Cultivating loyalty

China is the homeland of entrepreneurs. According to a Chinese saying, ?it is better to be the head of a chicken than the tail of an ox.?

Many Chinese entrepreneurs want to create maximum wealth for their family and keep business affairs within a close circle of insiders, even though this might limit the rise of their companies. Driven by a desire for entrepreneurial sovereignty, many Chinese employees use big companies as a training ground to becoming independent. In their own ventures, they release a fountain of energy and ideas, which employers fail to tap.

As a result, foreign and domestic companies alike suffer from high personnel turnover and hyper-competition. They find it difficult to build, maintain and replenish their ranks from an already limited talent pool. Employees usually take with them important information about their former employer and the industry, as well as contacts – sometimes even poaching a complete management team. They then start to compete with their previous employer and often become formidable opponents.

How can the leaders of established companies overcome this obstacle, attracting, developing, motivating and retaining the right employees? I found it helpful to learn from the best Chinese companies, which struggle with the same problems as their foreign competitors. Many practices are innovative, while some are known in the West. But most important, unlike theoretical discussions in Western textbooks, they demonstrate what really works in China. Until now, few foreigners have considered emulating Chinese practices, since they are deemed inferior. Instead of managerial imperialism, which has failed, managers need to analyse those aspects of China that differ from the West and adapt their systems accordingly.

I developed a framework that contains five best practice recommendations for capturing and retaining valued talent in China. The key insight is that companies need to manage the whole human resource flow, from entry to exit, as a system instead of taking isolated action. The vision and charisma of the chief executive and leaders at lower levels glue the whole system together and inspire it.

The aim of my framework is to retain those people whom the company really wants to keep. This qualification recognises the fact that some personnel turnover is healthy. For one thing, new blood reinvigorates the company. Besides, the threat of exit may spur employees to work hard. Further, poached employees are actually a mark of honour for a company. I tend to measure the bench strength of a company's human resources, as opposed to the strength of its systems, by the number of people who are attracted by competitors.

Attracting motivated talent
China is notorious for its difficult human relations. Most Chinese use sophisticated warfare, strategies in everyday life, which helps them to outsmart their compatriots and, in particular, foreigners. The importance of playing the human game results from the lack of clear structures and rules in Chinese society.

To retain talent and prevent intrigue, you first, have to select the right people. But which criteria and approaches should you use in such a complex country without a well-functioning labour market, which is informed, flexible and mobile? Managers can analyse indices' and 'signals.' Indices, such as race, are inborn characteristics of a person and cannot be manipulated. Since 92 percent of China's population are Han, indices are not very useful here. Signals are acquired traits, such as university education, but they are often less objective in China than in more advanced countries. And without a well-established labour market, it is very difficult to find the handful of good people.

Let us therefore analyse how Chinese winners deal with this conundrum. With US$ 1bn in assets, the Hope Group is main-land China's largest private enterprise. It was founded by four brothers and split into four parts afterwards. Its core business is animal feed, and it has recently invested in new areas such as food processing, banking and insurance. Faced with a scarcity of indices and signals, the chief executive of the Hope Group and its subsidiary, Eastern Hope, Liu Yong-xing, decided to select people based on character.

Judgement of character
But how do you judge character? Liu used a proxy that he believes is closely correlated with desirable attitudes. He only selects people who do not smoke, drink or gamble. Those who do, have to quit after joining the company. The results of the selection processes are promising. Liu's experience proves that these behavioural traits are excellent predictors of quality. Those who refrain from these habits are likely to have strong willpower and discipline.

A foreigner would never think of such a policy and it is also very unusual in China, where these vices are widespread. This is one of the many examples where foreigners have to radically change their Western mindset.

Because of their familiarity with anti-discrimination legislation back home, most foreigners would never consider limiting the pool of candidates in such a way. But Chinese entrepreneurs are not subject to such policies. Enterprises often mention in their recruitment advertisements that they prefer a woman or man or specify age ranges such as 20-35 years. An entrepreneur is thought best able to judge what he needs, better than unknowledgeable and ideologically-biased bureaucrats. Such freedom is one of the competitive advantages of China, which you can exploit to your advantage.

Initially, Liu also avoided recruiting people from state-owned enterprises, fearing they might transfer their inefficient practices to his dynamic private enterprises. Employing talent from foreign-owned competitors proved to be too expensive. However, given the need for more professionalism and the absorption of SOEs by private enterprises, he has recently started to recruit industry insiders as well.

In old China, students who passed the imperial exam and became officials often employed people from their home village, because they trusted their loyalty. Likewise, about 90 percent of the employees of Eastern Hope originate from Liu's home province of Sichuan in central China. Those people are famed for their mobility and willingness to work extremely hard.

After initially relying on informal contacts, Liu very early started to develop an internal talent-screening mechanism. He established a recruiting centre in Chengdu, the capital of Sichuan, which markets his company to prospective employees and sup-plies the recruited talent to all his operations throughout China. He plans to open a similar recruiting office in Shanghai, where he has moved his headquarters.

Employers also need to understand what drives prospective employees. If they are motivated primarily by money and strive for independence, they might be more likely to leave the company in the quest for other opportunities. In contrast, intrinsic motivation is often a stronger engine of performance and can lead to greater loyalty, if the employee feels that he is serving a worthy cause greater than himself.

A professional reputation
Reputation is another important factor that attracts talent. Liu Yong-hao, the chief executive of New Hope, another branch of the Hope Group, listed his company on the Shenzhen stock exchange. Unlike in the West, the main objective was not to attract capital, but to force the company to adopt a transparent structure, subject it to outside monitoring and thus earn a reputation for professionalism that attracts talent.

A professional reputation helps to overcome outsiders' fear of nepotism in private enterprises. Kinship relations in a family firm, though creating valuable internal social capital, tend to have a negative impact on outsiders. Professional outside talent often fears that family members obtain privileges independent of merit and intervene irrationally to the detriment of the company and non-family employees.

Fear of nepotism is justified. A capable manager was invited to become vice-president of a decoration material business in China. The owner told him that he could implement any changes he deemed necessary. But when he started to put in place a rational, standardised system of administration, the owner's wife felt insulted and laid out traps. He finally left, recognising that change was impossible.

Liu Yong-hao reports that prospective employees often ask him whether family members hold positions in his company. To attract and retain outside talent, he proclaimed the policy of excluding family from business – rather unusual for a private Chinese enterprise. Liu Yong-xing adopts the same policy, which enables his company to grow beyond the confines imposed by the family structure. This is only possible by hiring outside managers.

Balancing conflicting demands
Family managers have to try to find an optimum balance between these conflicting demands of familism and professionalism and institute systems that everybody respects as fair and impartial. To achieve this reputation, the leader must act as a role model and take symbolic action that shows that the only measure of value is merit.

Likewise, foreign companies should remove glass ceilings that separate Chinese managers from senior positions. If Chinese employees believe that the top jobs are reserved for foreign managers, they are not likely to join the company or stay there long.

A reputation for technological sophistication and innovation can be as important as a reputation for professionalism. Official recognition of the technological competence of a firm and state support in the recruitment of specialists carry much weight.

Huawei is a private Shenzhen-based high-technology company. Its competitive advantage derives from the technological competence of its employees, who develop new products and processes that propel the company above the noise level created by the myriad of competitors. Forty percent of its 9,000 employees are involved in R&D, while 85 percent went to university, obtaining bachelor degrees or higher.

Support by the local government proved crucial in upgrading the pool of research talent. Seven years ago, it did not allocate people with higher degrees to private enterprises, which were treated as pariahs. Such restrictions have since been lifted. The government has appointed the company as an institution for postdoctoral research. This reputation and the concomitant development prospects helped to attract many specialists, who otherwise might have remained in academia. Huawei now possesses a strong intellectual bench of more than 3,000 master and Ph.D. students.

Another Shenzhen-based company, Zhongxing, develops high-tech communication products. The company found it difficult to attract talent from Shanghai and Nanjing, because they did not want to leave their home town. A residence permit, hukou, is very valuable in these cities and thus reduces labour mobility. To remove this bottleneck, Zhongxing opened R&D centres in both Shanghai and Nanjing and thus managed to recruit from these important cities.

The strategy proved successful. The Shanghai centre developed a mobile communication system, which was ordered by Yugoslavian customers for a total of US$225m. The centre in Nanjing invented a digital programme control device, which generated revenues worth several billion yuan.

Locating such centres in places where people are likely to stay also increases the prospects of successful retention. Zhongxing even established an R&D centre in Silicon Valley, which I believe acts as an incentive for people to join the company and stay with it in the hope of one day becoming part of the US operation.

Flexibly assigning talent to lead
The phenomenon of people rising from rags to riches has all but disappeared in modern corporations in the West. Management has become a science; little is left to chance. People with unconventional backgrounds have little opportunity to enter companies.

Eastern Hope begs to differ. In China, many talented people did not have the chance to get the formal credentials that are often a mark of quality in the West. In view of imperfect information, chief executive Liu Yong-xing builds in complete flexibility into the career of his employees. For example, three car drivers have become general managers. Another driver was the most active participant in one of my recent strategy seminars at the company, and he also has aspirations for promotion. Conversely, it is not unusual for Eastern Hope to demote a general manager. Everybody accepts this.

People from modest origins are less likely to demand a lot and act like prima donnas. Given the basic human urge for reciprocity, they are likely to honour the trust put in them with hard work and loyalty.

The ideal preparation for leadership is to give people real exercise and the ultimate test of leadership is to watch them operate in practice. Eastern Hope elevates those with limited skills and experience but great potential into leadership positions. The chief executive cushions them with a team of experienced specialists who have insider knowledge. According to traditional Chinese culture, which values seniority very much, it is highly unusual to give young people great responsibility.

But such young leaders often succeed. For example, the chief executive of the Meihao Flour Factory in Chengdu, Xi Gang, is only 29 years old, but held different general manager positions for the past four years. During this time, he significantly improved the performance of the companies he led.

Foreign companies are well advised to assign employees to experimental positions, including young high potentials, and to watch and test them in action. People can be piloted like products. Watching their action is more useful than listening to their words or studying their CVs. Foreigners should also not be afraid of demoting people. The corporate culture should be adjusted so that such decisions are considered completely normal.

Change a winning team
As another strategy, Eastern Hope often breaks a golden rule in sport ?never change a winning team. To equip employees with a wide range of skills, to avoid special privileges that tend to develop over time (especially in China) and to prevent intrigue, Liu rotates even his closest subordinates. For example, his own secretary has to take on a new position after a couple of years. This is an act of continuous creative destruction – the successful old team is destroyed, but fresh people with energy get a new opportunity while the old people can invest their talents in other places in the company.

Prof Dr. Kai-Alexander Schlevogt (Ph.D Oxford) is a leading expert in international strategic studies. After serving at McKinsey & Co. and Harvard University, he became the first permanent foreign professor in the PRC (at Peking University) and a senior faculty member at the Australian Graduate School of Management. He frequently leads education programmes for top managers and government officials in China and overseas. Website: http://www.schlevogt.com

Email: schlevogt@schlevogt.com.