China: Guanxi and Corporate Security

January 16, 2008 | 1941 GMT

By Fred Burton and Scott Stewart

Stratfor recently reported on the case involving Yuan Hongwei, a Chinese national who fled the United Kingdom before a court was to decide Jan. 10 whether he should be extradited to the United States on charges of violating intellectual property rights. Intellectual piracy is a hot-button issue – and a well-known source of contention between the United States and China. There is a lesser-known issue, however, that can be quite costly as well for Western companies doing business in China and elsewhere in Asia.

That issue is “guanxi”, a complex cultural system of personal relationships — and moral obligations — which most Chinese see not only as a natural way of doing business but also as pragmatically necessary. Many U.S. and other Western businesses, however, simply regard guanxi as corruption.

This difference in point of view creates problems for Western corporate security managers, many of whom have learned the hard way that attempts to end the practice — even by suggesting to Chinese workers that it will not be tolerated — can alienate workers and lower their efficiency. Guanxi, as a part of Chinese culture, cannot be stamped out. It therefore must be understood and shaped so that it can be lived with.

Western company standards, and the codes of conduct in which these standards are codified, hold that the interests of the company come first. When a person becomes an employee of a company, he accepts an ethical obligation to put the company’s interests first. Because of this, an employee who uses his position to have his company purchase goods from the employee’s friend that are slightly higher in price or inferior in quality would be regarded as unethical, even blatantly corrupt. Though such things do indeed happen in the West, few would regard this type of action as ethical. When such incidents are discovered, the offenders often are dealt with quickly and harshly by the company hierarchy, and they frequently are even reported to the legal system.

Chinese business ethics, however, are built on the basis of guanxi, which places relationships above other considerations, including an employer’s code of conduct and even the law. The idea that taking a job with a company, particularly a non-Chinese company, cancels obligations toward people with whom someone has long-term relationships and to whom one owes much guanxi is seen not only as alien but also as the essence of immorality. Perhaps even more confounding to Western businesses, the obligations of guanxi can bridge time and distance, sometimes being invoked even when two people have not seen one another for many years.

Thus, a Chinese national hired by a Western company would consider it morally obligatory to drive business in a longtime friend’s direction, even if the price of his friend’s goods and services are higher than other bidders or if the quality is not as high. Moreover, if one’s relationship obligations require that “gifts” be provided in return for certain favors, that practice is considered quite acceptable under guanxi. Not only is this considered ethical, but the Chinese legal system would have trouble seeing this action as violating the law. In China, it is culturally understood that the written law — like Anglo-American common law — makes room for guanxi.

While guanxi is seen by Westerners as contributing to corrupt behavior, it also is important to understand that guanxi is not a license to steal. As with all ethical principles in China, guanxi is guided by the principle of moderation. Indeed, excessive guanxi, which exceeds reasonable and moderate bounds, is considered to be unethical and illegal, and it is a prosecutable offense. Even the obligations flowing from relationships have their limits.

The Chinese have been conducting business for thousands of years, and their system of business ethics has been shaped by the culture in which it developed — as was the business system in the West. But because of Chinese culture, guanxi defines not only relationships but also how business is done in China. More significant, on a deeper level, guanxi also outlines the way the Chinese view ethics.

Not all guanxi is bad for business. In fact, it can be considered essential for preserving or advancing a company’s interests — such as winning a big contract. Guanxi also can be beneficial when an employee’s friend is able to supply the required goods or services at a lower price or better quality than a competitor. Other times, an employee who has a relationship with a person in the local government can get his company assistance in regulatory or zoning disputes — though the gift provided in return could put a Western company at odds with laws such as the Foreign Corrupt Practices Act in the United States. Not all acts of guanxi involve giving gifts to government officials who do favors, however. Many are similar to the wining and dining that goes on in the corporate world in the West — and are not nearly as unethical as the selective allocation of stock offerings.

At its heart, Chinese culture is far more relational than Western culture, and this difference is especially pronounced in business culture. Western business culture is transactional, while Chinese business culture is relational and based largely on honor and respect. Because of the transactional nature of Western business culture, what a Western businessperson (and perhaps even the U.S. government) would view as corruption on the part of a Chinese employee would be seen by the Chinese as the normal, natural and ethical process of business — a process that has as its end social harmony, as well as profit. The Chinese, in turn, would see the Western principle of evaluating all business relationships on a transactional and purely financial basis — and expecting all employees do so on behalf of their Western employers — as quite unnatural.

Because of this cultural conflict, insisting that Chinese employees abandon guanxi and follow Western business practices serves to further undermine the employees’ loyalty to the company. Because of their strict codes of conduct, Western companies often are seen as alien and incomprehensible entities — a perception that can cause Chinese employees to further intensify the practice of guanxi, causing them to become even more loyal to friends and family while their loyalty to the company declines. As Chinese employees come to understand that Americans seek a different standard of behavior, their intensified guanxi often can become more covert, not because they believe the behavior is shameful or improper but because the continuance of such behavior is necessary for the Chinese to feel they are behaving ethically in the midst of a corporate culture that is ignoring what they view as the natural order of things.

This cultural clash creates a fundamental problem for Western companies doing business in China. Western business is built around reducing costs, not maintaining relationships. The moral principles of Western business — maintaining low prices for customers and increasing shareholder value — collide daily with the Chinese principle of guanxi. In some instances, guanxi can undermine the business process by imposing costs that reduce competitiveness.

In many companies, the guanxi center of gravity is the bilingual cadre of employees who are Chinese-born but who frequently are Western-educated — a class of individuals Western companies depend heavily upon. While these people attended school and maybe even worked in the West, culturally they still have obligations to personal relations that they believe transcend their business and legal obligations. Some Chinese employees can use the strictures of working for a Western company to avoid guanxi obligations that they find objectionable, but this is not a universal thing. Western companies often expect Western-educated Chinese to adhere to Western business ethics, and they are frequently shocked when they find these employees engaging in some of the more blatant forms of guanxi.

Much to the dismay of corporate security directors and internal control auditors, the deep cultural roots of guanxi mean that attempts to tackle the practice cannot be expressed as absolutes. Stamping out all corruption in Western business operations in China often is undertaken as an attempt to stamp out guanxi — which is a frustratingly impossible task. Again, not all guanxi is corruption; some of it is quite harmless, and attempts to completely stop the practice will alienate Chinese employees who see the company as being disrespectful to their culture and trying to subvert it.

While guanxi cannot be eradicated, it can be molded if it is understood for what it is — and is not. Western companies conducting business in China must first understand that they are subject to some Chinese ideals and norms of behavior that are uncommon in the West. They also must recognize that Chinese employees regard many U.S. business practices as alien and unnatural, just as some Westerners regard guanxi as unethical. Finally, it must be understood that China is not a corrupt society — it is an utterly different society. Because of this, it is very difficult for Western companies doing business in China to try to redefine the culture of their Chinese employees without alienating them. This process also can be unnecessarily destructive, especially when alternatives exist, such as publicly acknowledging that guanxi is a way of life but setting clear and strict parameters within which it can or cannot be practiced. These parameters can assist in keeping a company legal and in business.

Many Western businesses do this, not only in China but also in places such as Latin America and Russia. Before entering into any negotiation, they state clearly and up front the legal parameters within which they can act, already laid in stone by their superiors. This shapes their foreign counterparts’ expectations of what they can squeeze out of the negotiations and keeps them from overstepping Western legal boundaries in their demands. This does not always work, but it is increasingly being used and returning results.

Although guanxi lives strong in China, the Chinese business environment already has started to be shaped by Western/foreign business norms. Ultimately, the change is a two-way process that requires the informed and purposeful participation of Western companies. The rules of doing business in China are not the same as they are in the United States or Europe. Without recognizing the profoundly different cultural and ethical standards involved, any attempts at understanding guanxi — much less at controlling it — are next to impossible.