McCampbell's Global

Start here

Target’s Canada Pull-Out: The Lessons of Assumption and Adaptation

By Duncan J. McCampbell

January 16, 2015

The apparent causes of Target’s failure in Canada are well documented. They went in too big, too fast. Unresolved supply chain issues led to empty shelves. Add poor site selection, some poor store designs and questionable merchandising and, well, you have the makings of a case study that will be discussed in my International Business classes for years to come.

Target’s Canada experience is particularly useful to me as a teaching tool because Canada seems, well, so similar to the U.S.  Yet it’s hidden surprises led a very successful U.S. company to suffer a $2 billion market entry loss.

I would like to see companies—particularly American companies—stop making the same, very avoidable and often rather spectacular, foreign market entry mistakes. Such mistakes—along with a few notable successes, provide a fascinating and dramatic backdrop for my upcoming book on corporate globalization entitled The Four Dimensions of Global Business.

I am not writing this to say ‘I told you so’ to Target. I might have made some of the same decisions and indulged in many of the same assumptions. It’s not harmful to have assumptions—we all do. What’s important is (1) knowing that you have assumptions; and then (2) what you do about your assumptions when they are proven false.

The Target Canada failure hits very close to home.

I know nearly a hundred current and former Target employees-many of whom were my best students. The Minneapolis campus of Metropolitan State University, where I currently lead the International Business program, is a mere three blocks from Target’s world headquarters.

Target’s Canada failure also feels a lot like a failure I experienced first-hand: Thomson’s smaller, but no less humiliating withdrawal from Germany in 2003.

Thomson swaggered into Germany in 2000 burdened with all of the assumptions that can come from long, seemingly effortless success in much larger, very different markets. Thomson needed to do some things in Germany—like make an anchoring acquisition the “German way”—that was just a bridge too far for that very Anglo-American company. In short, Thomson couldn’t adapt.

But wait, you say, that’s Germany. Can’t a Minnesota company be forgiven for assuming some things about Canada? They speak English, play a lot of hockey and drive Chevrolets. Don’t we share the world’s longest unfortified border?

But, you see, that’s just the point. It is one thing to believe (and then be relatively unsurprised when proven wrong later) that everything you do successfully here in the U.S. will also work a “very” foreign market—say China. You are prepared for surprises because the language, culture—everything—is so different.

But when the surprises happen (as they always will) in a market that seems so similar . . .

Today I quote the famous Prussian military strategist, Moltke the Elder, for a point that every internationally expanding company (even those eying “easy” Canada) should pound into its senior leaders:

“No plan of operations extends with any certainty beyond the first contact with the [enemy].”

Of course, you need a plan to go to battle. But winning the battle once it starts isn’t about how well you planned. It is all about how quickly you learn and adapt once the battle is joined.

So, my friends, go ahead and do your market entry research. Nurture and defend your fondest assumptions. Have your clever MBA’s build more of those fabulous ppt. decks that always impress and comfort the CEO.

But remember that when the first bullet is fired–when your in-country people actually enter the market–they will get kicked around. They will come back to the HQ bruised and bleeding to tell you things that you don’t want to hear because they shatter cherished assumptions and demand rapid, sometimes radical changes in plan. If the company can’t make those critical battlefield adjustments, then it’s just a matter of time (and money) before it’s all over.

Trans Flats and Other Oddities: China’s Evolving Property and Banking Systems

China is making a slow, cautious move from a state-managed production economy to a more consumer-driven economy, fueled by the as-yet restrained purchasing power of the world’s largest and fastest growing middle class.

While China is often able to do things at blinding speed, the change to a market economy must be done carefully to avoid major economic—even political–destabilization. Here are a couple areas of reform that, because of their potential impact on the global economy, as well as millions of Chinese, warrant regular scrutiny.

photo (1)

If you want to get an idea of the strange state of Chinese residential real estate, just look at the picture. This is an apartment building in one of China’s statistically invisible third-tier cities.  Sitting side-by-side with occupied units, are vacant units–windowless, transparent voids have never been finished; most never will be. I call them “trans flats” because they sometimes allow you see right through an apartment tower. And like their unhealthy namesake, they have a sclerotic effect on the Chinese residential real estate market.

You won’t see these unfinished properties in Beijing or Shanghai, which is the worrying part. They are common in both new and old apartment complexes across the second and third-tier cities of China–the cities that the Chinese government is hoping will absorb the millions of people who are moving off the land in China’s urbanization program.  What’s the problem?  Well, the market isn’t functioning properly because these units actually aren’t technically vacant.

Let me explain.

While this building sits 50 percent uncompleted towards the end of its useful life, a block or two away, a brand new apartment building springs up, only to face a similar fate.

This is because most of the unfinished units aren’t unsold. They are owned by non-resident investors, often the very government officials who helped the developers secure the land and construction loans. These investors buy them—sometimes a lot of them–at discounts and hold them in their unfinished state as speculative investments. Steadily rising property prices over the last twenty years have made these among the safest places for the connected few to put their money.

Cavities of waste, they symbolize the decay caused by China’s sugary, GDP-at-any-cost diet, where real estate development was one of the only ways for local governments to raise revenue and achieve growth targets. But like a clogged artery, these properties take price-moderating capacity out of circulation–at a time when the Chinese government is trying to do two economically inconsistent things: keep the property bubble from bursting and creating a banking crisis, while meeting the affordable housing needs of a rapidly urbanizing population.

Necessary reform in the residential real estate sector is going to take another decade and will be intertwined with two other reforms that wait impatiently in the wings: (1) reform to the residential registration system (Hukou) which ties a citizen’s education and health benefits to their registered place of residence; and (2) rural land ownership reform, which will help China’s inefficient, under-mechanized, subsistence-driven agricultural sector become more productive.

Banking and Investment Reform

The Chinese are the world’s greatest savers. But the average Chinese citizen doesn’t have many legitimate options for putting those savings to work. There is no such thing as a 401(k) in China. State pensions pay little more than survival stipends. The few investment opportunities open to the average Chinese citizen are either very wimpy or very risky and possibly illegal.

If you are an average Chines citizen, you should think hard before investing in the Chinese stock market. The Shanghai exchange—recent gains notwithstanding—has developed a well-deserved reputation for being little more than a casino. Lax regulation and China’s inadequate corporate accounting standards mean that only insiders know what is really happening in many Shanghai listed companies. You can also forget about buying shares traded in more stable, more rational foreign stock markets. Chinese law prohibits that.

Deposit your savings in a Chinese bank account and you will earn a money-losing interest rate that doesn’t keep pace with anything. There is a reason for that. For the last 30 years or so, big Chinese banks (which are all state owned) have used a total lack of competition and the essentially free liquidity of citizen deposits to make often questionable loans to developers, local governments, and big state owned enterprises (SOE’s), many of which are now non-performing.

That China’s largest banks have huge bad loan exposure is well known, but because of China’s opaque financial reporting regulations, no one knows just how huge those liabilities are. Likewise, no one knows whether the government will make good on deposits if the banks fail. Sensing this lack of confidence and the impact it could have on bank liquidity, the government recently announced a proposed scheme to guarantee deposits.

Limited investment options lead millions of Chinese to participate in the “shadow banking” sector, a frighteningly unregulated, very Chinese sort of private equity space that tends to promise, and sometimes even deliver, unnaturally high investment returns. According to an estimate published in The Economist, at least 30 trillion yuan ($4.9 trillion), or more than 50% of Chinese GDP is invested in shadow banking products. The government is constantly playing regulatory whack-a-mole in a futile attempt to rein in the shadow bankers, who always manage to stay a step or two ahead.

http://www.economist.com/news/finance-and-economics/21615625-chinas-shape-shifting-shadow-banks-evolve-once-more-moving-targets

Market reforms in China should include the development of a normally functioning retail financial services industry with regulated (and taxed) investment products.

The Real Story Behind Falling Oil Prices–The Saudis Whack Iran and Russia

By Duncan McCampbell

December 17, 2014–Recent analysis about the rapid drop in crude oil prices depicts the Saudis in a market share battle with the frackers of North Dakota and Texas. Underlying it all is a false assumption—that Saudi Arabia, the world’s largest oil exporter and the strongest voice in OPEC, is acting merely to restore its position in the U.S. market.

“One theory for why OPEC is allowing prices to fall is that the cartel (and particularly Saudi Arabia — it’s largest member) is attempting to fight off competition from US shale oil and maintain its share of the US market. Keeping prices below $100 a barrel will put pressure on higher cost US shale producers and will prevent further erosion of OPEC’s position in the Americas.”

http://www.businessinsider.com/opec-votes-not-to-cut-production-oil-prices-plummet-2014-11#ixzz3M9a8INod

I disagree with the conventional wisdom.  Yes, falling oil prices will slow U.S. exploration in marginal or expensive areas (including deep water and the arctic) and take some lower producing fracking wells off line.  But due to improvements in production technology most U.S. shale oil is still profitable at $60 a barrel.  Wails of pain will issue from sectors of the U.S. economy which have placed bets on continued high oil prices.  Too bad.

Here is the new normal: the U.S. now produces more crude oil per day than any other country in the world.  This isn’t the sour, sulphurous sludge that oozes into Gulf Coast refineries from Venezuela and Mexico.  Much of America’s new oil is the light, sweet, easy to refine stuff that comes from North Dakota’s Baaken formation.  This oil has put the U.S. well on its way to oil independence. The Saudis know it.  I don’t think they’re trying to claw back share in a market they know they’ve already lost.

No, I think the Saudis very much want oil prices to crater—but for strategic reasons. They needed to wait until the U.S. produced enough oil to make their price play stick.  The Saudis can afford to wait out a period of low oil prices.  They are sitting comfortably on foreign exchange savings of about $757 billion (the stolid Norwegians have squirrelled away $800 billion of their North Sea oil revenue).  And the Saudis are relishing every minute of the economic pressure cheap oil is putting on two very troublesome, recalcitrant countries—Iran and Russia.

Oil producing countries that are most vulnerable to substantially cheaper oil are those with a combination of (1) inefficient or high-cost production; and (2) an unhealthy budgetary reliance on oil revenue. Because they have failed to diversify their economies and sock away a big chunk of their oil earnings, some countries need oil in the $90-130 a barrel range for their national budgets simply to balance. According to the Wall Street Journal, Iran needs a barrel of benchmark crude to price at an improbable $130.70 to balance its budget; Nigeria needs $122.70 and Venezuela, $117.50. Oil at today’s $60 a barrel is catastrophic for all of these countries–even for Russia, which breaks even at a mere $98.

Russia, whom Sen. John McCain famously—and correctly–called “a gas station masquerading as a country” has three big problems: cheap oil, Western economic sanctions, and a kleptocratic, oligarchic government that abuses its regulatory authority to plunder businesses and punish successful entrepreneurship. It is rapidly burning through its large cash reserves in a failed bid to prop up the free-falling rouble.

Venezuela—a badly behaved, poorly governed exporter of oil, regional instability and baseball players—comes close behind Russia and Iran in the trouble-maker category. But today, and thanks in part to Venezuela’s swoon, cheap oil gave the world its very first foreign policy breakthrough: the announced normalization of diplomatic ties between Cuba and the U.S.  You see, when oil was at $130 a barrel Cuba could count on the support of Venezuela, even Russia.  But with its two patrons headed toward recession and possible default, Cuba realizes that the game has changed.

And while we are on the topic of badly governed oil producers, resource rich Nigeria has recently passed South Africa to become the largest economy in Africa.  But it is, sadly, one of the continent’s worst governed countries. Like Venezuela, cheap oil will drag Nigeria down into an economic and political abyss.

But let’s focus on the Saudi’s game, because that is what the cheap oil is all about.

Mind you, the Saudis like to make money on their abundant oil. But there is one thing that the Saudis like even less than cheap oil: Iran. Iran is trying to make a bomb, which threatens Saudi Arabia and its neighboring Sunni monarchies and emirates–to say nothing of Israel’s strong views on the matter. When Iran, a country with the world’s fourth largest petroleum reserves, isn’t vigorously—and ridiculously–asserting its right to have nuclear power (and the bomb), it stirs the pot in an already tension filled region. They’ll support Shiite movements in Arab countries, send missiles and aid to Hezbollah and Hamas, and fund Shiite militias in Iraq. Iran, in the view of most of the world—and certainly the Gulf’s conservative monarchies and emirates–throws its weight around constantly and unhelpfully.

But to the Saudis, Iran’s most egregious conduct is its support for the murderous Alawi regime of Syria’s Bashar Assad. The bestial, interminable struggle in Syria has become a proxy war between Saudi Arabia (and its Gulf allies) and Iran.

And Russia, which is where we return to the plot.

Assad has survived because Iran and Russia provide him weapons and money. Russia has many reasons to support Assad. First, Russia needs friends and arms customers in the region. Egypt and Iraq, once Soviet allies, are now in the U.S. sphere. Second, Russia’s only naval base in the Mediterranean is in Tartus, Syria. And while it still has money to pay, Syria is one of Russia’s biggest arms customers–at a time when Russia needs non-oil export revenue.

The Saudis made their move at the November 27 OPEC meeting. They successfully blocked attempts to cut production despite a world-wide glut of oil caused by increased U.S. production and weakened demand from a cooling Chinese economy. Venezuela pleaded for production cuts. Russia, which is not an OPEC member, sent their energy minister to the meeting to urge production cuts—to no avail. Prices, which had already dropped $30 from their June apex, fell immediately and haven’t found their bottom yet.

So, while Americans get at least a winter of cheap gas for their SUV’s, far bigger things will happen.

Russia, smarting from low oil prices and the bite of economic sanctions put in place after Putin’s expensive Crimea and Ukraine adventures, is desperately–and unsuccessfully—trying everything from currency intervention to interest rate hikes to stop the rouble’s free-fall. Capital is fleeing Russia at a breathtaking rate. Russian banks and corporations need to refinance their debt but can’t because EU sanctions cut off access to European capital markets. Many will default.

One ponders Putin’s options for lifting sanctions, while saving face domestically (his Crimea and Ukraine moves are both wildly popular at home). I am certain that his continued support for Assad is now one of the few openly displayed cards on his table of diplomacy.

As for Iran, low oil prices worsen an already teetering economy and devalued national currency. Life becomes even more difficult for the average Iranian. Iran has one of the region’s youngest populations. If the Arab Spring taught us anything it is that lots of unemployed Internet-connected young people milling about without an economic future is not conducive to political stability. What the Iranians want is jobs, growth and an end to their isolation, and they know that only a lifting of sanctions and access to long-frozen assets will get them there.

Perhaps they will re-assess their costly support for terrorist clients in Gaza and Lebanon. Most importantly, Iran may be at the point where, in exchange for the lifting of sanctions, it ends a decades-long game of nuclear lies and delay–before a very unsympathetic, incoming Republican congress whacks them with yet more sanctions.

And as with Russia, I am certain that Iran’s support for Assad, the butcher of Syria (which incidentally isn’t winning Iran any friends in Turkey or anywhere in the Arab world) is on the table.

Assad should be very nervous, pondering various exit strategies. Getting rid of Assad merely begins the process of dealing with the threat of ISIS and the rebuilding of war-ravaged Syria. This may include (to forestall slaughter at the hands of the majority Sunni Syrians) a partition of Syria’s Alawite northwest under UN supervision.

So, by the middle of 2015, I reckon we’ll be able to chalk one up for the Saudis. Another story that hasn’t been written will be what John Kerry and the U.S. State Department did with the Saudis and their Gulf friends to make all of this happen in the most natural sort of way.

And as for Russia, Iran and all the rest, it couldn’t happen to a likelier pack of rogues.

Time for Judicial Reform in China, Part II: Moving Beyond Greater Transparency

By Duncan J. McCampbell

“You know, publishing judicial cases in China won’t work because no one cares what the courts say,” declared my best Chinese friend Mike, seemingly out of nowhere, as we entered the crowded Beijing subway on a slate-grey afternoon in the autumn of 2007.

The statement stunned me.  After all, I’d been sent to China three months earlier to build and launch a new Chinese legal online service.  Our research told us that Chinese lawyers and judges wanted access to more and better organized cases.  They certainly did in all the previous places I had worked: the U.S., the UK, Germany.

Incredulous, I stopped in my tracks.  Bustling commuters pushed past me along the filthy subway walls.

“In China it doesn’t matter what the law says,” he continued.  “What matters in China are your relationships.”

“You see, if you go to court in China you have no idea what will happen—unless of course you bribe the judge, which is what most people do.  But if you have the right relationships, then you don’t need a court.  Come to think of it, if you need a court, that means you don’t have influential friends—and that means you have no power, and that means no one will respect you.  So you’re finished, game over.”

It sometimes seems that a lifetime has passed since that shattering exchange.

I posted Part I of this article a month ago–shortly after China’s Supreme People’s Court published a very public appeal for greater judicial independence and an end to the “power, money, allegiances, relationships and other extrajudicial disturbances” that my friend Mike so devastatingly described six years ago. In that posting I made a case for why judicial reform should actually make sense to the people who run China’s government: it strengthens the stability and legitimacy of an unelected government.

A week ago, to my immense surprise, China’s domestic security boss, Meng Jianzhu, apparently agreed.[1]  He published a startling article calling for a more independent judiciary and greater transparency in trials.  The most unexpected thing he shared was a famous quote by former U.S. Supreme Court Justice Louis Brandeis.  “Sunlight,” said Brandeis in a 1913 article on Boston’s corruption-plagued city government, “is said to be the best of disinfectants.”

Brandeis noted that a government which conducts its business in the open is less prone to corrupt influences.  For China, the task of opening up government is a daunting one.  China’s government is monstrously large, heavily politicized by the existence of a single party, and dominated by a massive executive branch at both the national and provincial levels.

In this article I address reform in only a small part of China’s government: its relatively underpowered and under-appreciated judicial branch. I recommend changes that ought to result in things the central governments wants: legitimacy, stability.  I don’t address many aspects of reform that are more political in nature, such as how judges are selected, disciplined or promoted, though I believe that many of the reforms I propose will be achievable only by and through a more professional judiciary.

Also, this article is entirely about achieving reforms in the administration of civil justice—the least developed part of China’s legal and judicial system.

[Note: When discussing Chinese judicial matters it is helpful to make a very western distinction between criminal and civil justice.  The Chinese often don’t. They are fond of their criminal law. They have given us some of history’s most elaborate and elegant criminal codes.  These codes are typically proscriptive, defining relations between the ruler (emperor) and the subject people.  But you don’t need a democracy to produce a robust civil society.  The still-imperial Germans gave us their enduring, world-changing Bürgerliches Gesetzbuch (Civil Code) in 1899.  The Chinese, meanwhile, have invested far less in defining civil legal relationships—those between people or other non-state legal persons, such as businesses, to say nothing of mechanisms for resolving civil disputes between them according to law.  Under the great Qing Code, for example, these were “minor matters” to be handled under customary law by local magistrates. It could be validly argued that for centuries Chinese culture has supplied a workable, non-legal social framework for resolving civil disputes between people.  I believe, however, that global commercial engagement and the rise of private property under the modern Chinese state now requires a more robust and accountable legal mechanism in the civil sphere.]

I have recently delivered a series of lectures at a leading Chinese law school posing the following questions: (1) Can the Chinese government enhance stability and legitimacy by being more transparent in the civil judicial sphere?  (2) What would be the practical and legal effect of explaining and publishing the legal grounds upon which judicial decisions are made?

In this article I share some of the main points from those lectures.

I have no doubt—because some of the people working for judicial reform in China are my friends–that changes already underway are resulting in a more open, more professional judiciary which will, in time, produce more judicial decisions based solely upon the rule of law.

But here is the point: unless the legal grounds for those decisions are shared with the public and, crucially, with lawyers and other judges, people will simply assume that the cases were decided in the old way.  By favoring greater judicial transparency the government makes an important move.  But without the kind of transparency that changes people’s opinions of the judiciary, the government gets no benefit for a reform that requires relinquishing a certain degree of political control over the resolution of civil disputes.

What happens when cases are decided according to the rule of law?  Well, the decisions themselves become more important, especially to the legal class (other judges and lawyers), especially if they share rationale and analysis that may shed light upon how future controversies might be handled by a court.

That sounds, you may say, a bit like the common law notion of stare decisis (to stand by things decided), the doctrine descended from the English tradition of following prior decisions, or precedents.  China, you may correctly note, hews more to a civil law tradition (like France and Germany).

As a general rule judges in civil law countries, China’s included, do not follow the doctrine of stare decisis.  Chinese courts are not bound by prior decisions and are often not permitted, under the rules of the court, to reference prior decisions in their opinions.  The same often goes for the parties in their court briefs.  How a particular court has ruled on a particular law in a prior matter has no legal effect—whether dispositive or merely persuasive—in any future dispute.

Some think this fact makes prior court decisions (the very foundation of the common law system) irrelevant in a civil law system.  “Cases,” my English handlers in London were fond of saying while I ran the Westlaw Deutschland project, “don’t matter much in a civil law country like Germany.”  Isn’t it strange, then, how our market research consistently told us that German judges and lawyers wanted greater online access to well organized and comprehensive collections of cases?[3]  Cases, it turns out, can actually matter more in a civil law setting, and let me tell you why.

Classic civil law doctrine handed down from the Romans via the French posits that all legal disputes must be resolved through reference to legislation–laws made by elected representatives of the people (I will return to this point when we take up China again).  Judges are intended to merely apply the law, not step in and “make” law when the statutes are vague or unhelpful.  But here is where the civil law somewhat runs afoul of its own doctrines.

The world and its legal relationships are constantly changing.  Legislation always lags behind developments in society, commerce, technology. So when a legal system requires its courts to define all known and still-unknown legal relationships under legislation, the laws must be broad, brief, and often so vaguely drafted that in terms of concrete application they can be rather unhelpful.

Germany’s law on unfair competition, for example does not define the term “unfair.”  Where on earth does a German court go for that definition?  The answer is simple: prior judicial decisions and authored commentary, which largely codifies, in doctrinal form, what has been reasoned and decided in prior court cases.

So, the point here is that even in a civil law system old cases matter a lot.  The judges and the lawyers are all reading them, when they can get their hands on them; they’re just not always allowed to make full use of them.

What will happen, then, when Chinese lawyers, judges and law students actually take notice of what is contained in judicial opinions—especially ones from the higher courts which, presumably, have jurists of higher quality?  There will be several knock-on effects.

First, the courts will, overnight, have more power and prestige (and the quickest way to lose it would be a return to the old way of making judicial decisions). Second, the way court opinions are written, organized and published will become much more important.

Broad publication helps assure the people that their judges are making decisions based upon the rule of law.  Consider, also, the quality control benefits of broad publication. The Supreme People’s Court is at least nominally responsible for overseeing judicial quality in China’s lower courts. When a lower court judge is reversed on appeal, broad publication of that face-losing reversal—and the grounds for it—will help impose greater uniformity and discipline.  No judge likes reversal—especially the corrupt or incompetent ones.

Imagine that you represent a client whose legal position lines up nicely with a prior decision of the country’s highest court. Wouldn’t you want to point out that prior case to the lower court judge deciding your case?  And if you were that judge would you feel uncomfortable ignoring a position laid down by the country’s highest court?  Perhaps not, because it happens every day in China’s lower courts. That must change.

In 2007, when I began my work with the Supreme People’s Court, their press office wanted to publish the Court’s database of “Top 50” decisions on the online service we were building, Westlaw China.  Why?  The court was troubled by what it perceived as inconsistent interpretation of laws by lower court judges.  They wanted every judge and lawyer in China to know how to correctly decide cases.

It is not enough merely to publish judicial opinions broadly. The court’s opinion must also explain its reasoning in detail.[4]  So the third and perhaps most important effect of a new interest in the contents of judicial opinions will be the flowering of a natural desire among lawyers to source prior decisions (especially ones that issue from top courts, and are well-reasoned, supported and written) for guidance on how the court may rule in future matters.

The Chinese government wants, above all else, order and stability.  Today they achieve this throughout the branches of government by overt expressions of authority and efforts to increase discipline within the Party.  The courts of China have discipline and authority—of a sort.  It is largely supplied by the “extrajudicial” agents of money and political influence.  But as judicial reform decreases the prevalence of these corrosive influences, something else must replace it.

The answer is the highly conservative common law doctrine of stare decisis.  Stare decisis is by its nature conservative and stability-enhancing because it looks backward, not forward, for its authority.  Indeed, stare decisis could have been a Chinese invention since it presumes a hierarchy of authority, with the nation’s highest courts having the most authority and thus the final word on any legal question.

China needs stare decisis, because if you take away money and politics and don’t replace them with anything else, the courts will spin out of control. Stare decisis, administered by the Supreme People’s Court from above, will guarantee legal discipline and give the central government at least the administrative legitimacy it seeks from judicial reform.

A common misunderstanding about the distinction between common law and civil law is the belief that citation to prior judicial opinions can erode the primacy of legislation.  This is not true.  Chinese law and rules of procedure can and should mandate that legislation is the sole source of legal authority—even while it must be recognized that the civil law doctrine of legislative primacy derives largely from the fervent democratic sentiments of a post-monarchic France.

Note, also, that I have proposed civil judicial reform in matters only between private parties and businesses.  China’s judiciary is not ready to tackle the impartial handling of matters involving any of China’s ruling elites or the executive and legislative branches of government.

Once lawyers and judges are encouraged to take heed of prior judicial decisions, we are confronted with the issue of citation.  Assuming that courts and lawyers will be allowed to reference such cases in their papers and decisions, how will these cases be cited?  This may seem a terribly technical and mechanical matter for many, but how citation policy is established and enforced by a country’s courts can have a profound influence on the development of the country’s legal publishing system—a key pillar in the quest for legitimacy and stability.

China’s case citation formats are not well developed because (a) judicial opinions were not always widely available to lawyers and judges; but when they were (b) the court’s decision was often not well explained; and, in any event (c) what the court said didn’t have any legal consequence for subsequent cases.

Citations serve several purposes, the chief of which is to inform its reader, with some level of precision, where the cited authority can be found.  When lawyers and judges cite cases it is important that their citations are in a standard format and point to the same authoritative sources, preferably an official version of the cited authority.

Following judicial reform in China legal citations—especially to cases—will be far more important than they are today. It behooves the government to take control of citation policy, or private publishers will step into the void.[5]

Conclusion

The key to successful judicial reform in China is the free flow of legal information, especially cases. The people of China, thirsting for simple justice, want to repose faith in an impartial and independent judiciary.  They won’t do that until they see that disputes referred to China’s courts are resolved fairly and according to the rule of law.

In what promises to be a painful structural and cultural transition, the Chinese judicial branch needs the support of the central government to drive reform, which should include measures to reform and, to the extent possible, de-politicize judicial selection, discipline and promotion.

I have proposed adoption of the doctrine of stare decisis, primarily as an instrument of continuity and stability. When prior decisions become important, the judiciary becomes more respected. An entire legal information ecosystem needs to be developed.  Private publishers would be delighted to occupy that space.  I advocate for a strong judicial role in legal publishing and standards enforcement—especially from the Supreme People’s Court.

I have also pointed out that a stronger, more respected, more disciplined Chinese civil judiciary need not threaten the primacy of legislation or the prerogatives of either China’s ruling elites, or the more powerful executive and legislative branches of China’s central government.

DM


[3] The civil law prohibition against citing prior cases does have an impact on cases research and publishing strategy.  The most profound difference that common law researchers and publishers will note is this: with no references to prior decisions contained in a judicial opinion (and thus no embedded case citations to programmatically extract and build metadata around), there is no opportunity to hyperlink or to develop case citators of the kind published in the U.S. and UK.  Judges and lawyers still need to find relevant cases.  Mere key word searching of raw, unenhanced text will not get the job done reliably.  But the good news is that most major civil law statutory systems have very logical structures around which to organize cases.  The structure of legislation becomes the “tree” of cases classification, digesting, annotation. There is no need to create entirely separate case-based classification and digesting systems, such as those developed by private publishers in the U.S., the UK and other common law countries.

[4] A typical Chinese case report is, by western standards, terse and legally unenlightening. Besides citing the law under which the case was decided and announcing the prevailing party, little or no effort is usually made to explain the rationale behind the court’s decision.

[5] Private legal publishers, like West Publishing in the U.S., derive substantial commercial advantage from official citation policies that mandate reference to their products. Even when the government publishes an “official” case compilation (such as the U.S. government’s Supreme Court Reports), the mere fact that most lawyers, for various reasons, prefer to use the West products means that citations to West’s products are included in any complete citation to a U.S. Supreme Court decision.  When I was running the Westlaw China project (a fully online product) I advocated for the production of a paper version of our Chinese cases collection.  We would sell these books at or below cost to municipal and university libraries around China.  Why?  The volume number and page breaks in the books would mirror those in our online product.  Enterprising Chinese would invariably obtain access to the books, then copy and re-sell them to local lawyers, in violation of our copyright.  We would prosecute some token infringement cases to preserve our rights.  We would lose some low-end revenue from lawyers who were unlikely online customers anyway.  More importantly, our citation format would become widely used—and thus embedded–in the market.

Time for Judicial Reform in China: Part One

By Duncan J. McCampbell

In the week leading up to the recently concluded Third Plenum meeting of the Chinese Communist Party, the Supreme People’s Court, China’s highest court, issued a white paper recommending that the government “implement the courts’ independent exercise of judicial authority based on constitutional principles.” If that wasn’t enough to get your attention, the Court asked the government to support this proposal by eliminating “power, money, allegiances, relationships and other extrajudicial disturbances.”

“Golly,” a Chinese lawyer friend commented, half seriously, “how on earth would they make their decisions?”

In the end the desired judicial reforms did not appear from that meeting.  What we got instead was a commitment to substantial new economic reforms, a certain relaxation of the one-child-only and policy, and the elimination of labor re-education camps.

Proposals for greater judicial independence in China have been floated, in one form or another, many times in the past.  Perhaps I should not take them very seriously.  But I really believe that judicial reform is the Next Big Thing in the Chinese government’s quest for stability and legitimacy.

[Full disclosure: my interest in Chinese judicial reform began in 2007-08 with a rather more commercial objective in mind.  I was living in Beijing, leading the Westlaw China project for Thomson Reuters, the world’s leading legal publisher.  My job was to do what I had previously done in the UK, Germany and a few other places–build and launch a local-language online service that lawyers use to research the law.]

What got my attention, and what makes the Court’s recommendation so important, is not just the level at which the statement surfaced–but in its timing: in a pre-Plenum white paper. Can I be forgiven for thinking that the conditions necessary for serious judicial reform in China are now, finally, beginning to coalesce?

The Chinese government is keen to preserve and grow the legitimacy it has earned through three decades of fabulous economic—if not political—reform.  But alongside the economic growth that has positively impacted virtually every sector of Chinese society, there is also runaway inequality, breathtaking abuses of power, and, recently, a seeming inability to control unprecedented environmental contamination.  These chip away at an unelected government’s hard-earned legitimacy.

We are presented with the spectacle of an absolute government more insecure, more stability-obsessed, more legitimacy-craving than the western governments we know—ones that are run by people who could be thrown out of work in the next election.

Some people point to the American system of government and state flatly that legitimacy only comes through the ballot box.  With all due respect to the well-meaning pro-democracy communities now active in China, the answer is not elections–at least not yet.

More elections will eventually come to China, but in China’s ancient culture no one is entitled to anything.  Rights and powers are conferred—usually from above—and are not innate.  People in such a culture actually derive certain comfort from knowing their place in a highly stratified societal hierarchy. The Confucian, collectivist soil of China is a tough place to plant the seeds of messy, noisy, bottom-up democracy–the kind that Americans always think everyone else wants.

If you have raised an eyebrow, allow me to ask whether you believe the recent spectacle of a U.S. government shutdown and threatened debt default (remember who holds much of that debt) received balanced coverage in the Chinese media?  Do you think the nightly warbling of Boehner and Reid won over any converts to our system of representative government?  It works for us—sort of, lately.  But not for China.

The Chinese still want many things that we have.  But they actually don’t have a problem with basic social inequality, or even a big, all-powerful, unelected government.  All they ask, in exchange for masters not of their choosing, are three things:

-continued economic opportunity and growth;

-a reasonably healthy environment in which to raise their only child;

[it wouldn’t hurt if the government elite—especially at the local level—bloody learned to behave]; but most importantly,

-Simple Justice.

Yes, simple justice. What the Chinese people want, oh so much more than democracy, is a judicial system that is fair and impartial.  I am not talking about correcting the inequalities that pervade any single-party political system. Party members—who form a tiny minority of the Chinese population, will continue getting all the good stuff—the jobs, the dwellings, the cars, the mates.

I am talking about a system that resolves the simple disputes that arise out of a society with an exploding, burgeoning commercial class filled with people who have galaxies more property (and the desire to keep it) than Chinese people of, say, twenty years ago.

Forty years ago in China only the government and powerful party functionaries owned significant property.  Now even average citizens have their own cars, apartments, houses. They even buy and sell securities, investment properties, etc. How do they resolve their inevitable disputes?

Probably not in China’s courts.  Today, the only way to achieve “predictable justice” in a Chinese court is to bribe the judge.  And if you are well-connected in the Party, so much the better.  Would you willingly submit your property or contract dispute to a court that you know is likely to be influenced by personal connections, money or politics?

This is actually something rather basic: impartial and efficient judicial resolution of the hundreds of thousands of private disputes that arise between Chinese citizens.  The Party is not in the room as justice is dispensed.  Just the people, the facts, the law and the Court.

I propose the English model.  The English began building their greatest gift to the world–an independent judiciary–in the 11th century by focusing reforms in lower courts, ones that (1) did not deal with criminal matters, and (2) did not adjudicate the rights/property of the powerful elites: the Crown, the propertied class, the Church.

Following this example, Chinese reforms to judicial administration and the rules of judicial conduct could begin in courts that adjudicate only matters between private citizens.  The goal is to create a perception of fairness so that the people won’t continue undermining the court’s legitimacy by resorting to “extrajudicial disturbances.”

This is more judicial reform than political reform.  The English had reasonably independent magistrates meting out basic justice between private parties (and thus lending legitimacy to the Crown) centuries before representative democracy leveled the political playing field.

In tribal societies the legitimacy of the chief is maintained, in no small part, by the fairness and wisdom he displays in resolving disputes between his people.  Legitimacy through political reform (of the electoral variety) remains a ways off in China.  But if the government reforms the judicial system into a reasonably fair and impartial arbiter of disputes, isn’t this really the low hanging fruit of civil legitimacy?

Next week:  How Chinese courts resolve disputes, and then how they explain and propagate the rationale for their decisions, can be the stability and legitimacy-creating agents that the government desires.

Follow me on Twitter @takeitglobal

http://www.mccampbellglobal.com

My Big Six For 2014

I normally wait until the December solstice to issue my annual Big Six predictions.  I do this because December 21, or thereabouts, is the shortest day of the year.  Every day afterwards is longer, and thus more hopeful, which is the state of mind you want to be in when you are making important decisions.

We are getting an early start this year.  You are, or course, welcomed to archive this article until your heliocentric state of mind improves.

Significant research has gone into this year’s crystal ball and I fully expect to eclipse last year’s 76% accuracy rate.

All good economic or political predictions, as I tell my students, are based upon The Big Thing that must happen.  The key is not to predict The Big Thing (which anyone can do), but to nail the secondary things that follow from The Big Thing.

Some of the items below are merely Big Things that will create opportunity for the prescient, pecunious and prompt (my 3P’s of successful entrepreneurship).  So please don’t make your stock picks based upon what you read here.  Winning that game, as you should know, is more about the timing of your moves than whether you have aimed in the right direction.

If it seems that much of what you read below is about overseas events and an increasingly crowded planet, please forgive me.  “When in doubt, refer to iambic pentameter and the rise of the middle class,” intoned my state school English professor in another century.  So forget the Arab Spring.  Rapidly rising middle classes in the world’s two most populous countries are the Big Thing of our time.

Some clear-headed people are making a lot of money from it.

1.     A Rising Tide Lifts All Engineers: Ocean Levels and Infrastructure Investment

While politicians, of all people, continue to offer their useless opinions about whether the planet is warming (it is) and why ocean levels appear to be rising (because of you and me, Sistah), the debate is over in three better informed and more relevant communities: the scientific, engineering and investment communities.

Sea level pic for blog

As the oceans rise big things will happen—gradually.  Since more than half the world’s population lives within 50 miles of the ocean, substantial shoreline alteration and population dislocation will occur.  There will be more coastal flooding during what will be–due to global warming–more frequent and/or more violent storms, such as the one that recently struck the Philippines.  And as we learned during Super-storm Sandy, big property values, commercial infrastructure and insurance risk are all disproportionately crowded into the coastal zones of developed countries.

The American Society of Civil Engineers is already publishing books and pamphlets on sea level rise and its effect on coastal infrastructure.  The shares of several large civil engineering groups, such as Fluor Corp. (NYSE: FLR.N) and URS Corp. (NYSE: URS.N) have been strong and should continue that way into 2014.

Insurers with large books of business in high-density, high-value coastal markets are doing some deep thinking right now.  Coastal property owners will find it increasingly difficult to obtain affordable insurance.  Look for more U.S. insurers to investigate what might have previously been considered overly risky foreign markets.

So, if you can put your climate politics aside, watch how rising sea levels are making money for some people, while causing big headaches for property/casualty insurers, developers, and state, local and national governments all around the world.

Notes:

North Carolina lawmakers reject sea level rise predictions http://www.reuters.com/article/2012/07/03/us-usa-northcarolina-idUSBRE86217I20120703

2.      Market Reforms in China

The Chinese leadership is about to make a crucial pivot to improve the country’s slowing economy and rapidly deteriorating environment.  Dangerous air pollution in many Chinese cities has prompted a public outcry and forced the leadership to undertake two key reforms.

First, the Chinese government will move gradually to reduce China’s dependence upon manufacturing and exports for growth.  As the Chinese have learned (along with every developed industrial economy since the invention of the steam engine) industrialization creates prosperity–and lots of pollution.  The Chinese government has realized that rising prosperity (which is the government’s sole claim to popular legitimacy, and not a hollow one when you consider how many millions of Chinese have been pulled up out of poverty by the economic reforms of the last 30 years) no longer trumps an unhealthy environment.

To do this, however, China’s leaders will have to rein in the juggernaut of state owned enterprises (or SOE’s).  The SOE’s are disproportionately responsible for the pollution that wracks China’s air, water—even soil.  But these oligarchic behemoths have become a law unto themselves.  Owned and managed by the ruling families of China, they will be a tough political nut to crack for China’s new leader, Xi Jinping.

3.     Infrastructure Improvement and Frontier Sensibility in India

One constantly hears of India’s breathtaking economic rise.  Yet this is a country so profoundly mismanaged that theft of electrical power consumes over 20% of its generating capacity.  This, together with India’s failure to build more power plants, optimize distribution and manage its abundant coal reserves leads to regular, crippling electrical power failures impacting tens of millions of people.  Yes. Now. In the 21st century.

Meanwhile, the government’s failure to invest in road and rail transportation makes Indian cities gridlocked warrens of logistical frustration and profound inefficiency.

India will make massive investments in electrical power, road and rail transportation infrastructure in 2014 and beyond—or stagnate economically.  Much of the money will, of course, disappear into the customary ether of corruption and inefficiency.

And while we are on the subject of India, I predict that the Indian government will recognize that its real geopolitical rival is now China.  India will see that fighting over some glacier in the Himalayas just isn’t yielding a good ROI and will come to terms—of some sort—with its neighbor and official Sick Man of Asia, Pakistan.

Rapprochement with India won’t please the real power in Pakistan–the ISI, or Inter-Services Intelligence agency—which needs an existential threat from India to build its power and nurture militants in the drone-ravaged “tribal areas” that it continues to claim, despite all reality, as sovereign territory.  But I digress somewhat indulgently about a profoundly troubled part of the world from which the U.S. would be best removed.

4.     But Wait! Just a Quick Word About Afghanistan’s Eye-Popping Mineral Wealth

Did you know that one of the few positive outcomes of the U.S.’s interminable involvement in Afghanistan was the first comprehensive study of Afghanistan’s non-fuel geological resources by the U.S. Geological Survey?  The results will astound you.

It showed, for example, that Afghanistan’s Balkhab District was home to the world’s largest deposits of copper.  Not Arizona, not Utah, not Chile.  Afghanistan.  Two new large copper deposits in Logar Province and Herat Province provinces have subsequently been discovered, one of which is estimated to be worth $43 billion. Copper and gold mines worth of $30 billion were also discovered in the Zarkasho area of Ghazni, and lithium deposits (used for batteries) valued at $20 billion were discovered in Farah and Nimroz provinces.  A deposit of beryllium which, lighter than aluminum and stronger than steel, is used in airplanes, helicopters, ships, missiles, and space craft, has been found in the Khanashin district of southern Helmand Province.  The reserves are estimated at $88 billion.

And we are not just talking about metals.  There are enormous deposits of highly strategic minerals, such as the rare earths used for semiconductor and other computer applications.

Yes, Maynard, that poor, war-torn, corruption-wracked country that supplies the world with opium is literally a gold mine.  Did you also know that resource-hungry China shares a short, but very important border with Afghanistan?  And, finally, did you know that the ever acquisitive Chinese are alleged to have bribed Afghanistan’s Minister of Mines to obtain the rights to exploit that poor, war-torn, corruption-wracked country’s mineral resources?  And the beat goes on.

Sources: http://pubs.usgs.gov/fs/2007/3063/

http://www.nytimes.com/2010/06/14/world/asia/14minerals.html?pagewanted=all&_r=0

http://articles.washingtonpost.com/2009-11-18/world/36875491_1_aynak-afghan-minister-metallurgical-group-corp

5.     Water, Water, Water

Clean, consumable water will soon be the world’s most sought-after commodity.  China has the dual curse of naturally scarce water resources and dreadful environmental enforcement.  Shanghai, one of the world’s largest cities, also has one of the world’s most contaminated supplies of municipal water.

If you are American, you are forgiven for feeling a bit smug.  The U.S.—with the key exception of the Southwest and parts of California–has plenty of relatively clean, relatively affordable water for human consumption, industry and agriculture.

Water for human consumption comes from two places: either pumped out of aquifers in the ground, or from surface sources, like rivers.  The vast Ogallala aquifer that lies beneath much of the U.S. middle states was already under intense agricultural pressure before the water-hungry practice of oil and gas fracking came to Kansas, Oklahoma, Nebraska and North Dakota.

Large rivers, like the Mississippi (which supplies both drinking water and a destination for treated sewage for millions of Americans), are increasingly becoming contaminated with persistent pharmaceutical and agricultural agents.

Out of this seeming gloom comes a Big Thing.  If you haven’t heard of it yet, you will soon.  It is a material called Graphene.  This material will have many world-changing applications, but the one you want to watch is water filtration.

Have a look and start investing–wisely.

http://www.extremetech.com/extreme/115909-graphene-the-perfect-water-filter

6.      How North Dakota is Changing the World

So fracking is a Big Thing, producing an American energy revolution that will have impacts across the U.S. economy.  But have you considered how it will change the global geopolitics of oil?

Have you noticed how recently the Saudis have been very publicly unhappy with the U.S.?  On the surface the snit is about two things: the continued failure of the U.S. to find a solution to the Israel/Palestinian issue (it’s our problem to solve, right?) and the recent discussions with the Saudi’s religious arch-enemy, Shiite Iran, over a proposal to lift crippling sanctions in return for abandoning their nuclear weapons program.

But that’s not the issue, really.  What’s happening is that we are getting over the Saudis—finally.  For a lifetime–in my case–we have lived through and assumed without question (despite all of our brave words about universal human rights, democracy, etc.) an alliance with one of the most repressive, retrograde, unelected, fundamentalist Islamic monarchies in the world.  And it has always been about one thing: the Saudis have oil—lots of it.  And, Lordy, how we love our oil.

The shale deposits of North Dakota and the fracking technologies developed by U.S. oil exploration and development companies have given us back our energy mojo.  More importantly to the American soul, soon we won’t need to dance to the tunes of the repressive, kleptocratic governments that often form over large deposits of oil: Iraq, Libya, Russia, Venezuela and Nigeria all come immediately to mind.

North Dakota–settled by sober, hard-working Norwegians and Germans, is just as gob-smacked as the rest of us about its new-found wealth and global impact.  I am sure they will manage it wisely.  The oil, which until recently was locked in the shale deposits under 39th state, is changing the world–for the better.

DM

“You’ve got to get your corruption right.”

It was a typically nasty Beijing afternoon in August.  Millions of Chinese people were hard at it, chasing the next Yuan through the oppressive summer heat and choking pollution of Beijing’s Chaoyang District.  As I drove to a meeting with Jim, the company’s China consultant, taxis and filthy black German sedans darted across lanes and drove on the shoulder in a frantic, futile–and very Chinese–game of hurry-up and wait on the gridlocked Third Ring road.

Beside the road loomed the grimy, neglected skeleton of an unfinished office building.  Such monuments to commercial failure can be found all over Beijing.  I pointed to it and asked Jim what had happened.  He said something that I repeat to this day: “In China you’ve got to get your corruption right.”

Jim wasn’t advocating corruption, though in the twenty years he’d spent helping businesses like mine survive in China, he’d seen enough to write two very insightful, successful books targeted at Westerners seeking to do business there.  Jim was merely pointing out that in China, anyone who has failed spectacularly, such as the developer of that unfinished building, likely didn’t have the right relationships with the right government officials–relationships that usually arise from family connections and are carefully nurtured over many years by acts of mutual assistance.

The assistance doesn’t always involve cash.  So you need a construction loan or a building permit?  Well, you might be pleased to learn that the official issuing building permits needs help getting his one child into a good American university.  Perhaps you can help.  Perhaps that loan or permit isn’t going to take a year to obtain.  Is that corruption?  Hmm, you say. That sounds, well, kind of like Chicago.

So it probably is illegal.

So let’s say you’ve been sent by your company to live in China and start a company.  Before you shipped out you probably met with the lawyers.  They warned you, in typically obscure language and solemn tones, about the U.S. Foreign Corrupt Practices Act (FCPA).  This law makes it a Federal criminal offense to bribe foreign government officials–something that, if not strictly legal, is certainly an accepted business practice in China and much of the developing world.

The FCPA and its more recent U.K. sister, the Bribery Act, are both well-intentioned.  Accepted political and economic research, led by Yale’s Prof. Rose-Ackerman, demonstrates how corruption hurts a country.  It is politically corrosive, growth-defeating and economically inefficient.  But what if that is how business is done there?  Critics of these laws say they put U.S. and U.K. business at a competitive disadvantage.  Whatever your position, there is no doubt in my mind that the main flaw of the FCPA is its oh-so-American assumption that other countries have (or at least ought to have) economic and political systems that look like ours.  In the case of China, nothing could be further from the truth.

The Western sense that government officials are supposed to serve the people is still developing in China. While a government job in the U.S. is nothing particularly special, in China such a job carries prestige and power.  When a Chinese official controls access to a necessary government franchise such as a license or permit, it gives that official the ability to charge “rents” that a private business person can only envy.  It is not unusual, for example, for a local government official responsible for issuing building permits to also own a thriving family construction business.  Does that family business benefit from the government connection?  Or course it does. In fact, if the official didn’t use the power of office for his or her own benefit, he or she would likely be distrusted by peers.

In the West, bright lines separate the private and public sectors.  This is not true in China or in much of the developing world.  The boundaries are blurred to the point of legal irrelevance.  In China the officials and their families are in business in all places and at all levels.  The higher up you go, the more attractive the business opportunities.

So how does an American executive walk into the midst of this ancient system and succeed without getting himself and his company in trouble?  Well, in an ironic inversion of the Chinese model (where your money is made whild in government), the U.S. officials charged with enforcing our anti-bribery laws make their fortunes after government service.  Department of Justice and Security and Exchange Commission lawyers normally spend a few years enforcing the FCPA at government-level pay before jumping into lucrative private practice positions. Once there, according to the Wall Street Journal, they are happy to help American companies perform costly global compliance audits to stave off possible prosecution. “It’s one of the few … … crown-jewel practices right now”, says Dan Binstock, a Washington-based legal recruiter at Garrison & Sisson Inc., quoted in the article.

All this high priced lawyering is not surprising when you consider that under the FCPA, even the CEO of a company can be found personally liable for the acts of a company employee thousands of miles away and several levels down in the company chain of command.  And under the newer and stricter U.K. Bribery Act, proof of intent is not even required.

Recent years have seen several high profile FCPA investigations. Subsidiaries of Tyco International were found to have arranged illicit payments to foreign officials in more than a dozen countries.  Late last year the company agreed to pay $26 million to settle the SEC’s charges and resolve a criminal matter with the Justice Department.  Meanwhile, the Wall Street Journal reports that Wal-Mart pumped $51 million into an internal bribery investigation of its Mexico operations, and still remains the subject of some significant government scrutiny.

So what are the main take-aways?

Let’s deal with the easy part first. Yes, your company needs to have an active anti-corruption training program for everyone working overseas and everyone domestically who touches products, customers and financial reports from developing markets.  The same goes for the senior people you send on overseas trips to check up on things.  You may even want to re-consider the recent trend away from sending expats overseas and towards hiring native country managers. While hiring a local to run your China operation may be good from the standpoint of in-country relations, you’ll need a very strong, non-native finance person in place to keep your management out of trouble.  And now it’s not just the U.S. federal authorities that will be looking at you.  China has started prosecuting corruption by non-Chinese multinational corporations, as the global pharmaceutical company Glaxo Smith Kline recently learned.

Second, you may want to re-think merely extending your company’s existing corporate governance structure abroad, since it may unnecessarily subject your entire chain of command to FCPA liability.  Your lawyers would be delighted to share creative–and perfectly legal–ideas for Chinese capitalization, licensing and corporate governance.  If they aren’t, have them call me.

Now for the harder part.

The way we teach our American business leaders to avoid FCPA trouble comes in one of two, relatively limited, Western flavors: compliance and ethics.  The compliance approach is favored by lawyers, accountants and other absolutist types (of which I’m one) and works by informing those concerned of what the law is and how far they can go before breaking it. The ethical approach, taught in some business schools (mine included), gets us a little closer to our goal because it trains business leaders to think in terms of right and wrong (as accretive, of course, to knowledge of effective legal and financial compliance).  Unfortunately, neither the compliance nor the ethical approaches completely close the loop in places like China.

The reason FCPA compliance is likely to remain an expensive game of whack-a-mole for American global companies is that what we in the West call corruption is in fact part of the ancient commercial fabric of China and many developing countries. The issue isn’t legal and it certainly isn’t ethical. It’s cultural.

Easterners think differently than Westerners.  Among other stark differences in perception and processing, Easterners are uncomfortable with absolutes and universals, such as abstract legal rules that fail to take into account surrounding circumstances and relationships.  Prof. Nisbett, in his ground-breaking book, The Geography of Thought, reminds Americans (and most English-speaking Westerners) that they are the product of a unitary system of ethical values tracing back to the Greeks.

“We prefer to live by abstract principles and like to believe these principles are applicable to everyone.  To set aside universal rules in order to accommodate particular cases seems immoral to the Westerner.  To insist on the same rules for every case can seem at best, obtuse and rigid to the Easterner, and at worst cruel.

“This [Western] self–this bounded, impermeable free agent–can move from group to group and setting to setting without significant alteration.  But for the Easterner (and for many other peoples to one degree or another), the person is connected, fluid and conditional [emphasis added]. . .

“. . . there is great potential for conflict when people from cultures having different orientations must deal with one another.  This is particularly true when people who value universal rules [e.g. Westerners] deal with people who think each particular situation should be examined on its merits and that different rules might be appropriate for different people.”

It seems that culture is both the problem and the solution for your business in China.  Let me explain.

The Chinese are collectivists, as are people from many countries where corruption is a problem. Americans are off-the-scale individualists, according to Hofstede in his seminal study, Culture’s Consequences.  Tell an individualist American about the evils of corruption and you may modify his behavior.  If you appeal to his moral sense you may even move the dial on his values.  But nothing your company does is likely to impact his identity.  Those days–if they ever did exist in our culture–have gone the way of blue suits and red ties at IBM.

Like all collectivists, the Chinese derive much of their identity from the collectives in which they hold membership.  So here is the point: if you want to prevent your Chinese or other collectivist employees from engaging in illegal activity, don’t lecture them on some abstract American law.  Rather, envelop them in a corporate system that (1) behaves like a family–the only system they really understand and respect; (2) expresses zero tolerance for corruption and other illegal activity; and (here’s the clincher) (3) lives and demonstrates those values from the top to the bottom of the company.

You see, to a Westerner, the violation of a company rule may have legal, even ethical, consequences.  But it won’t impact their Western individualist identity–Nisbett’s “bounded, impermeable free agent.”  But if you can fight off the urge to cut corners and stay true to your Chinese cultural ethos, you will have done more than simply influence the behavior of your Chinese workers.  You will have formed their identity as members of your company.  You’ll be rewarded with committed, reliable, legally-compliant people.

At which point you can look your individualist, absolutist American lawyers in the eye and say, “Thanks.  Got it handled.”

DM

References

“FCPA Inc.: The Business of Bribery Corruption Probes Become Profit Center for Big Law Firms”. The Wall Street Journal. October 2, 2012. Retrieved from http://online.wsj.com/article/SB10000872396390443862604578028462294611352.html on March 3, 2013

Nisbett, R.E. (2003). The Geography of Thought. New York, N.Y.: Free Press

Hofstede, G. (1980). Culture’s Consequences. Beverly Hills, CA.: Sage Publications