Taking a strategic view of anti-bribery compliance in China
Developing a networking relationship with both the Communist Party and government in China requires an appreciation that the drivers of Western and Chinese business interests are quite diverse, an understanding of the Chinese concept of “guanxi” (the system of relationships that creates a basis for social interaction and the development of trust and cooperation) and how this relates to corrupt practices, and also an understanding of how to create and capitalise on ethical, institutionalized, corporatised guanxi.
How do the business drivers of western and Chinese companies differ in China?
Multinational companies (MNCs) in China are motivated simply by profit. The clear, required outcome for MNCs is to achieve financial return for shareholders and stakeholders. The strategy applied by most MNCs to achieve those returns is by applying two Western pillars of business practice: linear execution and the rule of law. “Rule of law” means the law is above everything else in the country with an independent judiciary.
On the other hand, Chinese companies have invested in two co-existing dynamic systems of power. Firstly, they have had to adopt a highly non-linear business approach as a result of the Chinese Communist Party’s massive and unpredictable influence on all aspects of business society. Secondly, Chinese business has more recently come to accept rule by law as a more rule-based system. “Rule by law” means administering China according to law as laid down and under the leadership of the Chinese Communist Party, without an independent judiciary. Rule by law has evolved from China’s traditional “rule by man” – ruling according to the ruler's will.
This situation prevails today because certain individuals and institutions that form the ruling elite group in China have been, and continue to be, above the law, because of their political affiliation in a one-party state. This situation is exacerbated because China does not have an independent judiciary or a government structure that is based on the separation of powers, which means that laws and court judgments are essentially applied with minimal transparency and at times arbitrarily. As a result, fear often drives decision-making and outcomes in relationships and businesses in China.
For centuries China was a place where most individuals had no control over important outcomes that affected their daily lives. People lived in fear of natural disasters – floods, earthquakes and other events completely beyond their control. They also had no direct participation in political power, which resided in a divinely-sanctioned ruling elite group.
What is Guanxi and why is it misunderstood?
Guanxi is both a central institution as well as an informal mediating mechanism that encompasses the personalized networks of influence in Chinese society. Guanxi describes, in part, a personal connection between two people in which one is either able to prevail upon another to perform a favor or service, or be prevailed upon in mutual relation and understanding and for mutual interest and benefit. Contrary to frequent Western views of guanxi, there is absolutely nothing idiosyncratic or unusual about it. In its simplest form, guanxi compares with a bridge one can choose to cross or not. It is also the ability to select or reject a friend based on mutual need and interest and complementary time horizons. Guanxi also relates to family bonds which are neither chosen nor easily dispensed. The trust that accrues through mutual guanxi and the network it suggests compares to the good old-fashioned gentlemen trust and relationships that has molded Western societies over the centuries, such as in the city of London or between ship dealers in Japan and Norway where deals were done based on verbal contract (“My word is my bond”).
Chinese guanxi networks arose centuries ago when there was no real legal framework in place to determine outcomes. More recently, in times of turmoil, guanxi networks have been relied upon as a mechanism for organizational governance when legal and institutional mechanisms fail to determine outcomes in a reliable manner. In many areas, and in many ways, modern Chinese guanxi networks serve as positive ordering forces in modern China, where incomplete reforms, and the relatively new legal mechanisms accompanying them, are not yet uniformly adopted by Chinese society or enforced by Chinese state authorities.
China today is a place where outcomes are often determined by two co-existing, sometimes contradictory, systems: modern adapted versions of traditional Chinese guanxi mechanisms (based on the rule of man) and international legal norms (predicated on the rule of law). Because reforms are not complete, individuals and companies in China cannot rely on investing solely in legal mechanisms to determine outcomes, and so they continue to invest time and resources in guanxi network mechanisms.
What makes investing in guanxi more important is the fact that, since the 16th Party Congress in 2002, the proportion of the Congress delegates from business and civil sectors was set to gradually increase. In the provincial nomination for the 18th Party Congress, conducted in late May, a significant number of candidates were business executives or board members. It would certainly be an advantage to build guanxi with such individuals, who are well connected to and known by policy-making bodies, as ties between government and business are strengthened.
Provided that the clearly-defined rules and moral principles of guanxi are respected, the building and use of it is, from a Chinese point of view, unambiguously ethical. Guanxi is used by most individuals in China to try to determine important outcomes based on the rule of man. Guanxi contacts begin with personal relationships founded on trust and the prospect for mutual benefit between individuals. This basic, personal relationship of trust is then extended to encompass others who are bound together in a network of extended mutual trust.
There are many types of guanxi networks, all of which derive, to greater and lesser degrees, from traditional Confucian relationship hierarchies. The first and most important type of relationships are intra-group relationships: parent to child, husband to wife, teacher to student, ruler to subject, and so forth. The second-most important relationships are inter-group relationships of common interest; peer groupings such as hometown clan to clan, classmate to classmate, employee to employee, same-sector businessman to businessman and the like. The third is between different common interest groups, such as businessmen and public to government officials. Guanxi then develops into a networked series of exchanges or transactions between the various relationship groupings. Goods, services or personal favors can be exchanged for anything of value and benefit to the relationship parties.
Investing resources solely on Western norm–based business practices (such as financial and legal due diligence and contractual obligations), and resorting to arbitration and courts when things fail is not sufficient, given the realities of Chinese society. Rather, using guanxi network mechanisms are generally superior, if not highly complementary, in order to determine outcomes.
Does Guanxi lead to bribery and corruption?
One of the problems with guanxi in China today is that the Chinese family and social systems which underpin traditional hierarchical value systems have broken down. The damage wrought by the chaos of the Cultural Revolution, in which children turned against parents, students turned against teachers and the society turned against the State and the Communist Party is pervasive.
This fundamental and pervasive breakdown of order still impacts daily life in China far more than most foreigners know. It has created a confused state of affairs in which the traditional guanxi rules and ethics that used to apply broadly within Chinese society prior to 1949 are no longer understood by recent generations of their people. During the course of 2500 years of Chinese imperial rule, dynastic change brought new emperors and ruling elite, who – with one exception 2000 years ago – consistently maintained the Confucian foundation or fabric of Chinese society.
There has, perhaps as a result of social pressures, developed a bias in most discussions about guanxi that it is a negative activity linked inextricably with corrupt practices; however, guanxi and corruption are not necessarily so linked. When used for legal purposes which do not infringe on public interests, guanxi can be an extremely useful way for members of a relationship network to take care of their legitimate personal or business affairs. Guanxi only becomes corrupt when the exchange or transaction taking place within a guanxi network involves corrupt activities or where one or more of the relationship parties in a guanxi network operate outside of the law.
The scandal of former Party Chief Bo Xilai earlier this year has generated political fallout in the civil society, which has caused the Chinese government to show more determination to curb corruption.. Therefore, the question for a business becomes, How do we retain the benefits of good guanxi, while maintaining ethical business conduct?
The corporatization of Guanxi
China’s martial history shows a long tradition of zero-sum warfare where the winner takes all. Doing business in China is often likened to fighting a guerrilla war. For a recent example, see “Guerrilla Tactics” by John E. Coulter in China Business Review, May–June 2007. In this article, Coulter points out that deception is often seen as elegant and honorable in China, and will even be protected by the higher authorities (albeit tacitly).
Corporatizing a guanxi network capability via a systematic, institutional, comprehensive programme, which we will call “Multilateral Relationship Development and Management” (MRDM), is a critical first step for any MNC to control important outcomes in China and to mitigate the risks of corruption. Most MNCs that are active in China today have not taken a hands-on approach to developing and managing their own guanxi relationships. Many MNCs do not even try to manage their guanxi relationships systematically, while others outsource this function either to an in-house employee (usually Chinese, who never transfers these relationships to the companies) or to an external agent (usually a trusted Chinese advisor, supplier or customer who also doesn’t transfer the relationships to the MNCs).
Creating guanxi relationships and managing them via MRDM requires a significant and on-going commitment by the entire company; guanxi network development and management should not be outsourced to a third party. Once MNCs start using their own corporate MRDM-developed guanxi mechanisms, they can lever them to transform the competition with Chinese counterparts from practices akin to zero-sum warfare, where they can be blindsided by guerrilla tactics, into win–win outcomes, where all interested parties achieve their mutually understood and acknowledged objectives.
One client company active in the power generation business took this approach using MRDM to address their needs in China on a joint-venture-by-joint-venture basis. If you are comfortable that your organization has a similar, well-developed set of focus areas to develop key MRDM in China, then you are well on your way. If your organization hasn’t even identified the focus areas yet, you have a long way to go.
The following questions might be considered in determining whether a company has an institutional and systematic approach to developing ethical, corporatized guanxi:
- Does your company have a reliable, institutionalized, and systematic process to manage and update key changes in Chinese leadership at national and local levels in place today?
- Do you know and, more importantly, are you known by top national-level leadership of China (for example, the members of the Politburo of the Chinese Communist Party Central Committee) and the top local-level leadership (for example, the 62 Provincial Party secretaries and governors or mayors), whose decisions and policies fundamentally affect your business in China?
- Do you know how your business is actually impacted by party or government policy and decision making, and who is in charge of each substantive area of influence?
- How have you cultivated and developed those relationships since 2002, when this group came into power?
- Do you know who amongst this top leadership group will retire at the upcoming 18th Party Congress and who from the next generation of Chinese leaders are likely to replace them? (According to the Brookings Institution, six individuals have more or less secured their membership in the next Politburo Standing Committee.)
- The 17th Party Congress has pledged to progressively increase the proportion of delegates from the business and civil sector. Do you know who of them are in the proposed name list for the 18th Party Congress in different provinces?
- Most importantly, are you ready and in position to develop and manage relationships with this new generation of Chinese leadership, who will be looking for trusted partners to do breakthrough deals with your company over the next ten years (2012–2022)?
The Chinese CEO of the same client company cited above made extensive use of guanxi relationships to resolve serious problems his company faced in the power-generation sector.
What are the benefits to ethical business from the corporatization of Guanxi?
Any organization that can develop “corporate guanxi” allows it to operate, relate and engage influencers at a much higher level of business and government. Organizations that have no system or corporate guanxi tend to be those that get caught up in urgent, last-minute illegal corruption in a desperate attempt to win a deal or influence a transaction. Having MRDM relationships means that your company will have a structured approach at relationship management. Using this approach means that:
- Your organization will not need to enhance its sales or positioning by paying illegal bribes to government officials because it will be operating at a high level of government and will be winning deals because of its investment in the country and products.
- You will have the right relationships in the right places to drive business results without the short-term profit driven focus of “influencing the next deal”; building these relationships is a long-term process of MRDM that, over time, will build your corporate brand in the senior Chinese leadership.
- Your organization will become known as one that operates at senior levels of government and party, and any groups that practice polluted guanxi will not even engage with you for fear that an offered bribe will be refused and reported.
- Your overall ethics compliance system will be much stronger than the more tactical (but absolutely necessary) anti-bribery compliance programme that you have in place.
General Counsel and compliance officers should be leading the efforts to step up the guanxi corporatization efforts – it is essential for success in China, both on the business side and also for best-practice ethics risk management. If you focus on ethics at a strategic level, as well as tactically, then there is strong potential for your business in China to grow exponentially in a legal and ethical way by utilizing the right level of corporate guanxi for you, not against you.
About the authors
Scott Lane is the Chief Executive Officer of The Red Flag Group. He has over 15 years' experience in legal, compliance, internal audit, export control, ethics and corporate governance, providing counselling and advice to senior management throughout the world in the development of legal and compliance practices.
W. John Hoffmann is the co-founder and principal of Exceptional Resources Group (XRG), a strategy and transactional consultancy that works with international companies and governments in China.