Calypso Consulting

(A version of this article was first printed in Chinese in CHO Magazine in August 2009)
In the West, the law is very mature.  There are, for the most part, clear directions for companies based on prior legal decisions.  In China, the legal system is still relatively immature.  Also, in China, the various government entities (provincial, county and local) may have very different interpretations of laws mandated by the state.  Many argue that these interpretations are often self-serving and driven by those who have the most to lose if a particular regulation is followed.
         Let us look at one example, written contracts.  In all Western countries where there is a “rule of law,” the contract is a final document that cannot be violated without penalty.  Only if both parties agree in writing that the contract needs to be changed can one party decide not to do something spelled out in the contract.  In China, the contract often has a different meaning.  The contract in China is sometimes more like what Westerners call a “letter of intent.”  That is, the contract can identify what is intended of both parties at any point in time.  Both parties then move forward with that document as a guideline for how to proceed, but not always as a final and permanent document.   These very different views often cause conflict when there are relations between Chinese managers and Western managers.
In the West, since such a document is binding between people and organizations, the Westerner trusts that if such a document exists, then both parties will do all that they can to honor it.  The contract document is backed up by the signatures of both parties and, if necessary, by the courts of the land.  The Western expectation is that a contract spells out exactly what both parties will do for the other, often including very specific payment terms.  For many Chinese, such a document is neither considered binding nor backed up by any law.  It is intended to be vague so that parties can continue to negotiate and work out issues along the way.  Generally, Chinese business people expect that they can work out contract differences between themselves as they occur.  It should rarely be a matter for the courts.
Another example of the difference in law between China and the West is in the basic premises of the two legal systems.  In the West you are presumed innocent until proven guilty.  In other words, the law trusts that you are not guilty of a crime and it is up to the state to prove otherwise.  In China, just the opposite is true.  Once you are arrested, it is first presumed that you are guilty.  There is not a presumption that you are innocent.  The burden is on you to prove your innocence. 
This presents a big problem for companies who are often the subject of legal complaints from embittered employees or local officials.  Once the accusation is made, the burden is on the company to prove its innocence.  Leaders need to be careful not to get too glib about an outcome; no matter how true is their innocence.  There is always an uncertainty about how a case will turn out, however clear the evidence.
I am aware of one case in Beijing where a company did everything legal with a group of employees who decided voluntarily to leave the firm.  The company asked them to stay and even audio-taped their rejection.  They offered them more money to stay but the employees still decided to leave.  Even though the company tried to retain them and taped the employees’ admission to leave, the employees filed for termination pay from the local labor review board.  The local review board initially ruled in favor of the employees because they did not sign a termination agreement.  Of course they were offered such an agreement but chose not to sign.  This ruling was eventually overturned when the lawyer for the company explained to the review board that, if they sided with the employees in this case, then all any employee would need to do in the future is refuse to sign a termination agreement, no matter what the reason for dismissal, and potentially be rewarded by the firm.
      From a Chinese perspective, one may argue that this vagueness in the law allows a leader to be creative in its interpretation and to use it to the advantage of the company.  Others sarcastically say that the law is meant to be broken.  What both of these comments indicate is that, while the law may be intended to protect the public, it is not so rigid that it cannot be modified to meet certain needs if it can be proven that the modification is not in opposition to the public good.
       There is one final point about legality in China as it refers to business.  This is the matter of a corporate code of ethics.  Nearly every multi-national firm has one. When a matter occurs that potentially threatens the code of ethics, anyone involved must understand the consequences of those either following or not following the ethical code.  Sometimes the result of following the code strictly will mean there is a possibility of losing a business deal.  If a leader in China believes that they can be “flexible” in getting something done, but such flexibility might require actions that threaten the corporate ethical code, this action should not be taken without first obtaining corporate approval in writing.  If you take action on your own, you do so at your own peril.