Part 1: The GSK China scandal in 2013

1, GSK and GSK China

GlaxoSmithKline plc (GSK) is a British multinational pharmaceutical, biologics, vaccines and consumer healthcare company after the merger of Glaxo Welcome plc and SmithKline Beecham plc, both of which were more than 100 years old, in 2000. As the world’s fourth-largest pharmaceutical company, GSK has a comprehensive portfolio of products from products for major disease areas to products for consumer healthcare. In 2012, its revenue is £26.431 billion and its net income is£4.744 billion. As a public listed company, it is mainly listed in London Stock Exchange and in 2012, its market capitalization of £74.8 billion, which made it to one of the top 5 largest company listed in London Stock Exchange.[1]

GSK firstly entered in China in 1908, 4 years before Qing Dynasty was overthrow by Xinhai Revolution but was forced to leave China in 1949 after Republic of China was replaced by People’s Republic of China. In 1984, GSK entered into China again through joint venture with local Chinese firms. In 2000, SmithKline Beecham (China) Investment Co., Ltd. was renamed GlaxoSmithKline (China) Investment Co., Ltd after merger in 2000, with a total investment exceeding US$500 million[2] and more than 5000 employee[3]. GSK has 8 operation companies in China mainland and it has office in Hong Kong. According to Reuters, “Although Britain’s biggest drug maker generates less than 4 percent of its sales in China, it has invested heavily in the country, where it employs 7,000 staff and has five factories and a research centre.” [4]

2, What’s the scandal about and how it happened

In July 2013, GSK China was accused of accepting cash rake-offs and paying bribes to Chinese officials and doctors by Chinese authority. According polices investigating the GSK case, it used “at least four travel agencies to funnel more than 3 billion Yuan ($489 million) since 2007”[1] which was used to pay the bribe to officials, doctors and hospitals by senior managers and sales of GSK China. Besides, the sexual bribery was also an approach frequently used by GSK China to maintain business contacts, according to China Daily.

The main purpose is to boom the drug price to get high profit. In recent years, GSK China maintained a 20% annual revenue increase. “The bribes could account for at least 20 percent of the prices of medicines”, said by one insider lawyers. In addition, GSK China also wanted to reduce government supervision and regulation through bribery. However, the effects were not only limited to above because GSK China was also a very big player in Chinese pharmaceutical market. It would also destroy market competition and erode industry integrity and public trust. In recent years, customers were always complaining the surprisingly high price of drug in market.

After this investigation, 4 senior managers of GSK China were arrested by polices. Along with other head counts changes for legal or illegal causes, there were few senior manager left in GSK China. But the negative influence to GSK China was not only limited to human resources.

3, The financial influence of this scandal to GSK

The direct outcome of GSK China’s bribery scandal is the decrease of its sale in China which is not out of expectation of analyst. Before scandal, the sales of GSK products in China boomed with a 14% annual growth rate. Because of the scandal’s destructive hit to GSK’s marketing and reputation in China, its sales in Chinese market in the third quarter of 2013 was expected to decreased 61 percent to 77 million pounds. Deutsche Bank analysts describes the fall of sales in China as dire, according to Reuters, and its global EPS also decreased by 2% by 1330 GMT[1].GSK chief executive Andrew Witty said on October 23 that “If not for China, sales in the region(Asia-Pacific region) in the third quarter would have grown 5 per cent”.

Due to the fierce competition of Chinese Pharmaceutical market, the market left by GSK was quickly taken by its competitors. For example, Roche and Novartis, two Swiss Pharmaceutical giants also active in Chinese market, experienced growth of sales in Chinese market. Certainly, GSK is not the only multinational pharmaceutical companies faced investigation in China. After this GSK scandal, the traditional marketing model (using seminars and sponsored trips for doctors to boost sales[2]) of multinational pharmaceutical companies in China would be challenged and many of them would be forced to find alternative marketing model.

Part 2: What’s the scandal means in CSR?

1, Possible reasons of GSK’s bribery in China

Why is it possible for the surprisingly high price of foreign drug in Chinese market? One reason is due to its “foreign” status. Take GSK for example. Even though most of multinational pharmaceutical companies claimed that they do not charge high price in Chinese market, there are some vacuum of supervision which could stimulate multinational companies to charge unreasonable high price. At the first 5 years a drug of a multinational company entering Chinese market, there is barely any regulation because they are not Assigned drugs of medical insurance which is under regulation. Even though after 5 years these drugs were permitted to be the assigned drugs of medical insurance, these companies could still cheat in their cost which Chinese government cannot check their reports’ veracity[3]. Another scandal of GSK regarding their R&D cost is obvious evidence. For this reason, the drugs prices of multinational companies can be easily boomed, which could be many more times than the similar local drugs produced by other Chinese firms.

3, CSR analysis

GSK China’s CSR strategy

In this scandal, GSK’s CSR police in China were still in Responsive CSR stage (Mitigate adverse effects from value chain). Before the scandal was disclosed, GSK did not try to correct its illegal and unethical behaviour in China, which cumulated into this big scandal for it. After the scandal happened, GSK expressed its commitment to Chinese market. GSK’s Chief Executive Andrew Witty said that “This is a very important business to GSK. China is a critically important country of the future.”[4] GSK also published its statement on its website that: “These allegations are shameful and we regret this has occurred……GSK fully respects the laws and regulations in China and expects all staff to abide by them.”[5]But except some defence to mitigate the adverse effects from this scandal, we cannot see any initiative or Strategic CSR movement, at least until now. GSK only emphasized the importance of Chinese market to it because as a fast growing market, Chinese market could become one of its profit drivers in the near future, but it never express its willingness to positive contribution and responsibility to the customers and other stakeholders in Chinese market.

From this scandal, we could discover very big conflict between the interest of shareholders and stakeholders for GSK. The only motive of the bribery and cheating in R&D of GSK China is to increased its profits and maintain very high growth rate. And the surprisingly high drug price has become much wired for Chinese customers. The fact proved that the high price is not due to its high cost or high R&D investment, but because of its bribery and crazy pursuant of high profit. It already caused big damage to its stakeholders in China, including customers, regulation authority and pharmaceutical industry. At the beginning, the high profit from Chinese market could increased the profits of its shareholders but the lost of Chinese market could lead to serious damage to its reputation and finally its shareholders interest, as was shown by the decrease of GSK global EPS discussed previously in this report. Beside hefty fines from Chinese government, GSK need some time to repair its reputation in China and get its market share back, which is very difficult due to many more substitutes in Chinese market.

For this reason, GSK corporate activities in China now is not sustainable and responsible, which not only tarnished the interest of stakeholders in Chinese market, but also caused the damage to its shareholders, which has been proved by its declining of global EPS. It is not an ethical leader in Chinese pharmaceutical market.

Part 3: The possibility for GSK to avoid it

1, GSK’s peer in China

Some of GSK’s peers did good job in CSR in China. Novartis is a Swiss based pharmaceutical company which is also active in Chinese market. “Being a good corporate citizen isn’t just the right thing to do, it’s also sustainable and related to business development.” said Hong Chaoyang, director of Human Resources at Novartis China, according to China Daily[6]. In recent years, Novartis did a lot to promote the medicine accessibility in China. The Glivec International Patient Assistance Program (GIPAP) has proved to be very successful in China, in which Novartis donated over 15 billion RMB in about 10 years[7]. Novartis also promoted several environment protection projects in China and the most famous one is the forestry carbon sequestration projects in located in Sichuan Province which has been registered as the UN Clean Development Mechanis in October 2013. For this reason, Novartis was awarded as the best CSR employer in China on December 2013. Take Novartis as example, we could conclude that it is possible and reasonable for a international pharmaceutical company to take good CSR actions in China.

2, GSK’s internal capacity to avoid it

As the world 4th largest pharmaceutical company, GSK is fully capable to take active CSR which could promote its reputation and market share in China instead of get unethical market share and profit through bribery.

Part 4: How could GSK avoid the scandal according CSR?

In philosophy, there are two different perspectives which can be used to analyze the CSR business development. One is the perspective of Deontology. Kant has said that: “Nothing in the world—indeed nothing even beyond the world—can possibly be conceived which could be called good without qualification except a good will”[8].

Another perspective is Utilitarianism, “principle which approves or disapproves of every action whatsoever according to the tendency it appears to have to augment or diminish the happiness of the party whose interest is in question: or, what is the same thing in other words to promote or to oppose that happiness. I say of every action whatsoever, and therefore not only of every action of a private individual, but of every measure of government.”[9]

Different activities and outcome could be derived from different perspectives. According to Utilitarianism, it is acceptable to take immoral behaviour in business to make everyone involved happy but in the long run the unethical behaviour would lead to negative influence to everyone including shareholders and stakeholder. By contrary, according to Deontology, the goodwill should be the premise of all business actions and goodwill could lead to a sustainable circle of business CST circle. Therefore, the perspective of Deontology should be a good idea and standpoint taken by GSK if it wants to avoid similar scandal in the future. It is the philosophy for a future ethical leader in business.

Currently, GSK did badly in the pyramid of corporate social responsibility (appendix 3), it only care about profitability, even did not obey the law. The first thing GSK need to do to avoid the scandal in the future is obeying the local law of China. If it cannot obey the law, the CSR is nothing to it and similar scandals will happened again.

Specially speaking, GSK could make future decision according to the ethical leader’s decision tree (appendix 2). The first thing GSK need to consider is its shareholders value but it cannot only consider the shareholders’ value because in China the value of shareholders and stakeholders are connected with each. The scandal has proved that GSK shareholders’ value cannot be maximized without considering stakeholders’ value. For this reason, the fund GSK used to bribery should be used to promote cheaper medicine for Chinese customer and other environment protection project which could promote its reputation and therefore market share in China, and eventually its profit and shareholders’ value would also be promoted. Novartis’ experience has proved that this kind of CSR strategy is fully feasible for a multinational pharmaceutical company; the question is only about whether the company is willing to take this ethical CSR action.

The further question is to ask are the activities ethical? Morality should be the basis of a good CSR behaviour. If the GSK China’s office could calm down and think about this question, the scandal would be avoided definitely. Because from the perspectives of both business and human being, to bribery government an official is not an ethical behaviour and it is a gambling behaviour putting its own reputation, which is very important for an international company as GSK, at risk.

But were GSK senior management level so stupid that not knowing the bribery they took was unethical and dangerous for their company’s reputation and profits? Certainly not and why they still took this highly risky behaviour? The most possible reason is their standpoint, they did not choose Deontology standpoint but choose Utilitarianism, a typical Anglo-Saxon type of idea. And they took chances to cheat everybody which cannot be successful.

Therefore, the final solution for GSK is that they should change their basic idea about CSR and respect the ethical principles for a human being and for a company and take strategic CSR instead of responsive CSR. Currently, GSK China only takes responsive CSR and only tries to mitigate adverse effects from value chain after the sandal disclosure. If GSK could take an active and strategic CSR policy in China initially, it could transform its value chain and stakeholder engagement into a sustainable model. The senior managers of it could take the serious outcome of their unethical behaviour into consideration when they started to put the bribery into fact and finally avoid these disastrous results to GSK China.

Part 5, Conclusion

The scandal of GSK showed that how important a right CSR strategy to a company in China. China has been on the way from a developing country to an industrialized and developed country. And for this reason, the government and society also begin to pay much more attention to the CSR of company, especially to the multinational companies in China. Even though Chinese market is huge, the competitions are also very fierce which stimulate companies to take most advantageous CSR strategy to solidify their status in China and maximize their shareholders value. In this process, the choice between ethical CSR and unethical CSR has become a critical turning-point for companies. But the scandal of GSK proves that an ethical CSR should be the best for company and society.

Note:This is the essay assignment of the course Corporate & Management and Responsibility in Vlerick

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