Do the intentions behind enforcement of domestic or international anti-corruption laws matter? Or is ‘the law the law’ and it really does not matter what a government’s motives are in enforcing laws that it has on the books. That question comes up for discussion from time-to-time. Some believe that motives and intentions do matter; others believe that enforcement of existing laws are motive and intention enough. This subject has been raised over the past several months in connection with the Chinese government and their anti-corruption enforcement efforts against western companies as exemplified by the GlaxoSmithKline PLC (GSK) enforcement action, announced last summer.
Trying to understand the motives of the Chinese Communist Party and the Chinese government have long been a subject for Americans. China watchers have pontificated and speculated for many years. I am not sure that the true motives are ever clear to us westerners. But simply because we may not always understand them does not mean that we cannot consider them, particularly now that China is so opened up to western businesses which desire to garner a part of the market share in a country with the world’s largest population.
This subject was explored in a recent Financial Times (FT) piece, entitled “China: Red restoration”. The article began with a short discussion about a recent meeting held by the President of China, Xi Jinping, with several prominent leader of western businesses; including Mike Duke, President and Chief Executive Officer (CEO) of Wal-Mart, Indra Nooyi, Chairman and CEO of PepsiCo., Muhat Kent, Chairman and CEO of Coca-Cola, David Rubenstein, co-founder of The Carlyle Group, and Maurice Greenberg, the former Chairman and CEO of American International Group (AIG). As reported by the FT, President Xi told the group, “Your suggestions are a very important source of inspiration for the Chinese government.” The FT believes that this statement and others made by President Xi “were intended to signal that the world’s second largest economy remains open for business.”
Contrast that last statement with what has happened to GSK over the past several months. Company executives have been arrested or detained; passports have been pulled so that company executives could not leave the country; company executives have been paraded in front of state television cameras to confess wrongdoings; a high company official went to China and publicly apologized for the company’s conduct. All of this from a company that was already under a Deferred Prosecution Agreement (DPA) in the United States for fraudulent conduct in marketing certain pharmaceuticals. Moving it from a compliance to a business perspective, the FT noted that GSK “recently revealed that its medicine and vaccine sales had fallen 61 per cent in the third quarter from a year earlier”. Talk about taking it ‘in the wallet’.
However GSK is not the only company to come under Chinese regulatory scrutiny for allegations of bribery and corruption. Since July approximately 15 western companies have heard their corporate names listed as being under investigation. These companies range from other pharmaceuticals, to baby-food and formula companies, as well as others in health care and medical products and supplies. Beyond these anti-corruption investigations, other companies have felt the heat from Chinese regulators. Apple CEO Tim Cook was forced to publicly apologize over poor customer service and “to promise to improve customer services policies.” The German car manufacturer Volkswagen was required to recall over 380,000 vehicles in China after media reports surfaced that they were “unsafe”. Still other companies faced media criticism which led reduced sales. For instance, stories in the media surfaced about Kentucky Fried Chicken (KFC) and food safety issues which led to a 10 per cent slump in sales.
The FT article noted that there may be several motives for these actions against western companies. One is obviously a strain of nationalism which holds that such markets should belong to Chinese enterprises. Bao Dike, managing editor of the PKU Business Review, summed up this view when he was quoted as saying “they also show how China doesn’t need these foreign enterprises any more”. Kerry Brown, Professor of Chinese Politics at Sydney University, was quoted as saying, “Politically it is also a very easy populist move to beat up on foreign companies; much easier than taking on big Chinese companies and their powerful backers.”
Another motive might be what is termed “killing the chicken to scare the monkey.” Under this motivation, Chinese regulators are investigating western companies in order to send a message to the entire market about pricing and competition. The FT stated, “they intend to clean up things in order to provide quality products at reasonable prices in industries about which the public is concerned.” The Chinese public was certainly concerned about the prices it was paying for pharmaceutical products and one response may have been for the Chinese to investigate, in a very public way, GSK. The same holds true for the makers of baby-formula and milk-powder makers. Li Huafang, an independent economist and newspaper columnist, was quoted as saying “I actually think the new administration wants to strengthen regulations for both foreign and domestic businesses.” Or as Peter Gabriel might say “Shock the Monkey”.
The final motive discussed in the FT article was that of consolidation of power by the new President, Xi Jinping. Wang Lixiong, a prominent political writer, said that “The rough treatment of some foreign businesses stems from Mr. Xi’s need to establish his authority; to impose his will; this is a very common tactic among new rulers. We need to wait until he has consolidated power to see what his real intentions are.”
All of this tells me that western companies need to factor all of the above into their risk assessments when deciding whether to engage in business in China. This is a broader risk assessment than you would normally do for anti-corruption such as under the Foreign Corrupt Practices Act (FCPA). This is a political risk assessment. But the key is that you look at your risks and measure them. The FT ends its article by noting that it appears that President Xi is still welcoming western businesses to China, and said, “As long as they can show that their investments and operations in China support or at least do not get in the way of efforts to garner support for the party and its leadership, they will probably be allowed to stay and even thrive.”
For a western company, from an anti-corruption perspective, this clearly means you need to investigate your Chinese operations now. If you detect problems, you should work expeditiously to remedy them now. The FT article makes clear that whatever the motivations of the Chinese regulators are; if you are in violation of Chinese domestic laws regarding bribery and corruption, your experiences could well be costly and the reputational damage immense.
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© Thomas R. Fox, 2013