Never far from the news, corruption is a recurring problem for responsible investors. Defined by the anti-corruption watchdog Transparency International as ‘the abuse of entrusted power for private gain’, corruption is widely appreciated as negatively impacting societies where it is endemic as it undermines faith in institutions, increases transaction costs, reduces the quality of public services, and distorts the market by favouring influence over efficient quality. The extent of corruption varies across the globe. One country identified as being vulnerable to the practice is China, which is ranked 80th out of 176 on Transparency International’s Corruption Perceptions Index (2012). Following the latest change in leadership in 2013, China is now witnessing a re-energized crackdown on corruption.
Since 26 August 2013 five executives of China National Petroleum Corporation (CNPC, the largest oil and gas producer and supplier in China) have been investigated by the Central Committee for Discipline Inspection (CCDI) for corruption, including Jiang Jiemin, the director of the state-owned Assets Supervision and Administration Commission (SASAC) and former chairman of CNPC. Rumors have been circulating that additional senior officials from the company and its subsidiaries have been removed by the government, and that many others with close ties to CNPC are also being questioned. This most recent anti-corruption campaign has drawn the attention of the Chinese public, beginning shortly after regulators put the spotlight on GlaxoSmithKline PLC (GSK) and other foreign pharmaceutical companies for their involvement in a large national bribery scandal.
Historically speaking, every major leadership transition in China has been followed by an anti-corruption campaign, and Xi Jinping’s new government has been no exception. However, the campaign this time around appears to be much tougher and serious than before. Over 20 high level government officials have been investigated since the change of leadership. CCDI, the Party’s anti-corruption watchdog, launched its official website on 2 September 2013 for the general public to report irregularities concerning government officials. Following the public trial of Bo Xilai, a prominent former Communist Party official accused of bribery, embezzlement and abuse of power, the CNPC became the focus of the government’s anti-corruption efforts. As one of the largest state-owned enterprises (SOE), its senior managers are all Party members, and are technically regular government officials. This is why CNPC’s corrupt executives were removed by the CCDI for investigation and were not charged by either the Ministry of Commerce or the State Administration for Industry and Commerce, the two main bodies that typically conduct commercial bribery investigations.
Back in December 2003, China signed the United Nations Convention against Corruption, and later established the National Bureau of Corruption Prevention to combat graft in 2005. China, however, does not have a systematic legal structure concerning domestic or overseas practices. All anti-corruption measures are contained within different provisions of China’s Criminal Law and Anti-unfair Competition Law, and are only composed of two or three different articles related to commercial bribery. In addition, a scattered mix of anti-corruption articles can be found in regulations for various industries, such as Pharmaceuticals Administration Law and Construction Law.
The current crackdown on companies engaged in corruption adds to the reputational risk of operating in China. A besmirched reputation is not the only consequence for a company engaging in bribery, however, as it exposes it to blackmail and further demands for bribes, and fosters a skewed environment when it bids for government contracts.
Responsible investors are aware of the risks posed by investing in companies operating in China, and realize that their companies need a strong anti-corruption programme supported by credible compliance systems. This is especially true for companies in sectors commonly associated with corruption, and whose industry is characterized by large investment and significant government interaction and regulation, such as public works and construction, utilities, real estate and property, oil and gas, and mining.
While the governance of foreign companies operating in China deserves a cautious study by the investor community, that of Chinese companies themselves requires much greater scrutiny, and possibly even active ownership and demand for transparency on behalf of investors. According to Transparency International, Chinese firms came second to last on its Bribe Payers Index (2011) studying the businesses of the world’s 28 largest economies. Only Russian companies fared worse. Few Chinese companies have convincingly acknowledged this risk, however, as Ethix SRI Advisors has repeatedly noted failures in their disclosure of their anti-corruption programme.
Given the incipient risks associated with corruption in China, it would be advisable for investors to scrutinize the anti-corruption programmes of their companies seeking to gain a foothold in the Middle Kingdom. More importantly, however, investors with an exposure to the emerging market should encourage their Chinese companies to disclose their anti-corruption programme and ensure that that it includes the following components:
The above are the rudiments, and no anti-corruption programme should be without them. They are often not sufficient, however, especially in the bribery-prone sectors. For these, active owners may want greater assurances, and urge their Chinese companies to:
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About Ethix SRI Advisors
Ethix SRI Advisors is a Nordic-based consultancy which provides institutional investors with responsible investment-related services and products. Ethix has extensive experience in ESG research and analysis. It is the pio*neer of norm-based screening and is a frontrunner in SRI emerging markets solutions. The consultancy’s analyses encompass international humanitarian law, human rights, labour rights, the environment, anti-corruption, and governance issues. Ethix's clients manage SRI assets totaling in excess of €300 billion. www.ethix.se
About SynTao
SynTao Co., Ltd. is a leading Beijing-based consultancy promoting sustainability and responsibility in the Asian region. We provide consulting, research and training services in Corporate Social Responsibility (CSR) and Socially Responsible Investment (SRI) . syntao.com/index_EN.asp
SynTao is Ethix SRI Advisors’ research partner in China.
Author
Damien Fruchart, Ethix SRI Advisors
Valentina Wu, SynTao Co., Ltd.