China’s Corporate Crackdown

BEIJING – Multinational corporations are under siege in China. In recent months, the government has leveled a series of allegations of corporate misconduct – ranging from food-product contamination to price rigging, bribery, and environmental shortfalls – against foreign-owned companies, with important implications for the development of China’s business environment.

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?

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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.