This story from Bloomberg talks about how the Communist Party in China is getting more intrusive into big business in China. It reminded me about when I was an undergraduate, studying business at ODU in the early 1980s What was drilled into our heads was that the primary goal of a company was to maximize shareholder value. Your first concern was to make sure that the owners of the firm got a proper return on their investment. Make money for the owners – the shareholders – who have trusted you with their money. After you do that, you can think about other priorities, other stakeholders, but keep your shareholders front and center. That is why CEOs get fired when share prices are depressed for too long. They have failed in their primary mission.
Now, you don’t necessarily hear this expressed the same way in 2023 in business schools, or as vigorously. You hear a lot about social goals, etc. But I still think the message gets across to future CEOs. If nothing else, if they read the Wall Street Journal, they see what happens to CEOs who don’t hit profit targets. They get fired a lot. So the students at business schools are still getting the message to maximize shareholder value in the U.S., even if it is not quite as directly expressed as in my day.
In China, it is different. This has potentially big implications. What will get you fired in China is if you are not loyal enough to the party. Fired and possibly arrested. In fact, the more successful you are at running a business, the greater a concern you can be to the government. You may be accumulating too much power relative to the party. You may be operating too independently. You may be getting too rich. If you are a very smart 20-year-old looking at opportunities, you may decide to leave China because you want to build a great company, and you are worrid that if you are too successful, you will end up in prison. Or you will have some party hacks sharing decision-making with you.
For all of our faults in the West, we typically reward successful entrepreneurs. We don’t haul them off in the middle of the night. Jeff Bezos worries about a lot of thing, but winding up in prison is not one of them.
I don’t know how China fixes this. There are a lot of people who have written a lot about China over the years, and how it is overtaking the U.S. But the problem China has is the party. The number one objective of the party is to keep control. For much of China’s history, it was invaded and subjugated by foreign powers. Since 1949, the Communist Party in China has maintained order and sovereignty, often brutally. It has overseen China’s rise from the devastation of Japanese occupation and civil war to become a world power. This has happened in less than 75 years. And so now the party controls 18 percent of the world’s population. It does this by spying on the population, maintaining tight censorship, relentless propaganda and by keeping a grip on all institutions. And by whisking people off to prison.
The problem is how to maintain that control indefinitely in a world that is getting more connected every day by technology. The most successful countries are ones where citizens can take advantage of technology and increased access to information, knowledge and global markets. But China is very reluctant to allow its citizens to have that kind of access, and its increasingly aggressive military actions make its technology exports suspect to Western governments. China wants the economic benefits of globalization, but only on its terms, internally and externally.
This will always tend to limit China’s ability to innovate. But if it does allow its citizens the freedoms that Western entrepreneurs have, the party is worried that it will lose control. And if it loses control, chaos could follow, it fears. So how do you keep the Communist Party in control while allowing unfettered capitalism and entrepreneurship, and a free flow of information? How do you give 1.4 billion Chinese unfettered access to the Internet while keeping control? How do you keep control while letting your citizens shape their own destinies? The answer is you can’t. When the world was less connected and there was no Internet and China wasn’t so integrated into the global economy, this was less of a problem. But now it is. We will see how big a problem it is if China invades Taiwan. China will risk its Western markets. Western foreign direct investment will dry up. Chinese students will see educational opportunities in the West closed off. Millions of Chinese whose living standards are now pegged to globalization will suddenly find themselves out of jobs. The bargain with the Communist Party has been that if you keep raising our standard of living, pulling us out of poverty and ensure that we have jobs and good housing and consumer goods, we will let the party run things. We will trade freedom for stability and prosperity. That’s the deal. That is how the Communist Party has stayed in power, because if it couldn’t deliver, 1.4 billion Chinese people would see little point in letting a relatively small group of Communists run the show. I mean, 2.5 million soldiers in the PLA cannot subjugate 1.4 billion citizens indefinitely just by force of arms. There has to be some reason 1.4 billion Chinese are going along. There is also that other problem, which is if China gets into a shooting war over Taiwan, how will it divide its attention between keeping enough security forces to maintain order internally while fighting a war. That isn’t discussed too much by national security experts in the West, but I always wonder if there are folks in China who may be waiting for the central government to be distracted by war. Can China successfully prosecute a war while also ensuring it can put down sudden uprisings in the interior? It is a big country.
I don’t know how this ends. Xi Jinping has tried to ride a wave of Chinese nationalism that he has built up to help keep the party strong. But the logical consequence of that nationalism is to be more aggressive, and do things like take Taiwan. Eventually, if you keep talking about taking Taiwan, you have to take Taiwan, or your people begin to realize that it is just a slogal. And if you keep rattling sabers, young entrepreneurs may decide to get out while they still can, because they see a dim future in a China that is in a permanent confrontation with the West.
This whole approach in China – where businesses are supposed to be loyal to the party first, and shareholders second – is part of China’s larger party problem. I don’t see how the Chinese Communist Party finds a peaceful off-ramp while still keeping control.
The other day, Dr. Ely Ratner, assistant secretary of defense for the Indo-Pacific, said he didn’t think China would attempt to invade Taiwan before the end of the decade because of the high cost. I don’t know. Every military conference I go to, military leaders talk about China. When you talk with officers in the back of the room in private, they talk about China and the inevitability of conflict. They are getting ready for something sooner than Ratner suggests. An air force logistics general, Mike Minihan, made some headlines recently when he told his folks to get ready, because it could happen by 2025. He is in charge of getting stuff to the theater to sustain a campaign. So who are you going to believe, Ratner, an academic who has thought a lot about China at places like Berkeley, or Minihan, a general who has flown C-130s for a living?
To believe Ratner, you have to believe in a rational Communist Party leadership in Beijing, and I am not willing to do that, because I don’t think, based on how they are treating their business leaders, that they are rational. I think they are consumed by fear of real and imagined enemies, internal and external. That’s what we’re dealing with.