management should have a sense of mission, mid-level managers should have a sense of crisis, and grassroots workers should have a sense of hunger. The top executives are highly paid and enjoy more dividends. To some extent, wealth is no more than a symbol to them. They are not motivated by material gain. They have already completed their “primitive accumulation.” What they need to go further is a sense of mission and passion for their career. In short, the elite at the top of the pyramid must be driven by a spiritual power.

On the other hand, the mid-level managers who were once grassroots workers can often get promoted because they have shown dedication throughout their years of work for the company. For the overwhelming majority of employees, more work for more pay is the basic and most realistic motive.

This is a universal law of humanity that reflects human desire, a law Huawei understands and follows in its compensation design.

Huawei believes that mid-level managers should have a sense of crisis. If they fail to organize and drive their team to fulfill its goals or if they are selfish and self-complacent, they will be quickly replaced or demoted. They will be promoted again if they regain their passion and meet all qualifications. “Grassroots workers should have a sense of hunger,” for bonuses, company shares, promotion, and success. Such hunger breeds wolf-like aggressiveness. Without it, any spiritual appeal will be pointless.

Around 1997, Huawei had been at par with its Western counterparts in terms of employee compensation. The company had no choice because it had to attract and retain talent. This is also why, soon after it was estab- lished, Huawei adopted the employee shareholding scheme. The shares were not worth much at first, and during the early years no dividends were paid. But they have now become the most valuable assets of its employees, since the company has kept growing and the dividends paid each year are more than their salary and bonus combined. Ren Zhengfei once said:

Huawei has survived by virtue of hard work and technical innovation. Does technical innovation have no limit? Is Moore’s Law always right? Can we keep our market with a certain technology? I believe that technology innova- tion will slow down when the bandwidth and coverage of wired and wireless access reaches a certain level. At that time, only companies with exten- sive market penetration and excellent management that can provide high- quality services at low cost will be able to survive the cut-throat competition. So, Huawei should try to reach this level before it dies. Within the coming decade, we will try to learn from Western companies how to manage the business, how to improve its efficiency, and adopt a fitting human resources management system to motivate our people to fight for survival.

Ren has told the truth of the global IT industry. It is a cruel reality. Unlike other industries, IT is engaged in a death race that started very early on and will last far into the future. The law, however, is that the one who lasts the longest wins, no matter how fast they are running. Then how can a company avoid premature death? There is no choice but to fight. And how can a company turn its employees into motivated fighters? The answer is having a reasonable and superior human resources regime.

It seems a natural law that people run fast if they turn rich in mea- sured steps, but they stumble if they get wealthy overnight. A lot of com- panies, both Chinese and foreign, are promising and robust before they

go public, but they suffer from organizational shock quite soon after they get listed. And that primarily rests with the people who get rich too quickly. They stop pushing forward the frontier or leave their company and join their competitors for even more money. Some sell their share of the company and set up their own operation; worse still, they poach people from their former company and become the bitter enemy. Clearly, this is a poor human resources regime.

Ren Zhengfei once asserted on an informal occasion, “If we do not go public, we might someday conquer the entire world.” The assertion has at least three meanings. The first is the collective fighting spirit. Abundance weakens an individual or organization. With too many “pies,” a team will ultimately lose its muscle, and the worst scenario is cell or organism necrosis. If the company remains private and pays as much compensa- tion as the global industry captains, plus yearly dividends, it will not only attract and retain talented people but also maintain their fighting power and aggressiveness. Up to now, Huawei has struck a perfect balance.

The second is that the decision power should be under control. Given the scattered share structure of the company, any private equity inves- tor may easily gain relative control over Huawei. And should the com- pany become controlled by any investor seeking only short-term returns, Huawei would not be very far away from collapse.

The third is with respect to the goals of Huawei people. Huawei has been able to reach so far and overtake most of its Western counterparts because it has a long-term vision. The company has worked on its 10-year plans, while its competitors struggle to follow near-term fluctuations of the capital market. The capital market, so to speak, is a cold-blooded and impatient animal, and the industry is constantly running out of patience. From 2G to 3G, and then to 4G, from mobile Internet to cloud comput- ing, the industry is busy renewing itself. In this context, a company will die sooner than later if it cannot plan for the future in light of the upcom- ing changes.

So when will Huawei go public? Perhaps when the threefold chal- lenge just elaborated on gets sorted out mentally and organizationally. After all, the company needs more capital to expand its global pres- ence. According to China’s Corporation Law and Securities Law, a com- pany must not exceed 200 shareholders before it may go public. This is an impossible hurdle for Huawei, which is held by more than 70,000 employees. Huawei certainly won’t go public until the law is amended.

Spinning Top: The Wooden Monkey That Never Rests

Ren Zhengfei once said at a casual meeting with employees:

If you believe you are born to die, why then were you born at all? Since you can bathe in the sunshine without doing anything, why should you work hard to enjoy the sunshine? If you believe your life will end in nothingness, you can stop any efforts to improve it. But in this way you will be much too pessimistic. We live an average of 70 or 80 years, and I am convinced that life becomes completely different if some measure of effort is put into it. The process of making life more beautiful and enjoyable could be full of pain. A farmer reaps nothing if he has not tilled the land, and a city won’t be any better without construction workers toiling under the scorching sun; a country won’t have any steel or iron if none of its people endure the heat of furnaces, and Marine Corps soldiers won’t get to the beach if they haven’t trained hard enough. “No pain, no gain,” as the English proverb says. I believe you have taken great pains to get into university. You deserve every- t hing you have earned. Each pain you have experienced is the price you have paid for a wonderful life.

Success, or the sense of success, is the personal perception or sense of value that each person possesses and is dependent on. Without this sense of value, people feel empty. Emptiness is a dark force that can destroy a person. In human history, prominent and successful people have sub- stituted social commitment and lofty values to replace the perception of emptiness. They are destined to lead a difficult life, filled with solitude and pain.

Ren Zhengfei and other leaders of Huawei carry the same cross on their backs. They are obliged to drive the express train of Huawei to every corner of the world, and to keep it in perpetual motion. This seems to be a national value. Ren belongs to a special generation that identify with the country, and for his generation, personal and business success belongs to the country. Needless to say, every successful business leader is full of national pride when they are conquering the world.

The greater the underlying desire, the stronger the sense of mission. If it is going to live long and thrive, Huawei needs to ensure the organiza- tion has enough motivation. The company should therefore develop more extensive and effective incentives to resist or offset (because it is impos- sible to eliminate) organizational fatigue. This is a big challenge for its leaders and all of management. Although a perpetual motion machine is only hypothetical, Huawei’s leaders must keep themselves in perpetual

motion. And while they try to resist “leadership fatigue,” they must lead the organization out of fatigue as well.

In this sense, not everyone can be a good leader, as it is one of the most painful jobs. It is not a mere issue of competence, personal integrity, or charisma. The key is how to keep the motivation always fresh to coun- teract laziness and boredom. That simply makes being a leader the most uncomfortable and inhuman job in the world.

This reminds me of my childhood. When I was about seven or eight years old, I loved to make paper boats, and when it rained I would go out front and launch a few on the stream that would form by the gate. I would then watch the paper boats bobbing up and down until they floated out of my sight. These boats carried away the dreams of a boy who had not