Companies working in China have had plenty of warning about a government crackdown on wayward practices, argues Paul French

It used to be argued by bullish chief executives of multinationals operating in China that you didn’t need to worry too much about ethics in the “Wild East”.
Ethics were alien to Chinese business culture: the government would tolerate anything that brought in investment and created jobs, and HQ back home would turn a blind eye if you kept the cash rolling in.

It was a popular trope with those who believed themselves omnipotent and untouchable in China, arguing vociferously that weak rule of law, fungible regulations, pliant officials and unrepresented workers was a much better recipe for commercial success than all those pesky regulatory compliance officers and ethical guidelines.

Perhaps it would be good to ask Mark Reilly, former China chief of pharma giant GSK, what he now thinks about ethics, regulation and long-term profits?
As we commented in 2013, the scandals at GSK in China were a mixture of “grey” areas, loose regulation and legal weaknesses. Now, more than six months later, Reilly and two local GSK executives, Zhang Guowei and Zhao Hongyan, have been charged with corruption – accused by China’s Public Security Bureau (PSB) of bribing doctors to prescribe GSK pharmaceuticals.

The charges could lead to life sentences for the accused. GSK says it is cooperating with the PSB. Foreign business in China has declared itself shocked – the American Chamber of Commerce in Shanghai says it is “surprised at the strong response”.

But should they be surprised? And should they not all look at their own practices?

Jeremy Gordon, a veteran risk consultant on China, says in his forthcoming book, Risky Business in China: “It may be easy to blame the companies and the managers for lack of internal controls, or plain wrong-doing, but the risks in this case were not simply about commercial bribery. It was also about policy.”

Gordon explains: “The GSK case is a good example of how changing political winds and market conditions can create an environment in which old risks, that were readily accepted as normal business practice, can be transformed into high risks and potentially disastrous ones. Managers operating in the middle of the storm may be too involved to pause for thought, so corporate governance and strategic guidance, let alone legal compliance, need to be in place.”

High profile campaign

On hearing that foreign business is surprised, many might find it a bit hard to swallow. 

A former director of the State Food and Drug Administration, Zheng Xiaoyu, was executed back in 2007 for corruption, including receiving bribes from pharmaceutical companies. It was front-page news in China.

Whatever the ultimate fate of Reilly, Zhang and Zhao, GSK is suffering commercially in China now. After years of strong growing revenues the company’s China income fell 61% in the third quarter of 2013 after the bribery scandal broke. Currently GSK’s China sales are still down by 20% year on year. A short-term lack of ethics seems to have led to a long-term loss of business.

So what are the lessons of the GSK scandal for foreign business in China?

The most obvious is that the days of multinationals appearing legally immune in China are over. Jeremy Gordon, surveying the wreckage of the scandal, says that the GSK case “shows clearly that foreign businesses and their managers (whatever their nationality) will experience serious consequences when rules are broken”.

It’s worth noting that it has been Big Pharma at the centre of this particular storm (as well as GSK, the PSB has investigated AstraZeneca, Sanofi, Eli Lilly, Novartis and Bayer) but the new, harsher, regulatory environment will affect all sectors.

The American Chamber’s stated “surprise” also is odd in the light of the extremely high-profile arrest of the so-called Rio Tinto Four for bribery and theft of business secrets in 2009. That case did act as a wake-up call for some (certainly in the China commodities business), but clearly not for others in different sectors.
Foreign businesses need to adapt to the new reality of slower growth, higher costs and more competition in China, while also accounting for the ongoing anti-corruption campaign and increased official scrutiny.

High-profile foreign companies in sensitive sectors, including healthcare, need to move beyond box-ticking compliance and to invest in creating (and regularly testing) risk management and staff reward structures that can withstand the increasing pressures they are facing. A few more courses in business ethics and less talk of the “Wild East” might be a good starting point for corporate re-education in China.

Based in Shanghai and the UK, Paul French is an independent China analyst and writer.

business practices  business regulation  China column  Chinese business ethics 

comments powered by Disqus