To Do Business There, You Need Directors With Guanxi
from
January/February 2006
by Randy Myers
Do
you have the right board to make the move to China? Ideally, you’ve got
at least one director who can speak the language, knows the culture,
understands the business environment, and has a certain amount of
guanxi. That’s Mandarin for connections, and it is the key to doing
business in the Middle Kingdom.
You don’t? Executive
recruiters point to two sources of boardroom talent: the fairly large
pool of Chinese Americans who have maintained ties to China and the
smaller but growing pool of Chinese nationals, educated in the U.S. or
Europe, who work for major companies inside or outside China.
Wilson
Chu, 47, a partner with the Dallas law firm of Haynes & Boone LLP,
thinks Chinese Americans make perfect additions to the boardroom. “They
are bicultural. They grew up here, but do business in China and have
friends and relatives there,” he says. “They are global Chinese.” Chu,
born in Hong Kong and raised in Texas, could be talking about himself.
Of
course, some Chinese Americans already serve as directors on
high-profile boards. Andrea Jung, 47, born in Toronto of a Shanghai
mother and a Hong Kong father, is chairman and CEO of Avon Products and
sits on the board of General Electric. Susan Wang, who was born in
Shanghai and is the former CFO of Solectron, an electronics company, is
a director of the software outfit Altera and serves on three other
boards. Carolyn Y. Woo, 51, raised in Hong Kong and now dean of Notre
Dame’s Mendoza College of Business, is on the boards of three public
companies, including Circuit City. Taiwan-born, California-raised Jerry
Yang, 38, is a co-founder of Yahoo and sits on that board, as well as
Cisco’s.
Chinese Americans are on other boards too,
including those of Agilent Technologies, American International Group,
and Walt Disney Co.—but they’re not commonplace. Only 11.4% of Fortune
500 companies have an Asian on their boards. The Committee of 100, a
nonprofit association that addresses Chinese American issues, has
conducted two surveys of the number of Asian Americans serving as
directors of Fortune 500 companies, in 2003 and 2005; there hasn’t been
much progress. The organization’s 2005 report points out that while
Asians account for 5% of the U.S. population—a percentage expected to
increase by half between 2000 and 2010—they hold just 1.2% of Fortune
500 board seats, up from 1% in the 2003 survey. Asian American
representation was somewhat higher on the boards of companies in the
tech-heavy NASDAQ 100—4% in the 2003 survey. (The group hasn’t
revisited the NASDAQ 100 since then.)
Says Wilson Chu, the Committee of 100’s general counsel and secretary:
“We
want companies to ask, ‘If Asia is such an important market for our
growth, what are we doing inside the boardroom about that?’”
“Thinking
about it,” answers executive recruiter Julie Daum, head of Spencer
Stuart’s North American board services practice. “Boards talk about it
because they know it’s going to be important, and they say that if
somebody had experience in China, that would be an added plus in a
director search. But they haven’t yet said, ‘We must have someone on
the board from China.’”
They’d better. It’s hard for
Westerners to grasp China’s 5,000-year history, its Confucian culture,
its political hierarchies, its nationalism, and its 21st-century
political and commercial ambitions. “The system of doing business in
China is very different,” warns Chuck King, managing director and head
of global board services at the executive recruiting firm Korn/Ferry
International. “The pace is different. The levels of bureaucracy one
goes through, the influence of the government—there are a number of
different factors that play upon doing business in China, and I think
it’s probably frustrated a number of companies in the past. It has not
been an easy market to break into.” Chinese companies looking for
Westerners to serve as directors face comparable challenges—but some
have found what they needed. American Oriental Bioengineering Inc. of
Hong Kong, for example, signed up Eileen Brody, a clothing-company
executive based in South Natick, Massachusetts.
If
Chinese Americans can help fellow directors understand China, wouldn’t
Chinese nationals be just as good, or even better? China may not have
had the time to develop a large pool of world-class executives since
the mainland began its transformation from a centrally planned economy
to a market one less than 30 years ago, but it is catching up fast.
Witness Lenovo Group’s $1.75 billion purchase of IBM’s
personal-computer business last May, and Alibaba.com’s deal in August
with Yahoo. For $1 billion, Yahoo got a 40% stake in Alibaba, China’s
pioneering Internet auction site. The Chinese company got all of
Yahoo’s business in China, which makes Alibaba the largest online
player in one of the fastest-growing Internet markets in the world.
(Guanxi note: Jack Ma, who founded Alibaba, has been friends with
Yahoo’s Jerry Yang since he gave him a tour of the Great Wall in 1998.
The connection made a difference—eBay was also interested in linking up
with Alibaba.) Companies looking for potential directors could do a lot
worse than the executives of Lenovo and Alibaba, especially if they’re
interested in anything high-tech.
There is surely some
hard selling to do, however. Chinese nationals with U.S. board
potential aren’t always interested in the opportunity—and not just
because of the potentially onerous travel demands, which could well
consume a month of their time each year. More pointedly, they are not
accustomed to having non-Chinese on their boards, so why should they go
onto a foreign one? “Asians are fearful of serving on American boards,”
says Joie Gregor, vice chairman and managing partner of the global
board of directors practice at executive recruiter Heidrick &
Struggles International. “They don’t fully understand the ramifications
of Sarbanes-Oxley. Intellectually they understand it, but emotionally
they don’t.” In addition, Chinese aren’t always comfortable speaking
out. Free speech is not yet a political reality in China, nor has it
been a cultural virtue over the years. “Growing up in Asia, we are
taught that the empty barrel makes the most noise, but that’s not true
when it comes to American business,” says attorney Wilson Chu. “Inside
that boardroom, if you don’t speak up they think you don’t have
anything to say.”
Companies that want the insights of
executives intimately familiar with China can sidestep some of these
issues by setting up advisory boards consisting of Asian executives who
might meet three or four times a year to share information—without the
responsibilities of directorship. Typically receiving modest stipends,
the advisers meet with senior members of the company’s management team
to talk about a wide range of issues, from the Chinese economy and its
effects on the business to the company’s image and performance in areas
like customer service and new product development.
“This
is something financial institutions have done in the past, but now
we’re seeing big industrials and other global companies do it too,”
says Joie Gregor, who recently fielded a large industrial company’s
request for help in forming such a group. “Sometimes they’ll invite
their largest client contacts to come and give them input about the
political environment or consumer buying patterns. I’ve seen this be
very successful.” Martin Tang, head of the Hong Kong office of Spencer
Stuart, says his firm recently helped a large U.S.-based retailer put
together a five-person Chinese advisory board. The participants—most
Chinese but all with substantial experience of doing business
there—bring different types of functional expertise to the table. None
are customers of the retailer; one is a Chinese business-school dean.
Each board member receives an annual retainer of $8,000, Tang says,
plus $4,000 per meeting for three meetings a year that are also
attended by the head of the retailer’s China operations and,
occasionally, some of its U.S.-based executives.
George
Davis, co-managing partner of the U.S. board practice at the executive
search firm Egon Zehnder International, says his company has put
several such boards together for American clients, including one
recently for a capital-intensive Fortune 100 industrial corporation. At
that outfit and many others, he says, the goal is to build an advisory
board with a significant number of Chinese executives but also
executives from other emerging markets to provide a balanced view of
the region, particularly about matters such as where to site a
production facility.
Companies can also hire
China-based consultants. Davis says these firms can advise on
navigating China’s political or regulatory environment. “Directors are
there to provide strategy,” says Wilson Chu. “Things like getting
approval from this province or that governor can be handled by
underlings.”
Some companies eager for Middle Kingdom
expertise at the board level are casting their recruiting nets beyond
China to include Mandarin-speaking executives from Asian countries with
links to both China and the West, such as Singapore or Taiwan. “A
Taiwanese can absolutely be helpful,” says Chu. “Economically, Taiwan
and China are very integrated. There are more than one million
Taiwanese living in Shanghai alone.” Some companies also look to
Western expatriates with experience in Asia. Starbucks Corp., for
example, recently named Javier Teruel, 55, vice chairman of
Colgate-Palmolive Co., to its board. A native of Mexico, Teruel has
extensive experience in Latin America but also in Europe and Asia. Chu,
however, cautions that expatriates often don’t have the same level of
immersion in Chinese culture that Chinese Americans do. “Expats tend to
live in a bubble, in an expatriate community,” he says. “They’ll never
have direct contact with the line workers or the people of China.”
So
the process of finding the best “Asia hand” for your board can be
tricky. But the exercise itself should be interesting, and may even
generate some important guanxi. As for when to start looking for this
new director, you might consider the Chinese proverb: “Do not fear
going forward slowly; only fear standing still.”
