Off The Record

A major problem that confronts companies doing business in China is that of graft and corruption.  Generally we tend to think of government bureaucrats requiring some payment to expedite some matter held up in red tape.  Occasionally we relate the problem to senior politicians demanding major payments to help resolve an issue.  But more common than these are the problems companies face from within their own ranks.  It is more likely to come from the employee who takes kickbacks from a supplier to push business in the supplier’s direction.

These issues came to the fore earlier this month when some foreign press, including the Financial Times (subscription required), reported that a number of foreign enterprises had become caught up in a bribery investigation by Shanghai authorities.  According to the authorities, staff at several companies had been arrested for taking bribes from IT equipment suppliers.  Foreign companies caught up in the swoop included management consultancy McKinsey and Co., fast food giant McDonald’s, engineering firm ABB, and appliances manufacturer Whirlpool.  The bribes had totaled more than RMB4 million.

The PR machines of the companies concerned went into overdrive, stating the companies knew nothing more than what they had read in the press and that they were cooperating with the authorities in their investigation of the matter.  They could do little more given the circumstances.  This was text book crisis management.

But the real issue for foreign companies operating in the market is what can be done to avoid these types of problems in a market where graft and corruption are known to be rife.

First companies need to adopt a “zero toleration” policy on matters of graft or corruption.  Communicate to staff that if anyone is caught taking bribes or kickbacks they will be fully investigated and, if evidence or sufficient cause for suspicion is found, they will be fired.  No questions asked.

If the transgression is serious enough, employees need to understand that the police will be called in to investigate and that this could result in criminal prosecution.  Few would find the prospect of internment in a prison in China appealing.

Second companies need to have a clear code of ethics detailing what is allowed and what is not.  The door for infringement of the code of ethics is often opened by a foreign manager who is suckered into the view that China is different and that HQ doesn’t understand what we are facing out here in the frontlines.  It’s reminiscent of the Jack Nicholson speech in the film A Few Good Men, where he justifies breaking the rules on the frontline where US troops in Guantanamo Bay stand eyeball-to-eyeball with their adversaries in Cuba.  Let’s not forget that Nicholson was the bad guy in the movie and his approach directly led to the excesses and abuses of power that formed the basis of the film’s plot.

Allowing local staff to bend the rules or ignore the code of ethics because China is different sends them a signal that you will understand the differences if they do other things like taking kickbacks.  Managers need to take a firm stand on the company’s code of ethics.

Third, put in place strong checks and balances to ensure employees do in fact play by the rules, to ensure there is little room to maneuver and get up to mischief.  Here are some things that should be put into place:

1. Make sure all procurement decisions are checked and vetted by another department (the procurement department) and that payments are only made directly by the finance department.
    
2. For major contracts require three tenders for the contract.

3. Require a two envelope tender process with the technical bid assessed by the technical department while the financial bids are checked by procurement and finance departments.

4. Tendering companies should be vetted in an open and transparent tender environment.
        
5. If the contract is unusually large, bring in an accounting firm to monitor the tender process.

    

China, like all developing markets, is a murky place to do business.  But there are ways to make it less opaque and more transparent.  Put in place good standards and procedures and stick by them.  Under no circumstances should you yield to the “China is different” syndrome.