Values versus profits: the cost of investing in China
Hong Kong-based airline Cathay Pacific, global accountancy firms, the US’s National Basketball Association and California-headquartered tech company Apple might not appear to have much in common. But they can all possess one point of dubious similarity: each was subject to pressure from the Chinese government to change their behaviour with regards to Hong Kong’s ongoing protests.
In the case of Cathay Pacific, it was firing employees (and forcing the resignation of the CEO) who had participated in Hong Kong protests. Similarly, PwC, Deloitte, EY and KPMG had to distance themselves from a full-page newspaper advert supporting the protests. Meanwhile Apple agreed to delete a mapping app from its App Store after the Chinese authorities complained it could be used to track Hong Kong police movements.
Most recently, on October 4, NBA Houston Rockets general manager Daryl Morey kicked over a hornets’ nest when issuing a seven word tweet – ‘fight with freedom, stand with Hong Kong’. It caused an almost immediate backlash in China, which forced the NBA (which earns billions of dollars in the nation) into a panicky response. Initially it apologised to the country and claimed it didn't agree with Morey's comment – only to feel the heat at home as Americans lambasted it for kowtowing to an authoritarian regime.
China has long been notorious for its sensitivity to outside criticism about its politics. Indeed, US companies have traditionally avoided ever commenting on the three ‘T’s – Tibet, Taiwan and Tiananmen Square – when conducting business there. And until relatively recently this arm-twisting, while discomforting, received relatively little international opprobrium. It was just a cost of doing business.
But Beijing's unwillingness to brook any dissent over Hong Kong is a new phenomenon. For months, protests in the city have continued to mount, led by media-savvy demonstrators who have garnered international attention. That’s caused a mounting level of defensiveness from the Chinese government about the state of its southern city – and with it a willingness to punish outside companies (or their employees) who are seen to support those efforts.
The Party’s swift reactions have likely only been exacerbated by China's ongoing trade war with the US. The willingness of the Trump administration to tariff most of its exports to the US appears to have left Beijing willing to dish out payback where it can.
CHANGING PRIORITIES
Until recently, many foreign companies were willing to keep their heads down and accede to the Chinese government’s pressure to stay shtum.
Indeed, western companies have for decades justified making money in authoritarian nations with dubious human rights or environmental records by claiming it was their fiduciary right, under the ‘shareholder theory' doctrine of economist Milton Friedman, to prioritise making money for shareholders above all else.
But times are changing. These days, individuals, investors and governments – primarily in the West – are growing more concerned about the apparent erosion of democracy and freedom of speech in the world. At the same time worries are rising about flat income levels and the damaging consequences of global warming, courtesy of companies having pursued profit-above-all for decades.
The combination is pressurising businesses and their investors (particularly in Europe) to start considering their duties to an enlarged pool of stakeholders that includes employees, local society and economies at large. It’s also causing the ‘greed is good’ argument to become far less palatable.
China sits at the forefront of this tension.
International companies are entranced by its huge economy, and the hundreds of millions of potential customers that it contains. But the regime that operates it has hobbled foreign company entrants for years, and, as Cathay Pacific, Apple and the NBA can attest, it is quick to curtail commercial access to businesses whose employees criticise how it operates.
This may not be a problem for private companies willing cut deals with authoritarian countries (see: the Trump Organisation). But it is a bigger problem for listed companies, and the fund managers and asset owners behind them.
Increasingly, the pressures emerging today are likely to force them to weigh how much their stakeholder responsibilities require them to encourage companies to support concepts like freedom of speech and employees' rights, versus the revenue damage that supporting these actions could cause in China.
SLIDING SCALE
The conversation remains in early stages, at least among Asian institutional investors. “We haven’t had any asset owner ask us for how to deal with this,” the global head of ESG stewardship at UK-based fund manager told AsianInvestor.
But it's unlikely that asset owners in Europe, Asia or the US can avoid them forever. The Trump administration has been making noises for some weeks now about its desire to prevent US institutional investors from buying Chinese company assets and to limit the latter’s ability to raise capital in the US.
That appears to be a naked political move by president Donald Trump force Beijing to surrender to his preferred trade policies, but it underscores the pressure asset owners are coming under. And the US government can point to the fact that Beijing extorts companies to silence them about topics it doesn’t want discussed. Plus there is no guarantee it won't begin to use this tactic to suppress words or actions it dislikes that sit outside of its onshore politics.
Eventually, investors and companies in Europe, the US and increasingly Asia, will have to decide exactly where they sit on the sliding scale of profits versus values in China. Those genuinely claiming to respect worker and broader societal rights will find it impossible to bend to every angry demand made by Beijing – even if it costs them money.
Indeed, NBA commissioner Adam Silver appears to have accepted this. While on a trip to Japan on Monday (October 7), he told Japan’s Kyodo News Agency that “as a values-based organisation that I want to make it clear… that Daryl Morey is supported in terms of his ability to exercise his freedom of expression,” adding that “there is no doubt, the economic impact is already clear”.
It will be informative to see how many investors and asset owners are willing to make similar stands.