The major pharmaceutical multinational GlaxoSmithKline is being investigated by the Chinese authorities for anti-trust and bribery offences. It is alleged that the company's management in China orchestrated an industry-wide bribery scheme to designate GSK's products as the "drugs of choice" for patients. The scheme involved paying bribes to professionals in the medical, hospital and pharmaceutical industry.
It is also claimed that prices were fixed, resulting in unreasonably high retail prices for patients. Bribes were channelled allegedly through a travel agency which supposedly organised overseas trips for the professionals to medical conferences and symposiums. A number of these trips never materialised. Such bribes were disguised as expenses for the bogus trips and charged to GSK China for reimbursement, thus hiding them from the internal controls of the company's UK head office.
If such allegations are proven, GSK will be criminally liable under China's Anti-Unfair Competition Law and the anti- bribery provisions of its Criminal Law.
Anyone who advises US or British multinationals knows that it is critical to have a strong legal and compliance department supported by robust internal audits and controls. This is because some countries have weak laws or lack the vigour to prevent or combat misconduct like bribery and anti-competition practices. The US and Britain have anti-bribery laws with extraterritorial jurisdiction, regulating the business conduct of their companies in overseas markets. Reputable multinationals doing business in China have robust systems and processes in place.
I assume a sizeable multinational like GSK had them in place, too. But its legal and compliance processes failed. According to media reports, 3 billion yuan (HK$3.8 billion) in bribes were paid under the scheme. This is not nickel-and-dime stuff.
We don't yet know how they got caught. What we do know is that the Chinese government is dealing seriously with this seemingly industry-wide problem. Thus, it was surprising to see in a recent op-ed on these pages, by Professor Kerry Brown, suggestions that China was "irritated" by GSK's profits, the inference being that this was the cause, or at least a cause, of the investigation by Chinese authorities. This is wrong; GSK was investigated because the alleged scheme is illegal.
Professor Brown, executive director of the University of Sydney's China Studies Centre, also said "there are also pretty grave risks that come from doing too well" in China. Such a statement cannot remain unchallenged.
The Chinese government knows well that foreign investors are attracted to China because they can make a good return on their investment, and China welcomes them.
Foreign companies are successful because of their unique value proposition - superior technology, manufacturing know-how, logistics management and quality of their Chinese management and staff. They will continue to be profitable in this big and growing market.
For example, 73 per cent of US companies operating in China were profitable last year, according to a recent survey by the American Chamber of Commerce in China, and 40 per cent of them report a higher profit margin than their global average. The 1,500 McDonald's in China outperform other McDonald's in the world. Business between China and the US continues to thrive.
American, British and other foreign companies will continue to be profitable in China. The pie is big enough for everyone and it is growing.
Professor Brown also said the GSK admission "seems like a hasty climbdown". But that neither resonates with the facts nor with modern management practices.
A multinational like GSK facing an investigation has three options: one, deny legal liability and fortress itself; two, negotiate a settlement with the authorities without admitting liability to preserve its legal position from civil lawsuits; or, three, own up and deal with the problem head-on.
In my more than 30 years in practice, I have found that the first option provides cold comfort for the client. If a company does not arrest its problem quickly and decisively, it has a propensity to snowball into a much bigger issue in the internet age.
I know the first two options are preferred by lawyers. Nevertheless, a good lawyer qualifies his advice by stating that it addresses only the legal risk and reminds the client to consider other risks before making a business decision. GSK's legal problem in China has global implications with respect to the company's reputation, corporate value and shareholders' expectations. The first two options are illusive at best and confusing in practice in the GSK case.
The fact is that GSK did take the first option. It stated earlier that its four-month internal investigation had resulted in no cause for concern. This was no hasty climbdown. Then the problem blew up in its face and it immediately sent Abbas Hussain, the company's president of emerging markets and the Asia-Pacific, their global chief of internal audit and a team of internal and external professionals to China.
After meeting the Chinese authorities and an intensive on-the-ground investigation, on July 22, Hussain made a humble admission that senior executives at GSK China had violated Chinese law in breach of GSK's corporate policy. The statement was carefully crafted to protect GSK from an equally big, if not bigger, fallout with the British and US authorities. Two days later, chief executive officer Andrew Witty answered questions candidly at the GSK quarterly results briefing.
In my view, this was crisis management and damage control executed as best the company could. I applaud the management for good leadership in taking decisive action.
Modern Chinese history gives us some clear guidance on where the country is heading. China has a proven track record of successful reforms in the past 30 years. It has prioritised the challenges and dealt with them tenaciously.
These 30 years of unprecedented reforms are staring us in the face. Now China is dealing with new priorities, corruption being one. The GSK case is a wake-up call for all companies, foreign and domestic. They must clean their house and conduct their businesses as responsible corporate citizens in China.
Rick Yetsan Tang is the founder and convener of the China Rule of Law Forum. He has lived and worked in six countries for top-tiered multinationals for over 30 years