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Politics in the Boardroom: The Role of Chinese Communist Party Committees

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Politics in the Boardroom: The Role of Chinese Communist Party Committees

What will the consequences be if Party Committees take up a larger role in pressuring company boards?

Politics in the Boardroom: The Role of Chinese Communist Party Committees
Credit: Pixabay

China’s President Xi Jinping has called for efforts to strengthen the role of the Chinese Communist Party (CCP) within domestic borders, considereding the Party as the engine behind the country’s rejuvenation. Indeed, to navigate the unstable international scenario and make China a global power by 2050, the CCP has adopted “the spirit of the nail,” according to which one must strike until the nail is well in place, because a single blow with a hammer is not always enough. Following that philosophy, China’s Communist Party works hard throughout all levels of society to improve its credibility and continuity over time, cementing a vision that is reflected even in the business sphere. In particular, Party Committees represent an important mechanism through which Beijing’s government expands its authority and supervision over organizations, creating different nuances of corporate governance with Chinese characteristics.

A Party Committee is formed by a group of senior CCP members who are given a leadership position inside the halls of public and private companies operating in China. The legal pillars sustaining such a committee’s activity are marked in the 2012 Constitution of the Communist Party of China. In China’s state-owned enterprises (SOEs) the committee’s leading position refers to its competence in setting the right decision, keeping in mind the big picture, and supporting the meeting of shareholders and boards of directors to decide on major issues. Within private enterprises, however, it implements Party’s policies and operates through the Trade Union and the Communist Youth League Organization. According to Asian Corporate Governance Association’s reports, to understand what a Party Committee really does, we must take into account three main points:

  1. It makes the “Three Important, One Large Decisions,” which means being responsible for the allocation of funds relative to important issues, cadres’ appointments or dismissals, and new projects.
  2. The members of the Party Committees could also become part of the board of directors or the executive team.
  3. The Party unit must oversee the system of appointment of the executives.

The presence of these governmental bodies is particularly emphasized within strategic sectors and zones. In 2017, Party Committees existed in around 70 percent of 1.86 million private owned companies in China, with a presence that is destined to grow. Last September, local authorities in Hangzhou, capital city of Zhejiang province, announced that 100 private companies in their city alone have welcomed governmental officials to foster the growth of the business environment. The province of Zhejiang is an important backbone for the national economy; among the  players included in that initiative are Zhejiang Geely Autombile Holdings Ltd., Hangzhou Wahaha Group Co., and Alibaba.

Chinese experts who advocate for the Party Committee system argue that it benefits production, long-term planning, and the fight against corruption inside Chinese companies.

But the Party Committee has an explicit role even within foreign companies, where its nature has raised debates especially among the community of investors involved in joint ventures (JVs) with state-owned enterprises. Even if Chinese Company Law regulates the establishment of Party units in foreign invested enterprises (both JVs and fully owned) without requiring governance roles for their members, recent trends  in officials’ attitude — which are oriented toward the demand for more power — indicate accelerating interference. That suggests that these positions are not merely symbolic, but rather an eventual source of political pressure around the boardroom.

Leadership is a core concept in the dynamics of a board of directors. Factors that challenge this leadership impact the performance of the body, with repercussions across the whole organizational entity. The eventual superseding of business strategies by political ideologies could put directors in a difficult position and evolve into board pathologies that make them vulnerable. These outcomes will affect the group’s decision making process and could result in negative group conflicts, dysfunctional coalition formations, board polarization, and pluralistic ignorance. All these elements could result in a private company becoming a sort of “political weapon,” which deploys its potential when diatribes between international actors occur in the global scene.

It would be interesting to monitor how and if a higher level of external complexity — generated by commercial wars, diplomatic tensions, and geopolitical involvements — could be translated by China’s governmental apparatus into a need for strict controls internally. Due to this consideration, even the business setting could become an important minefield where companies are expected to gain results that contribute to China’s great rejuvenation and where creating situations of vulnerability and tension could bring some advantages to the Party.

Federica Russo writes about business and geopolitics. Her analysis has been published by Asia Times, OBOReurope, Asia Power Watch, Cultural Bridge and several platforms where she is focused on China’s engagement in the global scene, corporate boards’ dynamics, and organizational behavior.