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China and the World of Business • China Business and the World

Silicon Hutong - China and the World of Business • China Business and the World

Business Ethics and Culture Clashes in China

Hutong West
Dodging the Heat Wave
1740 hrs.

When I used to take and read The Harvard Business Review, over time I found myself avoiding the case study section of the magazine. While fictionalized accounts of management challenges may be interesting to some, I found the cases almost unfailingly sterile.

I understand why the Harvard Business School teaches to cases, and the rationale behind fictionalizing them. It is important for students to practice addressing difficult scenarios, and “changing the names to protect the innocent” makes the case less gossipy and eases the challenge of getting tiresome permissions. When I realized that I was getting just as much out of good investigative business journalism that DID name the names, I stopped buying and reading cases.

To every rule there is an exception, and Adam Mezei forwarded me a link to a Harvard Business Review case that deserves to be read by everyone doing business in China. The case, “Culture Clash in the Boardroom,” delves into a common problem in China: operating an ethical business versus doing everything to get as many orders as possible. Making the case even more challenging, the business in question is a Sino-foreign joint venture. I won’t tell you any more – go ahead and read the case.

If I may, however, I’d like to make some general points for your consideration as you read through the case and put yourself in the shoes of the Hong Kong-born joint venture president.

Avoiding the Problem

Ethical conflicts are endemic to foreign businesses operating in China. Failure to recognize this represents either obfuscation or denial. The best way to deal with most of them is to avoid them altogether, and for the rest there has to be an iron set of principles to guide managers.

The only way to avoid some of the more fundamental conflicts like the one in the HBR case is to address them at the time a company makes a decision about whether to go into China or not. As a part of that decision process, some of the questions that need to be addressed include:

  • What do our local competitors do to get and keep customer business? Is there anything that they do as a matter of habit that is simply out of the question for us?
  • What would our joint-venture partner really do if we had to make a hard choice between ethics and sales?
  • Can we turn our more ethical behavior into a business advantage, or indeed lead the industry to more ethical practices, or are we shooting ourselves in the foot by trying to play a “cleaner” game than our competition?
  • Are foreign companies held to a higher ethical standard in our industry than local companies?
  • Do our customers care whether we do things better? Or do they only care about price?

These seem to be tactical, but in a growing number of industries these questions can determine whether a venture will succeed or fail, and are thus strategic. Compellingly, the same questions need to be asked about quality, and whether customers and consumers really care about the value we see in our products and services, or whether price is all.

Once in a venture, however, the questions above become somewhat moot. All that is left is for the company to determine where it draws the line between sales and ethics. Managers will not only require a clear set of non-negotiable principles on matters ranging from worker safety to kickbacks to employee infractions, but a guarantee from the company that losing sales for reasons of ethics will not count against sales targets and budgets.

What this implies, of course, is that ethics in China can cost money. The smart way to approach this problem is to budget internally for these shortfalls, and count them on the ledger as a long-term investment in corporate reputation.

Of course, if doing business ethically is going to push a company into permanent losses, at some point it might make sense to cut those losses and run.

The Double Standard

One area not touched upon by the case is the issue of government and popular expectations. As I’ve discussed before, foreign and private enterprises operating in China are held to a higher standard of operational ethics than local and state-owned enterprises. The ethical playing field is not level, so behaving unethically just because the local competition does is not an acceptable defense. Indeed, the government is more likely to make an example out of the foreign enterprise that behaves badly than local companies that do so.

Operating in a joint venture is not likely to provide much cover, especially when the brand on the joint venture is – or includes – the name of the foreign enterprise. A joint-venture is as good as a foreign company when it comes to juicy targets for fines and other forms of prosecution. Any wise JV president would have that little tidbit up his sleeve to help mollify a bombastic local executive.

It Will Be Known

Another point that the beleaguered manager can toss at his joint venture partner is the inevitability that the unethical behavior will become public knowledge, and that such knowledge could be even more disastrous than missed sales targets. Some of the best investigative journalists in China have chosen to make a career out of catching unethical businesses in the act, and while taking on locally powerful SOEs can be tricky, they have editorial carte blache to target foreign enterprises. Add the media bulldogs to the prospect of a frustrated competitor or disgruntled employee, and engaging in unethical behavior looks plain stupid.

Some local partners, especially the larger, better connected ones, will protest that they have the ability to put the muzzle on the local media. This may have been the case a decade or more ago, but it is no longer. There are simply too many reporters and too many outlets, a growing number of whom seek to build their careers as either muckrakers or crusaders against shoddy business practices. Lenovo, Li-Ning, and Mengniu Dairies comprise a short list of notable companies who have discovered that the number of reporters in China who can be bought is shrinking, as is the number of reporters who will stay bought once they have been paid off.

Who is Working For You?

One final point that the case dodges is the matter of ethical hires. The case assumes that because a sales manager is a high performer, his ethics can be overlooked, or corrected by re-training from human resources. This is so much nonsense. An employee willing to play loose with ethics who is tolerated by his management will come to believe that his performance will protect him from meaningful punishment for his ethical lapses.

Ethics does not come from a training: you either hire people for their integrity and their performance, or you simply do not care enough about the former. In an environment like China, where good performers are always in short supply, the temptation to look away or to believe that somehow the corporate culture will change a person’s character can be overwhelming. Unless you are prepared to sack your highest performers for moral transgressions, you are creating an environment for ethical lapses.

Part of the problem the JV president faces is a human resources failure, which, in the world of Chinese human resources, means a senior management failure. The JV president is paying for it in this case, and part of the solution has to be a change in personnel. In the context of a JV, however, solving that problem is going to be tough: the JV partner often has a say, and if there is an ethical disconnect, an attempt to fire an unethical executive may sunder the JV.

All of which serves to reinforce the most important point: the time to deal with ethical problems in China is at the point of entry, not when the problem shows up like a letter-bomb on an executive’s desk.

Category: China Rules, FITG
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