A Matter of Trust
By Lilly Teng, Managing Partner, Orchid Group PLLC, and Hal Kaiser, Senior Partner, Orchid Group LLC
“Can we trust the local (foreign) partner?” We are asked this question more often now than ever before, and it requires a well-thought out and carefully articulated response.
Regardless of whether you are involved in international, complicated cross-border transactions or domestic business deals, finding the right partner, knowing your client and whom your client is working with should be the first risk to check off the list before committing resources and investing time along with priceless reputations. We have previously described a method of conducting a thorough and deep due diligence beyond contracts and documents.
This article compares issues that often result from a gap in understanding of business cultures and communications between America and Asia and the impact on international business. We will focus on issues that arise from a lack of trust and knowledge of business cultures and communication styles in China and Korea.
Americans understand there are many business cultures and communication styles in the USA, shaped by immigration from around the world over hundreds of years. We are fortunate to live in a stable country with the most diverse society with significant individual liberties (e.g. political, social, economic, and personal).
The vast majority of Americans communicate through English (American style) and, except for local accents and phrases, can travel and do business in the 50 states without serious consequences caused by a lack of understanding the local culture or from miscommunications caused by a language barrier. In contrast, the populations in Asia, while comprised of primarily homogenous societies, communicate through hundreds of languages and dialects that are not mutually intelligible and business cultures that are vastly different.
Americans manage risks through contracts and develop trust during the course of working together, doing deals, and participating in business and social events. Perhaps one reason is the opportunities in America and ”deal flow” are plentiful.
In contrast, Asians manage risks through relationships— and the relationships, therefore, must be trustworthy. Business opportunities are also plentiful; however, the consequences of aligning with the wrong partner has significantly greater and in some cases, permanent consequences.
Korea Business Culture and Communications
The fear of embarrassment, or of losing face, remains paramount in Korea and among Korean professionals. Historically, this manifested itself through avoidance of speaking too much for fear of making mistakes in English as well as a reluctance to admit a failure to understand what is being said.
While the linguistic side of things has evolved significantly after a generation of parents pushing their kids to learn English and an educational and tutorial system heavily built around English competency, fear of losing face remains an issue in international business.
The more common challenge in transactions these days is a lack of understanding of market complexities in the USA and the continuing reluctance among companies to hire competent local advisers, or insistence on hiring known and trusted advisers in Korea who are unable to provide the local knowledge.
This lack of understanding of the intricacies of deals becomes a challenge to timelines; Korean companies will not suffer the embarrassment of outright admitting to a lack of knowledge. Instead, they will ask the other side to provide information about certain aspects of the market and will lock on to deal aspects they can understand, regardless of how unimportant those aspects may be to the overall transaction.
Americans, not realizing what the Koreans are asking, typically will not provide enough information for the Korean side to get what they need to explain to management or credit committees. For example, if the transaction relates to the power industry, the Korean company may ask for the American side to provide an explanation of risk management tools for securing power revenue and managing fuel exposure as well as examples of where such tools have been used on other projects. The American side will generally provide high-level overviews, failing to realize the Korean side does not understand and is really asking to be taught and provided with detailed information.
What we observe next is the American side will grow irritated as the Koreans latch onto elements they can understand, but are generally unimportant. As a result of these issues, frustrations mount among Americans because deals take too long and fall apart without understanding what happened, why the deal did not close, or how to handle interactions better the next time (if there is a next time).
How do Americans bridge the gap and engage Korean business partners more efficiently and within the expected transaction process timelines?
The best approach is to have an adviser experienced in working with Koreans, who knows how they think and operate, and who has the trust of the Korean company. Then, the team members will ask all the questions, get complete answers, will rely upon the explanations, and be in position to explain the situation up the organization’s chain of command. The adviser should be a huge part of running the meeting, coordinating communications, and educating the deal team.
Building trust takes time, especially with both social and business contacts, and must be earned. Speaking the language is not enough. Korean investors have been misled by Korean-speaking advisers in USA energy investment deals. These advisers lacked basic market knowledge, but were too proud to admit it.
In a typical outbound investment or divestiture, the two parties (assume a Korean company is reviewing an investment with an American company) execute a non-binding expression of interest. The data room is opened and the legal due diligence begins along with technical experts.
External counsel is engaged and the billable hours begin. Combining the customary western legal rate structure with Korean business culture norms, plus not enough trust, leads to a perfect-storm scenario in which the client’s deal team does not ask all the necessary questions, or admit they don’t understand, or ask for further explanation. The tendency and cultural norm is to stay quiet and plow onward. The results are several-fold.
- Deal closes and immediately problems flare with rising tempers and legal costs;
- Deal does not close, advisers and Americans are frustrated and criticize the Koreans; and/or
- Relations and bridges are scorched forever, without genuine understanding of what happened and how it could have been handled better.
Korean companies are increasingly becoming ideal partners for American companies, particularly as lenders to projects. Helping the deal team work through and understand the market, legal/regulatory, and commercial issues so they can explain to management or credit committees in headquarters means they are much better partners for American companies.
China Business Culture and Communications
Unlike Korean business culture, “losing face” is not a main cause of issues resulting in frustrated business dealings with companies from China. “Losing face” pales in comparison to other significant factors in doing business in China or with companies from China.
Much has been written about “guanxi” (关系), which for the vast majority of Americans and foreigners doing business in China and with Chinese companies, means “relationship.” A deeper and more accurate interpretation of the characters includes elements/feelings of a connection, nexus and/or bond beyond a mere introduction or chain of introductions that brings a business opportunity or dealing.
Relationships, connections and networks, are important in every country and all cultures. However, it is over simplistic to believe if one has a relationship or series of relationships in China, that is enough. The provocative and deeper query is, “which relationships can be trusted and who is trustworthy?”
Trust is a very complicated characteristic and trait to describe. The characters of “Trust” (xinren, 信任) and “Trustworthiness” (chengxin, 诚信) encompass qualities of such things as belief in, honesty, count on, and reliability.
China’s thousands of years of history, reoccurring periods of political instability, revolutions (along with famine and hardships) have caused the Chinese to first and foremost rely upon and trust family, unconditionally, based on blood, heritage, and legacy. The second kind of trust is with people introduced by family members with whom they have done business successfully.
To have these types of connections is a very important factor in business in China. Business opportunities introduced through these relationships should have a higher probability of being advanced because there is high level of trust, from all sides.
On the contrary, business culture in the USA frowns upon doing business through family and relatives’ connections. Nepotism is not allowed because our value system is based upon principles of non-discriminatory and equal access/treatment. We require disclosures about familial connections in applications for jobs, schools, procurement contracts, tenders, etc. The overarching public policy is not to be preferential and we have many rules and protocols in place to enforce such.
In the Chinese culture, officials and authorities receive respect, however, trust is only placed in people they know and with whom they share a common unconditional bond. The Chinese perspective of "guanxi" remains real, but the real relationships usually come through a family or extended family level, and not through official channels.
Even official relationships of the type that are resilient through changes in control, power and regime often begin with a period of growing up together in the same hometown, village, and regional culture, where the extended family network is located.
However, an ethical and legal conundrum could arise for Americans in these situations. If one is brought into a business opportunity through the family and extended family networks, along with unconditional trust, there is an expectation to use great efforts to try to understand the Chinese perspective and turn the opportunity into something tangible and successful for all involved in the introduction, while keeping American issues and sensitivities in check.
This means certain USA laws and rules, such as FCPA, are not necessarily the foremost important issues from the Chinese perspective. Therefore, Americans need to know upfront who is being introduced, how business has been done and will be done, and what is expected before accepting the offer of “guanxi,” or else risk burning bridges and coming under scrutiny. This includes knowing whether the people involved in the deal are being investigated or have the potential of being investigated by authorities in China or USA, before taking any steps forward.
How do Americans as non-family members find trustworthy relationships and do business in full compliance with USA laws and rules, and ethical principles? The short answer is that it is complicated and takes time and patience.
Trustworthy relationships are earned, built through work, and a track record of correcting mistakes and solving problems and disputes with business solutions (without litigation) over years. Chinese trust the people who can get things done successfully, and who have the necessary knowledge and wisdom. All this takes time in the spirit of cooperation. If understood and applied properly, Chinese companies and people can be very good partners for Americans in international business.
Consider certain fundamental differences between the USA and China legal systems. In China, there is no attorney-client privilege or other legal privileges that can be invoked related to the attorney’s work and communications with the client or others involved in the matter. In the USA, the legal system is an adversarial structure with protections such as due process, right to sue and face your accusers, pre-trial discovery, choice of judge or jury, etc.
Our systems and processes are transparent and we are given the opportunity to learn, find facts, dig for the truth, prepare arguments, and present to a neutral third party (e.g. mediator, arbitrator, judge, or jury) for decisions. However, the legal system in China is based on an authoritarian system (discovery should not be presumed step) and the judge reports to Communist party and law enforcement officials. Therefore, government authorities are the final arbiters in civil and criminal cases. As a practical matter, settling disputes with business solutions is highly preferred in China.
Changes in policy are made at the highest levels and not always announced until later, not published laws, determine the direction of things to come. Fact is that majority of China Bar lawyers and foreign lawyers working in China can hardly keep up with the pace of changes. For example, the guidelines for securing outbound investment approval are changing in China.
Depending on the nature of the investment and reputations involved, a Chinese company will be required to conduct a broad investigation of foreign partners and people involved prior to legal and technical due diligence. The investigation covers market reputation and integrity, track record, allegations of impropriety, financial problems, failed ventures, business and political connections, litigation, etc.
We have explained how China’s long history, multiple business cultures, and systems shape the complicated and colorful business cultures(s), actions and thinking of people in business, legal procedures, and interpretation (and enforcement) of substantive laws and regulations.
Understanding all of these important points will help American companies and advisers structure arrangements with Chinese companies that are consistent with each other’s commercial goals, and legal and ethical principles.
Meaningful relationships combined with a trusted adviser should be considered soft pre-conditions, providing flexibility to timely pivot with political and policy changes, before such occur. In other words, in China business cultures, lawyers are better advisers by being proactive, not reactive.
 See, Lilly Teng, Hybrid Due Diligence in International M&A and Litigation, 1 Newsl. Int’l L. Sec. St. B. Tex. 16 (2018), http://files.constantcontact.com/cf349dd3701/b45c3ac1-4ba9-4f88-b822-ef13de029bf2.pdf, and http://www.orchidlaw.biz/news-and-insights/hybrid-due-diligence-in-international-m-a-and-litigation.
 There are multiple business cultures in China created by the approximately 200+ primary dialects and sub-dialects, which do give rise to differences in communications and approaches that foreign companies should be aware.
About the Authors
Lilly Teng is the Managing Partner of Orchid Law, and Senior Partner and General Counsel of Orchid Group. Lilly’s family, extended family groups, and professional networks are primarily in USA, China, and Taiwan. Her career in the USA energy industry began in 1982 with Southern Natural Gas working in the midstream industry. In 1994, she moved into international energy business and law in Asia, working with Enron, Texaco, Chevron, and private companies. Lilly advises American and Asian companies in the energy and critical industries. http://www.orchidlaw.biz
Hal Kaiser is Senior Partner and CEO of Orchid Group. He began his career in the energy industry with Texaco in 1998 and has worked predominantly in power generation, LNG, and renewables on six continents with a heavy emphasis on Asia. Hal advises an extensive client base in Asia, Korea in particular. http://www.orchidgroup.biz