FCPA Compliance and Ethics Blog

March 27, 2013

Amway’s Lessons in China: How to Weather the Compliance Storm

One of the questions often presented to the compliance practitioner is what to do in a foreign culture to make your program relevant and, more importantly, followed. Even if you have a well-established compliance program in other areas of the globe, moving into new or different regions can present new and different challenges. For instance, if your company has never done business in the Far East or in China, many of the cultural differences in those regions can present challenges for the implementation of a Foreign Corrupt Practices Act (FCPA) compliance program. I thought about those challenges when I read a recent article in the Harvard Business Review (HBR), entitled “Amway’s President on Reinventing the Business to Succeed in China”, by Doug DeVos, President and co-Chief Executive Officer (CEO) of Amway.

For those of you who do not know, Amway has a long running successful sales model based on door-to-door sales by independent salespersons; this direct sales model has been used by the company since the 1960s. Amway entered the Chinese market in 1995 but found that it was locked out of the market in 1998, when the Chinese government outlawed the direct sales model for Western companies. The Chinese government made this change because it believed that some direct sales models were simply scam artists, taking advantage of the Chinese peoples’ desire for all things Western. This would have appeared to sound the death knell for Amway in China as the company had never built or operated out of fixed retail outlets. The story of how Amway overcame this change in Chinese law and eventually prospered financially has some interesting insights for the compliance practitioners.

Lesson One: Understand the Market, Economics, Politics and People

Amway did not believe that the Chinese government would withdraw its legal permission to engage in direct sales. It viewed the Chinese actions as an extreme over-reaction to a relatively small problem. Further, the company believed it had shown its commitment to the Chinese market both to the Chinese people and the government. But the key in the company’s understanding came in its response in losing its license.

Senior management in the US were counseled by the head of Amway China to stay the course when she advised the company “not to lose sight of the opportunity” which presented itself to the company in China. Amway should work with the Chinese government to “create good direct selling legislation”. Relying on an old Chinese proverb (are there any new Chinese proverbs?) “If you are patient in a moment of anger, you will escape a hundred days of sorrows” the company did the spade work with the Chinese government and with its local senior management to enact reforms which set the stage for Amway’s growth in China.

Compliance Lesson: Key your eye on the compliance ball.

Lesson Two: Remain True to Your Mission and Purpose

While this concept would seem to be sacrosanct to a compliance practitioner, there may well be lots of factors driving a company’s actions in new markets, particularly when a company’s financial investment is on the line. For Amway, this meant that the company had to ask some hard business questions about itself. The question that the company eventually had to answer dealt with its core value: was it a direct sales organization only or was it a “company providing a business opportunity based on core values of partnership, integrity, and personal responsibility?” Amway decided it was the latter.

Based on this realization of its core values, the company decided not only to work with the Chinese government to create new laws to protect buyers from unscrupulous direct sellers but to do something the company had never done, create physical stores; market to them and set up suppliers to deliver products in a new and different manner. It had to set up a new distributor compensation system to begin to do brand advertising. In short, it had to learn to do business a new way but did so in a manner that it believed was consistent with its core values because once again the long term focus was on the opportunity that the Chinese market presented to the company.

Compliance Lesson: You can engage in a new business model if your core compliance and ethical values are in place.

Lesson Three: Being an Honorable Corporate Citizen

The biggest thing that Amway was able to develop was trust. This had to begin with developing a trusting relationship with the Chinese government so that Amway could prove itself to the government officials with whom it was interacting. But trust has another component; it is that you are in for the long term and you are in China to stay. The company needed to demonstrate that it “would be a long-term honorable corporate citizen in China.”

For their part, Chinese government officials listened to Amway’s ideas about how create a business environment which would benefit both Western companies with direct sales approaches and the Chinese need to protect its citizens from unscrupulous operators. But through this trust relationship, the appropriate government officials began to understand that Amway wanted to “create a mutually beneficial opportunity.” It all paid off for Amway when in late 2005, legislation was passed which allowed Western companies to engage in direct sales in China and Amway received a license in 2006.

Compliance Lesson: Not only do you have to engage in the compliance talk the talk, but you must walk the compliance walk.

Lesson Four: Stay the Course

This lesson involves how important it is to build a business by taking the long term view. The Amway view is that you must take a long term view even if it feels like you are taking a step backward at times. The Amway experience is that you can be humble without being weak. While the rules for doing business may be unique in China, the Amway experience shows that if you keep your eye on the ball for the long-term, you can overcome many substantial obstacles.

It turned out that Amway derived many advantages from their experiences in China. They developed a new and different business model, which there were able to take to other areas in the world. But perhaps the biggest change was that Amway admitted it had to change the way it had done business for over 40 years and that this change could be accomplished. But the company did so by focusing on what it needed to do to accomplish what it wanted to do.

Compliance Lesson: Your compliance program is a core part of any successful international business and integration of it into your overall business planning will pay off by making your company a better business at the end of the day.

While the Amway experience in China relates to sales, the concepts that the company used and were articulated in the HBR article provide some interesting lessons for the compliance practitioner. If you move your compliance program into a new region, listen to your local folks, take the long view and stay true to your core compliance principles. If you do this, you may well be able to install a compliance program that not only works for you but in the new territory that you are opening it into.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

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