How do you implement Western style Code-of-Conduct requirements in China, a country with a notoriously complex business culture and legislature? Per Linden, CEO and founder of Scandic Sourcing sits down on a one-on-one and talks about what makes or breaks a Code-of-Conduct program in China.
After operating a Sourcing company in China for over a decade, Per Linden, CEO and founder of Scandic Sourcing, was recently awarded a prize by the Swedish minister of commerce. Every year the Swedish Chamber of Commerce gives out an innovation prize and this time Per Linden received it for his creation of a whole new Code of Conduct program. This program has widely been used on a big number of Chinese suppliers. However, implementing it has not been a straight forward process.
The progression of gradually encouraging suppliers to change their standards according to Western ones as outlined in internationally adopted guidelines for sound business practices such as the UN Global Compact, OECD Guide Lines for Multinational Enterprises and the international Chamber of Commerce guidelines has not been an easy job, andmaking a Code of Conduct correlate with Chinese legislation has proved to be a precarious obstacle which Per Linden has learned all about negotiating.
Why is there a need for a code of conduct program?
Per Linden: After the Enron and Arthur Anderson incidents in 2003, industrial companies realized the importance of working with a well defined internal behavioral code and many companies thus decided to upgrade and provide clearer definitions to their internal programs.
Bridging the gap
What problems can a company face when implementing a code of conduct program in China?
Per Linden: China's rapid industrialization has brought about many improvements regarding the general standard in factory, health, safety, environment and labor treatment. However, there is an enormous awareness gap among workers, factory managers and the Chinese government regarding what standard that western companies expect. Another problem is that while head office values are understood by management and sales in subsidiaries; it can often be difficult to penetrate all the way through the purchasing departments, due to the local nature of the procurement business. Check lists produced by the headquarters and used by internal purchasing staff covering code of conduct items during quality or general supplier audits are commonly used but less effective as they are constructed for a different reality. Purchasing staffs main priorities has always been to negotiate price, delivery and ensure quality while attempting not to disturb the close relationships often developed in China between buyers and sellers with unclear issues that none of the parties fully conceived.
Finally, the millions of factories producing goods in China are run by people with little education. They do not study the laws and they are even less familiar with the UN global compact. Their only guidance is usually guidelines drawn up by local government officials. Using special relations to officials, suppliers can avoid or delay to conform to certain rules. Hence, lack of knowledge is also an all pervading issue in China.
How does the Chinese legislature fit into all of this?
Per Linden: Multinational companies usually have well developed code of conduct programs, often based on the UN Global Compact. However, many points in the UN Global Compact are against the Chinese law, such as independent unions, human rights as well as key labor issues.
It is extremely hard to impose Western ideas about working conditions when that implies going against standard procedures accepted by workers, factory management and government. It is also hard for staff working in foreign companies to always understand clearly what is expected.
For this reason these programs seldom penetrate fully through a foreign company's own organization in China, and even less often, all the way to its suppliers.
Furthermore, Chinese laws tend to be theoretical entities that are created centrally. These laws are usually implemented over entire decades during which there is big confusion over what exactly applies. To add to the confusion, laws are interpreted differently by different districts or officials active even in the same city.
How's your program been received by the suppliers being audited?
Per Linden: The starting point in Scandic Sourcing's approach is that most factories are not following international norms and Chinese laws deliberately,
but rather from a lack of knowledge. Engagement, education and encouragement are key tools to raise awareness among such suppliers.
To encourage changes it is necessary to build trust, set reachable goals and priorities and to communicate. Not everything can be fixed at once. Urgent, as well as easy items can be dealt with first to achieve early successes and to build trust in the process. Requirements can then gradually be tightened.
A general principle is that everybody needs to conform to Chinese applied laws and accepted praxis and gradually to policies under implementation in the industry. Sometimes the requirements are set higher, considering customers "key values". If there is a conflict between different systems in any area, it is normally judged from the fair interest/protection of the Chinese worker.
Most suppliers have been exited by the possibility to get approved by a foreign company on these issues. The possibility to measure improvements have given encouragement and discussion possibilities. A green light system was implemented with classifications of red, yellow and green.
In those cases where the companies have not responded well, it has often been a case that those suppliers had a murky track record in other areas as well, and several have been weeded out.
About 40 suppliers are now audited on a regular basis and the program will be expanded. The experience has been very positive. Suppliers have generally been very open to show their situation as well as listening to recommendations. Willingness to improve has been surprisingly good. Some supplier weaknesses that we identified were mostly issues regarding personal safety and facility management whose remedies are fairly inexpensive to correct. Other problem areas such as labor issues have been identified and a communication process started with the supplier informing about the recommended way.
Can you outline your auditing process?
Per Linden: We have defined 21 key areas. In each one of them several questions describing a future state has been defined. It is judged on a 5 point scale how well this future state has been met. Scandic specifically avoids Yes/No questions. Averages are calculated for each area.Critical areas are selected and minimum "requirements" are defined. For longer term goals we describe these as "recommendations". For example we have recommended everybody to follow the provisions in the new labor law, while we knew it would take them some time to implement so it was no idea to require it at that point. However, we got a chance to inform the suppliers about the important issues at hand and give them some time for preparation.During audits each area is reviewed by an Engineer and an HR specialist. Time is taken to inform about the purpose and also feedback and discuss recommendations.
Then what happens?
Per Linden: After each audit a detailed report is sent to the client and a summary and action plan to the audited supplier. Time for corrective action is set and action is followed-up. Records are kept and statistics compiled.
Where can this be applied?
Per Linden: The Scandic Approach is especially applicable in all production situations in China. Although they were developed for the mechanical industry, the principles are universal and can be adapted to any situation. Scandic provides consulting services to assist foreign companies to work with code of conduct issues in China. The program is after 4 years of trials now ready to be applied on a wider scale.