Lessons from China's Lenovo - Globalizing the company board
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G lobal Board • By Michael Useem and Neng Liang
Globalizing the company board:
Lessons from China’s Lenovo
others in India, and state holders over what is less understood is how compa-
“The board of directors others in China. nies remake their boards to reflect the
The sustained growth of the Indian emerging reality of global equity and
has the important role of
and Chinese economies, however, has operating markets. This article seeks to
overseeing management forced regulators, shareholders, and identify the process by which company
performance on behalf of companies in both countries to reex- leaders are restructuring their gover-
shareholders” amine their governance practices for nance through investigation of how
two reasons. First, international inves- one of China’s more prominent com-
tors increasingly moved cash across panies, Lenovo, transformed its board
country lines, and as they took greater following acquisition of IBM’s personal
T
he rise of the Indian and Chi- ownership in publicly traded companies computer operation in 2005.
nese economies during the past outside their home countries, they also Founded in 1984, Lenovo had
decade is transforming how brought home-country biases for inde- emerged two decades later as China’s
executives and directors think about pendent, informed, and even-handed largest computer maker. It had cap-
company governance. In both coun- directors. Second, Indian and Chinese tured 27 percent of China’s rapidly ex-
tries, corporate boards had traditionally executives increasingly moved their panding computer market, with annual
played a modest role in company de- operations across national boundaries, revenue exceeding $3 billion. The com-
cisions. And even when more actively and as they entered demanding in- pany concluded, however, that its long-
involved, they had often pulled deci- ternational markets, they also learned term growth depended on its becom-
sions toward objectives not entirely in that independent, informed, and ing an international player, just as many
keeping with governance ideals. If di- even-handed directors can constitute a American and European companies
rectors are in theory the eyes and ears source of company advantage. had concluded in years past. “In our
of all company owners, in practice they The broader outlines of these world,” explained executive chairman
sometimes favored family owners over trends are reasonably well known, but Yang Yuanqing, “a high growth rate is
CorporateGovernanceAsia 01 April-June 2012
G l o ba l B o a r d
hard to sustain if you only try to maintain yond its manufacturing and sale of per-
your position in the China market.” sonal computers in China, but that effort
After thirteen months of negotia- largely failed. In the meantime, its PC
tions, Lenovo and IBM announced that dominance within the Chinese market
Lenovo would acquire IBM’s Personal was coming under increasingly success-
Computing Division for $1.75 billion. ful attack by Hewlett-Packard, Dell, and
Founder Liu Chuanzhi declared that glo- other foreign and domestic makers. In
balization had become a necessity, the 1994, Lenovo held 4 percent of the Chi-
company’s only option for growth and nese PC market, and by 2000 its fraction
survival. In the months that followed, had risen to 29 percent, but its market
Lenovo restructured its governing board share then dropped back to 27 percent
as well, and we focus here on that in 2003 and 26 percent in 2004. Top
change. management concluded that for con-
tinued growth, international expansion
Two Conceptions of had become essential. It also concluded
Corporate Governance that it would have to change its original
Before we enter the boardroom, it is use- name—Legend—to Lenovo, because
ful to identify the major potential areas the name of Legend was already used by
in which directors may make decisions. other companies in other countries.
We are primarily concerned with direc- Michael Useem, William and Jaclyn Egan At the time, however, Lenovo had
tors’ explicit involvement in company de- Professor of Management and Director no foothold outside greater China. By
cisions and the criteria that they apply in of the Center for Leadership and Change coincidence, IBM approached Lenovo
reaching those decisions under varying at the Wharton School of the University of on the possibility of the Chinese com-
market conditions. From prior research, Pennsylvania, USA. pany acquiring IBM’s personal-comput-
theory, and experience we anticipate er division, and Lenovo’s management
that directors engage in two areas of de- Partnering with Management: A swiftly embraced the offer, even though
cision making, each with its own set of long-standing additional conception IBM’s operation drew four times the
distinct criteria. of corporate governance suggests that revenue of Lenovo. But IBM was los-
Monitoring Management: One well- directors are decision partners with the ing money on its personal-computer
established conception of the firm views top executives, joining with them in sales, and Lenovo’s due diligence con-
directors as largely serving as the eyes making the company’s most important vinced management that it could turn
and ears of the shareholders, ensuring choices. Directors are seen as co-pro- the much larger IBM operation around.
that company executives conduct them- ducers of the firm’s strategic decisions. “We finally came to believe that in
selves properly on behalf of the own- This is the informal view that business IBM’s hands the PC division would con-
ers. The decisions that directors take are executives often take of themselves. tinue to suffer annual losses,” reported
therefore inferred or prescribed to be The chief executive of a large financial- Liu Chuanzhi, then executive chairman
directed at monitoring the decisions that services firm, for instance, spoke for of Lenovo, but he felt that in his own
executives make. This is the formal view many in describing the decisions that hands the IBM operation “could be
that big business sometimes even takes directors reach in his boardroom. They profitable.” That conclusion was partly
of its own boardrooms. “The board of are, he said, those that are “strategi- based on analysis of overhead that the
directors has the important role of over- cally impactful” and those that will IBM parent allocated to its PC division.
seeing management performance on be- “change the future.” If a company’s The division would have been profitable
half of shareholders,” declared the U.S. executives are seeking to integrate were it not for the high headquarters
Business Roundtable, and “directors are newly acquired international opera- overhead imposed on it. And it could
diligent monitors, but not managers, of tions, for example, directors may col- have been even more profitable had
business operations.” By way of illustra- laborate with the executives in reach- it adopted Lenovo’s lean manufactur-
tion, directors often take decisions to en- ing key decisions on how to optimize ing methods. Assembling a PC in the
sure that their executives do not enrich the process. United States at the time cost $24,
themselves at the expenses of sharehold- compared with $4 in China.
ers, nor that they enter into sweetheart Lenovo Goes Global Lenovo announced the IBM acqui-
deals with other companies controlled by During the late 1990s and early 2000s, sition on December 7, 2004 at a Beijing
the executives’ families. Lenovo had attempted to diversify be- news conference attended by some five
CorporateGovernanceAsia 02 April-June 2012
G l o ba l B o a r d
hundred Chinese and Western journal- dustry CGQ. The CGQ scores represent
ists, and it completed the acquisition in a company’s percentile ranking, with a
April 2005. From a dominant but fal-
“All of this work requires score of 50 implying that the company’s
tering place in the Chinese computer an unprecedented degree governance ranks better than half the
market, Lenovo became a substantial of professionalism, dedi- comparison firms and worse than half.
and rising force in the global computer Lenovo’s governance ranked at
cation, and fine-grained
market. The IBM acquisition moved about the 25th percentile on both mea-
Lenovo from the eighth to third larg-
knowledge on the part of sures during the year of the acquisition
est computer maker worldwide after today’s board member” (the first year ISS appraised Lenovo’s
Dell and Hewlett-Packard. In the year governance). During the two years
after the acquisition, Lenovo doubled that followed, however, Lenovo had
its workforce to twenty thousand and ecutive were both Chinese; coming out elevated its governance ranking above
quadrupled its revenue to $12 billion. of the acquisition, the executive chair- the 40th percentile compared with all
To appreciate the governance im- man was Chinese and the CEO Ameri- companies, and above the 50th percen-
pact of this transformation of a largely can. Of the top management team in tile compared with other firms in the
domestic Chinese manufacturer into 2004, all were Chinese; of the eighteen technology hardware and equipment
a significant international maker, we members of the top management team industry. By these measures, Lenovo
interviewed the key decision makers in 2007, six were from greater China, had moved its outward features of gov-
in 2007–2008. They included Liu Ch- one from Europe, and eleven from the ernance for monitoring management
uanzhi, Lenovo’s founder and executive United States. Ma Xuezheng, the com- into the middle ranking of company
chairman just prior to the IBM acquisi- pany’s CFO at the acquisition moment, governance worldwide.
tion; Yang Yuanqing, Lenovo’s chief declared at the time, “This is going to
executive before the acquisition and be very much an international company Partnering with Management
executive chairman afterward; William operated in an international fashion.” Our interview evidence also points to-
Amelio, Lenovo’s second chief execu- Compared with publicly traded ward a transformation of the Lenovo
tive officer; Shan Weijian, a non-exec- companies worldwide, Lenovo’s post- board to include a partnership with
utive director of Lenovo representing acquisition governance reached inter- management. Company executives in-
one of its major private investors; and national norms for director monitoring stigated the change in the immediate
two other top executives at Lenovo. of management. To see this, we turn to wake of the decision to expand rapidly
Institutional Shareholder Services (ISS), outside of China through the acquisi-
Monitoring of Management which furnishes institutional investors tion of the personal computer division
Lenovo’s market and organizational with independent appraisals of com- of IBM.
remake brought a substantial remake pany governance, drawing upon pub- “The IBM PC acquisition is a wa-
of the governing board. In 2003, non- licly available data sources. ISS gathered tershed,” observed Liu Chuanzhi. “Be-
independent directors outnumbered data on 236 governance features, rang- fore that point,” he said, “the board
the independent directors four to ing from board composition and execu- of directors did not play much role.”
three. The post-acquisition board, by tive compensation to takeover defenses The board had mainly been concerned
contrast, was divided between five ex- and stock-option expensing. ISS provid- with company audit and executive pay.
ecutive and non-independent directors, ed an overall measure of a company’s The board played a modest monitoring
three private-equity directors, and three governance with its Corporate Gover- function on behalf of non-state inves-
independent directors. Prior to the ac- nance Quotient (CGQ). The CGQ com- tors, but was otherwise little involved
quisition, all seven of the directors were pares Lenovo’s governance with that in the firm’s strategic decisions. Lenovo
Chinese or of greater China origin. Af- of publicly traded non-U.S. companies has been listed on the Hong Kong stock
ter the acquisition, four of the eleven (those included in Morgan Stanley Cap- exchange (and through an American
directors were Americans. Before the ital International’s EAFE index and the Depository Receipt on the New York
acquisition, board meetings had always Financial Times’ All Shares and World Stock Exchange), and in keeping with
been conducted in Chinese; after the Developed indices). ISS also compared Hong Kong tradition, independent
acquisition, because all but one director Lenovo with a subset of technology non-executive directors prior to the IBM
spoke English and several spoke no Chi- and hardware equipment makers out- acquisition were viewed by the com-
nese, English became the medium of side the United States. ISS termed the pany as largely present to protect mi-
expression. Going into the acquisition, first comparison a company’s Index nority stockholders—in this case, inves-
the executive chairman and chief ex- CGQ, and the second a company’s In- tors other than the Chinese Academy
CorporateGovernanceAsia 03 April-June 2012G l o ba l B o a r d
of Sciences. Liu and Yang reconstituted tee along with two Americans—James
the board to go well beyond that focus, Coulter and William Grabe. The board
adding the international directors, im- met quarterly, but the strategy com-
proving board capacity to render guid- mittee met monthly to focus on issues
ance to the executive team, and, more ranging from competitive strategy to
generally, creating a governing body cultural integration. Regarding the lat-
that is more globally informed and in- ter, for example, Yang viewed the non-
dependent, important prerequisites for executive directors as an “impartial third
partnering with management rather party” that would help prevent a “con-
just monitoring to management. frontation of two teams, two cultures,
The decision to add international di- and two mentalities.” With their own
rectors, for instance, was largely driven money invested in the company, the
by the reported need for the board to “third party” private-equity representa-
bring global “vision” into the board- tives would not be reluctant to resolve
room. “Now,” said Yang, “internation- the differences, or for that matter to
alization is our key consideration as we delve into other significant issues. “In
are taking on international business.” order to build a world-class organiza-
This in his view required directors who tion,” said private-equity director repre-
would bring fresh insight into how sentative Shan Weijian, “you really have
Lenovo could make inroads into the Neng Liang, professor of Management to have world-class challenge.” The
worldwide market share of its larger at the China Europe, International directors were ready to provide it, and
rivals—Dell Computer at 18 percent Business, China and vice president of company executives sought it. In CEO
and Hewlett-Packard at 16 percent in the International association of Chinese William Amelio’s words, the role of the
2005—and at the same time hold onto management research (IACMR). directors on the strategy committee was
its market share against its smaller ri- to pick from an array of choices “the
vals, including Acer at 5 percent and board following the IBM purchase also right idea that is going to maximize the
Fujitsu at 4 percent in 2005. brought the directors into direct guid- core competence of the company.”
Although Lenovo was still the big- ance of the integration of Lenovo’s and Lenovo’s board also became di-
gest player in the Chinese market— IBM’s distinct operating styles. IBM had rectly engaged in decisions on execu-
the nearest rival, Founder Technology built up strong, enduring relations with tive succession, an arena that had also
Group, held less than half its market its select corporate customers; Lenovo not previously been its prerogative.
share—domestic dominance provided had by contrast created a largely “trans- Two non-executive directors from the
no assurance of growth abroad. “If actional” exchange with its many retail private-equity groups in 2005, for in-
you have a highly successful business customers. Although large enterprise stance, played a pivotal role in replac-
in one country,” warned Amelio, “it relations had been the staple of IBM’s ing the first CEO after the acquisition.
does not mean that you will have a PC sales, management anticipated At the time of the purchase, the IBM
highly successful business in a global greater growth among small consum- executive responsible for the PC divi-
operation,” and that is where the ers. But identifying the optimal areas sion, Stephen Ward, had been the
counsel of the non-executive directors for growth outside of China and iden- logical candidate for the role of chief
would prove particularly valuable. And tifying effective ways of reaching them executive, with Yang to serve as execu-
their counsel pointed toward equal were uncertain and risky judgment tive chairman. Their dual appointment
footing for the Chinese and American calls, and in making them management was largely an executive decision, but
operations. Non-executive director sought director guidance. within months it became evident to the
Shan Weijian explained, “We don’t Facing many decisions of this kind board’s strategy committee that the
want people to have a feeling of take- in the wake of the acquisition, the com- former IBM executive was not the right
over [by a] Chinese company of the pany formed a strategy committee, person to lead the combined enterprise
American company. We want an inte- charged with vetting the company’s given the specific challenges it faced,
gration process which doesn’t involve mid- and long-term decisions on behalf topped by the need for greater supply-
which part takes which part. What of the board. As a step toward interna- chain efficiencies. Yang and Liu wor-
we want is [to be] integrated into [a tionalization, the company placed two ried, however, that an unexpected exit
single] global operation.” Chinese directors—Yang Yuanqing and of the top American executive so soon
The restructuring of the Lenovo Liu Chuanzhi—on the strategy commit- after the acquisition would cast a shad-
CorporateGovernanceAsia 04 April-June 2012G l o ba l B o a r d
ow over their effort to internationalize than twenty candidates, narrowed
the firm. Neither knew the interna- the list to four finalists, and then se-
“Lenovo’s board also
tional computer industry well enough lected Barter because of his “very solid
to identify a strong replacement, and became directly engaged background” in finance and manage-
it was American non-executive direc- in decisions on executive ment with publicly traded American
tors James Coulter and William Grabe succession, an arena that companies. Equally important was his
who identified several candidates for extensive experience on the boards of
had also not previously
succession, including William Amelio, American companies—including NYSE-
then head of Dell Computer’s Asian been its prerogative” listed BMC Software—because he
operations, who eventually became would bring an understanding of best
the successor. Nor were Yang and Liu practices in American corporate gover-
familiar with the process of replacing aged its investments in China and East nance to the Lenovo board. “As we are
an American chief executive, but the Asia, affirmed the same, reporting that going international,” said Yang, “we’d
private-equity directors on the Lenovo “our influence comes less from owner- like to learn from American companies.
board represented firms that had often ship than having been trusted advisors That’s why we invited people like John
done so. Said one of the private-equity for Lenovo’s key decision makers for a Barter to join us.”
directors, “we have done this repeat- long time.” Our interviews revealed that a host
edly, and we are familiar
with the U.S. market and
the practice over there, the
environment, and how to
do it.”
Private-equity firms
generally seek direct en-
gagement in company
decision making through
service on the governing
board. Texas Pacific Group
and General Atlantic were
no exception, and both
were already well familiar
with the IBM operation.
TPG had hoped itself to
buy out the IBM PC divi-
sion, and had conducted its own due Similarly, the criteria for bringing of other major issues—how long to
diligence. GA had been asked by Liu specific non-executive directors onto retain the IBM logo, what acquisitions
Chuanzhi to advise him on whether the board after the IBM acquisition re- to make, which “adjacencies” such
to buy the IBM division, and it too flected a preference for directors who as servers to consider, and whether to
had gathered detailed data on the would partner with management more build devices that bridge laptops and
IBM operation. Though other bidders than monitor or defer to manage- telephones—now came to the directors
emerged, Lenovo and TPG became the ment. The selection standards for the for vetting and decision making. Before
two finalists, and IBM notified Lenovo new board members, reported Yang, the acquisition, the board’s decision
that it had won and TPG that it had lost included their industry experience, domain had been largely limited to au-
just thirty minutes apart. Consequent- “strategic vision,” personal reputation, dit and reporting issues. “The board of
ly, James Coulter of TPG and William and functional expertise in such areas directors during that period,” said Liu,
Grabe of GA were already well versed as finance, strategy, and marketing. For was “mainly to ensure transparency”
in the personal computer business example, in the case of the appoint- and played little “role in business or
when they joined the Lenovo board and ment of John Barter, who had served as strategy decisions.” But after the acqui-
its strategy committee. Executives as a Allied Signal’s chief financial officer and sition, the board frequently engaged in
result treated them like partners rather president of its thirty-five-thousand- both business and strategy decisions.
than minority investors, reported Coul- employee automotive division, Yang Lenovo subsequently considered acquir-
ter. Vince Feng, a GA partner who man- and his colleagues had identified more ing personal-computer makers Packard
CorporateGovernanceAsia 05 April-June 2012G l o b a l B o a rd
Bell, for instance, and the directors took frequently flew to the U.S. to meet with
an active role in deciding on whether to “If the board is to serve the American directors, especially when
proceed and what to pay. “Everybody the board faced contentious issues.
was involved,” reported non-executive
as a strategic partner, ßCompany leadership and gover-
director Shan Weijian, “because this is it requires an investment nance have long been conceived as
a large issue for the entire company.” of time well beyond distinct domains. With the exception
Lenovo decided to back off—another that necessitated by a of the chief executive, executives and
PC maker, Gateway, was later acquired directors have often been seen as con-
by Taiwan PC maker Acer—and the
legitimating board stituting different sets of people with
board’s deliberations proved critical in or a board controlled distinct imperatives. Executives led. Di-
reaching that decision. by management” rectors monitored—or sometimes not
By way of illustration of the value even that. We have found at Lenovo,
of independent director “opinions on however, that its directors came to play
strategy,” consider Lenovo’s focus on components and best foreign sources more of a leadership role in the wake
operational efficiency in the wake of of computer engineers. of the international acquisition, advising
the IBM purchase. Lenovo found that and guiding executives in major compa-
certain points in the chain inherited Conclusion ny decisions and representing the com-
from IBM enhanced value while oth- We have seen a sharp divide in Leno- pany to major owners. They also played
ers reduced value, and Lenovo believed vo’s boardroom between the com- a leadership role in facilitating cross-
that the key to turning the IBM opera- pany’s governance before and after its cultural integration after the acquisition.
tions from money-losing to moneymak- decision to build out globally through If Lenovo’s experience is symptom-
ing was the effective “worldsourcing” the IBM purchase. Prior to the acquisi- atic of what other Asian companies
of its supply chain. “We have been tion, the board had operated without are likely to face as they globalize their
relentless in trying to squeeze every a strategy committee or performance operations and ownership, and we be-
penny out of this process,” observed review. Now it had both. Director deci- lieve that it is, we can anticipate that
non-executive director Shan Weijian, sions had been largely limited to proper company governance at other firms will
for “making sure the process is as ef- audit for protecting small sharehold- also move toward greater engagement
ficient as possible.” ers. Now their decisions ranged from of directors in collaborative decision
Although the American Business branding to sourcing. Executive suc- making with management. Executives
Roundtable had warned that directors cession and director selection had been and directors will ask, as one academic
should be “monitors, not managers,” the prerogatives of management. Now observer of Chinese enterprise has re-
Lenovo drew its directors directly into they were shared decisions with direc- cently suggested, whether they “have
decisions on worldwide sourcing. “We tors. The boardroom norms had been a plan for corporate governance that
need thinkers that are on the board high in formality and low in content. will focus the firm on national competi-
that can help us make sure that we Now they were the opposite. A limited tive advantage and ultimately global
are in the process of maximizing this form of director monitoring and man- advantage rather than short-term
concept of Worldsourcing,” affirmed agement control had been superseded profitability in local markets.” As they
Amelio. Whatever the optimal way by director partnering in reaching the consider or adopt such a plan, that in
to produce computers, you have to company’s major decisions. turn will point toward an evolving skill
“gravitate to it rapidly in order for you If the board is to serve as a strate- set for directors, with greater emphasis
to have the most competitive offer- gic partner, it requires an investment of on director capacity to work with ex-
ings for your customers,” he added, time well beyond that necessitated by a ecutives at critical choice points. It will
and that pointed to engaging direc- legitimating board or a board controlled also point toward a changing skill set
tors directly in decisions on manu- by management. Informed directors for executives, with a stronger ability to
facturing operations. When Lenovo who trust one another and have faith work with directors expected at major
looked at the recruitment of new di- in their executives constitute an essen- decision moments and less inclination
rectors, pragmatic operational expe- tial platform, and Lenovo management to hold directors at arm’s length. Insti-
rience proved an important criterion. worked to build it. The company adopt- tutional investors and other major hold-
The preferred expertise could range ed a rule, for instance, that all directors ers will be more likely as well to look for
from knowing the pitfalls of SAP soft- must attend all board meetings, which directors and executives who can col-
ware implementation to identifying are rotated around the world, or send a laboratively engage in the firm’s most
the best foreign suppliers of computer pre-designated alternate. Liu Chuanzhi important decisions. n
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