First Imperative: Addressing Corruption and Financial Crime

Part I – The genesis of the problem of corruption

Corruption is authority plus monopoly minus transparency.

The scale of bureaucracy in China and the break-neck pace of its economic development from an almost standing start are the two ideal conditions for the growth of corruption and unbelievably massive financial gain by underpaid government officials.

Official corruption: a long-standing pedigree

“The abuse of public power (gonggong quanli) by the occupants of public office (gongzhi renyuan) in the state and party apparatus for private interests,” is how China’s authorities define corruption.

Transparency International scores China at 36 (out of a possible 100) on its corruption index (http://www.transparency.org/country#CHN) where 0 is most corrupt and ranks it 100^th out of the 176 countries surveyed.

Corruption (fubai in Chinese, meaning decay and putrefaction) has been a part of life since many millennia.

In the face of rampant corruption, Confucius helped re-establish the ancient traditions of honour, morality and social hierarchy so as to check the empire’s decline in the later centuries of the Zhou dynasty (1045 – 265 BC).

Two millennia later, peasants in Guizhou province launched protests in 1851 amid famines and local government corruption as the Qing dynasty (1644 – 1911) drew to a close.

At that time, cheating in the imperial examinations was elevated to an art form: Confucian texts were sewn into the cuffs, fans had notes inscribed on their hidden side, miniature books were made available so that they could be concealed between the fingers of an open palm. Some examinees hired experienced scholars to sit exams in their stead. Then, of course, the easiest way to pass was to bribe the examiners.

Mao’s Communist Party of China rose to power in 1949 on the anti-corruption campaign against Chiang Kai-shek’s ruling Kuomitang. The communist party’s dominant position and the economic hardships of the population-at-large meant that poorly paid party officials could easily use their position for personal gain.

Official corruption re-emerged as a principal source of frustration in the late ‘80s fuelling the Tian’anmen Square protests of 1989. Despite the stated policy of President Xi to stamp out corruption, and with the exception of convictions of some high-profile individuals on the grounds of sleaze, little has been achieved.

A cursory glance at the passengers alighting from helicopters at the Hualapai Heliport at Grand Canyon shows that 9 out of 10 fee-paying passengers, who have just parted with USD250 per person for a 1 Hr ride down the Grand Canyon, are junior party officials of the Communist Party and their families. Macao casinos still have high rollers fly in to try their luck at the tables, who, when they are done go back to the mainland to their desk jobs in the local party apparatus.

Going hand-in-hand with market reform, corruption has grown over the past 3 decades relying solely on two factors: opportunity, presented to officials in the form of extensive role of government as a regulator, allocator, producer and employer and motivation, such as, ‘confusion over changing values, weakness of moral sanctions, relative impoverishment and a lack of alternative sources for self-enrichment’. Add to this the privatization of state assets has put numerous opportunities for official graft within tempting reach of poorly paid bureaucrats. Coupled with this, central government has devolved the decision-making apparatus to the local level in critical areas such as investment processing and law enforcement. As an example of this in context, our joint venture counsel teams often highlight the hidden costs of doing business which often appear as ‘fees’. Over the years we have had occasion to see birth control fees, public health fees, public security fee, tree planting fee, traffic control fee, fire department fee and so on.

Having set the stage of the level of corruption, the next important thing one has to come to grips with is the strategy to be implemented to reduce corruption and bring transparency to the dealings of the party and the dealings of the ordinary Chinese. If this is brought about, China will become a beacon for the continent.

Part II in this series will address the initial steps that should be taken to bring light to the dark corridors of power.

On a visit to India during the week of December 1^st I noted that the front pages of the national dailies were agog with the princely starting salaries on offer to graduating students from the elite Indian Institutes of Technology. Facebook appeared to be leading the fray with offers North of USD300 000 p.a.

The Indian Institutes of Technology have an entrance examination where more than a thousand young people vie for every seat. Once accepted, the student has to survive 5 years of gruelling coursework, quizzes, examinations and lab work. The reward for all this expenditure of effort and unexploited talent? Facebook.

This is the tragedy that India is becoming. Youngsters and seasoned bureaucrats hope that India’s much bandied-about IT sector will be a viable alternative to manufacturing-led development. There is no doubt that firms such as Tata Consultancy Services (TCS) can stand up to international competition. However, almost a quarter of a century after the launch of India’s reform agenda in 1991, a mere 3 million of India’s estimated 1.4 billion people work in IT. The technicians, managers and entrepreneurs who graduate from the IITs and turn up at the doors of TCS on their first day of work create far fewer jobs for others than had they opted to manage factories. Three decades of policy neglect have created a situation where only 10 per cent of the work force is employed in manufacturing. Contrast this with South Korea where the focus was industry-based development for the past 2 decades and fully 30 per cent of the labour force is drawn into industry.

There is no glossing of the fact: it is impossible that the IT firms of Bangalore, or the financial services elite in Bombay will catapult India to the ranks of Japan, Korea, Taiwan or China. This is not going to occur in the foreseeable future and this is the rub: punditry that likens India’s economic development to that of the more northerly countries is fatuous.

For a full treatment of Asian development and especially how Japan, Korea and Taiwan differ from Indonesia, Thailand and Malaysia, refer to ‘How Asia Works’ by Joe Studwell, (2013) Profile Books.

Bill Gates seems to have the right idea:

http://www.gatesnotes.com/Books/How-Asia-Works

The story, set in 1890, goes like this.

JP Morgan, Westinghouse, Charles Schwab and Heinz were all contemporaries of Andrew Carnegie who was the richest man in America (and, by extension, the world) and were residents of Pittsburgh. Carnegie was seated very sagely in a corner of a room during a cocktail party for the above-mentioned movers and shakers of Pittsburgh surrounded by an admiring crowd listening to his every word. Frederick Taylor, who was starting to make a name for himself as a business consultant, was introduced to Carnegie who said, “Young man, should you tell me something about management that is worthy of my attention, I will send you a check for ten thousand dollars’” Now, ten thousand dollars was a princely sum but Taylor did not even blink. With everyone’s eyes on him he replied, “Mr Carnegie, my advice to you is to make a list of the ten most important things you can do, and then start doing them beginning with number one.” Carnegie did not even pretend to have registered the suggestion and continued his banter with the assembled crowd.

A week later, a messenger arrived at Taylor’s with a check for ten thousand dollars.

The question is, why would Carnegie see the benefit of making a list, especially when he was a titan of industry.

The benefit is not the list itself but the process of putting it together. Taylor’s advice is, in a nutshell, to think through the intersection of what was important and what was actionable. Carnegie was forced to ruminate on those things that were fundamental purposes to him and to devise ways to advance them.

Being strategic is being less myopic, less shortsighted than others

Every day there are a number of companies that struggle to pay their bills. The world is speeding past them and they could be oblivious to the peril that they are in. The myopic vision of the company’s leadership can be, in itself, excused but when hundreds of jobs rely on their decisions, that is where a sense of injustice creeps in.

What leads to a company’s demise?

Customers no longer see value in the goods or services on offer, or they feel that their relationship is not flourishing or that it is only a one way street. One thing is certain: the company has stopped innovating, has stopped investing in itself and in its people and is on ‘cruise control’, i.e., it is satisfied with the status quo.

The worst thing that could happen at such a juncture would be for the bank to call in a note.

It is then that the survival instinct kicks in. The Chairman stands back from the day-to-day mayhem and earns his keep. He makes decisions. Many of them should be painful. If they are pleasant, the fruit they will bear may be bitter.

It is at this time that he should call in a third-party, a professional or a professional group, who can assess the current status, determine what has worked and what needs to be fixed and what it will take to stabilize the ship before embarking on the next stage. Too many companies want to grow but not realize that this is not possible in the presence of a haemorrhaging wound.

The number of people who are in leadership position who pick up the telephone and are prepared to be counselled is pitifully few.  In the absence of this courage, near-death experience could deal a mortal blow.

Bar financial havens, steel has been an important part of all industrialization processes.   Britain, United States and Germany, Japan, Taiwan and Korea owe their success to steelmaking and this ability to make steel continues to be an essential input into all manufacturing economies. ‘National strength flows from iron and steel’, is the inscription that hangs at POSCO’s headquarters in Pohang, South Korea, the location of Korea’s first steel plant.

The success in steelmaking hangs on scale, corralling a limited number of inputs and incrementally improving the technology that has, at its core, not undergone much change in almost two centuries. The challenges that this brings about are best addressed under state ownership. Initially, the governments of Japan, Taiwan and Korea owned the steel plants. Policy-making also was in the state’s realm. These three nations ended up making exceptional steel and, at least in the case with Japan and Korea, eventually passed on the plants to private interests.

Malaysia tried the Taiwanese model of public ownership but fell woefully short in this important sector and the auto industry in this country, like all large-scale manufacturing in Malaysia, is nothing but a white elephant. In the meantime, in Korea, owing to private industry running steel as well as the important auto sector, theHyundai-Kia colossus became nothing short of a world-beater. This was all possible with export discipline.

The entrepreneur is compelled to compete in the international arena. The automotive sector is exceptionally brutal and cyclical. Korea’s government managed this sector very well by giving subsidies to a handful of hungry entrepreneurs who were measured by success in the export market. In a process that lasted almost 4 decades, the handful were slowly whittled down to Hyundai-Kia.

On the other hand, United States Steel, US Steel, attempted a hybrid model and did not place over-riding emphasis  on export and after a colourful history that involved JP Morgan, Andrew Carnegie and Charles Schwab, forays in Serbia and Canada, it is falling on hard times.

Strategy, how to formulate it, implement it and determine its effectiveness is much talked about but little understood. Metastrategy, Inc removes the fluff and comes up with meaningful insights and action plans.