Available online at www.sciencedirect.com

ScienceDirect Procedia - Social and Behavioral Sciences 224 (2016) 467 – 474

6th International Research Symposium in Service Management, IRSSM-6 2015, 11-15 August 2015, UiTM Sarawak, Kuching, Malaysia

What is Governance? The Ethical Dilemma for Leaders and Managers: Multiple Case Studies of Corruption from China Samuel Petros Sebhatua,*, Li Pei-linb b

a SAMOT/CTF, Karlstad University, Karlstad Sweden School of Business administration, Henan University of Economics and Law, Zhengzhou, P.R.China

Abstract The objective of the paper is to look deeper on how these emergent and fast growing factors affect the relationship between ethical dilemma and governance in a newly industrialised country from the corruption and bribery aspect. The paper is explorative in nature. It identifies the need for new governance thinking, based on stakeholder and stewardship theories and transparency as well as its impacts in reducing corruption. The empirical study involves multiple qualitative case studies of multinational corporations of transparency and governance in China (5 cases of multinational companies, and 1 corporate governance code). In this paper, we are not arguing on the role of governance as a control or reporting initiative for corruption, but its role to shun institutional weakness in reducing corruption and resource integration. The study will reveal the challenges of transforming the role of governance in fighting corruption. Strong governance system is a vital component of company efforts to reinforce the right incentives and practices and to address the corrupted practices that they confront and defy ethical dilemma. Governance takes account of all the interests that affect the viability, competence and moral character of an enterprise. Thus, the pres ent results indicate, not only the positive relationship between governance and corruption, but also reveal the characteristics of dynamic governance thinking within a broader governance framework for developing values based service business. Future research in this area should focus on generalizing the present findings by studying the development and integration of governance and clearing the dilemma in other empirical settings and conceptualization, for instance developed economies. © Published by by Elsevier Ltd.Ltd. This is an open access article under the CC BY-NC-ND license © 2016 2016The TheAuthors. Authors. Published Elsevier (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of Universiti Teknologi M ARA Sarawak. Peer-review under responsibility of the Universiti Teknologi MARA Sarawak Keywords: governance; ethics; corruption; China;corporate governance; CSR; resource integration; service research and emerging economies

* Corresponding author. Tel.: +4-654-700-2163. E-mail address: [email protected]

1877-0428 © 2016 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of the Universiti Teknologi MARA Sarawak doi:10.1016/j.sbspro.2016.05.422

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1. Introducti on The several corruption and bribery cases unfolding in the newly industrialized countries, especially Ch ina rais es the basic question: What is Governance? and its ethical dilemma for managers and leaders. The scandal, by big corporations, in China is not a new thing, wh ich hasn’t been done before by companies considering themselves as most responsible ones, like IKEA, Oly mpus, Glaxo SmithKline etc. Corruption and bribery practices seem ubiquitous in the global economy. The Un ited Nations Global Co mpact estimates that corruption adds up to a 10% total cost of doing business globally and 25% additional procurement c ost of doing business with developing countries (Bajo ria, 2011). Transparency International’s (2013) global corruption baro meter investigated the public attitudes towards corruption of mo re than 114,000 respondents in 107 countries, wh ich indicates that th e problem is increasing. The way business are handling corruption, ethics and governance may not be a sign of p rogressive changes in the way business are operating in the mo re globalized and transparent world. Roberts (2001) starts his article by indicating that ethics is not so much missing fro m corporate life entirely as obscured, deferred, and marginalized in the way that we seek to govern the issue and the systems of corporate governance. He is arguing that “the current proliferation of codes of busines s ethics and the associated development of new social and environmental metrics to audit and measure such conduct will serve, paradoxically, to inhibit rather than pro mote the exercise of moral sensibility with in the conduct of corporate life” (Ib id, p.109). The current discussions and reports on corruption of different business organizations, at the top management level, justify this argu ment. Th is creates the need for further d iscussions on how to defy corruption and bribery through the governance systems by integrating new components to alleviate the ethical dilemma, i.e. resulting in new governance thinking. Several researches and organization emphasized the harms of corruption against development in the public sector (Carr and Outhawaite, 2009; Wu, 2005; Hellman et.al., 2000; Wei, 2000; LaPorta et.al., 2000; Kauffman and Wei, 2000), but very few studies assess the importance of corporate governance in combating corruption in the world business (Wu, 2005; 2009) by integrating social responsibility thin kin g and assessing the role of NGOs (Sebhatu et. al., 2012). There is a need for deeper studies on its influence in business. In this paper, we are assessing the theoretical foundation of these different concepts to understand the role of governance in flouting corruption and bribery and the need for new governance influenced by corporate governance (CG) and corporate social responsibility (CSR) thinking. In this paper, we are arguing on the role of governance in avoiding the ethical dilemma for leaders and managers and the effect of corruption and as an integrator of different thinking and transparency. Accordingly, our research question is formu lated in the following way: what is the role of governance in discounting corruption and the ethical d ilemma? To an swer this research question, we studied a case from China - Chinese CG code and the ethical dilemma among leaders and managers, as China is one of the countries highly influenced by corruption and distressed by different business scandals. The paper is of an explorat ive nature, based on qualitative study. In this paper, we are assessing different studies on governance, corruption, business ethics, dilemma and corporate social responsibility, wh ich construct our theoretical frame work in the first part. The second part assesses the research methodology and the research design of the empirical study based on the codes of business ethics and five organizations: SanLu Group Co., Ltd., Gu jing Group Co., Ltd, China National Petroleu m Corporation, Glaxo SmithKline in China, Tianjin Depp Co, .LTD, which is followed by the discussion and analysis. The last part presents the discussion and conclusion with limitations of the paper. 2. Theoretical framework 2.1. Governance, corporate governance and corruption There are several defin itions of corruption with interrelated meaning. Transparency International defines Corruption as the abuse of entrusted power for private gain (Transparency International, 2013). It was, frequently, regarded as “the abuse of public office” (Wu, 2005, p.5) until the Foreign Corrupt Practices Act introduced in the United States, in 1977 (Alfo rd, 2012). Although corruption can lead to a gain in wealth and considered as a way of doing business with a short term perspective, it has an abundant amount of negative effects. Carr and Outhwaite (2009) in their report analysed the engagement of international business on corruption and its negative impacts

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based on the extensive study. International business provides ample opportunity for engaging in a variety of corrupted activities, fro m bribing of public officials and others in positions of power for obtaining contracts, licenses and tax concessions to price fixing and bid rigging (Ib id). Additionally, corruption is an unsustainable practice that increases running costs of enterprise, destroys fair co mpetit ion and can lead to distortion of economic growth. The Agency problems arise within a firm whenever managers have incentives to pursue their own interests at the shareholder expense (Agrawal and Knoweber, 1996). A great incentive for co mpanies to avoid corruption is not necessarily their attitude towards creating sustainable business models, but their fear of losing their brand image and reputation (Alford, 2012). Increased awareness of the negative impact of corruption has over recent years led to the introduction of a broad spectrum of measures designed to combat corruption, includ ing in the private sector (Carr and Outhwaite, 2009). As a norm, the word corruption is associated with a range o f acts such as bribery, extortion, buying influence, nepotism, favouritis m, fraud and embezzlement. Nevertheless, it is at root evidence of a moral failure (Iqbal & Lewis, 2002). It is an unsustainable practice that increases running costs of enterprise, d estroys fair competition and can lead to distortion of economic growth (Sebhatu et. al., 2012) This paper main ly assesses the role of leaders and top managers’ bureaucratic corruption, wh ich is specifically related to the abuse of public office. Therefore, we have employed the World Ban k’s (1997) defin ition of corruption, according to which ‘corruption is abuse of public office fo r private gain’ (p.8). Four different modes inherently ensconced in the concept of corruption are: bribery, extortion, nepotism, and kickbacks (Noor, 2009). In 2007, China created the “National Bureau of Corruption Prevention;” however, this initiative cannot be individual investigated, and thus has no effective repercussions. Nowadays, there is a greater recognition that these short-term advantages of accepting the existence of corruption are acquired at a longer-term cost, since corruption distorts the economic system and erodes faith in democracy and the rule of law. The term CG has become everyday usage in business and financial co mmun ities since the 1990s (Carlsson, 2001; Malin, 2013) and is a global phenomenon focusing on securing shareholder value (Carlsson, 2001; Enquist, et al., 2006). CG is simply defined as “a term describing good, efficient management and supervision of c o mpanies on the basis of internationally recognized standards in the interests of the company’s owners and its social environ ment ” (Cro mme, 2005, p. 5) It strives to create a framework and processes that can increase efficiency of corporations, shareholders, employees and thus, of the stakeholders. According to Macey (2008), corporate governance has the purpose to “persuade, induce, compel, and otherwise motivate corporate managers to keep the promises they make to investors” (Ibid, p. 1). This is why corporate governance has to play an important role within the business practices by specifying the distribution of rights and responsibilit ies of directors. The concept of corporate governance has a tremendous impact on business performance and acts as a double-benefit as it can lead to a greater performance, as well as mitigating corruption (Wu, 2005). The standards have a profound impact on the effectiveness of the global anti-corruption campaign (Wu, 2007). Therefore, corporate governance should normally, mitigate corruption as it offers mechanisms to control excessive use of power by directors as well as audit controls (Carr & Outhwaite, 2011). Ho wever, the importance of corporate governance and transparency had been underestimated with meagre application o f the codes, wh ich let scandals revive. Even though scandals such as of Enron led to changes in the focus of corporate governance, poor corporate governance standards are contributing to the proliferat ion of corruption that damages the interests of s hareholders and reduces existing transparency (Wu, 2002). Transparency and disclosure should be put into spotlight and ethical issues and ethical performance should get a focus (Gill, 2008), wh ich ensures transparency, full disclosures and accountability o f co mpanies to all its stakeholders” (Fernando, 2009). Simply, the lack of good corporate governance bears the potential for corruption other than binge used as a mechanism for its mitigation. 2.2. Ethical dilemma Ethical (Moral) dilemma refers to the situation where it is very difficu lt to choose what is right and what is wrong. In such a situation, there are significant value conflicts among different interest groups and at the same time, the alternatives seem to be equally judiciab le (Banik, 2010). Ethical behaviour is influenced by mult idimensional factors, which are rooted in differences between individuals, organizational settings, and the interplay between the

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two (Longenecker et al., 2006). Personal moral dilemmas and judgments are the concern of th e appropriateness of personal moral violations. According to Robinson (2004), morality as responsibility means acting in accordance with other people's concerns, rights and expectations. He further indicates that any decision where moral considerations are relevant can potentially give upsurge to an ethical dilemma, fo r example, a decision that should be taken in ones’ self-interest but which appears to violate a mo ral principle o r decision that morally requires two or more courses of action, wh ich are in practice incompatib le with each other (Ibid). Many anti-corruption reforms fail because individual and collective interests are poorly aligned or perversely set against one another. Reforms that accentuate a conflict between the interests of individuals and the collective interest pose a social dilemma. Corruption can be thought of as the betrayal and abuse of trust for private benefit (Wolf & Gurgen, 2000). Corruption can also been perceived as a deviant behaviour aiming at private gains at public sector’s expense (Tummala, 2009). 2.3. The role of CSR and external stakeholders The emerg ing area of study on new governance provides a new perspective on governance responsibility and accountability. This is emerged as a reaction to the failures of the oudated command-and-control system, as the old system proved itself to be much of co mmand and control, inefficient and too slow when attempt ing to adapt to new environments and circumstances (Hess, 2008), wh ich is going beyond complying. In addtion, corporate socia l responsibility (CSR) has also become a co mmon concept and a global phenomenon during the 21st century. CSR can be seen as “a market for v irtue” (Vogel, 2005) and in its light version a market act ivity fo r “green washing” (ib id.) but it can also be an important part of a new type of business model (Sebhatu, 2010) where CSR can be used as a strategy for development and transparency for values -based business (Edvardsson and Enquist, 2009) and as a resource for enabling the creation of stakeholder value (Enqu ist, et al., 2006). The “triple bottom line” agenda for business and governance of institutions was also a description of the convergence of the CG agenda with wider societal concerns (Elkington, 2006). In other words, recognition of the importance of CSR is derived fro m recognition that an organisation is accountable for its impact on all relevant stakeholders. Moreover, a stakeholder perspective stimu lates pressure for change in transforming business thinking to include social values because a commit ment to CSR is perceived to enhance opportunities for the co -creation o f value with relevant stakeholders in the long term (Edvardsson and Enquist 2009; Prahalad and Ramaswamy, 2004; Zadek, 2004). A values -based business is perceived to be better placed to create customer value, and thus to become a sustainable service business (Enquist et al., 2008; Edvardsson and Enquist, 2009). The above discussion suggests that the creation of sustainable value in today’s competitive context can be facilitated by integrating stakeholders from the wider society—such as non-government organisations (NGOs) and cit izens —as potential business partners, rather than treating them as illegit imate adversaries (Waddock, 2008). In recent years, NGOs of various types have assumed an increasingly influential role in corporate life (Sebhatu, 2010; Teegen et al., 2004; Sjöström, 2008). Such NGOs are formed by individuals who co me together around common ideas, needs, or causes with a view to a collective mobilisation of resources in support of their co mmon interests (Sebhatu, 2010). Several of these NGOs have raised awareness of social and environ mental issues that impinge upon CG and CSR. As Waddock (2008) has observed, the significance of these actors is that they effectively force co mpanies to be responsible, accountable, and transparent with regard to moral and social issues. Their role as ‘corporate watchdogs’ has become mo re pro minent since the late 1970s in parallel with a growing belief that businesses should be more socially responsible (Sebhatu, 2010). In particular, the increasingly pro minent role played by NGOs in support of sustainable development has transformed the mind -sets of entrepreneurs and senior managers regarding the importance of co mmun icating corporate values and implementing CSR strategies and transparency through proactive thinking (Sebhatu, 2010). 3. Empirical study In this paper, we are assessing the need for integrating disclosure in the business practices, which is selfregulation as an emp irical framework for New Governance. Hess (2008) in his paper specifies the new type of governance created over the last few years, wh ich is called “New Governance”. Self -regulat ion is supported by meta-regulation mechanis ms, indicat ing that an external actor such as NGOs who engage through activism and other

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campaigns needs to be involved (Gill, 2008). The new regulatory system is based on three pillars, namely disclosure (referring to information), dialogue (when dealing with stakeholders) and development (with reference to enterprises) (Ibid.). T able 1. A framework for New Governance mechanisms and systems for assessing ethical dilemma. Mechanisms

Systems Disclosure

Dialogue

Development

Meta-regulation Self-regulation

This case study is “designed with purpose” (Harrison and Freeman, 1999) to analyse and conduct an in -depth study. The selection of these different organizations is based on having a deeper understanding and limit ing the bias. The case study method was chosen in order to assess and reveal the strength and ext remity (Yin, 1994) of the role of governance based on transparency and discloser on assessing ethical dilemma. The study focuses on narrating (Pentland, 1999) the five cases. A qualitative, longitudinal study was used to explore these organizations. Our sampling of these organizat ions was discriminated. We samp led cases which represent different engaged and successful organizations. They all show persistent patterns when it comes to governance and ethical dilemma (Strauss & Corbin, 1990). 3.1. Five cases from China “2014 Chinese entrepreneurs Crime Report” was published by Chinese entrepreneurs Crime Prevention Research Centre of Beijing Normal University in 2014. The report disclosed that they collected 657 cases of entrepreneurs’ crime fro m December 1, 2013, until November 30, 2014. The 657 cases involved a total of 799 criminal entrepreneurs. There was, a total of 122 people in state-owned enterprises, accounting for 15.27% of entrepreneurs crime; the private entrepreneurs crimes are 677, accounting for the tot al number of 84.73%. The Crime distribution structure of entrepreneur's crime shows that there was a significant difference between the state -owned and the private entrepreneurs: the state-owned entrepreneurs involving most of the charges as "the crime of corruption and bribery"; and the private entrepreneurs violate the most accusation "the crime of undermin ing the order of the market economy". 3.1.1. China National Petroleum Corporation corruption China Nat ional Petro leu m Corporat ion (CNPC) is a Ch inese state-owned oil and gas corporation and the largest integrated energy company in the People's Republic of Ch ina. It has its headquarters in Dongcheng District, Beijing. CNPC is the parent of PetroChina, the second largest company in the world in terms of market ca pitalization as of June 2010. In PetroCh ina, until 2014, at least 45 top managers have been involved in an oil corruption case and are being investigated. On March 20, 2013, Tao Yuchun (the general manager of Petro China operator's Kunlun Energy Limited Co mpany) was apprehended by the relevant authorities (under investigation for corruption), due to the company's financial situation and other related reasons. This opened the approach for a corruption in the oil case, which led to the investigation of four senior executives for "serious violations of discipline" fro m their posts later, in August and September. 3.1.2. Gujing Group Company corruption Anhui Gujing Group Co mpany is a large state-owned liquor industry and a leading enterprise in China. It is a diversified business group which expands from a single liquor company, in Bozhou, to hotels, real estate and pharmaceuticals. One of the Group’s core enterprise (flagship liquor industry) - Gujing Distillery Co., Ltd. is a listed company. In 2008, the China Central Co mmission for Discip line Inspection has investigated the main individual

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(Wang Xiaojin) in charge of the enterprise and the vast majority of middle -level cadres with executive scandal of Gu jing group. In February 2009, the former chairman of the board of Furu i Group Wang Xiaojin ad mitted that he accepted bribes and was involved in corruption. Xiao Jin and ten top managers were sentenced for corruption and bribery. 3.1.3. Sanlu tainted milk scandal Sanlu Group CO., Ltd is a state-owned Chinese dairy products company based in Xinhua District, Sh ijiazhuang, the capital city of Hebei Province. New Zealand's Fonterra also had 43% share of San lu. The co mpany is producing one of the oldest and most popular brands of infant formu la in Ch ina. The investigation for scandal for corruption and cover-up against this company started in November 2008, after the Ministry of Chinese Health reported that an estimated 294,000 Chinese infants were sick, more than 50,000 were hospitalized, and six d ied. Later, in Ju ly 2008, fourteen infants in Gansu Province who had been fed San lu milk powder were diagnosed with kidney stones. Later, the company was involved in contaminated milk powder scandal. Earlier in December, 2007, San lu received complaints fro m parents of child ren in remote rural areas that infants have kidney stones and other complications after drin king Sanlu ’s infant milk powder. However, the top executives of Sanlu Group didn’t take it seriously and cover-it- up, and continue producing and selling the milk powders. 3.1.4. Siemens corruption in China Siemens, a German company, is active in the business areas of Information and Co mmunication; Automation and Control; Power Generation and Power; Transportation; Medical Solutions; Lighting; and Financing and Real Estate. German prosecutors initially opened the Siemens case in 2005, in which A merican authorities became involved in 2006 (as the company shares are traded on New Yo rk Stock Exchange). According to the U.S. Justice Depart ment Court Ch ina is one of the key countries of the Siemens bribery. Bribery scandals involving Siemens were revealed in 2006 and 2007, with some of the co mpany's employees bribing foreign officials to gain contracts and create slush funds for this purpose. Fro m 2003 to 2007, Siemens had five Ch inese state -owned hospitals bribery cases of $ 23.4 million. At the same time, Siemens also bribed some Ch inese officials to win t wo contracts for high voltage power transmission line project worth $ 1 billion. 3.1.5. GlaxoSmithKline bribery in China GlaxoSmithKline (GSK), headquartered in London, is one of the largest pharmaceutical co mpanies in the world. The firm is known for its wide range of over-the-counter and prescription medicines and vaccines, including its popular anti-depressant drug (Paxil) and diabetes drug (Avandia). GSK was suspected in trying to increase sales channels and prices by using different means such as travel agencies to bribe project sponsors of government officials, med ical associations, hospitals and doctors, and faking tax receipts. In July 2013, the Chinese Ministry of Public Security detained four senior Chinese executives of GlaxoSmithKline and some related personnel in China, alleg ing that they were involved in passing bribes totalling 3 billion yuan (US$484 million) to government officials, med ical associations and foundations, hospitals and doctors. "The bribed money makes up nearly 20 to 30 percent of the price of the med icine” according to Liang Hong, Vice-President of Operation of GlaxoSmithKline. The money aimed at expanding drug sales in China was transferred through 700 third-party travel agencies. 4. Discussion and conclusion Our study assesses the emerging topic on the ro le of governance towards corruption and the dilemma for leaders and Managers. The study focuses on considering business organizations engagement on reducing corruption through governance issues. The interrelated CG and CSR p rinciples and values are connected to vision and mission as well as to a license to operation based on dialogue with all the stakeholders, as argued by Transpa rency International. This is part of the governance process related to the governance and societal (in a broad sense) dialogues beside the triggers and causes for engaging in d ifferent scandals by the leaders as in these cases. Parallel with this trend,

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transparency and discloser has also become familiar in the corporate world, and is a global phenomenon in the 21st century. The emergence of corporate governance as tool for tackling financial crises and corporate scandals has created the need for wider transparency and the engagement of different stakeholders. Existing research concentrates on either corporate governance or corruption in the public sector and developing or emerg ing economies, but rather neglects the gap in corporate governance towards corrup tion in business. This paper identifies the need for new governance, discloser and transparency and its impacts in reducing ethical dilemma through the mechanisms of self regulation and meta-regulat ion. Finally, the empirical studies indicate, not only th e relationship between governance and corruption, but also reveal the ethical dilemma and the need for dynamic governance codes to combat the fundamental institutional weaknesses. 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