EXTRACT from Harvard Business Review - HBR

September 2011

HBR Case Study: Culture Clash in the

 Boardroom

by Katherine Xin and Wang Haijie 

(Harvard Business Review) HBR’s fictionalized case studies present dilemmas faced by leaders in real companies and offer solutions from experts. This one is based on a teaching case at China Europe International Business School in Shanghai.

The room was already packed when Liu Peijin walked in. His flight from Shanghai to Chongqing had been delayed, and he had fretted about missing the training. But fortunately he’d gotten there in time. Liu knew his presence was important. As the president of Almond China, he wanted to show his Chongqing colleagues how much he cared about the topic under discussion: ethical business practices.

Taking his seat, Liu nodded at the head of HR, who was running the training. The two went way back: Both had been with their German parent company, Almond Chemical, since 1999, when it first established operations in China. Since then Almond China had set up two joint ventures with local partners—the only way foreigners could do business in chemicals in the country. Almond controlled 70% of the stock in one of them. The other was a venture with Chongqing No. 2 Chemical Company, in which Almond had a 51% stake and the Chinese directors were very active.

Liu sat next to Wang Zhibao, the vice president in charge of sales for the Chongqing joint venture. Wang looked skeptical. He was good at his job, having closed several key deals that had kept the business afloat during its early years. But he was also at the center of a conflict between the venture partners: The Chongqing executives were increasingly vocal about how difficult it was to operate according to European standards, particularly the rules against gifts and commissions. Such incentives were commonly accepted in China and routinely employed by Almond’s competitors. Trying to do business without them, Wang argued, was foolhardy. “This is China, not Europe,” was his refrain.

But the line between these practices and breaking the law was a fine one. Almond was headquartered in Munich and listed on the New York Stock Exchange as well as the Frankfurt Stock Exchange, meaning it was required to adhere to the U.S. government’s Foreign Corrupt Practices Act, which specifically forbade the bribing of foreign government officials by U.S.-listed companies.

Liu kept an eye on Wang as the HR director explained Almond’s ethics regulations and the legal consequences of business bribery. Liu knew the rules made sales more difficult, but Almond’s policy was clear, and he wanted to make sure that every member of the sales team understood it.

He had taken the same hard line on safety and environmental practices. The production facilities in Chongqing had been built according to German national standards, and all the safety equipment—helmets, shoes, and protective clothing—had come from Europe. The Chinese partners had called these investments “wasteful” and “frivolous”—“luxurious expenditures” that the young venture couldn’t, and shouldn’t, afford. But, with backing from the head office, Liu had stood firm. Similarly, he’d insisted that the factory’s MDI (methylene diphenyl diisocyanate) waste be treated as a dangerous substance and processed with a special cleaning agent, in accordance with European standards, even though Chinese law didn’t mandate it. His partners had been dismayed at the millions of yuan this would cost. But Liu refused to compromise, because he had witnessed the consequences of lesser standards firsthand. Years before, when he was working for another Chinese chemical company, an affiliate’s chlor-alkali plant had suffered an explosion, injuring 200 staff members and residents of the surrounding area and halting production for more than a month.

The training was reaching its end, and the HR director signaled to Liu that it was his turn to speak. Liu hesitated slightly as he looked at his Chongqing colleagues. “At Almond, ethics are nonnegotiable,” he said. “We need to remember these laws as we go about our business. We are not just a Chinese company; we’re a global one.” Solemn, blank faces stared back at him.

As he left the room, he couldn’t help feeling that his remarks had fallen on deaf ears.