The quality of corporate governance in affiliates is critical to the effective- ness of a company’s anticorruption strategy, particularly in the common case of minority joint ventures. This is an obvious concern for a large oil, mining, or utilities corporation (see chapter 4 and case studies in part II for specific examples), but it is also a challenge for companies with intra- Asian investments, especially if their headquarters are in countries with little or no corruption. As a Singaporean businessperson observed, it is important “to continually push the limits” but at the same time to be real- istic about the prospects for improvement, especially when the prevalent business culture does not traditionally rely on codified ethics and gover- nance standards.
Finally, listed companies experience more pressure to adopt sound internal systems. Increasingly, corporate governance–related codes and guidelines applicable to listed companies in emerging economies refer to compliance systems or, more generally, to business ethics (box 5.7).
features of the countries in which the company operates. Hence the strenuous efforts made by many companies to involve a broad range of employees in the formulation of their ethics codes, not just to train them in the application of the codes.
To highlight some of the cultural issues companies face in East Asia Pacific, this section looks at the widespread practice of guanxi (more fully described in part II) and explains how companies, Western ones included, are adapting to it and using it.
Guanxi relationships link millions of Chinese firms throughout the region in a social and business network. Guanxi has been described as an
“I scratch your back, you scratch mine” type of give-and-take, but it is also akin to a two-way line of credit, to be drawn on in time of need. No formal account of a person’s “indebtedness” is maintained, but guanxi ties are considered binding. Someone who fails to return an obligation risks loss of face, personally and for the members of his or her network.
Since guanxi networks often comprise generations of family members, the social pressure to deliver on guanxi commitments—and avoid family embarrassment—can be intense. Maintaining face, or mianzi, for oneself and one’s family is important because a person must possess a certain amount of personal prestige to be considered trustworthy, which in turn is the basis for cultivating and maintaining guanxi.
Box 5.7. Compliance and Ethics in Corporate Governance Guidelines in EAP
The Pacific Economic Cooperation Council (PECC) is a nongovern- mental economic advisory body to Asia-Pacific Economic Cooperation (APEC) that brings together businesses, public organizations, and aca- demic experts from APEC countries. In 2002 PECC issued corporate governance guidelines that adapted the OECD guidelines to better take into account some typically East Asian features such as the con- centration of ownership under family control. Among the nine mis- sions cited for corporate boards is “ensuring ethical behavior and compliance with laws and regulations.” PECC also recommends that boards approve a code of ethics and monitor compliance with the code.
In April 2002 the Philippines Securities and Exchange Commission issued a code of corporate governance for listed companies. The code does not explicitly refer to a program of ethics, but it does promote strong oversight, by a corporate board and the board’s audit commit- tee, of the internal control mechanism and environment, as well as of the company’s compliance.
Studies have shown that companies gain a competitive edge by build- ing and maintaining a strong guanxi network. Guanxi helps individuals and companies to:
• Mitigate external political and socioeconomic risk
• Navigate opaque bureaucracies
• Cope with absence of rule of law
• Access reliable information, resources, and infrastructure and predict market changes
• Recruit trustworthy employees.
The prevalence of guanxi raises several business conduct concerns.
Although Chinese culture draws a sharp distinction between guanxi and illegal corruption, the prevalence of guanxi can help create the conditions in which corruption can take root. Chinese businesspeople naturally wish to work with those they know and trust—which is all the more under- standable, given the difficult and (outside China) often hostile conditions in which Chinese businesses operate—but this preference can lead to cronyism and nepotism. Whistle-blowing and transparency are only slowly accepted in environments influenced by the guanxi tradition.
Chinese society believes that guanxi should operate in compliance with the laws and within a legal framework. Engaging in misconduct for personal benefit not only results in a loss of face for the individual but also brings shame to the group or network. In this respect, guanxi acts to discourage improper behavior.
Yet the fact that a trusted individual can hold a tremendous amount of discretionary power with little oversight creates an environment con- ducive to misconduct. When an individual engages in wrongdoing not for self-enrichment but for the ostensible benefit of the company, the link between guanxi and misconduct becomes more complex. And by dis- couraging whistle-blowing, guanxi lessens the likelihood that illegal behavior will receive public attention.
As China strives to comply with international business norms and compete globally, the guanxi practices of Chinese firms and the behavior of their foreign counterparts are becoming less distinct. With the spread of internal and external monitoring and enforcement of policies, the pro- fessionalization of management, increased transparency of laws and reg- ulations, and increased use of (and faith in) legal contracts, many of the environmental factors that enable guanxi to facilitate misconduct are eroding.
Whereas in the past guanxi was essential at every point in a transac- tion, this is no longer the case in China today. Procedures, laws, and reg- ulations have become more standardized and conform more closely to
international norms. Most important, there has been a distinct evolution away from the “gentlemen’s handshake” and toward contracts as an accepted means of making business commitments.
Both Chinese and Western firms are taking a new, strategic, more flex- ible approach to guanxi. They increasingly recognize the value of guanxi with other firms and stakeholder groups, not just with government offi- cials. And they are making efforts to transfer the personal guanxi of employees to the firm level.
In China today, Chinese and successful foreign firms share similar atti- tudes toward guanxi. Both see guanxi first and foremost as a competitive advantage. Neither would shy away from hiring an individual based solely on the value of the guanxi he or she brings to the firm. Both some- times grapple with the business conduct issues that result from improper use of guanxi, just as they also actively seek to capitalize on the benefits and efficiencies to be derived from it.
Notes
1. As explained in chapter 3, the SEC was the first regulator to promote a company system as part of good corporate governance, and it was instru- mental in the passage of the Foreign Corrupt Practices Act. Section 30A of the Securities Act of 1934 explicitly makes foreign bribery a breach of the securities law but also suggests the implementation of a compliance sys- tem by the issuers.
2. According to experts, the law has had visible results for large corpora- tions. Dissemination of best practices has been slower among small and medium-size enterprises, which contribute a bigger share of output in Italy than in any other industrial economy.
3. The International Monetary Fund (IMF), the OECD, and the World Bank are sponsoring Reports on the Observance of Standards and Codes (ROSCs). ROSCs are country-specific. They target a given component of the financial and corporate infrastructure and benchmark it against inter- national standards and practices. One series of ROSCs looks in great detail at accounting and auditing practices, while others concentrate on corporate governance of listed companies. Accounting and auditing ROSCs are available for some Asian countries, including the Philippines and Thailand, at <www.worldbank.org/ifa>.
4. The protection of minority shareholders and shareholder activism have had an unexpected downside. There is anecdotal evidence that in some countries listed companies have been blackmailed for illegal
payments by individual shareholders in exchange for those individuals’
not making an abusive use of shareholder rights. One of the Japanese companies in the sample set up its code of ethics after it was found that shareholders’ meetings were controlled by organized crime groups that extorted the management. This is apparently a real concern in a few emerging markets in Asia (the case of the Philippines has been men- tioned to the authors) and also in the recent past in European countries such as Italy.
8 3
Firms that espouse ethical business standards can help spread these stan- dards by raising their expectations for ethical behavior among their employees and business partners and by codifying and exchanging good practices. A company’s ethics program is, first of all, a matter of individ- ual choice and commitment. But to develop sound tools, a company needs to access appropriate resources and to assess itself against bench- marks provided by the experience of others.
This chapter examines the activities being pursued to disseminate good practices in compliance and ethics in the region and the initiatives being taken, beyond the firm level, to help improve corporate ethics.
Such efforts are being made in the private sector but also in the context of private-public partnerships. (A list of relevant Websites is given in appendix D.)
The following inventory (as of late 2002) demonstrates that not only is there a wealth of initiatives in East Asian countries or relevant for East Asia but also that this is a fast-moving area. There are many possible vec- tors of dissemination, depending on the partnerships involved. The con- tent of the resources available is very diverse: while large international corporations are looking for increasingly sophisticated benchmarking tools (discussed in some detail here), other programs that focus on values and awareness of the issues target a larger audience of smaller firms, agents, and other players such as the media.