Is Corporate Social Responsibility (CSR) a corporate governance concern for China?

Keywords: Is CSR corporate governance concern in China, How Chinese Government promotes CSR, Extent companies practising CSR in China how CSR of benefit to Chinese investors, Corporate Social Responsibility (CSR) and corporate governance Assignment Writing Services

Introduction

Corporate social responsibility (CSR) is concerned with relationship between the global corporation, individual citizens and government of countries. It elaborates relationship between a corporation and its stakeholders in a society in which it operates. According to Carroll, CSR for business encompasses legal, economic, ethical as well as discretionary expectations of society from the organisation at given point of time CSR is a concept in which organisation integrates environmental and social concern into business process and interact with stakeholders on a voluntary basis (Zentes, Morschett and Schramm-Klein, 2017).

Tricker (2015) stated that corporate governance (CG) is defined as the way organisation directed and controlled. Corporate governance enclosed accepted structures and well-defined framework whereas CSR is voluntary free—form actions of the organisation. The interaction of CG and CSR involves reconciliation between stakeholder and shareholder. CG and CSR interaction involves a business strategy which makes ultimate goals of organisation achievable and transparent as well as demonstrates responsibility towards environment and communities and takes interest of stakeholders into account when making long-term business decisions (Ho, 2016).

The goal of this essay is to analyse and evaluate CSR and CG interaction in Chinese context. The essay is based on four parts. The first is concern with determining the extent to which CSR is a corporate governance concern for China. The second part involves analysing how much Chinese Government promotes CSR. The third part of essay elaborates to what extent companies practising CSR. The fourth part of essay evaluates how CSR of benefit to Chinese investors seeking a return from organisation.

The extent to which CSR is a corporate governance concern for China

Wintoki, Linck and Netter (2012) describe that corporate governance includes formal and informal relationship network involving the organisation and consequences of its actions on society. CG implicates cultural, set of legal and institutional arrangement which highlight how control and risk for organisation activities is managed. Therefore, CG looks beyond maximising shareholder value and govern relationship with stakeholders to achieve goals of organisation.

Idowu, Capaldi and Zu (2013) recognised the principles of CSR are sustainability, accountability and transparency. Sustainability is concerned with action taken in present and how it effects the future generation. In other words, sustainability involves using resources in a way it available for future generations. Accountability is concerned with recognition of the actions effect on external environment and thus assuming the effect of its actions on the society. It involves quantification of the effect of business action which is internal and external to the organisation.

Transparency means external impact of the organisation actions which is ascertained from the organisation report and matter no disguised in the reports. Transparency is important milestone because external stakeholders lack information (Thrasyvoulou, 2016).

Davidson and Yin (2017) indicated that in China CSR reporting was started by Shell in 1999 and with introduction of Chinese company’s law in 2005, Chinese security regulatory commission issued guidelines on corporate governance which is marked as beginning of integration of stakeholders in corporate governance. CSR in China is divided into divided into two parts which are voluntary CSR and absolute CSR. Voluntary CSR is not enforceable and enable the companies to understand concept of philanthropy.

On the other hand, Li and Foo (2016) apprised that absolute CSR involve basic bottom line and involves compliance with requirement of corporate governance such as working time, environmental protection and child labour. The key indicators of CSR are economic interest, shareholders interest, legal responsibility, and economic benefit and environment concerns. In China, voluntary (non-compliance) is achieved through legislation whereas company focus on the absolute CSR (Yang and Guo, 2014).

Corporate Social Responsibility and corporate governance in China
CSRCG
The CSR internal dimension includes responsibility towards internal stakeholders to manage the issues related to working condition, human rights, and labour right and workplace safety.The narrow CG perspective involves accountability, transparency and compliance.
The stakeholder approach highlight the complexity involves in network and complex web relationship and responsibility towards wider stakeholder groups.The wider perspective related CG is answering sustainability and organisation answering to internal and external stakeholders.

 

Firstly, looking at the extent to which CSR is corporate governance issue in China. According to Noronha et al (2013), only 20% of Chinese companies issue CSR report but there is significant degree of difference on level of information released on CSR activities. In the political economy of China, the state ownership of organisations is high which influence control and corporate governance of organisation. Government significant sway of resources as well as legitimacy for organisation and thus it influences distribution (subsidiaries and permits) along with project approval.

In such politicise governance context, the lack government transparency and rule of law affect the decision-making process. Organisations are faced ambiguity on relationship with government actors such as Shenzhen and Shanghai stock exchanges, administrative commission and state assets issued guidelines for reporting of corporate social and environmental practices and activities (Kuo, Yeh and Yu, 2012).

Wang et al (2015) examines that CSR model in China is based on Anglo-American model which focus on profit maximisation and disperse ownership by considering company interest as whole. However, in China, appointment such as chief executive and board of directors are subject to government control and intervention. Chinese business focuses on activities such political donations, lobbying and testimony to reduce uncertainty, create business opportunities and decrease transaction cost.

Xun (2013) asserts that the personal network of leadership within government is important because of weak rule of law; weaker enforcement and underdeveloped infrastructure make it hard for organisation to determine how to respond to government (external environment). The focus of the organisation in China is concerned with building legitimacy and signal the government is critical for business survival.

In China, top management regard CSR as window dressing and the goal of CSR is to improve corporate image rather social development and environment management. The management perspective for CSR is based on business-orientation approach rather moral and principles. When compare with CSR practices of Western market where customer and investors are important constituencies. In china, government is important stakeholders at top of pyramid because it is important stakeholder for business (Marquis, 2013).

In China, Government has significant state ownership which is critical source of legitimacy as well as provide positional advantage. According to Oliver and Holzinger (2008), sine qua non in China is important for unrestricted access to market, access to resources and long-term survival of companies. Thus, China government as key player is important policymaker and regulator and in some cases provide protection in certain situation. The political influence makes CSR reporting less relevant to gain social status (Moon, 2014).

Li and Foo (2016) acknowledges that in China, it is common that firm leadership have political connection. The executive might hold top position in the political system and there are two common types of political connections. The first is that organisation executive member of National People Congress (NPC) which does legislation or membership of People Political Consultative Conference (CPCC) which is advisory committee to the Chinese government.

The member of such bodies signals social status in China rather immediate business benefits. In the CSR context, business executive are inclined to political connections and firm respond to government pressure. The directors follow the government policies and regulations and issuing CSR report involves maintaining the legitimacy with government and its actors (Chizema et al., 2015).

Zhao (2014) highlighted that legislative process for CSR in China is slow and not transparent in China. Article 14 of Chinese company’s law state that it company must comply with law and protect the public interest in course of business activities. Shanghai stock exchange issues recommendation to clarify social responsibility of companies as well as NPC (National People Congress) proposed company law specifically includes section and provision to address CSR and relationship with stakeholders.

The private owned firm in China lack positional legitimacy and thus private ownership has low social status and consider as people enemies which result in discrimination against such firms (Davidson and Yin, 2017).

Zheng, Balsara and Huang (2014) underlined that In China, private form of ownership is new form of ownership which lack legitimacy in both society and economy and have strong motivation to cultivate relationship with the government. China economy is based on export-led structure and thus, global supply chain plays an important role. For instance, MNC in China has code of conduct for vendors (SA 8000) to manage conduct of partners and supplier (Zheng, Balsara and Huang, 2014).

How much Chinese Government promotes CSR

Secondly, analysing how Chinese government promote CSR reporting and initiatives in China. Raynard, Lounsbury and Greenwood (2013) established that company law is a key source of corporate governance in China and it regulates the social interest and organisation responsibilities to perform CSR. Security and exchange commission regulate the corporate governance and instruct the companies how to perform CSR.

For example, article 5 of Chinese company law state company must abide by regulations and activities like manipulation of stock and inside trading is prohibited. This protects the interest of investors in the stock markets.

Graafland and Zhang (2014) analyses that Chinese government legislation on protecting stakeholders, contract law and law of social welfare ensure organisation practice CSR through social development. According to Carroll, legal responsibility is important factor in CSR and it is important that companies take their legal responsibilities. Therefore, CSR in China is based on the regulations and legislations and high concentration of power shows that implementation of CSR is rather state-led, then voluntary approach.

According to Noronha et al (2013), CSR and CG is complementary to each other and influenced through market forces. To support the interest of internal and external stakeholders, Chinese government have codes of conduct and guidelines. SASAC issues the guidelines for organisation to implement CSR particularly for state-owned enterprises.

Similarly, In China, State Environmental Protection Administration (SEPA) presented model for environmental reporting and companies must disclose the environment information to the public. In addition, Shanghai stock exchange provides guideline for environment disclosure by companies and guide on social responsibility. Government actors regulate that companies implement both CSR in corporate governance as well as disclose information to public (Luo, Wang and Zhang, 2016).

Chinese ministry of Commerce issued reference book providing guideline on preparing CSR report. The CSR standards in China are based on Chinese Academy of Social Science 1.0 and 2.0 (Zhong 2009) which explains extend and degree of activities and processes enclosed in CSR report (Scherer et al., 2016).

Chinese government is building capacity through tools and actions by proposing industry standards, regulations and policies to increase the level of CSR. Chinese government encourage the importance of CSR and signal from range of channels for CSR that it is desired and appropriate activity and resulting companies are picking up the pace for CSR reporting. Chinese’s government guidelines and statements on the CSR reporting are based on the legitimacy principles (Dauvergne and Lister, 2012).

This signal of power stakeholders define and influence the activities of organisation. This creates the conflict in terms of what organisation must comply and hold high degree of legitimacy. In recent times, Chinese government has issued sustainable equity growth fund as well as initiated green credit policy for bank to assess environment performance during credit assessment (Cheung, Jiang and Tan, 2012).

Chinese government provides incentives for the CSR development through proposing China Social Compliance (CSC) 9000 which elaborates contract law, labour law and society plan in textile (Ho, 2013).

Zhu, Liu and Lai (2016) explain that Chinese government promotes CSR through number of legislation and regulation. For example, Ministry of commerce has issued documents for companies providing guidelines to implement CSR. In addition, in 2015, SASAC provide set of rules and guidelines for companies for effective implementation of CSR.

Local and regional authorities plays critical role in CSR development in China. The southern and eastern are considered actively participating in CSR development and statistics showed that by end of 2015, 18 cities and 8 provinces have published standards and guidelines on CSR for local business.

Crane, Matten and Spence (2013) added that For instance, Pudong district have specific policies and offices to promote CSR and provide training, conduct evaluation of companies CSR initiatives as well as manage incentive schemes. At national level, Chinese government has not taken CSR as national strategy as well as there are no national standards (Dai et al., 2016).

China central government has assigned any authority for coordination on work for CSR. Local governments’ initiatives on social responsibility such as CSR promotion remains fragmented.  There is need of policy mechanism to develop national strategy for CSR and enforcement of CSR (Li and Foo, 2016).

Extent companies practising CSR

Thirdly, essay examines the extent to which companies practising of CSR. Raynard, Lounsbury and Greenwood (2013) disucss that Chinese government control resources which shape firms position and competitive landscape. The effect of organisation activity is not limited to itself but affect the external environment in which organisation operates. Organisations are concerned with subsidies, taxation and regulation and strategic choice of Chinese companies involve enhancing own position and strength relationship with government actors.

The quality of CSR reporting in China varies significantly based on decoupling, political dependence and monitoring and legitimacy guidelines. For examples, in China, only 8% of companies CSR report meet the G3 guidelines (GRI 3.0) and only 6% of the reports have third-party solicited opinion for their CSR report (Bhatia and Tuli, 2015).

Shin (2014) stated that there is lack of uniform standards to monitor and evaluate CSR performance of organisation in China. When compare with Western countries where organisation issue CSR reports since 1980. Despite the fact, Shell released CSR report in China in 1999, the focus on CSR in China started in 2006 with companies such as COSCO group and state grid start releasing CSR report. The CSR reporting is increasing trend in China which increasing number of companies issuing CSR reports.

According to Ho (2013) MNC prefer to invest in China, because lack of explicit regulation and ineffective monitoring. Chinese people perceive greater interest in western companies and despite low performance get the trust of partners, Chinese government and consumer. On the other hand, small businesses are less concerned with CSR processes and implementing in China. For example, there are number of SME in the south China but due to weak position in china market economy, the sole objective of such companies is profit making (Davidson and Yin, 2017).

Park, Chidlow and Choi (2014) highlighted that the social barrier directly influences the adaptation of CSR in China. Companies with long social history have notion of corporate citizenship and social identity. In the western countries, some companies have long history and culture and CSR helps the companies to improve reputation and image through considering wider stakeholders. However, in China, companies are transition period and building resource bases and thus, less concern and familiar with concept of corporate citizenship identity (Scherer et al., 2016).

Kolk, Dolen and Ma (2015) argued that Chinese consumers are itself a challenge for organisation to implement the CSR. In western society’s consumer evaluate positive and negative impact and use purchasing power to express the social concerns. The consumption pattern of consumer encourages the importance of CSR through human rights, social interest and environment. In comparison, a survey conducted among the Chinese customers show that consumers are more concerned with price of commodity rather how and where good is produced (Moon, 2014).

The corporation CSR implement is based on following criteria (Diagram 1). In China, impact of companies on society is determined through employment opportunities, taxes and development of local markets. The economic performance includes employment opportunities and local economic development is important criteria. Sustainability implies that organisation should no use more resources than it regenerated. The environment performance includes ability to address climate and greenhouse emission. CSR in context of environment is managed through environment legislation in place (Ho, 2013).

In China, environment performance of corporation highlights poor implementation of regulatory compliance and inefficient monitoring. Labour condition includes issues such as occupational health and safety, training and compliance with legal requirement of wages, pension and insurance. This SME employ large number of migrants without giving consideration to social welfare and no concern for the environment challenges (Idowu, Capaldi and Zu, 2013).

Raynard, Lounsbury and Greenwood (2013) proposed that In China, there is lack of consensus and company has poor record of implementing of CSR. For instance, migrant workers worked over 44 hours per week. The fourth important indicator of CSR in China is community development which includes community involvement and local development. Chinese corporation actively participate in donations and according to China Charity and Donation information, 58% of donation in 2015 came from private organisations. According to KPMG, China CSR reporting account for 15% of total CSR reports published worldwide and percentage of reporting among top 100 companies was 72% for 2015.

Nevertheless, 92% of CSR reports issued by Chinese corporation are not audited as well as on 17% of the report had quantitative indicators. The diagram below shows how companies in China integrate CSR into daily operations (Davidson and Yin, 2017).

CSR intended in daily operations of company -- china

How CSR of benefit to investor seeking a return

In this fourth part, the focus of essay is on analysing how CSR of benefit to investor seeking a return. According to Friedman (2008) corporate executive are agent of shareholders and direct responsibility to conduct business according to their needs. Company needs to balance profit maximisation and rules of society at same time. Therefore, shareholders have significant influence on the actions and operations of organisation.

In CSR context, unethical behaviour is associated with short-term profitability and shareholder preference is profit maximisation ahead of other considerations which happen at terms of shareholders. CSR context of corporate governance involves management of relationship with stakeholders and investor seeking better return by looking at CSR of company. CSR as intangible asset gives companies competitive edge and increase shareholder value (Luo, Wang and Zhang, 2016).

According to Hoffman and Fieseler (2012), modern investors are concerned with reputation and public perception of company as well as stakeholder relationship is matter of concern for investors. Shareholder engagement involves dialogue process and investor change company behaviour through shareholder activism. This signal of power stakeholders define and influence the activities of organisation.

This creates the conflict in terms of what organisation must comply and hold high degree of legitimacy. Therefore, companies find it difficult to balance because financial market participants have different perspective on CSR when compare with other stakeholders. In China, mainstream investors are less concerned social responsibility perspective because of short-term profitability perspectives (Thrasyvoulou, 2016).

In china, the problems with CSR from financial market participant are that CSR is considered as cost or charitable deed. Institutional investors engage with companies based on value and risk management approach of companies (Liang and Tie-nan, 2013).

In Chinese state-owned enterprises, investors have is prevailing uncertainty on the goals and performance of organisation because of lack of information. The lack of efficiency, unattractive products and lack of independent management represent that investor less concern for CSR policy and practices of state-owned enterprises. CSR for state-owned enterprises increases efficiency of working motivates employees, improve the quality of the product as well as tackle social and environment (Song et al., 2016).

This assures the investor’s long-term success of the company through improving image of company under CSR perspective. Investors are concerned with financial performance and non-financial information disclosure of company. The power of institutional investors to influence and acting in their own interest and thus, active investor with social and environmental concerns make company aware of their political liability. Therefore, there is need to assure investors through combining financial objectives with social, environmental and governance issues (Tan-Mullins, 2016).

Dai et al (2016) proposed that the economic reforms have increased the number of private companies in China. The problems associated with private companies are of professionals and poor management system. Companies with positive image through CSR can attract professional which increase shareholders wealth and ensure long-term survival. The emergence of private after the economic reforms means these company lack image and culture. The investors in privates companies are individuals and focus on economic benefits.

CSR provides the opportunity to project positive image with stakeholders through ethical behavioural and practices. Organisation in china faced issues such as low awareness of statutory requirement, blind eye towards pollution, labour and property rights and taxation. The problems are poor relationship with internal stakeholders such working condition and wages as well as failure to comply with statutory requirement like tax evasion (Li and Foo, 2016).

Cheung, Jiang and Tan (2012) elaborated that CSR strategy can benefit from three perspectives. First, it would allow building knowledge and intelligence pool which would allow developing skill and know-how of companies and thus increasing business efficiency. This would allow achieving basic bottom of economic benefits for the company. The development of technologies, management model, intelligence pool and social norms shape legal system and increase the efficiency of operations. The second benefit achieved from CSR is that it makes operations lawful through practising norms and statutes (Zhu, Liu and Lai, 2016).

For example, CSR provides opportunity for improve working condition for employee and decrease pollution through resource efficiency. The third benefit involves establishing a corporate culture through setting beliefs, values, rules, attitudes and traditions. This would allow overcoming unethical practices of management and improve the image of companies through better working condition, good labour rights and maximise social development (Li et al., 2013).

Conclusion

CSR is China is relatively new phenomenon when compared to western world. The issues related to human and labour rights, environment and regulation present challenges to companies. In China, CSR legislation and implementation have additional complication for CSR matters. Socially responsible business and environmental practices in China faced with unintended imperfections.

In China, CSR is the matter of compliance (absolute CSR) rather working with wider stakeholders. The effect of organisation on the external environment includes utilisation of resources, competition between itself and other organisation, providing employment opportunities as well as the transformation of landscape due to the extraction of resources.

Business executives are inclined to political connections and firm respond to government pressure. The directors follow the government policies and regulations and issuing CSR report involves maintaining the legitimacy of government and its actors.

Chinese government legislation on protecting stakeholders, contract law and law of social welfare ensure organisation practice CSR through social development. CSR is important aspect of stakeholder theory which interest social and environment issues. CSR is important tool to improve efficiency of corporate governance to maximise shareholder wealth and meet expectation of stakeholder through achieving company objectives.

Companies with serious CSR practices stimulate the consumer interest and translate into consumer and investor decision-making. CSR should be voluntary and work beyond legislation for interest of wider stakeholders. The range of CSR initiatives includes local government guidelines, laws and regulations such as CSC 9000.

CSR perspectives for state-owned enterprise is concerned with improve efficiency and productivity to improve product quality, enhance revenues and increase shareholder satisfaction. CSR strategy enables the organisation to improve technology, resource efficiency and attract customers.

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