Boardroom battle escalates

Lighting firm's management struggle reflects corporate governance problem

Internal struggles between the chairman and the CEO and founder of China's largest lighting specialist have escalated in recent days, moving on from the boardroom to the real world.

This has resulted in a forceful takeover of a plant, suspension of plant production, mediation from local authorities as well as caused observers to reflect on corporate governance in the country.

Wu Changjiang, CEO of Hong Kong-listed NVC Lighting, was sacked by the company's board on August 8 for allegedly having signed secret licensing agreements on behalf of a NVC subsidiary with three other companies, granting them rights to use the NVC brand for 20 years. This was the third time that Wu has left the top posts of the company that he co-founded in 1998.

The person behind Wu's current removal is Wang Donglei, NVC's chairman, who reinstated Wu during previous internal discord back in 2012 with a capital injection that made a company controlled by Wang the largest shareholder with a 27.1 percent stake in the company.

Confrontation

NVC is the largest specialist by revenue in the domestic market in commercial lighting, office lighting, outdoor lighting, residential lighting, and lamps.

The company's products lit up the China Pavilion of the 2010 Shanghai World Expo and the gymnastic centers of the 2010 Asian Games in Guangzhou.

After Wu's removal on August 8, production was halted at the company's plant in Wanzhou, Southwest China's Chongqing Municipality, one of its four major plants. Wu's supporters occupied it and refused to turn it over to caretakers appointed by the board.

The standstill will cost the company 2 million yuan ($0.33 million) a day, according to a report by the Beijing News newspaper.

On August 11, two press conferences, one held by Wang in Beijing and the other by Wu in Chongqing, took place.

The two sides accused each other of committing improper commercial transactions within an affiliated enterprise. The company's shares were suspended from trading on the Hong Kong Stock Exchange on the same day.

A report by the Beijing-based China Times on August 14 cited legal professionals as saying that it is hard to verify the accuracy of the accusations from both sides and the truth may come out earlier if the case were brought to court.

Because Wu's supporters refused to turn over the plant in Chongqing, the company said in an exchange filing on Wednesday that it has entered an "emergency state" and the board has decided to suspend the business of the Chongqing subsidiary and set up an interim headquarters in Huizhou, South China's Guangdong Province, as Wu has "unreasonably and unlawfully disobeyed the board's decision."

A worker at NVC's plant in Huizhou told the Global Times Wednesday that the plant is under a "partial" standstill.

Costs

As the event continues to unfold, experts say cases like this are actually quite common in China.

Shi Jinchuan, dean of the college of economics at Zhejiang University, said there are many cases in China in which the founder of a company has disputes with investors and the phenomenon reflects a changing relationship between monetary capital and human capital from the Industrial Age to the High-tech Age.

"In the past, monetary capital was the king and had an unchallenged say in the appointment of professional managers," Shi told the Global Times on Wednesday.

"During the past 30 years, however, the rule has been altered to some extent. Some professional managers have enough attributes or resources that could allow them to defy the decisions of the board or the top investors."

Louis Li, CEO of Pacific Founder International Holdings, said a miscommunication issue exists in the ongoing case.

"An executive running his own secret channels is not permitted from a legal perspective, but that is a grey area. Sometimes it produces win-win results and the board will choose to 'overlook' it," Li told the Global Times Thursday.

"If the chairman chose to resort to violence in the Huizhou takeover, rather than conduct due diligence, these actions undermine his position," Li said.

However, experts said internal boardroom struggles mostly end badly.

Shanghai Jahwa Group Co, China's leading cosmetics maker, is one such example.

In May 2013, the board of Jahwa dismissed Ge Wenyao, who had led Jahwa for 28 years, from the position of group chairman over allegations of embezzlement.

A string of ripples that happened over a year after Ge's departure, which includes the sacking in June of general manager Wang Zhuo, a close ally of Ge, has wiped out more than 10 billion yuan in the company's market cap, according to a report in Guangzhou-based Time Weekly on August 14.

When it senses risk or sees its interests being undermined, money will talk, Shi noted, using a play on words to refer to a firm's investors.

"The usual pattern is, when investors talk [announcing disagreement], the company is already in some sort of trouble. If the company has no problems at all and remains a healthy cash cow, investors will choose to remain silent," Shi said.

For NVC, the company's profitability was marred due to Wu's disputes with controlling stakeholders such as private equity firm Softbank Asia Infrastructure Fund and French electrical systems supplier Schneider Electric back in May 2012.

According to NVC's annual report in 2013, the firm's profit stood at 280 million yuan, in comparison to the 570 million yuan profit made in 2011 before the internal strife happened.

Lesson

The difference for Wu is that during the first two rounds of internal struggles, the firm's distributors sided with him. But this time, most distributors have vowed to support Wang.

On August 12, Wang rallied support from 19 dealers, who together control 80 percent of NVC's sales channels.

Shi noted that whenever a company's investor and founder have disagreements in how the company should develop, investors will be concerned.

"Because monetary capital has a function that no other kind of capital can perform, despite the changes in social environment and the advancement of technology, it shoulders loss and risk," Shi said.

For better or worse, the case serves as a good example to probe the soundness of corporate governance of Chinese companies.

"What's really behind the case is the issue of corporate governance. In China, legal persons, executives, and supervisors often bind their personal interests to the company they serve. Such combinations create a lot of grey areas," Li said.

"Up to now, this is an aspect the regulator desperately wants to rectify but the reality is there is not much progress," Li noted.