What can we learn from the recent NVC Lighting’s power struggle between company founder Wu Changjiang and Elech-Tech International (ETI) CEO Wang Donglei? According to a recent report from Tencent, the dramatic transition of power and management reflects how Chinese companies operate differently from the West.

Shortly after former NVC Lighting CEO Wu Changjiang was stripped of his company position by the board and new company CEO Wang, the two have been engaged in a finger-pointing game, with both sides throwing various accusations at each other. Wang has repeatedly alleged Wu’s gambling debts skyrocketed to RMB 400 million (US $64.96 million), and even claimed the debt’s monthly interest surpasses RMB 10 million. Wang has also been quoted by several Chinese-language reports that “NVC Lighting will face bankruptcy on Christmas Eve (December 24) this year if Wu does not leave.” Wang’s has justified the company’s board decision to remove Wu from post based on Wu’s shady transactions and business deals done behind the company board’s back.

Wu’s retort has been Wang violated agreements made prior to the merge, and has over interfered in the company management. He also went on noting Wang’s attack on his personal finance situation was vicious. In another report by Chinese-language National Business Daily, Wu even claims ETI would have sunken deeper in debt without aid from NVC Lighting. He believed at the time ETI’s good product quality and NVC Lighting distribution channels could compensate each other’s weakness and generate greater profits. Wu also pointed out NVC Lighting’s sliding performance was because board members did not know how to manage the company.

This has been Wu’s third major conflict with investors, and the most serious to date since the company’s merge with ETI. The two closest allies have become each other’s worst enemies, who throw punches at each other.

Behind NVC Lighting’s dramatic turn of events is the embarrassing relationship between China’s private company investors and founders.

Even though, China’s business environment is improving, it continues to be marked by battles between investors and company founders. Whether it has been Baan International and GOME Electrical Appliances or the more recent NVC Lighting and ETI.

Many Chinese companies in the private sector have learned to structure and manage companies using Western models, but the market’s economy has only underwent development in the last 20 to 30 years. Therefore, most private companies have imitated the appearance of a Western company but have not inherited the core values. The seed of dispute germinates from the entrepreneurs inability to internalize the rules of corporate governance.

Wu Changjiang Kicked Out of Company Board Becomes Irreversible

NVC Lighting’s turn of events can be made into a TV drama. On Aug. 8, 2014, NVC Lighting board members approved the removal of Wu from CEO position, and also discharged the company’s Vice Presidents Wu Changyong, Mu Yu and Wang Minghwa.

Adding fuel to the flame, a video released online shows Wang leading a group of men to NVC Lighting’s office to search for the corporate seal and company documents. The video also showed two NVC Lighting employees being beaten by a group of men and several female employees cowering in fear in the company restrooms. Some reports have quoted Wang claiming Wu’s employees attacked first

In an interview on Aug. 11, 2014, Wang questioned why a simple legal issue could not be executed in a country that follows the rule of law? Why constructions of NVC Lighting’s Wanzhou factory could not be carried out? Why Wu has refused and even invalidated the board’s decision, was able to set up a series of obstacles, and even physically assaulted others?

He has repeatedly denied recent actions against Wu had to do with power struggles between board members and the company, and even pointed out in previous company press release, Wu’s authorization of NVC Lighting brand licenses to three other companies was the main cause behind the latest actions.

Brand rights are no doubt a NVC Lighting asset, and this series of branding security could present certain issues if it is not taken care of. It will even become “landmines” for companies aiming to becoming listed companies. This has been clearly illustrated in the branding GOME Electrical Appliances branding dispute in 2010. When company CEO Chen Xiao tried to introduce finances from Bain Capital to counter founder Huang Guangyu family, he soon encountered a problem that Huang had complete control over trademark rights. The listed company was only able to obtain the right to use the trademarks.

Unlike GOME Electrical Appliances case, where the founders have complete control over company development, Wang and Wu are only business partners. Once the brand rights are licensed for self-serving purposes it could present serious issues.

However, Wang has more advantages over Wu in terms of measures he could take and has legal support for his actions. Wu is only a small NVC Lighting stockholder and is at a disadvantage in serving as company CEO or Chairman, said New Access Capital Chairman Andrew Qian.

Since the NVC Lighting board approved to remove Wu from post, it will still be implemented regardless of Wu’s protests, analyzed Qian. If Wu still refuses to turn over the corporate seal and documents, he is more likely to lose a legal battle at court, Qian added.

Investors also at a disadvantage

Wang has emphasized the phases “regret” and “overtly trusting” during interview with media. When accepting media interviews, Wang noted the two companies only considered their businesses were strongly complimentary, so the commercial model designed bounded Wang and Wu’s interests closely together.

“Under normal business logic, I don’t think this would have been an issue,” said Wang. “In other words, I saved the nearly bankrupt Wu Changjiang by using my voting rights to deliver him to board and CEO position. You (Wu) should have been easy to work with, and promised me never to conduct related transactions again.”

Who knew Wu would not follow the rules of listed companies, and even escalated dealings with related transactions, Wang continued. He has repeatedly crossed the line for listed companies until the board simply had enough. Firing Wu was a difficult but necessary decision.

Wu and investor Andrew Yan from SAIF Partner’s personal feud in 2012 is also important to understanding the recent developments. During the most intense conflict period, employees even staged strikes, suppliers terminated supplies and distributors stopped placing orders.

Yan, the investor representative decided to fight against Wu. At the time, media reports all leaned in favor of Wu, and accused Yan of being profit driven. JD.com Chairman Richard Liu even accused Yan of lying, and causing NVC Lighting’s demise.

After many years, Yan has remained silent about the NVC Lighting incident and even left the board. He has no intention of becoming involved, and Wu’s behavior also allowed outsiders to realize Yan was wrongfully blamed.

Chinese company management only imitate the West

Whether it has been the NVC Lighting incident in 2012 between Wu and Yan, or the conflict between NVC Lighting and ETI today, it reflects despite becoming a listed company, at the core of NVC Lighting is an entrepreneur’s kingdom.

However, NVC Lighting is not isolated incidents, there are many similar cases. South Beauty founder Zhang Lan soon regretted merging with CDH Investments, and even viewed it as the company’s worst mistake. The two companies partnership was once considered as “match between heavens” soon turned sour.

CDH Investment and Zhang had “very serious conflicts.” Zhang, who was a manufacturer, had a frugal mentality of hoping one cent could be used as two, while CDH Investment wanted exponential revenue return. Their different values and way of thinking required constant compromises.

Another example is GOME Electrical Appliances once had an “internal insider.” Company CEO and Chairman Chen tried to collaborate with Bain Capital to acquire the rights from Huang family, but Chen lost the struggle. In the end Bain Capital left the company with high profits, but GOME Electrical suffered heavy losses.

In less than one year, another conflict broke out between NVC Lighting and investors. This is another classical example of management issues in the privatization of Chinese companies.

Some analysts noted it is important for manufacturers to break away from this type of abnormal power struggles, and let investors enter a company and clean out the structure to determine who the boss is. How do similar incidents like NVC Lighting occur? And how can investors constrain people such as JD.com CEO Liu who have absolute power over the company. These are all issues that Chinese private companies need to overcome.

One investor noted, there are two disadvantaged groups in China, the first is financial investors, and the second type is industrial capital. Financial investors tend to be the weaker group because after they invest, the founder basically has full control over the company and has absolute voicing power. In comparison, industrial capital investments in companies are larger, and is controlled by the industrial capital who can even send and appoint high ranking officers or CEOs to the company.

The above mentioned indicates most of the time the relationship between the founder and investor is a commissioned relationship. The investors commissioned the CEO to manage the company, and when they have larger share holds get a bigger voice on the board. This Western rule has been in operation for several hundred years, and has proven effective, but private enterprises in China often have only imitated the appearance and not the core of the company. Many entrepreneurs have never accepted this arrangement.

The result is most of China’s private enterprises act similarly to triads. When they start forming gangs, investors often will face issues similar to NVC Lighting, which often ends in replacing the CEO. The company will be impacted, but maintaining status quo would be equivalent to allowing more illegal actions. In comparison, Western rule of law is cold, rigid and less humane, but more effective.

“Some of China’s private enterprises management is based on traditional experiences,” an investor said. Better education, and more civilized entrepreneurs are required to enable enterprises to become more international.

Qian noted, Chinese manufacturers are still too focused on company ownership, which causes many irregularities. For instance Wistron Corporation founder Huang Hong-shen was responsible for a listed Hong Kong company, and the largest shareholder. He was sentenced to jail in Hong Kong for violating related corporation regulations. Therefore, a small investor of a private company such as Wu Changjiang with questionable business practices, has an even a higher possibility of violating legal issues in Hong Kong and China.