Zong Qinghou is unlikely to bury mines for his daughter in terms of equity

Produced by Tiger Sniff ESG Group

Author: Hu Wei

Header image: Visual China

This article is the 071st article in the #ESG Progress Watch# series

Key words for this observation: corporate governance, equity

Zong Fuli has no father.

As everyone already knows: on February 25, Zong Qinghou, a generation of Zhejiang businessmen and chairman of Wahaha Group, died of illness at the age of 79.

Wahaha-Zong Qinghou = zero, this is what Zong Fuli once said. And now, the role of that subtraction is up to her, and one of the chips is to inherit the equity of the business held by her father. But Zong Qinghou is not the controlling shareholder of Wahaha Group, or even the largest shareholder.

Even if Zong Fuli inherited all of her father's shares, the outside world was worried about whether she would be able to succeed smoothly.

Equity is not the same as control

If you haven't paid attention to Wahaha's shareholding structure, one thing is really surprising: the largest shareholder of this private enterprise is a well-established state-owned enterprise, namely Hangzhou Shangcheng District Cultural and Commercial Tourism Investment Holding Group Co., Ltd. (hereinafter referred to as "Shangcheng Cultural and Commercial Tourism", which is wholly owned by the local State-owned Assets Supervision and Administration Commission), which holds 46% of Wahaha's shares, Zong Qinghou holds 29.4% of the shares as the second largest shareholder, and the remaining 24.6% of the shares are held by the Hangzhou Wahaha Group Co., Ltd. Grassroots Trade Union Joint Committee (hereinafter referred to as "Wahaha Trade Union").

In less rigorous terms, it is customary to assume that 67% of the shares are absolute, 51% are relative, and 34% have veto power. But Zong Qinghou holds less than 30% of the shares, and it seems that he does not even have a veto.

Therefore, the outside world is worried that even if Zong Fuli inherits all of her father's shares, it will be difficult to control Wahaha. The fear is not entirely unreasonable, but the chances of it becoming a reality are slim.

Taking the helm of a business with a small stake is common and can be done in a variety of ways. For example, if a concerted actor agreement is signed (A holds 30% of the shares, B holds 20% of the shares, and the other five minority shareholders each hold 10% of the shares, but through the agreement, the five minority shareholders become the concerted actors of B, then B has the right to speak in the company). It is also possible to confirm that a shareholder has a higher voting right (e.g., a 20% shareholder with 70% of the voting rights) can also be confirmed through the company's articles of association. In addition, the same shares do not mean the same rights, and some stocks only enjoy the right to dividends but no voting rights, or there is almost no possibility of exercising voting rights.

It's hard to say how to do it, and the reality is far more complex than the theory. For example, in the "Baowan Dispute", China Resources and Baoneng, which alternately became Vanke's largest shareholders, had conflicts with Vanke's management almost at the same time, but after paying a heavy price (such as Wang Shi's resignation as chairman), Vanke's management, which held fewer shares, not only defeated Baoneng, but also finally withdrew from the board of directors.

There are many more intuitive examples: Liu Qiangdong enjoys about 80% of the voting rights of JD.com with about 20% of the equity, Ren Zhengfei only uses about 1% of the equity to control Huawei, and Ma Yun relies on the partnership system to take the helm of the Alibaba system.

Since Wahaha is not a listed company, it is not obliged to disclose more equity information to the outside world, and it is difficult for people to speculate on the company's right to speak through the proportion of equity. But Zong Qinghou may have more voting rights, or act in concert with the Wahaha union, or there may be other ways to take charge of the company.

In short, almost no one doubted Zong Qinghou's control over Wahaha. Eight years ago, a corporate insider told me that Wahaha also had the drawbacks of Zong Qinghou's "Yiyantang" - it is hard to imagine that a person who cannot actually control the company can say everything.

If holding less than 30% of the shares is not a problem for Zong Qinghou, then it is not a problem for Zong Fuli.

Zong Qinghou is familiar with equity operation

As long as Zong Qinghou is willing, it is unlikely that he will bury mines for his daughter in terms of equity.

In the "Dawa Controversy" at the beginning of this century, he personally felt the impact of equity on business operations.

In 1996, Wahaha established a joint venture with Danone of France and Peregrine of Hong Kong. Peregrine resold its shares to Danone after its bankruptcy in 1997, giving Danone a 51 percent stake in the joint venture and Wahaha a 49 percent.

Initially, Wahaha leveraged its local resources and brand advantages to provide the joint venture with strong market support and consumer base, enabling Danone to reap huge profits from the joint venture.

However, in 2006, Fan Yimou, Danone's new chairman of the joint venture, discovered that Zong Qinghou had established a series of non-joint venture companies outside the joint venture that were owned by state-owned enterprises and employees, and that their products used the Wahaha trademark and brought a lot of money to the Wahaha group. Fan Yimou believes that the non-joint venture company has divided the profits of the joint venture company, and requires that 4 billion yuan be used to acquire 51% of the equity of the non-joint venture company and bring it under the unified management of the joint venture company.

Zong Qinghou and Wahaha employees could not accept these requirements, which led to the "Dawa dispute".

Danone has launched dozens of lawsuits at home and abroad in an attempt to acquire shares in the non-joint venture through legal means, but the lawsuits have all ended in Danone's defeat. In September 2009, the two companies announced a settlement in which Danone sold its 51% stake in the joint venture to a Chinese joint venture partner for 3 billion yuan.

This was called "the most influential international business war in the 30 years of China's reform and opening up", and the final victory also made Zong Qinghou quite proud and was written into his memoirs.

In addition to the "Dawa dispute", the topic of Wahaha's equity has also been reported by the media many times, such as:

In 1999, Wahaha began to implement an employee stock ownership incentive system, and by 2003, all employees had achieved stock ownership.

In 2018, Wahaha repurchased employee shares. At that time, some analysts believed that after the equity was recovered, the shareholding of Wahaha employees remained unchanged, but the number of shareholders changed, which may be the company's preparation for listing. However, Wahaha responded that it was to distribute equity more reasonably, and "there is no plan to go public yet". Looking at it nearly 6 years later, Wahaha has indeed not yet gone public.

In December 2023, 100,000 shares of Wahaha were transferred by auction on the Alibaba asset platform.

Zong Qinghou is familiar with equity operation.

The keeper is also a pioneer

Ownership structure is naturally the core topic of corporate governance, but Zong Fuli will most likely not have problems in this regard. If the outside world must worry about her, it is better to pay attention to her personal ability.

As an entrepreneur, Zong Qinghou turned a little-known school-run enterprise into a commercial giant ship with an adult revenue of tens of billions of yuan, even if the shareholding ratio is not large, it will not affect his right to speak on Wahaha. But as a keeper of the business, Zong Fuli is easily labeled as "sitting back and enjoying her success", and similar labels may reduce her prestige and even make it difficult to convince the public within the company.

In fact, the media has been paying attention to Zong Fuli for nearly 20 years. With the gradual aging of the first batch of private entrepreneurs after the reform and opening up, whether the second-generation members of the family business can take over smoothly has always been a topic of concern to the public, business and academic circles.

In foreign countries, it is already common for families to produce successful offspring members for their businesses. For example, Toyota has become the world's largest car company after three generations, and Trump's career has gone beyond business and into politics.

But China has its own national conditions.

Many second-generation enterprises have encountered the family planning policy, and as only children, they may naturally become the successors of enterprises. But when it comes to the founding generation, they don't have much choice in terms of successors.

Although more than 40 years of reform and opening up have passed, China's market economy is still in the stage of need to be improved, which also means that the governance mechanism of many private enterprises is not yet mature. Excellent foreign enterprises may need several generations of precipitation, and under the special development model of China, it may take only one generation to build a business empire, but the temporary nature of the internal mechanism may lead to the short-lived enterprise like Alexander's empire.

The second generation of enterprises with a good education in economics, management and other disciplines may learn theories that are out of touch with reality. For example, some second-generation enterprises try to introduce the manager system into the enterprise, but the mature professional manager culture has not yet been cultivated in Chinese society, and some managers may lack professionalism and even embezzle corporate assets.

……

Zong Fuli's appointment cannot be separated from the background of the times, as the second generation of the earlier succession, she has become a pioneer among the keepers.

Fortunately, she has come a long way - she went to the United States to study in junior high school, returned to Wahaha after graduating from college in 2004 and started from the grassroots level, served as the president of Hongsheng Beverage Group in 2007, served as the director of the brand public relations department of Wahaha Group in 2018, concurrently served as the deputy general manager of the group's sales company in 2020, and served as the vice chairman and general manager of the group in 2021.

In the past 20 years, the outside world has had mixed reviews of Zong Fuli's performance. Overall, it was neither particularly praising nor derogatory. There is a lot of content but it is a little bland, a bit like the Spring Festival in recent years.

But just after the Spring Festival, the news of Zong Qinghou's critical illness and death came. Previously, the last time Wahaha received widespread attention may be the exposure of AD calcium milk on the Spring Festival Gala magic show. This classic product of the Zong Qinghou era has been born for nearly 30 years, and through the operation of Zong Fuli, the main concept of "today's minors", the sales volume has maintained double-digit growth every year in the past three years.

On February 26, in Hangzhou, at the gate of Wahaha Group headquarters, citizens placed AD calcium milk to commemorate Zong Qinghou. (Source: Visual China)

Perhaps, this is the most precious gift that Zong Qinghou left to his daughter, and it is also Zong Fuli's deepest response to her father.