Corporate Governance and CSR in China: A Comparison Between Domestic Enterprises and Multinational Companies

Both corporate governance and Corporate Social Responsibility (CSR) have been much discussed in the past decade in China. Ever since joining the WTO in 2011, China’s domestic enterprises have been facing fierce competition from multinational companies (MNCs). Compliance with international standards of corporate governance and CSR is one of these challenges. This essay aims to compare domestic enterprises and MNCs in China in terms of their CSR conducts. The article is divided into four parts. The first introduces the two different models of corporate governance. The second part illustrates the characteristics of corporate governance in China. The third compares domestic enterprises and MNCs. Conclusion and discussion are provided in the last part.

Definition of corporate governance

Generally speaking, corporate governance studies can be categorized into two parts (Denis and McConnell, 2001): inside studies and outside studies. Inside studies focus on the relationships among shareholders, the board of directors, and managers. Outside studies focus on the relationship between the company and society, including government, customers and employees. With this division, there are two kinds of corporate governance models. Most of the definitions follow the Anglo-American model and stress the management of implicit relationships among board, managers and shareholders. Shleifer and Vishny (1997), defined good corporate governance as “having legal protections for investors”. This definition focuses on the guarantee of profit, which is typical of the Anglo-American market-oriented model. The traditional principal-agent problem is addressed here. For managers, they cannot afford to sacrifice short-term goals in exchange for long-term ones, because they will be fired when the short-term performance is bad. At the same time, shareholders will not allow low short-term performance from happening. Although in contradiction to the principal-agent theory stating that managers are the ones to blame for risk-taking behaviours, Stulz and Beltratti (2009) found that banks were pushed by boards to increase risk-taking activities. Gropp and Kohler (2010) had the same results. This example illustrates that the Anglo-American definition is not effective enough to explain the problem of corporate governance, because shareholders may also accompany managers to cause negative impacts to external stakeholders.

Given the problem mentioned above, outside studies have been gaining more importance. The 2014 Nobel Prize Laureate Jean Tirole once defined corporate governance as “the design of institutions that induce or force management to internalize the welfare of stakeholders” (Tirole, 2001). This is the “multistakeholder model” popular in continental Europe and Japan that emphasises the external relationships with other stakeholders, such as financiers, customers, government and community. In contrast with the previous one, this model connects corporate governance with CSR. This definition combines businesses and society, and is hence more comprehensive and complicated. Because of its complexity, the possibility of application is still in discussion. While most welcome this model, some famous scholars such as Milton Friedman have openly criticized this theory and argued: “the Social Responsibility of Business is to Increase its Profits” (Friedman, 1970).

Characteristics of Corporate Governance in China

Chinese corporate governance features are highly distinctive because of corporate history. In the 1980s, the economic reformation had just taken place in China and most of the companies were state-owned. This actually generated four distinctive features of Chinese corporate governance in the late 2000s. The first one is strong state ownership. According to Liang (2009), the government held 51% of all listed shares in 2008, and members of the Communist Party are often appointed to company boards. Secondly, these companies all have highly concentrated ownership. Of the 1602 listed in 2008, the biggest five owners held 52% of the average company’s shares. Thirdly, unlike British or American firms that are owned and operated in a stand-alone basis, Chinese companies have pyramid ownership structures: the benefits of listed and unlisted companies are mixed together, which increase the possibility of malfeasance tunnelling. Fourthly, China has weak markets for corporate control. Because of the shareholder structures, corporate decisions sometimes are not made according to the markets, but through government decisions.

From corporate governance to CSR

In this section, a comparison between domestic companies and MNCs in China in terms of CSR conducts is made. Given that the “multistakeholder model” is gaining more importance, it is easy to see the relevance between corporate governance and CSR. In the past several years, many CSR issues have been raised in China, especially on food safety. From the poisoned milk powder scandal caused by large domestic companies to Sudan I chemical crisis caused by MNCs in China (and not in other areas), there are many quality issues raised in the past decade. Other scandals include bribery from Daimler, Coca-Cola, McKinsey and Wal-Mart; labor issues from mainland factories of Disney, Apple, Adidas and others. This negative conduct triggers questions: why do these MNCs seldom make these errors in other countries? Wang (2010) conducted a survey of 350 MBA students, who represented upper-middle class and rational decision makers, on their opinions towards CSR contribution of MNCs. More than 50% of respondents thought MNCs have double standards treating China and other markets; 61% thought the reason for low CSR commitment of MNCs was due to the low CSR standard [in China].

This conclusion is supported by another study undertaken by Harvard Business School. Robert Eccles and George Serafeim studied more than 2000 companies in 23 countries and ranked these countries based on “the degree of integration of corporate environmental and social performance with financial performance” (Eccles and Serafeim, 2011). They also ranked the countries by looking at the number of times investors accessed environmental and social data on Bloomberg terminals. This study found that China fell in the category of “unsustainable countries”, meaning “there was very little integrated reporting by companies and very little interest by investors in nonfinancial performance metrics” (See Graph 1 and Graph 2). They further commented, “it is unlikely that market forces will be sufficient to generate a change in behaviour”. Another study was in compliance with this conclusion. Liu (2014) found that although most consumers say they care about CSR issues, the actual buying behaviour is different. This illustrates that the core problem remains in delivering CSR values through benefits that customers can feel (quality, price and so forth).

In this context, the benefit for MNCs to conduct CSR in China is much less because ESG issues receive less attention than average in the International sphere. At the same time, the cost of not implementing CSR is also much less since the government does not place too much attention on it. These two factors greatly reduce MNCs’ incentives to keep their CSR commitment.

Table 1. Company Integration and Investor Interest in Environmental Performance

Table1.png

 Source: Eccles, Robert and George Serafeim, “Leading and Lagging Countries in Contributing to a Sustainable Society”

Table 2. Company Integration and Investor Interest in Social Performance

table2.png

 

Source: Eccles, Robert and George Serafeim, “Leading and Lagging Countries in Contributing to a Sustainable Society”

Conclusion

The analysis above showcases some of the CSR issues in China. The biggest difference between domestic enterprises and MNCs is the different mindset towards CSR. For most domestic enterprises, their small sizes determine the restricted ability to implement CSR. Most of the companies do not understand the reasons to establish a CSR strategy when they do not even have a sound corporate governance mechanism. For MNCs, although they understand the importance of this and have a reputation for doing it globally, the temptation of not following is high. Nevertheless, there are still positive signs in the development of CSR in China. According to Fortune’s ranking on CSR, China’s domestic companies scored much higher in 2013, while MNCs in China all remained with similar scores as in previous years. More and more independent CSR reports are issued. Of course, only large domestic firms can afford these. The CSR measures applied by enterprises can only move forward, since they will doubtlessly be the most important determinants of successful companies in the future.

References

Beltratti, A. and Rene M. Stulz. (2009). Why did some banks perform better during the credit crisis? A cross-country study of the impact of governance and regulation. National Bureau of Economic Research

Denis. D.K. (2001). Twenty-five years of corporate governance research and counting. Reviews of Financial Economics. 10(3): pp. 191-212

Eccles, Robert and George Serafeim. (2011). Leading and Lagging Countries in Contributing to a Sustainable Society. Available from: < http://hbswk.hbs.edu/item/6716.html>[10 March 2015]

Friedman, Milton. (September 13, 1970). The social responsibility of business is to increase its profits. The New York Times Magazine

Gropp, Reint, and Matthias Kohler. (2010). Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis. Centre for European Economic Research

Li, Weian, Aichao Qiu, Jianbo Niu, and Yekun Xu. (2010). Recent development of corporate governance: international trends and China’s mode. Nankai Business Review. 13 (6): pp. 13-24

Liang, Neng and Michael Useem (2009). Corporate Governance in China. Handbook of international corporate governance. pp. 167-175

 

Liu, Jianhua. (2014). The inherent mechanism of consumer reactions to corporate social responsibility. Doctoral Dissertation, Shandong University

Shleifer, A. and Robert W. Vishny. (1997). A Survey of Corporate Governance. Journal of Finance. 52 (2). 737-783

Tirole, Jean. (2001). Corporate governance. Econometrica. 69(1): pp1-35

Wang, Mantian. (2010). Research on social responsibility of multinational corporations in China. Modern Management Science. (5): pp. 42-45

Zhou, Qing. (2009). The study on the social responsibilities of multinational corporations in China. Masters Dissertation, Suzhou University

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In the third stage, a seminal paper is devised based on a comparative social policy analysis – between Blair/Brown, Cameron/Osborne, and the Coalition, and the social implications of their respective policies.

 

These papers, with others, will be discussed in our forthcoming policy briefing seminar (date and venue to be announced soon) on child poverty policy issues. For details, you can email us at socialvision06@gmail.com.  

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1 https://www.gov.uk/government/policies/arts-and-culture

Is the UK Losing its Christian identity as Christians become less religious?

There is a frightening trend that is occurring in the UK for British citizens who state that they have no religion, or belong to a non-Christain faith, despite the fact that they were raised as Catholic, Anglican or Protestant and have identified as such throughout their earlier life.  
According to the Census data since 2014 the proportion of the population who identified themselves as having no religion - 'noones' reached a record 48,5% in 2014, and this figure has almost doubled from 25% in 2011. There is a clear growth trend of 'no religion' according to the data collected by the British Social Attitudes surveys over the last 30 years. 
The main driver of this change is caused by people, who were brought up as religious but later on in their lives have stopped practicing their faith on a regular basis. Even in the traditionally most religious part of the British Isles like Northern Ireland, an increasing number of citizens claim they belong to a non-Christian religion or to no religion.
These remarkable developments of the modern society we live in seem to point towards a scary phenomenon that is lying underneath – that of a shared disinterest and disengagement with the Churches, similar to the sentiments towards the political establishment. 
The real concern should be for the Christian leaders of this country about the growing indifference to organised religion. This year the Church of England said it expected attendance to continue to fall. Moreover According to Bullivant’s report, Contemporary Catholicism in England and Wales – which will be launched at the House of Commons next week, both the Anglican and Catholic churches are struggling to retain people brought up as Christians. Four out ten adults, who were raised as Anglicans define themselves as having no religion, and almost as many “cradle Catholics” have abandoned their family faith to become “nones”. 
Neither church is bringing in fresh blood through conversions. Anglicans lose 12 followers for every person they recruit, and Catholics 10. (Guardian - People of no religion outnumber Christians in England and Wales, https://www.theguardian.com/world/2016/may/23/no-religion-outnumber-christians-england-wales-study)1


The vast majority of converts come from other Christian denominations, rather than non-Christians or people with no religion. 
The proportion of the population who describe themselves as Anglican plunged from 44.5% in 1983 to 19% in 2014. Catholics made up 8.3%, other Christians 15.7% and non-Christian religions 7.7%.

The disintegration of society and the loss of a common identity
One crucial observation is tantalising - Are foreign religions taking over the British society?. The first Muslim mayor in the Western world was elected in London. Traditionalists will voice their concerts that there is a danger that the British identity will eventually be lost. Or that it has become irreversibly interwoven with new fluid forms, variations and modifications from the influx of people from a vast range of faiths, traditions and customs, who settle here and make Britain their home, and have their children here who become the new UK generations, and replace the orthodox religious practice and affiliation and traditional rapport.

There is a frightening trend that is occurring in the UK for British citizens who state that they have no religion, or belong to a non-Christain faith, despite the fact that they were raised as Catholic, Anglican or Protestant and have identified as such throughout their earlier life. 

According to the Census data since 2014 the proportion of the population who identified themselves as having no religion - 'noones' reached a record 48,5% in 2014, and this figure has almost doubled from 25% in 2011. There is a clear growth trend of 'no religion' according to the data collected by the British Social Attitudes surveys over the last 30 years. 

The main driver of this change is caused by people, who were brought up as religious but later on in their lives have stopped practicing their faith on a regular basis. Even in the traditionally most religious part of the British Isles like Northern Ireland, an increasing number of citizens claim they belong to a non-Christian religion or to no religion.

These remarkable developments of the modern society we live in seem to point towards a scary phenomenon that is lying underneath – that of a shared disinterest and disengagement with the Churches, similar to the sentiments towards the political establishment. 

The real concern should be for the Christian leaders of this country about the growing indifference to organised religion. This year the Church of England said it expected attendance to continue to fall. Moreover According to Bullivant’s report, Contemporary Catholicism in England and Wales – which will be launched at the House of Commons next week, both the Anglican and Catholic churches are struggling to retain people brought up as Christians. Four out ten adults, who were raised as Anglicans define themselves as having no religion, and almost as many “cradle Catholics” have abandoned their family faith to become “nones”.

Neither church is bringing in fresh blood through conversions. Anglicans lose 12 followers for every person they recruit, and Catholics 10. (Guardian - People of no religion outnumber Christians in England and Wales, https://www.theguardian.com/world/2016/may/23/no-religion-outnumber-christians-england-wales-study)1


 

The vast majority of converts come from other Christian denominations, rather than non-Christians or people with no religion.

The proportion of the population who describe themselves as Anglican plunged from 44.5% in 1983 to 19% in 2014. Catholics made up 8.3%, other Christians 15.7% and non-Christian religions 7.7%.

 

The disintegration of society and the loss of a common identity

One crucial observation is tantalising - Are foreign religions taking over the British society?. The first Muslim mayor in the Western world was elected in London. Traditionalists will voice their concerts that there is a danger that the British identity will eventually be lost. Or that it has become irreversibly interwoven with new fluid forms, variations and modifications from the influx of people from a vast range of faiths, traditions and customs, who settle here and make Britain their home, and have their children here who become the new UK generations, and replace the orthodox religious practice and affiliation and traditional rapport.

 

1 Guardian - People of no religion outnumber Christians in England and Wales, https://www.theguardian.com/world/2016/may/23/no-religion-outnumber-christians-england-wales-study