The Fine Line in Compliance
The Fine Line Between Appreciation, Favours, and Bribes
Due to the Chinese government’s recent efforts to strengthen transparency, compliance is becoming an increasingly important topic for international companies operating in China. China Focus interviews Dr. Richard Zhang, President of Heraeus’ Greater China Regional Headquarter on his experiences with compliance in China.
How has the compliance mindset evolved in China?
In the late 80s and early 90s, when international companies first came to China, they had to learn to adjust to the so-called “Chinese way of doing business”. While building up their local organisations, they were confronted with a variety of people coming from many different backgrounds, which inevitably influenced the way they did business. For a long time, foreign companies were testing the waters, realising that anti-corruption laws in China were nowhere near as comprehensive as those they were used to at home. In some cases the laws even left significant room for interpretation!
The two major wakeup calls were the Siemens case in 2006 and the Glaxo Smith Kline case in 2014. The Chinese government started cracking down on corruption, and foreign companies were not exempt. Multinationals realised that not only their global reputation was on the line, but there were also substantial legal consequences, such as hefty fines and even imprisonment of foreign senior managers.
What has been the short-term impact of the anti-corruption drive?
From a business perspective, a major side effect has been that many people in authority have been scared or reluctant to make decisions. A major contributing factor to this is that compliance regulations and their legal consequences are unclear and inconsistent. As a result, it has taken longer to, for example, receive approvals for projects, or issue new licenses, which in turn could potentially hold back investment. In the short term and from a business perspective, this has been a negative consequence of the anti-corruption drive.
With all new policy guidelines, there will be winners and losers. Those who benefit less will try to come up with countermeasures to slow down the implementation of new policies. This is a significant challenge for China because it is a big country and there is no real federal system for policies.
Is this the new status quo in China?
Some take the pessimistic view and say that the current leadership’s anti-corruption drive is only a way to rid of political opponents. However, I like to believe that there is true determination to grow a cleaner political structure for the future. The government has made it clear that bad behaviour will no longer be tolerated. This is a clear warning signal to Chinese party members on all different levels, as well as local and foreign companies alike.
What is the biggest challenge for foreign companies wanting to implement their compliance strategies in China?
Culture is an important factor when it comes to compliance because it is the context in which all people make decisions in their personal and professional life. Eastern and Western customs are very different, especially in showing appreciation and relationship building. In Asian culture, entertainment and gift giving is part of everyday business and even sometimes the basis of strategic interactions. In the Western world, by contrast, these concepts are treated as separate. Understanding this is one of the biggest challenges for companies who want to implement their global compliance policy in Asia.
Luxury has often been at the centre of business interactions in China, manifested in extravagant gifts or banquets. The country has developed rapidly in the last few decades, but the mentality has remained the same, with more emphasis being placed on material items than activities such as playing golf, which is popular in more developed Asian nations such as Japan or Taiwan. As the living standard evolves, business relationships demand even more costly gifts. The real problems arise when people do not observe the fine line between showing appreciation, asking for a favour, and giving a bribe.
How would you evaluate the awareness and attitude of Chinese employees towards compliance issues?
In my experience, local colleagues in management positions are well aware and fully understand the importance of compliance. But when it comes to middle management and lower (e.g. sales staff, operators, and floor workers), it is more challenging as they tend to not see the bigger picture. Often times, they overstate the importance of personal relationships and understate other factors such as quality and service. Since they interact directly with clients, they consider this decision their prerogative or even as beneficial for the company. For managers, it is a big challenge to keep this kind of behaviour in check.
How do you discourage this behaviour as people move up?
Good behaviour can be fostered through training, internal whistleblower hotlines, and a positive company culture that reinforces the company’s values at every level. To some low level or entry level employees the concept of compliance is just theoretical. For many fresh graduates in entry level positions, the temptation to find a shortcut to get rich is very enticing, especially because the social pressure for buying luxury goods in the modern Chinese society is immense. Furthermore, when successful performance is rewarded with promotions, compliant behaviour is not a prerequisite. As we get older and more senior, we gather life and work experiences that teach us that there are certain areas we just should not touch. Overall, there seems to be more awareness for this topic due to the number of public cases and scandals, but it still remains a cultural challenge for China.
What are your top tips for international companies on how to enforce a compliance strategy in China?
In my opinion, compliance should not be left only to the HR and legal departments, but should be on the agenda of all senior executives of a company. People development is a task that all managers must spend time on. While compliance trainings are important, they do not shape employees’ behaviour. Every single manager must lead by example and highlight the company’s key values: true, long-lasting success doesn’t come from kickbacks and entertainment but from good quality products, service, and reputation.
Compliance has to be taken in a cultural, social, and economic context. Many companies underestimate this aspect and simply say “this is the Chinese way of doing business.” But the Chinese way is changing! It will take time to really enforce this but we have already seen positive changes in attitude. As the awareness for compliance issues improves along with the internationalisation of the Chinese business environment, doing clean business in China is possible, but not guaranteed. We have to work at it and with time we will see the results.
Dr. Richard Zhang joined Heraeus Group in 2012 and was appointed as President of the newly-established Regional Headquarters of Heraeus Greater China two years later. Besides his strong leadership in the Chemical Industry, Dr. Zhang also has profound expertise in compliance and spares no effort in advocating and strengthening compliance in business environments. Dr. Zhang worked in Germany for more than a decade and thereafter continued to work for German companies globally. His multi-cultural background and extensive management experience gives him a unique understanding of compliance across countries and cultures. His latest contribution was one chapter titled “Corporate management as a compliance tool in China” to the recently published book “Compliance Management in China”.