25 Years of Business in China: Interview on Tackling Corruption

Interview with Dwight Nordstrom

Dwight, you have been in business for 25 years in China, and not just any business, you’ve been involved in manufacturing in big industries, like chemicals and telecommunications, regularly importing supplies and exporting products. How big has the issue of corruption been?

Well let me just start by saying: This is real! This is not hypothetical stuff, it’s a big issue for us. I would say I have to deal with about 25 cases a year of substantial corruption-related situations. To put that in perspective with other common issues faced by businesses, in last 20 years, across our operations of about 5000 people in Asia, I have had zero illegal drug issues, a couple of alcohol related issues, I have had two sexual harassment issues of a serious nature to deal with, but the major issue by a long way is corruption which I have had to deal with at least twice a month. Corruption is a big issue.

Can you give us an example where you’ve had to deal with someone trying to bribe you?

We’ve had situations where we’ve lost business over refusing to pay a bribe. We had a speciality chemical and the representative in a wholly-owned German company asked for a 5% kickback, with 1% going into a personal account. That was a million dollar plus account per year and I don’t even know now six years later if we’ve ever recovered the value of the account.

Another situation we faced was in 2012, when the Chinese government were trying to corner the market by controlling global prices for rare earth metals. They came up with a regulation that you had to have a license to export rare earth products extracted from China. We had a factory that was importing the rare earth from outside of China, processing it and exporting it again. So it had already gone through customs on the way in, and it should have had nothing to do with the regulation! But when it came to exporting it again, the customs people basically said, ‘We know this is nothing to do with the regulation, but we are going to apply it anyway, however, if you pay us a “facilitation fee” we’ll let it through.’ This rare earth, a liquid metal, was 100% of our production at our factory and we had to shut it down for 14 weeks because we refused to pay. We did our paperwork, kept pushing and pushing, and drew on any relationships we had in the government, and in the end they relented. We had a shut down factory for 14 weeks and that cost us a lot of money.

In many contexts it’s not against the law to pay a bribe, so I know that others have come to different conclusions on what to do in these kinds of situations. They weren’t asking for an outrageous amount, but for us in that situation, we just knew that not paying was the right thing to do.

I know you have developed some tools and frameworks in PRI to help you deal with corruption, can you tell us about that?

If I get 25 corruption cases a year, each one has a little different flavor to it, so it’s difficult to generalize. However, there are some things that you can ask yourselves, a few diagnostic questions, that very quickly help you identify what is going on. We’ve developed these key questions, that we ask in a four-step process, in every case of corruption that comes up.

Then normally we do training on this every six months for people in high risk jobs. We also do training from time to time and put policy in our HR manuals for people who are not in such high risk positions. We have all kinds of policies and guidelines in place, for instance a conflict of interest policy, ethics and guiding values for the company, best practices for intellectual property rights and so on.

The key thing is getting other people involved as part of the process. The human heart is infinitely corruptible, and, without accountability and others to set boundaries for you, it is so easy to talk yourself into doing things. So we build those accountability structures into our company.

These days many of our experienced general managers handle corruption issues at their level, but they come to me when it’s a substantial issue. I get more involved when there are younger, less experienced leaders dealing with the situation. There are three issues that if they happen in one of our divisions I should hear about it within 48 hours. Those issues are any serious sexual harassment case, any worker injury, and then any major corruption issue.

In terms of dealing with cases of corruption that are uncovered, it’s difficult sometimes to prove a case of corruption, but it will go on an employee’s record. We’ve had to fire about 10 people for corruption, but about half those, we’ve had to do it through some sort of mutual agreement. I had one of my top leaders leave a few years ago in such circumstances. We agreed together that it was time for him to go, but we did it in a face-saving way.

Please talk us through your four step process for dealing with corruption. This has come out of many years of experience, and I am sure can be of great help to other, younger, companies struggling with this issue.

Well the first question that we ask ourselves, of course, is: Is it against the law?

However, most of our corruption issues are not even covered by the ‘Federal Corrupt Practices Act’ which is the USA anti-corruption law that applies to us as a USA-based company. That is for a variety of reasons, perhaps they are not big enough, or we’re dealing with private companies versus government officials – since it’s against the law to pay a bribe to a government official, but not a private one.

So, really, we focus on these following three questions.

1. Is the deal transparent to all the parties? You’ll often find that someone will object if you transparently communicate pricing! Most sales here are done where there are more than two parties and someone doesn’t know all the details about the deal. They’ll withhold information, either the boss doesn’t know what the purchasing department are doing, or the distributor in the middle is adding his cut, and so on. For example, we took on the management of a company here in China, part of very significant international company. The sales to the China operation had, up to that point, been handled by a distributor. The price that this distributor had been selling to the company was 218% of the price that the USA parent company was selling to the distributor. Some of that could be explained by taxes, but it turned out there were enormous kickbacks going on for somebody in the purchasing department of the company and the distributor, and both were removed from those positions. So everything has to be really transparent to all the people involved. You need to find out what the pricing is up and down the stream.

2. Does this action reflect Jesus teaching on the “golden rule”: do unto others what you’d have them do to you? To apply this we do role play. We do reverse role play and put ourselves in the position of the other party. My people know they are not going to get me to accept a bribe. But it’s interesting how many of my sales guys will come back to me and say, ‘Well this is how it’s done in China’. So I say to them, well let’s flip the roles, so we’re no longer the seller, we’re the buyer. If you are the President of the company that’s buying and your purchasing department is skimming off 3% of this million dollar contract, would you like that? Would that be most effective for the company? They can clearly answer no, because that’s a $30,000 price reduction for the whole company! By switching roles they can understand why corruption is bad. I find here in Asia that people often have blind spots about bribery, but then when you reverse the roles they see it more clearly. So in any given situation we imagine, now I am the buyer, now I am the seller, now I am the distributor and role play like that.

3. Does anyone involved have an uncomfortable feeling about what is proposed? This is the one you hope you don’t have to get to. This is what I call ‘the weakest brother’ test, from Romans 14. I learned this through dealing with threats. I have quite a high tolerance for threatening situations, just because of where I grew up! But I have learned that some people when verbally threatened just go to pieces. So in this case, you go with the “weakest brother or sister’s” ‘stomach’, their ‘gut feeling’. It’s about searching your heart and listening to your instincts. You do want to get away from the deceitfulness of people’s hearts because it’s really easy for people to convince themselves something is okay, but essentially you want to ask those involved, ‘What is your gut telling you? Are you easy with this?’ If one of the people are not easy about it, then you just say, well we’re not going to do this. You try not to get to this point, but at times this has been the question to sway it. You have to say, ‘Well we’re a team, someone is not feeling good about this and if we force them to go along with this, it’s not going to work out well’.

With thanks to Dwight Nordstrom, talking to Jo Plummer.

Download Resource: Corruption Prevention Practices – 4 Step Process

Read Dwight’s ‘Lessons from the Edge’: Insights from a BAM practitioner on dealing with corruption.

Read more about the work of PRI in this extensive 6 part blog series of interviews with Dwight.

Dwight Nordstrom has over 25 years experience in doing business as missions in China and Islamic countries. Since 1990, he has been the chairman of Pacific Resources International (PRI), a USA manufacturing-holding company with support functions of consulting and engineering for start-up and/or expansion of manufacturing in China. PRI specializes in planning and implementing small to medium high-technology manufacturing start-ups, mergers or acquisitions – over 30 of these since 1990. PRI currently has equity or management interests in approximately 10 manufacturing or other business operations in China. Dwight has also been General Manager of 9 factories in China with employment ranging from 30 to over 750.