Playing straight sometimes misses bottom line

Chinese yuan

KAI RYSSDAL: The big geopolitical news is happening in Beijing. Down in Shanghai, there's a huge corruption scandal unfolding. The city's former Communist party chief's under investigation for looting a pension fund. A Shanghai real estate tycoon's being prosecuted for tax fraud. And police are investigating employees of seven multinational companies, including McDonalds and Whirlpool, for accepting bribes.

Twenty-two people have been detained. Suspicion is they took half a million dollars in kickbacks from computer equipment suppliers. In most countries scandal's bad for business. But Jocelyn Ford reports sometimes, being on the up and up means lost business.


MIKE WESTER: I wanted to welcome everybody to today's event . . .

JOCELYN FORD: It's 7:30 on a Sunday morning. The general manager of a Beijing English language city magazine is herding a group of advertisers onto a bus. They're going on an all-expenses-paid trip to the ski slopes.

WESTER: Our biggest reason actually to take everyone here to

Nunchen is to have some fun and get to know you guys. A lot of people . . . a lot of you guys are clients of ours . . .

Manager Mike Wester says the thrifty ski trip is a good way to get to know clients. He doesn't allow his ad sales staff to lure customers with kickbacks. Even though that's common practice in the magazine industry, as Wester learned early on.

WESTER: You know one time, when we first started out, this guy pulled us aside from a real estate company and he said, "You guys are fools. Look at this sales kit."

It gave the actual price of an ad, and the advertiser said it was way too low.

WESTER:"I'm telln' you. You know what you need to do? Make it 10 times that. But when you come to sell me an ad, give me 50 percent off first of all. Then, give me a massive kickback, and I'm gonna book ads like crazy." He's like "That's the way it works, don't you know? Don't you understand?" And we were kinda like "Ohhhh my God, what have we gotten ourselves into?"

At "That's Beijing" magazine, Wester has a "zero tolerance" rule for ad sales people who accept kickbacks. So far, he's only had to fire one person.

But at larger corporations, policing employees is a bigger challenge.

PETER HUMPHREY: Most multinationals in China suffer from a horrendous amount of employee corruption and petty fraud.

Peter Humphrey is a corporate investigator. Over the past nine years, his company has handled over 500 cases in China. He's done investigations for just about every multinational operating here.

HUMPHREY:Most of it involves kickbacks taken from suppliers. Across the board in every imaginable industry. Every imaginable thing that a company might need to buy in China.

Humphrey says a lot of the foul play goes unnoticed by foreign executives. Especially if the foreigners don't speak Chinese.

HUMPHREY: Maybe you have an American company running a big factory with 2,000 people. And what happens is that there's a lot going on beneath the surface that they don't notice. The Chinese staff all know what's going on. They gossip about it in their canteens and so on, they all know. But the expatriate management usually do not know.

Until, for example, there's a company audit. Or a whistle-blower sends an anonymous e-mail or fax. Humphrey says that's what happened in the recent case of the seven multinationals whose employees were caught.

Corporations like McDonalds and Japan's Fuji Xerox might be embarrassed by the investigation. But Humphrey says it's good news the police are starting to enforce the law against kick backs.

Meanwhile, executives like Mike Wester and his ad sales staff continue to pay a price for following the law.

WESTER: They will occasionally run into an advertiser who says, "Alright, what's the deal, how much are you gonna give me as a kickback?" So, we don't get the client.

But Wester believes the short-term loss is a long-term gain. He'd rather sell ad space to people who believe his readers actually might buy their company's products. He says those people are more likely to come back to advertise issue after issue.

In Beijing, I'm Jocelyn Ford for Marketplace

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