Anti-bribery and anti-corruption compliance issues in China continue to catch international news headlines and are showing no signs of cooling down.
As the number of companies charged for corrupt activities in China continues to rise, and the probe into corrupt activities continues to spread into various industries and sectors, multinational corporations (MNCs) are sparing no efforts in establishing and implementing an enhanced compliance system in China.
As a result of this, human resources (HR) professionals with responsibility over China are often asked to (1) provide input on how to design a system that ensures compliance by the employees and (2) to implement decisions against employees who are found to have committed misconduct. So what are some of the common challenges for HR when grappling with these tasks? This article will provide number of top tips for dealing with them.
The regulatory environment
We provide a brief recap of regulatory actions taken against corrupt business activities in China during the past year.
Regulators in China kept the aggressive stance towards corrupt activities, which began since President Xi came to power. Since the beginning of 2015, the Chinese Communist Party's Central Commission for Discipline Inspection conducted two rounds of extensive inspections focusing on large state owned enterprises, many of them are among the world's top 500 companies. Enforcement actions and investigations span across different industries, including finance and banking, automobile, aviation, military, health, energy, telecommunications, transportation, and construction.
Foreign regulators have also focused on investigation and enforcement actions against MNCs with China operations. Based on recent filings to the U.S. Securities Exchange Commission (SEC), at least 29 U.S. listed companies have been involved in on-going federal investigations under the Foreign Corrupt Practices Act in connection with their business activities in China. In 2015, Bristol-Myers Squibb and Mead Johnson agreed to pay US$ 14.7 million and 12 million, respectively, to settle civil charges that its China business made improper payments to public hospitals to promote sales. In May 2015, the SEC subpoenaed JP Morgan with respect to its hiring of candidates referred by Chinese clients and government officials.
Changes to code of conduct or employee handbook
Businesses increasingly need to seek China HR’s assistance in establishing an enhanced compliance system to head off the above regulatory risks. This often involves updating the company’s code of conduct or employee handbook in China.
Chinese law requires any introduction or amendment of major company policies to be subject to an employee consultation process. A common misconception is that the company must obtain each employee’s consent to be bound by the new policies. Employee consent, though ideal, is not mandatory. In practice, most companies would present any major updates through a meeting and seek questions or suggestions from the employees. The company is not required to agree or accept the employees’ comments, though it should keep record of how it considered and responded to the employees’ comments. The company would then proceed to publish the final version of the new code of conduct, and request employees to acknowledge receipt or keep a record of delivery.
In terms of the contents, companies are advised to include a comprehensive list of misconduct and update it based on experience of past cases or cases that have been published in the media to close any loopholes. A number of companies have, for example, started to introduce policies requiring employees to disclose relationship with government officials and stating that any violation of the disclosure obligation would be punishable by summary dismissal.
Training and certification
Regular training on codes of ethics and anti-corruption policies, as well as annual certification of employee’s compliance with them, continue to be a key element of any effective compliance program. However, a common challenge in China is that employees would attend trainings and certify that they have acted in a compliant manner, but continue to act in a non-compliant manner in their daily activities.
To address this issue, more and more companies are strengthening the impact of noncompliance on the employees. This includes making compliance an express and mandatory condition for bonus payments and job promotions.
An effective compliance program requires the company’s leadership to set the tone at the top and foster a culture of compliance. This, together with effective codes of conduct, training program, incentives and disciplinary measures, are part of the elements that make up an effective compliance program set forth in the well-known U.S. Sentencing Guidelines.
Holding managers accountable for compliance of their team members is difficult, especially in China. Employees with managerial skills are harder to replace and has more impact on the business. Further, it is often difficult to find evidence that they are directly involved.
Nevertheless, given the harsh regulatory environment, more and more companies in China are prepared to hold managers accountable for violations of their team members. Company policies, job descriptions and communications need to be strengthened to emphasize manager responsibility.
Implementing disciplinary action
Labor law restrictions
Chinese labor laws heavily restrict companies’ ability to impose disciplinary action against its employees. Reduction in salary or demotion is not permitted without employee’s consent.
Moreover, except in cases of very serious violations, the company will likely need to issue a warning letter to an employee who has committed misconduct first, instead of dismissing the employee immediately. Dismissing an employee immediately carries significant risks in China. The employee may challenge the dismissal before a labor arbitration commission or court, which will hold the company to a very high standard of proof and require the company to provide a lot of evidence to justify the dismissal. Failing to justify a dismissal could result in the employee being reinstated to his/her original position.
Direct documented evidence from sources outside the company, such as signed admissions by the employee or statements by external parties, is often expected by the courts but lacking in cases involving alleged fraud or corrupt activities by an employee. Instead, companies often have indirect evidence of circumstances suggesting fraud or corruption, or statements from whistleblower or witnesses from within the company. Relying on such evidence alone to dismiss an employee would be risky, as labor arbitration commissions or courts tend to consider such evidence unreliable and reluctant to accept them.
HR professionals need to be aware of these requirements under Chinese labor laws, so as to advise businesses appropriately when disciplinary action is being contemplated. In light of the regulatory enforcement trends, companies are increasingly prepared to punish or dismiss employees for violations of code of ethics or anti-corruption policies, but the relevant risks need to be identified and assessed, so that companies would be prepared to defend any potential employee claims.
- Ensure appropriate employee consultation procedures have been carried out before implementing changes to code of ethics or anti-corruption policies.
- Include a comprehensive list of misconduct and update it based on experience of past cases or cases that have been published in the media.
- Make compliance with code of ethics and anti-corruption policies a key element of bonus and promotion policies.
- Strengthen company policies, job descriptions and communications to emphasize manger responsibility over his/her team’s compliance situation.
- Be mindful of labour law restrictions on disciplinary action imposed on employees, particularly with respect to summary dismissal, and advise business of relevant risks appropriately.
This article was published in the January 2016 edition of HKIHRM.