Dawu Group’s Concept of ‘Constitutional Labor-Capital Republic’ and Its Model of ‘Open Governance and Co-Prosperity’

Wang Jiangsong, November 24, 2020

Sun Dawu (孙大午) is a name many of our readers might be familiar or have heard of. A famed agricultural enterpreneur in Hebei province, China, his story and success is perhaps one of the most inspiring examples of China’s era of Reform and Opening Up. Over more than three decades, his business has grown from a chicken and pig farm to the Dawu Group that has more than 30 companies in areas of farming, animal husbandry, feed, food, hotels, and finance, employing 9,000 people. On November 11, Sun Dawu and his close family members and top management—totalling 28 people, were suddenly arrested, sending shock waves throughout the Chinese internet. It’s unclear at this point what this is all about but the larger picture doesn’t bode well for Sun Dawu, his enterprise, and China’s private entrepreneurs in general. As China Change prepares an in-depth profile of Sun Dawu, we provide a translation of an article by the Beijing-based labor scholar Wang Jiangsong (王江松), who has known Sun very well, to introduce our coverage of this alarming development as it unfolds. — The Editors 

The news of Sun Dawu being detained [on November 11 along with the Group’s top management] has gone viral on the Chinese internet. In this piece, my aim is not to comment on the legal issues related to this event; rather, it is but a brief academic introduction, for general reference, to the private enterprise’s concept of “constitutional labor-capital republic” (私企立宪、劳资共和) and the model of “private-own, open governance, and co-prosperity” (私有、公治、共和) that the Dawu Group has espoused and practiced over the years.

The origin of Dawu’s the constitutional governance

The Dawu Group was originally a chicken-and-pig ranch started by peasant woman Liu Huiru (刘会茹), from Langwuzhuang village in Xushui County, Hebei Province (河北省徐水县郎五庄), in partnership with a few villagers on 400 acres of uncultivated land. In 1984, it was on the verge of bankruptcy when Liu’s husband, Sun Dawu, resigned from his position with the Agricultural Bank of Xushui County to take over the business, renaming it Dawu Agricultural and Animal Husbandry Group Corp. (大午农牧集团有限公司).

In 2003, Dawu Group was making hundreds of millions annually when it met with an unexpected setback. The company was accused of illegally raising capital, and Sun Dawu was sentenced to three years in prison with a four-year reprieve, during which his son Sun Meng (孙萌) served as interim chairman of the board. After Sun Dawu was released [from ten months of detention], according to the law, he could not serve as chairman of the board and legal representative of the enterprise during the probation period, and Sun Meng also resigned from his provisional post. This created difficulties in the shareholding system within the family and among the company’s founding employees.

Given the crisis, Liu Huiru asked Sun Dawu to try to solve the problem of corporate succession: “Can you think of a way to design a system in which we and our children are disengaged from the shareholding system; so that, on the one hand, the company can keep growing, and on the other, our children can either choose to start their own business or enjoy corporate welfare?” So Sun Dawu made a painstaking study, absorbing lessons from the British constitutional monarchy, the Sui Dynasty’s system of three departments and six ministries (三省六部), the German system of labor-management through joint decision making, the commonwealth ideals of Confucianism and socialism, and other aspects of Chinese and Western wisdom. The result was a new type of private enterprise: the constitutional labor-capital republic.

The ‘constitutional labor-capital republic’ and ‘open governance and co-prosperity’ private enterprise model

Firstly, there are restrictions on private property rights and the power of capital. Although the Group’s assets are clearly property of the Sun family, they are not divided and alloted to each family member, but rather owned by the Sun family as a whole. Sun family members receive monthly living expenses equivalent to two to three times the average salary of employees. They are also provided benefits such as housing, medical care, schooling, covered overseas travel expenses, and aid for starting their own businesses. Sun family members are encouraged to run for election to the supervisory board, the board of directors, and the company’s governing council; any remuneration and rewards for those positions would then go to them as individuals.

Secondly, the board of directors is elected by the employees to exercise the group’s operational decision-making power and implement the public governance of the enterprise.

Thirdly, the business profits were shared between labor and management. Sun Dawu put it thusly: “at the core of the constitutional system of this private enterprise is a republic of labor and management, the enhancement of the republic of capital is an upgraded version of the shareholding system.”

“What does constitutional private enterprise place limits on? The first is limitations on the power of investors, who are prevented from interfering with company operations down the line. The second limit is that the highest staff can’t be paid more than 10 times what the lowest workers earn. Constitutional private enterprise means a constitution concerning distribution, governance, and power. ‘Socialism with Chinese characteristics,’ as I understand it, should be the middle way, which I think is the way forward. A market economy encourages competition, but the fruits of labor in a market economy should be shared by the members of society, and common prosperity with differences [according to ability, diligence, etc.] is the fundamental guarantee of social stability.”

Separation of powers and mutual checks and balances between the supervisory board (ownership), the board of directors (policy making) and the governing council (executive power)

The supervisory board has ownership but no policymaking or executive power (operating power); the board of directors has policy making power but no ownership or executive power; and the governing council has executive power and no ownership or decision-making power.

1. The Supervisory Board consists mainly of members of the Family Council and the Workers’ Union, plus the Director of Legal Oversight, the Chief Financial Officer, and some retired leadership personnel. The powers of the Supervisory Board are as follows:

(a) Preparing and revising draft Group-wide rules and regulations.

(b) Organization of general elections for the Board of Directors, operated by the workers’ unions.

(c) Providing institutional and ethical oversight of the members of the Board of Directors and the governing council and, if necessary, impeaching the directors.

(d) Working for the welfare of workers and for the public good.

(e) Inspecting the Group’s finances and operations, reviewing the Group’s financial reports, business reports, and profit distribution[1]  plan, as well as implementing supervision of finances and asset rights.

Members of the Supervisory Board are limited to supervisory authority and cannot participate in the election of the board of directors, much less become governing council members themselves. The supervisory board is, in effect, a merger of the family council and the workers’ union, always representing the interests of owners and workers and providing a balance of power over the board of directors and the governing council.

2. The members of the Board of Directors are elected by the employees of the Group through three procedures:

All employees working in the Group have the right to vote in the primary election of directors, groups of five or more than jointly recommend candidates.

Employees who have worked in the Group for more than one year and cadres with shift supervisors have the right to vote in the second-round of elections, and shall elect official candidates from the recommended list.

Employees who have worked in the Group for more than 10 years and cadres with shift supervisors shall have the right to vote in the final election of directors at the Group’s election assembly. The person who receives the most votes becomes chairman of the board. At the same time, cadres at the level of shift leader or above, salesmen of at least one year, technicians of at least two years, and employees of three years or more all have the right to be candidates. The powers of the board of directors include:

(a) Learning and implementing the Group’s guiding philosophies of operation, governance, and corporate culture;

(b) Determining the Group’s development strategy and development plans;

(c) Determining the Group’s annual production, operational and investment plans, and work plans;

(d) Formulating an annual incentive mechanism for cadres and employees and a year-end profit distribution plan; and

(e) Coordinating the production, operational, and collaborative relations among members of the Group.

3. The Governing Council is elected by the board of directors and consists of the General Manager, Deputy General Manager and Chief of Staff. Directors may also co-serve as Group General Manager, Deputy General Manager, and subsidiary managers. The governing council is empowered to carry out the following:

(a) Presiding over the production and operational management of the Group, and to carry out, organize and implement the resolutions of the board of directors;

(b) Organizing the implementation of the Group’s annual business plan and investment plan, responsible for the final accounts and task evaluation;

(c) Day-to-day operational management of project execution, financial management, internal coordination, logistics, fund-raising and allocation, and so on; and

(d) Representing the Group in important external business.

While the supervisory board, board of directors, and the governing council practice separation of powers, checks and balances, and the division of responsibilities, the coordination and unification of the three is carried out by the joint meeting of the three councils in accordance with democratic principles. The joint meeting of the three councils is the highest authority of the enterprise. When making decisions, the chairman of the supervisory board, chairman of the board, and general manager each have one vote, and a one-veto system is in place. The enlarged meeting of the three councils is attended by personnel at the level of vice-president and above.

Workers’ unions as a bridge between labor and management

All employees of the Group have the right to vote and to be elected to the union, and the Group holds a monthly union committee and an annual congress. The president of the union holds an important seat on the supervisory board and, on behalf of the employees and in conjunction with the family council, is responsible for supervising the board of directors and council, has a say in, and participates in, the development of the constitutional system of the company, and is independently responsible for the health, welfare, retirement, social security and public welfare of the workers.

Lifelong employment, internal insurance and free in-house medical care for all employees 

Similar to Japan’s lifetime employment system, after a probationary period, unless they voluntarily resign or are found to have participated in graft, Dawu Group employees can work until retirement and enjoy generous benefits, retirement, and medical benefits. Firing a worker is contingent to strict procedures such as warnings, fines, and suspension.

Dawu Group employees can choose between the national social security system, the corporate retirement system and the internal insurance system. The retirement plan gives employees with more than 15 years of service a monthly retirement pension of 500 yuan, and beyond that, with every year of service, depending on the total length of service, a monthly increase of 80-150 yuan.

Under the internal insurance system, for employees with more than three years of service, each employee contributes 1,000 yuan per year, and the company matches 3,000 yuan, and the sum of the two reaches 60,000 yuan, forming the group’s internal insurance fund, with each employee holding an internal insurance card, i.e. personal account, and the funds in the account accumulating on a rolling basis with interest using commercial bank’s interest rate for two-year loan. This is in fact a profit-sharing system.

Employee medical care for Dawu Group employees has been built up over a gradual process, from partial reimbursement to free for all. In 2016 the Supervisory Board decided that all employees of the Group who paid union dues as well as the company’s retired employees were entitled to medical care. In January 2018 the official implementation of free medical care for all employees was put in place, and together, the union, Dawu Hospital, Human Resources Department, Finance Department, Legal Department formed the management committee for free health care.

The two highlights of the “constitutional labor-capital republic” of the Dawu Group are the collective ownership of the family’s private property rights and the formation of a community of interest aligned with the ownership of the employee labor force, and the formation of oversight of the board’s decision-making power and the board’s operational powers; the second is that the board is directly elected by the employees, and the employees form a direct limitation on the board. These two institutional constructions have resolved the fundamental conflict of interest between workers and owners, forming a close community of interest and common cause between labor and management.

A brief academic commentary

As a scholar with 41 years of academic history, especially as a labor and labor relations scholar, I can responsibly say that Sun Dawu is not only an entrepreneur, but also a thinker. Moreover, he is an exemplary figure who has put his beliefs into practice. He’s been an avid consumer of philosophy, economics, management, political science, sociology, and history, and his knowledge comes from practice and is put back into practice and grounded in institution-building. This is true life wisdom. His unique practice of “constitutional labor-capital republic” and “open governance and co-prosperity” in a private corporate system has absorbed the essence of traditional Chinese culture and advanced foreign corporate management culture, and to a large extent, avoided drawbacks associated with the so-called collective ownership and family private system. At the same time, it is committed to the goal of a win-win labor-management and community republic. This is not only a significant innovation for China, but a kind rarely seen around the world.

To ruin Sun Dawu and destroy the Dawu Group would really mean the reckless destruction of a thriving, self-governing community, a brutal demolition of a national and popular treasure. Such an act will surely incur historical punishment.

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