AGENDA 2006 I 11/10/05 10:58 AM Page 24

AGENDA 2006

Mastering the Art of Doing

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

O
f all the challenges ket economy. Figuring out how to navi-
facing chief execu- gate this transition is obviously complex.
tives, getting China Foreign executives are usually naive.
right is one of the Few are even aware of the relevance of
most import a n t . politics, much less know how to play it.
But many CEOs When they envision the “Chinese govern-
assume they can do ment,” they see a monolith, displaying an
business in China the way they do busi- idealism that’s laughable to the Chinese.
ness in other countries. They cannot. If Foreigners are often not aware of compet-
most business is local, most business in ing interests among central, provincial
China is also political. and municipal levels of government, and
China says it is evolving into a “social-
ist market economy with Chinese charac-
teristics.” While critics consider
that a tortuous way of har-
monizing capitalistic
practice with Com-
munist ideology, it
reflects a long and
complex transi-
tion from a plan-
ned economy to
more of a mar-

Robert L.
Kuhn, author
and Citigroup
China adviser

24 www.chiefexecutive.net December 2005

AGENDA 2006 I 11/10/05 10:58 AM Page 25
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 govern-
ment official responsible for that industri-
al sector, then they have a high likelihood
of achieving their goals. They do not appre-
ciate the disparate personal loyalties that
thread through most Chinese organiza-
tions, or customary mechanisms of deci-
sion-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 state-
owned partner in a joint venture was, unbe-
knownst 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 govern-
ment cut its support for the venture. The
foreign partner never had a clue about what
was obvious to everyone else.
Using Powerful Tools
P
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 man-
ufacturing multinational found itself at a
standstill after protracted negotiations. It
decided to take a risk by inviting the most
senior provincial leader—the Party secre-
tary—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
BEST PRACTICES
Kuhn on the Do’s and Don’ts

Conduct (quietly) analyses of
those you’re dealing with. Assess polit-
ical factions and alliances between indi-
viduals within government agencies,
partners, suppliers, customers and com-
petitors who can affect your business.

Build relationships with key peo-
ple, personal as well as professional.
Discern their real objectives and under-
stand their background—education,
hometown, family, prior jobs, relationships
and aspirations.

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.

Cater to the most senior executive
or official in every meeting. Chinese
organizations are still built on strict hier-
archies, and foreign executives must be
sensitive to that.

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 inter-
nal controls).

Awareness is critical. Once politics
are understood, companies can utilize rep-
utable 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.

Seek natural allies. Identify institu-
tions 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.

Don’t neglect any level of govern-
ment—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.

Don’t underestimate the impor-
tance of personal relationships. China
is changing, but personal relationships
(guanxi) continue to play a role in gener-
ating trust and assuring loyalty.

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, demot-
ed or transferred, sometimes suddenly.

Don’t think that if the boss agrees,
the deal is done. Organizations, particu-
larly government agencies and state-owned
enterprises, often have multiple lines of alle-
giances that even CEOs cannot overrule.

Don’t assume that all Chinese are
on the same side. Chinese people, like
all people, are interested in their own pri-
vate careers, opportunities and financial
benefits.

Don’t forget Chinese history, partic-
ularly as it may affect the attitudes and sen-
sitivity of people who affect your business.

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.

Don’t assume that a contract will
protect you. China is serious about oper-
ating according to rule of law, but it is not
there yet. Personal relationships and busi-
ness importance come first; contracts
come second.
CEO Magazine December 2005 25
AGENDA 2006 I 11/10/05 10:58 AM Page 26

AGENDA 2006

its homework and knew that in the Party

secretary’s previous position (in Guang-
dong 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 impor-
tance of personal relationships, a Japan-
ese multinational sought entry into an
industry requiring a special license by
engaging a large state-owned conglom-
erate in a similar industry as its partner.
After months of futility, the Japanese
executives realized that although their
Chinese partner was in their same indus-
try, it was less powerful than the Chinese
partner chosen by the Japanese compa-
ny’s chief international rival. As a result
their license application was being
blocked.
After doing sensitive political analy-
sis (using politically savvy consultants),
they were introduced to a much small-
er Chinese company in a different indus-
try, but one whose executives had deep
personal relationships, going back to col-
lege, 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 hap-
pens, 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. 

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 www.chiefexecutive.net December 2005

UN C OMMON WISDOM

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

I
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 medi-
um-sized companies, and to
sell them for the very highest
at the top of our hit lists.
One business owner complained to
me that we had not valued his compa-
ny for “more than it was really worth.”
He wasn’t being funny: My company
had a reputation—among corporate
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 disfellow-
BRUNO BUDROVIC/IMAGES.COM

possible prices. During that time,
we closed over 1,200 M&A transac-
tions, and when we sought prime
candidates to pay the most money,
corporate buyers were almost always
buyers not always a good one—of ask-
ing and often getting high prices for its
sell-side clients.
How did our M&A dealmakers
cajole or coerce tough-minded,
ship from the High Church of
M&A Bankers, I’m going to reveal
the M&A secrets of the inner sanc-
tum: how top dealmakers manipu-
late CEOs to get them to pay too

20 www.chiefexecutive.net July/August 2006

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 pur-
chasers 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 sell-
side clients, they are under no obliga-
tion, unlike district attorneys, to
present their cases based on all the
evidence. A banker’s job is to get the
highest price possible; smart, aggres-
sive advocacy is essential for a free-
market 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 finan-
cial projections looked like “hockey
sticks”—three years of historical prof-
its sliding steadily downward followed
by five years of forecasted profits ris-
ing 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 over-
head of an acquisition, folding the
purchased business into your own
business, then the target’s gross mar-
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 simi-
lar 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 be-
come stealthy anti-synergies, the
kinds that appear to be real but
transmogrify on full-scale imple-
mentation and become toxic to the
entire company.
One textile company bought a
similar company assuming that the
seller’s products could be manufac-
tured in the acquirer’s underuti-
lized 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 dis-
integrated.
Recast Aggressively and
Without Doubt
This is a common technique, espe-
cially when selling private compa-
nies. In making projections, the idea
is to eliminate expenses that the pri-
vate business owner, who is motivat-
ed to reduce taxes, runs through the
company. These include “excess
compensation” that the owner may
pay to herself or to her family mem-
bers. Some such recasting is legiti-
mate when this compensation, to be
charitable, is “above market,” but
can the company really attract a
quality CEO for the assumed lower
compensation?
M&A bankers may use the term
“normalize,” which means to recast
the financials by eliminating “one-
time 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 perenni-
al existence of a neverending series of
“one-time expenses” may be a “nor-
mal” part of the business!
Make Presentations Elegant
The more elegant the package, the
more believable its contents. This
sounds so contrived (or simplemind-
ed) that no sophisticated CEO would
fall for this. Wrong. Subtle psycho-
logical factors are at work and M&A
bankers exploit them. After all, how
could big, beautiful books from large,
distinguished investment banks con-
tain little, manipulating fibs?
Seduce the CEO
Nirvana for sell-side M&A bankers is
when the acquiring CEO gets emo-
tionally 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 21
UNCOMMON WISDOM
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 anx-
ious to do the deal, that you the buy-
er 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 compa-
nies, a quick close is almost always
best. You never know what can hap-
pen, 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 happen-
stance that occurs, nonrandomly,
well less than 50 percent of the
time—it is usually more difficult for
the seller to raise the price.
22 www.chiefexecutive.net July/August 2006
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
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 fin-
gerprint 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. Diffi-
cult 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 dili-
gence team of the acquiring
company with paper—not box-
es full of paper but rooms full of
paper (especially on legal matters
and assorted trivia). As a result, fun-
damental matters of business, like
who will run the company after you
make the current owners very rich,
are not addressed.
Good 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 pres-
ent the Principles that Protect CEOs
from Paying Too Much. Don’t close
your deal before then.

Dr. Robert Lawrence Kuhn was pres-
ident and co-owner of The Geneva
Companies, the largest M&A firm rep-
resenting privately owned, middle mar-
ket companies (in terms of number of
transactions closed); in 2001, he sold
Geneva to Citigroup, where he is now
ARNO SPAANSEN/ISTOCKPHOTO.COM
senior adviser to the Investment Bank
(China). Dr. Kuhn has a doctorate in
anatomy/brain research and is the
author of numerous books on deal-
making and corporate strategy.
Wisdom_Kuhn.nt.9.16.qxd 9/18/06 7:00 PM Page 20

UN C OMMON WISDOM

Inside
M&A
Banking
How do you
protect a CEO
from paying
too much?
BY ROBERT LAWRENCE KUHN

he relationship be- what seems quite modest work. he calls the old jeweler: “Are you

T
tween CEOs and When clients thought my M&A nuts? $100,000? You didn’t work an
investment bankers firm’s hourly charge outrageously hour!” “I’m sorry,” responds the old
is like that of me- high, I would smile sagely and tell jeweler, “I should have itemized my
dieval popes with the following story. bill: For cutting the diamond, $10;
Knights Templar, A rich man brings a rough dia- for knowing where to cut the dia-
the famous order of warrior monks mond to an old jeweler. The old jew- mond, $99,990.”
who raised their own revenue and eler studies the stone, positions his For investment bankers, relation-
were a power that the Church as chisel, and, with a single sharp blow ships are key. The inside term is “cov-
much feared for its independence of his hammer, splits the stone with erage,” which means that bankers are
TONY VITA/IMAGES.COM

as relied upon for protection. M&A perfect cleavage, yielding four per- assigned, usually by industry, to par-
bankers present their profession as fect gems. A week later, the rich man ticular corporate clients and tasked
High Art, charging large fees for receives a bill for $100,000. Enraged, to “cover” them. Translation? To

20 www.chiefexecutive.net September 2006

Wisdom_Kuhn.nt.9.18.qxd 9/18/06 7:03 PM
smother or metaphorically kidnap
them if necessary, with the twin
goals of eliciting some new fee-gen-
erating deal and preventing com-
peting 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 suc-
cessful acquisitions are not done.
They occur all the time: Astute buy-
ers pay high prices, turn their acqui-
sitions into star performers and
generate even higher returns. These
rare—but not random—occurrences
happen when perceptive buyers dis-
cern deep, untapped, even unrecog-
nized 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 princi-
ples by which CEOs can defend
themselves against overpaying.

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 know-
ingly 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
Page 21
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
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?

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.

Speak Directly With the Seller.
Try to get time alone with the sell-
ers, 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 be-
come nervous, switch subjects or
interrupt their clients, the sellers.
Each is a lead to follow.

Negotiate With Another
Company. Never negotiate with
only one target. Try to find another
candidate you can explore acquir-
ing as an alternative. Even if this
other company is a stretch, there is
psychological benefit in diversify-
ing 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 acqui-
sition options.

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 rea-
sons for simulating depressing sce-
narios: It will make your company
better able to respond if such circum-
stances occur; and it will dampen the
euphoria that drives up prices—and
investment-banking fees.

Seek Anti-Synergies. Most cor-
porate acquisitions are driven by
searching for synergies, trying to
materialize greater value by inte-
CEO Magazine September 2006 21
Wisdom_Kuhn.nt.9.16.qxd 9/18/06 7:00 PM
UNCOMMON WISDOM
grating the acquired company with
the acquiring company for a com-
bined post-acquisition value larger
than the sum of the separate pre-
acquisition 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 cor-
porate viruses in your pre-acquisi-
tion analysis is to assume that each
synergy for which you are doing the
deal will be defeated. Try to imag-
ine ways in which these apparent
synergies disappear and calculate
the consequences of each disaster.
The exercise will be revelatory.
Page 22

Scrutinize Any Recasting.
Watch for hidden traps when assess-
ing “recasting,” or the normalization
of revenues and expenses. Here are
two: If the recasting substantially
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 sup-
posed market rates, can you really
get a first-rate CEO for that lower
salary? And check whether all those
“one-time” expenses, such as extraor-
dinary legal expenses, that get nor-
malized (i.e., eliminated in the
recast) are actually expenditures that
regularly occur.

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 anx-
ious 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.

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.

Discern the Difference Be-
tween 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
owners. This difference colors every
aspect of the deal. (There is also a dif-
ference between entrepreneurs, the
founders of the business and subse-
quent generations of family owners.)
Entrepreneur owners will do things
that professional managers will not.
They will react more emotionally, par-
ticularly regarding their employees
(or certain employees). And you know
what? They have earned the right to
act that way. They created their com-
pany 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 pro-
foundly concerned about their repu-
tations, 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. 
Dr. Robert Lawrence Kuhn, an inter-
national investment banker and corpo-
rate 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 com-
pleted more than 1,200 M&A transac-
MARK STAY/ISTOCKPHOTO.COM
tions. An intellectual with a doctorate
in anatomy/brain research, he is also a
television producer and the author of
numerous books on strategy, creativ-
ity, science, business and finance.
Wisdom_Kuhn.nt.10.30 10/30/06 1:20 PM Page 18

UN C OMMON WISDOM

12 and how to treat them.

efore I became an
“CEO Diseases”
BY ROBERT LAWRENCE KUHN

case, running a firm doing M&A for catch may seem minor; these can be

B
investment banker, medium-sized companies, I saw over the virulent ones that morph stealthily
I studied to be a 12 years perhaps 15,000 companies into major corporate illnesses. Follow-
doctor. (I did a Ph.D. whose CEOs either wanted a valua- ing are some CEO diseases and my
in anatomy/brain tion or decided to sell. I was like a prescriptions for treating them.
research at UCLA, doctor examining a very large num-
Talking Too Much. You never
CLAUDIA WOLF/GETTYIMAGES.COM

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
ber 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
learn by talking, but some CEOs
imagine the world to be in desper-
ate need of their constant wisdom.
It is a rare subordinate who will risk
stifling a CEO.

18 www.chiefexecutive.net October/November 2006

Wisdom_Kuhn.nt.10.30 10/30/06 1:20 PM
My Prescription: Track the per-
centage of time you speak com-
pared 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.

Goals Too Aggressive. Unreal-
istic goals “demotivate,” especially
when compensation is involved.
One CEO expected his plastics
company to continue its 30 percent
annual growth rate, not appreciat-
ing that with a larger base and a
mature market their era of high
growth had to end; the result dis-
couraged managers.
My Prescription: Set goals that
have, say, a 35 to 45 percent likeli-
hood of success. (Assume all works
well but not extraordinarily well.)
Goals should make your executives
reach, but not too high.

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 paradoxical-
ly 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 un-
pleasant 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 psy-
chological test. When making a big
decision, ask yourself how it will
build the market value of your firm.
Then, immediately, shift the intro-
spective question to how the deci-
Page 19
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 ques-
tion, stressing firm value, your ego
may be exceeding your greed, and
this should be a cause for concern.

Not Respecting or Recognizing
the Ideas of Others. In general,
CEOs are egotistical. Highly suc-
cessful 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 subor-
dinates pollutes the organization.
You benefit when your people are
encouraged and empowered to gen-
erate novel ideas.
My Prescription: Do the opposite
of what comes naturally. In a situa-
tion where a good idea was really or
largely your own, go out of your way
to give credit to others.

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 artifi-
cial 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 busi-
ness. Demand unsimplified infor-
mation for these factors. And get it
randomly so that your staff never
knows where or when you will re-
quire raw data.
CEO Magazine October/November 2006

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 particu-
larly vulnerable when making acqui-
sitions—who knows why Ford bought
Aston-Martin?
My Prescription: Engage the exec-
utive 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.

Feeling Invincible: CEOs to
be CEOs must have superb track
records—some are almost unblem-
ished—so they have a proclivity to
imagine themselves as invulnerable.
The natural corollary is a robust con-
fidence, 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 serendip-
ity 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,”
19
Wisdom_Kuhn.nt.10.30 10/30/06 1:20 PM Page 20

UNCOMMON WISDOM

the relationship is far from perfect. A
Generalizations. CEOs like to of current trends, whether macro-
sobering exercise is to analyze your spot trends, spot trends, finding scopic movements or management
career, looking for “luck.” Also, deep principles to predict and affect theories. Think Time Warner pur-
don’t believe your own hype. business. But beware of averages, chasing AOL at the height of the

Personnel Too Similar. In which can deceive. For example, dot.com boom and destroying most
some organizations, many of the sen- assume that, in a pharmaceutical of the acquirer’s value.
ior executives look like the CEO. I company, prices are declining for My Prescription: Ask yourself
mean this quite literally and it can one-half of the drugs and increas- whether you really believe the cur-
be very funny. Not just obvious char- ing for the other half; the fact that rent trend or whether you are feel-
acteristics like gender and race, but the average price of all drugs has ing socially coerced? Your instincts
also personal traits like size and remained steady is worse than are often a better strategic guide
stature, political philosophy, sport- meaningless information. Strategies than the hot stories in the latest busi-
ing interests, demeanor, even style for drugs that kept prices steady ness magazines.
of dress. In a globalized world where might not work at all with those
Falling for Contemporary
customers and suppliers may be very whose prices were decreasing or Tricks. Every few years, it seems,
different kinds of people, it is not increasing. there is some new fad with which
wise for the executives of a company My Prescription: Recognize that CEOs must contend. In the 1960s,
to be homogenous, and hence, uni- as the world has become progres- conglomerates grew by accretive
form in their thinking. sively more narrowcasted in de- acquisitions, seeking earnings per
My Prescription: Look at your key mand and supply, the power of gen- share growth and cyclical balance. In
external relationships; target those eralization has become progressively the 1980s, highly leveraged financings
who are markedly different from more suspect. were the rage. And in virtually every
you, and ask yourself whether any of
Not Asking the “Stupid” decade, specious tax shelters and spu-
your top executives are like them. If Question. You learn by asking. If rious tax gimmicks always pop up
not, hire some. you don’t understand something, you (e.g., trying to postpone huge capital
can’t make a proper decision. CEOs gains taxes through tortuous and ulti-
are not known for sporting mately disallowed techniques).
small self-images, but if My Prescription: Most CEOs
these top-floor egos are should be wary of cutting-edge
so fragile that they can finance and simply stay away from
never appear unin- tax dodges. Playing near the foul line
formed, CEOs will suffer isn’t worth it.
strategic disadvantages. It How to diagnose your own CEO
is astounding how many diseases? You will have to be your
“dumb” questions, well own doctor since I do not make
timed, might have pre- house calls. 
vented poor decisions.
My Prescription: Go out Dr. Robert Lawrence Kuhn, an inter-
TA
K FO of your way to ask stupid, national investment banker and cor-
IM E AS D R
P
O R ERI D I R ISE CEO dumb questions—even when porate strategist, is senior adviser to
A
CO EGO LITIS TED
E C ASE
OR NSU INFL . IF HE FOR C
S you don’t need to—just to get Citigroup Investment Banking. He is
16 LT Y AM AD
SW
EO
your ego conditioned to how it the author or editor of numerous
RE - Y E O U MA E
DR FILLA AR- R PH TION LLING
.R BL OL Y P
D D S I C I E RS I S
feels. In this way, when you really books on business and finance; his lat-
O B E: 2 X
ER AU AN TS ,
need to ask that key question, your est is China’s Banking and Financial
TL GH
AW TER
RE . ego won’t immobilize your tongue. Markets—The Official Report [of the
NC
EK
UH
N
Falling for Current Trends. Chinese government], forthcoming
It’s easy to be sucked into the vortex from John Wiley & Sons.
UN C OMMON WISDOM

Globalization
and Its Discontents

U
.S. President George W. Bush’s grand vision is of a
How can CEOs of Western-style “Democracy World,” where all countries
multinational com- have a similar system of selecting their leaders in a
majority-rule, one-person-one-vote, free election. Chi-
panies skirt the nese President Hu Jintao’s grand vision is of an East-
ern-style “Harmonious World,” where all nations live
hurdles of global- together in mutual respect and peace, even though they have and main-
tain different systems of government.
ization? Follow The problem with President Bush’s grand vision is what happens when
majority rule initiates or instigates more, not less, belligerent and violent
these four policies. acts against perceived foes, such as rival ethnic or religious groups, whether
in foreign countries or within their own populations. The problem with
KINO BROD

BY ROBERT LAWRENCE KUHN President Hu’s grand vision is what happens when certain countries do

26 www.chiefexecutive.net 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 intri-
cacies is not. Human beings are
rarely rational actors; what they do
may not be in their own best inter-
ests. Why do poorer people, say, in
America or in China, feel more dis-
affected today than they did 30 years
ago, even though their standards of
living are much higher now? And
why do people in developing coun-
tries, by and large, still honor their
despotic leaders who perpetrate,
instigate or allow monumental viola-
tions of common decency?
To appreciate the political psychol-
ogy 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 ground-
ing of these relative standards is usu-
ally recent circumstances. If you are
worth $10 million and stocks plum-
met so that your worth is reduced to
$9 million, you are depressed, where-
as if you are destitute and find a mod-
est job, you are ecstatic.
Now assume that both situations
describe you—you are the same per-
son just shifted in time—so that your
rich self exists today and destitute self
20 years prior. Although you have
intellectual appreciation of your con-
tinuing 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,
Pride is a powerful and persistent
human trait; but it can also warp com-
mon behaviors and priorities.
but if you then cut your finger while
cooking you are unhappy.
The application to economic per-
ceptions is direct. When the Chi-
nese people were all financially
equal 30 years ago—all equally
poor—envy of lifestyles and materi-
al 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, exagger-
ating them too, by skewing to glam-
our and elegance and by glorifying
physical possessions and sybaritic
behaviors. Today in the Muslim
world, and soon across Africa, tele-
vision and the Internet make social
and economic differences with the
developed world stark and disturb-
ing. 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 priori-
ties. When struggles of national inde-
AGENDA 2007
pendence movements bring about
economic hardships, people are usu-
ally willing to accept sacrifices in
order to gain their freedom from for-
eigners. When national leaders
restore pride to their people, particu-
larly those who had been humiliated
by invading oppressors, they are giv-
en wide latitude for error. Witness the
Chinese people’s continuing appre-
ciation (though no longer adoration)
of Mao Zedong, who enabled the
Chinese people to “stand up” in the
world and regain their long-lost dig-
nity, even though, not much later, he
was responsible for divisive mass polit-
ical movements, including the devas-
tating 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, for-
eign factories are a constant reminder
of their own secondary status or sub-
servient place in the world and no eco-
nomic benefit is worth such
anguishing and continuing dishonor.
This endemic and enduring psychol-
ogy presents a challenge for multina-
tionals as they plan global strategies.
Prescriptive Policies
Recognizing these psycho-political
problems, what can multinationals
do? Corporate executives should sen-
sitize themselves to needs of local
people for whom disparities in eco-
nomic status can be psychologically
CEO Magazine December 2006 27
UN C OMMON WISDOM
devastating. Consider an analogous
problem that faced Chinese Presi-
dent Hu Jintao when he took leader-
ship and faced the growing problem
of multiple disparities between sec-
tors 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 Devel-
opment Perspective,” balancing
social and environment factors with
pure economic growth. Though dis-
parities remain severe, President Hu’s
resultant popularity in China facili-
tates his change-making policies.
But to be effective, a leader’s phi-
losophy 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-stand-
ing beliefs or personality. When Pres-
ident 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 acci-
dentally 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 perspec-
tive? What can CEOs of global com-
panies do to ameliorate the dangers of
globalization? I have four suggestions:

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, peo-
ple will not be as happy in the gap
periods between these spurts, when
there will seem to be stagnation.
28 www.chiefexecutive.net December 2006

Local Hires. Use local managers
whenever possible, and develop a sys-
tematic method of training and pro-
moting 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-
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 non-
Japanese CEO.

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 gov-
ernment 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, Hen-
ry Paulson, Maurice Greenberg, John
Mack and Chuck Prince/Bob Rubin,
respectively, traveled to China multi-
ple times every year.

Transparency. People are nat-
urally suspicious and secrecy feeds
their fears. Rumors can be so rootless
and virulent that they are hard to
source and impossible to stop. When-
ever operating internationally, com-
panies—like countries—should learn
to be more open, even though overt
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-
kets, which are critical for the coun-
try’s economic development and
which have been legitimately criti-
cized in the foreign press for lack of
transparency, credit culture, controls,
and the like. If the Chinese govern-
ment would react by seeking to fur-
ther 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 Eng-
lish for the international community.
Globalization is an inevitable,
inexorable trend. Getting it right
means understanding the psycholo-
gy of people as much as the eco-
nomics of productivity. 
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).
UN C OMMON WISDOM

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

“G
rand Thinking” makes
great companies. I
criticize CEOs when
they don’t see its
importance, and am
frustrated when they do see its impor-
tance 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
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 energiz-
ing CEOs to Think Grandly, an
entire universe, whose extraordinary
secrets, discovered by insight and pre-
cision, have turned speculative phi-
losophy into exhilarating science.
The visionary kind of thinking that
cosmologists use to discern what real-
ly happened billions of years ago in
time and billions of light years away
is perhaps the grandest kind of think-
ing that human beings can ever do.
Further, by studying the past histo-
KINO BROD/IMAGES.COM

vital for making companies more approach that could be described ry of the universe, cosmologists can
valuable, and hence for building the as, well, “far out.” I have always been make breathtaking predictions
wealth of their shareholders, than fascinated by cosmology, the study of about its future prospects. My
Grand Thinking. the origins, structure and ends of the point? The same thinking can be

26 www.chiefexecutive.net January/February 2007

applied to the more earthly endeav-
ors 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 plat-
forms. It is the idea that overarch-
ing 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 “gen-
eral 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 inhab-
ited by more than 100 billion galax-
ies, many hosting more than 100
billion stars. What’s more, most cos-
mologists 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 his-
tory, human beings have wondered
about the origin of the universe.
Although many fascinating ideas
were put forth by scientists, philoso-
phers and theologians, no one imag-
ined that data and measurement
could ever distinguish between
opposing theories. After all, scientists
can hardly conduct controlled exper-
iments on the origin of the universe.
Yet, in just two decades, even cos-
mologists have been amazed at how
their field has become an experi-
mental science with streams of hard
data from the very early universe,
even from the Big Bang itself, flow-
ing into their telescopes and satel-
lites. Today, cosmic microwave
background radiation, which fills the
entire universe and is measured
meticulously by satellite-borne instru-
mentation, 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 devel-
oping 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-
CEO Magazine January/February 2007
tion between the theory of what
should happen and the reality of
what is happening, a CEO should
come to two conclusions: first, reali-
ty must be believed; second, some-
thing 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 expo-
sures 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 under-
stands 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 postu-
late an awesome amalgam of multiple
universes (the “multiverse”), perhaps
stupendous numbers of universes, per-
haps infinite numbers of universes!
The fact that these putative other uni-
verses 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
27
UNCOMMON WISDOM
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—appear-
ing the same in all directions—
without any possibility for
interaction between its widely sepa-
rated parts? Then in 1981, an
obscure physicist named Alan Guth
proposed that the early universe
underwent a short phase of expo-
nential 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 con-
fronted with multiple problems,
even if very different, they might
look for possible links (especially if
they have arisen within a given time-
frame) 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 execu-
tive, 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 outward-
pushing 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-
28 www.chiefexecutive.net January/February 2007
tract. In 1998, observations designed
to demonstrate that the expansion
of the universe was in fact slowing
down revealed, shockingly, precise-
ly 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
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 real-
world 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 consid-
ered. The best CEOs always expect
the unexpected.
Think Far Future
Cosmology: You think you worry
about the future? Scientists contem-
plating 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 con-
templating the future of the universe
generally begin with events hun-
dreds of billions of years into the
future and are quite comfortable
speaking of what might happen 1033
years into the future (proton decay)
or even 10100 (nothing existing but
dispersed radiation).
Company: It may seem that think-
ing 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
can speculate intelligently about
the far future, whether of the cos-
mos or of companies, it often
enhances one’s ability to see more
deeply into the immediate future.
Trying to imagine consumer elec-
tronics in 100 years might help
companies plan better products in
10 years.
Corporate leadership in today’s
dynamic, globalized economy
demands Grand Thinking. To stim-
ulate and energize it, contemplate
the cosmos.

Dr. Robert Lawrence Kuhn is an inter-
national investment banker and corpo-
rate strategist, adviser to the Chinese
government and senior adviser at Cit-
igroup. The author or editor of more
than 25 books on business, finance
and science, he is editor in chief of Chi-
na’s Banking and Financial Markets:
The Official Report and host of the PBS
series on the meaning of state-of-
the-art science, Closer To Truth—
www.pbs.org/closertotruth. He has a
Ph.D. in anatomy/brain research (UCLA)
and an M.S. in management (MIT).
UN C OMMON WISDOM
Talking to China
he irony about China, a
What Business
T
senior Chinese leader told
me recently, is that “when
Leaders Can Learn for more than a century for-
eigners thought we were so
from Politicians weak, we weren’t really so
weak, and now when foreigners
Mistakes think we are so strong, we aren’t
really so strong.”
BY ROBERT LAWRENCE KUHN
When American and Chinese
political leaders interact, divergent
perceptions are common. Ameri-
20 www.chiefexecutive.net March 2007
cans focus on their huge trade
imbalances with China, Chinese
fret about foreign acquisitions of
their companies. Americans envi-
sion China as a voracious econom-
ic competitor and growing military
power; Chinese assert that more
than half of its exports—and about
85 percent of high-tech exports—
PHOTO CREDIT HERE
come from foreign-funded firms,
and that it needs a strong military
to protect its homeland. Ameri-
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 danger-
ous. In 1999, during NATO’s mili-
tary campaign against ethnic
cleansing in Yugoslavia, an Ameri-
can aircraft accidentally bombed the
Chinese embassy in Belgrade.
When the Chinese government
bused college students across Bei-
jing 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 work-
ers and common citizens. So the
Chinese leaders determined that
busing the students would be the
best way to contain, and not exacer-
bate, the volatile situation—precise-
ly 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 politi-
cal leaders, and it is no less so for
business leaders. Let’s explore both.
Political Communications
E
ffective political communi-
cations 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 reach-
ing agreement, it is often the opti-
mum approach.
Most Chinese believe that Amer-
ica seeks to “contain China” and
thwart its historic resurgence as a
great nation. This is the real reason,
they say, that America supports Tai-
wan, not as a worthy democracy but
as an “unsinkable aircraft carrier”
by which America can assert domi-
nance over China and keep the
motherland divided. Chinese see
America encircling them by mili-
tary alliances with Japan, Taiwan
and perhaps India; forcing open
their markets to control China’s
industries and exploit Chinese con-
sumers; and by introducing West-
ern culture to erode China’s
independence and sovereignty.
Most Americans believe that Chi-
na is a determined, monolithic com-
petitor whose intentions appear
threatening. They view China as act-
ing 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 gov-
ernment, they say, should. With 1.4
billion people, the Chinese obses-
sion with stability has been seared
into the collective consciousness by
a catastrophic political legacy of
roiling mass movements that deci-
mated 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 appar-
ent lack of democracy, human rights
violations, support of dangerous
regimes and huge trade surpluses;
this is why China’s continuing mili-
tary build-up is so worrying. Ameri-
cans should appreciate that China’s
stability requires a different develop-
mental path due to its different his-
tory and culture and to its massive
population, and that China’s resur-
gence as a great nation and responsi-
ble power is good for the world.
To understand China today one
must understand President Hu Jin-
tao’s overarching vision, summarized
by three slogans: “Harmonious Soci-
ety” and “Scientific Development
Perspective” domestically and
“Peaceful Development” internation-
ally. Harmonious Society calls for
fairness and equity across China’s
diverse populations and geographies
and embeds careful social, legal and
political reforms. Scientific Develop-
ment Perspective applies optimized
sets of solutions to arrays of econom-
ic, social and environmental prob-
lems seeking to rectify economic
imbalances, increase energy conser-
vation, reduce pollution, achieve sus-
tainable development and prioritize
innovation. Peaceful Development
conveys that no matter how strong
China becomes, it will never threat-
en its neighbors.
Styles of Communication
C
hinese and Americans, by
tradition and culture,
express subtle differences in
styles of communication. A senior
CEO Magazine March 2007 21
UNCOMMON WISDOM
Chinese official contrasted four
general ways of thinking that cause
political misperceptions and which
affect all instances of Chinese-
American communications, com-
mercial as well as political.

Chinese are more indirect and
cyclical, whereas Americans are more
Americans see China awash with cash,
holding more then $1 trillion in reserves;
Chinese see their vast, poor rural popula-
tion, 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.

Chinese use more abstract
forms and general terms, focusing
on principles and theories, whereas
Americans use more concrete forms
and specific terms, focusing on prac-
tice and precedents. Thus, Americans
may see Chinese as programmed and
robotic, whereas Chinese may see
Americans as pompous. (For exam-
ple, 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.)

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.

When dealing with weighty
matters, Chinese are not given to
humor, nor do they engage in self-
22 www.chiefexecutive.net March 2007
deprecating banter or smile in seri-
ous situations. As such, Chinese
leaders may appear more rigid,
inflexible, impersonal, doctrinaire
and unapproachable than they real-
ly are. The dour countenances of
many Chinese officials may well be
the residual conditioned response to
a past system of fear-driven gover-
nance where a single mistake could
cost an official his job, if not his free-
dom. Under President Hu, there is
more tolerance: mistakes don’t end
careers, risks can be taken.
Business Communications
L
et’s consider each of these
contrasting styles of commu-
nication, and construct gen-
eral 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 sim-
ilarity with Western ways and these
principles are less applicable.)

Be patient in negotiations. Do
not assume the Chinese side is
being deliberately opaque. If you
must press for answers or resolu-
tion, do so with sensitivity and
respect.

Learn to appreciate the pur-
pose 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.

Recognize that as China
adopts elements of democracy, col-
lective decision-making in many
large Chinese enterprises has
become more common. Senior
management is now less able to dic-
tate decisions than their American
counterparts. Chinese business
leaders must engage their own mid-
dle management in sometimes-
laborious 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.

Respect the formality of meet-
ings; maintain professional decorum.
Business success in China is
determined by multiple factors and
difficult enough under ideal condi-
tions. Don’t manufacture addition-
al stumbling blocks with poor
communications. Although politi-
cal leaders often seem genetically
predisposed to have divergent per-
ceptions, business leaders should
rise above such instincts and avoid
such errors. 
Robert Lawrence Kuhn, senior advi-
sor at Citigroup and senior partner of
IMG China, has worked with the Chi-
nese government for 18 years on eco-
nomic policy and business issues. He
is co-editor-in-chief of China’s Bank-
ing and Financial Markets: The Inter-
nal 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.