A Revisit to Corporate Organization, System and Culture by Chairman Ren in celebration of the 8th anniversary of the founding of ChemChina

  May 9th is the day ChemChina was officially founded eight years ao. As usual, Chairman Ren of ChemChina wrote this essay in celebration of the 8th anniversary of the company.

  As Chairman Ren begins, 2011 is the first year in China’s 12th five-year plan period. It is also a landmark year in ChemChina’s history.

  In 2011, ChemChina joined the Fortune 500 club, closed two major M&A deals,acquiring Elkem from Norway and MAI from Israel,further raised her level of internationalization and made new progress in management transformation and IT construction. The strategic objectives of “2215” set for the company during the five-year plan period have been partially fulfilled ahead of time. The strategic objectives of “2215” mean during the 12th five-year plan period, the total assets and sales of the company will both exceed RMB 200 billion, her profits will surpass RMB 10 billion and ChemChina will become a Fortune 500 company.

  Chairman explains that some at ChemChina may doubt that our strategic objectives are too conservative since most of them were already achieved in the first year of the five-year period. In fact, we already suspected how things would stand before we finalized our plan for the 12th five-year period. The reason why we allowed such a big leeway in our plan is that we anticipated the severe challenges we would be confronted going forward. We are fully aware of the uncertainties in the competitive landscape and our position in the industry, our capital structure and our profitability. Less than optimistic about the evolving situation, we believe that without continued industrial readjustment and management transformations, even if we deliver on our strategic objectives, the results will not be sustainable. Therefore, we have allowed some room in our plan for structural readjustment which will stay as our central task during the whole five-year period. If there is any change to make in our objectives, it could be “stay firmly as a Fortune 500 company” instead of “become a Fortune 500 company”.

  As Chairman Ren says, to maintain healthy and sustainable business growth has always been a hard nut to crack for the world’s business community. Small businesses are often short-lived or easily eliminated by market competition while big ones also find it challenging to stay vibrant forever. Statistics shows that among all the global top 500 companies, only 23 are centenarian. When it comes to Chinese companies, even the top 500 lag quite far behind their global peers in terms of business size, sales margin, market position and brand recognition, much less ChemChina.

  The indicators above show that the slow progress in our level of development is attributed to our lack of core technologies and talents coupled with our weaker management relative to our peers. As a result, we run the risk of being disqualified as a global top 500 company at any time, or even being eliminated by the market.

  Take the multi-national Eastman Kodak for example. The century-old film pioneer has made an interesting business fable out of itself with its filing for bankruptcy protection several months ago. Staying in the old rut, the inventor of digital cameras is knocked out by the digital camera industry. What an irony it is!

  The global economy right now is messy. As late starters, Chinese companies have to review and reflect on our path of growth. What else can we depend on if we are to abandon the traditional models of extensive growth and “leap-forward development”? To stay firmly as a Fortune 500 company:easier said than done! A minor change in the definition of our strategic objectives weighs extremely heavy.

  Chairman Ren goes on that BlueStar is the first in China to start the franchised cleaning business more than 20 years ago in an attempt to increase our market share in the cleaning industry. However, until today we haven’t finished cleaning all the industrial boilers in China, even once, because we are not able to establish such country-wide monopolistic organization to do it. So we need to understand that business organizations have boundaries. Chester I. Barnard, a US expert on modern business management, holds that a formal organization must have three essential elements: common purpose, willingness to serve and communication. Business organization is a system composed of cooperative individuals. This indicates that business organizations up to certain size cannot be effectively operated without efficient internal management and effective coordination among the three essential elements. As a business, we are not supposed to do everything, nor everything done exclusively by us. In the “jungle” of markets, we may become a lion, or even lead a pride of lions, if we fare well. But we will never know how many prides of lions there are in the jungle, nor will we ever command the whole jungle. Therefore, we have decided to strive for stronger and more sustainable earning capabilities through optimized portfolio and product mix and improved operational efficiency, on the basis of a stable size of RMB 200 billion assets and sales respectively. To put it simply, we will shift our focus from growing bigger to growing better and stronger.

  As Chairman Ren reminds, Deng Xiaoping, chief architect of China’s reform and opening up initiative, once said, the organization of, and unity, within such a big country as China relies first on ideals and second on disciplines. The same principle applies to business management. Before we are strong enough to create alternative technologies or revolutionary innovations, only systems and cultures can provide space for our survival and thrive.

  What is system? A system is a collection of rules and processes for a business organization, or best management practices we are introducing into the company. Business management activities have been ongoing for about centuries. And systematic theories of scientific management were born 100 years ago with the advent of Frederic Winslow Taylor’s The Principles of Scientific Management. They have been evolving over the century and resulted successively in classic management theories, human relations—behavioral science theories and contemporary western management theories that can be subdivided into a dozen of schools. The focuses of those schools are nothing but the following two issues: 1) how to set up and run a business organization to make it, more productive in the past and, more responsive to ever-changing markets nowadays; and 2) how to manage people so that they have more initiatives that can be translated into productivities of a business organization.

  It is worth noting that there is a gradual confluence of the studies on organizational management and those on people: emerging in the management science is a trend that integrates the behavioral science with classic management theories. According to this trend, it is rigid for classic management theories to regard people as mere tools, to be sure. Nevertheless human-oriented management cannot rely on human nature itself either. It could only be achieved through the traditional management activities within an organization, such as planning, organization, direction, coordination and control, etc. The collection of these management activities is then the management system that can suit an entire organization and meanwhile being executed by each individual within the organization.

  Chairman Ren explains that the reason why he is back on basic management in his writing this year is that our basic business management is weak and our management system deficient that basic management preciously shall be our first priority.

  Currently the real economy has to bear the brunt of the crisis triggered by the burst of bubbles in the financial sector. Many of our businesses are suffering from weakening demand, rising cost and declining profitability. Such a situation exactly creates the opportunity for us to improve management. Indeed, the big environment is to blame for the underperformance by some of our businesses. But the main culprit is very likely to be weak management. So we must take process control and cost saving measures to seek efficiency, quality and growth.

  He further stresses that he has been emphasizing the importance of hiring professional managers for our businesses and having regular look-back reviews of the management transformation and IT projects we have implemented all these years. Because he is afraid that for all the money we have spent, maybe only 20% has generated benefits. A large number of our businesses are seriously taxed by poor management and staff with uneven qualifications. To go for management transformations in such businesses blindly and stubbornly regardless of their immature conditions is just like doing embroidery on the gunnysacks—not only unhelpful but may even destructive to existing systems and mechanisms.

  Chairman Ren wishes to share with us an interesting story about organizational management.

  Once upon a time there was a temple run by an abbot with good moral standing and undisputed reputation. Every day the abbot would distribute food in person and all the monks in the temple lived in peace and harmony with each other.

  When the abbot became aged, a young monk was selected as the new abbot to distribute the food on his behalf. At the beginning, food was distributed fairly. But soon the young abbot was surrounded by a group of squealers, slanders and toadies. Naturally some monks became closer to him, others more distant. And, the food was no longer distributed evenly. Before long complaints were heard everywhere and the temple was almost a living hell.

  With no alternative, the elder abbot dismissed the young abbot and set up a food distribution committee through democratic election. There were altogether a dozen of monks in the temple and now seven or eight of them were on the committee. Each day, those monks were busy bargaining and wrangling on the committee without doing any real work. At the end of the day, the food was distributed fairly again, but at the cost of efficiency: the food would have long gone cold before it reached the mouths of the monks.

  Then another solution was born: each monk in the temple would take charge of food distribution for one day in turn. But the result was that the monk in charge that day would take the biggest share of food.

  How should this situation be improved? The elder abbot racked his brains and finally came up with a fine tune to the distribution method: the one in charge that day shall take the last remaining share of food. This way, no matter who was in charge on any day food was distributed quite fairly and everyone was satisfied.

  As Chairman Ren believes, this story is a vivid manifestation of the core idea of western economics: human beings are egocentric by nature and this is an inherent weakness. The same group of monks, with different rules of food distribution, produced remarkably different results. So the crux of the matter is not who but rather how to distribute the food—it is the system that determines the result.

  When it comes to business, system-based management can drive effective division of labor and cooperation that enable business organizations to run efficiently like big machine. German management expert Max Weber holds that for an organization to achieve its objectives, the organizational activities need to be divided into several basic tasks based on the division of labor per specialization and organized according to the hierarchical design of authorities. Each position in the organization entails clearly-defined rights and responsibilities, according to which personnel appointment is made with reference to the results of examinations, education and trainings. “Professional” managerial personnel are managed with fixed salary policies and expressively stipulated ascending rules. Each individual within the organization must abide by its rules and disciplines that are insusceptible to personal feelings and that shall prevail under any circumstance. The interpersonal relationships in the organization are governed by rational criteria, etc. To date, these principles are still instrumental for governments and business organizations, big or small, to run efficiently along the track of rules and systems. These plain thoughts conceived from business practices have become more profound as time goes by. And the organizational transformations, career development planning initiative, the introduction of professional managers and a variety of specialized trainings we are executing all have drawn inspirations from such theories of scientific management.

  Chairman reiterates that a ten-year business is the product of sound management whereas a hundred-year business is the result of fine culture. And I have repeatedly emphasized that the corporate spirit is our soul and corporate culture our core competitiveness. In many cases we don’t have the luxury of enabling conditions or favorable resources to stay competitive. Therefore we need firm beliefs to guide our practices. In other words, we need soft power to make up for our hard power. System-based management can regulate organizational behaviors, even the actions of workers, but it hardly can address issues with people‘s minds or personalities. Systems may convert individuals into screws for the big machine of a company, but only culture can turn individuals into active cells of an organization.

  He reviews the hard times where many of our businesses struggled to survive and thrive and reminds us that the fight for the turnaround of businesses is by no means the same as running companies under typical or normal business conditions. Rather, sink-or-swim was often the order of the day where spirits, faith, courage and conviction were critical to survival. Many of ChemChina’s corporate values, such as “serve the country with a flourishing business”, “all success hinges upon human efforts”, “stick to our goals and work with perseverance”, “seek harmony but not uniformity” and “reward star performers with generosity”, etc, are all derived from our enterprising endeavors. They are not mere slogans or ostentatious rhetoric. They are the voices deep in our hearts, the wellspring of our strength to overcome difficulties and challenges.

  Chairman confronts some of our businesses that are in desperate need of more encouraging organizational structures and more galvanized management teams.

  He then goes on to challenge what is eating away our fine culture? Why are good traditions not upheld and new cultures being carried forward? Chairman Ren believes it may also be a type of “big corporate syndrome”. When businesses are small, the organizations are simple and rules clear. Particularly, when managers set good examples with their own conducts, organizational values and norms are properly guided. But when businesses grow bigger, the organizations are more hierarchical and people’s opinions more diversified. And maintaining the purity and integrity of corporate culture thus becomes a systematic undertaking. Similarly, the ever-increasing internationalization of our businesses and the multi-polarization of social values also require us to keep abreast with times in our ideas and cultures so as to strike balances in individual needs and interests.

  He emphasizes that to form and maintain a common cultural identity, we need to properly address the questions about “people”. The accomplishment of key tasks, the implementation of policies and measures, and the effective operation of institutions all depend, in the final analysis, on people. Only when people share aspirations, values and norms of conduct can we have better production management, continuous improvement, improved corporate image and discharge of our social responsibilities, among many other long-term endeavors.

  With regard to corporate cultural development, business managers need to understand that “everyone has his place” and that “there may be talents placed in wrong positions but there will never be people with no saving graces at all”. Corporate culture is often the culture of the “commander-in-chief”. Business managers who are resolute, optimistic and transparent can help set visions for the company, instill into employees strong sense of pride and rally the whole organization around shared aspirations where all can play a decisive role in building a work environment of mutual-trust.

  In addition, organizational cultures will not be healthy and sustainable without appropriate incentives. Not only short-term and long-term incentives, but also other policies and arrangements designed to boost the morale of the company and improve the level of satisfaction and sense of honor among its employees. People work not only for money but also for the sense of security, and belonging and respect from others. For instance, professors from Washington University would rather give up well-paid jobs and work for low salaries at the foot of the Mount Rainer in Seattle, just to enjoy the beautiful landscape there, or the Rainer Effect, as is jokingly dubbed. It suggests that an organization can attract and retain talents with their “beautiful landscape” which, of course, refers to sound interpersonal relationships and healthy cultural and work environment.

  Third, routine management shall be stepped up and execution strengthened. For organizations, culture is the land whereas systems the tracks. Driving not along the tracks will end in collision or derail. In building healthy and strong corporate culture we encourage everyone to be enterprising and innovative for personal development. Nevertheless, the purposes of the company, the stability of the organization and the efficiency of the business shall always be the first and foremost priorities. Behaviors should be regulated within the framework of the rules and systems of organizations and exception management should never become normal state of affairs. Very often we are busy mending the broken windows without questioning why they are broken or whether the saboteurs are brought to justice. Firemen are heroes, to be sure; but they do not create values. Forest rangers are ordinary, but they are essential for afforestation and disaster prevention. So we need more “forest rangers” than “firemen”.

  We shall keep challenging ourselves: of all the things we are doing each day, which are really necessary and which are not? More often than not we are doing the right thing in wrong way. In fact, the key is not to understand what we can do but what we should not do. No individual shall violate established rules, nor can any organization transcend normal orders. Deviations are detrimental to the well-being of organizational culture, as is embodied in many Chinese literary allusions. On the other hand, stringent compliance management and strong execution capabilities are cornerstones for sound corporate culture.

  Chairman concludes his writing with an interesting biological phenomenon called the Aslan Phenomenon: A flock of sheep were circled by barbed wire fence. Each day the sheep would try to jump out of the fence to escape. Then the wire fence was electrified; but the sheep continued to bombard the fence and some died. Gradually the number of the sheep that would still dash against the electrified wire fence reduced and more would rather stay away from the fence. Later, the barbed wire fence was de-electrified, but the sheep still would not get close to it. When the wires were finally removed, no sheep even wanted to move outside the circle.

  This phenomenon tells us that once the rules are set, compliance would gradually become a habit, an intuition or a type of culture for an organization, embodying the value of rules and facilitating high standard management.

  This year is the first year for the management enhancement activities campaigned by the SASAC. Through this writing Chairman Ren wishes to share with everyone his reflections on our business organization, management systems and culture and try to refresh and reform our thought through a regurgitation of Taylor’s theories, in celebration of the 8th anniversary of the founding of ChemChina.

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