Mastering the Art of Doing Business in China
Not enough CEOs know how to play the game to their advantage. BY ROBERT L. KUHN


f all the challenges facing chief executives, getting China right is one of the most import a n t . But many CEOs assume they can do business in China the way they do business in other countries. They cannot. If most business is local, most business in China is also political. China says it is evolving into a “socialist market economy with Chinese characteristics.” While critics consider that a tortuous way of harmonizing capitalistic practice with Communist ideology, it reflects a long and complex transition from a planned economy to more of a mar-

ket economy. Figuring out how to navigate this transition is obviously complex. Foreign executives are usually naive. Few are even aware of the relevance of politics, much less know how to play it. When they envision the “Chinese government,” they see a monolith, displaying an idealism that’s laughable to the Chinese. Foreigners are often not aware of competing interests among central, provincial and municipal levels of government, and

Robert L. Kuhn, author and Citigroup China adviser

24 December 2005

on each level among diverse commissions, ministries, agencies, departments and bureaus with overlapping interests of turf and power. On the personal level, lack of awareness is often worse. Foreign executives imagine that if they have a pleasant meeting with the CEO of a state-owned company, or surely if they are encouraged by a government official responsible for that industrial sector, then they have a high likelihood of achieving their goals. They do not appreciate the disparate personal loyalties that thread through most Chinese organizations, or customary mechanisms of decision-making that usually require agreement at multiple levels. In many organizations, someone quite low in the power structure, someone surely unknown to the foreigners, may maintain effective veto power. In one case, the CEO of a Chinese stateowned partner in a joint venture was, unbeknownst to the foreign partner, locked in a long-standing political struggle with his government boss, a personal battle that was common gossip around the organization. When the CEO was ousted, the government cut its support for the venture. The foreign partner never had a clue about what was obvious to everyone else. Using Powerful Tools


Kuhn on the Do’s and Don’ts
Q Conduct (quietly) analyses of those you’re dealing with. Assess political factions and alliances between individuals within government agencies, partners, suppliers, customers and competitors who can affect your business. Q Build relationships with key people, personal as well as professional. Discern their real objectives and understand their background—education, hometown, family, prior jobs, relationships and aspirations. Q Watch retirement ages. Do not rely on executives or officials approaching mandatory retirement (the age differs by rank and sector). Successors are likely to distance themselves from predecessors’ friends and partners. Q Cater to the most senior executive or official in every meeting. Chinese organizations are still built on strict hierarchies, and foreign executives must be sensitive to that. Q Align your interests with those of your Chinese partners and managers. Structure and organize your business to be as self-regulating as possible (as if there are neither legal contracts nor internal controls). Q Awareness is critical. Once politics are understood, companies can utilize reputable advisers—professionals with long experience in China whose track record and relationships can be independently assessed. Beware of charlatans claiming to be related to a government official. Q Seek natural allies. Identify institutions and individuals who will benefit from your success and seek to engage them. Similarly, identify any who will benefit from your failure and seek to neutralize them. Q Don’t neglect any level of government—central, provincial, local. All but the very largest businesses depend on the support of local and provincial government, and that support (or lack of hindrance) is often instrumental in corporate success. Q Don’t underestimate the importance of personal relationships. China is changing, but personal relationships (guanxi) continue to play a role in generating trust and assuring loyalty. Q Don’t overestimate the importance of personal relationships. In other words, don’t rely on any one person in a Chinese institution, government agency or state-owned business—not even the top person. People get promoted, demoted or transferred, sometimes suddenly. Q Don’t think that if the boss agrees, the deal is done. Organizations, particularly government agencies and state-owned enterprises, often have multiple lines of allegiances that even CEOs cannot overrule. Q Don’t assume that all Chinese are on the same side. Chinese people, like all people, are interested in their own private careers, opportunities and financial benefits. Q Don’t forget Chinese history, particularly as it may affect the attitudes and sensitivity of people who affect your business. Q Don’t depend on a change in law or regulations. Politics are complicated, mired in competing interests. Time estimates for government action can mean little. Q Don’t assume that a contract will protect you. China is serious about operating according to rule of law, but it is not there yet. Personal relationships and business importance come first; contracts come second.


olitics, used properly, can be a powerful tool for getting deals done and keeping joint ventures on track. In structuring one very large joint venture in China, a European manufacturing multinational found itself at a standstill after protracted negotiations. It decided to take a risk by inviting the most senior provincial leader—the Party secretary—to participate in the discussions. Involving the senior leader directly could be ill-advised because there’s typically no appeal of whatever decision he makes. However, the foreign company had done

CEO Magazine December 2005



its homework and knew that in the Party secretary’s previous position (in Guangdong province), he had shown great innovation. The gamble worked. To this day, the Party secretary speaks of this high-profile, successful deal as a source of personal pride. In a case that highlights the importance of personal relationships, a Japanese multinational sought entry into an industry requiring a special license by engaging a large state-owned conglomerate in a similar industry as its partner. After months of futility, the Japanese executives realized that although their Chinese partner was in their same industry, it was less powerful than the Chinese partner chosen by the Japanese company’s chief international rival. As a result their license application was being blocked. After doing sensitive political analysis (using politically savvy consultants), they were introduced to a much smaller Chinese company in a different industry, but one whose executives had deep personal relationships, going back to college, with key regulators. The Japanese then got the license. Obviously, foreigners cannot discern all the politics swirling around and within Chinese organizations, and indeed most foreign executives do business in China without ever appreciating it. What happens, though, is that the politically naive never understand why their deal is delayed or aborted—or how negotiations can be facilitated, problems averted and issues resolved. L
Robert Lawrence Kuhn, a senior adviser to Citigroup China, is the author of The Man Who Changed China: The Life and Legacy of Jiang Zemin (Random House, 2005), the best-selling book of the year in China.

26 December 2005


What M&A Bankers Would Rather I Not Write
Methods that manipulate CEOs to pay more


f you are a CEO, you were my target. For more than 10 years, I ran a firm whose business was to sell small- and medium-sized companies, and to sell them for the very highest possible prices. During that time, we closed over 1,200 M&A transactions, and when we sought prime candidates to pay the most money, corporate buyers were almost always

at the top of our hit lists. One business owner complained to me that we had not valued his company for “more than it was really worth.” He wasn’t being funny: My company had a reputation—among corporate buyers not always a good one—of asking and often getting high prices for its sell-side clients. How did our M&A dealmakers cajole or coerce tough-minded,

market-hardened CEOs to shell out top dollar, sometimes paying more for the business than it was “really worth”? What were our techniques? Our tricks? Though I may face disfellowship from the High Church of M&A Bankers, I’m going to reveal the M&A secrets of the inner sanctum: how top dealmakers manipulate CEOs to get them to pay too


much. Here’s what M&A bankers do to you. Discern the Decision Maker If you are the CEO of a corporate buyer, dealmakers want to find your V (vulnerable) spot. Many CEOs are motivated more by power than by money; they are more concerned about the reputation they build than about the returns they earn. At the risk of channeling Gordon Gekko (a fictional character in the movie Wall Street who became a symbol of corporate greed), I’d always like to have CEOs, the prospective purchasers on the other side of the table, who were more motivated by ego than by greed. Make Hockey Stick Projections When M&A bankers represent sellside clients, they are under no obligation, unlike district attorneys, to present their cases based on all the evidence. A banker’s job is to get the highest price possible; smart, aggressive advocacy is essential for a freemarket economy. Whatever M&A bankers present should be the truth, but not necessarily the whole truth. When they make forecasts, they do not even pretend to be unbiased. Sure, they try to be credible, but I can’t tell you how many of our financial projections looked like “hockey sticks”—three years of historical profits sliding steadily downward followed by five years of forecasted profits rising steadily upward. When M&A bankers provide projections, image them as criminal defense lawyers (or as masked goalies). Conjure Up Strategic Fit “Synergies” and “strategic fit” are the Holy Grail when bankers search for

buyers willing to pay an outlier price. If you come to believe that you can eliminate most of the overhead of an acquisition, folding the purchased business into your own business, then the target’s gross mar-

compensation” that the owner may pay to herself or to her family members. Some such recasting is legitimate when this compensation, to be charitable, is “above market,” but can the company really attract a

I’d always like to have prospective purchasers who were more motivated by ego than by greed.
gin can magically become its net margin. As a result, the price you are now willing to pay, assuming a similar multiple, escalates. The reason corporate buyers pay, on average, more than do private equity groups is that CEOs imagine synergies that may not exist. Worse, such ephemeral synergies may become stealthy anti-synergies, the kinds that appear to be real but transmogrify on full-scale implementation and become toxic to the entire company. One textile company bought a similar company assuming that the seller’s products could be manufactured in the acquirer’s underutilized plants. But since the product quality of the seller was higher than that of the acquirer, the products produced were inferior, customers fled, and the acquired business disintegrated. Recast Aggressively and Without Doubt This is a common technique, especially when selling private companies. In making projections, the idea is to eliminate expenses that the private business owner, who is motivated to reduce taxes, runs through the company. These include “excess quality CEO for the assumed lower compensation? M&A bankers may use the term “normalize,” which means to recast the financials by eliminating “onetime expenses” like unusual legal fees. Sure, companies do have “one-time expenses,” but they may have them all the time—each specific expense may indeed be “one time,” but the perennial existence of a neverending series of “one-time expenses” may be a “normal” part of the business! Make Presentations Elegant The more elegant the package, the more believable its contents. This sounds so contrived (or simpleminded) that no sophisticated CEO would fall for this. Wrong. Subtle psychological factors are at work and M&A bankers exploit them. After all, how could big, beautiful books from large, distinguished investment banks contain little, manipulating fibs? Seduce the CEO Nirvana for sell-side M&A bankers is when the acquiring CEO gets emotionally involved with the deal. “Has [X] fallen in love?” was a question we’d ask. We couldn’t make you, Mr. CEO, begin to court our client, but once you asked for the first date, we

CEO Magazine July/August 2006



knew how to puff your ego and make you feel great. Never Appear Anxious M&A bankers try to convince CEOs that their clients are not all that anxious to do the deal, that you the buyer want to buy more than the seller, the banker’s client, wants to sell—a state of affairs that is often not the case. Anxiousness, which we often felt, was always masked. Speed the Process “Time Kills Deals” is one of our adages. For sellers, especially when small companies sell to large companies, a quick close is almost always best. You never know what can happen, what disruption lies in store. Change and surprise do not normally bode well for sellers. New financials are more likely liability than asset. If actuals do not meet forecasts, the buyer puts downward pressure on price and negotiates final contract terms more stringently. Alternatively, if actuals beat forecasts—a happenstance that occurs, nonrandomly, well less than 50 percent of the time—it is usually more difficult for the seller to raise the price.

Induce CEOs to Bid Against Themselves This technique is a favorite that M&A bankers try to use regularly. Here’s how it works: 1) You are the only viable buyer. 2) The seller is anxious to unload. 3) You keep

es full of paper but rooms full of paper (especially on legal matters and assorted trivia). As a result, fundamental matters of business, like who will run the company after you make the current owners very rich, are not addressed.

We couldn’t make you, Mr. CEO, begin courting our client, but we knew how to puff your ego.
sweetening the deal. The banker opens this lock with two keys: first, the buyer has to love the deal; and second, the banker has to convince the buyer that a hot auction is going on. Turning both keys leaves the fingerprint of a good banker. Swamp Due Diligence Due diligence is when the buyer checks the seller to make sure that what seems to be true really is true. It’s nail-biting time for bankers who have calculated their fees and are waiting for the most opportune moment to submit their fee letter to their client. The deal has been negotiated; price and terms are set. Neither will get better during due diligence; they can only get worse. Every company has warts and it is the job of the M&A banker, representing the seller, to make them blur with the background. Not difficult to find, but difficult to see. Difficult to find? That would be improper and could be illegal. But difficult to see? That’s good representation. The idea is to so overwhelm the due diligence team of the acquiring company with paper—not boxGood bankers don’t hide anything (knowingly), certainly not anything asked directly. It’s not right and it’s not practical: Any evasion appears as a giant neon sign arrow pointing to a serious problem. The best M&A bankers are always forthcoming, always answering every question, and often doing so exhaustively with massive amounts of material. It is a statistical fact that most M&A transactions erode the value of the acquirer. M&A bankers do not like you to know this. They talk synergy and strategy, and get you feeling grand. But now you know what you’re up against. In the next issue, I’ll present the Principles that Protect CEOs from Paying Too Much. Don’t close your deal before then. L
Dr. Robert Lawrence Kuhn was president and co-owner of The Geneva Companies, the largest M&A firm representing privately owned, middle market companies (in terms of number of transactions closed); in 2001, he sold Geneva to Citigroup, where he is now senior adviser to the Investment Bank (China). Dr. Kuhn has a doctorate in anatomy/brain research and is the author of numerous books on dealmaking and corporate strategy.


22 July/August 2006


Inside M&A Banking
How do you protect a CEO from paying too much?
he relationship between CEOs and investment bankers is like that of medieval popes with Knights Templar, the famous order of warrior monks who raised their own revenue and were a power that the Church as much feared for its independence as relied upon for protection. M&A bankers present their profession as High Art, charging large fees for what seems quite modest work. When clients thought my M&A firm’s hourly charge outrageously high, I would smile sagely and tell the following story. A rich man brings a rough diamond to an old jeweler. The old jeweler studies the stone, positions his chisel, and, with a single sharp blow of his hammer, splits the stone with perfect cleavage, yielding four perfect gems. A week later, the rich man receives a bill for $100,000. Enraged, he calls the old jeweler: “Are you nuts? $100,000? You didn’t work an hour!” “I’m sorry,” responds the old jeweler, “I should have itemized my bill: For cutting the diamond, $10; for knowing where to cut the diamond, $99,990.” For investment bankers, relationships are key. The inside term is “coverage,” which means that bankers are assigned, usually by industry, to particular corporate clients and tasked to “cover” them. Translation? To



smother or metaphorically kidnap them if necessary, with the twin goals of eliciting some new fee-generating deal and preventing competing bankers from getting or staying too close. The fact is that despite all the front-page glory M&A transactions receive, most prove less lucrative than corporate buyers initially expect. This does not mean, of course, that successful acquisitions are not done. They occur all the time: Astute buyers pay high prices, turn their acquisitions into star performers and generate even higher returns. These rare—but not random—occurrences happen when perceptive buyers discern deep, untapped, even unrecognized opportunities, often involving operational leverage. In the first article of this two-part series (“What M&A Bankers Would Rather I Not Write,” July/August), I revealed the kinds of manipulations that investment bankers use to make CEOs pay too much for acquisitions. In this article, I explain the 10 principles by which CEOs can defend themselves against overpaying. Q Never Believe M&A Bankers. M&A bankers are not your friends. Not even those on your side, much less those on the other. This does not mean that what they tell you is knowingly false; indeed much of what they say is probably true. Most bankers, most of the time, tell the truth. The problem is twofold. First, what is true may not be the whole truth. Second, you don’t know when they’re not telling the truth—and sometimes neither do they. This does not mean that you, as a buyer, should not listen to bankers representing a seller. Listen hard, because the one thing you know for

sure is that whatever they tell you is crafted to get you to pay more. You’d be surprised how much you learn when you listen through this filter. For example, if bankers are stressing

Company. Never negotiate with only one target. Try to find another candidate you can explore acquiring as an alternative. Even if this other company is a stretch, there is

Never assume that any seller who gets rich on your money will stay around post close, or that if they stay around that they will work hard.
one thing, say, increasing net profits, why are they neglecting another, say, decreasing gross margins? Q Run Your Own Numbers. Never rely on numbers generated by the other side’s bankers. You shouldn’t even use their models. There is great benefit working de novo: Build your own models; start from first principles. Q Speak Directly With the Seller. Try to get time alone with the sellers, without bankers present—yours or theirs. Bankers will not like this. They fear that if buyers and sellers meet privately, this may diminish their perceived value, an unhealthy psychology when it comes time for M&A fees agreed to in principle to actually be paid. At my firm, we told our bankers never to allow our clients, the sellers, to be alone with the buyers. It was as if our clients were underage juveniles and potential buyers were sexual predators. If such an encounter occurred, we chastised our banker for dereliction of duty. When meeting with bankers, watch when they become nervous, switch subjects or interrupt their clients, the sellers. Each is a lead to follow. Q Negotiate With Another psychological benefit in diversifying your acquisition explorations. M&A bankers representing sellers seek as many buyers as reasonably possible; it’s part of their DNA. In my past life, we indoctrinated our seller clients and prospective clients with the mantra, “One Buyer is No Buyer.” Buyers should balance negotiating power by having acquisition options. Q Plan a Worst Case Scenario. The best case will take care of itself; the worst case is what CEOs should study. What are all the things that could go wrong with an intended acquisition? Think not only about usual issues, such as integration and operations, but also about unusual shocks, such as product liability and macroeconomic dislocations. Never assume that the future will mimic the past. There are two reasons for simulating depressing scenarios: It will make your company better able to respond if such circumstances occur; and it will dampen the euphoria that drives up prices—and investment-banking fees. Q Seek Anti-Synergies. Most corporate acquisitions are driven by searching for synergies, trying to materialize greater value by inte-

CEO Magazine September 2006



grating the acquired company with the acquiring company for a combined post-acquisition value larger than the sum of the separate preacquisition values. Clever buyers do the opposite. They seek synergies that are imagined but do not really exist, those that appear to be real but when attempted following the acquisition turn out to be illusory. I call these Anti-Synergies; they are the most insidious because you keep trying to make them work. One way to find these hidden corporate viruses in your pre-acquisition analysis is to assume that each synergy for which you are doing the deal will be defeated. Try to imagine ways in which these apparent synergies disappear and calculate the consequences of each disaster. The exercise will be revelatory.

Q Scrutinize Any Recasting. Watch for hidden traps when assessing “recasting,” or the normalization of revenues and expenses. Here are two: If the recasting substantially

owners. This difference colors every aspect of the deal. (There is also a difference between entrepreneurs, the founders of the business and subsequent generations of family owners.)

Never rely on numbers generated by the other side’s bankers. You shouldn’t even use their models. Build your own.
reduces owner compensation to supposed market rates, can you really get a first-rate CEO for that lower salary? And check whether all those “one-time” expenses, such as extraordinary legal expenses, that get normalized (i.e., eliminated in the recast) are actually expenditures that regularly occur. Q Don’t Bid Against Yourself. M&A bankers love this technique. Here’s the situation: 1. You are the only viable buyer; 2. the seller is anxious to unload his company; and 3. you keep sweetening the deal. That, we would say, is the fingerprint of a good banker. The antidote? Don’t be quick to raise your bid. Q Watch Those Who Get Rich. Never assume that any seller who gets rich on your money will stay around post close, or that if they stay that they will work hard, or that if they work hard they will continue to do so. Former owners may have every good intention, but reality sets in quickly. Newly rich people become fickle. Be especially careful when an entrepreneur is selling. Q Discern the Difference Between Owners and Managers. There are two kinds of companies that sell: those that are sold by owners who are active managers and those that are sold by managers representing passive Entrepreneur owners will do things that professional managers will not. They will react more emotionally, particularly regarding their employees (or certain employees). And you know what? They have earned the right to act that way. They created their company and struggled through hardships. If they now want to do something unusual, work with them. Finally, good investment bankers do bring a wealth of experience to deals. What’s more, because they expect to make a great amount of money and because they are profoundly concerned about their reputations, they will work intensely and creatively to make deals successful. The bottom line? There is nothing wrong with paying high investment banking fees as long as the product you get is a perfect gem. L
Dr. Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser to Citigroup Investment Banking. For 10 years he was president and co-owner of a middle market M&A firm that completed more than 1,200 M&A transactions. An intellectual with a doctorate in anatomy/brain research, he is also a television producer and the author of numerous books on strategy, creativity, science, business and finance.




“CEO Diseases”
catch may seem minor; these can be the virulent ones that morph stealthily into major corporate illnesses. Following are some CEO diseases and my prescriptions for treating them. Q Talking Too Much. You never learn by talking, but some CEOs imagine the world to be in desperate need of their constant wisdom. It is a rare subordinate who will risk stifling a CEO. case, running a firm doing M&A for medium-sized companies, I saw over 12 years perhaps 15,000 companies whose CEOs either wanted a valuation or decided to sell. I was like a doctor examining a very large number of particular patients: One comes to recognize the symptoms of their special diseases and comes to learn how best to treat them. Some of the “diseases” that CEOs

and how to treat them.

efore I became an investment banker, I studied to be a doctor. (I did a Ph.D. in anatomy/brain research at UCLA, never returned to medical school at Johns Hopkins, and 15 years later went to business school at MIT—but that’s another story.) An investment banker sees many businesses. In my


My Prescription: Track the percentage of time you speak compared to that of your subordinates. Yours should be a lot less. If you want to give a speech, call it that. Otherwise, control yourself; to be blunt, shut up. Q Goals Too Aggressive. Unrealistic goals “demotivate,” especially when compensation is involved. One CEO expected his plastics company to continue its 30 percent annual growth rate, not appreciating that with a larger base and a mature market their era of high growth had to end; the result discouraged managers. My Prescription: Set goals that have, say, a 35 to 45 percent likelihood of success. (Assume all works well but not extraordinarily well.) Goals should make your executives reach, but not too high. Q Power Building Trumps Wealth Building. CEOs tend to make decisions that enhance their scope and influence, even at the expense of increasing shareholder value—and this can be paradoxically true even when the CEO is a large shareholder. Sometimes, for effect, I put it this way: “I want a CEO whose greed exceeds his ego.” Sure, greed and ego are both unpleasant traits that are impolite to laud in public, but by privileging greed over ego I make the point that good CEOs should be motivated more by amassing wealth for their shareholders than by accreting empires for themselves. My Prescription: Take this psychological test. When making a big decision, ask yourself how it will build the market value of your firm. Then, immediately, shift the introspective question to how the deci-

sion will increase your personal power. It is the speed of your answer, not its substance, that I’m assessing here. If the speed of your internal answer to the second question, stressing personal power, exceeds that of your answer to the first question, stressing firm value, your ego may be exceeding your greed, and this should be a cause for concern. Q Not Respecting or Recognizing the Ideas of Others. In general, CEOs are egotistical. Highly successful almost by definition, many CEOs would seem to have every right to be self-impressed. However, when you hold the top spot, puffing yourself up at the expense of subordinates pollutes the organization. You benefit when your people are encouraged and empowered to generate novel ideas. My Prescription: Do the opposite of what comes naturally. In a situation where a good idea was really or largely your own, go out of your way to give credit to others. Q Seeing Only Summaries. A CEO should perceive the world as it truly is; if cluttered and chaotic, so be it. When information is always “high level,” predigested by staffers, a CEO may be perceiving an artificial world, a virtual reality as it were, of cleanly manicured lawns. Most CEOs have great instincts about their businesses, and such instincts should be nourished by raw data, like, for example, call reports of customers. My Prescription: You know the critical success factors of your business. Demand unsimplified information for these factors. And get it randomly so that your staff never knows where or when you will require raw data.

Q Don’t Fall in Love. Your social life is your own affair, but when you sit in the corner office, follow your head not your heart. Every business must have a strategic or financial purpose, and if a business happens to make you feel good that’s fine as long as your emotional attachment doesn’t interfere with your rational decision-making. CEOs are particularly vulnerable when making acquisitions—who knows why Ford bought Aston-Martin? My Prescription: Engage the executive most likely to call your favorite business babies “ugly.” You don’t have to agree, but you do have to listen. Also, when an executive challenges your favorite projects, praise her. Q Feeling Invincible: CEOs to be CEOs must have superb track records—some are almost unblemished—so they have a proclivity to imagine themselves as invulnerable. The natural corollary is a robust confidence, even if subconscious, that past success assures future success. I can’t tell you how many dozens of CEOs I’ve seen who refused to sell their companies at what would turn out to be, in hindsight, their peak market values, simply because they were convinced that tomorrow’s prospects would mimic yesterday’s triumphs. Looking backward and looking forward, a humble, healthy respect for the subtleties of serendipity is the beginning of wisdom. As the Proverbs say: “When pride cometh, then cometh shame” (11:2): “Pride goeth before destruction, and an haughty spirit before a fall“ (16:18). My Prescription: Even the best CEOs are lucky, and although I agree with the adage that “the smarter you are the luckier you get,”

CEO Magazine October/November 2006



the relationship is far from perfect. A sobering exercise is to analyze your career, looking for “luck.” Also, don’t believe your own hype. Q Personnel Too Similar. In some organizations, many of the senior executives look like the CEO. I mean this quite literally and it can be very funny. Not just obvious characteristics like gender and race, but also personal traits like size and stature, political philosophy, sporting interests, demeanor, even style of dress. In a globalized world where customers and suppliers may be very different kinds of people, it is not wise for the executives of a company to be homogenous, and hence, uniform in their thinking. My Prescription: Look at your key external relationships; target those who are markedly different from you, and ask yourself whether any of your top executives are like them. If not, hire some.


Q Generalizations. CEOs like to spot trends, spot trends, finding deep principles to predict and affect business. But beware of averages, which can deceive. For example, assume that, in a pharmaceutical company, prices are declining for one-half of the drugs and increasing for the other half; the fact that the average price of all drugs has remained steady is worse than meaningless information. Strategies for drugs that kept prices steady might not work at all with those whose prices were decreasing or increasing. My Prescription: Recognize that as the world has become progressively more narrowcasted in demand and supply, the power of generalization has become progressively more suspect. Q Not Asking the “Stupid” Question. You learn by asking. If you don’t understand something, you can’t make a proper decision. CEOs are not known for sporting small self-images, but if these top-floor egos are so fragile that they can never appear uninformed, CEOs will suffer strategic disadvantages. It is astounding how many “dumb” questions, well timed, might have prevented poor decisions. My Prescription: Go out of your way to ask stupid, dumb questions—even when you don’t need to—just to get your ego conditioned to how it feels. In this way, when you really need to ask that key question, your ego won’t immobilize your tongue. Q Falling for Current Trends. It’s easy to be sucked into the vortex

of current trends, whether macroscopic movements or management theories. Think Time Warner purchasing AOL at the height of the boom and destroying most of the acquirer’s value. My Prescription: Ask yourself whether you really believe the current trend or whether you are feeling socially coerced? Your instincts are often a better strategic guide than the hot stories in the latest business magazines. Q Falling for Contemporary Tricks. Every few years, it seems, there is some new fad with which CEOs must contend. In the 1960s, conglomerates grew by accretive acquisitions, seeking earnings per share growth and cyclical balance. In the 1980s, highly leveraged financings were the rage. And in virtually every decade, specious tax shelters and spurious tax gimmicks always pop up (e.g., trying to postpone huge capital gains taxes through tortuous and ultimately disallowed techniques). My Prescription: Most CEOs should be wary of cutting-edge finance and simply stay away from tax dodges. Playing near the foul line isn’t worth it. How to diagnose your own CEO diseases? You will have to be your own doctor since I do not make house calls. L
Dr. Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser to Citigroup Investment Banking. He is the author or editor of numerous books on business and finance; his latest is China’s Banking and Financial Markets—The Official Report [of the Chinese government], forthcoming from John Wiley & Sons.


and Its Discontents

How can CEOs of multinational companies skirt the hurdles of globalization? Follow these four policies.


.S. President George W. Bush’s grand vision is of a Western-style “Democracy World,” where all countries have a similar system of selecting their leaders in a majority-rule, one-person-one-vote, free election. Chinese President Hu Jintao’s grand vision is of an Eastern-style “Harmonious World,” where all nations live together in mutual respect and peace, even though they have and maintain different systems of government. The problem with President Bush’s grand vision is what happens when majority rule initiates or instigates more, not less, belligerent and violent acts against perceived foes, such as rival ethnic or religious groups, whether in foreign countries or within their own populations. The problem with President Hu’s grand vision is what happens when certain countries do


26 December 2006


not respect their neighbors and will not tolerate peace with them. To most CEOs, that globalization is efficient economics is obvious; that it embeds psycho-political intricacies is not. Human beings are rarely rational actors; what they do may not be in their own best interests. Why do poorer people, say, in America or in China, feel more disaffected today than they did 30 years ago, even though their standards of living are much higher now? And why do people in developing countries, by and large, still honor their despotic leaders who perpetrate, instigate or allow monumental violations of common decency? To appreciate the political psychology of globalization, consider two overarching principles of human emotions: “feelings are relative” and “pride trumps comfort.” Feelings are Relative Human cognition is such that how we feel is almost always a function of short-term comparisons. In assessing our current status our mental methodology is to use relative, not absolute, standards, and the grounding of these relative standards is usually recent circumstances. If you are worth $10 million and stocks plummet so that your worth is reduced to $9 million, you are depressed, whereas if you are destitute and find a modest job, you are ecstatic. Now assume that both situations describe you—you are the same person just shifted in time—so that your rich self exists today and destitute self 20 years prior. Although you have intellectual appreciation of your continuing good fortune—to be worth the $9 million is certainly wildly better than that old modest job—you still

cannot help but feel dejected today because your previous circumstance of destitution has no affective impact on your present emotions. Similarly, if you are sick with a terminal illness and told that a new drug might extend your life for two years, you are happy,

pendence movements bring about economic hardships, people are usually willing to accept sacrifices in order to gain their freedom from foreigners. When national leaders restore pride to their people, particularly those who had been humiliated

Pride is a powerful and persistent human trait; but it can also warp common behaviors and priorities.
but if you then cut your finger while cooking you are unhappy. The application to economic perceptions is direct. When the Chinese people were all financially equal 30 years ago—all equally poor—envy of lifestyles and material possessions did not exist. Today, while all Chinese are dramatically better off, the fact that some are now wealthy while others are not is increasing social strains. Blame the ubiquitous media, which highlight disparities, exaggerating them too, by skewing to glamour and elegance and by glorifying physical possessions and sybaritic behaviors. Today in the Muslim world, and soon across Africa, television and the Internet make social and economic differences with the developed world stark and disturbing. One should not be surprised that attitudes of poor people are deteriorating and levels of their anger are rising. Pride Trumps Comfort Pride is a powerful and persistent human trait; it can motivate great acts of artistry or bravery, but it can also warp common behaviors and priorities. When struggles of national indeby invading oppressors, they are given wide latitude for error. Witness the Chinese people’s continuing appreciation (though no longer adoration) of Mao Zedong, who enabled the Chinese people to “stand up” in the world and regain their long-lost dignity, even though, not much later, he was responsible for divisive mass political movements, including the devastating Cultural Revolution, in which millions suffered and many died. When multinational corporations invest in developing countries they almost always bring economic gain to the local population, yet their presence is not always welcomed. To some, foreign factories are a constant reminder of their own secondary status or subservient place in the world and no economic benefit is worth such anguishing and continuing dishonor. This endemic and enduring psychology presents a challenge for multinationals as they plan global strategies. Prescriptive Policies Recognizing these psycho-political problems, what can multinationals do? Corporate executives should sensitize themselves to needs of local people for whom disparities in economic status can be psychologically

CEO Magazine December 2006



devastating. Consider an analogous problem that faced Chinese President Hu Jintao when he took leadership and faced the growing problem of multiple disparities between sectors of Chinese society. As a priority of his administration, he adopted a “close-to-the-people” policy that seeks to construct a “Harmonious Society” through a “Scientific Development Perspective,” balancing social and environment factors with pure economic growth. Though disparities remain severe, President Hu’s resultant popularity in China facilitates his change-making policies. But to be effective, a leader’s philosophy can rarely be of recent mintage. Expediency is a graceless and obvious motivation. Policies work best when a leader’s philosophy is founded on his or her long-standing beliefs or personality. When President Hu was a young official in west China’s poor Gansu province in the 1970s, he was close to the people. I spoke with a former subordinate of Hu’s who told me how he had accidentally burst into his boss’s office. Hu, though at first startled, invited him to sit and talk for an hour. Hu is a people person who works to turn crisis into opportunity. Is there prescriptive advice we can draw from a psycho-political perspective? What can CEOs of global companies do to ameliorate the dangers of globalization? I have four suggestions: Q Steady Progress. Seek managed, modulated improvement rather than unexpected big spurts, particularly in wages or working conditions. Even if the “big-spurt strategy” would produce better absolute results over time, people will not be as happy in the gap periods between these spurts, when there will seem to be stagnation.

Q Local Hires. Use local managers whenever possible, and develop a systematic method of training and promoting them. Limit ex-pat executives as much as possible. When this is not practical at the beginning of a foreign operation, evince progress by increas-

honesty may go against the grain of leaders, who by nature tend to be guarded and controlling. The importance of transparency in a media-intense, tightly wired world cannot be overstated. A case in point is China’s financial and banking mar-

CEOs must vote with their bodies, not only with their mouths, and travel to countries that are important to their firms... superficial visits wear thin.
ing the number and seniority of local leaders. Sony, for example, stresses local hires, even selecting a nonJapanese CEO. Q Respect. CEOs must vote with their bodies, not only with their mouths, and travel to countries that are important to their firms; words alone are not sufficient and superficial visits wear thin. Trips should be regular and substantive, including meetings with local managers and staff, as well as government officials. Some language learning doesn’t hurt either, if only to demonstrate an effort to appreciate the culture. Four of the most successful firms in China are Goldman Sachs, AIG, Morgan Stanley and Citigroup; for years, their senior executives, Henry Paulson, Maurice Greenberg, John Mack and Chuck Prince/Bob Rubin, respectively, traveled to China multiple times every year. Q Transparency. People are naturally suspicious and secrecy feeds their fears. Rumors can be so rootless and virulent that they are hard to source and impossible to stop. Whenever operating internationally, companies—like countries—should learn to be more open, even though overt kets, which are critical for the country’s economic development and which have been legitimately criticized in the foreign press for lack of transparency, credit culture, controls, and the like. If the Chinese government would react by seeking to further control bad news, it would just feed the fire of international doubt. Part of the long-term solution is for China to enable its best financial scholars to assess and analyze the industry, and then to publish their findings publicly, in Chinese for domestic consumption and in English for the international community. Globalization is an inevitable, inexorable trend. Getting it right means understanding the psychology of people as much as the economics of productivity. L
Dr. Robert Lawrence Kuhn is an international investment banker and corporate strategist, adviser to the Chinese government, and senior adviser at Citigroup. The author or editor of more than 25 books, he is editor-in-chief of China’s Banking and Financial Markets: The Official Report, (John Wiley).

28 December 2006


Learn from the Stars
These eight central ideas of modern cosmology can be applied to modern companies.


rand Thinking” makes great companies. I criticize CEOs when they don’t see its importance, and am frustrated when they do see its importance but don’t make time for its development. CEOs tell me that they are beset with more pressing issues—an excuse that is real, but not legitimate. There is nothing more vital for making companies more valuable, and hence for building the wealth of their shareholders, than Grand Thinking.

Grand Thinking encompasses those visions and strategies that have high impact. Grand Thinking includes thinking big, but it is grander still. Now, how to stimulate Grand Thinking? Of Cosmologies and Companies I have my own recipe for energizing CEOs to Think Grandly, an approach that could be described as, well, “far out.” I have always been fascinated by cosmology, the study of the origins, structure and ends of the

entire universe, whose extraordinary secrets, discovered by insight and precision, have turned speculative philosophy into exhilarating science. The visionary kind of thinking that cosmologists use to discern what really happened billions of years ago in time and billions of light years away is perhaps the grandest kind of thinking that human beings can ever do. Further, by studying the past history of the universe, cosmologists can make breathtaking predictions about its future prospects. My point? The same thinking can be

KINO BROD/IMAGES.COM January/February 2007

applied to the more earthly endeavors of managing organizations. It may seem absurd to suggest that cosmologies and companies have anything in common. But there is something called “general systems theory,” which looks for similar mechanisms and common causes across widely diverse platforms. It is the idea that overarching principles are at work at all places and levels in the world, and it seeks deep insights by comparing and intersecting disparate fields. So here are some of the central ideas of modern cosmologists studying the universe, along with their “general systems theory” applications to modern companies. Think Big—Really Big Cosmology: About a century ago, scientists thought the entire universe was about 3,600 light years in size and that our galaxy, the Milky Way, was the totality of reality. Today, the observable universe has a radius of 13.7 billion light years and is inhabited by more than 100 billion galaxies, many hosting more than 100 billion stars. What’s more, most cosmologists are convinced that even more galaxies and stars, far, far more, lie beyond—even, as strange as it sounds, multiple universes (which cosmologists call a “multiverse”). Company: Who would have thought that Lakshmi Mittal, who in 1989 acquired the Iron & Steel Company of Trinidad & Tobago, would control the largest steel company in the world by 2006? Don’t Settle for Speculation Cosmology: From the dawn of history, human beings have wondered about the origin of the universe.

Although many fascinating ideas were put forth by scientists, philosophers and theologians, no one imagined that data and measurement could ever distinguish between opposing theories. After all, scientists can hardly conduct controlled experiments on the origin of the universe. Yet, in just two decades, even cosmologists have been amazed at how their field has become an experimental science with streams of hard data from the very early universe, even from the Big Bang itself, flowing into their telescopes and satellites. Today, cosmic microwave background radiation, which fills the entire universe and is measured meticulously by satellite-borne instrumentation, is believed to be a relic of its Big Bang origin. Company: For CEOs to speculate is not wrong. What is wrong is when CEOs assume that they can never go beyond speculation. For example, business instincts may suggest developing one product over others. But CEOs should corroborate instinct by amassing real data, such as from focus groups of target customers. Forget Theory Cosmology: Aligning theoretical predictions with experimental results is the core of the scientific method. Yet regarding the vacuum energy of “empty” space, which opposes the inward pull of gravity in balancing the expansion of the universe (dubbed the “cosmological constant” by Albert Einstein), the predictions of the best physicists using the best theories miss the mark by 120 orders of magnitude—a mismatch between theory and reality that is the worst in the history of science. Company: When facing a contradic-

tion between the theory of what should happen and the reality of what is happening, a CEO should come to two conclusions: first, reality must be believed; second, something must be wrong with the theory. Forget Practice Cosmology: When astronomers aimed the Hubble Space Telescope at a minuscule region of space— smaller than a grain of sand held at arm’s length—and took 800 exposures during 400 orbits, they were confident that although the space appeared sparsely populated there was something significant to be found. The resulting photograph showed some 10,000 ultra-faint galaxies, never before seen, as they had been developing billions of years earlier. Company: A CEO who really understands the business can override what may not be apparent to others less knowledgeable or insightful so as to formulate vital new strategies. When Lou Gerstner took the reigns of IBM in 1993, who would have predicted his remarkable success in transforming IBM from a hardware company manufacturing Big Iron into the leading enterprise software and services company? See the Unseen Cosmology: Scientists now postulate an awesome amalgam of multiple universes (the “multiverse”), perhaps stupendous numbers of universes, perhaps infinite numbers of universes! The fact that these putative other universes are forever impossible to observe does not dampen the belief that they really exist. Company: Steve Jobs saw the unseen when he put Apple, an also-ran in

CEO Magazine January/February 2007



computers with a market share of about five percent, into iPods with a market share of over 70 percent. Solve Many Problems with One Solution Cosmology: For much of the 20th century, cosmologists seeking to understand the universe struggled with several vexing problems. For example, how could the universe be so uniform on large scales—appearing the same in all directions— without any possibility for interaction between its widely separated parts? Then in 1981, an obscure physicist named Alan Guth proposed that the early universe underwent a short phase of exponential growth called “Inflation” (of the cosmic kind). This remarkable theory, which has been confirmed by independent observations, solved all the problems at once. Company: When CEOs are confronted with multiple problems, even if very different, they might look for possible links (especially if they have arisen within a given timeframe) and a simultaneous solution. In a case of multiple disturbances, the common cause was traced to a senior executive whose incompetent hand had touched and triggered each of them. Changing the executive, one simple solution, resolved all of the complicated problems. Prepare for Shock Cosmology: For decades, scientists assumed that although the universe was expanding (due to the outwardpushing force of the Big Bang), this expansion was slowing down (due to the inward-pulling force of gravity) and might eventually reverse so that the universe would thereafter con-

tract. In 1998, observations designed to demonstrate that the expansion of the universe was in fact slowing down revealed, shockingly, precisely the opposite. The expansion of the universe was in reality speeding up. The only way to account for this astounding finding was with a new force called “dark energy,” literally

years into the future (proton decay) or even 10100 (nothing existing but dispersed radiation). Company: It may seem that thinking about the far future is of little worth, especially to companies that report profits quarterly (or yearly), but such an assumption would be myopic and mistaken. When one

Good CEOs are willing to accept data that contradicts their worldview, no matter how much money or ego they have invested in the previous paradigm.
the vacuum energy of “empty” space that dominated the universe. Company: Good CEOs are willing to accept data that contradicts their worldview, no matter how much money or ego they have invested in the previous paradigm. Even if realworld data doesn’t seem to make sense, if the data is real—and of course the more it deviates from expectation the more it should be checked and rechecked—then new ways of thinking must be considered. The best CEOs always expect the unexpected. Think Far Future Cosmology: You think you worry about the future? Scientists contemplating the future of the earth talk about what happens when our sun “leaves the main sequence” in four to five billion years and swallows the earth in its swelling fire. Those contemplating the future of the universe generally begin with events hundreds of billions of years into the future and are quite comfortable speaking of what might happen 1033 can speculate intelligently about the far future, whether of the cosmos or of companies, it often enhances one’s ability to see more deeply into the immediate future. Trying to imagine consumer electronics in 100 years might help companies plan better products in 10 years. Corporate leadership in today’s dynamic, globalized economy demands Grand Thinking. To stimulate and energize it, contemplate the cosmos. L
Dr. Robert Lawrence Kuhn is an international investment banker and corporate strategist, adviser to the Chinese government and senior adviser at Citigroup. The author or editor of more than 25 books on business, finance and science, he is editor in chief of China’s Banking and Financial Markets: The Official Report and host of the PBS series on the meaning of state-ofthe-art science, Closer To Truth— He has a Ph.D. in anatomy/brain research (UCLA) and an M.S. in management (MIT).

28 January/February 2007


What Business Leaders Can Learn from Politicians Mistakes

he irony about China, a senior Chinese leader told me recently, is that “when for more than a century foreigners thought we were so weak, we weren’t really so weak, and now when foreigners think we are so strong, we aren’t really so strong.” When American and Chinese political leaders interact, divergent perceptions are common. Ameri-

Talking to China T
cans focus on their huge trade imbalances with China, Chinese fret about foreign acquisitions of their companies. Americans envision China as a voracious economic competitor and growing military power; Chinese assert that more than half of its exports—and about 85 percent of high-tech exports— come from foreign-funded firms, and that it needs a strong military to protect its homeland. AmeriPHOTO CREDIT HERE

20 March 2007

cans see China awash with cash, holding more than $1 trillion in reserves; Chinese see their vast, poor rural population, 300 million of whom must be moved to urban areas by 2020. Divergent perceptions are dangerous. In 1999, during NATO’s military campaign against ethnic cleansing in Yugoslavia, an American aircraft accidentally bombed the Chinese embassy in Belgrade. When the Chinese government bused college students across Beijing to the U.S. Embassy to protest violently, American politicians assumed that Chinese leaders orchestrated the demonstrations. In truth, the Chinese leaders worried that if protesting students marched through the city to the U.S. Embassy their ranks would swell with workers and common citizens. So the Chinese leaders determined that busing the students would be the best way to contain, and not exacerbate, the volatile situation—precisely the opposite of what American politicians assumed. To no small degree, the peace and prosperity of the 21st century depends on the bilateral relations between China and America. Good communications are vital for political leaders, and it is no less so for business leaders. Let’s explore both. Political Communications ffective political communications require honesty and clarity. The place to start is for each side to explain how it truly feels about the other side. Being frank is often uncomfortable, but if both sides are sincerely interested in reaching agreement, it is often the optimum approach.


Most Chinese believe that America seeks to “contain China” and thwart its historic resurgence as a great nation. This is the real reason, they say, that America supports Taiwan, not as a worthy democracy but as an “unsinkable aircraft carrier” by which America can assert dominance over China and keep the motherland divided. Chinese see America encircling them by military alliances with Japan, Taiwan and perhaps India; forcing open their markets to control China’s industries and exploit Chinese consumers; and by introducing Western culture to erode China’s independence and sovereignty. Most Americans believe that China is a determined, monolithic competitor whose intentions appear threatening. They view China as acting solely in its own interests, even to the detriment of the international order—such as by selling weapons to Iran and sustaining North Korea’s intransigence. Americans see China as an economic predator that keeps its currency artificially low to boost exports; as a repressed society that tramples human rights to maintain Communist Party control; and as a looming military force that harbors expansionist ambitions. The Chinese government does not deny that its policies benefit its own people—any legitimate government, they say, should. With 1.4 billion people, the Chinese obsession with stability has been seared into the collective consciousness by a catastrophic political legacy of roiling mass movements that decimated a generation and, nearly, the country. They see China’s stability and development as essential for world stability and development.

Disturb the former, they warn, and you disrupt the latter. America and China should respect each other’s thinking. Chinese should appreciate that Americans are genuinely troubled by China’s apparent lack of democracy, human rights violations, support of dangerous regimes and huge trade surpluses; this is why China’s continuing military build-up is so worrying. Americans should appreciate that China’s stability requires a different developmental path due to its different history and culture and to its massive population, and that China’s resurgence as a great nation and responsible power is good for the world. To understand China today one must understand President Hu Jintao’s overarching vision, summarized by three slogans: “Harmonious Society” and “Scientific Development Perspective” domestically and “Peaceful Development” internationally. Harmonious Society calls for fairness and equity across China’s diverse populations and geographies and embeds careful social, legal and political reforms. Scientific Development Perspective applies optimized sets of solutions to arrays of economic, social and environmental problems seeking to rectify economic imbalances, increase energy conservation, reduce pollution, achieve sustainable development and prioritize innovation. Peaceful Development conveys that no matter how strong China becomes, it will never threaten its neighbors. Styles of Communication hinese and Americans, by tradition and culture, express subtle differences in styles of communication. A senior


CEO Magazine March 2007



Chinese official contrasted four general ways of thinking that cause political misperceptions and which affect all instances of ChineseAmerican communications, commercial as well as political. Q Chinese are more indirect and cyclical, whereas Americans are more

deprecating banter or smile in serious situations. As such, Chinese leaders may appear more rigid, inflexible, impersonal, doctrinaire and unapproachable than they really are. The dour countenances of many Chinese officials may well be the residual conditioned response to

Americans see China awash with cash, holding more then $1 trillion in reserves; Chinese see their vast, poor rural population, 300 million of whom must be moved to urban areas by 2020.
direct and linear. Thus, Americans may see Chinese as evasive and deceitful, whereas Chinese may see Americans as rude and arrogant. Q Chinese use more abstract forms and general terms, focusing on principles and theories, whereas Americans use more concrete forms and specific terms, focusing on practice and precedents. Thus, Americans may see Chinese as programmed and robotic, whereas Chinese may see Americans as pompous. (For example, the American media tends to mock China’s political slogans— when it considers them at all—as empty jargon, rather than consider the insight into political priorities they offer.) Q Chinese stress the collective more than they do the individual, believing that the needs of human society exceed in importance the ideals of human rights; Americans prefer the reverse. Q When dealing with weighty matters, Chinese are not given to humor, nor do they engage in selfa past system of fear-driven governance where a single mistake could cost an official his job, if not his freedom. Under President Hu, there is more tolerance: mistakes don’t end careers, risks can be taken. Business Communications et’s consider each of these contrasting styles of communication, and construct general principles that American businesspeople can apply when dealing with executives of Chinese companies, particularly those of state-owned enterprises. (At private Chinese companies, especially high-tech firms, there is more similarity with Western ways and these principles are less applicable.) Q Be patient in negotiations. Do not assume the Chinese side is being deliberately opaque. If you must press for answers or resolution, do so with sensitivity and respect. Q Learn to appreciate the purpose of general principles and why


the recitation of these principles may be repeated more than you think necessary; do not move too aggressively to nail down specifics. Q Recognize that as China adopts elements of democracy, collective decision-making in many large Chinese enterprises has become more common. Senior management is now less able to dictate decisions than their American counterparts. Chinese business leaders must engage their own middle management in sometimeslaborious internal discussions and negotiations before finalizing an important transaction. This means that foreign business people must work with many managers in the hierarchy, even those down the line in the chain of command. Q Respect the formality of meetings; maintain professional decorum. Business success in China is determined by multiple factors and difficult enough under ideal conditions. Don’t manufacture additional stumbling blocks with poor communications. Although political leaders often seem genetically predisposed to have divergent perceptions, business leaders should rise above such instincts and avoid such errors. L
Robert Lawrence Kuhn, senior advisor at Citigroup and senior partner of IMG China, has worked with the Chinese government for 18 years on economic policy and business issues. He is co-editor-in-chief of China’s Banking and Financial Markets: The Internal Report of the Chinese Government and author of The Man Who Changed China: The Life and Legacy of Jiang Zemin, the best-selling book of the year in China in 2005.

22 March 2007

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