IN FOCUS

In both Europe and China the common CSR discourse asserts that through protecting the environment, enhancing transparency, taking care of workers and helping the community, corporations will not only build their reputation, strengthen their brand and enhance their corporate image but they will also improve their bottom line. Despite these attractive incentives some managers are questioning the relevance and effectiveness of CSR. Perhaps the numerous invitations to CSR conferences, seminars, workshops, etc; and the floods of articles preaching the transfer of CSR best practices, have lead to a "CSR fatigue". The issue is not a lack of interest in corporate social responsibility as "responsibility" - though perhaps not defined in the same way in China and in Europe - which is generally understood as a necessary ingredient of sound management and is also considered as an expected attribute of human behaviour. The issue is in the "corporate" and "social" components of CSR. Opponents in both China and Europe argue that CSR is inappropriate, not cost-effective and untimely. Here are their arguments:

Inappropriate

Any manager who has been through business school has heard the message that a "corporation" cannot have a conscience, only an "individual" can. Furthermore, the dominant paradigm still endorsed in most business schools is Milton Friedman's claim that the responsibility of the corporation is to maximise shareholder value (without deception and fraud). The manager is seen as the agent of a principal, who trusts and expects him to behave in a way that maximizes his return, to reward the risk he takes. Re-distribution of profit is not the responsibility of the manager, the hand of the government is there for that purpose. Hence social responsibility is seen as inappropriate to the manager and therefore a responsibility best left to government. It does not belong to management, as after all companies are not in the "common good" business. It is passing the buck to the government.

Not cost-effective

CSR initiatives are said to cost money. Investments in the environment, worker and product safety, employee training, quality control and community development are likely to affect the bottom line, at least in the short term. As competitors do not necessarily espouse CSR approaches and may cut corners, these CSR expenditures may be seen as not cost-effective. Why should I invest in being or doing good, when my competitors won't and when there is no level playing field? Why shoot myself in the foot?

Untimely

CSR approaches are possibly rewarding in the long term and seem to be increasingly used in Europe, but it is too early for China. The Chinese market is not yet ready for CSR. It is seen as a luxury of a developed economy and China is not yet at a stage where it is able to afford these supposed to be wonderful (but expensive!) social practices. CSR practices are premature in China, in the same way that no one in Europe was concerned about them during the industrial revolution when unsafe working conditions, child labour and a complete disregard for the environment were accepted as part of the development model of the time. Don't give us a lesson, come to see me in 10 years, then we will be ready.

In spite of these three objections, interest in CSR is gaining momentum in China, so much so that the danger of CSR fatigue - which is so noticeable in Europe - might be beginning to take hold here as well. Furthermore, another risk is to turn CSR into a tool, a set of instruments or a box of gimmicks, to dress up the corporate image and/or make more money.

In fact, CSR is very appropriate in China, today; it is timelier than ever and has proven to be effective, over time, in enhancing corporate performance and brand image. A simple way to define CSR is to say that it is a company's commitment to operating in an economically, socially and environmentally sustainable manner while balancing the interests of diverse stakeholders. Such a definition can be operationalised step by step and goes beyond simple compliance, philanthropy or enhancement of energy efficiency; it brings a strategic dimension to efforts for responsible behaviour implementation. In that sense it internalises responsibility, it relies on responsible leadership at the top and incentives to have responsibility percolating through all levels of an organisation. Corporate responsibility is visible through the way people are recruited, developed and managed; it is visible through the image that a company develops inside and outside; it is visible in the manufacturing processes used and in its inputs; it is visible in the transparency that it endeavours to illustrate through its accounting and reporting procedures, and evident in the management of the interface with the environment and with its many stakeholders. CSR is a philosophy in action; it demonstrates the value of values. A corporation may not have a conscience, but it must have values to discipline purpose.

A number of multinational corporations operating in China, along with many Chinese state-owned and private enterprises, demonstrate that they "walk the talk" of their values. The winners in the CSR Olympics in China are now well-known. They are willing to share their recipe, to talk about the various "trials and errors" that they went through and to share the principles they have internalised on their journey. They tell us that if everyone does everything wrong it does not make it right, and that there is no correct way to do something wrong. They believe that no corporation can be honest with the public if it is not honest with itself, and that responsible leadership and integrity start at the top. They are convinced that not everything is relative, that there are things that are absolutely wrong (independent of cultural differences) and that in the grey area - where business so often navigates - only the individual moral compass (rooted in the character of the individual) and the corporate values (rooted in the corporate culture), make it possible to cope with the dilemmas created by the conflict between values and survival in tough (and often unfair) competition.

This is the way they manage "responsible competitiveness", the art and skills for long-term survival through today's effective performance, driven by values and with responsibility deeply embedded into corporate practices.

Picking the right buyout target

CHAMBER DIARY

China is one of Asia's top mergers and acquisitions markets, but finding a suitable acquisition target in the country is challenging for foreign companies, who must avoid sensitive sectors key to national or economic security, said experts at a breakfast seminar on March 13 in Beijing.

Some sectors, such as financial, automotive, heavy industry and construction, are seeing a large amount of M&A activity, but even in these areas foreigners still need to think about what they are contributing.

Acquiring a large state-owned enterprise would be acceptable if the target firm is in financial difficulty, but permission would not be given to acquire a successful firm even if it is small but seen as a leader.

Deals are easier if the target is registered offshore rather than domestically. Offshore companies may be stranded at the moment, without access to capital in currently uncertain markets abroad.

Seminar attendees were advised to take a structured approach to looking for the right acquisition by drawing up a list of search criteria, whether it includes quality control procedures or a promising Chinese brand.

Once a potential target has been identified, buyers should run thorough checks on a range of business areas, as much business in China is done on informal contracts with plenty of room for uncertainty. Prospective investors should not assume that a company necessarily holds all of the intellectual property rights for the products it sells, for instance.

Acquiring firms should also check that licences are in place, taxes are being paid and whether there are mortgages on the assets. It is imperative to talk with key suppliers and customers, as those relationships are not documented and could be rife with problems.

When it comes to structuring the deal, cash is preferred over most other methods by Chinese companies, as there is a distrust of shares of indeterminate value, and use of deferred payment schemes is also limited.

The continuing challenges for foreign firms looking to buy in China mean that domestic deals will account for the largest share of M&A activity this year, likely increasing over last year.

It does not appear that the US recession will dampen interest in the market. Private equity funds have already raised the money to invest in China and there are still lots of companies out there to be bought, restructured and sold on.

Reading the tea leaves of the NPC

The 11th National People's Congress (NPC) brought few surprises and, despite some reorganisation of ministries, little will change for foreign firms operating in China, said speakers at a breakfast seminar held by the European Chamber on March 27 in Beijing.

The major government restructuring that had been anticipated in domestic media prior to the congress did not take place. The total number of ministries was only reduced by one to 27, still a large number compared with most developed economies, and evidence of the extent to which the economy is still planned by the government.

Nor did the forming of new "super-ministries" go as far as some had expected. The State Environmental Protection Agency has been raised to ministry status, underlining current policy to tackle pollution, although it is unclear whether it will have more resources. The creation of the new Ministry of Human Resources and Social Security also follows current policy to improve social welfare.

But there is still no Energy Ministry, despite widespread anticipation of the creation of such a body in the run-up to the NPC. Instead a National Energy Commission will sit under the National Development and Reform Commission (NDRC) and will likely suffer the same problems as in the past, with no more power than other organisations like Sinopec.

Talk making the NDRC less powerful is also a distant prospect. While the new Ministry of Industry and Information, which incorporates the old Ministry of Informatin Industry as well as the State Council Information Office and the Commission of Science, Technology and Industry for National Defence, is a stepping stone to change in this area, taking over industry project approvals, the NDRC is expected to retain control over foreign investment. Little will therefore change for international businesses.

The parliament also heard significant debate on inflation. Rising prices are largely being viewed as an agricultural issue, and the government is expected to back further subsidies for farmers to increase food supply. Inflation this year will depend on harvests and potential weather-related risks. However, China's fiscal strength (it posted a fiscal surplus last year) gives the government plenty of flexibility to deal with such problems.

China's domestic market is still very robust. The roll-out of financial services to inland areas will further boost consumer spending. Government spending on health, education and the social safety net, is also increasing rapidly, as part of the ongoing drive towards a "harmonious society". This is good news for stability as well as the development of inland markets that some foreign firms are targeting, including areas such as healthcare.

Rooting out fraud and misconduct

Many companies in China, often without knowing it, run the risk of either being charged with corruption or falling victim to embezzlement or theft. To inform members about these hazards and the best defense against them, the European Union Chamber of Commerce in China Shanghai Office held a breakfast seminar titled "Handling Fraud and Misconduct in China" on March 13.

Companies must first be aware that their actions are governed not only by laws in China, but also by international rules such as the OECD Anti-Bribery Convention. Bribery-related offenses in China are divided into corruption of public officials, which can include Chinese journalists or officers in state-owned enterprises, and commercial corruption, wherein a company is deemed to have received "improper benefit" in return for gifts. Companies should be keenly aware of the administrative and criminal thresholds for corruption and avoid overzealous engagement with the government.

Wrongdoing by employees also poses a large risk. The seminar audience was presented with a number of detailed case studies of embezzlement scenarios, a common one being an employee buying at inflated prices from suppliers in which he (or his family members or friends) own shares. Other, more complicated schemes were also introduced.

Hiring investigation specialists can help find the people responsible for a scam, though at that point the money already lost is usually gone for good. However, it is often the case that some employees know of malfeasance occurring within the company but are afraid to speak up publicly or are unsure of whom to tell. Companies should have well-publicised channels for anonymous tips. Though there is some potential for abuse, most anonymous allegations turn out to be true, and all should be taken seriously.

Other sensible preventive measures include thorough background screening during the recruiting process, a clear, regularly updated corporate code of ethics available in Chinese with strong anti-bribery and anti-fraud language.

Businesswomen meet up in Nanjing

In March, the month of International Women's Day, the European Chamber held its first networking event specifically for female professionals in Nanjing. The event aimed to not only help women build their professional network, but also spend an enjoyable evening in a relaxed atmosphere.

The event was held in the elegant surroundings of Sheraton Cigar Bar. Guests were exclusively all female but represented varying departments and a range of companies. They were greeted with a red rose and gifts from the sponsors of the event. The General Manager of Sheraton Nanjing, Catherine Racsko, and Baden-Württemberg International Chief Representative Julia Guesten welcomed everyone with speeches, sharing their experiences as professional women in China.

Drinks flowed freely throughout the evening as guests enjoyed conversation, a buffet dinner and, in keeping with the cigar bar's theme, petite cigarillos. The evening concluded with a lucky draw. The European Chamber would like to thanks the Sheraton Nanjing Kingsley Hotels & Towers for sponsoring this event, as well as the Sheraton Suzhou, the Indonesian style Spa retreat Kayumanis, the French restaurant Les 5 Cens and the Nanjing branch of the hairdressing chain Toni & Guy for providing prizes for the lucky draw.

We hope this will be the first of many events for businesswomen in Nanjing.

All eyes on private equity in China

Private equity has been quickly changing the way transactions are structured in China, presenting a wide range of opportunities. About 140 companies raised capital through 270 PE firms ahead of their initial public offerings in China last year, but stock-market volatility has started to cast these pre-IPO deals in a different light. With such challenges in mind, the European Chamber held a breakfast seminar at the Kerry Centre Hotel in Beijing on April 8 to discuss the many opportunities available to mergers and acquisitions professionals in China.

PE has come a long way in China since the 1997 Asian financial crisis. After five years of steady growth, the sector is now at a critical turning point, with a stream of new joint-venture funds coming on board. Shinsei Bank's initial public offering in Tokyo in 2004 is seen as a defining PE deal in Asia, but Ctrip's Nasdaq listing several months earlier was equally significant for the Chinese market in particular, as it was the first deal to generate solid returns.

Now, the percentage of total realised capital is steadily rising, despite taking a slight hit in recent months due to volatility in global financial markets. China has replaced Japan as the region's top draw, attracting US$7.5 billion (€4.8 billion) in fresh capital last year. The advent of new vehicles like renminbi-denominated funds, industrial funds, funds of funds and the first two billion-dollar funds has breathed new life into private equity in China.

The Chinese government has largely encouraged private equity investment, though it was noted that foreign investors must identify niches to effectively compete with local firms. There are growing opportunities to collaborate with Chinese fund managers, but it may be wise to be patient for the present. Domestic firms are increasingly seeking out deals on their own, whereas in the past the typical case was a foreign PE firm that identified a target and partnered with a local fund to do the deal. The emergence of Chinese players has caused foreign institutional investors to pay more attention to how they operate.

The market has slowed in recent months, but this was viewed as largely a positive development, as multiples and valuations had begun to spiral out of control. China will continue to draw PE investment, but a new deal horizon will emerge if the current volatility in the A-share market continues. The emergence of RMB-denominated funds will be the trend to watch in the coming years, though this will also present more regulatory hurdles for foreign investors. Beijing's ability to redirect export-focused industries toward the domestic market, as well as the changing pool of capital available to local investors, are just two external factors that could affect private equity investment in China over the next few years.

Bonding through basketball

The sense of the company as a community is something fundamental to the Chinese perspective of the workplace, and the "iron rice bowl" mentality still has resonance in today's China. However, it is often an issue for multinational companies in China that employees find it difficult to identify and commit themselves to their employer and as many newly hired people come from widely different backgrounds they often have little alignment with a shared reference framework. It is acknowledged that getting commitment from employees is a big problem among European companies in China - and in extreme but not uncommon cases, it seems to make little difference to employees which company they work for.

The first European Chamber Basketball Tournament took place in Nanjing on March 23, drawing 200 players and supporters. The tournament was successful as a sports event, with no foul play, no injuries and smooth organisation, but the most successful facet of the tournament was its delivery to member companies of the opportunity for employees at all levels to come together, united within their company framework. Large cheerleading teams accompanied players made up of colleagues and family members. Nine of the participating companies were accompanied by a busload of very vocal supporters, who during every match crowded the sidelines to cheer their team on and give support.

Building a sense of team spirit and strengthening company culture is the main goal of an event such as this, but when participating in a sporting tournament, competitiveness will naturally play a role. The great venue provided by Nanjing International School allowed two separate groups to play out simultaneously. Each group included six teams, with each company playing five group matches and the group winners squaring off in the final. The tournament culminated in a hard fought final between Nordrhein-Westfalen Uniteam and the Nanjing International School Community team. The latter were eventual and deserved winners after combining skill and teamwork on the court.

Participating teams were provided with company banners, company team kits, lunch, drinking water and souvenir bags. Professional referees were also hired to ensure that fair play prevailed. Our thanks go to Allianz insurance for sponsoring the event and making the benefits provided to participants financially possible. The European Chamber would also like to thank Nanjing International School for providing the excellent venue and their hard-working team of students who took care of scoring throughout the tournament.

Business networking in Shenzhen

The European Chamber Pearl River Delta Offices continue to organise regular business networking events, attracting general and middle managers from various backgrounds. They have a common interest in mingling with business people who are pleased to share their information.

A business networking event was organised on March 13 in the Shekou area of Shenzhen. With almost 50 participants, the event was a great opportunity for participants to exchange best practices on several aspects such as enterprise status, employee retention and learn or share ideas on the outlook for China's economy in 2008.

We were honoured by the presence of the Consul General of Switzerland, Werner E. Nievergelt, who was pleased to meet representatives from European companies in Shenzhen. All industries were represented, with particularly high attendance from the electronics and high-technology industry and from small and medium-sized enterprises (SMEs). These two categories were highlighted at this event, in order to kick off a monthly SME Forum and also a monthly Electronics Forum in the Pearl River Delta. Another business networking event was held on April 22. Check the European Chamber website for the upcoming business networking events in the Pearl River Delta at: www.europeanchamber.com.cn/view/events

IPR seminar series concludes

In order to give information on intellectual property rights to our members before the Canton Fair, the European Chamber PRD Chapter was pleased to organise a series of four seminars on IPR in China in partnership with Rouse & Co International in early 2008, concluding in April. Members can receive the minutes of these seminars for free upon request. Please contact Tim Rossignol at trossignol@euccc.com.cn.

Presenting the audience with an introduction of everything from the legal environment of IPR in China to IP infringement at trade fairs, Rouse & Co International used a combination of theoretical and practical approaches to analyze the IPR environment in China. Case studies and the sharing of experiences among the participants reminded everyone of the critical importance of IPR issues in business operations and the need to protect and handle these intangible assets with the special attention that they deserve.

Enhancements to the EUCCC website

ANN OUNCEMENTS

Among many of the actions in the recently announced five-year strategy, the European Union Chamber of Commerce in China launched its redesigned website with enhanced usability on March 12, 2008. As a membership-fee based organisation, the European Chamber constantly focuses on its member service quality at national and local levels and redesigned its website to provide an enhanced service offering.

The new website's online membership applications function encourages digital membership applications, which aim to accelerate and improve the process. The new website also allows current members to edit their company profiles and manage their own entries. The upgraded services for members is prompted by the aim "to extend the range and improve the quality of our events, publications and online services", identified as part of the European Chamber's five-year strategy.

Another new section, Member Discounts, aims to function as a platform for members and non-members to offer their products and services at preferential prices to members of the European Chamber. The selection of products and services is sorted by industry type. The website also offers a number of banner advertising opportunities for companies wishing to market their products and services to the European business community in China.

Under the guideline of refining services at a local level in the five-year strategy, the European Chamber divides the new website into local sections according to its geographical presence of eight offices throughout China, and thus helps users easily navigate to the relevant office.

Other usability enhancements include features such as an improved search engine, a news ticker to highlight the latest news headlines, government updates and lobbying activities as separate and more identifiable sections to update the users on the European Chamber's lobbying efforts, and a section dedicated to news and media interviews.

By combining the essentials of the old website with the necessary technological advancements, the new website will continue to provide information on business and market conditions to its members and users, and retains exclusive members-only sections.

The European Chamber website address remains unchanged:

www.europeanchamber.com.cn.

The entire site is a product of Kroznot, the Beijing-based multimedia studio established by David Roberts in 2006. Thanks to their efforts, all eight offices of the European Chamber across China can now manage nearly all of their daily operations through one intelligent system.

Should you have any feedback or comments on the new site, please contact Bryan Wang at webmaster@euccc.com.cn.

Calendar

Pearl River Delta

Environment Working Group Meeting
Guangzhou
Members only
The Environment Working Group in PRD will meet in Guangzhou to discuss the 2008/2009 Position Paper and finalise the first draft.

IPR Working Group Meeting
Guangzhou
Members only
The Intellectual Property Rights Working Group will meet to discuss the final draft of the 2008/2009 Position Paper. This meeting will play a crucial role in the development of the group, as it will also discuss the upcoming meeting with the Guangdong provincial IPR Working Group in June.