According to this author, a vicious circle exists in many Chinese organizations: Owners don’t rust managers, and in turn, managers take actions that benefit themselves but hurt the company. In some cases, managers resort to unethical behaviour voluntarily; in others, they feel forced to do so to protect their careers. In almost all cases, unethical behaviour is rarely punished, which is why foreign companies investing in China should be concerned.

In today’s booming Chinese economy, more companies are facing the challenge of managing their employees. Labour dispute cases in China increased by nearly 300 per cent between 1990 and 2000, and the number of employees involved in the disputes increased by 91 per cent. Many of these disputes involved senior management, and some companies suffered losses because of them. A large Chinese home appliance company experienced serious difficulties when an internal power struggle caused its senior sales manager and all of his key subordinates to go to work for a competitor. Similarly, a Chinese electronics company almost went bankrupt when a senior managing director left the firm to set up his own company and took all of the wholesale customers with him. While he was an employee of the electronics firm, the director had used the power of his position and company resources to build relationships with wholesalers.

In addition to walking off with company contacts, many Chinese managers take advantage of their senior positions in an organization to benefit themselves in unethical ways. For example, in Lanzhou, a city in northwest China, a company found that one of its managers used his senior position and power to transfer company funds to his own account. By the time the company found out, all the funds had already disappeared. Also, it is a well-known fact that senior managers in China use their power to obtain kickbacks and offer bribes, especially when they purchase materials or products for their companies.

There are many social and historical factors that lead business managers in China to exhibit unethical behaviour. This article discusses the problems and the possible solutions.

Why does China have an ethical dilemma?

Overall business environment

In China, the overall business environment is not conducive to ethical conduct, in part because many companies-even large, multinational organizations-have not developed clear, ethical standards for their employees to follow. When Lucent Technologies found that managers in its Chinese operations bribed government officials in order to do business there, the company fired its entire senior management team in China. While this way of doing business may be very common in China, it is illegal in the United States.

In China, executives are sometimes even punished for being ethical. In the late ’90s, a newly hired senior manager in a Chinese pesticide company learned that the firm had made false financial statements to investors. He reported the fraud to investors, who then withdrew their equity and sued the company. In retaliation, the owner of the pesticide firm sued the manager for conspiring with investors to sabotage the company. Surprisingly, even the court ruled in favour of the company, and sentenced the manager to a one-year prison term.

Trust and power sharing

Managers’ unethical behaviour may lead companies or business owners to distrust their own people. This lack of trust, especially among owners of private businesses, causes managers to have a very short-term perspective on their careers. Many private business owners are used to operating their companies with family members, and they find it difficult to trust or share power with externally hired managers. The managing director of a large, well-known Chinese home-appliance firm said that his power was limited, even for specific tasks that were within his area of responsibility: “When I decided to adjust the company’s financial budget or to change management teams, I had to receive approval from the board of directors. I spent a lot of time dealing with the board members, as they did not trust me and my ability.” Finally, the manager left the company.

The lack of trust and power even causes problems among very senior executives. In 2003, two senior sales and marketing executives left HACI, a privately owned Chinese drug and health care company, because, as one of them said, “Although I had the highest salary and position in the company, it was hard for me to show my capabilities. The owner of the company had the final say and no one could challenge his decisions even though everyone knew that some of his decisions were wrong.” Problems like this create frustrations for managers that can directly or indirectly contribute to unethical behaviour.

On the other hand, some business owners have paid a high price for trusting their managers. The owner of one Chinese household-products firm trusted one of his managers so much that he gave him enough power to run the company. Subsequently, the manager kept such tight control of the company’s financial records that no one-not even the owner-was able to get a look at them. Then, when the owner forced the manager to agree to an outside financial audit, the manager tried to purge documents that he didn’t want others to see. In the end, the manager left to build his own company.

Weak management system in companies

Weak management and accounting systems in Chinese companies make it all too easy for managers to engage in unethical and even criminal behaviours: Many companies don’t require managers to submit expense receipts with claims for reimbursement; managers may simply submit false receipts when they are required; and spending company money for personal gain is not uncommon.

Business owners are also quite willing to take advantage of loopholes in China’s accounting system and company policies are not effective in preventing this. Bribing government officials with company money is a popular approach in China. The owner of one industrial-products company paid off government members in return for their help in sending business his way. Sometimes the bribes took the form of free drinks or dinner, all paid for with company money. The management system in this company was so weak and full of holes that the managers, too, were getting away with unethical behaviour.

Weak legal systems

The legal system in China actually contributes to the country’s ethical dilemma because it does little to protect employment contracts or settle labour disputes. Employment contracts do exist, but they are rarely enforced. If companies are not satisfied with their managers, the owners may simply dismiss them, even if the dismissal violates employee contracts. Chinese business owners, managers and employees often do not seek legal protection over labour disputes because they are not used to the legal system, and do not have confidence in its integrity or fairness. Those who do use legal channels to resolve an employment dispute are likely to receive only small compensation. As a result, perpetrators face little legal risk for engaging in unethical and illegal business behaviours.

Short-term personal gain is a priority for many managers because they can be terminated at will, with little legal consequence. One wholesale department store in China discovered that many of its managers were using the company’s sales channels to sell their own products, which dramatically increased company costs. What’s more, the managers neglected their jobs to promote their own products. In the end, the company was forced to file for bankruptcy.

Other factors

As China’s economy booms, business managers are eager to advance their careers and share in the wealth. In 2001 a survey of business managers in five major Chinese cities found that close to 40 per cent were not satisfied with the career opportunities provided by their companies; about the same number were not happy with their living and career conditions (see Table 1). With such a high rate of dissatisfaction, it is not surprising to find unethical behaviour among Chinese business managers.

In China, it is also far too easy for managers to hide past transgressions when they are changing jobs, because employee referral and background checking systems are ineffective. Chinese companies often do not have reliable sources to check the background of management candidates, so managers engaging in unethical behaviour are actually risking little.

Solutions and suggestions

The ethical issues facing Chinese companies can’t be solved overnight, but here are some recommendations for getting started.

Promote an ethical culture


Companies such as Huawei Technologies Co., a well-known Chinese IT company, are strengthening management ethics through education and culture change. In 1997, Huawei developed ethical behaviour standards for employees and the company; it educated employees about the new rules, and included ethical behaviour in employee evaluations. Companies may also recruit managers whose values and personal goals are similar to those of the organization, as well as encourage their managers to identify with the company’s goals. This helps managers to feel comfortable about the company and stay with the firm longer. With a long-term view, managers are less likely to engage in unethical behaviour.

Mutual trust and career opportunities for managers


When managers trust the company’s owners, they are more inclined to be loyal to the organization. The family-owned Vanward Company, a manufacturer and exporter of gas and electric appliances in China, is a good example. In the beginning, the founders managed the company by themselves, but the organization grew to a point where they needed to hire managers externally. In 2003, Vanward’s owners hired three MBA students and gave them full responsibility for managing the company’s operations, sales and human resources departments. While they weren’t getting paid as much as some of their classmates, the new hires were committed to the company due to the owners’ trust in them and the great growth potential of the firm. Macro Link Ltd., a diversified conglomerate in China, credits its strong ethical performance to a focus on professional training and development. The CEO frequently invites business experts and professors to facilitate professional development workshops for employees, and managers are given opportunities to discuss ethical and career issues with their colleagues. These open discussions help managers to clarify how ethics relate to their jobs, and supports career and skills development.

Reward and punishment system

The reward and punishment system is another effective tool for managing unethical behaviour. One large Chinese IT company developed a dividend-sharing system that gives employees 60 per cent of dividends. Financial incentives are a great motivator and also help to build long-term commitment to the company.

China International Marine Containers (Group) Co. follows a strict, merit-based reward system-managers know they will be rewarded if they do well, so they are willing to work hard for the company. This system is very open and clear, and provides a fair measure of a manager’s performance, which reduces the possibility of unethical behaviour.

Some companies have new managers sign detailed employment contracts that stipulate ethical behaviour guidelines. If a manager breaches the contract, he faces the risk of criminal prosecution and financial consequences. Sina, a Chinese web-portal company, uses employment contracts: When the company hired a new CEO, he was asked to sign a 300-page employment contract. Although enforcing employment contracts is not always easy, clear and detailed contracts help companies minimize unethical behaviour.

Other suggestions

The Chinese Professional Manager Association offers a certificate program for managers called the International Professional Manager Program, which includes training workshops in business ethics. Graduates receive a certificate that serves as a formal referral or license when they are job hunting. Although China does not have a well-established network to check the background of professional managers, companies should actively use various formal and informal networks, such as social contacts or the local chamber of commerce. In this manner, companies can share information that will help to control unethical behaviour.

Many labour disputes in China stem from the high probability that managers will behave unethically. This sets up a vicious circle: Owners don’t trust managers; managers, in turn, take actions to benefit themselves and protect their future, which can hurt the company. Though it is difficult to solve these problems overnight, companies in China need to pay attention to the issues and find solutions to minimize or prevent the problems. Although such problems are more common and serious among Chinese firms in the country, foreign companies investing in China also need to be concerned.


About the Author

Chia-Pei Chen is an MBA candidate in the School of Business and Management, University of San Francisco.

About the Author

Roger Chen is a professor of management in the School of Business and Management, University of San Francisco.

About the Author

Roger Chen is a professor of management in the School of Business and Management, University of San Francisco.