Does
the government’s recent behavior reflect a commitment to strengthening
business ethics, marking the start of a long-overdue regulatory catch-up
process? Or is it intended merely to create a convenient populist
distraction from China’s current economic woes? Or are these revelations
of often long-known corporate misdemeanors part of a complex power play
involving competing Chinese interests?
The
answer probably is a combination of these factors. But, whatever the
motivation, the message is clear: the age of irresponsible business in
China is over.
The
authorities’ new regulatory activism is late in coming, but it will
ultimately benefit Chinese consumers and firms. The targeting of
multinationals – which have long received preferential treatment,
including subsidies and regulatory incentives, while profiteering from
Chinese consumers’ distrust of locally made products’ quality and safety
– portends the creation of a more level playing field. Given that
booming sales of imported baby-food products have exemplified the
problem of profiteering, the $100 million in fines recently incurred by a
half-dozen international baby-formula producers over food-safety issues
sent a particularly strong message.
Hardly
a day goes by without China’s government thrusting another global brand
into the limelight. Last month, China’s environment ministry rejected
an application from BMW Brilliance, the German carmaker’s Chinese joint
venture, to expand one of its plants, citing inadequate waste-water
analysis and failure to meet official pollution-reduction targets. Less
than a week later, an electrical fault forced the company to recall more
than 140,000 vehicles, further undermining BMW’s long-standing
reputation for high production standards and sterling environmental
credentials.
Similarly,
Apple – a company famed for its customer-oriented approach – recently
came under fire from state-backed media for offering sub-standard iPhone
warranty services in China. And the British pharmaceutical giant
GlaxoSmithKline, long positioned as a beacon of virtue in a sector known
for its ethically dubious behavior, has been accused of bribery, tax
fraud, price fixing, and improper research practices.
To
be sure, not only multinationals are being caught out – and Chinese
business leaders often face far more serious punishments. Li Peiyang,
the head of a state-owned firm that controls several airports, and Zeng
Chengjie, a prominent real-estate developer, are just two of the Chinese
executives who have been executed in recent years for white-collar
crimes such as fraud, bribery, and embezzlement, none of which caused
death or injury. But, considering that Transparency International ranked
China 80th out of 176 countries in its 2012 Corruption Perceptions Index, the conviction rate among Chinese businesspeople and public officials remains disproportionately low.
Multinationals
are certainly not blameless victims: many of the accusations leveled
against them have proved to be true. But the timing and type of
allegations against multinationals have so effectively damaged their
brands that one might ask whether there is a deeper logic to the
government’s actions. Exposing foreigners’ ethical failings and ruthless
business practices sends the message that China must remain vigilant,
while reinforcing the legitimacy of a powerful, interventionist state,
including state-owned enterprises, which have come under increasing fire
in recent years.
Multinationals
are enmeshed in China’s complex political economy – and entangled in
the patronage system that underpins it. Credible, responsible business
practices are becoming increasingly important rules of the game, as
citizens use tools like social media to challenge their leaders to take
action against hazardous products.
This
shift is reflected in the proliferation of rankings, indexes, and
high-profile awards. Following international practice, companies are
responding with advertising campaigns, strategic philanthropy, public
sustainability reporting, and even stakeholder dialogues.
But
China’s “corporate responsibility” agenda is shaped more by national
interests than by principled notions of the public good. In this
environment, adopting business practices that advance China’s interests
is essential for companies to secure official support, public trust,
and, ultimately, continued access to the world’s largest consumer
market.
Today,
high-profile philanthropy counts for little, while demonstrable
environmental compliance, previously less important, is essential.
Technology-rich companies are expected to pursue continuous technology
transfer and, increasingly, to localize their research and development
capacity. At the same time, firms must work diligently to uphold ethical
practices in a corruption-riddled system in which state actors are
often would-be partners in crime.
A
new era of corporate responsibility has begun in China, and not a
moment too soon. As with other aspects of China’s transformation, it
draws pragmatically on international practice, but is defined by its
Chinese characteristics. Global business leaders should take note.
