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May 1, 2008

TRUST ME

How the confidence game is played worldwide and why it's so difficult to trust our trading partners.

 

Some metals leaders, like The Timken Company, the Canton, Ohio-based maker of specialty steel and tapered roller bearings, are reluctant to send their most innovative technologies and processes to countries where piracy is a concern and adherence to intellectual property law is minimal.

Others, such as Newport Beach, California-based Macsteel Service Centers USA, part of the global Macsteel Holdings Group, carefully research and assess prospective partners and the details of any deals they do in emerging markets, where it may be initially unclear who to trust.

From corruption in bidding and contract awards to uneven quality control, copyright infringement and theft of project ideas, global metals companies are kneedeep in issues of ethics and trust. Violations of trust and breaches of ethics permeate the fabric of international commerce, engendering cynicism, feeding dishonesty and crime, fostering prejudice and fear, undermining relationships, increasing costs, promoting inefficiencies and reducing profits.

Some violations are the result of differences in culture and long-standing traditions of doing business, especially in emerging economies.

The Chinese, in particular, have become notorious for intellectual piracy of all sorts. They routinely violate copyright and licensing agreements on products ranging from clothing to music and movies, to architectural designs and marketing plans. “China is still the biggest pirate in the world,” says Joseph A. Massey, Ph.D., professor and director of the Center for International Business, Tuck School of Business, Dartmouth College. Some of this may be rooted in a culture that believes information of all kinds is a public good and, hence, public property. But this flies in the face of Western law and notions of private property and intellectual property rights.

It is well known by now that the Chinese and Indians often value personal or family relationships before those with strangers or foreigners. In Muslim cultures, trust, integrity and honesty may be reserved for those in the Muslim community, or umma, and discounted for non-believers.

“I’ve got probably a bigger problem with counterfeiting in India than I do in China,” says Ward J. “Tim” Timken, Jr., chairman of the company that bears his name. “But it is something that is clearly front-and-center in our business, given the strength of our brand. I mean, that is just a fact of life of doing business in some parts of the world. Russia, we’ve got a lot of the same issues. Eastern Europe, we’ve got a lot of the same issues. It’s not specific to any single country.”

Bribery, favoritism in bidding and other forms of corruption may seem endemic, mainly in developing economies, but are all too frequently important issues in the West, as well. Economists and experts in business ethics trace a direct link between corruption and mistrust in business dealings. Where payoffs, lavish gifts and trips are embedded in the profit structure of business, they say, issues of product quality, delivery deadlines and other contract requirements may become secondary.

Name the Price

Common criminals perpetrate some ethics violations. But other violations, such as bribery, happen because of economic isolation or because gift giving is an accepted and encouraged way of doing business. Last year alone, the Organisation for Economic Cooperation and Development (OECD) investigated and prosecuted more than 100 cases of international corporate bribery.

Transparency International, a Berlin-based nonprofit group, annually ranks countries of the world in its “bribery index.” The latest available, for 2006, named Switzerland, Sweden, Australia, Austria, Canada and the United Kingdom as those countries with the least bribery at home and abroad. The United States came in ninth on that list, tied with Belgium. Those countries with the greatest amount of bribery were India, China, Russia, Turkey, Malaysia and Taiwan.

It’s no accident that mistrust grows strong alongside bribery and corruption, says Donald J. Johnston, former OECD secretary general. “We live in a multilateral, networked world,” he writes in an article for the OECD Observer. “It requires rules, of course, but these will never be strong without a system based on principles and values. Trade, business and science are just a few examples of areas where trust needs to be rebuilt.”

Europeans and Americans who do business in China, India and other developing countries complain that bribery and corruption, although now illegal in most of those countries, remain common costs of doing business. For example, the Ethisphere Institute, the research arm of the non-profit Ethisphere Council, supported by more than 100 international organizations and corporations, reports that although China has strengthened its intellectual property laws since joining the World Trade Organization (WTO) in 2001, “it still has the highest piracy rate in the world.” Estimates vary widely, but many put the cost of piracy at more than $500 billion a year, with China responsible for as much as 70%.

Piracy is only part of the sagging picture of global ethics and distrust. Abuse of public office, kickbacks on government contracts and embezzlement of public funds all erode trust for countries and companies that do business in those places.

Transparency International each year puts out a Corruption Perceptions Index. The index, the organization says, “ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. It is a composite index, a poll of polls, drawing on corruption-related data from expert and business surveys carried out by a variety of independent and reputable institutions.” Denmark, Finland and New Zealand tied for first as countries seen as least corrupt. India, China, Mexico, Morocco, Peru and Surinam, although hardly the worst (those would be Iraq, Somalia and Myanmar) all tied for 72nd place. The United State was No. 20.

The point: There is enough corruption, bribery and unethical behavior in the world that no single people, culture or country can claim exclusive rights.

The dominant Western concept is that without fair dealing, genuine competitive bidding, a judicial system that enforces the rule of law—including contract, real property and intellectual property rights—countries, companies and their people will not be trusted and accepted as ethical players in a world economy. Developing countries, especially those that join or seek to join the WTO, seem to understand this very well. China and India have passed, or expect to approve, a range of measures to outlaw corruption, favoritism, piracy and abuses of contracts, attempting to create a more stable, predictable and lawful business environment.

All necessary and commendable actions. But laws are nothing without a parallel effort at law enforcement. And enforcement means little without meaningful penalties for violators. “The Chinese have a legal process for prosecuting copyright and intellectual property pirates,” says Massey. “Microsoft, the biggest victim of theft in the world, has used that process and won in Chinese courts. A foreign country can prevail using China’s legal system. The problem is that the penalties are inadequate to stop the violations.”

Passing laws does not produce overnight change, especially when the economic roots of a problem are as deep as the cultural roots. Chinese factories that produce pirated goods offer desperately needed jobs in places where local governments and provincial officials are measured on their financial success. The Chinese market for pirated software, movies and other consumer products will remain strong and impervious to law enforcement until issues of product quality and the ethics of intellectual property theft become more important than price.

And that will not come soon when Microsoft wants several hundred dollars for its Office software and a pirated version is less than $5 on the street.

Massey says corporations doing business in piracy-prone countries must have concrete political, legal and negotiation strategies for dealing with such theft. They should have strong government relations programs as a start, he says, “because when they have a strong case, it should be put before the WTO, but only governments can file claims with the WTO.” That government relations effort should also focus on the host country’s government, he emphasizes.

There is an apocryphal story about one of New York City’s best-known real estate developers. It is said the real negotiation begins only after the contract is signed. This same story is told about Middle Eastern and Asian businesspeople, who are often viewed with suspicion from the West. And indeed, other cultures may not share the reverence for written contracts that allegedly prevails in the West.

In the Middle East, for example, written contracts are routine, but business is often conducted with relatives or longstanding associates. Some ethicists say the Muslim concept of primary allegiance to the community of Muslims, rather than any government or non-Muslim, may have a hidden impact on business relationships with those outside the faith.

The Chinese have a name for their common network of trusted relationships, guanxi. It is said to be rooted in the writings of Confucius: “The father conceals the wrongs of his son, and the son conceals the wrongs of his father. This is justice.” In fairness, there are other venerated Chinese philosophers—Mozi, a philosopher of the 5th century BC, for example—who urge a more communitybased version of justice that respects concepts of the common good.

A prominent Western expectation is that capitalism, or at least some version of a market economy, will bring positive change as global commerce evolves. The argument is that a global market economy will force reform, because stability, predictability and mutually agreed upon, culturally neutral legal and ethical standards are a condition of doing business effectively.

The Saudi Arabian government says it is in the middle of a $2 billion overhaul of its archaic, Koran-based and cleric-ruled judiciary system to bring a more West European-style rule of law to the country. India already has such laws on its books and now, led by a few of its major industrial corporations including the Tata Group, says it is trying to eliminate bribery as a routine cost of doing business.

Common Ground

There are signs, in any case, that international business executives may actually have more in common on corporate governance, ethics and social justice issues than they realize. Two surveys last year of executives around the world by international consultant McKinsey & Company “reveal that 84% … believe that corporate obligations to shareholders must be balanced by contributions to the broader public good—for example, providing good jobs, making philanthropic donations, and going beyond legal requirements to minimize pollution and other negative effects of business activities. The consensus for engagement is widespread, ranging from 75% in China to 90% in India. …”

Positive trust-building measures all, and all very likely to take an unpredictably long time to implement. Which is not holding back international economic expansion for a second. A recent Ernst & Young study of its corporate clients found intense interest in doing business in emerging markets. But the same study showed that only about onethird of attempted deals are completed, because company executives are not visiting the countries involved or attempting to understand their cultures.

“If someone is going into a country for the first time, they have to be aware that this is going to take some time and effort,” says Michael Hoffman, president and CEO of Macsteel Service Centers USA. “When going to a country for the first time, I would be especially vigilant since you may be dealing with letters of credit and contracts and inspection of goods, or contemplating an investment or joint venture of some kind. It would necessarily follow that one would apply one’s mind to the challenges, recognizing the initiation of a new relationship. Trust is not something you build up overnight.”

Another successful international businessperson, Chicago real estate billionaire Sam Zell, who invests in Egypt, China, India and Libya, makes it a point to visit and forge personal relationships in the countries where he puts his money. “You’re making a marriage,” Zell explained in a recent New Yorker profile.

It is a marriage with potentially significant cost advantages. “Establishing trust goes right to the bottom line,” says Diane Katz, president of Tucson, Arizona-based The Working Circle, which specializes in building trust and communications in companies. “When people are spending time pointing fingers and harboring resentment, their productivity suffers.”

The Michael Hoffmans and Sam Zells of the global business community understand how executives and their subordinates should behave to engender trust. “It is very dangerous for anyone to categorize people in other societies and cultures as having less integrity and honesty. You have to keep in mind they may measure with a different yardstick,” Hoffman says.

Trust, but verify, as the saying goes. And understand that, as with any new relationship, progress toward understanding happens gradually. “How do you know who to trust, especially at first? You don’t,” says Hoffman. “But if you are especially vigilant in the beginning, with an enhanced attention to detail, in the fullness of time, you come to understand the people you do business with, their idiosyncrasies and how they conduct themselves in business, wherever they are.”