Changing everyday business practices instead of focusing only on legal issues may help companies comply with Chinese anti-corruption laws.

In the aftermath of this summer’s bribery scandals involving pharmaceutical firms GlaxoSmithKline (GSK), Sanofi S.A. and Novartis AG, as well as French food and consumer products manufacturer Groupe Danone, multinational companies (MNCs) know they must take more direct action to protect themselves from further criminal indictments by Chinese authorities. At the same time, they must also strive to comply with the demands, and in some cases, the terms of past criminal settlements arising out of the United Kingdom’s 2010 Bribery Act (UK Bribery Act) and the United States’ Foreign Corrupt Practices Act (FCPA).

Within this world of multiple enforcement regimes, the most fundamental task required of MNC decision makers is to first properly identify what “compliance” means within each regulatory regime in which they operate. Only once this initial inquiry is completed will it be possible to assemble successful compliance mechanisms. These new compliance programs will necessarily be novel, without much—if any—directly relevant precedents.  Ultimately, the right approach in China will require more than simply maintaining the status quo.

In light of the GSK scandal in particular, global corruption enforcement has become a lot more important to both MNCs and SMEs. One fact seems absolute:  the legal acrobatics that until now have characterized corporate responses to FCPA and other indictments will no longer be sufficient. This is because the Chinese approach to enforcement of anti-corruption laws is not concerned with legally-clever compliance programs of MNCs—programs that comply with the language of the law but not necessarily the spirit. Rather, the Chinese approach is all about putting plain-clothes officers on the ground to observe and conclude, in black and white terms, whether or not corruption exists. It is certain that the officers will not ask to see an internal compliance protocol—they will judge compliance solely through observable actions. Therefore, the new reality for healthcare industry players in China is that everyday business practices now count just as much as HR and sales oversight policies. Dealing with this new reality requires fewer lawyers and more detectives.

GSK’s conundrum

The GSK scandal is especially instructive in illustrating the proposition that MNCs must now think about compliance as more than just a set of symbolic or bureaucratic precautions designed to keep British and American authorities at bay.

Charges brought against GSK by Chinese authorities came on the heels of a 2012 FCPA criminal indictment that saw GSK agree to pay $3 billion in criminal fines and implement an extensive internal anti-corruption and compliance protocol. The sudden arrest and subsequent public shaming of some 30 GSK executives also provoked a frenzy in Chinese and Western media.

In China, the media whipped up a populist and nationalist outcry against GSK and other western purveyors of “black gold” benefits—illegal under-the-table gifts and payments traditionally linked to the excesses of Communist Party cadres. Public sentiment toward the Chinese government was overwhelmingly positive and resulted in an environment that favored pressing on with charges and public scolding of a misbehaving western corporation.

At the same time, in the west, the media produced detailed stories containing first-hand information on GSK’s alleged illegal activities. With a few exceptions, the sordid details of bribery scandals were hidden behind non-disclosure agreements. For myriad reasons, the two agencies tasked with enforcing the anti-corruption and accounting provisions of the FCPA—the Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC) —prefer to settle these cases before they reach the courts.

As a direct result of the global media coverage, GSK found itself caught in a situation where its response to the arrests would have to somehow satisfy Chinese authorities and keep the SEC from starting its own investigation into whether GSK had violated the terms of its 2012 settlement.

The threat of new FCPA charges presented a purely legal conundrum: GSK’s official public statements had to be crafted in a way that preserved plausible deniability as to whether there was institutional knowledge about the multiple instances of bribery alleged by Chinese officials. Conversely, the arrest and detainment of GSK executives and the media aftermath demanded an unequivocal statement or act of goodwill from GSK to diffuse the situation.

Within this latticework of competing obligations, GSK tried to thread a middle path that would satisfy Chinese authorities and keep FCPA investigators at bay. Unfortunately, the effort involved qualified public apologies and the redirection of blame from the company to specific individuals. Without media support, the apology failed to score political points. GSK’s Chinese employees and salespeople are still making rounds of apologies on state television.

Protecting and complying

What if anything should GSK have done? The Chinese prosecutors, at a minimum, wanted what China analyst Andrew Hupert of China Solved calls the “Chinapology,” a brief, to-the-point admittance of guilt and expression of sorrow over one’s misdeeds in public. This sort of action would have likely prompted further proceedings on the Chinese end to move behind closed doors. This is not what happened. Stuck between the rock of the Chinese state and the hard place of the FCPA and the UK Bribery Act, there was no perfect public statement to satisfy both overseers. Because the US and UK laws apply to acts of bribery committed abroad, fully admitting to wrongdoing to in a public Chinese forum—the course of action that would have likely best served GSK in China—would have also meant admitting to wrongdoing under the FCPA and UK Bribery Act. In effect, then, there was no way out if the only tool to be used was the traditional tool of compliance defense—carefully prepared language.

With the Chinapology no longer an option, and carefully chosen words insufficient, what options remain for operators in China’s healthcare space? They must shift the focus of internal protocols from how to legally comply to how to satisfy Chinese authorities. Legal compliance is still important for the purposes of the FCPA and the UK Bribery Act. But satisfying Chinese authorities is a purely tactical move that expands the scope of inquiry beyond the comfortable walls of corporate legal protections, moving it into what is actually happening in practice. This is what Chinese officials tasked with enforcing anti-corruption measures are concerned with.

The three principles of China’s new compliance

Above all, this summer’s domestically initiated bribery probes illustrate three principles that should inform both the questions companies should ask themselves and their responses. First, being compliant with the FCPA or with the UK Bribery Act does not mean that a company is in compliance with China’s domestic anti-bribery provisions. Second, the focus in China is shifting from bribe takers to bribe givers. Third, the Chinese have reaffirmed their commitment to not apply a legalist system of enforcement to corruption. Instead, they are reaffirming a “call-it-as-it-stands” approach that places absolutely no value on de jure compliance.

Companies should focus on an action-oriented rather than legally oriented response. When the issue shifts from how to legally comply to how to satisfy Chinese authorities, companies can stop wondering whether this crackdown is the opening salvo of an anticipated Xi Jinping-led anti-corruption drive or the dead canary that portends the targeting of even more foreign firms. These questions are nearly impossible to answer.

China has a corruption problem that political leaders in China are being pressured to address. Moreover, given the rapid, policy-driven changes in the healthcare landscape since 2009, it is probably more helpful to understand this crackdown as a necessary step in the process of implementing the stated goals of China’s healthcare reforms—specifically, to clean up the ills of improper doctor payments.

Tactical maneuvers

At the tactical level, pharmaceutical, device, and diagnostic companies need to turn their attention towards how they adjust internal compliance practices in light of GSK’s troubles.

Many times, what companies have in writing relative to internal compliance standards is not the problem. There are likely areas where GSK’s China compliance rules needed to be tightened; but the violations that got GSK into trouble more than likely were at odds with what the company already had as internal standards for practice.  The issue for GSK—and for any life science company working in China— is what happens when management’s drive to achieve revenue growth and a sales force incentivized to do the same, look past the rule book.  McKinsey estimates the top 10 pharmaceutical MNCs have added almost 20,000 new sales reps in China over the last five years alone. The compliance issues brought on by this pace of hiring are numerous and extreme. Given the massive growth in China’s pharmaceutical sales force, the potential for misunderstanding, misapplication, and misuse of internal compliance controls is both more likely and more risky than ever.

In light of the GSK scandal, eight lessons on compliance need to be fully embraced by multinationals operating in China’s healthcare sector.

1.     Revenue growth expectations for the China market need to be tempered.

While China remains an exciting growth opportunity for pharma and medical device companies, much of the questionable behavior that the GSK scandal has exposed is a symptom of sales organizations under extreme strain to generate sales. It also shows a willingness to do whatever they deem necessary to create new customers and keep old ones. The more realistic a sales team’s revenue goals, the more likely a company is to have this group of people—already likely incentivized to grow their market—behave within the organization’s compliance expectations.

2.     The room for discretionary spending—especially non-receipted travel and entertainment expenses—has grown markedly narrower. 

To those whose training and careers have unfolded in developed economies, this may seem an unnecessary point. However, in markets like China, where wide latitudes in sales receipts and expenses are often tolerated, tightening expense account policies can be easily overlooked. While this is not a perfect solution, it does introduce another layer of formal accountability to how the company disburses money to its employees and how the employees use the cash they have been given. Penalties for improperly documented expenses should be swift and trigger follow-up analysis on the part of a compliance staff member.

3.     When problems present themselves—and they most certainly will as new standards and expectations are rolled out—make a point of communicating the punishment to your China sales force. 

The Chinese idiom “killing the chicken to scare the monkey” has been often and properly used in the context of the GSK scandal. It has equal application to how companies should approach the inevitable non-compliance issues that present themselves as new standards are brought forward within the organization.

4.     Re-configure how your sales force sells.

As Chinese hospitals get more sophisticated, pooling their purchasing resources at the same time the central government pushes manufacturers on price, China is becoming an increasingly price-sensitive market. It is too easy for salespeople in general—not to mention new salespeople under high growth expectations–to sell on price, price, and price.

This approach all but ensures compliance problems.  Companies that help their sales teams understand the value proposition of their therapies and devices are going to be able to weather the short-term pricing battles that will characterize the Chinese healthcare market for the next several years. This approach also should inform how companies talk to doctors. In the United States and the European Union, pharma and device companies work under much more consistent and enforceable compliance standards than in China. What the industry has discovered is that selling tactics have changed, and that doctors in particular want access to new information, new applications, and best practices that can be facilitated by the industry to remain in compliance. Similar efforts in China have been cosmetically attempted, but real continuing medical education programs should become an increasingly important part of how pharma and device companies talk to—and interact with—their clients.

5.     Increase compliance staffing levels. 

The rate of growth for Chinese sales forces has outstripped most companies’ hiring of compliance staff. These two have to be linked and, in the face of the GSK scandal, the ratio between the two likely needs to adjust in favor of more compliance officers. In addition, compliance staff are going to need to step up internal auditing especially in the short term. At the same time, these team members are going to need to put more time into training the sales force on new rules and expectations. Compliance officers need to act more like internal detectives than lawyers.

6.     Payments to third parties such as industry organizations, affiliate networks, and event organizers need to be audited.

The GSK scandal exposed a critical link between the firm and a specific travel agency that was acting as an intermediary between the company and its customers.  As is now painfully obvious, having a third party handle the most questionable part of your sales channel is not protection against FCPA violations.

7.     Make sure distributors understand your compliance standards and that they are following your lead in terms of how their sales force is trained, audited, and incentivized.

Too many pharma and device companies assume they can push their compliance issues off on their distribution partners. While this may provide some level of plausible deniability, manufacturers need to anticipate that their distribution partners will be held to similar compliance standards. Distributors that balk at external audits by their manufacturers are likely hiding practices that ultimately could get both parties into trouble.

8.     Make an effort to apologize.

As Hupert points out, you must make an effort to “Chinapologize.” Given the political and cultural weight attached to anti-corruption measures being taken around China today, the need is greater now than ever to understand the necessity of making a swift and public apology if problems are encountered. This realization has likely already driven many life science companies in China’s healthcare market to take their problems to Chinese regulators much sooner than they would have before the GSK scandal became public.

The opportunity to participate in China’s healthcare economy is not certain. The sector has been one of the last to open to foreign investment and expertise. Healthcare remains an issue that carries powerful political undertones and captures much of the anxiety average Chinese and their leaders feel about the impacts of globalization and economic growth. Companies need to understand that going forward, compliance in China is about more than simply meeting regulatory minimums. Today, compliance is about being seen by Chinese consumers and government officials alike as a force for good and fairness in the midst of a massive attempt to address long-standing problems specific to healthcare access, bribery, and pricing.

[author]  Benjamin Shobert ([email protected]) is the founder and managing director of Rubicon Strategy Group. Damjan DeNoble ([email protected]) is a partner at Rubicon Strategy Group. [/author]

(Photo by James Perkins via Flickr)

Posted by Christina Nelson