INTERNET: Neutrality Needed In Corporate Corruption Clean-up
Bottom line: Chinese companies should follow the lead of Huawei, Baidu and Tencent in fighting internal corruption, but Beijing should also play a role by ensuring such probes don’t become a weapon for companies to attack each other.
The growing clampdown on corruption at private Chinese companies was in the headlines last week, when Internet giant Tencent (HKEx: 700) disclosed that it was investigating half a dozen employees suspected of accepting bribes. But unlike other similar probes that have been growing in number over the last year, this particular one involved former Tencent employees, including one now working as a top executive for Internet rival Alibaba (NSYE: BABA).
Such corruption and other economic crimes have no place in a healthy corporate landscape, and leading Chinese high-tech names like Huawei, Baidu (Nasdaq: BIDU) and now Tencent should be commended for their efforts to stamp out the problem. But Tencent’s targeting of a high-level employee who went to work for a rival is also slightly troublesome, as it shows that companies could use such probes as a weapon to punish workers who defect to their competitors.
Companies themselves have the largest responsibility for vetting prospective new employees, and perhaps Alibaba would have discovered the potential risks associated with former Tencent executive Patrick Liu if it had checked more thoroughly before hiring him. But law enforcement authorities could also play a role in preventing abuse of the system by making sure they pursue cases that are truly worthy of their attention and not just motivated by corporate rivalries.
China’s crackdown on corporate corruption dates back more than 2 years, and is part of Beijing’s broader campaign to stamp out practices like acceptance of bribes and lavish spending on banquets by officials at government agencies and big state-owned enterprises.
Telecoms giant Huawei was one of the first private sector companies to join the campaign, with its announcement last year that an internal probe had netted more than 100 workers suspected of accepting more than 100 million yuan ($16 million) in bribes. (previous post) Internet search leader Baidu joined the campaign earlier this year, announcing its own internal probe that netted 3 director-level employees suspected of corruption. (previous post)
Tencent added its name to the list of corruption fighters last week, when it disclosed that it was investigating a half dozen employees for accepting bribes when they worked in the company’s online video unit. (English article; Chinese article) One of those was Patrick Liu, who left Tencent in 2013 and was working as an executive director at Alibaba Pictures (HKEx: 1060), a unit of e-commerce giant Alibaba, when he was recently detained by police in connection with the case.
Non-Compete Violation Allegations
Alibaba issued a statement confirming Liu’s detention, adding the case had nothing to do with his work at Alibaba Pictures. Court records showed that Tencent had previously accused Liu of violating a non-compete clause in his contract and taken him to court in 2014, and that Liu had unsuccessfully tried to appeal the matter.
The case looks somewhat similar to one from late last year involving a former NetEase (Nasdaq: NTES) executive who later started Momo (Nasdaq: MOMO), a popular social networking app. In that instance, NetEase disclosed its view that the executive, Tang Yan, had violated non-compete clauses in his contract and possibly also stolen intellectual property when he left the company in 2009 to start Momo. (previous post)
While that case didn’t involve bribery, it attracted major attention because NetEase made its disclosure just as Momo was preparing to make an IPO in New York. The announcement ultimately delayed the offering for several days, as the US securities regulator and investors asked for clarification. It also hurt broader sentiment towards the offering, as many wondered about Tang’s integrity and future liability issues.
Instances of accepting bribes and violating non-compete clauses are relatively common in China, and companies like Tencent, NetEase, Huawei and Baidu are right to aggressively pursue current and former employees suspected of such acts. But as the NetEase and Tencent cases show, companies can also use this kind of internal probe to punish former workers and create disruptions at their rivals.
In the latest case, Alibaba might have uncovered the bribery risk associated with Patrick Liu by conducting a more thorough background check before hiring him, including checking with Tencent itself. But in such instances, law enforcement authorities could also help to ensure fairness by informing all involved companies as soon as they believe there is sufficient evidence of wrongdoing. Investigators could also consider political motivations when they decide which cases to pursue.
Such an approach would show that China’s legal system is committed to the fight against corruption, while emphasizing the government will take a neutral stance and not get involved in the fierce rivalries that are common in the country’s vibrant private sector.
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