Kitchen Best: Ethics when Doing Cross-Boundary Business in Southern China

Brief background and context:
Kitchen Best is a Hong Kong-based electrical-appliance company founded by Chan Dong-hwa, who ran business with a paternalistic style. The company has a manufacturing facility in Guangdong and sells its wares to customers around the world. Henry Chan, the newly appointed CEO, has ambitious plans for business. He brought a more Western style to company and aimed to double the company’s revenue by 2012. However, due to his heavy reliance on the senior management, he lost sight of other management aspects of the business. A series of instances of misconduct and unethical behavior occurred, making him realize that the business is suffering from a lack of internal control. He needs to set up a more systematic internal control mechanism to ensure future growth target of the company. Who are the key players involved:

i. Chan Dong-hwa – Founder and Chairman of Kitchen Best, leave daily management in 2010 due to health deterioration. ii. Henry Chan – Chief Executive, son of Chan Dong-hwa. iii. Li Qingyang – Silent partner with 25% equity stake; aunt of Li Meihua. iv. Ma Luk – Operations Director and Head of Greater China Business, report to Henry. v. Horatio Sze – Purchasing and Production Manager, report to Ma; Li’s grandson. vi. Macy Wei – Quality Control Manager, under Sze and report to Ma. vii. Eddie Lau – General Manager of Honghua and a friend of Ma. What are the main issues/allegations?

i. What should Henry do concerning about the crisis below:
a. The customer complaints about “the bowls and plates were not microwavable” from a European designer under the Malaysia-based distributor Shago. b. Henry Chan ignored the anonymous letter stating that the products for German retail chain HdM did not meet the safety requirements for fear of losing the customer. c. The business with Honghua is at risk because Ma was unable to use kickbacks with Lau. The delivery in time and product development capacity of the company is not as competitive as other suppliers. d. Henry found out that Ma was using fake invoice to reimburse expenses and inflate his own gain. ii. How can Henry better monitor his staffs of various cultures and improve his management team? iii. How can his company keep a good and healthy relationship with its customers internationally? iv. What would he do to deal with the practice of offering and accepting kickbacks? v. What kind of internal control should he take to help achieve his company’s expansion and long-term success? What is/are the main ethical issues?

The ethical issues concerned in this case are the following: a. Sze awarded a contract to a factory in Dongguan which was owned by his brother-in-law. In return, Sze and his wife received a free package trip. b. Wei knew the relationship between Sze and the factory owner, but did not report to seniors because Li is Sze’s grandmother. She took no remedial actions after informing Sze once. c. Qinghua Electrical Appliance Ltd, a subcontractor of Kitchen Best, ordered inferior products which did not meet HdM’s safety standards. The proprietor bribed money into Keemark’s team leader in order to pass the safety test. d. Henry received an anonymous letter about the testing issues raised from Qinghua, but took no further action for fear of losing customers. e. Ma paid kickbacks into Lau, Honghua’s general manager to place orders of kitchen appliances with Kitchen Best. Moreover, he used kickbacks, entertainment and gift-giving to do business; reimbursed the expenses and inflated his gain through fake invoice.

f. For Henry, whether to monitor every incident and take legal actions toward staffs or not. What else happened in the case that is relevant/important (that is additional to what has already been said above)? According to Laws of Hong Kong Cap 201, “an employee should not solicit or accept any advantage relating to his work without his principal’s permission”. In this case, Sze was committed as “accepting bribes”. According the Cap 201, “offering bribes to private sector employees” and “employees using false documents to deceive an employer” are also committed as “bribery”. In this case, Keemark Testing Service received the money from the subcontractor Qinghua, constituting a serious illegal act. How do you feel about what happened? What are your reflections? What would you do and why?

The reasons for what happened are not only the lack of internal control by Henry Chan, but also the unhealthy practices in China when doing business, especially the act of kickbacks and bribery. The incidents happened in this case are illegal and unethical. Offering and accepting kickbacks may result in some short-term profits, but it does no good to company’s long-term operations. I don’t think Henry should ignore the incidents or do nothing according to them. He should set up a monitoring and controlling mechanism for employees and other related partners, avoiding those incidents happen again. Besides, he can build up the company’s competitive power by improving the products quality and delivery time, instead of using kickback method to maintain customer relationships.