International Business Management

AccuForm Corporate Corruption Case Analysis

Establishing a subsidiary in a foreign nation poses many challenges. Corporate leadership challenges can often be the most daunting to resolve. One a most challenging leadership challenges is that of ethical considerations and corporate corruption. Corporate cultures differ and these differences can create major difficulties for foreign subsidiaries. This case involves corporate espionage and the theft of proprietary product information, as well as the unauthorized use of a corporate trademark. In the midst of this scandal, AccuForm faced public humiliation for actions that they did not take. Kim now faced challenges about how to present these problems to the board can help to distance the company brand from these incidents. This analysis will explore the many facets of this case.

Social, Ethical and Legal Challenges

This case highlights the social, ethical, and legal challenges that a company can face when operating a joint venture in a foreign nation. AccuForm now faces social problems of how to distance themselves from public outcry over their product and their company. The incident caused media sensationalism, with a focus of the coverage on the allergic reactions of the children. The company has obviously been targeted as a source of blame, which could have damaging effects on its reputation. Regardless of the motives of the person who first released this story, the result of the actions has led to serious social problems involving AccuForm and is public reputation.

AccuForm now faces many ethical and legal challenges associated with this event. It is possible that they could face lawsuits arising from the allergic reactions of the children. They could also face legal problems from the alleged money-laundering, misappropriation of assets, illegal rebates, and bribes. Even though it is obvious that these actions were not intentional, AccuForm could face allegations that they did not take appropriate action to keep their R & D. efforts safe and secure until the new products could be tested for safety. The actions and public outcry arising from this incident will have a long-term effect when AccuForm and its subsidiaries. This could have far reaching effects that go beyond this company, potentially affecting the reputation of other companies operating within Chinese borders.

Corporate Culture and Joint Venture

Corporate culture varies between countries, as do labeling in product standards. For instance, under the Textile Labeling Act in Germany, any product containing more than 0.15% free formaldehyde must be labeled as containing formaldehyde. Another example is flame retardant coatings in the UK. Flame retardant coatings are acceptable in the UK, but Germany has placed a ban on the same products. U.S. standards cite environmental pollution as the main concern for fire retardant materials on clothing and mattresses.

These concerns place increasing pressure on AccuForm and other manufacturers of fabric coatings. They not only face legal pressures and regulations regarding their products, they also potentially face public ridicule and social pressure from consumer groups that feel these coatings are not safe for use on children. The sensationalism caused by the children that had allergic reactions was an obvious attempt to draw attention to the risks associated with the coatings produced by this company. This is set against a backdrop of global trends that favor high performance fabrics for those in certain professions such as doctors and firemen.

The decision to base a subsidiary in China was fueled by the booming Chinese economy and its growth in personal income and higher living standards. It was suspected that higher standards of living and an increased professional population would lead to increased demand for specialty coated fabrics, just as it had done in the United States and Europe. However, this negative publicity raises concerns about the coatings that may outweigh their advantages in the minds of the public.

Corporate Culture and the Joint Venture

A joint venture is often the most difficult type of formal business arrangement. Corporate culture is often the most difficult challenge to resolve. DynaCoat is a German Company, whereas CreaseFree is a Hong Kong manufacturer. AccuForm was another Hong Kong manufacturer with all of its sales and supporting offices in China. From a purely financial and strategic standpoint it would appear that these three companies would make the perfect joint venture. However, this case demonstrates that financial and strategic decisions go beyond the balance sheet.

CreaseFree operated within traditional Chinese culture. Chinese business culture is characterized by informal control systems and adaptability to the business environment. Business relationships in China are established on relationships between different companies and governmental entities. It is accepted to grant certain gifs in terms of goods, jobs for relatives, or the exchange of “favors” to gain a business advantage. Kickbacks to customers and suppliers are also not uncommon. This is often a cultural norm for which foreign entities are often not prepared when they decide to do business in China.

The exchange of favors in China is a longstanding cultural tradition. Commercial bribery is an accepted practice in China, but a practice that is frowned upon in Europe and the United States. CreaseFree had a corporate culture of only doing the minimum in terms of environmental and social concerns. These business practices were in direct conflict with the German culture of DynaCoat. DynaCoat focuses on social responsibility and minimizing their impact on the environment. DynaCoat was one of the most reputable corporate citizens in Europe. DynaCoat and CreaseFree were opposites in terms of corporate culture. Actions considered to be a normal part of daily business for CreaseFree would be completely unacceptable for DynaCoat.

Role of Top Management

Although both sets of top management at CreaseFree and DynaCoat played a role in the development of the current situation, the managers at DynaCoat and AccuForm must take a majority of the blame for the situation. The reasoning behind this is thar CreaseFree was simply operating in a manner that was consistent with a societal norms of its home country and culture. DynaCoat was operating in a foreign land and should have known the cultural norms of the society with which it intended to enter a joint venture. DynaCoat did not do its due diligence concerning the company with which it wished to enter an agreement. This case study demonstrates that corporate culture plays a key role in the success of a business venture. Success of a business venture goes beyond the monetary benefits of the alliance. Corporate culture can make or break the best logical choice for a business venture.

At first, the close relationship and exchange between AccuForm in CreaseFree appeared to be the sign of a successful partnership. However, one must consider the social and cultural norms that exist within China. This close and open relationship also set up the potential for corporate corruption. CreaseFree’s technicians had a close working relationship with those of AccuForm, providing for lax policies regarding R & D. efforts.

Raymond Kim was an American-born Korean, who was most familiar with American and German cultures. Although he may have appeared to be an Asian, his knowledge base reflected that of American and German business culture and ideals. Kim was responsible for AccuForm’s R.&D efforts in Asia. It is unlikely that he understood the dangers of an open relationship in Asia. Kim adopted an open and egalitarian managerial style. He expected hard work and strict ethical standards from his employees. His business relationships with his customers were based on mutual trust.

When employees were transferred over from CreaseFree, this was not the corporate culture to which they were accustomed. They were used to more authoritarian managerial styles. They were not willing to strictly follow ethical codes of conduct, with which they were not familiar. They were unwilling to change their traditional way of doing business. They had a negative impact on the culture of AccuForm by introducing the culture of CreaseFree into AccuForm. The two cultures were not compatible. They wanted Kim to adopt their style of doing business, rather than to adjust to his. Kim was seen as a foreigner and his attempts to introduce foreign business standards were unwelcome.

This problem should have been foreseen by Kim long before the joint venture took place. The first sign of problems is that during the interview AccuForm focused on academic qualifications and experience, rather than finding someone that was a good fit for the company philosophy. This was the key philosophy that dominated the hiring of Albert Ching. Ching operated the business in the Chinese tradition, with corporate favor, thus forcing Chinese business practices on AccuForm. The fact that Kim failed to see the harm in these business practices by Ching demonstrates his lack of understanding of Chinese business culture. This lack of knowledge eventually led to the downfall of his company and his own reputation.

Kim could have prevented the scenario in his company by becoming more familiar with Chinese business practices. He would have been able to recognize the real motives behind Ching’s actions. As result of his naive assumption that everyone in the company was like him and operated in the same manner, he exposed himself and his company to corporate corruption. Kim can be blamed for his role in the money-laundering scheme and other corruption within the company. It was his responsibility to understand the environment and culture in which his company would operate. Had Kim instituted greater institutional controls and monitoring procedures, it would have been more difficult for Ching to conduct his activities undetected.

Recommendations

Although every manager wants to feel that they can trust their employees, it is reality that this is not always the case. Chinese business culture makes a likelihood of corporate espionage and money-laundering more likely that if the business were located in Europe or the United States where these practices are socially unacceptable (Hooker, 2009). Kim put his own personal feelings and managerial style ahead of the safety of the corporation and its proprietary information. As a result, he exposed himself and his company to liability. Kim could have prevented the theft of the chemical formulas and the resulting ties to allergic reactions with his company if he would have instituted stricter policies and regulations. Keeping tighter control on proprietary company instrumentation may not a prevented the situation altogether, but they would have made them less likely.

The first recommendation is that Kim needs to consider something other than schooling and formal qualifications in the personnel that they hire. Hiring employees from CreaseFree was a mistake due to differences in corporate culture. One needs to examine the inherent corporate culture that the person will bring with them. We are creatures of habit and do not give up our culture easily. The second recommendation is that Kim needed to institute tighter controls on their waste products and the ability to obtain them and reverse engineer the coatings and processes. The third recommendation is to institute tighter controls on the actual formulas themselves. These are standard operating procedures in many companies in today’s world. Failure to institute such security measures sets the company up for the scenario in this case study.

Kim’s most immediate problem is how to solve the issue and re-establish AccuForm’s reputation among customers. The only action that can be taken, even considering China’s tradition of payoffs and referral money, is to prosecute those who are responsible. Ching should be the focus of any legal proceedings. A full disclosure through the media will help to place blame on those individuals who are responsible, thus defusing corporate responsibility for the incident. The information disclosed to the media should contain information about how to spot “real” AccuForm Company labels as opposed to those of the impostors. The company must immediately distance themselves from those who would use their name to produce inferior goods. Although the Chinese are more accustomed to such scandalous behavior, they will still respect the role of individuals, as opposed to that of the corporation as a whole in harming their children. Attempts to hide the incident will more likely result in suspicion from the public.

Kim’s first mistake was that he did not become familiar with the business practices and culture in China. It is apparent that he did not even do minimal exploration of the topic. Information about country cultures and business practices is readily available on the Internet. Hofsted’s cultural dimensions would be a good place to start (Hofstede, 1997). In addition, it is always a good idea to hire a consultant who is familiar with the culture and customs of the foreign country.

Seeking advice within one’s own a company is always a good idea, but the information is not always readily available from these sources. Hiring an outside consultant can help the decision makers understand what they might face when opening the subsidiary. Had they done this, AccuForm would have known that facing payoffs and corruption was a possibility in the joint venture. They would have been able to put the hiring procedures in place to help avoid such employees. They would have been able to put procedures in place to help prevent theft of proprietary information. They could have developed a plan of action to follow in case an incident such as this should occur.

Had Kim taken the time to learn about the culture into which his company wished to enter, he could have been better prepared himself to deal with situations that might arise. In addition, he could have gained the support of other joint venture partners in his home corporation in helping to prevent this unfortunate scenario. Instead of lying awake in his hotel room wondering what to do, had Kim prepared himself about Chinese culture, he would be simply instituting the plan that was already in place for such a situation. This situation arose from a lack of planning on the part of Kim and DynaCoat executives. This case is an example of what can happen when senior management fails to do their due diligence before entering into a strategic partnership. In this case an ounce of prevention would a prevented a pound of headaches that the company now faces.

References

Hofstede, G. (1997). Culture’s Consequences, International Differences in Work-Related Values (Cross Cultural Research and Methodology). Sage Publications, Inc.

Hooker, J. (2009). A Cross-Cultural View of Corruption. Ethisphere. 2 November 2009.

Retrieved from http://ethisphere.com/a-cross-cultural-view-of-corruption/

Lau, A. & Wong, R. (n.d.). AccuForm: Ethical Leadership and Its Challenges in the Era of Globalization. Asia Case Research Centre. University of Hong Kong.