Reference no: EM132748953

Problem 1: What is the summary of the case "The Art of Corruption: Sensible Ways to Deal with Unethical Conduct in China"?

Problem 2: Are employees in China given too much or too little protection against unfair dismissal based on corruption/malpractices? What changes, if any, should be made to the protection of employees in China against unfair dismissal based on corruption/malpractices? Be specific and justify your answers.

Problem 3: Develop a set of HR procedures to deter, detect, and react to employee corruption and malpractices in an organization of your choice. Your procedures must be able to withstand the challenge by any affected employees in front of a neutral third party. Be specific and justify your answers.

Readings:

The Art of Corruption: Sensible Ways to Deal with Unethical Conduct in China

• Mr. Wang (not his real name) headed the purchasing department for his division in a Shanghai-based multinational advertising company. He was also a shareholder in a small technology company, a fact that he kept secret from his employer. The situation came to light following a whistleblowing letter sent to senior management.
• The advertising company's labor contract and employee handbook made it clear that employees aren't permitted to have conflicting interests involving supplier companies. Mr. Wang's employer was ready to take action if they found Mr. Wang had been sending orders to his own company.
• But the internal investigation hadn't actually uncovered any concrete evidence that Mr. Wang's company was directly a supplier to the advertiser.
• In fact, the technology company's main business was giving strategic advice to Internet startups, which had little overlap with advertising, a point Mr. Wang made when he was interviewed for the investigation. He also noted that he was only a shareholder, and not technically working at the technology company, which meant he was not in violation of his contract.

Finding Real Evidence

• This is not a specially unusual situation in China, where enterprising employees do not necessarily see eye-to-eye with multinational managers about what constitutes conflict of interest and corruption. The country's evolving labor laws and legal system complicate matters. As a result, it can be very difficult to fire an employee like Mr. Wang.
• In this case, though, the board had lost faith in him. They wanted to remove him. The problem was that they were lacking enough real evidence to do it. And they did not want to pay Mr. Wang compensation under a structured termination package.
• What to do? Sensibly, the board had continued with the investigation into Mr. Wang beyond the initial accusations. As a result, the investigation went on to uncover two key pieces of information.
• First, it was discovered that another shareholder in the technology company was also a shareholder in a current supplier to the advertiser. Second, and very unexpectedly, it transpired that Mr. Wang had forwarded company customer information to a competitor. Mr. Wang was confronted with the evidence and chose to resign immediately.
• The lesson here is that it is difficult to predict what type of evidence will be found during an investigation. Some investigation reports confirm suspicions, but don't uncover the hard evidence needed for termination with cause, which is particularly difficult within China's opaque legal framework.
• Understandably, businesses don't want to throw good money after bad, especially when investigating small fraud cases that don't involve large sums. They also want investigations to be concluded in a reasonable timeframe.
• In some situations, you need to keep looking beyond the first evidence of wrongdoing to eventually find the silver bullet that will enable you to terminate a corrupt employee.

Making Sure of Legal Grounds

• But what if Mr. Wang did not resign when he was presented with the evidence? The management would then need to ask if the evidence is sufficient under Chinese labor law to terminate his contract.
• That's because unethical conduct may not actually be legal grounds for termination-unless expressly prohibited by law or regulation, or by the company's written rules, such as the employee handbook.
• Under China's Labor Contract Law, an employee may be legally terminated for "serious violation of the company's rules" (Article 39(2)) or "causing major losses to the employer due to serious dereliction of duties, or malpractice for personal gain" (Article 39(3)).
• The statutory concepts are fairly vague, so the employer should use the employee handbook to spell out what conduct is considered to be unacceptable. The company should make it explicit that violation of the handbook's rules is deemed a serious violation that justifies termination under Article 39(2).
• In order to terminate an employee for malpractice for personal gain under Article 39(3), the evidence must show "major losses" to the employer resulting from the wrongful conduct. The rule of thumb established by case law is that RMB5,000 (US$800) is the threshold for a major loss.
• In addition, the actual process of finding evidence of corruption or fraud by investigations must meet the evidential standards imposed by the labor arbitration tribunals or the courts.
• For example, if investigators obtain a general manager's laptop and retrieve files stored in that laptop which record kickbacks the manager has received, those files may not be admissible evidence if the process of accessing the laptop and retrieving the files was not certified by a notary public agent.
• The investigation of employee corruption and fraud needs to be guided by the Chinese labor laws and regulations, or the employer may end up exposing corruption but, frustratingly, not being able to terminate the employee for cause.

Handling the Vengeful Employee

• A corrupt office manager is terminated. Story over? Not so fast. In China, removing a crooked employee is the first step, but follow-up is needed to ensure the company doesn't face post-exit risk from the employee.
• A multinational garment manufacturer's trusted China country manager was caught red-handed taking kickbacks. She had pressured suppliers to give "donations" to cover renovation costs at the garment company's new Guangzhou office.
• She executed this in a clever way, telling her European headquarters that "supplier donations to pay for renovation costs is just part of Chinese business culture." She managed to secure written approval to proceed.
• But when investigators interviewed the victimized suppliers, one came forward with a bank deposit slip showing that renovation payments first went to the manager's personal account. The manager dug herself in deeper when she claimed she had never received supplier payments to her personal account.

The company terminated her contract with cause.

• Although the investigation had been effective at proving the fraud, investigators hadn't looked deeper into the manager's background. During the final exit interview, she began making reference to her local relationships and telling interviewers to "watch themselves."
• Enquiries confirmed that she had certain local relationships that might be used to damage the company's interests. The manufacturer acted quickly to smooth those relationships and introduced new points of contact.
• During this interim period, management from Europe worked in Guangzhou to give staff reassurance, and gather more first-hand experience in China to avoid falling into future traps. Finally, office security was updated to prevent the manager from returning to the office at night and stealing property.
• A similar situation occurred at a technology company in Beijing. A director had forged signatures and was preparing to establish a competitor company. As a result, he was voted out by a board resolution.
• The investors, who had previously played a passive role, raided the ex-director's office, securing the company chop (official seal) and important documents. While the raid was necessary to prevent the director from committing an even bigger fraud, the events were highly disconcerting to the office staff.
• Friendly interviews were subsequently conducted with staff. Several came forward with details about other frauds committed by the ex-director. A few employees with personal loyalties to the ex-director were then investigated in relation to these new allegations.
• Within a few months, the new management team had secured staff loyalty and put new incentives in place to retain key talent. As a precaution, investigators continued monitoring the ex-director and his efforts to establish a competing business.

Seamless Transition

• It is one thing to uncover corruption within a company. It is quite a different thing for the company to remove the corruption without causing major and lingering collateral damage to the business.
• While it may be reasonably straightforward to keep a low public profile, the internal disruption is more difficult to minimize, especially when the corrupt employees are senior or general managers.
• For this reason, before terminating the corrupt manager, companies should determine who will step into his or her place until a permanent replacement can be found. Immediately the corrupt manager leaves the premises, someone else must assume their role and responsibilities, so employees and the business experience a transition that is as seamless as possible.
• In many situations, corruption involves more than one person at the company. Where there is enough evidence to terminate a whole group of corrupt employees, without proper planning, the employer may end up having to manage multiple employee terminations at the same time as maintaining a smooth-running business.
• To be fully prepared, management should formulate exit strategies and plans for replacing employees at the same time as they pursue the investigation.
• The employer may, however, only have enough evidence to immediately terminate the most culpable person for cause, and can therefore only remove other corrupt employees gradually, either by offering compensation pay through a structured termination package, or being vigilant for other reasons to terminate the employment for cause.
• There is also a risk that a terminated employee may harass the employer from the outside by whistle blowing to the authority with help from those accomplices who are still employed at the company and can supply fresh information about compliance deficiencies.
• There is no way to prevent this but a company can immediately start addressing the compliance failings that enabled the corrupt activity to take place. If a vengeful employee does then attempt to stir up trouble, the company can truthfully claim to already be taking steps to prevent such activity from happening again.