Business Ethics in China

july–august 2008 59

The Chinese Economy, vol. 41, no. 4, July–August 2008, pp. 59–68. © 2008 M.E. Sharpe, Inc. All rights reserved. ISSN 1097–1475/2008 $9.50 + 0.00. DOI 10.2753/CES1097-1475410404

John Hulpke and Cubie Lau

Business Ethics in China A Human Resource Management Issue? Abstract: China is widely perceived as having a problem in business ethics. One view holds that elements of Chinese culture tend to encourage unethical business decisions. Another perspective says that China has business ethics issues because its economy is in transition. The unclear rules of the game create opportunity for business ethics problems. The large amount of new wealth creates incentive to cut corners to get rich. Thus China, perhaps more than more developed economies, is seen as having business ethics problems. However, good business ethics help a society as a whole, and some say that good ethics can be a source of competitive advantage for an organization. Steps can be taken to improve Chinese business ethics at the societal level, at the individual level, and, importantly for this paper, at the organizational level. In addition to ethical leadership, we believe that one key to improving ethics at the organizational level is human resource management (HRM). Improvement can be made in the areas of recruitment, selection, performance appraisal, performance management, compensation, and benefits. Personnel policies can help ensure ethical conduct within the organization. The Western press often says that doing business in China is not easy and typically mentions ethics issues. For example, the guidebook Business China: A Practical Guide to Understanding Chinese Business Culture says, “China is a tough place for any Westerner to do business” (Kenna and Lacy 1994, 9). The book Passport China helps explain why, warning that one should expect “graft at all levels,” but with corruption particularly prevalent in more affluent areas (Li 1996, 63). Although these sources are looking at China from the outside and are now old and possibly outdated, sources from within China, and contemporary sources, keep the percepJohn Hulpke is a visiting professor at Hong Kong University of Science and Technology; e-mail: [email protected]. Cubie Lau is a Ph.D. candidate at University College Dublin. 59

60 THE CHINESE ECONOMY

tion alive. China does not have a good reputation for strong business ethics. A study by Farh gives reason to be pessimistic. Farh (1998) surveyed university students studying business in mainland China and in Hong Kong, and one item asked about acceptance of corruption. About 36 percent of Hong Kong respondents indicated an acceptance of corruption, while more than 76 percent of mainland respondents thought corruption was acceptable. Academics within China come to similar conclusions. Wu Xinwen studied some 800 business people in China and found that “quite a lot of business people are pessimistic about the ethical standards of their superiors and coworkers” (Wu 1997, 323). Look at the most recent Transparency International web page (www.transparency.org). This international anticorruption organization regularly ranks China among the top nations on its “Corruption Perceptions Index.” A 2007 article in the Wall Street Journal put it bluntly: “China has one of the world’s more corrupt business cultures” (Silva and Hutchison 2007). The reasons given to explain business ethics problems in China are similar to the reasons explaining business ethics problems everywhere in the world. But in China, there are some possible special factors. One view holds that elements of Chinese culture tend to encourage business decisions based on relationships instead of what Westerners call “free and open competition.” There are hundreds of articles attempting to explain guanxi (Chow 2005; Tsui and Farh 1997). While most correctly point out that relationships are important in business everywhere, some see guanxi carried too far as a causal factor in business ethics problems, including human resource management problems. For example, if a candidate for a job is a relative, Westerners would say hiring that the relative is nepotism. Hiring anyone other than the best-qualified candidate would be seen as having the potential for conflicts of interest, and perhaps seen as unethical. Most Chinese would probably say that hiring the relative makes good sense for many reasons. Again, hiring relatives is not exclusively a Chinese value. For example, the Maori people in New Zealand believe that hiring family members is the highest form of ethics because it builds stability and trust in an organization (O’Regan 2007). But whether beneficial or not, nepotism has a negative connotation and damages how the world sees business ethics in China. Another perspective says that China today has business ethics issues primarily because its economy is in transition (Xin and Pearce 1996). As the old command economy is replaced by a market-based economy, the rules of the game become less clear, and central authorities have less control. With the very rapid increase in the economy, there is tremendous wealth in the nation. The unclear rules of the game create opportunity for business ethics problems. The wealth creates temptation and incentives to cut corners to get rich. So, whether or not there really is a problem of business ethics in China, there is a perception that business ethics is a problem there. And business ethics probably is a problem, as it is everywhere—the United States Europe, Latin America, Africa, the rest of Asia. Certainly any observer of business in the last decade of the twentieth century is familiar with business ethics issues in the United States, from


Enron to WorldCom to Arthur Andersen to Health South. Europe has its share of business ethics scandals also, including Parmalat among others. In Korea, in the early twenty-first century, the CEO of Hyundai was sent to jail, and in Thailand accusations of corruption are a factor in the military takeover of the country’s government. Business ethics can be seen as a problem in most of the world. Certainly business ethics is also seen as a problem in China and is an issue worth facing. If it is a problem, who should solve it? We believe that business ethics is a problem in China especially in today’s transitional economy. An issue as complex as business ethics calls for action at the societal level, the individual level, and the organizational level. Societal Level At the societal level, law certainly plays a role in promoting business ethics. However, law is just a base line. Following the law is required, but is not enough to ensure business ethics. The incidents mentioned just above involved violations of laws. In a thoughtful essay, a law professor, Christopher Stone, explains why law can never be the total solution (Stone 1975). But law can make a difference. Most people agree that the establishment of the Independent Commission Against Corruption (www.icac.org.hk) made a difference in Hong Kong. And one might take encouragement from the fact that Chinese law is now addressing numerous issues related to business ethics, from piracy to corruption to pollution. Media also play a significant role. Those interested in business ethics find it encouraging to see complaints about corruption or employee safety or other business ethics issues reported almost every day in the People’s Daily or its English-language counterpart, China Daily (Zhu 2007). Indeed, Chinese media in the first decade of the twenty-first century are doing a good job in pointing out role models, individuals who do good things in business and society. The media also are now pointing out wrongdoing and naming names. One commonly sees photographs of business people or government officials, even up to and including mayors of cities as large as Shanghai, caught in anticorruption efforts. The television media also are playing a significant role in changing attitudes toward ethics and corruption. Education is important in instilling values in people in any society. Education has an important role to play in China. Over the decades, China had a tradition of recognizing heroes of the state called “People’s Heroes.” Reports indicate that some corruption fighters are now seen as heroes also, and thus schoolchildren across China are forming opinions that will help lead to a more ethical environment and in businesses in the future (Snell and Tseng 2003). Individual Level Many would say that all ethics is really an individual issue. Societal forces and culture help set the tone, but ultimately ethical decisions are made by individuals.


How do individuals form ethical values? Certainly family is important. Children in any society are taught values by parents and other family members. In China, these values have long included such things as frugality, and loyalty to family and friends. There are many essays describing the influence of Confucian values, even today more than fifty years after the communist government took control of China (Cheung et al. 2001; Lu 1997; Satow and Wang, 1994). Today another factor comes into play. People entering the workforce in the first decades of the twenty-first century are typically from one-child families. Some think that this generation of children will be extremely self-centered and spoiled. It is yet to be seen whether they will be more selfish and perhaps less ethical. Peers may equally have an impact on the values of individuals in China. Some would say that peers are as important as family. For example, why do people smoke? This is more a medical issue than an ethical issue, but still a good example. In smoking, peers are the problem. Peers may be a stronger issue in societies where connections, relationships, are considered more significant and important. In China, whether or not it is called guanxi, friends are expected to help friends (Goggin, Hulpke, Kelly, and Lau 2007). If a friend asks for help in circumventing a law, the person asked will feel pressure to help. This is true in any society in the world. But China is, on the whole, seen as more relational than Western societies. Thus, the overall culture of a society has an impact on business ethics. Peers play a role. Organizational Level But what about at the organization level? In particular, we are interested in businesses. Western literature often assumes that there are good organizations and bad organizations. Good organizations, for example, are celebrated in the Fortune Magazine list of best companies to work for. China also has such a list, with Shanghai’s Portman Ritz-Carlton receiving “Best Employer Awards” several times. Forbes Magazine frequently features organizations seen as socially responsible in regard to the environment, employees, or society at large. The perception is that some organizations are better, and probably more ethical, than others. In the best companies to work for, it is often the human resource management that differentiates good from bad, ethical from unethical. Our main interest in this essay is in organizations and business ethics. This issue looks specifically at the role of human resource management in China’s transitional economy. The discussion above helps increase our understanding of factors related to ethics at the societal level and at the individual level. But these more general factors apply at the overall cultural level. Culture, however, does not offer a complete explanation of good ethics or lack of ethics in specific cases and specific organizations. One of the scholars most associated with the idea of national cultures is Geert Hofstede. His classical work, Culture’s Consequences (1980), helped make common knowledge the idea that the United States is high in individualism and Japan is high in collectivism. The terms individualism and collectivism owe their


popularity in large measure to Hofstede, whose works are still cited and discussed in textbooks and articles today. But even Hofstede now sees reasons to look beyond national culture. He has pointed out that “organizational characteristics may be more important than national cultures as determinants of management practices and employee behaviors” (Schuler and Jackson 1999, 16). Organizational characteristics clearly relate to ethics. Buller and McEvoy (1999) suggest that sound ethical practices are not only important to a nation or a culture, but also to the organization. They hold that good ethics is good business, and that an organization with good ethical capability may have a potential source of competitive advantage. Buller and McEvoy specifically point out that organizational ethical capability involves an organizational culture that supports continual discussion and learning about ethics. Clearly, leadership is one key to building and sustaining a culture that supports ethics. The relationship between leadership and human resource management (HRM) is a two-way street. Ethical leaders help initiate and build ethical cultures. Many organizations perpetuate values set early, long after their initial leaders are gone. Robert Leonard Wood helped Johnson and Johnson (J&J) develop an ethical culture, and the J&J Credo still guides the company today. Xian Janssen Pharmaceuticals is known in China as a firm that delivers quality pharmaceuticals and does not give under-the-table payments to doctors or hospitals to get its medicines used. The J&J Credo is seen in huge characters on the wall of the cafeteria at the Xian Janssen (X-J) plant in Xian, reminding all who eat there daily that J&J (and X-J) is a good place for ethics. One must credit leadership for this, leadership past and present. But also consider who decided to place this huge sign on the wall. One must also credit the HRM officials of the company, in Shanghai, in Xian, and even the parent organizations in the United States and Belgium. Leadership also helped HewlettPackard set an ethical culture that lasted more than fifty years even as the firm grew huge, long after the company began in a garage in Palo Alto, California. Legend, and perhaps reality, holds that David Packard once publicly fired an attorney who gave a briefing about a new U.S. law and hinted that Hewlett-Packard need not pay much attention to the law, as it would be easy to bypass without getting caught. Packard is said to have stopped the briefing and instantly fired the lawyer, reminding the audience of a hundred or so top managers that Hewlett-Packard followed not only the letter of the law but the spirit of the law. Whether or not the story is precisely true is not so significant. What is significant is that people at HewlettPackard recounted the story for fifty years as if it were true. They reminded one another that at their company, one can get fired for taking ethical shortcuts. In the twenty-first century, Hewlett-Packard has changed, and it is questionable how ethical the firm is now. But clearly, leaders help set a firm going in an ethical or unethical direction. But as a firm matures, organizational policies keep an ethical culture going, and those in charge of human resource management set and publish those policies. Organizational culture and the leadership which initiates and perpetuates the


culture are critical. Ethical practices are important in any organization. Professor Lyle Schoenfeldt, whose influence will be apparent at many points in this paper, commented in a communication to the authors that it “starts at the top of the organization and then reaches throughout. It becomes part of the DNA or the organizational culture. What makes it all come together in a particular organization are the leaders and the culture t they create. If the culture can be driven to all corners of the organization through leader behavior, through appropriate control systems, and through shared values one can be sure that no employee who would think to act unethically.” If the culture, the DNA, does not support ethical behaviors, then the entire organization may develop an unethical culture. Consider the U.S. example of Enron and the accounting firm Arthur Andersen that helped Enron defraud the public. “Looking the other way becomes the norm and those who come up with the most ingenious methods of cutting corners are rewarded as a result of the profitability of their units.” As Schoenfeldt points out, when one company follows unethical practices, there may be negative impacts on their competitors as well, and on society overall. Without ethical practices there is a race to the bottom. For example, unethical organizations can cut corners in numerous ways, such as hiring child labor, disposing of toxic byproducts in nearby streams, using intellectual property without proper licensing arrangements, making substandard or even dangerous products, paying bribes to gain an advantage, and so forth. In this scenario the company that cuts the most corners is the most profitable (other things being equal). The ethical company bears a higher cost of operation and needs to charge more for its products.

These larger considerations reinforce why we think ethics is important, especially important to China in this period of transition, and to organizations within China. For firms in China to build and sustain an ethical culture, those responsible for human resource management play key roles. Looking again at the study referred to by Buller and McEvoy (1999), it is interesting to note that they too point to the role of human resource managers in creating ethical capability. What is needed are human resource systems and practices to acquire, develop, and sustain ethical capability. We agree that human resource management can be significant in building an ethical organization in China’s transitional economy. Human resource practices can play important roles at every stage of human resource management. There are many ways to describe the stages in HRM. One such list mentions planning, staffing, appraising, rewarding, and developing (Schuler and Jackson 1999). The American Society for Human Resource Management (www.shrm.org) suggests that the major functions of HRM include planning, recruiting, and selection, human resource development (HRD), compensation and welfare, employee relations and industrial relations, safety and health, and human resource research. Another way to look at HRM is to divide it into two parts: primary functions, which include


recruitment and staffing, compensation and welfare, industrial relations, HR planning, employee opportunity equality, and HRD; and secondary functions, which include organization and job design, performance-management systems, research, and information systems (De Simone and Harris 1998). Another source lists “traditional” HRM activities as recruiting, selection, compensation and benefits (Farh 1995). A management textbook looks at HRM as a whole system that has five major components: recruitment and selection, training and development, performance appraisal and feedback, pay and benefits, and labor relations (Robbins and Coulter 2007). We will consider each of these areas briefly to illustrate the role HRM can play in building and maintaining ethical organizations in China today. Recruiting and selecting plays a key role. Some job announcements in China today specifically state that the firm is seeking ethical employees (see, for example, http://work-in-china.com/detail.php?siteid=810, an announcement asking for honesty and strong ethics). Johnson and Johnson, and its unit Xian-Janssen in China, pay careful attention to hiring. False statements on applications, for example, immediately disqualify candidates, and falsifications found later will bring dismissal. The opposite was the case in Enron’s hiring. Stress interviews actually helped set the tone; even in hiring and selection, aggressive behavior and cutting corners were rewarded. Training and development play key roles as well. Two Korean firms, Samsung and Posco, sent ethics officers of their respective companies to Hong Kong in 2007 to learn about ethics approaches there. Both firms sent more than a dozen ethics officers, and meetings with Hong Kong’s Independent Commission Against Corruption were part of the trip agenda. This illustrates how training can be supportive of building and maintaining an ethical culture. The human resource officials who set up these trips saw the significance of training and development in ethics. Performance appraisal also plays a role. Some firms have a specific section in their periodic performance-appraisal forms asking to what extent the person being evaluated supports the company code of conduct or ethics code. The role of HRM in compensation and benefits as related to ethics is complex. But equal pay for equal work is today a global goal; women should be paid as much as men. This goal is not met in most organizations globally. It is also true that China does not pay women as much as men in many cases. This is an important area where human resource management must be vigilant, always moving toward equal opportunity. To review, many think there is a problem of business ethics in China. If their assumptions are true, is there a role for human resource management in making things better? We believe the answer is yes. Area by area, human resource practices can make a difference. This is true in each of the functional areas mentioned above, but there is another area worth considering. The individuals in charge of human resource management are usually the people who issue personnel policies. In large organizations this may take the form of personnel policy manuals, and in smaller organizations, it may simply consist of notices on the employee bulletin board. Some would say that policies follow


organizational priorities set by top management. Even so, how policies are spelled out falls to those involved in human resources. If a human resources director puts out a weak, watered-down policy against sexual harassment, and that policy has no penalties and sounds like a platitude, then there may as well be no policy at all. Even if leaders have ethical ideas, those implementing their ideas have a great responsibility and a great opportunity to build more ethical organizations. The truth is, progressive and ethical HR policies do not always originate at the top. Often leadership expects and encourages HR to suggest new policies. If a firm has a strong code against bribery, for example, it may have been developed by individuals well below the top-management level. The U.S.-based firm Becton Dickinson (www. bd.com/citizenship) has developed detailed anticorruption policies in its global code of conduct because representatives in the field report problems. Similarly, human resource managers in China can respond to needs seen at any level in an organization, drafting policies which are modified and ultimately become both part of the written policies and part of the organizational culture. Conclusion Sometimes it is not necessary to empirically test hypotheses to improve understanding. In fact, there are now numerous voices suggesting that the current vogue in academic management research is faulty. Hypothesis testing may focus on what is known and try to extend theory whether or not the theory has a significant link to reality (Cummings 2007; Starbuck 2006). Professor Joseph Cheng (2007) says that too much of what management scholars say is not linked to real-world issues. In addition, the current system of submission-review-revision-publication is definitely biased toward publication of papers that statistically test and support hypotheses. Those studies that refute hypotheses or find that nothing significant is going on do not get published. And more important, issues, however important, that do not lend themselves to statistical analysis are not even studied, much less published. Thus, scholars often focus on things that can be supported or proved, whether or not the issues described are relevant to the real world. Studies that reject hypotheses end up in the file cabinet, not in publications. But here we are talking about issues of high importance. China is now a world economic power in transition. Issues such as right and wrong, good and bad, are issues requiring thorough reflection more than empirical study. Business ethics is important, but just how important? This is not a question amenable to statistical analysis. So, should we ignore the issue? Our contention is that human resource managers in China can help improve the ethical climate of their organizations and, in turn, the ethical climate of China. This will be beneficial as China moves forward. Now is the time, during China’s period of economic transition. Thus, it is not necessary to prove statistically that there is a perception that problems exist in business ethics globally. A review of actual phenomena suggests that there are problems in business ethics. It is not necessary to prove that there


are problems in business ethics in China, it is enough to say this is a widely held perception, as can be shown by reading any issue of any newspaper in China today. And it is not necessary to verify that those who perform HRM functions can affect business ethics, even in China. It is enough to suggest that human resource could have such an impact. As scholars, we have the responsibility not only to dissect and report on the present conditions of HR and business ethics in China, it should also be our duty to suggest how things could be improved. And it is our contention that HRM could be a significant force toward improved business ethics everywhere, including China. References Buller, Paul, and Glenn. McEvoy. 1999. “Creating and Sustaining Ethical Capability in the Multinational Corporation.” In Strategic Human Resource Management, ed. R. Schuler and S. Jackson. Oxford: Blackwell. Cheng, Joseph. 2007. “Phenomenon-Based Research.” Journal of International Management 1, forthcoming. Cheung, Fanny, K. Leung, Z.X. Zhang. H.F. Sun, Y.Q. Gan, W.Z. Song, and D. Xie. 2001. “Indigenous Chinese Personality Construct: Is the Five Factor Model Complete?” Journal of Cross-Cultural Psychology 32: 407–33. Chow, Irene. 2005. “The Impact of Institutional Context on Human Resource Management in Three Chinese Societies.” Employee Relations 26, no. 6: 626–42. Cummings, Thomas. 2007. “Presidential Address: Quest for an Engaged Academy.” Academy of Management Review 32, no. 2: 355–60. DeSimone, Randy L., and David M. Harris. 1998. Human Resource Development. New York: Dryden Press. Farh, Larry. 1995. “Human Resource Management in Taiwan, the Republic of China.” In Human Resource Management in the Pacific Rim: Institutions Practices and Attitudes, ed. L.F. Moore and P.D. Jennings, pp. 265–94. New York: Walter de Gruyter. ———. 1998. “Exploring Business Ethics in Chinese Societies: A Comparison of Mainland China, Hong Kong, and Taiwan.” In A Sinyi Cultural Foundation Series: The Management in Taiwan and China, ed. B.S. Cheng, K.K. Huang, and C.C. Kuo, vol. 2: 1–36. (in Chinese). Goggin, Liu, John Hulpke, Aidan Kelly, and Cubie Lau. 2007. “Good Guanxi, Bad Guanxi? Drawing the Line.” In Perspectives on International Corporate Responsibility, ed. > Keynote speech delivered at the 24th Pan Pacific Conference, Otago, New Zealand, June.


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