As Western law firms that spent years growing their footprints in China either exit or retrench, the reason global firm Dentons cited for doing so stands out for its directness.
In a memo to clients, Dentons said it ended its tie-up with Beijing Dacheng Law Offices “in response to an evolving regulatory environment for Chinese law firms in China—including new mandates and requirements relating to data privacy, cybersecurity, capital control and governance.”
As conditions in China become increasingly challenging, how a firm communicates a decision to withdraw need not be left to the last minute – indeed, firms should have plans in place now, especially as the prospect of greater conflict in the region looms. The unlawful Russian invasion of Ukraine and Hamas’ more recent incursions into Israel signal the importance of having risk management and corresponding communications plans in hand before the next geopolitical crisis, which many believe will be Chinese President Xi Jinping’s inevitable attempt to take Taiwan.
The pullback among foreign law firms is the latest evidence that the Chinese government’s heightened focus on national security and related geopolitical tensions is impacting the ability of professional services firms to do business there. The Big Four auditing giants have also shut down legal affiliations with local firms in China, according to Law.com. Meanwhile, Chinese authorities earlier this year probed operations at China offices consulting firms Bain & Company and Mintz Group, and detentions of foreign executives are adding further chill to the business climate.
As one anonymous Dentons partner told The American Lawyer, “It wasn’t really a corrosion of our relationship [with Dacheng]. It’s more that it’s become impossible to serve our clients properly, those that have China links.”
Worsening Economic and Geopolitical Conditions Raise the Communications Stakes
The changes global law firms made to their Chinese platforms in 2023 are part of a longer-term trend. The number of foreign law firm offices in China has been in decline for five consecutive years, falling by 16% to 205 as of the end of 2022, according to Chinese Ministry of Justice data, with U.S.-based firms leading the withdrawal. More firms will likely be queueing up behind Dentons and others heading for the exits as China’s economic downturn deepens, limiting business opportunities while trade tensions slow cross-border investments.
These developments come as heightened tensions between China and Taiwan once again fan speculation around a possible Chinese invasion. Affluent Taiwanese are transferring wealth abroad or shifting money into portable assets. Multinational companies are taking force majeure clauses one step further and inserting provisions into contracts specifically tied to China-Taiwan tensions. Meanwhile, America’s military and political leadership are discussing deterrence and timelines of a possible Chinese invasion amid growing economic and diplomatic pressure.
Coupling these conditions with the increasingly aggressive Chinese regulatory stance toward foreign firms, leaders of professional services organizations must consider the possibility that a conflict in Taiwan could further compromise their business and compel them to communicate their position on Chinese aggression – operationally and philosophically – with clients, employees, regulators, and the public.
Recall the weeks following Russia’s invasion of Ukraine. Hundreds of global companies shut down Russian operations within a few days. Professional services firms were slower to react than other organizations and their responses varied widely—from resigning clients based in Russia to taking no action at all, perhaps reflecting the difficulty of giving up work when it can be done from anywhere.
Given the difference in the size of the Chinese and Russian economies and levels of foreign direct investment, we would expect even greater difficulty unwinding from China than from Russia despite China’s lackluster economic outlook. The International Monetary Fund last year ranked China the third most prominent destination for foreign direct investment, totaling $3.6 trillion in 2021. (This doesn’t count Hong Kong, which received another $1.9 trillion.) Russia isn’t even in the top 10.
As we saw after the invasion of Ukraine, intensifying Chinese aggression toward Taiwan would likely be followed by swift international condemnation and calls for Western firms to withdraw or to limit activities that could be said to support the regime. Other complications, from head-butting between the Chinese and U.S. militaries to stepped-up regulatory actions against foreign firms operating in China, could elicit similar responses, highlighting the need for firm leaders to be prepared for such eventualities.
In a Volatile World, Organizations Need a Proactive Communications Strategy
It is critical that firms have a clear framework for whether and how to respond to such crises, beyond the compulsory need to communicate regarding local staff who may be in harm’s way. As a starting point, we recommend the process we developed to help leaders decide whether and how to respond to social and political issues since the murder of George Floyd.
The Conference Board is aligned with our process. It recommends considering the issue’s alignment with the following:
- Your organization’s core values
- The requirements and expectations of internal and stakeholders
- The connection between the issue and business
- The significance of the issue to society
- The incremental impact your organization may have
Firms should choose how prominent a leadership role they wish to play and be transparent with stakeholders about the criteria and process they employed in deciding whether and how to respond. (Firms structured as vereins, with members and affiliates in different parts of the world, should take note of this last point.)
And as consulting giant McKinsey points out, you should also consider adjusting your corporate narrative with an eye to shifting geopolitical risks. If you have an early handle on how you would respond if a specific crisis occurred, consider whether that is aligned with how the firm talks about itself today. If that narrative conflicts with your anticipated position, shifting your narrative early can avoid confusion among internal and external stakeholders down the road.
Engaging with us in a rigorous scenario planning process can bring significant clarity. That’s especially the case if the process is conducted before the crisis occurs and urgency overtakes the opportunity to be thoughtful. We’ve helped clients navigate the invasion of Ukraine, the repeal of Roe v Wade, and the Oct. 7 attacks on Israel. Reach out if we can help you, too.
About the Executive Positioning Practice Exemplifying Greentarget’s commitment to being a trusted advisor to clients, Greentarget’s Executive Positioning team provides c-suite executives (managing partners, CEOs, executive committees, and boards) with insights to anticipate, understand and respond to important global and social developments, analyzing key issues that can impact reputation and compel leaders to communicate.
