Podcast The Anatomy of Corporate Hijacking presented by Chet Scheltema


  • Title: Podcast The Anatomy of Corporate Hijacking presented by Chet Scheltema
  • Date: July 10th, 2014

Chet Scheltema,International Business Advisory Manager, introduces the concept of corporate hijacking and how foreign business can prevent this from happening to their operations in China.


Corporate Hijacking
1. What factors you need to pay attention to about corporate hijacking in china
— The Key to understanding how a company can be so easily hijacked by local employees is to understand the administrative details of how a Chinese corporation is managed, including:
how authority and power are dispersed and the company’s points of managerial vulnerability, and also to understand the leverage that local employees have under Chinese labor law.
— Corporate Seals
* The authority to manage and direct the resources of a Chinese enterprise is dispersed very differently than in a western enterprise.
* Authority in a Chinese company resides in fact primarily in the hands of the person who currently holds the company’s corporate seals or “chops.”
* Everything from accessing the company’s bank accounts to entering into commercial contracts to making regulatory filings requires the use of the corporate seal or “chop.”
* Yet there is no legal or practical restriction on who may physical control or use these chops
* Further complicating the situation is the fact that the corporate seals are not easily canceled or replaced when lost.
— Legal Representative or Chief Representative
* Authority in a Chinese enterprise also rests with the person who is officially registered with the Administration of Industry and Commerce (AIC) as the Legal Representative of the enterprise, or in some cases a Chief Representative.
* Legal Representatives carry almost unlimited authority and decision-making power.
* unlike the situation in western corporations where a decision of the board of directors to dismiss an executive (or “legal representative”) is effective immediately, it may take months to update the records of the AIC and thereby replace a Legal Representative
* Meanwhile, the individual currently registered with the AIC as the Legal Representative will continue to act with the apparent, full authority of the company and board of directors and shareholders.
— Terminating an Employee in China
* Chinese law does not allow an employer to freely fire an employee.
* The employer must have good cause to terminate an employee or otherwise must pay potentially significant severance salary (roughly two times a capped monthly salary for each year of employment) and may even be required to reinstate the employee.
* the expense of a legal defense may be high and usually the employer will fail to successfully defend itself.
— Other Vulnerabilities
* The control and sustainability of corporate operations in China is also vulnerable to employee abuse in other ways.
* Access to and control of the company’s financial records and bank “tokens” is one obvious example.
* Access to and control of key assets is another.

2. How to prevent
— "Don’t put all your eggs in one basket"
* Practically, proverbial advice to not “put all your eggs in one basket” is highly apropos at this moment.
* Designing a hijack-proof Chinese company involves dispersing the points of power and authority and also dispersing responsibility for the points of vulnerability of a company in such a way as to prevent their abuse by any one person or group of persons.