Working Knowledge Blog

Heskett is THE man

He is the man in so many ways, which are too numerous to go into here. And, finally, to quote the great Mae West, It's better to be looked over than over looked.

Thank you, and goodnight.

Sean

Has Globalization Reached Its Peak?

The global corporation is once again under the microscope. Twenty to thirty years ago the concern was whether global corporations would behave responsibly without adequate international law and regulation to contain their behavior. The fear was that they would become as powerful as, and less responsible than, the countries in which they operated. Now the focus of interest seems to be different, if one believes the author of a book published several months ago, End of the Line: The Rise and Coming Fall of the Global Corporation.

The basic arguments of this book are that globalization has led corporations to outsource too much of their work and, more important, their intellectual capital. This has created a worldwide level of interdependency that increasingly threatens to disrupt supply lines and markets at times of earthquakes, explosions, terrorist acts, and other disasters in one part of the world. Operating a lean organization in a global economy, the argument goes, results in more use of just-in-time inventory management and premium transportation for critical parts and other resources that are increasingly sensitive to such disruptions. Further, U.S. manufacturers in particular face a decline in capability as a result of vigorous outsourcing initiatives.

This seems to come at a time when outsourcing is still on the rise. I was reminded of this again in late March: Several MBA student teams, engaged in putting together business plans for the annual contest among budding entrepreneurs here at HBS, were awaiting the arrival of software being designed in India that would allow them to demonstrate smoothly-functioning Web sites important to their prospective businesses. Getting the software completed in India allowed them to concentrate on strategic issues in which their audiences would be more interested. But Indian software was also much more affordable on the limited budgets available to these student teams.

And End of the Line's arguments come at a time when labor mobility is once again being debated on the North American continent. In this case, it concerns the treatment of illegal immigrants already in the U.S. The fact that they are here and that millions of others have arrived in Europe suggests an increasing tendency for labor to seek global solutions. Whether this is good or bad depends on whether one believes that jobs are lost and wages reduced for U.S. citizens and legal immigrants or whether immigrants of any stripe help lower costs for all kinds of goods and services.

Some would argue that more fluid labor markets, increased outsourcing, and the tendency to locate jobs in low-cost labor markets, wherever they might be, could provide a safeguard against any calamity except perhaps a world war. This assumes that astute global managers outsource primarily non-strategic activities, act responsibly, and maintain positive working relationships on the local operating level, as well as establish multiple sources of supply. Is this a tall order for them to fill? Has globalization reached its peak? What do you think?

To read more:  Barry C. Lynn, End of the Line:  The Rise and Coming Fall of the Global Corporation (New York: Doubleday, 2005)

Readers: If you'd like to respond, please write in before the deadline of Wednesday, April 19 at 10 a.m. EST.

Summing Up - The China Dilemma for U.S. Fir ms: Comply, Resist, or Leave?

The jury is in. Nearly all respondents to this month's column would advise U.S. firms such as Yahoo, Google, Cisco, and Microsoft to continue to operate in China despite the government's possible use of their content or technology to invade the privacy of its citizens. But about half would advocate a discontinuation of operations after attempting unsuccessfully to resist meeting government demands for private information. Some suggested more complex strategies.

Among those in favor of staying and trying to reach some kind of accommodation were Sandi Edgar, who commented, "If Google ended its service to China, China would respond by creating its own version of Google." Jack Carpenter advised, "If an organization is serious about doing business in China, it must 'ride out' all government restrictions. Things evolve fast in China. . . . Flexibility in building a position is necessary." Michael Peng concurred: "If U.S. firms choose to leave, they not only lose China's market, but also the chance to make an impact in China." Linda Sun added, "Having worked in China . . . , I know the best course is to comply initially to gain the trust of the authorities, and then to suggest changes and modifications."

Others advocated more vigorous actions and, if necessary, departure from China. Matt Deter commented, "If Yahoo and Google want to change China, they need to work against the system, not within it." Suraj Babalola wrote, "I would be very happy if both Google and Yahoo resisted these constraints. The real bottom line is people, no matter where they reside. . . . Please do not limit this discussion to China." Nicole Herbots put it this way: "Our truest self-interest is in the end always the ethical choice of resisting or leaving, as we will be inevitably be the next victims of the repressive policies we did not confront but ended up supporting by complying."

Some offered more highly-textured advice. Saurabh Gautam said, "Comply, resist or leave are strong, close-ended options. . . . I do not see any threat or moral hazard when the service provider makes clear to its customer the potential threat of use or sharing of the information by the intelligence or other authorities. Forewarned is forearmed. . . . As in Buddhist philosophy, follow the middle path and take baby steps." Gaurav Goel agreed: " . . . the solution is to make sure customers are aware that they are being watched or are being stopped from accessing particular information. Who knows? This may lead to a change in local policies toward a better world." Surya Deva commented, "Except Cisco, the other three companies could have provided services to Chinese customers without physically locating their servers in China."

After reading the March column, one of my Chinese students asked me if enough consideration is being given to legitimate reasons for actions of the Chinese government. David McKnight's comments reflected a similar need to take into account Chinese officials' views: "A far smarter approach is to evaluate the ethical impacts of Chinese law on a company's business model, and determine how to meet both ends. . . . They (the companies) can start lobbying for reforms that make sense to all parties—because frankly until it makes sense to China, it's not going to happen." What do you think?

Readers Respond: The China Dilemma for U.S. Firms: Comply, Resist, or Leave?

March 13, 2006

by Jim Heskett

A dozen years after the end of apartheid in South Africa, U.S.-based firms are confronting a dilemma that may be even more complex than that faced by General Motors and others during apartheid. For General Motors, the issues had to do with employment policies and whether or not to sell autos in a repressive society. For companies like Cisco Systems and Microsoft, the question has greater political implications-whether or not to continue selling hardware or software that filters communications or facilitates their monitoring to a government that is likely to use it for both purposes. For Yahoo and Google, among others, it gets even more complex. It is whether to: (1) comply with Chinese requirements that they make available information regarding individuals using their Internet sites that could endanger users' welfare, (2) resist such license requirements, or (3) cease doing business in China.

The increased complexity arises from the fact that Yahoo, Google, and others are not simply manufacturing and selling autos in South Africa. They are utilities that handle sometimes sensitive information on a worldwide basis.

Arguments for shutting down service in China include the importance of taking a stand against an oppressive government and its policies, refusing to compromise an organization's values by acceding to objectionable policies in the name of profits, and forcing a society in need of one's services to alter its views regarding privacy. To this list one might also add the reduced cost of dealing with protests and bad press resulting from a decision to stay.

Those defending a decision to stay say that change requires involvement and participation from the inside. Even though the process may be slow and, yes, profitable, they argue that abdication negates an organization's power to foster change. Further, if all U.S. information utilities operating in China were to take organized action, according to this argument, they would have significant leverage in forcing change.

Others may conclude that staying is the only course of action, whether or not efforts are made to influence government policies. This line of thought holds that a management's first obligation is to its shareholders, not others with political agendas. Further, they add that it is more appropriate that the U.S. government take whatever action is appropriate, including passing legislation requiring compliance.

Questions posed by this dilemma go far beyond the basic arguments stated above. For example, what does it mean to "leave" a market in an interconnected world served by network-based service providers? Have the services provided by these firms become so valuable to their customers that they could defy the Chinese government and somehow get away with it? Is coordinated action by the managements of these competing U.S. companies warranted in such a situation? Should what is often the business of governments be shifted to a group of business managers? If you were an advisor to the senior managements of these U.S. companies, what would you propose that they do? What do you think?

Readers Respond - The China Dilemma for U.S. Firms: Comply, Resist, or Leave?

The Actual Responses

In terms of social development the U.S., in my opinion, is at least a hundred years ahead of China. The question U.S. firms face is whether they want to return to the past. Society evolves gradually. If U.S. firms choose to leave, they not only lose China's market, but also the chance to make an impact in China. In brief, they should comply.

Michael Peng

I am Nigerian and have lived under a repressive regime. It is a horrible experience no human being should be subjected to, what with fear, lack of privacy, and so on.

I would be very happy if both Google and Yahoo resisted these constraints. The real bottom line is people, no matter where they reside. We are all connected. Please do not limit this discussion to China. Extend it to Africa and help us rid this continent of similarly repressive policies.

Suraj Babalola
Management executive
Smolt Nigeria Limited

We solved this question during the Cold War. Economics control change. Economic exchange with a repressive society yields less than desired results (e.g., the consequence of sales of technology to Iraq and Iran) even if it is tempting in the short term. Enabling the repressive regime to function with these products will in the long term undermine these U.S. companies' viability. As soon as China can, it will switch to Chinese, easier-to-control companies. Our truest self-interest is in the end always the ethical choice of resisting or leaving, as we will inevitably be the next victims of the repressive policies we did not confront but ended up supporting by complying. Always apply pressure in the right direction.

Nicole Herbots
Physicist, R&D
Arizona State University

The dilemma is primarily due to China. These corporations might not have bowed to the censorship pressure of the government of, say, Zimbabwe. The presence of 110 million Internet users (second only to the U.S.) makes the exploitation of the Chinese market indispensable for Yahoo et al. However, unlike the South African apartheid situation, it was possible to do business without becoming a party to censorship. Except Cisco, the other three companies could have provided services to Chinese customers without physically locating their servers in China. So, there was an option between total surrender and leaving the market.

In fact, Internet technology could have enabled Yahoo et al. to have presence in China without being actually present there. It was once suggested that the Internet is uniquely placed to nullify the power of repressive states to control and censor the free flow of ideas within their municipal boundaries. But the current controversy seems to indicate that powerful states can prevail over the might of even the Internet, at least for now.

The argument of staying in China to catalyze change is tempting but difficult to implement and measure. Once profit takes precedence over principles, it is not easy to reverse this order. In sum, instead of jointly putting more pressure on the Chinese government, Yahoo et al. opted for an easier and more profitable but less ethical option. I have dealt with some of these issues in "Yahoo! Free Speech in China," available at http://www.onlineopinion.com.au/
view.asp?article=4178

Surya Deva
Lecturer
School of Law, City University of Hong Kong

It's not worthwhile for a company to fight with the government. They should strive for expanding business practices and gaining more profits from the market, aligned with a win-win mentality. Philanthropic activities addressing the issues facing peasants, environmental issues, education, etc. will lead to goodwill from both from the government and Chinese consumers. Gradually, business growth will influence local business partners as well. Foreign companies should take the advantage to bring business know-how to local companies and weave an interdependent business ecosystem.

These foreign companies could survive while remembering that no government will give up its right to govern.

Anonymous

The twenty-first century business landscape requires organizations to look beyond their shareholders. Shareholders are certainly important constituents of any business, but other stakeholders cannot and should not be ignored.

The dilemma can perhaps be addressed if one were to look at Peter Drucker's contention that the only relevant purpose of any business is "to create a satisfied customer." How can customers whose safety or privacy is compromised be satisfied customers?

The dilemma can also be addressed if one looks beyond Milton Freidman's prescription that the business of business is to make profits. Mahatma Gandhi repeatedly emphasized that in every walk of life the means are as important as the ends. This is particularly relevant in today's context when the relentless pursuit of wealth creation often blurs the division between right and wrong.

It would indeed be naive to even imagine that organizations—either individually or through collective action—could change the way a country is managed. This may be true of relatively free market economies but does not hold for closed societies like China.

Taken to its logical conclusion, how is the authorities' demand for sensitive information different from a state-controlled monitoring system that keeps track of every move citizens make?

It is time to say enough is enough. If a country wants to reap the benefits of a globalized economy, it must equally be willing to let go of dogmas that have no relevance. Organizations must be willing to stand up and be counted. Buckling under pressure for the sake of profits would inevitably mean that only the end matters, not the means. And organizations would have betrayed their most important stakeholders—customers.

B. V. Krishnamurthy
Director and Executive Vice-President
Alliance Business Academy, Bangalore, India

Although it seems to be complicated to consider various issues, the central question is very basic: "What are business ethics?"

People and companies do not become corrupted overnight. They make compromises one at a time. The logic is always the same. "Well, it's OK this time since we have to focus on the current goal (whatever goal that might be). Maybe next time it will be different."

Another compromise for another goal/benefit, and it goes on and on. As time goes by, business ethics is just another subject taught by school and written on a mission statement, and that is the problem of today's education and corporate environment.

Will people still make pirated software if they could come up with innovative products by themselves? Will people counterfeit products if they had their own design? Will people not use more environmentally friendly alternatives if they can afford them?

But if we could make compromises for our own profits, why can't people in the rest of world make their own compromises for their own profits? Google has demonstrated the worst case study of corporate greed overpowering everything else. And that is it, period.

Anonymous

Any publicly traded organization has a responsibility to shareholders and stakeowners such as employees, suppliers, and regions or countries where it does business. That includes respecting the laws and cultures of the country in which they do business. Should an organization determine that it does not agree with those laws, it may resist or leave. However, using a longer-term view, as a country such as China evolves and enters the world market it will slowly change as it realizes that free market economies involve the free exchange of ideas that are not a threat to their government. After being a closed society for so many years, it will take time for this concept to evolve.

Les P. Demers
Supplier Quality Engineer

By complying, a business allows behavior and policy to continue unabated. The message is that it's OK to be this way in our world, we'll go along with it.

By leaving, the business sort of protests, but who cares? There are other, less principled providers out there who will take the business whatever the conditions . . . after all, it's about power and money . . . and so the behavior and process continues. Resist? It's the most difficult route, especially with the differences in cultural interpretation of privacy and the role of government.

Should we impose our views and values because we think we're right? Hasn't that been the foundation of wars for centuries? Behavior changes when there is a reason to change. Penalties and exclusion haven't bothered Chinese governments before; are they likely to now? Collective resistance/withdrawal has strength, but it only takes one weak link.

Working with people directly may be the only route of long-term consequence available to business.

Debbie
OD Manager
3M

Companies, like people, generally do what interests them and can be rationalized along those lines. There is no easy answer here. But . . . companies should be held accountable for what they do. Too often they are not. I recall an incident in which Toshiba sold the Russians sophisticated milling machines that enabled the production of super-quiet submarine propellers, even though such machinery was on a well-known list of forbidden sales. A full-page ad later in the Wall Street Journal expressing an apology wasn't good enough as the incident cost the American taxpayers a lot of money. That's one reason I still will never buy a product with the Toshiba name on it. Consumers and investors would do well to judge the actions of companies, because the market is a wonderful means for the informed to advise companies of agreement with their policies and decisions.

Edward Hare
Retired director of strategic planning
a Fortune 300 manufacturer

Having worked in China for over ten years, I know the best course is to comply initially, to gain the trust of the authorities, and then to suggest changes and modifications. If one is unwilling to do that then the best course is to leave, at least temporarily.

Many Americans go to China with a view to make a killing. That is not going to happen overnight or in the long haul. The profit is there, for sure, but it will not be found at the expense of the Chinese themselves, that's also for sure. However, I have made some great friends who taught me how to understand and to try, try again, and in the end make progress.

Linda Sun
Self-employed consultant

Although entering China allows access to a large population to whom to sell products and services, the political risk may be too high a price to pay. With the threat of reverse engineering, lack of human rights, and political interference, the soft costs in dealing with these issues will definitely reduce the perceived profitability of entering the Chinese market. It is better to enter a country such as India where the risks are overall much smaller, and you still have a high population.

Sunil Godse
Executive VP
Allied Health Management Group

Unless compliance involves ethically wrong corporate behavior (like child labor, trade in narcotics, arms supply to a repressive regime, and the like), companies should be guided by the size of the opportunity and its benefit to investors. The response to such situations need not be binary fight or flight. Fighting a state no matter how small is beyond the power of the mightiest corporation because as the repressive state masquerades as the sole protector of national honor facing a defiant multinational. Flight merely concedes market space to competition that may have no such qualms.

Instead, silently work for change from within. This is for the long haul, involving collaboration with allies within the host nation and building up public opinion. However, a necessary condition is the relative attractiveness of the market so the company finds its struggle both ethically and financially rewarding.

Hari Padmanabhan
IT advisor, independent consultant

The companies involved in this controversy are trying to frame the dilemma as "cooperate with the government or don't do business in China." The truth is a bit more complicated.

In a January 27, 2006 post on Google's official blog, senior policy counsel Andrew McLaughlin explained the company's decision:

Google users in China today struggle with a service that, to be blunt, isn't very good. Google.com appears to be down around 10 percent of the time. Even when users can reach it, the Web site is slow, and sometimes produces results that when clicked on, stall out the user's browser. Our Google News service is never available; Google Images is accessible only half the time. At Google we work hard to create a great experience for our users, and the level of service we've been able to provide in China is not something we're proud of.

This problem could only be resolved by creating a local presence, and this week we did so, by launching Google.cn, our Web site for the People's Republic of China. In order to do so, we have agreed to remove certain sensitive information from our search results.

The tradeoff faced by Google was not whether to do business in China or not, but whether to sacrifice the quality of its Chinese users' experience or be an active participant in the censorship act. (The reality is that even on Google.com, many search results are still inaccessible in China due to the filtering employed by the Chinese government.) Sacrifice the user experience, or sacrifice the truth? You know what they chose.

Yahoo has done a similar job masking the question. Yahoo chose to provide blogging services through servers located inside China, thereby exposing itself and its users to the demands of the Chinese government that led to the arrests of at least two dissidents. Yahoo could have provided the blogging service using servers located outside the country, but chose to locate the servers inside the country. To further mask the situation and wash its hands of responsibility for its actions, Yahoo has transferred 60 percent of the ownership of its Chinese business to Alibaba.com, its Chinese-owned partner.

The most alarming issue in my mind is the lack of full disclosure on the part of the companies involved. What we really don't know is what kind of calculations they have been conducting behind the scenes to figure out how much money they'll be making by helping the Chinese government suppress the freedom of its people. We also don't know how the Chinese people will react when the truth eventually comes out. But if I were an advisor to these companies I would say: Do right by the Chinese people or risk losing this market.

Eran Livneh
President
MarketCapture

Comply, resist, or leave are strong, close-ended options for an organization if we consider them in isolation and presume they are stand-alone options. But once we realize that  interactions and interdependences exist within these elements we can formulate and execute a strategy that can help.

Leaving is definitely not an option. Organizations should not ignore the "dragon's might" and its economic prowess. Resisting completely is also not an advisable stand, because you should never take the dragon head-on especially when you know it breathes fire. Complying completely is also not a recommended option because it may lead to strangling the very ethics and values on which the organization survives.

What I suggest is a combination of resist and comply. This gives you ample room to bargain and negotiate.

I do not see any threat or moral hazard when the service provider makes clear to its customer the potential threat [that it may share information with]  the [government] or other authorities. Forewarned is forearmed. So the organization can start with a basic product/service offering. Clearly study the politics and potential of the market and then slowly spread your wings by negotiating, bargaining, and making the authorities and customers understand the benefits of the offering.

As they say, when in Rome do as the Romans do. I would say in the East play it cool because aggressiveness can send the wrong signals to the authorities and also to people at large. As in Buddhist philosophy, follow the middle path and take baby steps in spreading business in the "Land of the Dragon." I agree with the critics of this strategy that profits will be limited and controlled, but so will losses in case the strategy or game plan fails. And it's better to fight than to attack or run and hide.

Saurabh Gautam
Samsara Group, India

I have been in China since June 2001, working on the lower rung of possible business development. My Web site is blocked from outside view and this e-mail is being monitored as I send it. If a company wants to make a decision about working here, management should first read Orwell's 1984. For at least the last fifty-six years, this appears to have been the guide here for doing business and, in my opinion, the government is improving on it. My personal recommendation is: If a foreign company has enough funds to last for another fifty years before profits, and is willing to accept this path of everyday change, then settle in for a lot of fun—if you can change frustration into fun. Just remember, the kaleidoscope is rotated daily.

Donald E. McCoy
President
World Environmental Systems

I am Hong Kong Chinese and have lived through the colonial era under the British Administration as well as the current China Special Administration. What I can say is that business should never be involved in politics.

The business landscape is too complicated for companies to get involved in country-to-country confrontation. Change should be implemented through proper policy rather than as a result of criticism from mass media.

Anonymous

If an organization is serious about doing business in China, it must ride out all government restrictions. Things evolve fast in China. What is forbidden at the outset may soon become permissible or required. Flexibility in building a position is necessary. True, it may be one that compromises U.S. standards (not laws), but compare that to the alternative of leaving a key market where returning may not be possible. Staying is usually best in China.

Jack Carpenter
In-country consultant, China
JWCA, Inc.

None of these companies can ethically sustain continued support of the People's Republic of China, any more than IBM could support its equipment being used in Germany in the lead up to World War II. IBM's fig leaf was that maybe they knew or maybe they didn't. The utilitarian nature of their products is quite beside the point.

In the case of Google and Yahoo, they are in the business of aiding and abetting a ruthless regime that is at least as oppressive as the Union of South Africa. It really isn't complex. Their products make a police state more efficient.

Anonymous

The problem in dealing with repressive societies, specifically China or other manufacturing countries, is not "Should I or shouldn't I do business with them?" The dilemma is, "If I don't do business with them, how long before they have an exact replica of my product?"

If Google ended its service to China, China would respond by creating its own version of Google, which would take money away from American society and recycle it back into its own repressive society. So then do we take China's money and conform to their standards or do we let them copy our product and keep their money?

I feel Google made the right move by censoring its product for the Chinese market; they obviously do not want it copied. Through good business practices and honest work I hope this risky business venture will result in more leverage for Google China down the road.

Sandi Edgar

The issue of complying with the Chinese government in giving the government access to information gathered over the Internet is more one of U.S. government policy than company policy. It is a tough question to answer, but companies will all need to agree on a response to this situation, or the government will.

C. J. Cullinane

It is very difficult to take a principled stand on this issue that would mean anything to the Chinese government after the mess we have made in Iraq. I would call for coordinated action on behalf of all companies that have had to alter what they do to accommodate pressure from the Chinese government, although I doubt such action would accomplish anything. Local or pan-Asian service providers will simply fill in the gaps. (This is my personal view, not that of my company.)

RitaSue Siegel
President, RitaSue Siegel Resources

It makes me nervous that China owns much of the U.S. debt. But as to the problem of the Internet and information: Whether a corporation stays in China, disengages, or leaves has to be the corporation's own decision.

On the other hand, the U.S. could exercise the option of reneging on its debt, or at least threatening to, if China doesn't concede more sensitively to this issue.

Argentina, for example, did renege on U.S. loans not long ago. During the '80s, banks and corporations failed all over the U.S., including Chicago's Continental Illinois National Bank and Trust Company [the largest bank in the history of the United States to require a bailout from the Federal Deposit Insurance Corporation]. The domino effect was that banks and businesses closed all over the Midwest when their lines of credit were pulled. Perhaps these precedents of tough tactics would interest China and raise its awareness.

Anonymous

To answer your question, I would choose resist if possible and leave otherwise. The point of responsibility to shareholders is an interesting one. Managers certainly have a responsibility to abide by the wishes of the owners of their company, and usually this means maximizing profit.

In this case, however, I would hope that the wishes of shareholders of Google or Yahoo would be that their company does its part in supporting the values that make a free society and free enterprise function. It could be argued that if these companies took a stand on principle, their potential profits and stock value would fall somewhat, inducing owners who value profit over freedom to sell their shares. Management could then feel confident that it is supporting the values of its current owners.

Ian Cummings

It's a little tough to ignore China at this point, considering that it is one of the largest trading partners of the U.S. and will likely become the largest in the not-too-distant future. And considering China does a far better job of selling into the U.S. market than U.S. companies do selling into China, it's patently naive to think the Chinese can't find pretty much whatever technology they're seeking from someone else if they can't get it from the U.S.

Picture Eric Schmidt at Google pulling his hand out of a bucket of water. That's the impression that Google will make by refusing to do business with China. A far smarter approach is to evaluate the ethical impacts of Chinese law on a company's business model, and determine how to meet both needs. It is possible to do that (even if the process of doing so might be more than a little frustrating).

Expecting to do business in China or any other emerging economy the same way one does business in North America is just a tad unrealistic. Companies (including Google and Yahoo) have a responsibility to identify what the differences are and how to best accommodate them.

Then with a significant presence in-country, they can start lobbying for reforms that make sense to all parties—because frankly until it makes sense to China, it's not going to happen. That would be like, oh, say France or Germany expecting the U.S. government to change an entrenched policy without making a solid case for that change in a way that makes sense in the U.S.

David McKnight
President
International Association for Technology Trade

Resist. I believe influencing change is more effective from within. I also believe that in the initial stage of a business relationship it is easier to influence another when you have a distinct advantage. Yahoo, Google, and other companies have technology that China is very interested in but does not have the capability to create (today). Therefore, there is an opportunity to influence the direction or severity of China's policies by resisting in such a way that no one loses face but instead creates a cross-cultural dialogue on what is fair for all parties involved.

Anonymous

There is another option: influence. Looking back in twenty years' time, we may feel much more comfortable about positive changes in the business situation in China.

Anonymous

I would ask some questions before making a recommendation.

1) Staying in China may be the best for short-term profits. However, what is our expected long-term outcome? American values have driven the largest wealth creation wave in history. Would we not be defying the proof of history to assume that we can do business contrary to those values and continue to be as profitable?

2) At what point do we cross the line between complying with the Chinese government and supporting it? For example, if the Chinese government obtains information on dissidents from U.S. companies that it could not obtain any other way and uses that information to persecute these individuals, would the U.S. companies not be complicit in that persecution? Aside from the morality problem, the publicity of being linked to human rights abuses would erode shareholder value in the West. We would be gambling our existing value and organic growth rate in an attempt for a short-term growth spurt in a new market.

Based on my own response to the above questions, I recommend not complying with China's demands and, if necessary, pulling out. However, these are questions that  companies and individuals must answer for themselves.

Anonymous

Any large corporation has multiple constituencies that it is obliged to consider before making such a substantive decision. At the same time it ought never to put aside the most fundamental value of all, that of the protection of liberty and freedom from the shackles of fear. In the face of these, business interests pale if only because capitalism itself, if it is to be sustained, must be founded on trust.

My advice would be to present firm and consistent resistance to any demands for compliance, maintaining that the ethical relationship with the using public must be scrupulously upheld. Where this proves unacceptable to prevailing authorities in the host nation, I truly believe it is in the firm's best interest to seek markets in places more amenable to liberty.

In the case of U.S. global corporations, I would like to believe the most compelling argument would come from the conscience of top managers who themselves enjoyed the benefits of having been raised in a free society and should know full well what its loss means.

Charles Albano
Adjunct Professor of Management
New Jersey City University

Especially in a network-based service model, it becomes increasingly relevant to proactively support and strengthen any actions that may even remotely resemble responsible business or corporate citizenship, because corporate social responsibility is the corporate governance of the twenty-first century. Compromises for the short or medium term, especially when profit is the only motive, lead to long-term damage. The global community is increasingly accepting this fact.

Normally there is validity in the argument that change requires involvement and participation from the inside. Though sheer staying power may provide impetus for fostering change, one must take into consideration the fact that the reasons for entry and participation were economic to begin with, not to foster social and/or political change. To that extent, how deeply entrenched is the resistance to change and how committed is the government to change is all moot for doing business in China; the argument would be valid in this case only if the government or agencies have made or make assurances of considering the options.

In such a situation, within a larger global framework coordinated actions by managements of the competing U.S. companies may be relevant in some parts and in some cases.

Now—and increasingly in the future—there will be no clear lines demarcating governments, private enterprises, and nongovernmental organizations. The pressure to be socially responsible is so great that increasingly these lines will blur and merge, such that responsible action and behavior is everyone's business: that of citizens, students, CEOs, bureaucrats, policy makers, or entrepreneurs.

If I were an advisor, I'd strongly urge the senior management of these companies to take this holistic and long-term view and, if required, do whatever it takes to comply with their vision, including leaving. Whatever they decide to do, it should be in line with an articulated, clear commitment. They should not blow as the wind blows or take a wait-and-watch attitude or, worse, rationalize that the problem does not exist or affect their business, because it does and will.

Deepa S. P.

The world is a complex marketplace. There are different cultures and different forms of government with their own regulations and values for their people.

Accept their culture or leave.

As the saying goes, when in Rome do as the Romans do.

There is always a middle ground to any situation, so let the executives concerned keep trying to find the middle ground that will satisfy the authorities concerned.

Jasper Ojongtambia
President/CEO
AEC Computer Division

If Yahoo and Google want to change China, they need to work against the system, not within it. China is not the U.S., where people have recourse within a (mostly) fair system.

This is Communist China, where the government owns a piece of everything there is, they have nukes pointed at our cities, and their citizens are oppressed over such silly things as Falun Gong and nudity on the Internet.

Yang and his cohorts may "feel awful" about their complicity to imprison freedom lovers in China, but I am sure this useless guilt does nothing to help the prisoners, nor does it help prevent more individual rights being sacrificed.

Google once declared they would "do no evil," but frankly, I'd be more inclined to trust George Bush on weapons of mass destruction in Iraq (in 2006!), than believe that Yahoo or Google are increasing freedom in China by toeing the party line and getting people thrown into dark holes in rundown Chinese prisons.

Shame on these people; they ought to know better.

Matt Deter
Engineer
A Fortune 500 company

Any U.S. citizen who continues to work at a company that has been shown to be assisting the state police of China is a traitor. Doing business with the Chinese government, doing business that is known to profit the Chinese government, or collaborating with the Chinese government makes one an enforcer of totalitarianism and withholder of basic human liberties. It is a betrayal of the letter and spirit of our Constitution, and a declaration of war against humanity and liberty. There are no legitimate excuses, only the substance-less spin of parasites whose every cent of pay is, quite literally, blood money.

Anonymous

Global organizations are comprised of people of varied ideologies, faiths, and beliefs. These organizations may not be the best bodies to classify local policies as right or wrong.

To quit a market on the basis of local government policies (requiring filtering and monitoring of information) may not be the best option for two reasons. The first reason is that the customers in such market should have the option to choose whether they want to access information even if they are being watched. They need to be aware they are being deprived of information by their government, not because they do not have the means to access the information.

The second reason is that government policies in the West may also change and may require monitoring information in the name of homeland security. In that scenario, would organizations quit western markets?

Having said that, I think companies must comply with their own value system and should be honest with their customers. At the same time they also need to follow the law of the land where they operate.

I think that the solution is to make sure customers are aware that they are being watched or are being stopped from accessing particular information. Who knows? This may lead to a change in local policies toward a better world.

Gaurav Goel
Project Manager
Infosys Technologies

The China Dilemma for U.S. Firms: Comply, Resist, or Leave?

by Jim Heskett

A dozen years after the end of apartheid in South Africa, U.S.-based firms are confronting a dilemma that may be even more complex than that faced by General Motors and others during apartheid. For General Motors, the issues had to do with employment policies and whether or not to sell autos in a repressive society. For companies like Cisco Systems and Microsoft, the question has greater political implications-whether or not to continue selling hardware or software that filters communications or facilitates their monitoring to a government that is likely to use it for both purposes. For Yahoo and Google, among others, it gets even more complex. It is whether to: (1) comply with Chinese requirements that they make available information regarding individuals using their Internet sites that could endanger users' welfare, (2) resist such license requirements, or (3) cease doing business in China.

The increased complexity arises from the fact that Yahoo, Google, and others are not simply manufacturing and selling autos in South Africa. They are utilities that handle sometimes sensitive information on a worldwide basis.

Arguments for shutting down service in China include the importance of taking a stand against an oppressive government and its policies, refusing to compromise an organization's values by acceding to objectionable policies in the name of profits, and forcing a society in need of one's services to alter its views regarding privacy. To this list one might also add the reduced cost of dealing with protests and bad press resulting from a decision to stay.

Those defending a decision to stay say that change requires involvement and participation from the inside. Even though the process may be slow and, yes, profitable, they argue that abdication negates an organization's power to foster change. Further, if all U.S. information utilities operating in China were to take organized action, according to this argument, they would have significant leverage in forcing change.

Others may conclude that staying is the only course of action, whether or not efforts are made to influence government policies. This line of thought holds that a management's first obligation is to its shareholders, not others with political agendas. Further, they add that it is more appropriate that the U.S. government take whatever action is appropriate, including passing legislation requiring compliance.

Questions posed by this dilemma go far beyond the basic arguments stated above. For example, what does it mean to "leave" a market in an interconnected world served by network-based service providers? Have the services provided by these firms become so valuable to their customers that they could defy the Chinese government and somehow get away with it? Is coordinated action by the managements of these competing U.S. companies warranted in such a situation? Should what is often the business of governments be shifted to a group of business managers? If you were an advisor to the senior managements of these U.S. companies, what would you propose that they do? What do you think?

Note to readers: For your response to be considered for inclusion in HBS Working Knowledge, please respond by or before Thursday, March 16, 10:00 a.m. (EST).

Summing Up - Should CEOs of Public Companies Offer Earnings Guidance?

Based on some of the most thoughtful comments to any of these columns, one might conclude that acceptable earnings guidance by CEOs should take on new forms. Let's first consider the pros and cons, then some research, then some recommendations.

Sandi Edgar, citing her former employer's practice of providing detailed information about the company's "quarterly standings, stock prices, new acquisitions, etc.," concludes that "anyone who has stock or investments in a public company should be privileged to certain short-term information. . . . Taking away these privileges will drive investors away to other companies." Guillermo Estefani concurs, saying, "It is important to show all real information available from the company, so investors can track its behavior and learn whether it is really achieving its long-term targets."

Citing his experience, Terry Ott commented, "I worked in a private company that went public. . . . Post-IPO, the company has continued to do well but the morale has seriously declined because employees feel pressure to have the business look good on a quarterly basis." Lola Wilcox put it this way: " . . . vast amounts of internal energy go to 'making the quarter return' rather than serving the customer and building the future. Why did quarter returns develop in the first place?" Bill Hubbell added, "The market has many mechanisms to establish expectations. . . . There is no benefit in risking this exposure."

Shiva Rajgopal, who has investigated firms that stop giving guidance, shared some of his findings and those of his colleagues: " . . . firms that stop guiding have poor trailing earnings and stock return performance; they also have lower institutional ownership. We document an average -3.6 percent three-day return around the announcement to stop guidance. . . . After the elimination of guidance, stock prices lead earnings less, but there is no change in overall stock return volatility or analyst attention. After firms' decisions to stop giving guidance, analyst forecast dispersion increases and forecast accuracy decreases." For those wishing the full story, read "Is Silence Golden? An Empirical Analysis of Firms that Stop Giving Quarterly Earnings Guidance."

What is to be done? A number of suggestions were advanced. Gaurav Goel suggested that, "Providing conservative guidance to the market may ease pressure to squeeze the last cent out of your client's pocket or to push your employees to their limits." Gerald Nanninga wrote, " . . . the issue is what type of guidance one gives. If you give low near-term guidance, . . . the stock does not go up as quickly. . . . But it doesn't go back down as quickly later, either." Damon Leavell takes a different tack, recommending that, "Rather than speculate on earnings, . . . create unique indices based on (the) business that provide a guide to the health and well-being of the company and the industry." And Lorenzo Ferlazzo comments, "I would maybe run a slew of guidance measures in commentary . . . and suggest analysts use their own initiative to communicate their interpretation to the markets."

These comments raise more questions. Can comprehensive retrospective data compensate for projections? What is "real information"? And do conservative estimates of the future lead organizations to underperform? What do you think?

Readers Respomd - Should CEOs of Public Companies Offer Earnings Guidance?

In reality the high goals for offering guidance have disintegrated into lazy analysts just regurgitating management forecasts, than whining on earnings conference calls when any variance, positive or negative, occurs from said guidance. In the world of unintended consequences, time is wasted discussing the forecasting rather than the underlying business.

Go back to the way it used to be. If people want to follow Novartis, as mentioned in Jim Heskett's article, then go to doctors' offices and find out what is being prescribed.

Anonymous

Does guidance mean CEOs have a crystal ball that can predict the future? Indeed we need guidance, but it should be based on initiatives for long-term growth plans, not just numbers.

I have seen company behavior change as it deals with pressure to meet the guidance (e.g., employees work on weekends to meet the quarterly results, spend more energy getting the numbers right rather than thinking about how to create a culture of innovation, and so on).

Laks

Companies should build mechanisms to get realistic guidance from different units in real time, and in the name of transparency the CEO should provide the earnings guidance to shareholders and employees.

The CEO (along with the unit heads and top management) has to perform a balancing act between stable, long-term growth and quick, short-term gains. The short-term tactics to meet the guidance should be aligned to the long-term strategy.

Providing conservative guidance to the market may ease pressure to squeeze the last cent out of your client's pocket or to push your employees to their limits. The market needs to appreciate that there's less risk with the companies and individuals who have a long-term strategy and growth plan.

Gaurav Goel
Project Manager
Infosys Technologies

I think CEOs should provide guidance. It is in keeping with the principles of transparency that are being drilled down from agencies like the Securities and Exchange Commission and the Financial Accounting Standards Board. Without them, stakeholders such as investors have little direction in making their decisions regarding a company stock purchase.

Anonymous

While working for the largest gourmet coffee establishment in North America, Starbucks, we were continuously updated with our company’s quarterly standings, stock prices, new acquisitions, etc. The CEOs, presidents, and managers did not own the company, we did. I believe anyone who has stock or investments in a public company should be privileged to certain short-term information. With the degree of fluctuation in which our economy operates, it is imperative that investors know where their money is going as well as the current return rate. Once satisfied with this information, one would hope the investors would not merely sell their shares based on a short-term analysis.

Comparing ourselves to the European business model is not reasonable. We have established trust with our investors because of the degree of certainty we give them; they know where their money stands as well as what it is worth. Taking away these privileges will drive investors away to other companies.

Sandi Edgar

I think that establishing a short-term carrot is not a very wise way to develop businesses. Nevertheless, I consider that it is important to show all real information available from the company, so investors can track its behavior and learn whether it is really achieving its long-term targets. There will be more risk in "the rules" if a company decides to establish a long-term objective.

Guillermo Estefani
General Manager
Grupo Estemon (Mexico)

My coauthors and I have investigated firms that stop giving guidance. Consistent with many of your statements, we find that firms that stop guiding have poor trailing earnings and stock return performance; they also have lower institutional ownership. We document an average -3.6 percent three-day return around the announcement to stop guidance; this reaction is associated with poor future performance. After the elimination of guidance, stock prices lead earnings less, but there is no change in overall stock return volatility or analyst attention. After firms' decisions to stop giving guidance, analyst forecast dispersion increases and forecast accuracy decreases.

You can access our paper, "Is Silence Golden? An Empirical Analysis of Firms that Stop Giving Quarterly Earnings Guidance," at: http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=820644

Shiva Rajgopal
Associate Professor
University of Washington, Seattle

I think CEOs should not give earnings guidance. I worked in a private company that went public. In the private environment, the company thrived and the morale was high because management took the longer-term view; employees knew that the partners would value innovative and somewhat risky ideas because the emphasis was always on doing the right thing for customers, knowing that down the road the financial side would take care of itself if the ensuing decisions were wise. We talked about how we did financially after the fact, and seriously, but only annually.

Post-IPO, the company has continued to do well but the morale has seriously declined because employees feel pressure to have the business look good on a quarterly basis. Costs are much more scrutinized and micromanaged based on how they will affect quarterly earnings. Of course, much of this just comes with the territory of being public. But the stakes are raised, and along with that so are tensions and the propensity for shortsightedness, when the executive team's reputation is on the line by virtue of some educated guesses about near-term earnings. It seems to me that stock price volatility is very much tied to the earnings forecast and results. A penny or two in either direction from the quarterly forecast is viewed as significant when, by the very nature of this professional services and "lumpy revenue streams" kind of business, the best we could ever hope for would be round number guesstimates of earnings, even in the medium term.

I'd rather have the CEO take the same position of the NFL coach who refuses to venture a guess about the team's season-end record, and who won't say whether or not a victory is likely versus the teams he is facing in the next month. It is enough to comment on the actions and priorities being taken to ensure the team has its very best chance of success.

So . . . let's be done with the game playing and manipulation. Just let the record speak for itself.

Terry Ott
Retired management consultant and business executive

As a consultant to large organizations responsible for helping them forward, I have seen top management drive to quarter returns rather than invest in the long range. Further, vast amounts of internal energy go to "making the quarter return" rather than serving the customer and building the future.

Why did quarter returns develop in the first place? Was it an oversight mechanism to warn investors of an issue in the first three months? It takes three months to notice an issue and correct course. The size of the organizations we are watching today makes a major change a three-year process. But we are moving CEOs every one and a half to three years. The entire mechanism needs to slow down if we are going to invest in the future.

Lola Wilcox
Organization and Employee Development Manager
City of Boulder

Companies should refrain from giving guidance on expected future results, whether revenues or earnings. The market has many mechanisms to establish expectations. CEOs face an ever present risk of being wrong about the future. There is no benefit in risking this exposure.

Bill Hubbell
Business Productivity Advisor
Microsoft

Certainly CEOs must have a business plan with a projection of what they would like to see the corporation achieve . . . or maybe it's their own salaries and stock options. I certainly don't think it's important to announce what those plans are any more than a football team telling the public they are going to win. It's all a crapshoot. The investors certainly want a return on their investment, but they are not going to know that ahead of time anyway.

The biggest schism between CEOs and investors is their salaries, stock options, and other perks that are not tied to performance, money that might contribute to the bottom line if it were.

Paul T. Jackson
Consultant
Trescott Research

An entertaining question!

If I were a smart CEO thinking of how I could capture publicity without restricting guidance and alienating institutional investors, I would maybe run a slew of guidance measures in commentary (maybe five or six, including earnings per share), emphasize the preferred ratio/measure, and suggest analysts use their own initiative to communicate their interpretations to the markets.

Gee, what have I just done? Well, (1) I've given earnings per share, so that keeps Wall Street happy, (2) I've given more than earnings per share so that makes me even more transparent and makes everyone happy, and (3) I've indicated the choice of short-term metric and that makes everyone think a little more. And I could even go so far as saying that I've transparently informed the market without really giving away too much.

For a quarterback who enjoys playing laterals to running backs, this makes sense. Advancing with caution and a range of options extends the offense and keeps the defense thinking right up to the line!

Lorenzo Ferlazzo
Ferfin LLC

Guidance has created more problems than it has solved. The quest for short-term profits has put a damper on many long-term projects that would help companies compete or even survive in the future.

Situations change on a constant basis. Guidance is just another form of guessing what will occur in the future. Strong profitable companies cannot be built on guessing unless you're in the gaming business.

The more guidance is emphasized, the more we will experience shortsighted decisions and self-fulfilling prophecies. The tenure of CEOs has fallen drastically in recent years. I feel some of the cause is due to this "guidance" and the failure to live up to these guesses and forecasts.

How often is the guidance correct? Business articles and programs seem to point to the fact that guidance is often not correct. No one knows the future, including CEOs. Let's not bet the bank on their educated guesses.

Charlie Cullinane

The reason to keep away from only a short-term focus is to prevent premature liquidation of a company. Two decision errors tend to lead towards premature liquidation: (1) underinvesting in the core business because the payback is not immediate, and (2) divesting of assets today for a quick profit, even though they may provide the competencies needed to get to a more prosperous long-term future.

So the question is whether a lack of guidance will help avoid these two errors. In general, I would think that whether one gives guidance or not has little bearing on these errors (unless one makes promises in the guidance that can only be fulfilled through premature liquidation). Instead, the issue is what type of guidance one gives. If you give low near-term guidance, because you do not want to prematurely liquidate the company by taking excess profits too early, that sends a specific message to the market.

Granted, the stock does not go up as quickly this way. But it doesn't go back down as quickly later, either.

Two things need to occur:

1. Get the profile of the people who desire to invest in your stock to be the type of people who invest for the long term. This can be done by sending the right kind of market signals and courting the right kind of investors.

2. Compensate top executives for long-term performance.

I think the bigger problem we have is that the average tenure for a CEO at large public companies is too short. They disappear before the long-term ramifications of their actions take place. They need to be compensated in such a way that the long-term ramifications beyond their tenure are a meaningful percentage of their total compensation.

Gerald Nanninga
Vice President
RVI

While I understand the importance of providing a constant flow of company information, I don't think it's a good idea to provide quarterly earnings estimates. I would argue that estimated earnings do not amount to transparency; on the contrary, they muddy the issue. Rather than speculate on earnings, provide investors with more information about the company or offer expanded financial data. One thing companies could do is create unique indices based on their business that provide a guide to the health and well-being of the company and the industry. Especially for sector leaders, this could be a great way to maintain analyst and media attention while continuing to solidify their brand in the marketplace. To circle back, earnings guidance is a form of speculation. Whether or not a company hits a quarterly estimate should not be a determining guide for investors.

Damon Leavell
CEO
Forrest PR

I think providing short-term guidance can produce a lot of pressure to meet the numbers, leading to extraordinary actions that are not representative of the company's usual business and/or accounting practices.

Rodgers Harper
Principal
The Harper Company

Quarterly measures by themselves do nothing more than stoke up short-termism. However, presenting them within the context of a well defined, longer-term strategy is helpful in pointing out whether an enterprise is on course. But nothing in life is certain and perhaps the quarterly statements should be more concerned with articulating variance. That way leaders would plan more diligently and conceptualize both the upside and downside possibilities. An organization should be managed with a mind to have a longer life than a fly!

David Physick
Partner Consultant
Glowinkowski International

Should CEOs of Public Companies Offer Earnings Guidance?

This question is not as innocuous as it might at first seem. According to those who study the matter, it may become part of a larger debate in 2006 about added pressures on managers to produce short-term earnings regardless of the impact on the long-term health of the business.

In his annual year-end letter to directors, Martin Lipton, a long-time student of corporate governance, cites the issue as one of the three most important issues facing managers and directors in 2006. He commented that, "Activist shareholders, led by hedge funds which today have aggregate assets of more than one trillion dollars and armed with the threat of withhold-the-vote campaigns against directors, will exacerbate the tension between short-term performance and long-term success of the corporation…. While different in form, this hedge fund pressure raises management and board issues similar to those created by the pressure to give quarterly earnings guidance and then meet the targets."

In a 2002 article in Fortune magazine, Daniel Vasella, CEO of Novartis, weighed in on the guidance issue: "The practice by which CEOs offer guidance about their expected quarterly earnings performance, analysts set 'targets' based on that guidance, and then companies try to meet those targets within the penny is an old one. But in recent years the practice has become so enshrined in the culture of Wall Street that the men and women running public companies often think of little else. They become preoccupied with short-term 'success,' a mindset that can hamper or even destroy long-term performance for shareholders." Perhaps with this in mind, a small but growing number of public company CEOs are electing not to provide earnings guidance, risking reduced interest on the part of analysts and possibly less publicity for their companies.

But this raises several questions. If this is the age of transparency, why shouldn't CEOs provide as much information as possible, including quarterly and annual business projections, in the interest of better information to investors? Isn't this part of the "perfect information" that markets (as opposed to individual investors) are often assumed to possess? On the other hand, haven't European markets and investors functioned just as well without very much forward guidance from management? Aren't diligent analysts able to come up with reasonably accurate projections without the assistance of management? Is it possible that the short-term pressure to meet public targets set by CEOs and analysts is beneficial to long-term performance as well? On balance, how does the practice affect investors? How should CEOs respond?

Is it coincidental that these questions are arising at precisely the time that the Securities and Exchange Commission is advocating disclosure of CEO pay packages, including the value of large stock option grants which many might conclude produce similar pressures for short-term performance? What do you think?

Readers: For your response to be considered for inclusion in HBS Working Knowledge, please respond by or before Thursday, February 16, 10:00 a.m. (EST).

To learn more: Martin Lipton, "Some Thoughts for Boards of Directors in 2006," Wachtell, Lipton, Rosen & Katz, December 1, 2005.

Clifton Leaf, "Temptation Is All around Us," Fortune, November 18, 2002, Vol. 146, Issue 10, p. 109.