"Graft", "Confucianism" and Chinese business

Whilst the fallout from the Mattel recall still reverberates it is worth reminding ourselves about the endemic culture of corruption that pervades Chinese business.

In many senses this is cultural and one should not expect Western values to be so quickly absorbed into mainstream business. With Confucianism putting loyalty to friends first it is no surprise to see an element of "capture" taking place within firms. It is fascinating to read how businesses are being advised to hire geographically dispersed workers to prevent such behaviour.

Dirty dealing [Economist]

THE announcement on July 26th that Chen Liangyu is to be prosecuted for corruption came as little surprise. The former chief of the Communist Party in Shanghai had been the subject of a well-publicised investigation since a 3 billion yuan ($390m) hole was found in the city's pension fund last year. Mr Chen's is the highest-profile corruption case for a decade, and although his prosecution is suspected of having political motivations too, it is a signal that the government is serious about clamping down on corruption.

This week several top media officials in Guangzhou were arrested for allegedly selling advertising slots privately. The stockmarket has also suffered from a rash of dodgy dealing, with 11 firms blacklisted and almost 300 people penalised in the past six months for activities including publishing fake company reports and false auditing. Every week, it seems, the local press has stories about people who have illicitly squirrelled away huge sums.

The fact that these crimes are now reported is itself a step forward. As in many countries the mentality of graft is deeply ingrained in China. But Chinese graft has particular characteristics: the dishonesty often takes place at very senior levels and frequently involves groups rather than individuals. There were more than 20 people involved in Shanghai's pensions scandal, and ten in this week's media case.

Within businesses, the most likely areas for graft are the purchasing or finance departments, where staff are given kickbacks from suppliers, or the personnel department, where employees are bribed to arrange interviews or jobs. The problem has become so bad that many foreign executives claim to be “overwhelmed by the business of kickbacks,” says Stephan Rothlin of the Centre for International Business Ethics (CIBE) in Beijing.

But he says it is a mistake simply to translate or impose Western ethical standards. Although much of the corruption is driven by greed, it is also the result of a different set of beliefs. Confucianism puts loyalty to family and friends first. Then comes “face”, and finally compliance with the law. Even then, the law is seen as malleable rather than absolute. Mr Rothlin argues that foreign firms need to strike a balance between imposing their own ethical codes and understanding the local culture.

It is even harder to deal with lower-level shadiness, such as a secretary booking a flight for her boss and then getting a payment from the travel agent, or a receptionist getting paid to refer new enquiries to a rival firm. Such cases usually involve relatively small sums and are often regarded as a socially acceptable way for employees to prepare for retirement or keep up with the spending of their peers.

Dane Chamorro, the regional manager for China at Control Risks, a consultancy, says the law against commercial corruption is rarely enforced—and when it is, prosecutions usually have additional motives. He suggests that foreign firms start their operations from scratch and impose their ethical standards from day one. They also need to avoid hiring “tribes”—groups of workers from the same region, or who speak the same dialect. Such groups are known to move systematically between businesses, especially foreign ones. Training is important too, as are regular audits.

But even though there is a growing push for a clampdown, the resistance to change is strong. Fu ze ren bu zai, “the man with the key is not here”, is a common way of asking for a bribe. Alas, the man with the key to solving China's corruption problem is nowhere to be found, either.