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Markkula Center for Applied Ethics

Business Practices in China

Margaret Steen

How can foreign companies doing business in China handle the ethical risks they will face?

At the Business and Organizational Ethics Partnership at Santa Clara University's Markkula Center for Applied Ethics, three panelists and a moderator discussed ethical issues that arise when doing business in China – and the outlook for improvement in this area.

The moderator of the talk, titled "Business Practices in China," was C.Y. Wang, Americas area leader of the China Business Network. The panelists were Lisa Chen, managing director of Aon Risk Solutions' China Business Group; David Chen, vice president and general manager of legal and corporate affairs for Great China Region for Microsoft; and Michael McCune, a retail and consumer marketing consultant who is director at CEB Iconoculture in the Global Advisory Services group.

McCune emphasized the importance of having a moral compass in addition to understanding the rules of law and ethics. "You're going to be offered a bribe. You're going to be asked to pay a bribe. You're going to be sitting there and there's no law, no guideline that's going to help you. It's a personal act, and you need a moral compass for that."

Issues of bribery, like other ethical issues, can get fuzzy in the real world. The panelists discussed a hypothetical example of a manufacturing company that wants to get into the Chinese market. It finds a promising partner but discovers during due diligence that that company's success is due to aggressive sales techniques that probably qualify as bribery. Without this partner, the manufacturing company could be shut out of the Chinese market for another five years. If the company goes ahead and acquires the company, it could run into legal problems. Many companies would say they would buy the company and clean up its practices, but it could be that the company's success is built on these practices and the company isn't worth as much without them.

David Chen pointed out that there is a difference between gift giving to help build a relationship and bribes that advance commercial interests. The latter, he said, lead to "short-term gains but long-term trouble. I think it's very, very dangerous. No company pays any of us enough to go to jail."

These decisions are relatively easy for higher-level employees of U.S. companies, which have to follow the Foreign Corrupt Practices Act, or FCPA, noted Lisa Chen. But some employees have conflicting incentives. "It's an easy decision for me: We give up the deal. But it's not an easy decision for a sales team member who is paid on a commission structure," Chen said. She noted that while bribery is illegal in both China and the United States, some definitions of what is ethical do vary from place to place.

The panelists saw several reasons for optimism that China's business culture will improve. For example, while in the past, working for a company whose home country (like the United States) prohibited bribery could help provide workers in China with a way out when faced with tricky ethical situations, attitudes are also evolving in China. "More recently, I see a change in China as well," said David Chen. "Doing business based on bribes is not helping either side."

This trend could help with one of Lisa Chen's suggestions: to build an ethical culture that is based on local culture, rather than imposing rules from company headquarters in another country. "Ethics is heavily influenced by culture," said Lisa Chen. Creating a lasting ethical culture in China will require an understanding of local culture and customs.

One questioner asked the panelists if Westerners are "too self-righteous" about bribery. McCune said the issue is "understanding culturally, where does undue influence start to manifest itself?"

David Chen said those doing business in China "have to have optimism — not just for international companies that want to make money in China, but for the Chinese people's own sake." He pointed to the progress that is being made in air quality in China: "Two years ago, nobody measured air quality. Now people use apps on smartphones to see the air quality index. You'll see an improvement once you start measuring."

Lisa Chen said she had seen an improvement in China's business culture while she lived there from 2008 compared to four years later.

The panelists suggested that companies can make ethical behavior easier by, for example, setting up the right incentive systems. A system that gives a large reward for selling $100 of goods but almost nothing for selling $99 will create an incentive to do whatever is necessary to make that last dollar of sales — which could collide with ethical decision making.

And the panelists offered advice for foreign investors who want to do business in China. Talent is still a big challenge, said Lisa Chen. "The first thing to think about is how you can plan out a long-term talent strategy: compensation, long-term career development."

David Chen said it's important to go to China for the right reasons. "Don't go there for cheap labor, for cheap material, or for less strict environmental standards. Those days are gone," he said. "Go there for the market. Find your competitive advantage. Then you need tenacity and perseverance."

Margaret Steen is a freelance author.

May 1, 2014