Mastering the Art of Doing Business in China Not Enough Ceos Know How to Play the Game to Their Advantage

AGENDA 2006 I 11/10/05 10:58 AM Page 24

AGENDA 2006

Mastering the Art of Doing Business in China Not enough CEOs know how to play the game to their advantage. BY ROBERT L. KUHN

f all the challenges ket economy. Figuring out how to navi- facing chief execu- gate this transition is obviously complex. tives, getting China Foreign executives are usually naive. right is one of the Few are even aware of the relevance of most import ant. politics, much less know how to play it. But many CEOs When they envision the “Chinese govern- assume they can do ment,” they see a monolith, displaying an Obusiness in China the way they do busi- idealism that’s laughable to the Chinese. ness in other countries. They cannot. If Foreigners are often not aware of compet- most business is local, most business in ing interests among central, provincial China is also political. and municipal levels of government, and China says it is evolving into a “social- ist market economy with Chinese charac- teristics.” While critics consider that a tortuous way of har- monizing capitalistic practice with Com- munist ideology, it reflects a long and complex transition from a plan- ned economy to more of a mar-

Robert L. Kuhn, author and Citigroup China adviser

24 www.chiefexecutive.net December 2005 AGENDA 2006 I 11/10/05 10:58 AM Page 25

on each level among diverse commissions, BEST PRACTICES ministries, agencies, departments and bureaus with overlapping interests of turf Kuhn on the Do’s and Don’ts and power. On the personal level, lack of awareness Conduct (quietly) analyses of Don’t neglect any level of govern- is often worse. Foreign executives imagine those you’re dealing with. Assess polit- ment—central, provincial, local. All but ical factions and alliances between indi- the very largest businesses depend on the that if they have a pleasant meeting with viduals within government agencies, support of local and provincial government, the CEO of a state-owned company, or partners, suppliers, customers and com- and that support (or lack of hindrance) is surely if they are encouraged by a govern- petitors who can affect your business. often instrumental in corporate success. ment official responsible for that industri- al sector, then they have a high likelihood Build relationships with key peo- Don’t underestimate the impor- of achieving their goals. They do not appre- ple, personal as well as professional. tance of personal relationships. China Discern their real objectives and under- is changing, but personal relationships ciate the disparate personal loyalties that stand their background—education, (guanxi) continue to play a role in gener- thread through most Chinese organiza- hometown, family, prior jobs, relationships ating trust and assuring loyalty. tions, or customary mechanisms of deci- and aspirations. sion-making that usually require agreement Don’t overestimate the importance at multiple levels. In many organizations, Watch retirement ages. Do not rely of personal relationships. In other words, don’t rely on any one person in a someone quite low in the power structure, on executives or officials approaching mandatory retirement (the age differs by Chinese institution, government agency someone surely unknown to the foreigners, rank and sector). Successors are likely to or state-owned business—not even the may maintain effective veto power. distance themselves from predecessors’ top person. People get promoted, demot- In one case, the CEO of a Chinese state- friends and partners. ed or transferred, sometimes suddenly. owned partner in a joint venture was, unbe- Don’t think that if the boss agrees, knownst to the foreign partner, locked in Cater to the most senior executive the deal is done. Organizations, particu- a long-standing political struggle with his or official in every meeting. Chinese organizations are still built on strict hier- larly government agencies and state-owned government boss, a personal battle that was archies, and foreign executives must be enterprises, often have multiple lines of alle- common gossip around the organization. sensitive to that. giances that even CEOs cannot overrule. When the CEO was ousted, the govern- Don’t assume that all Chinese are ment cut its support for the venture. The Align your interests with those of on the same side. Chinese people, like foreign partner never had a clue about what your Chinese partners and managers. all people, are interested in their own pri- was obvious to everyone else. Structure and organize your business to be as self-regulating as possible (as if vate careers, opportunities and financial benefits. Using Powerful Tools there are neither legal contracts nor internal controls). Don’t forget Chinese history, partic- olitics, used properly, can be a ularly as it may affect the attitudes and sen- powerful tool for getting deals Awareness is critical. Once politics sitivity of people who affect your business. done and keeping joint ventures are understood, companies can utilize rep- P on track. In structuring one very large utable advisers—professionals with long Don’t depend on a change in law or experience in China whose track record joint venture in China, a European man- regulations. Politics are complicated, mired and relationships can be independently in competing interests. Time estimates ufacturing multinational found itself at a assessed. Beware of charlatans claiming for government action can mean little. standstill after protracted negotiations. It to be related to a government official. decided to take a risk by inviting the most Don’t assume that a contract will senior provincial leader—the Party secre- Seek natural allies. Identify institu- protect you. China is serious about oper- tary—to participate in the discussions. tions and individuals who will benefit from ating according to rule of law, but it is not your success and seek to engage them. there yet. Personal relationships and busi- Involving the senior leader directly could Similarly, identify any who will benefit from ness importance come first; contracts be ill-advised because there’s typically no your failure and seek to neutralize them. come second. appeal of whatever decision he makes. However, the foreign company had done

CEO Magazine December 2005 25 AGENDA 2006 I 11/10/05 10:58 AM Page 26

AGENDA 2006

its homework and knew that in the Party secretary’s previous position (in Guang- dong province), he had shown great innovation. The gamble worked. To this day, the Party secretary speaks of this high-profile, successful deal as a source of personal pride. In a case that highlights the importance of personal relationships, a Japan- ese multinational sought entry into an industry requiring a special license by engaging a large state-owned conglom- erate in a similar industry as its partner. After months of futility, the Japanese executives realized that although their Chinese partner was in their same industry, it was less powerful than the Chinese partner chosen by the Japanese company’s chief international rival. As a result their license application was being blocked. After doing sensitive political analysis (using politically savvy consultants), they were introduced to a much smaller Chinese company in a different industry, but one whose executives had deep personal relationships, going back to college, with key regulators. The Japanese then got the license. Obviously, foreigners cannot discern all the politics swirling around and within Chinese organizations, and indeed most foreign executives do business in China without ever appreciating it. What happens, though, is that the politically naive never understand why their deal is delayed or aborted—or how negotiations can be facilitated, problems averted and issues resolved.

Robert Lawrence Kuhn, a senior adviser to Citigroup China, is the author of The Man Who Changed China: The Life and Legacy of Jiang Zemin (Random House, 2005), the best-selling book of the year in China.

26 www.chiefexecutive.net December 2005

e CEO Bill Green UNCOMMON WISDOM

What M&A Bankers Would Rather I Not Write Methods that manipulate CEOs to pay more

BY ROBERT LAWRENCE KUHN

f you are a CEO, you were my at the top of our hit lists. market-hardened CEOs to shell out target. For more than 10 years, One business owner complained to top dollar, sometimes paying more I ran a firm whose business me that we had not valued his compa- for the business than it was “really was to sell small- and medi- ny for “more than it was really worth.” worth”? What were our techniques? um-sized companies, and to He wasn’t being funny: My company Our tricks? sell them for the very highest had a reputation—among corporate Though I may face disfellow- BRUNO BUDROVIC/IMAGES.COM Ipossible prices. During that time, buyers not always a good one—of ask- ship from the High Church of we closed over 1,200 M&A transac- ing and often getting high prices for its M&A Bankers, I’m going to reveal tions, and when we sought prime sell-side clients. the M&A secrets of the inner sanc- candidates to pay the most money, How did our M&A dealmakers tum: how top dealmakers manipu- corporate buyers were almost always cajole or coerce tough-minded, late CEOs to get them to pay too

20 www.chiefexecutive.net July/August 2006 much. Here’s what M&A bankers buyers willing to pay an outlier compensation” that the owner may do to you. price. If you come to believe that pay to herself or to her family mem- you can eliminate most of the over- bers. Some such recasting is legiti- Discern the Decision Maker head of an acquisition, folding the mate when this compensation, to be If you are the CEO of a corporate purchased business into your own charitable, is “above market,” but buyer, dealmakers want to find your business, then the target’s gross mar- can the company really attract a V (vulnerable) spot. Many CEOs are motivated more by power than by I’d always like to have prospective money; they are more concerned about the reputation they build than purchasers who were more motivated about the returns they earn. At the risk of channeling Gordon Gekko by ego than by greed. (a fictional character in the movie Wall Street who became a symbol of gin can magically become its net quality CEO for the assumed lower corporate greed), I’d always like to margin. As a result, the price you are compensation? have CEOs, the prospective pur- now willing to pay, assuming a simi- M&A bankers may use the term chasers on the other side of the table, lar multiple, escalates. “normalize,” which means to recast who were more motivated by ego than The reason corporate buyers pay, the financials by eliminating “one- by greed. on average, more than do private time expenses” like unusual legal fees. equity groups is that CEOs imagine Sure, companies do have “one-time Make Hockey Stick Projections synergies that may not exist. Worse, expenses,” but they may have them all When M&A bankers represent sell- such ephemeral synergies may be- the time—each specific expense may side clients, they are under no obliga- come stealthy anti-synergies, the indeed be “one time,” but the perenni- tion, unlike district attorneys, to kinds that appear to be real but al existence of a neverending series of present their cases based on all the transmogrify on full-scale imple- “one-time expenses” may be a “nor- evidence. A banker’s job is to get the mentation and become toxic to the mal” part of the business! highest price possible; smart, aggres- entire company. sive advocacy is essential for a free- One textile company bought a Make Presentations Elegant market economy. Whatever M&A similar company assuming that the The more elegant the package, the bankers present should be the truth, seller’s products could be manufac- more believable its contents. This but not necessarily the whole truth. tured in the acquirer’s underuti- sounds so contrived (or simplemind- When they make forecasts, they do lized plants. But since the product ed) that no sophisticated CEO would not even pretend to be unbiased. quality of the seller was higher than fall for this. Wrong. Subtle psycho- Sure, they try to be credible, but I that of the acquirer, the products logical factors are at work and M&A can’t tell you how many of our finan- produced were inferior, customers bankers exploit them. After all, how cial projections looked like “hockey fled, and the acquired business dis- could big, beautiful books from large, sticks”—three years of historical prof- integrated. distinguished investment banks con- its sliding steadily downward followed tain little, manipulating fibs? by five years of forecasted profits ris- Recast Aggressively and ing steadily upward. When M&A Without Doubt Seduce the CEO bankers provide projections, image This is a common technique, espe- Nirvana for sell-side M&A bankers is them as criminal defense lawyers (or cially when selling private compa- when the acquiring CEO gets emo- as masked goalies). nies. In making projections, the idea tionally involved with the deal. “Has is to eliminate expenses that the pri- [X] fallen in love?” was a question Conjure Up Strategic Fit vate business owner, who is motivat- we’d ask. We couldn’t make you, Mr. “Synergies” and “strategic fit” are the ed to reduce taxes, runs through the CEO, begin to court our client, but Holy Grail when bankers search for company. These include “excess once you asked for the first date, we

CEO Magazine July/August 2006 21 UNCOMMON WISDOM

knew how to puff your ego and make Induce CEOs to Bid Against es full of paper but rooms full of you feel great. Themselves paper (especially on legal matters This technique is a favorite that and assorted trivia). As a result, fun- Never Appear Anxious M&A bankers try to use regularly. damental matters of business, like M&A bankers try to convince CEOs Here’s how it works: 1) You are the who will run the company after you that their clients are not all that anx- only viable buyer. 2) The seller is make the current owners very rich, ious to do the deal, that you the buy- anxious to unload. 3) You keep are not addressed. er want to buy more than the seller, the banker’s client, wants to sell—a state of affairs that is often not the We couldn’t make you, Mr. CEO, case. Anxiousness, which we often begin courting our client, but we felt, was always masked. knew how to puff your ego. Speed the Process “Time Kills Deals” is one of our sweetening the deal. The banker Good bankers don’t hide anything adages. For sellers, especially when opens this lock with two keys: first, (knowingly), certainly not anything small companies sell to large compa- the buyer has to love the deal; and asked directly. It’s not right and it’s nies, a quick close is almost always second, the banker has to convince not practical: Any evasion appears as best. You never know what can hap- the buyer that a hot auction is going a giant neon sign arrow pointing to pen, what disruption lies in store. on. Turning both keys leaves the fin- a serious problem. The best M&A Change and surprise do not normally gerprint of a good banker. bankers are always forthcoming, bode well for sellers. New financials always answering every question, are more likely liability than asset. If Swamp Due Diligence and often doing so exhaustively with actuals do not meet forecasts, the Due diligence is when the buyer massive amounts of material. buyer puts downward pressure on checks the seller to make sure that It is a statistical fact that most M&A price and negotiates final contract what seems to be true really is true. It’s transactions erode the value of the terms more stringently. Alternatively, nail-biting time for bankers who have acquirer. M&A bankers do not like if actuals beat forecasts—a happen- calculated their fees and are waiting you to know this. They talk synergy stance that occurs, nonrandomly, for the most opportune moment to and strategy, and get you feeling well less than 50 percent of the submit their fee letter to their client. grand. But now you know what you’re time—it is usually more difficult for The deal has been negotiated; price up against. In the next issue, I’ll pres- the seller to raise the price. and terms are set. Neither will get ent the Principles that Protect CEOs better during due diligence; from Paying Too Much. Don’t close they can only get worse. your deal before then. Every company has warts and it is the job of the M&A Dr. Robert Lawrence Kuhn was pres- banker, representing the seller, ident and co-owner of The Geneva to make them blur with the Companies, the largest M&A firm rep- background. Not difficult to resenting privately owned, middle mar- find, but difficult to see. Diffi- ket companies (in terms of number of cult to find? That would be transactions closed); in 2001, he sold improper and could be illegal. Geneva to Citigroup, where he is now ARNO SPAANSEN/ISTOCKPHOTO.COM But difficult to see? That’s good senior adviser to the Investment Bank representation. The idea is to (China). Dr. Kuhn has a doctorate in so overwhelm the due dili- anatomy/brain research and is the gence team of the acquiring author of numerous books on deal- company with paper—not box- making and corporate strategy.

22 www.chiefexecutive.net July/August 2006 Wisdom_Kuhn.nt.9.16.qxd 9/18/06 7:00 PM Page 20

UNCOMMON WISDOM

Inside M&A Banking How do you protect a CEO from paying too much?

BY ROBERT LAWRENCE KUHN

he relationship be- what seems quite modest work. he calls the old jeweler: “Are you tween CEOs and When clients thought my M&A nuts? $100,000? You didn’t work an investment bankers firm’s hourly charge outrageously hour!” “I’m sorry,” responds the old is like that of me- high, I would smile sagely and tell jeweler, “I should have itemized my dieval popes with the following story. bill: For cutting the diamond, $10; Knights Templar, A rich man brings a rough dia- for knowing where to cut the dia- theT famous order of warrior monks mond to an old jeweler. The old jew- mond, $99,990.” who raised their own revenue and eler studies the stone, positions his For investment bankers, relation- were a power that the Church as chisel, and, with a single sharp blow ships are key. The inside term is “cov- much feared for its independence of his hammer, splits the stone with erage,” which means that bankers are TONY VITA/IMAGES.COM as relied upon for protection. M&A perfect cleavage, yielding four per- assigned, usually by industry, to par- bankers present their profession as fect gems. A week later, the rich man ticular corporate clients and tasked High Art, charging large fees for receives a bill for $100,000. Enraged, to “cover” them. Translation? To

20 www.chiefexecutive.net September 2006 Wisdom_Kuhn.nt.9.18.qxd 9/18/06 7:03 PM Page 21

smother or metaphorically kidnap sure is that whatever they tell you is Company. Never negotiate with them if necessary, with the twin crafted to get you to pay more. You’d only one target. Try to find another goals of eliciting some new fee-gen- be surprised how much you learn candidate you can explore acquir- erating deal and preventing com- when you listen through this filter. ing as an alternative. Even if this peting bankers from getting or For example, if bankers are stressing other company is a stretch, there is staying too close. The fact is that despite all the front-page glory M&A transactions Never assume that any seller who receive, most prove less lucrative than gets rich on your money will stay corporate buyers initially expect. This does not mean, of course, that suc- around post close, or that if they stay cessful acquisitions are not done. around that they will work hard. They occur all the time: Astute buyers pay high prices, turn their acquisitions into star performers and one thing, say, increasing net profits, psychological benefit in diversify- generate even higher returns. These why are they neglecting another, say, ing your acquisition explorations. rare—but not random—occurrences decreasing gross margins? M&A bankers representing sellers happen when perceptive buyers dis- Run Your Own Numbers. seek as many buyers as reasonably cern deep, untapped, even unrecog- Never rely on numbers generated by possible; it’s part of their DNA. In nized opportunities, often involving the other side’s bankers. You shouldn’t my past life, we indoctrinated our operational leverage. even use their models. There is seller clients and prospective clients In the first article of this two-part great benefit working de novo: Build with the mantra, “One Buyer is No series (“What M&A Bankers Would your own models; start from first Buyer.” Buyers should balance Rather I Not Write,” July/August), I principles. negotiating power by having acqui- revealed the kinds of manipulations Speak Directly With the Seller. sition options. that investment bankers use to make Try to get time alone with the sell- Plan a Worst Case Scenario. CEOs pay too much for acquisitions. ers, without bankers present—yours The best case will take care of itself; In this article, I explain the 10 princi- or theirs. Bankers will not like this. the worst case is what CEOs should ples by which CEOs can defend They fear that if buyers and sellers study. What are all the things that themselves against overpaying. meet privately, this may diminish could go wrong with an intended Never Believe M&A Bankers. their perceived value, an unhealthy acquisition? Think not only about M&A bankers are not your friends. psychology when it comes time for usual issues, such as integration and Not even those on your side, much M&A fees agreed to in principle to operations, but also about unusual less those on the other. This does not actually be paid. shocks, such as product liability and mean that what they tell you is know- At my firm, we told our bankers macroeconomic dislocations. ingly false; indeed much of what never to allow our clients, the sellers, Never assume that the future will they say is probably true. Most to be alone with the buyers. It was as mimic the past. There are two rea- bankers, most of the time, tell the if our clients were underage juveniles sons for simulating depressing sce- truth. The problem is twofold. First, and potential buyers were sexual narios: It will make your company what is true may not be the whole predators. If such an encounter better able to respond if such circum- truth. Second, you don’t know when occurred, we chastised our banker for stances occur; and it will dampen the they’re not telling the truth—and dereliction of duty. When meeting euphoria that drives up prices—and sometimes neither do they. with bankers, watch when they be- investment-banking fees. This does not mean that you, as a come nervous, switch subjects or Seek Anti-Synergies. Most cor- buyer, should not listen to bankers interrupt their clients, the sellers. porate acquisitions are driven by representing a seller. Listen hard, Each is a lead to follow. searching for synergies, trying to because the one thing you know for Negotiate With Another materialize greater value by inte-

CEO Magazine September 2006 21 Wisdom_Kuhn.nt.9.16.qxd 9/18/06 7:00 PM Page 22

UNCOMMON WISDOM

grating the acquired company with Scrutinize Any Recasting. owners. This difference colors every the acquiring company for a com- Watch for hidden traps when assess- aspect of the deal. (There is also a dif- bined post-acquisition value larger ing “recasting,” or the normalization ference between entrepreneurs, the than the sum of the separate pre- of revenues and expenses. Here are founders of the business and subse- acquisition values. Clever buyers do two: If the recasting substantially quent generations of family owners.) the opposite. They seek synergies that are imagined but do not really exist, those that appear to be real Never rely on numbers generated by but when attempted following the the other side’s bankers. You shouldn’t acquisition turn out to be illusory. I call these Anti-Synergies; they are even use their models. Build your own. the most insidious because you keep trying to make them work. reduces owner compensation to sup- Entrepreneur owners will do things One way to find these hidden cor- posed market rates, can you really that professional managers will not. porate viruses in your pre-acquisi- get a first-rate CEO for that lower They will react more emotionally, par- tion analysis is to assume that each salary? And check whether all those ticularly regarding their employees synergy for which you are doing the “one-time” expenses, such as extraor- (or certain employees). And you know deal will be defeated. Try to imag- dinary legal expenses, that get nor- what? They have earned the right to ine ways in which these apparent malized (i.e., eliminated in the act that way. They created their com- synergies disappear and calculate recast) are actually expenditures that pany and struggled through hardships. the consequences of each disaster. regularly occur. If they now want to do something The exercise will be revelatory. Don’t Bid Against Yourself. unusual, work with them. M&A bankers love this technique. Finally, good investment bankers Here’s the situation: 1. You are the do bring a wealth of experience to only viable buyer; 2. the seller is anx- deals. What’s more, because they ious to unload his company; and expect to make a great amount of 3. you keep sweetening the deal. money and because they are pro- That, we would say, is the fingerprint foundly concerned about their repu- of a good banker. The antidote? tations, they will work intensely and Don’t be quick to raise your bid. creatively to make deals successful. Watch Those Who Get Rich. The bottom line? There is nothing Never assume that any seller who wrong with paying high investment gets rich on your money will stay banking fees as long as the product around post close, or that if they stay you get is a perfect gem. that they will work hard, or that if they work hard they will continue to Dr. Robert Lawrence Kuhn, an inter- do so. Former owners may have national investment banker and corpo- every good intention, but reality sets rate strategist, is senior adviser to in quickly. Newly rich people Citigroup Investment Banking. For 10 become fickle. Be especially careful years he was president and co-owner when an entrepreneur is selling. of a middle market M&A firm that com- Discern the Difference Be- pleted more than 1,200 M&A transac- MARK STAY/ISTOCKPHOTO.COM tween Owners and Managers. tions. An intellectual with a doctorate There are two kinds of companies that in anatomy/brain research, he is also a sell: those that are sold by owners who television producer and the author of are active managers and those that are numerous books on strategy, creativ- sold by managers representing passive ity, science, business and finance. Wisdom_Kuhn.nt.10.30 10/30/06 1:20 PM Page 18

UNCOMMON WISDOM

“CEO Diseases” and how to treat them. BY ROBERT LAWRENCE KUHN 12efore I became an case, running a firm doing M&A for catch may seem minor; these can be investment banker, medium-sized companies, I saw over the virulent ones that morph stealthily I studied to be a 12 years perhaps 15,000 companies into major corporate illnesses. Follow- doctor. (I did a Ph.D. whose CEOs either wanted a valua- ing are some CEO diseases and my in anatomy/brain tion or decided to sell. I was like a prescriptions for treating them.

research at UCLA, doctor examining a very large num- Talking Too Much. You never CLAUDIA WOLF/GETTYIMAGES.COM Bnever returned to medical school at ber of particular patients: One comes learn by talking, but some CEOs Johns Hopkins, and 15 years later to recognize the symptoms of their imagine the world to be in desper- went to business school at MIT—but special diseases and comes to learn ate need of their constant wisdom. that’s another story.) An investment how best to treat them. It is a rare subordinate who will risk banker sees many businesses. In my Some of the “diseases” that CEOs stifling a CEO.

18 www.chiefexecutive.net October/November 2006 Wisdom_Kuhn.nt.10.30 10/30/06 1:20 PM Page 19

My Prescription: Track the per- sion will increase your personal Don’t Fall in Love. Your social centage of time you speak com- power. It is the speed of your answer, life is your own affair, but when you pared to that of your subordinates. not its substance, that I’m assessing sit in the corner office, follow your Yours should be a lot less. If you here. If the speed of your internal head not your heart. Every business want to give a speech, call it that. answer to the second question, must have a strategic or financial Otherwise, control yourself; to be stressing personal power, exceeds purpose, and if a business happens blunt, shut up. that of your answer to the first ques- to make you feel good that’s fine as Goals Too Aggressive. Unreal- tion, stressing firm value, your ego long as your emotional attachment istic goals “demotivate,” especially may be exceeding your greed, and doesn’t interfere with your rational when compensation is involved. this should be a cause for concern. decision-making. CEOs are particu- One CEO expected his plastics Not Respecting or Recognizing larly vulnerable when making acqui- company to continue its 30 percent the Ideas of Others. In general, sitions—who knows why Ford bought annual growth rate, not appreciat- CEOs are egotistical. Highly suc- Aston-Martin? ing that with a larger base and a cessful almost by definition, many My Prescription: Engage the exec- mature market their era of high CEOs would seem to have every utive most likely to call your favorite growth had to end; the result dis- right to be self-impressed. However, business babies “ugly.” You don’t have couraged managers. when you hold the top spot, puffing to agree, but you do have to listen. My Prescription: Set goals that yourself up at the expense of subor- Also, when an executive challenges have, say, a 35 to 45 percent likeli- dinates pollutes the organization. your favorite projects, praise her. hood of success. (Assume all works You benefit when your people are Feeling Invincible: CEOs to well but not extraordinarily well.) encouraged and empowered to gen- be CEOs must have superb track Goals should make your executives erate novel ideas. records—some are almost unblem- reach, but not too high. My Prescription: Do the opposite ished—so they have a proclivity to Power Building Trumps of what comes naturally. In a situa- imagine themselves as invulnerable. Wealth Building. CEOs tend to tion where a good idea was really or The natural corollary is a robust con- make decisions that enhance their largely your own, go out of your way fidence, even if subconscious, that scope and influence, even at the to give credit to others. past success assures future success. I expense of increasing shareholder Seeing Only Summaries. A can’t tell you how many dozens of value—and this can be paradoxical- CEO should perceive the world as CEOs I’ve seen who refused to sell ly true even when the CEO is a it truly is; if cluttered and chaotic, their companies at what would turn large shareholder. Sometimes, for so be it. When information is always out to be, in hindsight, their peak effect, I put it this way: “I want a “high level,” predigested by staffers, market values, simply because they CEO whose greed exceeds his ego.” a CEO may be perceiving an artifi- were convinced that tomorrow’s Sure, greed and ego are both un- cial world, a virtual reality as it prospects would mimic yesterday’s pleasant traits that are impolite to were, of cleanly manicured lawns. triumphs. Looking backward and laud in public, but by privileging Most CEOs have great instincts looking forward, a humble, healthy greed over ego I make the point that about their businesses, and such respect for the subtleties of serendip- good CEOs should be motivated instincts should be nourished by ity is the beginning of wisdom. As more by amassing wealth for their raw data, like, for example, call the Proverbs say: “When pride shareholders than by accreting reports of customers. cometh, then cometh shame” (11:2): empires for themselves. My Prescription: You know the “Pride goeth before destruction, and My Prescription: Take this psy- critical success factors of your busi- an haughty spirit before a fall“ chological test. When making a big ness. Demand unsimplified infor- (16:18). decision, ask yourself how it will mation for these factors. And get it My Prescription: Even the best build the market value of your firm. randomly so that your staff never CEOs are lucky, and although I Then, immediately, shift the intro- knows where or when you will re- agree with the adage that “the spective question to how the deci- quire raw data. smarter you are the luckier you get,”

CEO Magazine October/November 2006 19 Wisdom_Kuhn.nt.10.30 10/30/06 1:20 PM Page 20

UNCOMMON WISDOM

the relationship is far from perfect. A Generalizations. CEOs like to of current trends, whether macro- sobering exercise is to analyze your spot trends, spot trends, finding scopic movements or management career, looking for “luck.” Also, deep principles to predict and affect theories. Think Time Warner pur- don’t believe your own hype. business. But beware of averages, chasing AOL at the height of the Personnel Too Similar. In which can deceive. For example, dot.com boom and destroying most some organizations, many of the sen- assume that, in a pharmaceutical of the acquirer’s value. ior executives look like the CEO. I company, prices are declining for My Prescription: Ask yourself mean this quite literally and it can one-half of the drugs and increas- whether you really believe the cur- be very funny. Not just obvious char- ing for the other half; the fact that rent trend or whether you are feel- acteristics like gender and race, but the average price of all drugs has ing socially coerced? Your instincts also personal traits like size and remained steady is worse than are often a better strategic guide stature, political philosophy, sport- meaningless information. Strategies than the hot stories in the latest busi- ing interests, demeanor, even style for drugs that kept prices steady ness magazines. of dress. In a globalized world where might not work at all with those Falling for Contemporary customers and suppliers may be very whose prices were decreasing or Tricks. Every few years, it seems, different kinds of people, it is not increasing. there is some new fad with which wise for the executives of a company My Prescription: Recognize that CEOs must contend. In the 1960s, to be homogenous, and hence, uni- as the world has become progres- conglomerates grew by accretive form in their thinking. sively more narrowcasted in de- acquisitions, seeking earnings per My Prescription: Look at your key mand and supply, the power of gen- share growth and cyclical balance. In external relationships; target those eralization has become progressively the 1980s, highly leveraged financings who are markedly different from more suspect. were the rage. And in virtually every you, and ask yourself whether any of Not Asking the “Stupid” decade, specious tax shelters and spu- your top executives are like them. If Question. You learn by asking. If rious tax gimmicks always pop up not, hire some. you don’t understand something, you (e.g., trying to postpone huge capital can’t make a proper decision. CEOs gains taxes through tortuous and ulti- are not known for sporting mately disallowed techniques). small self-images, but if My Prescription: Most CEOs these top-floor egos are should be wary of cutting-edge so fragile that they can finance and simply stay away from never appear unin- tax dodges. Playing near the foul line formed, CEOs will suffer isn’t worth it. strategic disadvantages. It How to diagnose your own CEO is astounding how many diseases? You will have to be your “dumb” questions, well own doctor since I do not make timed, might have pre- house calls. vented poor decisions. My Prescription: Go out Dr. Robert Lawrence Kuhn, an inter- TA F KE O of your way to ask stupid, national investment banker and cor- IM A D R P S D C O ER IR IS EO porate strategist, is senior adviser to R IA EC EA dumb questions—even when C EG LIT TE SE O O IS. D F S O NS IN IF O you don’t need to—just to get Citigroup Investment Banking. He is R U FL H R C 1 LT A EA EO 6 Y MM D S the author or editor of numerous R -Y O A W your ego conditioned to how it EF EA U T EL D IL R R P IO LIN R LA -O H N P G . R BL L YS ER feels. In this way, when you really books on business and finance; his lat- O E: D IC SI B 2X DA IAN STS ER UG , est is China’s Banking and Financial T H need to ask that key question, your LA TER WR . EN ego won’t immobilize your tongue. Markets—The Official Report [of the CE KU HN Falling for Current Trends. Chinese government], forthcoming It’s easy to be sucked into the vortex from John Wiley & Sons. UNCOMMON WISDOM Globalization and Its Discontents

How can CEOs of .S. President George W. Bush’s grand vision is of a Western-style “Democracy World,” where all countries multinational com- have a similar system of selecting their leaders in a majority-rule, one-person-one-vote, free election. Chi- panies skirt the nese President Hu Jintao’s grand vision is of an East- ern-style “Harmonious World,” where all nations live hurdles of global- Utogether in mutual respect and peace, even though they have and maintain different systems of government. ization? Follow The problem with President Bush’s grand vision is what happens when majority rule initiates or instigates more, not less, belligerent and violent these four policies. acts against perceived foes, such as rival ethnic or religious groups, whether in foreign countries or within their own populations. The problem with KINO BROD BY ROBERT LAWRENCE KUHN President Hu’s grand vision is what happens when certain countries do

26 www.chiefexecutive.net December 2006 AGENDA 2007

not respect their neighbors and will cannot help but feel dejected today pendence movements bring about not tolerate peace with them. because your previous circumstance economic hardships, people are usu- To most CEOs, that globalization of destitution has no affective impact ally willing to accept sacrifices in is efficient economics is obvious; on your present emotions. Similarly, order to gain their freedom from for- that it embeds psycho-political intri- if you are sick with a terminal illness eigners. When national leaders cacies is not. Human beings are and told that a new drug might extend restore pride to their people, particu- rarely rational actors; what they do your life for two years, you are happy, larly those who had been humiliated may not be in their own best interests. Why do poorer people, say, in Pride is a powerful and persistent America or in China, feel more dis- affected today than they did 30 years human trait; but it can also warp com- ago, even though their standards of living are much higher now? And mon behaviors and priorities. why do people in developing countries, by and large, still honor their but if you then cut your finger while by invading oppressors, they are giv- despotic leaders who perpetrate, cooking you are unhappy. en wide latitude for error. Witness the instigate or allow monumental viola- The application to economic per- Chinese people’s continuing appre- tions of common decency? ceptions is direct. When the Chi- ciation (though no longer adoration) To appreciate the political psychol- nese people were all financially of Mao Zedong, who enabled the ogy of globalization, consider two equal 30 years ago—all equally Chinese people to “stand up” in the overarching principles of human poor—envy of lifestyles and materi- world and regain their long-lost dig- emotions: “feelings are relative” and al possessions did not exist. Today, nity, even though, not much later, he “pride trumps comfort.” while all Chinese are dramatically was responsible for divisive mass polit- better off, the fact that some are now ical movements, including the devas- Feelings are Relative wealthy while others are not is tating Cultural Revolution, in which Human cognition is such that how increasing social strains. millions suffered and many died. we feel is almost always a function of Blame the ubiquitous media, When multinational corporations short-term comparisons. In assessing which highlight disparities, exagger- invest in developing countries they our current status our mental ating them too, by skewing to glam- almost always bring economic gain to methodology is to use relative, not our and elegance and by glorifying the local population, yet their presence absolute, standards, and the ground- physical possessions and sybaritic is not always welcomed. To some, for- ing of these relative standards is usu- behaviors. Today in the Muslim eign factories are a constant reminder ally recent circumstances. If you are world, and soon across Africa, tele- of their own secondary status or sub- worth $10 million and stocks plum- vision and the Internet make social servient place in the world and no eco- met so that your worth is reduced to and economic differences with the nomic benefit is worth such $9 million, you are depressed, where- developed world stark and disturb- anguishing and continuing dishonor. as if you are destitute and find a mod- ing. One should not be surprised This endemic and enduring psychol- est job, you are ecstatic. that attitudes of poor people are ogy presents a challenge for multina- Now assume that both situations deteriorating and levels of their tionals as they plan global strategies. describe you—you are the same per- anger are rising. son just shifted in time—so that your Prescriptive Policies rich self exists today and destitute self Pride Trumps Comfort Recognizing these psycho-political 20 years prior. Although you have Pride is a powerful and persistent problems, what can multinationals intellectual appreciation of your con- human trait; it can motivate great acts do? Corporate executives should sen- tinuing good fortune—to be worth the of artistry or bravery, but it can also sitize themselves to needs of local $9 million is certainly wildly better warp common behaviors and priori- people for whom disparities in eco- than that old modest job—you still ties. When struggles of national inde- nomic status can be psychologically

CEO Magazine December 2006 27 UNCOMMON WISDOM

devastating. Consider an analogous Local Hires. Use local managers honesty may go against the grain of problem that faced Chinese Presi- whenever possible, and develop a sys- leaders, who by nature tend to be dent Hu Jintao when he took leader- tematic method of training and pro- guarded and controlling. ship and faced the growing problem moting them. Limit ex-pat executives The importance of transparency in of multiple disparities between sec- as much as possible. When this is not a media-intense, tightly wired world tors of Chinese society. As a priority practical at the beginning of a foreign cannot be overstated. A case in point of his administration, he adopted a operation, evince progress by increas- is China’s financial and banking mar- “close-to-the-people” policy that seeks to construct a “Harmonious Society” through a “Scientific Devel- CEOs must vote with their bodies, not opment Perspective,” balancing only with their mouths, and travel to social and environment factors with pure economic growth. Though dis- countries that are important to their parities remain severe, President Hu’s firms... superficial visits wear thin. resultant popularity in China facili- tates his change-making policies. But to be effective, a leader’s phi- ing the number and seniority of local kets, which are critical for the coun- losophy can rarely be of recent leaders. Sony, for example, stresses try’s economic development and mintage. Expediency is a graceless local hires, even selecting a non- which have been legitimately criti- and obvious motivation. Policies Japanese CEO. cized in the foreign press for lack of work best when a leader’s philosophy Respect. CEOs must vote with transparency, credit culture, controls, is founded on his or her long-stand- their bodies, not only with their and the like. If the Chinese govern- ing beliefs or personality. When Pres- mouths, and travel to countries that are ment would react by seeking to fur- ident Hu was a young official in west important to their firms; words alone ther control bad news, it would just China’s poor Gansu province in the are not sufficient and superficial visits feed the fire of international doubt. 1970s, he was close to the people. I wear thin. Trips should be regular and Part of the long-term solution is for spoke with a former subordinate of substantive, including meetings with China to enable its best financial Hu’s who told me how he had acci- local managers and staff, as well as gov- scholars to assess and analyze the dentally burst into his boss’s office. ernment officials. Some language industry, and then to publish their Hu, though at first startled, invited learning doesn’t hurt either, if only to findings publicly, in Chinese for him to sit and talk for an hour. Hu is demonstrate an effort to appreciate the domestic consumption and in Eng- a people person who works to turn culture. Four of the most successful lish for the international community. crisis into opportunity. firms in China are Goldman Sachs, Globalization is an inevitable, Is there prescriptive advice we can AIG, Morgan Stanley and Citigroup; inexorable trend. Getting it right draw from a psycho-political perspec- for years, their senior executives, Hen- means understanding the psycholo- tive? What can CEOs of global com- ry Paulson, Maurice Greenberg, John gy of people as much as the eco- panies do to ameliorate the dangers of Mack and Chuck Prince/Bob Rubin, nomics of productivity. globalization? I have four suggestions: respectively, traveled to China multi- Steady Progress. Seek managed, ple times every year. Dr. Robert Lawrence Kuhn is an modulated improvement rather than Transparency. People are nat- international investment banker and unexpected big spurts, particularly in urally suspicious and secrecy feeds corporate strategist, adviser to the wages or working conditions. Even if their fears. Rumors can be so rootless Chinese government, and senior the “big-spurt strategy” would produce and virulent that they are hard to adviser at Citigroup. The author or better absolute results over time, peo- source and impossible to stop. When- editor of more than 25 books, he is ple will not be as happy in the gap ever operating internationally, com- editor-in-chief of China’s Banking and periods between these spurts, when panies—like countries—should learn Financial Markets: The Official Report, there will seem to be stagnation. to be more open, even though overt (John Wiley).

28 www.chiefexecutive.net December 2006 UNCOMMON WISDOM

Learn from the Stars These eight central ideas of modern cosmology can be applied to modern companies.

BY ROBERT LAWRENCE KUHN

rand Thinking” makes Grand Thinking encompasses entire universe, whose extraordinary great companies. I those visions and strategies that secrets, discovered by insight and pre- criticize CEOs when have high impact. Grand Thinking cision, have turned speculative phi- “ they don’t see its includes thinking big, but it is losophy into exhilarating science. importance, and am grander still. Now, how to stimulate The visionary kind of thinking that Gfrustrated when they do see its impor- Grand Thinking? cosmologists use to discern what real- tance but don’t make time for its ly happened billions of years ago in development. CEOs tell me that Of Cosmologies and time and billions of light years away they are beset with more pressing Companies is perhaps the grandest kind of think- issues—an excuse that is real, but not I have my own recipe for energiz- ing that human beings can ever do. legitimate. There is nothing more ing CEOs to Think Grandly, an Further, by studying the past histo- KINO BROD/IMAGES.COM vital for making companies more approach that could be described ry of the universe, cosmologists can valuable, and hence for building the as, well, “far out.” I have always been make breathtaking predictions wealth of their shareholders, than fascinated by cosmology, the study of about its future prospects. My Grand Thinking. the origins, structure and ends of the point? The same thinking can be

26 www.chiefexecutive.net January/February 2007 applied to the more earthly endeav- Although many fascinating ideas tion between the theory of what ors of managing organizations. were put forth by scientists, philoso- should happen and the reality of It may seem absurd to suggest phers and theologians, no one imag- what is happening, a CEO should that cosmologies and companies ined that data and measurement come to two conclusions: first, reali- have anything in common. But could ever distinguish between ty must be believed; second, some- there is something called “general opposing theories. After all, scientists thing must be wrong with the theory. systems theory,” which looks for can hardly conduct controlled exper- similar mechanisms and common iments on the origin of the universe. Forget Practice causes across widely diverse plat- Yet, in just two decades, even cos- Cosmology: When astronomers forms. It is the idea that overarch- mologists have been amazed at how aimed the Hubble Space Telescope ing principles are at work at all their field has become an experi- at a minuscule region of space— places and levels in the world, and mental science with streams of hard smaller than a grain of sand held at it seeks deep insights by comparing data from the very early universe, arm’s length—and took 800 expo- and intersecting disparate fields. So even from the Big Bang itself, flow- sures during 400 orbits, they were here are some of the central ideas ing into their telescopes and satel- confident that although the space of modern cosmologists studying lites. Today, cosmic microwave appeared sparsely populated there the universe, along with their “gen- background radiation, which fills the was something significant to be eral systems theory” applications to entire universe and is measured found. The resulting photograph modern companies. meticulously by satellite-borne instru- showed some 10,000 ultra-faint mentation, is believed to be a relic of galaxies, never before seen, as they Think Big—Really Big its Big Bang origin. had been developing billions of Cosmology: About a century ago, Company: For CEOs to speculate is years earlier. scientists thought the entire universe not wrong. What is wrong is when Company: A CEO who really under- was about 3,600 light years in size and CEOs assume that they can never go stands the business can override that our galaxy, the Milky Way, was beyond speculation. For example, what may not be apparent to others the totality of reality. Today, the business instincts may suggest devel- less knowledgeable or insightful so observable universe has a radius of oping one product over others. But as to formulate vital new strategies. 13.7 billion light years and is inhab- CEOs should corroborate instinct by When Lou Gerstner took the reigns ited by more than 100 billion galax- amassing real data, such as from focus of IBM in 1993, who would have ies, many hosting more than 100 groups of target customers. predicted his remarkable success in billion stars. What’s more, most cos- transforming IBM from a hardware mologists are convinced that even Forget Theory company manufacturing Big Iron more galaxies and stars, far, far Cosmology: Aligning theoretical into the leading enterprise software more, lie beyond—even, as strange as predictions with experimental results and services company? it sounds, multiple universes (which is the core of the scientific method. cosmologists call a “multiverse”). Yet regarding the vacuum energy of See the Unseen Company: Who would have thought “empty” space, which opposes the Cosmology: Scientists now postu- that Lakshmi Mittal, who in 1989 inward pull of gravity in balancing late an awesome amalgam of multiple acquired the Iron & Steel Company the expansion of the universe universes (the “multiverse”), perhaps of Trinidad & Tobago, would control (dubbed the “cosmological constant” stupendous numbers of universes, per- the largest steel company in the by Albert Einstein), the predictions haps infinite numbers of universes! world by 2006? of the best physicists using the best The fact that these putative other uni- theories miss the mark by 120 orders verses are forever impossible to Don’t Settle for Speculation of magnitude—a mismatch between observe does not dampen the belief Cosmology: From the dawn of his- theory and reality that is the worst in that they really exist. tory, human beings have wondered the history of science. Company: Steve Jobs saw the unseen about the origin of the universe. Company: When facing a contradic- when he put Apple, an also-ran in

CEO Magazine January/February 2007 27 UNCOMMON WISDOM

computers with a market share of tract. In 1998, observations designed years into the future (proton decay) about five percent, into iPods with a to demonstrate that the expansion or even 10100 (nothing existing but market share of over 70 percent. of the universe was in fact slowing dispersed radiation). down revealed, shockingly, precise- Company: It may seem that think- Solve Many Problems with ly the opposite. The expansion of ing about the far future is of little One Solution the universe was in reality speeding worth, especially to companies that Cosmology: For much of the 20th up. The only way to account for this report profits quarterly (or yearly), century, cosmologists seeking to astounding finding was with a new but such an assumption would be understand the universe struggled force called “dark energy,” literally myopic and mistaken. When one with several vexing problems. For example, how could the universe be so uniform on large scales—appear- Good CEOs are willing to accept data that ing the same in all directions— contradicts their worldview, no matter how without any possibility for interaction between its widely sepa- much money or ego they have invested in rated parts? Then in 1981, an the previous paradigm. obscure physicist named Alan Guth proposed that the early universe underwent a short phase of expo- the vacuum energy of “empty” space can speculate intelligently about nential growth called “Inflation” (of that dominated the universe. the far future, whether of the cos- the cosmic kind). This remarkable Company: Good CEOs are willing mos or of companies, it often theory, which has been confirmed to accept data that contradicts their enhances one’s ability to see more by independent observations, solved worldview, no matter how much deeply into the immediate future. all the problems at once. money or ego they have invested in Trying to imagine consumer elec- Company: When CEOs are con- the previous paradigm. Even if real- tronics in 100 years might help fronted with multiple problems, world data doesn’t seem to make companies plan better products in even if very different, they might sense, if the data is real—and of 10 years. look for possible links (especially if course the more it deviates from Corporate leadership in today’s they have arisen within a given time- expectation the more it should be dynamic, globalized economy frame) and a simultaneous solution. checked and rechecked—then new demands Grand Thinking. To stim- In a case of multiple disturbances, ways of thinking must be consid- ulate and energize it, contemplate the common cause was traced to a ered. The best CEOs always expect the cosmos. senior executive whose incompetent the unexpected. hand had touched and triggered Dr. Robert Lawrence Kuhn is an inter- each of them. Changing the execu- Think Far Future national investment banker and corpo- tive, one simple solution, resolved Cosmology: You think you worry rate strategist, adviser to the Chinese all of the complicated problems. about the future? Scientists contem- government and senior adviser at Cit- plating the future of the earth talk igroup. The author or editor of more Prepare for Shock about what happens when our sun than 25 books on business, finance Cosmology: For decades, scientists “leaves the main sequence” in four and science, he is editor in chief of Chi- assumed that although the universe to five billion years and swallows the na’s Banking and Financial Markets: was expanding (due to the outward- earth in its swelling fire. Those con- The Official Report and host of the PBS pushing force of the Big Bang), this templating the future of the universe series on the meaning of state-of- expansion was slowing down (due to generally begin with events hun- the-art science, Closer To Truth— the inward-pulling force of gravity) dreds of billions of years into the www.pbs.org/closertotruth. He has a and might eventually reverse so that future and are quite comfortable Ph.D. in anatomy/brain research (UCLA) the universe would thereafter con- speaking of what might happen 1033 and an M.S. in management (MIT).

28 www.chiefexecutive.net January/February 2007 UNCOMMON WISDOM

TalkingTalking toto ChinaChina

What Business he irony about China, a cans focus on their huge trade senior Chinese leader told imbalances with China, Chinese Leaders Can Learn me recently, is that “when fret about foreign acquisitions of for more than a century for- their companies. Americans envi- from Politicians eigners thought we were so sion China as a voracious econom- T weak, we weren’t really so ic competitor and growing military Mistakes weak, and now when foreigners power; Chinese assert that more think we are so strong, we aren’t than half of its exports—and about

BY ROBERT LAWRENCE KUHN really so strong.” 85 percent of high-tech exports— PHOTO CREDIT HERE When American and Chinese come from foreign-funded firms, political leaders interact, divergent and that it needs a strong military perceptions are common. Ameri- to protect its homeland. Ameri-

20 www.chiefexecutive.net March 2007 cans see China awash with cash, Most Chinese believe that Amer- Disturb the former, they warn, and holding more than $1 trillion in ica seeks to “contain China” and you disrupt the latter. reserves; Chinese see their vast, poor thwart its historic resurgence as a America and China should respect rural population, 300 million of great nation. This is the real reason, each other’s thinking. Chinese whom must be moved to urban they say, that America supports Tai- should appreciate that Americans are areas by 2020. wan, not as a worthy democracy but genuinely troubled by China’s appar- Divergent perceptions are danger- as an “unsinkable aircraft carrier” ent lack of democracy, human rights ous. In 1999, during NATO’s mili- by which America can assert domi- violations, support of dangerous tary campaign against ethnic nance over China and keep the regimes and huge trade surpluses; cleansing in Yugoslavia, an Ameri- motherland divided. Chinese see this is why China’s continuing mili- can aircraft accidentally bombed the America encircling them by military build-up is so worrying. Ameri- Chinese embassy in Belgrade. tary alliances with Japan, Taiwan cans should appreciate that China’s When the Chinese government and perhaps India; forcing open stability requires a different develop- bused college students across Bei- their markets to control China’s mental path due to its different his- jing to the U.S. Embassy to protest industries and exploit Chinese con- tory and culture and to its massive violently, American politicians sumers; and by introducing West- population, and that China’s resur- assumed that Chinese leaders ern culture to erode China’s gence as a great nation and responsi- orchestrated the demonstrations. In independence and sovereignty. ble power is good for the world. truth, the Chinese leaders worried Most Americans believe that Chi- To understand China today one that if protesting students marched na is a determined, monolithic com- must understand President Hu Jin- through the city to the U.S. Embassy petitor whose intentions appear tao’s overarching vision, summarized their ranks would swell with work- threatening. They view China as act- by three slogans: “Harmonious Soci- ers and common citizens. So the ing solely in its own interests, even to ety” and “Scientific Development Chinese leaders determined that the detriment of the international Perspective” domestically and busing the students would be the order—such as by selling weapons to “Peaceful Development” internation- best way to contain, and not exacer- Iran and sustaining North Korea’s ally. Harmonious Society calls for bate, the volatile situation—precise- intransigence. Americans see China fairness and equity across China’s ly the opposite of what American as an economic predator that keeps diverse populations and geographies politicians assumed. its currency artificially low to boost and embeds careful social, legal and To no small degree, the peace and exports; as a repressed society that political reforms. Scientific Develop- prosperity of the 21st century tramples human rights to maintain ment Perspective applies optimized depends on the bilateral relations Communist Party control; and as a sets of solutions to arrays of econom- between China and America. Good looming military force that harbors ic, social and environmental prob- communications are vital for politi- expansionist ambitions. lems seeking to rectify economic cal leaders, and it is no less so for The Chinese government does imbalances, increase energy conser- business leaders. Let’s explore both. not deny that its policies benefit its vation, reduce pollution, achieve sus- own people—any legitimate gov- tainable development and prioritize Political Communications ernment, they say, should. With 1.4 innovation. Peaceful Development ffective political communi- billion people, the Chinese obses- conveys that no matter how strong cations require honesty and sion with stability has been seared China becomes, it will never threat- E clarity. The place to start is into the collective consciousness by en its neighbors. for each side to explain how it truly a catastrophic political legacy of feels about the other side. Being frank roiling mass movements that deci- Styles of Communication is often uncomfortable, but if both mated a generation and, nearly, the hinese and Americans, by sides are sincerely interested in reach- country. They see China’s stability tradition and culture, ing agreement, it is often the opti- and development as essential for C express subtle differences in mum approach. world stability and development. styles of communication. A senior

CEO Magazine March 2007 21 UNCOMMON WISDOM

Chinese official contrasted four deprecating banter or smile in seri- the recitation of these principles general ways of thinking that cause ous situations. As such, Chinese may be repeated more than you political misperceptions and which leaders may appear more rigid, think necessary; do not move too affect all instances of Chinese- inflexible, impersonal, doctrinaire aggressively to nail down specifics. American communications, com- and unapproachable than they real- Recognize that as China mercial as well as political. ly are. The dour countenances of adopts elements of democracy, col- Chinese are more indirect and many Chinese officials may well be lective decision-making in many cyclical, whereas Americans are more the residual conditioned response to large Chinese enterprises has become more common. Senior management is now less able to dic- Americans see China awash with cash, tate decisions than their American counterparts. Chinese business holding more then $1 trillion in reserves; leaders must engage their own mid- Chinese see their vast, poor rural popula- dle management in sometimes- laborious internal discussions and tion, 300 million of whom must be moved negotiations before finalizing an to urban areas by 2020. important transaction. This means that foreign business people must work with many managers in the direct and linear. Thus, Americans a past system of fear-driven gover- hierarchy, even those down the line may see Chinese as evasive and nance where a single mistake could in the chain of command. deceitful, whereas Chinese may see cost an official his job, if not his free- Respect the formality of meet- Americans as rude and arrogant. dom. Under President Hu, there is ings; maintain professional decorum. Chinese use more abstract more tolerance: mistakes don’t end Business success in China is forms and general terms, focusing careers, risks can be taken. determined by multiple factors and on principles and theories, whereas difficult enough under ideal condi- Americans use more concrete forms Business Communications tions. Don’t manufacture addition- and specific terms, focusing on prac- et’s consider each of these al stumbling blocks with poor tice and precedents. Thus, Americans contrasting styles of commu- communications. Although politi- may see Chinese as programmed and L nication, and construct gen- cal leaders often seem genetically robotic, whereas Chinese may see eral principles that American predisposed to have divergent per- Americans as pompous. (For exam- businesspeople can apply when ceptions, business leaders should ple, the American media tends to dealing with executives of Chinese rise above such instincts and avoid mock China’s political slogans— companies, particularly those of such errors. when it considers them at all—as state-owned enterprises. (At private empty jargon, rather than consider Chinese companies, especially Robert Lawrence Kuhn, senior advi- the insight into political priorities high-tech firms, there is more sim- sor at Citigroup and senior partner of they offer.) ilarity with Western ways and these IMG China, has worked with the Chi- Chinese stress the collective principles are less applicable.) nese government for 18 years on eco- more than they do the individual, Be patient in negotiations. Do nomic policy and business issues. He believing that the needs of human not assume the Chinese side is is co-editor-in-chief of China’s Bank- society exceed in importance the being deliberately opaque. If you ing and Financial Markets: The Inter- ideals of human rights; Americans must press for answers or resolu- nal Report of the Chinese Government prefer the reverse. tion, do so with sensitivity and and author of The Man Who Changed When dealing with weighty respect. China: The Life and Legacy of Jiang matters, Chinese are not given to Learn to appreciate the pur- Zemin, the best-selling book of the humor, nor do they engage in self- pose of general principles and why year in China in 2005.

22 www.chiefexecutive.net March 2007