AUSTRALIAN COMPANIES expanding into China are ignoring potential integrity risks amid the rush to enter the new market, according to a local risk expert based in China.
While China’s economic and business environment has been rapidly liberalising in recent years, governance and ethics in business have not necessarily kept pace. Indeed, according to Transparency International, China, despite having ratified the United Nations Convention against Corruption, is perceived as one of the worst kickback payers globally.
“You see a lot of companies going into business with very much a ‘ready, fire, aim’ business plan where they really just want to get into China and get set-up quite quickly for the first-mover advantage,” said Nick Robinson, head of Deloitte’s China Forensic practice.
“With that approach some of the risks are overlooked. Obviously, they’ll do diligence on the commercial and financial side, but often some of the integrity aspects of that are missed. Really the key to managing the integrity risk in China is to look at the people with whom you’re doing business and look at the relationships with them and really try and understand who they are.”
Historically, bribe paying and kickbacks have been an accepted part of doing business in some countries, but increasingly, international companies are looking to exact their own standards on Chinese operations.
“There is one school of thought that says the only way to do business is through the sort of unethical or corrupt themes in a lot of these jurisdictions,” Robinson said.
“I suggest it is not because your reputation damage comes straight back to your home base and really, if you go back to the previous comment about shareholder and stakeholder acceptance of this type of activity and the damage to the reputation and the financial damage that causes, the tolerance is getting less and less for it. To go into somebody’s country with a zero tolerance approach to those types of issues is, I think, getting a lot more acceptable.”
The corruption risks are increasing, Robinson added, due to changes in Chinese working practices associated with the booming economic growth.
“Historically, if you look at the loyalty contract between employer and employee where perhaps 20 to 30 years ago somebody went to work for one company and stayed working for them and then was looked after,” he said.
“You’re seeing an erosion of that in the past decade or 15 years when people are very much working for themselves. Then including that with things like a rationalisation around corruption and unethical behaviour and then maybe an availability of cash as well, it makes for a higher risk environment.”
Chris Phillips, NSW lead partner at Deloitte Forensic, said there were numerous examples of Australian companies that have fallen foul of ethics risk in China.
“We have worked with an Australian business that’s been really forced to work with China because of the cost benefit and has gone into a joint venture relationship with some Chinese business people,” he said.
“Now the Chinese have decided, for whatever reason, to basically take that business into an alternative factory and, for all intents and purposes, steal that business. That leaves the Australian in a joint venture party in a pretty difficult situation. It’s potentially being taken from under their eyes. You don’t necessarily have confidence in the system up there that you have in Australia to provide some kind of either civil or criminal remedy.”