ISSUE 5: AUNT MAY, AGONY AUNT FOR BUSINESS IN CHINA

HOW TO DEAL WITH MY CROOKED GM AND OTHER LOVE STORIES GONE WRONG

Please note all content is personal opinion only and does not reflect the opinion of my employer or indeed anyone else. Indeed, it may not even reflect my opinion later today.

In 2021 and 2022 our team has noticed an uptick in compliance and internal fraud cases amongst our foreign invested clients in China. Many involved the General Manager. To get greater insights, we are excited to be joined today by Aunt May, our no-nonsense China business expert and agony aunt who takes the tough questions and deals out tough love:

Letter 1: Baffled in Berlin

The first question relates to a General Manager who may have strayed in his loyalties:

Dear Aunt May,

I am a 54 year old man and I have concerns my general manager in China may be unfaithful to the company.

We have for many years had a close and I thought exclusive relationship but since Covid he seems to have drifted away. He does not write many emails. When we have zoom calls, his camera is turned off.

As work has been busy I have been trying to put China out of my mind and just wish for the best in that market. Unfortunately, I have now received a recent detailed email from someone within the China organization detailing acts of infidelity. The list is very long – procurement fraud by providing confidential information to favored suppliers for commissions, failed to disclose financial difficulties of a supplier resulting in losses and delays in supply; shared an unreleased new product sample jointly developed by our company and another company to one of his buddies; has family members involved in our sourcing operations; required suppliers to give generous red envelopes to his daughter’s wedding and many more.

Is it possible that the general manager has been unfaithful to our company – on multiple occasions with many suppliers? If it is true then it is not just a one off fling but multiple long term relationships. To be fair we did receive reports of misbehavior in the past but we considered these to be just innuendo by a disgruntled employee. Indeed, when the previous whistleblower was uncovered the general manager got rid of the troublemaker pronto.

It is also not solely the general manager’s fault – to be fair we do not have a robust system in place to supervise employee conduct. Since covid our compliance process is pretty much like an honor bar in a hotel – once a year the general manager signs a short note in English confirming that he has acted in a compliant manner. He has had a perfect record since this was instigated.

Until now we have thought an investigation would be unfair to the general manager and damaging to our China operations.

This latest email has put a spanner in the works as it clearly comes from someone who has been a long-term employee of our China operations. He/she has provided concrete examples of serious misconduct and is seeking to bring these cases of serious to HQ’s attention.    

As an investigation is a very serious matter, will have material consequences and need a great deal of resources – my question is how can I continue to ignore this troublesome whistleblower and continue to turn a blind eye?

Yours,

Baffled in Berlin

Aunt May Replies

Dear Baffled in Berlin,

As I tell my nephew Peter – with great power, comes great opportunities to steal great amounts of money.

I know it can be difficult to accept that your China general manager has been unfaithful … this is even the case if you have had sneaking suspicions for years. I understand that many companies prefer “ignorance is bliss” to confronting matters head on. Unfortunately, putting your head in the sand like an ostrich is not a successful option – you need to take action!

At a minimum you need to investigate what is really happening and then make a plan. Also, what is this self-certification compliance program – are we in kindergarten? A few years ago, two American lawyers called me about their long term general manager who was clearly embezzling from the company. After I laid out what had happened one of the American lawyers said “This cannot be – Liu has been signing the code of conduct – EVERY YEAR”. To both their surprise and mine, I was unable to answer … not because I was stumped but because I was laughing like a hyena.

However, when dealing with an allegation it is important to not pre-judge (even though I always suspicious of everyone, all the time – in most cases where there is smoke there is fire but not always).

Sometimes disgruntled employees are … just disgruntled. Sometimes it can be someone frustrated with an imperious management style rather than concern at real non-compliance.

In some cases, HQ overreacts and moves to a full-scale investigation (Big 4* consultants flying in from overseas, massive disruption to operations etc.) and found … very little. In one case the main issue was that the management had distributed small gifts at Spring Festival to suppliers and customers. They were not tied to any specific project and did not seem to be non-compliant in spirit. Yet the private equity owned HQ sacked all management over the findings. When I was protested this to HQ they advised that the management had caused great losses. “What losses?” “Well, the Big 4 investigation cost over USD 1 million”.

But in your case, it seems likely your General Manager has betrayed you. You need to move on and find someone who you can trust. You cannot continue to waste years on what is a toxic relationship.

Aunt May

* when typing Big 4 I made a typo with shift and it typed Big $ - ironic.

Letter 2: Fake News:

The next letter is from an overseas CEO who has to write a letter:

Dear Aunt May,

Late last year we finalized a detailed investigation into the general manager of our China operations. We uncovered the following:

• the General Manager established a private company

• registered our trademarks in China

• proceeded to buy the full production of our manufacturing WFOE at below cost

• then his distribution company then sold the products on the market at a high profit

• also his wife is the CFO of our China operations (we thought at the time was “buy one get one free”)

After protracted discussions we have finally come to a settlement – and naturally this involves us providing him with a glowing reference – and even more naturally this distasteful task falls to me.

Any guidance as to how to approach this?

Writer’s Block in Washington

Aunt May Replies

Dear Writer’s Block,

It is always exciting to see a company with a China subsidiary with a GM and his wife as the CFO. Much like seeing a whale shark it is breath-taking to behold and you almost do not believe your eyes … but then you find out it is more commonplace than expected.

It is obvious but worth repeating that having the GM’s wife as the CFO is a bad idea. I think if you visit your China subsidiary and a management meeting resembles a family reunion … then you need to take action.

But you are a good man and I do not want to just blame you. In respect of a crooked GM, you are not alone in initially wishing to put him in a jail cell and then a few months later the company provides him with both funding for the GM’s next venture and a glowing reference for his next corporate victim. Many others have been in this situation.

If you are forced to write such letters it is good to pepper them with a hidden meaning so as to give the careful reader a heads up as to possible trouble ahead:

• “He treated the company as if it were his own.”

• “We do not know how the company will continue without him.”

• “The company would be in a completely different state without him.”

• “You would be a lucky man if you could get this man to work for the good of your company.”

• “I can assure you that no person would be better for the job.”

After writing the reference suggest a hot shower and a stiff drink – this will work wonders.

Write soon!

Aunt May

Next Issue: Solutions

So we have seen the necessity for multi-nationals to delegate more to in-country management at a time when expats are heading for the exits. In this issue we have considered the shenanigans management can get up to.

Do we have solutions? Spoiler alert: Maybe. Next issue I hope to have some insights from some friends on how to avoid these problems – I have not asked them yet so maybe not.

As always great to hear from you – especially questions that would be interesting to consider in such issues – we can do anonymously or if you are an exhibitionist we can accommodate this too.

See you next week,