Ethical Challenges for the Treasurer in China

China’s position as the world’s second largest economy is an important consideration for nearly every treasury professional in almost every industry; first and foremost as a source of supply and second as a major consumer market. Furthermore, as China is proving to be the world’s most buoyant market for mergers and acquisitions (M&As), an increasing number of treasurers in western companies need to manage the cash and financing for China-based subsidiaries, while treasurers of companies headquartered in China have increasingly international cash and risk management requirements. In either case the treasurer needs to do their job with integrity when dealing in the market.

The Role of the Treasurer

Of all the roles in a corporation, none depends more on trust than that of the treasurer. Because of their roles as ambassadors for the company both internally and externally, it is important that all treasurers ‘set the tone’ and behave with the highest ethical probity. The Association of Corporate Treasurers’ (ACT) ethical code sets out very clearly the treasurer’s responsibilities to those who put their trust in them. Treasurers are uniquely aware of their organisation’s reputation and responsibilities, whether they be to bankers, investors, the general public or fellow employees.

Historically, risk management was a term used to address insurable risks but now also involves addressing uninsurable risks such as a company’s reputation and integrity risk. A good reputation takes time to build, yet is so easily lost. It is easier to cultivate if the company recognises that doing business ethically makes for better business. That is what the treasurer is there to promulgate too, because better business means better margins. As part of their role is to manage risk, treasurers can view their company’s ethical policy as an ‘insurance’ against integrity and reputational risk.

It is not just the reputation of the company that they represent; it involves personal reputation as well. Indeed, in some cases it is prudent to put personal reputation above that of the company, because what you may be asked to do could go against your own personal set of values. This is the way by which you judge right and wrong when the correct answer isn’t clear and you can be faced with an ‘ethical’ dilemma.

It is important for treasurers to understand the objectives of the organisation they work for, their role within it, and their part in the reputation, governance and accountability process. Corporate governance systems are there to reduce the financial, business and operational risk of a firm, and the treasurer has an important role to play in ensuring that these risks are minimised. To ensure corporate governance guidelines are complied with, particularly in a country like China where the corporate governance structure is weak, the treasurer should ensure they act with integrity, independence and professional competence.

Doing Business in China

Chinese society is heavily influenced by the traditional values associated with Confucianism, which promotes a strict system of norms and propriety. This determines how a person should act within a community, with hierarchy a central theme. These traditional values can have a significant influence on employees’ behaviour in a corporate setting.

The concepts of
guanxi
(a deeply embedded system of relationships, personal connections, contacts and networks) and
mianzi
(the concept of ‘face’, broadly defined as pride or self-respect and its corollary – the preservation of the self-respect of others) are central to Chinese society and heavily influence business life.

The cultivation of guanxi can be thought of as a form of significant social capital and is not something casually acquired by exchanging business cards or having a single meal together. Rather, relationships are formed over time and are based on trust and reciprocity. It is common in China for an employee to take contacts with them when switching jobs as the guanxi is with the individual, not the company. Trading competitive information among one’s guanxi network may, in some cases, also be considered an acceptable practice. Convincing employees of the importance of maintaining confidentiality can be challenging.

Direct disagreement or confrontation with someone, such as a colleague or a person in a position of authority, may cause them to lose mianzi and is to be avoided. This, along with Confucian values of loyalty to one’s group and respect for superiors in a hierarchy, as well as the association with negative historical events such as the Cultural Revolution, often means the willingness of the Chinese to speak up or whistle-blow on colleagues is low.

As with many countries across the Asian continent, practices such as gift giving, token cash gifts or ‘red envelopes’ at special occasions – such as during the Spring Festival or the birth of a child – and invitations to family events are still prevalent in today’s business environment and serve the important function of ‘giving face’ or honouring a potential business partner.

Corruption is prevalent in both the public and private sector in China. Transparency International ranked China as the 75th most corrupt country in the world out of a total of 185 in their 2011 Corruption Perception Index and further research found that the Chinese public view business as the most corrupt institution, closely followed by political bodies and public officials. There is often a lack of separation of public officials from management in state-owned enterprises (SOEs), a lack of transparency when entering joint ventures with Chinese companies, and a requirement to use agents. Facilitation payments, also known as kickbacks or backhanders, are a common form of bribery.

To date, the corporate governance framework in China has been weak owing to the legacy of a planned economy, with substantial Party interference in the running of SOEs. The lack of accountability and transparency has contributed to the problem of corruption and bribery in China. A 2011 survey by the American Chamber of Commerce in China (AmCham China) of 318 US companies showed that there was significant dissatisfaction with corporate governance in China.  Companies expressed concerns over inconsistency in regulatory interpretations or unclear laws (42%), corruption (30%) and national protectionism (28%).  The World Economic Forum (WEF) Global Competitiveness Report for 2011-2012 reports similar findings and ranks China 57th out of 142 countries on its standards of business ethics index.

Ethical Challenges for Treasurers

Treasurers can face an array of ethical challenges. Common problem areas are major refinancing projects, managing balances over year-end or reporting points in case they fall foul of banking covenants. Banks may try to influence the treasurer to deal with them. Not only may more invitations of the ‘special’ kind be received, but if the markets are difficult or the company faces tough prospects you may be in doubt as to which course of action you should take. In company value terms there will probably be reference to dealing with all stakeholders with integrity and honesty. Anything other than an open and honest approach is remembered by others with feeling. Personal reputations and guanxi can become tarnished generally across the market all too easily. Best practice is always to talk it through internally, weighing up the pros and cons of your options, and then agreeing the strategy. In basic terms you may be weighing up your personal standing versus a couple of basis points on the margin.

While it is important that the company provides practical guidance to staff on dealing with ethical challenges, it is no good having a code of ethics unless it is relevant not only to the business policy but to the issues that face individual people in that business. For example supposing the treasurer is asked by a minor relationship bank to go on a weekend to a luxury golf resort outside Beijing, all expenses paid, just when the treasurer is about to undertake a major refinancing programme. An easy dilemma to resolve? In China, this may simply be part of the relationship building process, which is a time-consuming, normal part of business. Saying ‘no’ may constitute a loss of mianzi for the bank employee. A code of ethics for a treasurer to refer to, either provided by the company or by the ACT, can help to ensure consistent decision making and ethical conduct when situations like this arise.

Upholding the ethical standards expected in a company’s home market when doing business in a country with such differing cultural mores requires courage and leadership. It can mean going against the grain and sometimes turning away business where the risk outweighs the benefits.