In late May, Zhao Hongyan was one of about two dozen in-house lawyers who spoke at a conference in Shanghai. Her topic was an extremely common one for such confabs: dealing with corruption issues.
Her views on the subject are going to receive much more scrutiny in the weeks and months ahead. Zhao, the China legal director for British pharmaceutical giant GlaxoSmithKline, was one of four executives of the company detained by China’s Ministry of Public Security as part of
into whether the company funneled almost $500 million in bribes through 700 travel agencies to doctors and hospitals in order to get them to purchase or prescribe its products. No charges have yet been announced against Zhao and the other executives.
The fact that a senior in-house lawyer has been named in the unfolding scandal has raised tough questions about how corporate legal departments operate in China. Lawyers in the market appear divided on whether a lawyer in Zhao’s position would definitely have known about a large-scale pattern of bribery. But all agree that in-house lawyers in China often face great difficulties coordinating with headquarters general counsels while at the same time they feel enormous pressure to help the business side achieve its goals.
“[Many multinationals in China] appoint a local Chinese lawyer that lacks both an understanding of corporate policy and culture, and is someone that can be easily manipulated to step in line with the illicit activities of wayward on-the-ground managers that are under much pressure to capture the markets,”
Sheppard Mullin Richter & Hampton
Beijing managing partner James Zimmerman says. “The pressures to sell and to sell the Chinese way oftentimes leads to activities that cross the line.”
Exactly what Zhao, who also used the given name April instead of Hongyan, knew or did not know, did or did not do, is still unclear. Last week, GSK admitted in a statement that “certain senior executives . . . appear to have acted outside of our processes and controls which breaches Chinese law,” although it has so far not offered further details. The company last week hired Ropes & Gray to conduct an internal investigation into the matter.
Zhao herself has not been heard from, though another detained executive, GSK China vice president Liang Hong, has been shown on state television admitting to bribing doctors.
Most of the lawyers interviewed for this story had not heard of Zhao prior to current corruption investigation. A short biography posted on the website for the conference in which she participated in May says she joined GSK in 2007 and took over as legal affairs director four years later. Prior to GSK, her main experience was nine years as a judge with the Beijing Railway Transportation Court. According to the bio, she also spent two years in the litigation and arbitration department of a “reputable Chinese law firm.”
A London-based spokesperson for GSK declined to comment on Zhao’s hiring or whom she reported to, or the management structure of the company’s legal team in China.
Multinationals have taken different approaches with their in-house groups in China. Some mainly have foreign lawyers working for them in China, while others, like GSK, appear to have largely local lawyers on staff.
Chinese lawyers have the obvious advantage of greater familiarity with Chinese law, and many companies look to their China in-house lawyers to deal mainly with local matters. But some lawyers say GSK may potentially highlight the risks of relying entirely on local lawyers, especially when they do not have the support of corporate headquarters on compliance issues. Zimmerman notes that the lack of such support, and an inability to question illicit activities without fear of retaliation from local managers, often puts Chinese lawyers in a position where they are easily manipulated or ignored entirely by those local managers.
“If she is not a vocal advocate for zero tolerance, she then becomes part of the problem,” he says. “I am sure every company in China now with a local lawyer as the compliance gatekeeper is trying to figure out how not to make the same mistakes.”
Lawyers also note that Chinese in-house lawyers are more likely to feel conflicting loyalties between a company’s headquarters abroad and its local management.
“Many in-house people in China are going to face a lot of pressure from the business side, and there’s going to be lots of ambiguity about who is their boss,” says a Shanghai partner with a U.S. firm, who requested anonymity. “Is it the general counsel back at headquarters, or is it the local [business head]?”
Zimmerman says Chinese managers, including those for multinationals, generally expect in-house lawyers to follow their lead.
“I once had a China CEO for a U.S. telecom company tell me that he never wants to hear ‘no’ from his local lawyers,” he says. “That was 15 years ago, and it’s always the same. The local Chinese managers do not want somebody from headquarters questioning how they do business in China.”
Simon Liu, the Shanghai-based head of legal at Dutch company CEVA Logistics, says the problem of divided loyalties is often exacerbated because Chinese in-house lawyers often face difficulties communicating with and integrating into the headquarters legal team.
“We have to do regular reporting to headquarters, to the general counsel and legal affairs directors, and that usually takes a lot of time, just explaining to them how Chinese practices are different to Western cultures,” he says.
In Liu’s view, that’s an advantage of having a foreign lawyer acting as in-house counsel in China. “They can relate better with Western cultures and can communicate better with Western offices,” he says.
Randall Lewis, a U.S. lawyer who worked for seven years in Shanghai as associate general counsel for French food company Danone before moving back to the United States three months ago to take a job at ConAgra Foods, echoes those sentiments. He says his team at Danone did have Chinese lawyers but only those with extensive training in the U.S. or the United Kingdom. Simply having a master’s degree in U.S. or U.K. law was not enough to lend the kind of international viewpoint necessary to operate a China-based legal team, he says.
“In my experience, Chinese counsel tend to look at things only from a very local perspective,” he says. “Things will change, but we are not there yet.”
Liu says that it is hard for him to see how an in-house lawyer would not know about large-scale corruption like that alleged against GSK. He says that he and the two lawyers under him review every contract that management in China signs. They therefore know exactly the kinds of deals being closed and who are CEVA’s business partners. He speculates that the situation was much the same for Zhao at GSK: “As a legal counsel and head for that company, she must have been closely involved with the deals that the company made in China.”
Kenneth Tung, chief legal counsel at Chinese automaker Geely Holding Group Co. Ltd., agrees, pointing out as well that the kind of corruption alleged against GSK has long been thought endemic in China’s pharmaceutical sector. “I cannot imagine how an in-house counsel would not have suspected that such activities were taking place in this space,” he says.
But the Shanghai partner at a U.S. firm, who requested anonymity, says it is possible that Zhao did not know about the bribes. He notes that GSK’s payments to doctors were reportedly disguised as trips to medical conferences and other legitimate expenses and so might not have shown up on routine compliance checks. When employees are determined to go around the controls a company puts in place to prevent corruption, the partner says, in-house lawyers may find it impossible to detect illicit behavior.
“You can tell [the business team] to follow all the rules, and put in place all these policies,” he says, “but if the senior-most people are going to set up a mechanism outside your company and outside the scope of the rules there, I don’t know how you catch that unless someone [else] catches them.”
A Shanghai-based partner with a U.K. firm, who requested anonymity, says that although most businesses dutifully pay lip service to the importance of compliance, the actions of most in-house lawyers will ultimately reflect the priorities of top management.
“The general counsel is a small piece in a giant puzzle to make sure the company operates within the confines of the law,” the partner says. “There’s nothing the general counsel can do unless you have commitment from top-level management that they won’t engage in dirty business. Otherwise they will turn a blind eye, and everyone will know that.”