Intercedent Insight - April, Corporate Governance Deserves Attention

Companies should review and strengthen the corporate governance practices and procedures of in-China business units, suppliers, partners and representatives.
 
A company and executives who fail to control internal practices may face public censure, fines and imprisonment, an investigation at the corporate level and ultimately will fail in the market. There is no serious prospect of market penetration by relying on facilitation fees in lieu of demonstrating value added and quality of products and service.
 
Management must nip in the bud any potential for bad practices. This short list serves as an aide memoire for what is understood to be a complex undertaking:
 
• Re-issuance and signature of compliance to company’s internal practices guidelines;
• Distribution to local management and sales staff of copies of relevant legislation from the domicile of the parent company such as the Foreign Corrupt Practices Act in the United States, the Corruption of Foreign Public Officials Act in Canada etc.;
• Internal review and tightening of accounting procedures;
• Review of the background, goals of implementation third party distribution and commission agreements;
• Training sessions to enforce anti-corruption compliance messages;
• Inclusion of your company’s ethical guidelines in employer branding messaging and hiring practices.
• Undertaking of an internal audit using Kroll or similar outside service provider.
 
Intercedent predicts that there (1) will be a major push for cleaner government and business after the impending National People’s Congress which is to take place later this month and (2) that international and domestic companies will be treated equally when the campaign launches.
 
These predictions are based on a number of trends. December 26th, 2010 the State Council issued a white paper “China’s Efforts to Combat Corruption and Build a Clean Government.” The Chinese Academy of Social Sciences also released a Blue Book in February that stressed the need for improvement in government transparency.
 
The timing of this whitepaper is best understood in the context of this being the last full year of Hu Jintao’s administration. President Hu’s leadership and interest in improving government oversight dates back to his “8 virtues and 8 shames” campaign.
 
His leadership legacy to the Chinese people and the government will ideally be twofold. First is; increased political and moral awareness of the importance of preventing corruption. Second is; the legal, accounting and supervision changes adopted to eradicate bad practices. These include detailed internal party regulations, further professionalization of procurement process for State funded projects and companies coupled with rigorous implementation at the grass roots level of inspection.
 
With China’s economic performance being largely dependent this year on investment spending on fixed assets and infrastructure, there is in parallel rising concern about how public funds are being spent.   In this regard, in his recent article “China’s Potential Stimulus Hangover”, Pieter Bottelier, former Chief of the World Bank’s resident mission in China, warned that the risks to domestic economic growth included “corruption and nepotism pushing the limits of social tolerance with little warning”.
 
The impact of all anti-corruption work undertaken by the Chinese government, long term, is positive. The majority of foreign companies' internal practices and compliance stipulated by their country of origin already strive to prohibit bribery. Forcing competitors that do not currently comply with anti-corruption laws makes for better market adjudication. The result is a more transparent and even playing field for all.
 
The larger benefit is further de facto restoration of the influence of China’s traditional Legalist’s School or in the western term legalism in society.
 

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