TO: Kai Mueller
FROM: Lin Chen
DATE: April 1998
SUBJECT: NES AG – Gifting in China
NES AG’s problem is that needs approval to become a holding company in China. However, its code of ethics conflicts with the local custom of gifting to as a way of achieving certain outcomes. The problem in the short term is that the company needs to obtain the approval within a month. In the long term, not getting the approval would hurt shareholders or, if NES AG gives gifts to officials, it will violate NES’s ethical code.
The strengths of the company are that it is established and experienced in China with a strong reputation for its high technology expertise, quality, and professional management. The weaknesses are the absence of license to conduct business directly as a holding company, inability to manage workforce, lack of control over some management aspects. Employees may not be performing well knowing they cannot be fired and government restrictions on the office currently threaten the company’s flexibility and impair future planning and expansions. Gaining holding company status would give NES AG more opportunities, flexibility and lower its operational risk in China.
Knowing that a practice does not comply with company’s standards, I believe that it would be in the company’s stakeholders’ best interest to give the gifts to the officials. While reputation is definitely important, the Chinese market is the largest in the world and giving it up over several gifts would be considered unacceptable service to the shareholders. Gift-giving is common practice in China and without it; it is unlikely to get approval for the application. This is especially true considering the one-month time limit to obtain the approval. If we do not give the gifts, Mr. Zhu will lose face and will be unlikely to help us in the future. Furthermore, not receiving Mr. Zhu’s help will make approval process longer and more cumbersome. If the gifts are given, we...