Doing Business and Winning in China - For US Boards
1. +
Doing
Business
and
Winning
in
China
Dr.
Gregg
Li,
Interna0onal
Scholar-‐in-‐Residence
University
of
Hawaii
at
Manoa,
Fall
2013
2. +
A
Journey
Where
is
China
going?
h.p://
connectedchina.reuters.com
A
Journey
with
You
as
the
Explorer!
Picture by Louis Tang
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
3. +
3
Today’s
Discussion
n Understanding
China
n Doing
Business
in
China
–
Capitalism
with
Socialist
CharacterisKcs
n Winning
in
China
n Marshaling
Power,
Influence,
Law,
and
Profit
n Managing
Yourself
against
TemptaKons
in
China
–
CorrupKon
and
Guanxi
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
4. +
4
Where
I
am
coming
from?
n
Conducted
Over
250
visits
into
China
since
1986
n
Pioneered
a
new
mini-‐MBA
with
Fudan
in
Shanghai
in
1990.
n
Started
a
microfinance
co.
in
Chongqing
in
2010.
Introduced
Corporate
Governance
as
an
MBA
subject
into
Tsinghua
in
1991.
n
Sponsored
entrepreneurs
in
Beijing,
Guangzhou,
Shenzhen,
Shanghai,
and
Hong
Kong
since
1990.
n
Started
a
pan
PRD
InnovaKon
Advocacy
in
2013.
Aempted
to
acquire
a
100+
person
consulKng
company
in
2007.
n
n
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
5. +
5
Understanding
China
“Seeing
is
believing”…Elaine
Ann
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
6. 6
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
8. 8
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
9. +
9
Why
Is
China
So
Different…
n
Economy
n
n
Excessive
liquidity
and
potenKal.
China
received
highest
inflows
of
foreign
direct
investment
in
the
first
half
of
2012.
Renminbi
Foreign
Direct
Investment
(RFDI)
$108
billion
USD,
USA
received
$55.5
billion
USD
n
n
The
state
as
a
“hidden”
shareholder
Shadow
banking
and
coming
sub-‐prime
crisis
n
n
The
NaKonal
12th
Five-‐Year
Plan
(2011-‐
2015)
creates
policy
risks
unique
in
a
semi-‐planned
economy
China’s
policy
on
innovaKon
Environment
n
Air
polluKon
reducKon
measures
pushing
up
costs.
n
ConKnual
import
of
non-‐labor
intensive
products
(65%
of
soybean
are
imported).
Food
safety
n
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
10. Top 10 Risks by Region
China 1
Asia/Pacific 2
The World 2
Regulatory Changes
Damage to Reputation
Damage to Reputation
Corruption
Weather/Nat Disaster
Business Interruption
Environmental Risk
Business Interruption
Third Party Liability
Succession/Talent
Market Risk (financial)
Supply Chain Failure
Business Interruption
Third Party Liability
Market Environment
Supply Chain Failure
Environmental Risk
Regulatory changes
Market Risk (Financial)
Market Environment
Talent
Failure of DRP
Succession Planning/Talent
Market Risk (Financial)
Damage to Reputation
Failure of Disaster Recovery Plan
Physical damage
Weather/Nat Disaster
Supply Chain Failure
Failure of Disaster Recovery
Plan, and M&A
Aon’s Global Risk Consulting Best Estimates
2 Aon’s Global Risk Management Survey 2007
1
12. +
12
According
to
the
Booz
Allen
2013
Study…
n
China
saw
a
net
gain
of
15
companies
on
the
list
this
year.
n
In
fact,
since
2008,
the
number
of
Chinese
companies
in
the
Global
InnovaFon
1000
has
risen
from
10
to
75,
and
the
total
amount
spent
on
R&D
by
Chinese
companies
on
the
list
rose
from
$1.7
billion
in
2008
to
$20.5
billion
in
2013.
n
Yet
China’s
increase
in
innovaFon
spending
slowed
considerably
in
2013,
to
35.8
percent—a
li.le
more
than
half
of
its
five-‐year
compound
annualized
growth
rate
of
63.9
percent.
n
That’s
a
reflecFon
of
the
country’s
rate
of
economic
expansion,
which
is
down
considerably
from
recent
years.
Indeed,
no
region
can
be
expected
to
sustain
such
high
growth
rates
over
the
long
term.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
13. +
Doing
Business
in
China
Capitalism
with
Socialist
CharacterisKcs
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
14. +
14
Why
Investors
and
Workers
are
Worried….
China
World’s
80th
most
corrupted
country
(CorrupKons
PercepKons
Index,
2012)
l
Score
39
(0-‐100,
where
0:
highly
corrupt
and
100:
very
clean)
l
1st
place:
Denmark,
Finland
&
New
Zealand
(90/100)
l
Germany
17th
(79/100),
Russia
133rd
(28/100)
l
n
Corrup0ons
and
China’s
Enrons
ChunDu(春都)1998
n Monkey
King(猴王)1999
n ZhengBaiWen(郑百文)1999
n YinGuangXia
(银广夏)
2001
n Guangdong
Kelon
Electrical
Holdings
Co(广东科龙)
2005
n MingSheng
Bank(民生银行)2005
n Bank
of
China(中国银行)2005
n Gome
2010
n Xinhua
Finance
2011
n PetroChina
2013
n
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
15. +
15
Winning
in
China
Treading
a
fine
line
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
16. +
16
Fallacies,
Facts,
and
Half-‐Truths
Fallacies
Half-‐Truths
n
Most
foreign
companies
lose
money
in
China.
n
NegoKaKon
starts
ater
the
contract
is
signed.
n
You
have
to
bribe
people
to
do
real
business
in
China.
n
A
foreign
name
sells.
n
China
is
one
market.
n
n
Not
speaking
Mandarin
is
a
deal
stopper.
Probably
one
of
the
few
countries
where
“FacilitaKon”
payments
will
get
results.
n
Geung
money
out
of
China
is
very
easy.
n
Employ
a
professional
accountant
from
Hong
Kong.
n
A
good
deal
of
data
exist
and
one
can
strategize
based
on
data
crunching.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
17. +
17
Some
Advice
on
Dealing
with
CorrupKon…from
the
Frontline
n
If
it
is
too
good
to
be
true,
it
usually
is.
But
don’t
automaKcally
assume
you
are
“holier
than
thou!”
n
The
Sunshine
Test
n
The
Red
Packet
–
“Give
in
small
amounts”.
n
If
returning
the
cash
is
unlikely,
recognize
the
huge
git
then
share
it
with
everyone
in
the
company.
n
Ask
for
a
git
policy;
if
non-‐existent,
set
one
up
yourself.
n
Watch
the
Mou
Tai!
Don’t
do
a
doggie
bag.
(ICAC
Rules)
n
Be
familiar
with
the
US
Foreign
Corrupt
PracKces
Act
and
the
UK
Bribery
Act,
and
the
local
law
and
pracKces,
as
it
applies
to
your
business.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
19. 19
Survey
carried
out
by
Reuters
Figure
1
According
to
the
survey
carried
out
by
Reuters
in
2011,
96%
of
companies
surveyed,
reported
that
they
had
experienced
fraud
in
China
in
the
past
3
years.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
20. Case
of
PetroChina
Background
26
Aug
2013
27
Aug
2013
Sep
2013
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
20
China's
Ministry
of
Supervision
announced:
The
Vice
President,
Wang
Yongchun
has
been
put
under
formal
invesKgaKon
for
"severe
breaches
of
discipline“
§ Three
addiKonal
senior
execuKves,
Li
Hualin,
Ran
Xinquan,
and
Wang
Daotu
have
been
invesKgated
.
§ Three
of
them
resigned
on
the
same
day
with
‘personal
reason.’
§ PetroChina’s
records
have
been
seized
and
bank
accounts
frozen.
10/29/13
21. Board
structure
Figure
2
PetroChina
Shareholders
MeeKng
21
Supervisory
Commiee
Board
of
Directors
-‐ Total
13
directors
-‐ Including
5
independent
nonexecuKve
directors
Audit
Commiee
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
Investment
&
Development
Commiee
EvaluaKon
&
RemuneraKon
Commiee
Health,
Safety
&
Environment
Commiee
10/29/13
22. 22
Board Structure
Proportion of Independent Directors for year 2010 to 2013
Table 3 Board of directors of PetroChina
ItemTime
2010
2011
2012
2013
Executive Director
3
4
4
3
Non-Executive Directors
6
4
4
3
Independent Director
5
5
5
5
Total
14
13
13
11
35.71%
38.46%
38.46%
45.45%
Independent Directors Proportion
The
preceding
slides
are
courtesy
of
Andy
Ngan
Yu
Loong,
DBA
Candidate
2013
All
22
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
23. +
23
QuesKons
for
Discussion
n
PetroChina
at
one
Kme
was
worth
more
than
Exxon,
and
became
the
most
valuable
company
in
the
world.
If
you
were
an
investor,
you
would
have
been
proud
of
your
investment.
Were
you
an
investor?
n
Why
did
you
sell
your
share?
n
What
could
have
been
done
by
the
authoriKes?
n
On
a
more
personal
level,
let’s
assume
you
were
the
Vice
President
that
got
caught.
And
you
were
given
a
chance
to
redeem
yourself
if
you
can
save
one
of
you
from
ending
the
same
way.
n
What
would
the
Vice
President
say
to
you
a
new
joiner?
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
24. +
Marshaling
Power,
Influence,
Law,
and
Profit
The
Chinese
Board
of
Directors
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
25. +
25
Linkages
between
Ownership
and
The
focus
on
individuals,
their
Behaviors
responsibiliKes,
rights
as
individual
n
n
In
the
past,
the
State
owned
everything
and
everything
eventually
belonged
to
everyone.
n
A
company’s
expenses
could
cover
one’s
family’s
welfare
and
leung
other
members
of
your
clan
to
use
the
company’s
asset
was
generally
acceptable
and
expected.
n
“From
each
according
to
his
abiliKes
and
to
each
according
to
his
needs”,
a
Marxist
Idiom,
was
a
noble
vision
but
prey
inefficient
and
ineffecKve
under
the
new
China.
owners
versus
those
of
the
employees,
began
to
change
slowly.
Individuals’
assets
were
protected
by
law
and
others
without
ownership
could
not
use
those
assets.
Assets
were
no
longer
shared.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
n
InformaKon,
as
a
type
of
asset,
was
slow
to
evolve.
However,
the
lack
of
transparency,
restricKon
on
informaKon
flow,
and
different
speed
of
informaKon
disseminaKon
had
meant
those
who
have
it
would
hold
true
“power”.
n
And
the
Board
of
Directors
nominally
controlled
the
ownership,
disseminaKon,
transparency,
speed;
decision
making
informaKon
from
which
business
decisions
would
depend
upon.
10/29/13
26. Graphical
+
Comparisons
26
(Source:
Bob
Tricker,
2012)
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
27. +
27
Challenges
Currently
n
Party
Involvement
at
the
board
level
(SOEs
and
CSOEs)…weakens
independence.
n
Unaligned
interests
between
majority
(state)
and
minority
(you
and
me).
n
Board
of
Supervisors
is
more
like
an
Advisory
Board
of
an
NGO
and
has
no
power
to
remove
directors.
n
Academics
are
viewed
as
the
“preferred”
independent
directors
(aka
Vase
Director).
n
More
form
than
substance
(before
2013).
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
28. +
28
Relevant
LegislaKons
and
Codes
n
In
2002
a
Code
of
Corporate
Governance
for
listed
companies
was
formulated.
n
A
guidance
note
issued
by
the
required
each
listed
company
to
have
at
least
two
independent
directors
and
by
June
2003
at
least
one
third
of
the
board
should
be
independent
directors.
n
In
2005
CSRC
allowed
listed
companies
to
remunerate
managers
with
shares
and
stock
opKons.
n
In
2006
a
fundamental
review
of
Chinese
Company
Law
was
enacted,
creaKng
two
types
of
limited
company
-‐
the
limited
liability
company
(LLC
private
companies)
and
the
joint
stock
company
(JSC
public
companies),
bringing
the
legal
context
much
in
line
with
the
company
law
of
other
countries.
The
responsibiliKes
of
company
(board)
secretaries
were
established.
Securi0es
Law
Enacted.
n
A
new
Corporate
Bankruptcy
Law
was
enacted
in
2007
which
applied
to
SOEs,
foreign
investment
enterprises
and
domesKc
companies.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
29. +
29
Future
PerspecKves
n
How
can
Chinese
boards
become
even
more
effecKve?
n
How
can
they
recognize
risks?
And
by
doing
so
understand
the
limitaKons
of
risk
management?
n
What
about
innovaKon,
protect
it,
and
nurture
it?
How
can
our
employees
know
the
degree
of
innovaKve
freedom
permissible
by
their
Board
of
Directors?
n
How
can
Chinese
boards
be
more
democraKc,
more
independent,
more
responsible,
and
more
relevant?
n
Moratorium
on
IPOs
since
October
2012
remains;
some
800
cases
backlogged.
Market
perceives
this
freeze
as
(again)
a
measure
to
weed
out
bad
applicaKons
and
prevent
new
shares
from
draining
liquidity
(ACGA
News,
2013)
n
Stronger
acceptance
of
independence,
to
aract
higher
%
investment
from
foreign
mutual
funds
and
insKtuKons.
More
“outside”
directors.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
31. +
Gregg’s
Advice
for
US
Boards
Doing
Business
and
Winning
in
China
10/29/13
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
31
32. +
32
Five
Tips
for
China
Entry
n
Go
with
the
Flow:
Work
with
the
PrioriKes
of
the
Government,
not
against
it.
n
Avoid
JV
at
all
cost:
Go
with
wholly-‐owned
for
control.
n
Understand
and
communicate
the
non-‐nego0ables:
Total
control
is
impossible
and
best
to
idenKfy
what
controls
are
non-‐negoKable.
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
n
Flip
the
Table:
Be
in
a
posiKon
to
create
a
new
power
base,
not
changing
the
status
quo
of
an
exisKng
base.
n
Establish
Plausible
Deniability:
Have
a
robust
architecture
of
risk
management,
including
policies
and
procedures
on
the
handling
of
grievances,
fraud,
corrupKon,
and
statement
of
values.
10/29/13
33. +
33
Summary….and
Some
Unanswered
Q’s
1.
Why
is
China
so
different
from
the
perspecKve
of
the
American
Businesspersons?
How
can
we
appreciate
such
differences?
2.
What
can
we
export
to
China?
China
is
now
a
legiKmate
market
and
have
strong
purchasing
power.
3.
What
are
the
historical
and
current
poliKcal
challenges
between
the
US
and
China?
If
we
can’t
manage
it,
how
can
we
at
least
be
in
tune
with
such
changes?
4.
Where
do
you
need
to
be
in
the
next
3
years
to
ride
this
Super
Tidal
Wave?
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
10/29/13
34. +
Managing
Yourself
in
China
TemptaKon,
CorrupKon,
and
Living
in
China
10/29/13
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
34
35. +
35
Typically
Fatal
Challenges
for
Foreign
Families
The
Deranged
Spouse
Syndrome
All
Rights
Reserved.
Dr.
Gregg
Li,
2013
n
The
Marlon
Brando
Syndrome
in
the
movie
Apocalypse.
n
n
The
Super
Spoil
Brat
Syndrome
10/29/13
36. +
“A ship in harbor is safe – but that is not
what ships are for.”
- John Shedd, 1928.
10/29/13
All Rights Reserved. Dr. Gregg Li, 2013
36
37. +
n
n
n
n
§
37
References
Bai,
C.-‐E.,
Liu,
Q.,
Lu,
J.,
Song,
F.
M.,
&
Zhang,
J.
(2004).
Corporate
governance
and
market
valuaKon
in
China.
Journal
of
ComparaKve
Economics,
vol.
32,
pp.
599-‐616.
Bloomberg
News,
April
22,
2005
“Minsheng
Reports
New
Cases
of
China
Bank
Fraud.”
Case
Studies
of
Corporate
Governance”,
(2005)
Edited
by
Wang
Guo
Cheng.
Economy
and
Management
Publishing
House,
Beijing.
2005.
Pages
103
-‐107.
Chen,
G.,
Firth,
M.,
Gao,
D.
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