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CSR Forum Report: How to stop your Chinese dream turning into a nightmare

BritCham / CBBC
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On Tuesday 17 September, BritCham/CBBC held an exceptionally lively CSR forum titled "How to stop your Chinese dream turning into a nightmare". The event was very well attended by nearly 30 members from a diverse range of backgrounds.
 
 
Thanks to Clare Pearson, chair of the CSR forum in China, for holding the forum and providing the following report.
 
Introduction
Clare Pearson made a welcome to the members of the forum explaining that we were going to look at how global markets had shifted to China five years on from the collapse of Lehman Brothers (looking at GE sales in the US versus China between 2002 and 2013 as an example).  
 
The question for the forum was: "What has changed in terms of internal management of companies in China post-Lehman?".  Slide 2 was a picture of the US Trade Consul hosting a banking and NGO forum in his house last week in Beijing. We contrasted this with the UN forum on business in China (in Geneva). We focused on "time and place", e.g. the time and place to fix risk in China is in China in small fora where people can discuss their mounting issues openly.  
 
All CEOs in the room agreed that they no longer had time to travel to the UN for meetings on China. China is moving too quickly and is too risky at present. They need to stay close to the "emperor", i.e. Xi and Li, because no-one knows what is going to happen next and everyone seems to have a friend in prison right now. The new administration is known to be capricious. You have to be ready to bow or explain yourself at one hour's notice. Business trips to the US HQ etc to "fix China" are not viable in the current climate. 
 
Everyone who attended introduced themselves and expressed their key concerns regarding risk.  
 
Presentation 1: Wang Liwei and Clare Pearson on five ways to avoid risk in China
Following an overall summary by Wang, Clare and Wang role-played the five scenarios below from real-life cases and gave case studies which provoked questions.
 
1. Appoint a China expert to the board
They must: 
- live in China
- preferably have had government experience
- not be of the princeling group
 
Without mentioning corporate names Wang talked about the case of JP Morgan of hiring officials' children. He said that this group were less inclined to work hard and more inclined to get involved in drugs/sex scandals. Therefore they could damage your firm's reputation. This is a hot topic in China where the child of two PLA officials is currently up on a group rape charge. Wang advised that companies should focus on ex-civil servants who understood the internal workings of government. In other words, "the police know how to work with the police".  
 
He spoke about the case of Tata. James Zhan, who is the head of Tata in China, acknowledged that he had a government background. He also mentioned the case of British Sugar and Gary Teng. James and Gary both have a good understanding of government because of their previous jobs, but not so much money that they refuse to work and become a social liability.
 
We then presented a no-names comparison between a UK company currently under investigation for price-fixing and Bayer in China. We contrasted board structures and spoke about the UK company's use of outside consultancy and the appointment of Jing Ulrich to the Board on 1 May 2013. Comparing this company with others we stated that part-time advisors were insufficient. To have real teeth, it needs to be one of four key board appointments and speak from China. 
 
Contrasting this company with Bayer we spoke about Michael Konig, who has recently made the Board as the risk advisor for China at Bayer. We showed a picture of him asking questions to Wang at the Baden-Baden China Asia Summit for German CEOs and parliamentarians last year. We stated that he had asked a lot of pertinent questions about how to make risk a key issue at Board level. Subsequent to this meeting I noted that he had been appointed to Bayer's board in the top four executives (2013). He has lived in China and worked for the company for over 13 years. We concluded that you need an insider with country and corporate gravitas to raise issues of risk in China at board level (as opposed to a paid part-time consultant).
 
Then Wang and I role-played a US CEO coming to China and a China manager. I ask him to arrange government and media appointments during a sensitive period. He instead arranges for me to meet two of his friends who pretend to be officials (because the real officials won't meet foreigners at this time - too many people keep being arrested, and for Chinese to meet foreigners at present is too risky lest they be accused of corruption). Wang stated that the Chinese CEO will just cover the "real situation" and take his pay. Instead he needs to be at the Board meeting setting the CEO's schedule ahead of time, taking into account the political situation/local holidays in China.
 
2. How to appoint staff
Foreign companies tend to focus on degrees from abroad and academic backgrounds. Chinese companies focus on practical experience and government connections (even if the candidate lacks a higher degree). Wang did not say which was better. He just outlined the fact that most CVs in China are heavily embellished and may not represent the truth about academic qualifications etc. He also noted that China is less interested in what you know than who you know, especially when it comes to getting people off criminal charges.
 
3. How to manage internally
This area was about the difference in management style between Chinese and foreigners. Wang explained that family are often the safest people to employ (in the Chinese view) because you can at least find them. He said you should never employ a Chinese without knowing who controls them. Equally you should never take on a major supplier without being able to find them. China is big and people frequently disappear. We spoke a lot about "heavy-handed violent enforcement". People gave their own stories about the potential risk of prison or intimidation.
 
Wang and I then role-played a real story about a Singaporean CEO and his Chinese manager. The Singaporean CEO accused the Chinese manager of using his wife's company as the sole supplier of medical equipment. Why had he not gone to competitive tender? It came down to the issue of "control" in person, not by contract. The second issue was over falsifying fapiao (receipts). The Chinese manager had used false fapiao to reduce tax. However, this is legal here as long as you reach the right number. 
 
This role-play aroused strong debate. Ian Stewart (US chair of Wheels plus Wings) wanted to know about regulatory compliance and the thin end of the wedge argument. Then Edward Huang of King & Capital said that "we should all know that when we think of English people we think of the opium wars and that we do not want to accept UK governance". This lead to a very heated debate. Wang added that "foreigners are no longer gods sent from heaven". A heated but good-humoured debate ensued.  
 
Paul Atherley, chairman of Leyshon Resources and executive member of the British Chamber of Commerce in China, provided insight into his imprisonment and kidnapping following an internal dispute. He said you needed to go through these times to understand the consequences of mismanagement. He apologised for the opium wars and we discussed the issue of culture in business.
 
We all agreed that there needed to be more discussion and less litigation to resolve this issue. We noted that in China it is not illegal to employ your wife as the sole supplier. We talked about the cost of losing business time in a fast-moving market. Then everyone chimed in on the rent-hike in Beijing so no-one can afford to disagree any more. You have to negotiate, find a win-win and move on as best you can.
 
4. Meet the media before they meet you
We talked about the "price" of good media in China, and about the "iron-chicken list" of companies that refuse to "drop a feather" or pay their dues when they fly over China. The Government keeps this list and uses it to choose which companies to investigate for fraud, especially after natural disasters. Wang's recommendation was to approach the media before they are sent to investigate you. In the new austerity era, he did not recommend paying for holidays and lavish dinners (government relations 1.0), but instead investing in CSR (government relations 2.0). 
 
He showed the picture of the head of HR of SSP International at a CSR programme we ran for them in Shanghai. The Shanghai media are grilling him when he has just got off the plane from the UK. He has not slept and they are sceptical about why a UK company would fund a programme for rural Chinese children. We then showed the picture of the children looking at the media reports for the SSP programme online. We said that CSR is the best way to win clients, government relations and media wars in China. It is a new topic in China and the focus of the government's 12th Five-Year Plan (to reduce the wealth gap). Also, officials can show up at CSR functions but not banquets in the new austerity era.
 
5. Government relations in the austerity era
As a good example we talked about Andrew Forrest, chairman of Fortescue and one of Australia's richest men and most active philanthropists. He made a sizeable donation to the Chinese government following the Sichuan earthquake in 2008. In 2012 we met him at the China Philanthropy Forum in Beijing where he had funded a speech by Tony Blair. Subsequently he was one of the few business leaders selected to meet Xi Jinping at the Boao Forum in Hainan province in 2013. We have been told by the government (twice) that he is welcome to speak at Charitarian forums. It is very hard to find speakers that are both approved by the Government and understood by the foreigners.  
 
I also spoke about the BMW Forum (for 450 international social entrepreneurs and businesspeople the following weekend in Beijing). Wang was asked to speak but it is difficult for officials to meet foreigners in the current climate. We explained that you have to be very careful who you approach at the moment for CSR as your supposed PR can backfire even if it is for a good cause (in your view).  
 
Presentation 2: Nils Krause, DLA Piper, Hamburg on setting up a global risk department
Nils made a very informative and well-received presentation on how to manage a global risk management programme. Drawing on experience as a corporate lawyer and in the anti-competition body for Germany, he gave great examples of dawn raids against Russian mafia etc. The audience were very interested by his pragmatic and self-explanatory slides.  
 
He gave good examples of centralised and decentralised systems and spoke informatively about the difficulty of growing a risk management system within a family company. The most interesting examples were about the reluctance of family boards to embrace risk. Often they were third-generation owners who felt immune to reality. This resonated with some of the Chinese managers whose companies are controlled by very few people.
 
Nils and Wang attracted so many questions that the Q&A had to continue for two hours after the official end of the meeting.  
 
Conclusion
  • There is a need for more communication within companies to avoid litigation/imprisonment.
  • Cultural differences need to be understood at Board level.
  • There is a thirst in China for expertise on how to take Chinese companies to northern Europe, especially Germany - many questions related to this specific topic.
  • Chinese and foreigners view the world very differently and foreigners need to understand the innate prejudice against them due to historical incident - China is now growing in confidence.
  • Rio Tinto was the end of the honeymoon. Foreign companies are going to have to engage more openly with the Chinese government and media via CSR to build a bridge of trust.

Dr Krause's presentation is attached below.

 

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