Leaders Face Ethical Land Mines in China

By Ed Frauenheim

Mar. 26, 2007

Navigating the terrain of business ethics is tricky for leaders in China.

    Senior managers of multinationals in the country are confronted on the one hand with a commercial climate that remains very different from that of the West. Favors are expected. Agreements are more likely to change if a better offer comes along. Personal connections, including ties to government officials, can carry immense clout. The political system violates basic human rights.

    All the while, leaders of China operations are told by corporate headquarters to hold fast to business codes that typically frown on even the appearance of conflicts of interest or corruption.

    It amounts to a situation where executives in China easily can slip and find themselves either unsuccessful in China or stuck in a globally publicized scandal.

    The roots of the ethics challenge can be seen in classic texts of the East and West, says Janet Carmosky, CEO of consulting firm China Prospects. Whereas China’s Book of Changes emphasizes constant change and the balance of forces that are not inherently good nor evil, the Western Bible describes a clear distinction between right and wrong and suggests all things have a beginning, middle and end, she argues. The conflict helps explain why in China intellectual property rights frequently aren’t respected, and company officials are more likely to break contracts, says Carmosky, who spent nearly 20 years working in China.

    “The Chinese live to maximize opportunity,” Carmosky says. “We in America place a very high value on committing and seeing something through.”

    Frank Gallo, president of Calypso Consulting, has witnessed the tensions both firsthand and as an executive coach. Gallo served for 3½ years as head of China, Hong Kong and Taiwan operations for human resources consulting firm Watson Wyatt earlier this decade. It was common, he says, for officials at Chinese domestic firms to request kickbacks in exchange for selecting Watson Wyatt’s services. “People asked for graft all the time,” Gallo recalls. “We never did it.”

    Now semi-retired, Gallo acts as an executive coach for leaders at multinational firms in China. One of the people he coached faced the dilemma of a local newspaper planning to write a story critical of the executive’s company. A lower-level company official proposed paying the newspaper about $700 in exchange for favorable coverage. The executive agreed, and the newspaper wrote a glowing story, Gallo says. But that decision did not sit well with company higher-ups, who severely reprimanded the executive and did not renew his contract a few months later, Gallo says.

    Such unethical action in China can have greater ramifications than it used to at U.S. headquarters, thanks to tighter rules on corporate disclosures under the Sarbanes-Oxley Act, Gallo says. “Your boss can get fired for this,” he says.

    A case can be made that business ethics are in the spotlight like never before in China. Chinese authorities have been cracking down on corruption. This led to the sacking of a major Communist Party leader in Shanghai last year. Meanwhile, multinationals conduct ethics training in China.

    Edward Tai, vice president of Hyatt International Hotels and Resorts for China and Taiwan, says experience helps him avoid ethics land mines. A Chinese native who has been with Hyatt since 1973, Tai also shares his wisdom with the leadership team of Hyatt’s six current hotels in China.

    Some things that might seem inappropriate in the West make sense in China, Tai says. He has been willing to give jobs to relatives of hotel owner-investors as a gesture of goodwill, provided they are not key positions. There is “plenty of gray” he says. “Doing business in China is not as simple as many people think.”

Ed Frauenheim is a former Associate Editorial Director at Human Capital Media and currently works as Senior Director of Content at Great Place to Work. He is a co-author of A Great Place to Work For All.

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