Are you still hiring a compliance manager to solve your China problems?

Following the emergence of a series of high profile government investigations on the multinational companies in China such as on the GlaxoSmithKline with the bribery accusations in 2013, we have constantly seen foreign companies, big or small, whatever sector they are in, wherever they are from, busy with one “important” mission: make themselves fully compliant in China.

In my working with companies I have heard stories that a multinational pharmaceutical firm flew the global compliance head to China and tour their offices and plants nationwide to make sure every single business unit was “compliant”. Meanwhile, major foreign chambers of commerce organized intensive workshops and seminars to invite experts to discuss the compliance issues and share experiences.

However what actually happened in the China market in the last couple years was that the momentum on foreign companies was only escalating as many big names were hit on various fronts.

That makes us come back to one fundamental question: Is compliance the core, fundamental issue here?

The answer is no. It is not. At least it is not the one that will help the companies solve their China problems.

Actually most foreign companies, if not all, have been pioneering and in the absolutely leading position in both the mindset and implementation in complying to rules and regulations in China, as shown in a national level survey done in 2014.

The compliance concept started in the Western world in the 1990s. The UK Bribery Act came into force in July 2011 and the US has similar laws governing international anti-corruption enforcement. In contrast, the word “compliance” (合规) was only made known to the Chinese people since a few years ago.

Very interestingly in 2011 we saw the recruitment of a compliance manager by Apple in China made it to the news on Sina’s technology news section, (See figure below) indicating how fresh the idea of compliance was to the local business community. However as mentioned previously such advanced concept and doing didn’t seem to be so effective as to save the likes of #Apple or any IT or pharmaceutical giants in China from many troubles with the regulators.

So, if not for compliance, what could have gone wrong?

The answer – let me reiterate, for China - lies in some more critical issues: human resources, communications including internal communications, and government relations.

All in all, compliance is a matter of relationship, not a technical thing. Like in that piece of job description for the Apple role, it requires the technically-tasked compliance manager to “manage government relations, legal, and regulatory movement”. It simply got it all wrong.

One would argue that the compliance managers do need to work closely with the government relations and corporate communication functions. But the key question is: compliance can not solve the problems in human resources, communications, and government relations – all of which would cause compliance issues.

So why human resources (and internal communications)? In some of the high profile cases in recent years we have seen from news coverage that it is not rare that some cases sarcastically originated from the companies concerned themselves, not the authorities. There could be unhappy employees or former employees who might feel being treated unfairly and then reported the company’s “misconduct” to the authorities.

Compliance issues in nature are not new. However, imagine in early 1990s when FDIs were welcomed in China almost blindly and the young Chinese started to “go to the sea” (meaning jump out of the government system and explore in the commercial world), it was almost impossible for such “non-compliant” situations to take momentum. This is also why it is a wise move for GSK to improve its local sales teams’ benefit as part of the remedial measures after the then-record fine of US$489 million.

Why communications and government relations? After experiencing three decades of reforms and freer market, foreign executives tend to think they know China very well as they got to know the people and even speak the local language. But in case of major corporate crises like the ones we've seen in recent years, foreign companies tended to seek legal help as the “first aid” to defend them and find proof on how much they have contributed to this market. However, over decades what foreign companies have done most through the Western style public relations was to claim how important China market means to them, only to be interpreted by how many billion dollars they have made from the local consumers. That is why, during another high profile antitrust investigation, a ranking official can openly criticize a company like Qualcomm at the Summer Davos by telling the company’s boss: you made too much money and hurt the Chinese consumers – you crossed the bottomline.

And if we look back again at those high-profile investigations in the last two years, they were not launched by certain authorities but a truly all-round campaign: from the foreign trade ministry to the state planning body, and from the consumer association to the most recent industrial and commerce one regarding new advertising rules.

While the Chinese government’s anti-corruption campaign deepens and new regulatory environment is still taking shape, foreign companies are mulling their options, although pulling out from China is not the choice for most of them. Indeed, the cost of compliance is high and it adds to the once “cheap” China market – being compliant in China by a global standard could mean much higher labour cost and perhaps less customers.

As such, it is the most critical time of all to re-think about their understanding of the market landscape, have a thorough “body check” of what their China operations are experiencing, and undergo an overhaul of the company’s corporate image and its decades-old corporate messages.