ChinaMarket Insights

Can Good Reputation Become a Risk in China Business?

By 22 November, 2017June 30th, 2023No Comments

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Reputation management has been put on the agenda of nearly every company board over the past few years, and its importance is unanimously acknowledged.

A company’s reputation is often thought to be its public image or positive brand. The public image of a company is often just a result of the effect of marketing actions, whereas a good reputation also requires that attention be paid to fundamentals, such as comprehensive engagement of upper management, the inclusion of reputation risks in an extensive risk management strategy, transparency, uniform behavioral models and a self-critical attitude.

When does Good Reputation become a Problem?

Despite reputation issues having been front and center for a while now, many companies have failed in their reputation risk management efforts. The common element in many cases where a company has sailed onto the rocks is often the gap between a company’s reality and it public image. This phenomenon can be fed by short-term profit seeking, eccentric incentive schemes, management silos, poor internal communications and a simple lack of understanding. The wider the gap between reality and public perceptions, the greater the reputation risk. The materialization of the risk becomes even more likely when your local China staff views compliance and legal issues far differently than the European headquarters or a government audit would. Therefore it would be extremely risky to leave the compliance duties solely to the local China management

Often foreign firms in China will become the initial targets because it is the domestic competitors that the Chinese government would like to see succeed and at some point become global challengers. Recent textbook examples of companies that have developed a large gap between image and reality in China are the pharmaceutical giants such as GSK, Eli Lilly, Novartis and Sanofi. They have traditionally had a spotless public image, which has been reinforced over time.

Often the materialization of reputation risks e.g. by means of corruption suspicions arises when the commitment of the upper management has been weak, incentive schemes have guided internal goals in other directions, internal communication has been insufficient and cost-cutting measures have been targeted at functions that have little direct financial impact but are critical in a wider picture, such as limiting the investigation of reports coming in through whistle-blower channels to only certain areas.

Therefore it is most challenging to expect compliance in your China operations to be in order if simultaneously the home base in Europe is not. Nearly all of the companies that have seen negative press recently have previously had a good public image. This means that the gap between image and reality can come as a complete surprise to the board, and there may be no contingency plans in place for the possible repercussions. Negative publicity can take up a disproportionate amount of management’s time and resources, when dealing with the fallout becomes a new core function for an indeterminate period of time. Blaming solely the local Chinese management for the incidents can be unjustified and short-sighted.

Is China Compliance enough?

An increasing number of companies have launched their own global compliance programs and functions as part of their risk management efforts. While this is a step in the right direction, rolling out a compliance program alone in the organization is not a comprehensive solution to the problem. Many companies simply rely on behavioral instructions, policies and e-learning available online. However, once compliance systems have been built, the search for and investigation of other vulnerabilities is often forgotten. When done right, compliance is a good tool, but it is not enough to content oneself with unless other risk elements are also identified. Also scaling the parent company compliance program in China without taking into account the cultural differences can contribute to the materialization of the risk.

Challenging and renewing entrenched routines is something that no company can do too much of. A long-standing good reputation, if left unquestioned, can easily become an unforeseen business risk in China business.

ARC Consulting can help your organization in building better management systems in your Asian operations in order to be better positioned to encounter eventual future reputation and compliance challenges.

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