Advantages and challenges

Over the past few decades, many European corporations have expanded their operations into the Chinese market by establishing local subsidiaries in China. Initially, it was a common practice for these multinational corporations (MNCs) to deploy expatriate managers from their overseas headquarters (HQ) to manage the operations of Chinese subsidiaries. This approach was driven by several compelling reasons, including the transfer of specialised knowledge from HQ to the subsidiaries, alignment of corporate culture and supervision of subsidiary activities. However, in recent years, especially since the COVID-19 pandemic, a growing trend for MNCs operating in China to employ local managers has emerged.

In this article, Jeanette Yu and Sophy Wang of CMS Legal China explore the advantages and challenges of localising management and the legal considerations that MNCs must address when adopting this approach.

What contributes to the localisation of management in Chinese subsidiaries?

In recent years, especially since the pandemic, foreign national managers have become reluctant to come and work in China. Meanwhile, with the implementation of China’s opening-up policies over the past 40 years, the Chinese labour market has seen local talent thrive, many of whom have acquired overseas study and/or work experience with MNCs and insights into modern management knowledge and practices. As a result, it has become easier for MNCs to find professional, skilled and experienced managers for their Chinese subsidiaries in the local market. Local managers have the following advantages in managing Chinese subsidiaries:

1. Local market understanding: The Chinese market is vast and complex, with unique cultural, linguistic and regulatory nuances. Local managers possess in-depth knowledge of the local market, local business practices and consumer behaviour, empowering them to make more informed business decisions.

2. Faster adaptation: Local managers have advantages in terms of fluency in Mandarin and cultural understanding, which enable them to effectively bridge communication gaps and cultivate stronger relationships with Chinese employees, clients and stakeholders. They are often more aware of market trends and can quickly make adjustments based on the Chinese business environment, which will help local subsidiaries to adapt faster and succeed in the market.

3. Networking: Building robust local connections and relationships is pivotal to business success in China. Local managers play a key role in networking with government officials, partners, clients and suppliers, which can open doors to valuable opportunities and insights in the local business landscape.

What challenges may MNCs face when localising management?

While the localisation of management in Chinese subsidiaries offers benefits, it also brings a certain amount of challenges:

1. Legal complexity: Unlike many other countries, in China, MNCs must set up employment contracts with local management, who enjoy the same legal protection rights as those of non-management employees. MNCs must establish legally compliant employment contracts for local managers, specifying employment terms, work position, working hours, wages, leave and rest, and social security, in accordance with local laws. In addition, MNCs may agree with local managers on their work duties, confidentiality obligations and non-competition obligations, which will be specified in the employment contracts. As with non-management employees, local management staff contracts can only be terminated if one of a (very limited) number of statutory termination reasons applies. In practice, if local managers’ performances are not satisfactory, termination of their employment contracts will be difficult, not only because of stringent Chinese labour laws, which prioritise employee protection, but also because local managers normally know the operation of the company well and control company seals and corporate documents. Therefore, termination of a local manager’ s employment contract may bring risks to the normal business operations of MNCs.

2. Compliance risks: Local managers may lack sufficient understanding or have varying interpretations on business ethics and compliance standards required and promoted by MNCs. Without a clear alignment on these matters between MNCs and local managers, and an effective oversight mechanism to enforce limitations on the authority of local managers, there is increased risk of white-collar misconduct, unauthorised/ over-authorisation behaviours, and violations of corporate ethics. This could potentially result in external legal risks/issues and reputational damage for MNCs.

3. Cross-cultural management: Although local managers are familiar with Chinese culture and business environment, they may have limited international exposure and insufficient knowledge of overseas culture and practice, which can be a drawback for companies aiming for operations with a more global perspective. Local managers may encounter challenges when managing international teams and coordinating with global HQ.

How should MNCs prepare for and address legal challenges when localising?

When MNCs decide to localise management in their Chinese subsidiaries, they need to consider and make some legal and organisational preparations to ensure compliance and smooth operations. Here are some aspects which would be of use for MNCs in this regard:

1. Comprehensive employment contracts: One of the fundamental steps is to establish employment contracts that comply with local labour laws and regulations, and contain necessary provisions for local managers. Many companies adopt the same simple standard employment contracts for local managers as they do for non-management local employees. However, such contracts lack clauses specifically needed for local managers, such as detailed work duties, comprehensive remuneration structure, a longer notice period for termination of contract, and clauses relating to code of conduct such as secondary occupation, conflict of interest and non-competition. Therefore, the first step for MNCs should be to develop comprehensive employment contracts for local managers that both comply with Chinese labour laws and regulations and meet MNCs’ global personnel management requirements. Furthermore, if a termination is unavoidable, MNCs may wish to prepare in advance, make an action plan in order to handle the termination properly and ensure a smooth handover of work.

2. Employee handbook and code of conduct: As with non-management employees, local managers are also subject to a firm’s employee handbook and code of conduct. Therefore, MNCs may wish to develop a comprehensive employee handbook and code of conduct specifically for their Chinese subsidiaries. These documents can provide guidance on corporation values, ethical behaviour, professional conduct, labour discipline management, and other details. They can help in setting clear expectations for local managers’ behaviour and actions, fostering a culture of transparency and integrity. In addition, these policies can serve as legal basis for Chinese subsidiaries to impose disciplinary actions on local managers who have committed violations.

3. Oversight mechanisms: Effective oversight mechanisms should be put in place to monitor the activities of local managers and ensure compliance with both local and global corporate standards. This may involve creating local compliance teams, conducting regular audits and implementing a system for reporting and addressing compliance concerns. Such mechanisms can help MNCs identify and rectify issues in a timely manner, reducing the risk of legal and reputational problems.

4. Limitations on authority: In addition, to avoid ultra vires acts, or acts beyond local managers’ scope of authorisation, MNCs are advised to set up clear rules and limitations on the authority and powers of local managers in per forming work duties. For example, MNCs may set certain limitations on the value or type of contracts that local managers a re authorised to sign, set budgetary limitations on the economic decisions made by local managers, implement ‘four-eyes principles’ or ‘double approval’ systems for key matters, and so on. These rules should be documented in writing and incorporated into the employment contracts of local managers.

5. Compliance training: To promote a culture of compliance and ethics, MNCs may wish to establish training programmes for local managers of Chinese subsidiaries. This training may cover topics such as anti-corruption, avoidance of conflict of interests, and other legal and ethical issues relevant to the local business environment. Regular compliance training sessions will help in raising awareness and ensuring that local managers are well-informed about their legal obligations.

Conclusion

The localisation of management in Chinese subsidiaries is driven by the need for local expertise, cost-efficiencies and market access. MNCs are increasingly recognising the advantages of this strategy. However, localisation also presents legal considerations and challenges that must be carefully addressed by MNCs, including compliance with local labour laws, dealing with potential risks of misconduct by local managers, establishing necessary management and oversight policies, among others. As an old Chinese saying goes, if you want to do a good job, you must first sharpen your tools. If the decision is made to localise the management of Chinese subsidiaries, MNCs should prepare corresponding policies, documentation and mechanisms for dealing with the potential legal challenges.

Jeanette Yu is partner, and head of Employment and Pensions, at CMS Legal China, based at their Shanghai office. She has more than 20 years’ experience in providing legal advice for international companies on Chinese labour law and compliance management issues. Since 2017, Jeanette has also been acting as the national chair/vice chair of the Human Resources Working Group of the European Chamber. Sophy Wang is a senior associate on Ms Yu’ s employment team at CMS Legal China.