The Olympic Games in Beijing have showered us with heart stopping as well as heart breaking performances, new world records, and moments of intense national pride.  But the shadows of the Birds Nest hide a dark truth about China’s developing rule of law that holds a valuable lesson for corporate governance and compliance.

China’s Constitution provides for free expression and during the Olympics the Chinese government set up “protest zones” to allow citizens to express their grievances in an orderly fashion.  So far, so good.  There’s only one little hiccup.  Protests require prior approval and would-be protesters must file a Protest Application; otherwise their legal protest is illegal.  OK, still not so bad.

Nicholas D. Kristof, a NY Times Op-Ed columnist, decided to put the new system to the test.  His protest topic: preserving Beijing’s historic architecture.  The result: no permit.  His entertaining column is nonetheless well worth reading and details his Seinfeldesque interview with the Chinese Public Security Bureau, the police videographer shooting from multiple angles, his certification of the interview transcript, and what he calls the monstrous bureaucracy that dashed his “Olympic dreams.” That’s right.  No gold for you.

While the Chinese effort at due process can be applauded, not everyone filling out an application was as lucky to walk away as Mr. Kristof.  Others before him were arrested and today two grandmas got run over by bureaucracy. 

According to today’s NY Times, the two women, both in their late 70s, both walking with canes, and one partially blind, were sentenced to an “extrajudicial term of re-education through labor.” They might, however, get a suspended sentence if they stay at home and stop making trouble. 

Their “crime”: applying to hold a legal protest for receiving insufficient compensation when their homes bulldozed in the name of redevelopment.  Perhaps they would have fared better if they had had Kristof’s press pass. 

That got me thinking about how China’s challenges on the legal front are similar to those unknowingly faced by business leaders in the rest of the world. 

How many managers, for example, profess to have an open door policy but then shoot the messenger for bringing a problem to their attention?  If you happen to be the messenger it can leave you feeling like you’ve been run over by a reindeer. 

Just as China’s rough justice unnecessarily detracts from the country’s many other fine accomplishments, so too do corporate policy hiccups and mixed message communications.  It tarnishes the gold.

Whole Foods was recently caught up in a ground beef recall after illnesses were linked to the beef originating from a slaughterhouse in Omaha and distributed by Coleman Natural Beef, a Whole Foods supplier.  Although Whole Foods along with four other regional grocery chains were participated in the recall, it was a bigger black eye for Whole Foods than the rest.

The assumption is that for the extra money that you pay for most Whole Foods products, in return you’re getting something that’s safer, fresher and more nutritious, according to Gene Grabowski, head of the crisis and litigation practice at Levic Strategic Communications. Add to this a slowing economy where escalating food prices have caused consumer to stretch budgets by cutting corners and high priced chains and you have a mess.

So what happened?

In April, Whole Foods’ long time supplier, Coleman Natural Beef, announced the sale of its beef line to Meyer Natural Angus who started using Nebraska Beef in Omaha to process some beef and sold it under the Coleman brand. Unfortunately, Nebraska Beef had a spotty track record with the Agriculture Department.  According to a report in the NY Times, Coleman was supposed to get Whole Foods’ approval for the change, but didn’t.  It sounds like an important contract provision was ignored. 

Even though Whole Foods audits its suppliers annually and has strict supplier qualifying procedures, there was no procedure in place at the time of the incident to check the product codes as the goods were coming through the door at retail. If there were, Whole Foods would have seen the change. Instead, they trusted their contract and their supplier.

To their credit, Whole Foods has acted swiftly and instituted new procedures to audit their shipments more carefully and now requires E. coli testing of beef that exceeds government standards.  

What does this mean for you? 

Contracts are good, but they can only take you so far. They are good to the extent that they provide recourse against the party that harmed you. The theory of the case goes like this: they made a promise to tell you about supplier changes, they didn’t keep it, and now you’re harmed and entitled to be made whole (no pun intended). That’s helpful. But, the down side is that if you’re suing someone whose resources are questionable, you could win your suit and still loose. In other words, the operation can be a success but the patient can still die.

So yes, contract provisions requiring notice of any change in your supplier’s processes that can affects your business are good.  Also good are provisions requiring notice of change in control or ownership because unknown changes can undermine the due diligence of the supplier selection process and your vendor’s ability to meet your expectations. 

But in addition to contract terms, business steps should be taken to create fail safe mechanisms to protect the core business model. In the Whole Foods case consistent high quality was critical to its reputation and continued success and couldn’t be compromised. An extra step needed to be taken to make sure the contract was being complied with and that no adverse changes had been made to the product without notice to Whole Foods. The new audit procedure achieves that goal. It closes the loop on contract compliance and quality assurance.

In sum, in areas were failure is not an option, it’s OK to trust, but you also need to verify, to create redundancies, or fail safe mechanisms that insure consistent performance. Cut corners and you may get more than you bargained for, and not in a good way.