To many, the tainted milk scandal was a typical Chinese crime: Company cuts corners to minimize costs and consumers end up paying the price. Now this case has reached a typically Chinese conclusion.
On December 31, Chairman Tian Wenhua and three other top executives from dairy firm Sanlu pleaded guilty to producing and selling a substandard product. Since at least six deaths occurred, the defendants face a maximum penalty of life imprisonment or death.
The case followed what has become a standard route. Sanlu was forced into a government-supervised bankruptcy; an industry wide compensation fund was established; individuals considered responsible were subject to criminal sanctions, pleading guilty in non-public trials featuring rehearsed written confessions; and civil tort lawsuits against Sanlu were rejected on the ground that the public criminal and bankruptcy proceedings preempted the private litigation process.
Money isn’t enough
A key feature of this process is the use of harsh criminal sanctions against company executives. In the US or Europe, it is almost unheard of for a high-level executive to be criminally sanctioned for a food safety or pollution violation. The opposite is true in China.
Where there is major damage affecting a large number of people, private civil action is considered inadequate. The issue is public and requires a public response. Financial sanctions imposed on a lifeless company are not enough: some human being must suffer.
This is an important issue for foreign investors in China. Many foreign-owned businesses in China engage in manufacturing and an increasing number sell their products locally. In producing any consumer good, there is always the risk of malfunction, even with the best oversight.
In the West, liability for such damage is resolved within a well-developed system of private tort law. Foreign managers in China normally assume that the same is true in China and that they will never be held personally responsible for damages caused by the company.
The Sanlu case shows that this is not true.
Under the Chinese system, causing damage is a crime, and the person who is responsible for the damage is criminally liable. This is true even when the manager had no direct involvement in the activity that caused the damage. A Sanlu subsidiary was responsible for the tainted milk problems, yet the chairperson and senior executives of the parent company – none of whom had direct management control over the subsidiary – were prosecuted for the crime.
Consider the following examples:
o Dangerous chemicals are released into a river following an equipment malfunction at a manufacturing plant. It is shown that engineering staff were aware of the problems and chose not to make needed repairs.
o Children are taken ill after consuming food products containing a bacterial infection. It is shown the manufacturer’s quality control workers were aware of high levels of contamination but chose to continue production.
o A disgruntled employee of a drug manufacturer inserts poison into an over-the-counter medicine, leading to death and injury to consumers. When initial reports on the deaths are released, direct supervisory staff deny that the problem is related to the company product and more fatalities occur.
These kinds of situations are distressingly common in China. It is not unusual for a foreign manager’s best management practices to be ignored by local staff. And should the manager agree to follow local standards, such "standards" are often in violation of the strict provisions of Chinese law.
Food for thought
When foreign management learns that damage has occurred, their concern is that the liability arising from any subsequent law suit will be so severe it may force the company into bankruptcy. It is rare for the possibility of criminal sanctions against individual managers to even come under consideration.
As the Sanlu case shows, the risk of exposure to criminal sanctions is very real and must be taken seriously by foreign companies in China.
The next time local staff recommends ignoring industry best practices and Chinese law concerning health and safety standards, the foreign manager should consider the issue carefully. Is the financial benefit to the company worth the potential for an involuntary stay in a Chinese prison, or worse?