Investing in China involves confronting a wide range of ethical problems. Instead of following the herd and behaving unethically, managers should choose a strategy for each situation, writes Dr. Kai-Alexander Schlevogt.
Many companies start to tackle ethical questions only once they have reached a size that makes them believe they can afford philanthropic endeavours. And even then some large organisations dispense with ethical behaviour in times of crisis.
In China, ethical management is a practical issue that matters to all companies, whatever their size. This is because, in a country where corruption is widespread, ethics management affects the bottom-line. In this environment, enlightened conduct can turn into a comparative advantage and shape the fate of the whole corporation. This article makes practical suggestions how organisations in China can use ethics as a lever to success.
Recognising the impact of ethics
Imagine you are standing at the port of Shenzhen, waiting for your perishable cargo to be moved from the hot tarmac to refrigerated warehouses. Without the payment of a special ‘express fee’, the customs official shows no signs of wanting to attend to your goods. Should you pay up?
In Beijing, a foreign restaurant is obliged to pay more than 30 fees and levies, usually not sanctioned by the municipal legislature. They include payments for river dredging and decorations for the president’s birthday. Should you refuse to pay them?
A manager’s response to such dilemmas can have global repercussions. For example, Levi Strauss & Co, the international apparel company, has a strong reputation for ethical behaviour. If its customers were to find out that the company exploited child labour in China, many would boycott its products in Western markets.
Conduct also influences internal stakeholders. People who behave unethically externally, may also deal unethically internally, thus harming employees, shareholders and other stakeholders.
A company’s headquarters needs to establish the right institutional framework to assist regional managers in behaving ethically.
STRUCTURESA company can define clear rules and dedicate special bodies to resolve ethical questions, not only for itself but also for suppliers. Caring for the people who make a company’s products instead of just focusing on customers is a new perspective. Levi Strauss passed detailed guidelines for selecting countries for trade and investment and for engaging partners. Among other things, the country guidelines exclude places where business interactions would undermine the global brand image. Business partner terms of engagement stipulate environmental, ethical, health and safety, legal and employment standards.
Only a few years later, engagement manuals have become a standard for most multinationals. For example, McDonald’s issued precise franchisee selection criteria to safeguard its standards.
As regards other structural devices, Levi Strauss instituted a special inter-departmental ethics committee, called the China Policy Group. It decided whether the company should continue sourcing from China and invest in distribution and manufacturing there.
Informal design can also be helpful in emerging markets such as China by providing groups and individuals with a moral compass. For example, the corporate culture should be inspired by a value statement that specifies what constitutes desirable behaviour. Local managers should participate in drafting general and country-specific value statements, so that they incorporate different cultural perspectives. Levi Strauss’s code of ethics commits the company to commercial success ‘in terms broader than financial measures’. Its ethical principles include honesty and other virtues. The chairman of McDonald’s wants customers to be proud of ‘having the socially responsible company in its neighbourhood’ and demands that the ‘world should be a better place’ because of the fast food chain’s existence. Motorola’s code of conduct stipulates respect for local traditions, but prevents managers from engaging in transactions that violate accepted businesses ethics of Motorola or the law of the US, even if they are legal or customary in China.
SYSTEMS Rules and value statements have no value unless managers align incentives with the stipulated behaviour and implement the guidelines. Managers who demand high ethical values but reward only profits should not be surprised to find their subordinates contracting cost-efficient suppliers with poor working conditions. A company needs to select and reward employees who share the corporate values and avoid hiring old China hands with a habit of corruption.
PROCESSES Company transactions need to fit the structures and systems. For example, Levi Strauss designed a ‘principled reasoning approach’ to select countries and partners. Using this time-consuming approach, the China Policy Group found that even though Chinese partners met the company’s standards, the country as a whole prevented it from enacting corporate values. Its managers felt they could not protect their employees from judicial injustice or reject implementation of sanctions related to family planning. Despite the large market and supplier base, in 1993 it decided not to engage in China, a principled decision that impressed many stakeholders, including employees.
Organisational processes also need to ensure ethical consistency and avoid excessive self-promotion. Once a company has put itself in the spotlight as an ethical organisation, it raises expectations. Any U-turn is likely to generate vigorous criticism. For example, when Levi Strauss’s worldwide sales decreased by 4 per cent and 11 plants in the US were closed, it decided to enter China. It claimed that human rights had improved significantly but many human rights organisations did not share this view and opposed the decision. For example, the Clean Clothes Campaign asked consumers to write critical public letters to the company.
In general, it is better to actively help people to improve their behaviour than to punish failures – a view shared by Levi Strauss inspection teams that are meant to bring about positive change in the workplace.
Think through ethical dilemmas
These organisational arrangements prepare managers, but they do not provide the answers to all situations. Further analysis is often required.
INDIVIDUAL SCREENING An ‘ethical screening’ procedure should filter out issues that do not really bear on morality. A shift or widening of the perspective helps. For example, what is termed bribery may just be attributable to cultural differences, such as with respect to gift giving, or the country’s development stage, such as problems resulting from an underdeveloped institutional infrastructure.
Local authorities in China are often overstaffed and underfunded. To alleviate the problem, many collect their own revenues from local companies. These levies may best be regarded as taxes. A company should calculate the overall tax burden (composed of official and unofficial taxes), assess whether the level is acceptable and budget for it.
So-called corruption should also be put into international perspective. Even in rich countries such as Germany, municipal authorities levy fees from inhabitants for the construction of pavements and other infrastructure, although these investments should be covered by tax revenues.
You need to be careful in interpreting answers based on historical, geographical or cultural comparisons. For example, just because something is practised in the West, it is not necessarily right. Therefore, you need to ask yourself: ‘How would a person with high ethical standards view this problem? Would I be comfortable in seeing my behaviour reported in tomorrow’s newspaper? Would I want others to act in the same way as I do?’ If these questions turn out to be relevant to your special situation, yo
ur problem may contain important moral components.
DIALECTICAL REASONING Ethical dilemmas result from value conflicts, which become more apparent when companies go abroad and diversify their workforce. What is acceptable in one country may prove unacceptable in another. One way to resolve these conflicts is to rank the values and then choose the course of action that satisfies the highest value.
Alternatively, it often helps
to think creatively about the dilemma and try to reconcile the apparent contradiction by asking yourself: ‘How can I behave ethically and generate profits at the same time?’ Or even better: ‘How can I use ethics to make money?’ Such questions often direct your attention and energy to solutions previously overlooked. For example, instead of simply requiring subcontractors to stop hiring underaged girls in Bangladesh, Levi Strauss paid for their tuition in schools and employed them afterwards. DISAGGREGATING Sequencing, pacing and localising may help to divide a problem in time and space, again avoiding an ‘eitheror’ trade-off in the long-run, which affects all units. You may tackle a problem in a sequential manner, first acting in one location and then in others. For example, to save your perishable goods in one location, you may first pay the requested fee, even if you consider it unjustified. But subsequently, you may contest this fee and seek to improve the institutional infrastructure. Choosing an ethics strategy Managers must choose their individual ethics strategy for each situation and tactical approaches to implement it. Strategy aims to increase effectiveness (doing the right thing) while tactics are concerned with efficiency (doing things in the right way).
IMITATING Many companies in China believe they have no choice but to do what everybody else does. Otherwise, revenues may decrease or costs increase. Because of pervasive corruption, many managers tend to be more ready to behave unethically in China than in their own country. Yet localising does not mean having to copy all local practices. Bribing officials in China cannot be justified on the basis that the practice is so commonplace. Besides, ‘appeasing’ greedy officials only encourages them to request more payments in future.
DELEGATING Some companies shift the ethical burden to others by subcontracting. McKinsey & Co asks outside specialists to deal with the notoriously difficult customs officials in China when relocating staff. Eastern Hope entrusts third-party distributors to move its animal feed. This is because in the logistics industry, many companies neglect weight restrictions for their trucks to become more cost-efficient. By taking this approach a company risks perpetuating unethical behaviour.
AVOIDING A deceptively convenient approach to solve ethical issues is simply to avoid the controversial activity. An extreme case was Levi Strauss’s decision not to engage in China. This eliminates the risk of behaving unethically but it may also exclude a company from profitable opportunities and constructive engagement.
REFRAMING Some fees that first appear to be extortion and bribes, upon closer scrutiny may turn out to serve important purposes, such as a river-dredging fee. Ask yourself: ‘Does the fee serve a purpose that is consistent with corporate values? Do higher government authorities approve of them? Will the fees actually be used for the stated purpose?’ If you answer ‘yes’ to all the questions and want to channel and monitor your contributions to society, it may be best to set up a budget for community services and ask officials to convert their demands into applications for funding their projects. This approach enhances a company’s reputation and benefits society at large.
SHAPING Instead of just taking the environment as given, managers can shape it. For example, they can help build institutions and train officials to operate them. A company may help to draft legislation for regulatory bodies that guarantees a level playing field and lobby for its implementation. Government officers who demand bribes in return for awarding contracts may be invited to the corporate headquarters. Here, they may meet fellow government officials, who showcase the advantages of transparent tender processes.
Before setting up operations in one location, a company should negotiate the terms of engagement with local authorities. Once the investment has been ‘sunk’ and the company risks being held up by post-contractual opportunism, it often helps to join forces with other companies directly or through industry associations and chambers of commerce. It is particularly advisable to team up with Chinese companies. This increases local clout and avoids the charge of ‘troublesome’ foreign interference. The company may even build coalitions with influential ‘change champions’ in government. Such ethical alliances create invisible economies of scale (for example, in contractor inspection) and prevent those engaged from freeriding on the benefits of newly created public goods.
The home government, supranational governmental and non-governmental institutions (such as the World Bank, World Trade Organisation and the Fair Labour Organisation), the media and other stakeholders can also improve the institutional environment. Linking up with ‘critical’ organisations, such as human rights activists, also improves credibility among the key opinion-makers, creates joint ownership of the problem and disseminates learning.
Home governments should also be lobbied to pass legislation that makes unethical behaviour abroad illegal. Laws such as the US Foreign Corrupt Practices Act are aimed at preventing companies from engaging in ‘ethical competition’, resulting in a downward spiral of moral standards. They also assist managers in implementing their standards internally and externally, even if they cannot guarantee ethical behaviour. A recent survey by Transparency International ranked US-headquartered multinationals 13th in the world on its measure of a company’s propensity to bribe in emerging markets (China was ranked 20th out of 21 countries studied). Besides, in 1998, the US National Labour Committee found American companies to be ‘acting in ways that are actually lowering standards in China’.
In general, companies need to create goodwill without being exploited by Chinese stakeholders. Such invisible capital helps to avoid ethical friction and creates mutually beneficial outcomes. Patriotism matters particularly. For example, the insurance company AIG helped its cause by setting up a special infrastructure fund for China while at the same time repatriating pieces of art to the Middle Kingdom. The principles suggested in this article apply to foreign and Chinese companies alike. Managing ethics in China starts with the chief executive, who plays a crucial role in influencing the inherently fragile ethical climate inside and outside the company. Sometimes, sacrifices are necessary. Ethics managers in China and other emerging markets must avoid a b l a c k – a n d – w h i t e approach and instead closely scrutinise individual dilemmas and their true causes. In general, to avoid the charge of ethical imperialism, companies need to act subtly, especially in China, which is highly sensitive to foreign interference. They need to strike the right balance between enforcing their standards on others and uncritically embracing the standards of others, and between overinvesting and underinvesting in ethical action.
Positive results Instead of thinking in contradictions, managers should view ethics management as an enabling lever that catalyses results that were previously unattainable. For example, high ethical performance may make employees proud to work for a responsible company and generate invisible value for customers intent on purchasing ‘ethical products’. Then, small investments in ethics can yield disproportionately positive results. Companies must prepare for changes over time and take proactive measures to improve the ethi
cal climate. Managers may get away with their unethical behaviour now, but will suffer in future when the institutional framework in China becomes more transparent.
According to an ancient Chinese story, an old man started to heap earth that he had excavated with a teaspoon, announcing that he intended to make a mountain. When told of the futility of his actions, he answered: ‘Perhaps I will not finish my task, but if every subsequent generation continues my work, the highest mountain on earth will emerge.’ Managers should bear in mind this moral tale and realise that their own incremental efforts in improving ethics in China will yield great fruits, which extreme and one-off action will never produce.
Dr. Kai-Alexander Schlevogt (Ph.D. Oxford), an internationally renowned expert for strategic studies, is the founder and president of the Schlevogt Business School, the first privately-owned higher education institution in Germany that focuses on research, teaching and consulting related to emerging markets, especially China. He became the first permanent foreign professor at a PRC university (Peking University) and served as a senior faculty member at the Australian Graduate School of Management (at the University of New South Wales and the University of Sydney). He also held appointments at Harvard University and McKinsey & Co in Greater China. Website: www.schlevogt.de; Email: firstname.lastname@example.org.