Doing Business and Winning in China - For US Boards

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A short presentation on how best to do business in China, and doing business well.

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Doing Business and Winning in China - For US Boards

  1. 1. +   Doing  Business  and  Winning  in  China   Dr.  Gregg  Li,  Interna0onal  Scholar-­‐in-­‐Residence   University  of  Hawaii  at  Manoa,  Fall  2013  
  2. 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. +   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. +   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. +   5     Understanding  China   “Seeing  is  believing”…Elaine  Ann   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  6. 6. 6   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  7. 7. 7   10/29/13  
  8. 8. 8   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  9. 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. 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
  11. 11. 11   Source:  Booz  Allen  InnovaKon  1000,  2013   Where  is  China?    
  12. 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. 13. +   Doing  Business  in   China   Capitalism  with  Socialist  CharacterisKcs     All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  14. 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. +   15   Winning  in  China   Treading  a  fine  line     All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  16. 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. +   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  
  18. 18. 18 All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  19. 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. 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. 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. 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. +   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. 24. +   Marshaling  Power,   Influence,  Law,  and   Profit   The  Chinese  Board  of   Directors   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  25. 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. 26. Graphical   +  Comparisons   26   (Source:  Bob  Tricker,  2012)   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  27. 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. +   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. +   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  
  30. 30. 30   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  
  31. 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. +   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. +   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. 34. +   Managing  Yourself  in  China     TemptaKon,  CorrupKon,  and  Living  in  China   10/29/13   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   34  
  35. 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. 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
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  38. 38. +   38   n  Mabel  Tsui.  (2010)  "Corporate  Governance  in  China”.  hp://epublicaKons.bond.edu.au/cgej/20   n  Transparency  InternaKonal.  (2012).  CorrupKon  PercepKons  Index  2012  brochure.     n  InternaKonal  Finance  CorporaKon,(2005)  “Step  by  Step  –  Corporate  Governance  Models  in  China”.   Washington,  D.  C.  April  2005.    Page  10.     n  James  Feinerman,  ‘New  Hope  for  Corporate  Governance  in  China’  (2007)  191  The  China  Quarterly    590,   593.   n  hp://www.newsgd.com/business/enterprise/200601240031.htm.    Kelon  ExecuKves  Embezzled  US  $  73   Million.       n  hp://www.chinaknowledge.com/print-­‐media-­‐detail.aspx?ID=36.    RequoKng  an  arKcle  from  Business   Times,  21  June  2005.    CAO’s  Road  to  PerdiKon.     n  Course  enKtled  “Issues  in  Corporate  Governance”,  in  the  capstone  course  of  the  Masters  Degree  in   Corporate  Governance.    Open  University  of  Hong  Kong.  2001.    This  is  a  30-­‐hour  graduate  level  course  with   distance  learning  course  materials.    Took  9  months  to  develop.    This  was  later  revised  in  2008  and  co-­‐ authored  with  Professor  Robert  Tricker  and  Ms.  Jill  So.     n  Li,  Gregg  (2008)“Emerging  Risks  and  PotenFal  SoluFons”.    11th  Annual  Asia-­‐Pacific  Risk  and  Insurance   AssociaKon’s  Annual  Conference.    Taipei.    22  July  2008.   n  Li,  Gregg  (2008)“Top  Ten  Corporate  Governance  Risks  in  China”,  Overseas  Direct  Investment  Premier     Conference  organized  by  Aon.    Beijing.    First  Quarter  2008.     n  Li,  Gregg  (2008)  “The  Zen  of  Corporate  Governance  –  How  Corporate  Governance  is  evolving  in  the  New   China”  Mumbai.    Bombay  Management  InsKtute.  7  Nov  2008.   All  Rights  Reserved.  Dr.  Gregg  Li,  2013   10/29/13  

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