By: Steve Dickinson
The China Economic Review recently published this column by CLB’s own Steve Dickinson, entitled, “Foreign Managers Are Not Above the Law.” [link no longer] It bears mentioning that Steve wrote this article in China (where he lives and works) before the news of the Peanut Corporation of America’s salmonella outbreak in the US.
Here’s Steve’s column:
The San Lu tainted milk scandal reached a typically Chinese conclusion on December 31, 2008. On that day, San Lu group chairperson Tian Wenhua and three other top group executives pleaded guilty to the crime of production and sale of substandard product. Since at least six deaths occurred, the defendants face a maximum penalty of life imprisonment or death.
Resolution of the tainted milk scandal followed a fairly typical Chinese pattern:
• San Lu was forced into a government-supervised bankruptcy.
• An industry wide compensation fund was established and managed by the government.
• Individuals considered responsible were subject to criminal sanctions, pleading guilty in non-public trials featuring rehearsed written confessions.
• Civil tort lawsuits against San Lu were rejected on the ground that the public criminal and bankruptcy proceedings preempted the private litigation process.
A key feature of this process is the use of harsh criminal sanctions against company executives. In the U.S. or Europe, it is almost unheard of for a high-level executive to be criminally sanctioned for a food safety or pollution violation. The opposite is true in China. Where there is major damage affecting a large number of people, private civil action is considered inadequate. The issue is public and requires a public response. A key element of the public response is that punishment must be imposed. Financial sanctions imposed on a lifeless company are not enough: some human being must suffer.
This is an important issue for foreign investors in China. Every year, China approves 25,000 or more foreign owned businesses in China. Many of these businesses engage in manufacturing in China and an increasing number sell their products in China. It is simply a fact of life that manufacturing and sale of products can result in damages to the public and to consumers. Modern businesses attempt to reduce such damage to a minimum, but even in the best of situations, damage can occur. In the West, liability for such damage is usually resolved within a well-developed system of private tort law. Foreign managers in China normally assume the same is true in China and that they will never be held personally responsible for damages caused by the company.
The San Lu case shows this is not true. Under the Chinese system, causing damage can be a crime, and the person who is responsible for the damage can be held criminally liable. This is true even when the manager had no direct involvement in the activity that caused the damage. A manager whose duties included supervision of the specific activity can be held liable even if the manager had no actual knowledge of the criminal acts. The treatment of the San Lu defendants illustrates this principal. The defendants were the Chairman of the Board and three general managers of the group company. The crime was committed by a subsidiary company over which none of the defendants had direct management control. However, the lower level managers who actually committed the crimes were not prosecuted. Instead, the senior managers of San Lu were prosecuted and convicted. They are now facing life imprisonment or death for actions that they did direct and over which they may have had no control.
The risk of such a result is always present in China. Consider the following examples:
• A chemical manufacturing plant experiences a major breakdown due to faulty equipment and a dangerous chemical is released into a local river. It is shown that engineering staff were aware of problems with equipment and chose not to make needed repairs.
• A food manufacturer suffers a bacterial infection in its food product leading to illness or death in children who consume the product. It is shown the quality control staff were aware of high levels of contamination but chose to continue production.
• A disgruntled employee of a drug manufacturer inserts poison into an over the counter medicine, leading to death and injury to consumers. When initial reports are released concerning such deaths, direct supervisory staff deny the problem is related to the company product and more deaths occur.
These kinds of situations are distressingly common in China. Even where foreign management seeks in good faith to introduce best management practices, it is not unusual for this to have little effect on the day-to-day practices of local staff. It is also not unusual for a foreign manager to be convinced to do things according to “local standards.” Such so-called “local standards” often not only are not in accord with industry best practices but they also often violate the strict provisions of Chinese law.
When foreign management learns damage has occurred, their concern is that the company will be sued and liability will be so severe the company may be seriously damaged or even forced into bankruptcy. It is rare for foreign management to consider the possibility the event will be treated as a crime and that the foreign Chairman of the Board and senior management will be subject to criminal sanctions. As the San Lu case shows, the risk of exposure to criminal sanctions is very real and must be carefully considered by management of every foreign company operating in China. The next time local staff recommends ignoring industry best practices and Chinese law concerning health and safety standards, the foreign manager should consider the issue carefully. Is the financial benefit to the company worth the potential for an involuntary stay in a Chinese prison, or worse?