The recent series of foreign government probes into their companies’ China business practices has claimed its first major victim, with word that the local investment banking chief of JPMorgan (NYSE: JPM) will retire from the company. There’s no direct evidence that the departure of longtime JPMorgan executive Fang Fang is related to the ongoing US probe against his company’s China hiring practices. But of course everyone is speculating that’s the case. The development looks like a positive one, as it sends a message that foreign companies intend to change the way they do business in China, and I expect we could see some other similar executive shuffles in the months ahead.
According to the latest reports, Fang will retire from JPMorgan as part of a major overhaul of its top management in China. (English article; Chinese article) Responsibility for the company’s China investment banking business will be taken over by Frank Gong, a former JPMorgan economist. No reasons were given for Fang’s retirement, though one report points out the timing isn’t ideal as JPMorgan gets set to act as one of the lead banks for the blockbuster IPO for leading Chinese e-commerce firm Alibaba.
I personally don’t know anything about Fang, who joined JPMorgan in 2001. Before joining the US banking giant, he was a vice president at Beijing Enterprises, an investment company controlled by the Beijing government. That connection was almost certainly a key reason for JPMorgan’s decision to hire Fang, who brought with him strong connections with top government officials who control most of the country’s biggest financial decisions.
Those kinds of connections are at the heart of the current US investigations, which are looking into allegations that JPMorgan and other banking giants actively hired the children and relatives of high-level Chinese officials to win more business. Previous reports have indicated JPMorgan engaged in an institutionalized program of hiring such people, including the son of a major Shanghai conglomerate chief and daughter of a former railway official.
This kind of hiring shouldn’t come as a big surprise to anyone in China, and is even relatively common in the west, where executives often engage in such practice as a favor to their associates. But the practice had become institutionalized in the China operations of many big western companies, which were hoping to win business from a huge field of government-controlled entities that are responsible for some of the country’s biggest purchasing and IPOs.
Other US banks and British industrial giant Rolls Royce are also being investigated by their home governments for similar business practices. (previous post) I can’t really blame these companies for such behavior, as this kind of hiring is quite common in China and failure to follow the custom can cause a company to lose a major competitive advantage. Still, the practice is clearly rife with the potential for corruption, and really has no place in the modern, transparent business landscape that China is trying to create.
In the case of JPMorgan, the replacement of someone like Fang Fang with Frank Gong also carries a certain degree of symbolism. That’s because Fang had strong government connections due to his ties with the Beijing government, whereas Gong was probably less connected due to his background as an economist. Thus this shuffle shows that JPMorgan aims to change its ways as the US probe continues. In the meantime, we can probably expect to see some similar personnel shuffles at other companies under investigation, and 1 or 2 more probes as part of the cleanup among foreign multinationals in China.
Bottom line: JPMorgan’s retirement of its longtime China investment banking head is likely to be followed by more similar shuffles as multinationals look to clean up bad practices at their China operations.