Chinese academics say ZTE case should kill old notion of ‘breakable contracts’

More Chinese companies should examine their compliance practices in the wake of ZTE saga if they want to expand overseas, academics say

PUBLISHED : Friday, 08 June, 2018, 3:22pm
UPDATED : Friday, 08 June, 2018, 11:37pm

The ZTE case has exposed years of negligence and should ring alarm bells about what rigorous compliance really means at Chinese companies hoping to expand overseas, say several Chinese business academics.

Although companies have boards and even a Communist Party branch in place, many fail to uphold the core tenet of corporate governance – which is the “spirit of contract and compliance”, said Gao Minghua, director of the Corporate Governance and Enterprise Development Research Centre at Beijing Normal University.

“Breaking a promise is a big taboo in international society, where laws and rules are stressed and any violation shall be punished accordingly,” said Gao, adding that the ZTE incident exposes deeper roots of the “Chinese way of doing business” which can involve off-the-books communications and bargaining with authorities.

A debate has been stirred after US Commerce Secretary Wilbur Ross announced on Thursday an end to sanctions against ZTE, in an agreement that includes a US$1 billion penalty for the Chinese telecom equipment maker and the installation of a US-selected compliance team at the company.

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The US Commerce Department imposed the export ban on ZTE in April after it was found to have breached the terms of a previous settlement, by paying full bonuses to employees who engaged in the illegal sales of equipment to Iran, failing to issue letters of reprimand to those employees, and then lying about it to US authorities.

The firm’s access to important components that go into everything from smartphones to network equipment had been cut off, forcing it shut major operations.

“While compliance committees report to the board in international practice, they reported to the president in ZTE’s case, who did not have a grasp on up-to-date information,” said Gao, adding that the committee should be responsible for maintaining proprietary compliance knowledge, keeping track of compliance requirements and informing decision-making departments on a regular basis.

“It is the mentality of people that needs fixing first,” said Gao. “Ill-formed corporate governance is a major issue faced by Chinese companies.”

These comments were echoed by Deng Ziliang, associate professor of business at Renmin University of China, who pointed out that Chinese firms hoping to expand globally should examine if there are any legal and regulatory gaps first. “Chinese companies should have a compliance team with ample staff and expertise to reduce the risk,” said Deng. “It’s obvious that they still have a long way to go.”

“Hi-tech firms and those with government backing” should be especially aware of compliance risks, given the looming trade tensions between China and the US, added Deng. “Finance teams should also analyse various risks, including over-reliance on certain suppliers or a high concentration on the source countries for key parts, and learn to increase core competitiveness.”

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For many, ZTE should not be the only company singled out for bad practices amid a potential trade battle between the US and China.

“In ZTE’s case, company management was aware of the regulations and violated them anyway,” said Liu Wenyuan, compliance officer of Beijing-based corporate consultancy firm Key Finder. “While it’s sometimes common in China for companies that don’t obey rules to ‘outdo’ those that do, it won’t end well to apply these practices overseas,” the legal veteran added.

Meanwhile, Gao emphasised that obeying international rules is not enough, strict adherence with compliance rules should also apply domestically.

“China has been stressing its identity as a responsible super power,” said Gao. “Now as a member of the G20, China should abide by the principles of corporate governance installed by the G20 and OECD.”

“The old notion of breakable contracts has to go,” he said.