Book proposal and book review

71 The China Business Model. Copyright © H. C. Chandan and R. Das. Published by Elsevier Ltd. All rights reserved.2017

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CHAPTER 4

Evolution of Responsible and Sustainable Corporate Identity for Chinese Firms Harish C. Chandan1and Riturpana Das2 1Argosy University, Atlanta, GA, United States 2Adamas University, Kolkata, West Bengal, India

4.1 INTRODUCTION

Chinese economy is a mixture of state-owned enterprises and private companies. A transition from state-controlled to market economy has con- tributed to the runaway economic growth, leading to environmental pollu- tion due to lack of corporate social responsibility (CSR) practices by firms, and lack of regulation and monitoring by the government. In China, CSR is driven by the central government creating a policy and regulatory frame- work for introducing and promoting the adoption of corporate sustain- ability (CS) reporting. The CSR practices are evolving rapidly, led by the state-owned enterprises (SOEs) (V.H. Ho, 2013).

Historically, North America and Western Europe lead the world in CSR practices. The Western-centric perceptions of CSR, however, need to be modified when being applied to China: what constitutes CSR and how organizations act responsibly. The practice of CSR and stakeholder engagement relies on specific institutional elements, which are structur- ally possible and normatively legitimate CSR practices. Various state regu- lations, industrial norms, civil organizations, and community groups may result in different CSR sense making and practices (Yin & Zhang, 2012). A firm’s approach to CSR is context-specific due to social environment, cultural ethics, political structure, government regulations, peer-pressure, and economic considerations (Hou & Li, 2014).

This chapter summarizes the evolution of CSR practices in China. The roles of cultural ethics (national and organizational), normative and struc- tural aspects (political structure, and government regulations), competitive forces (consumer-driven and peer-pressure), corporate philanthropy, and

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social environment are reviewed. The current Chinese CSR/sustainability practices are discussed in terms of the international CSR standards (UN Global Compact (UNGC), G4-Global Reporting Initiative (G4-GRI), and ISO 26000).

4.2 HISTORICAL PERSPECTIVE ON THE EVOLUTION OF CSR IN CHINA

People’s Republic of China was established in 1949 with a centrally planned economic system and SOEs. In 1978, China instituted an eco- nomic reform, opening up to the rest-of-the world policy. The CSR concept was introduced into China from the West in late-1980s. The the- oretical foundation of CSR research in China began c.1990 and CSR was defined as the enterprise’s obligation to face the social needs and all kinds of social problems, to safeguard the state, the society and the fundamental interests of people, while ensuring its own survival (Li, Zhang, & Check- Teck, 2013).

As China transitioned from the state-controlled to market economy, its a strong emphasis on rapid economic growth for over 30 years, has led to excessive environmental pollution, social injustice, social inequal- ity, income inequality, rural poverty, corruption, and social protests. The Chinese leaders are very sensitive to the social disorder (luan) that has pre- viously led to social unrest during many dynasties and governments in the history of Chinese civilization. All segments of society are called upon to share responsibility to finance, monitor, and deliver social services to build a modern and harmonious China. Since 2005, the business sector has been recognized as a key to deliver better social services through CSR (Lu, 2009; See, 2009).

The economic reform of building market-oriented economy began in 1993, leading to a rapid growth of private firms at the expense of envi- ronment pollution and ethical treatment of customers. China’s econ- omy has been more export-oriented since the beginning of economic reforms. Economic globalization brought the multinational corporations (MNCs) into China, and as the MNC’s implemented certification and audit procedures on production regulations, such as Social Accountability International, SA8000, the focus on CSR increased. The CSR audits of Chinese suppliers of the MNC’s motivated Chinese firms to begin CSR practices. This practice of CSR was not only to maximize the profit of shareholders, but also benefit all stakeholders, including employees,

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consumers, creditors, debtors, small- and medium-sized competitors, the local community and environment, vulnerable groups, and the whole of society (Li, Zhang, Mao, & Min, 2012; Selmier, 2013).

China joined the World Trade Organization (WTO) in 2001. A tri- angle model of CSR was proposed, consisting of the mandatory legal level, the adherence to standard level, and the strategic and moral level that reflect managers’ value judgment; CSR was considered as the third responsibility beyond economic and legal responsibility. Some Chinese scholars defined CSR similar to the West: as a four-dimensional CSR concept, involving economic, legal, ethical, and discretionary (or philan- thropic) dimensions (Carroll, 2004,1991).

In 2005, Chinese President Hu Jintao instituted a “Harmonious Society (jianshe héxié shèhuì)” policy as China’s socio-economic devel- opment process in order to reduce social disparities in China. This new vision was aimed at building a society that placed people first, includ- ing the employees and creditors. This vision combines economic growth with social and environmental concerns, and emphasizes the increased level of CSR in China beyond mere compliance with regulatory norms. Between 2006 and 2011, the enforcement of China’s company law (CCL) contributed to some progress relevant to CSR, including data on the per- formance of directors’ duties toward stakeholders. Enforcement of CSR- related legal requirements still involves some political interference. Public awareness of the social problems that CSR can impact, improvements in the legal system, and business disclosure of social and environmental issues will contribute toward better CSR (Zhao, 2012).

In 2006, the Company Law of the People’s Republic of China was amended. This law requires companies to abide by social ethics, business ethics, to be honest and trustworthy, as well as to fulfill social responsi- bilities, including sustainable development. The CSR was defined as the combination of economic responsibility and legal responsibility, abid- ing by laws about environment, resources, and the rights and interests of stakeholders while defending the benefits as well as the sustainable development of the society. Another definition of CSR, for the  purpose of sustainable development, was divided into three hierarchies: the legal responsibility that must be fulfilled, the economic and ethical responsibil- ity that need to be fulfilled, and the charitable responsibility that is volun- tarily fulfilled (Wong, 2009).

Since 2006, the Chinese government has promoted building a har- monious society, which has led to a greater focus on reporting of CSR

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and sustainability. Shenzhen and Shanghai Exchange-listed companies are required to issue sustainability reports, and the Shenzhen Exchange pro- vides training on data collection and CSR-report writing for listed com- panies. China’s New Social Policy assesses the social impact created by the market-oriented changes in China’s social policies, and contests the idea that market-oriented development can result in a more sustainable society (Zhao & Lim, 2009). There is an overlap between the objectives of a har- monious society and CSR, and the new social policy may lead to increased CSR engagement in China. Toward the end of his tenure in 2011, Hu appeared to extend the ideology to an international dimension, with a focus on international peace and cooperation—said to lead to a “harmoni- ous world,” whereas Hu’s successor, Xi, Jinping has used the Harmonious Society philosophy more sparingly, in favor of emphasizing his vision of the Chinese Dream. Harmonious Society is unlikely to promote CSR in China’s growing private sector because policy measures that affect the “constraints” driving CSR are bound by other political considerations (See, 2009). Innovation of CSR processes is necessary for overall efficiencies of economy, society, and environment (Wang, Qin, & Cui, 2010).

The CSR practices of foreign multinational enterprises in China can contribute to China’s national priority of building a harmonious society. Based on personal reflections, extensive literature review, and 8 years of experiential field work in China, it was found that only 4 out of 20 mul- tinational enterprises surveyed were committed to fostering green growth, improving livelihood, and promoting a general integration of Chinese business into global markets through social innovations and collaborative projects. Many CSR programs were found to superficially complement China’s harmonious society policy (Lam, 2014).

In 2008, the Chinese Academy of Social Sciences established a set of CSR reporting guidelines, which is now highly recommended by Central Government officials. There was a notable increase in the subsequent CSR articles written by Chinese university researchers. Most of the arti- cles employed an empirical research methodology to study CSR in vari- ous sectors. There were no comparative studies found between China and other countries that may perform better in CSR. It is likely that the Chinese academics may be under some political pressure not to compare Chinese CSR unfavorably with foreign examples (Memon, Chanar, & Robson, 2015). Based on a synthesis of Carroll’s CSR model and the stra- tegic legitimacy approach, the political capital influences corporate philan- thropy (Chen & Cao, 2016).

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The China Enterprise Management Association defines CSR as the responsibility that must be fulfilled was the economic and legal responsibil- ity, the responsibility that should be fulfilled was the ethical responsibility, the responsibility that is voluntarily fulfilled was the charity responsibil- ity. Another definition of CSR in China considers three levels: the basic responsibility, including economic and legal responsibility for the share- holders, the employees and the government; responsibility related directly to the development of enterprise, including responsibility for employees and consumers; charitable responsibility related directly to the develop- ment of the enterprise, including responsibility for the environment and the public. The nongovernmental organizations (NGOs) can serve to monitor corporations for sustainability practices, but, in China most of the influential NGOs that serve to monitor corporations are established by, or dependent on, government agencies. China needs to develop independent NGOs in order to apply greater checks on this power and allow the social and economic system to run more smoothly (Yu, 2015).

From 1953 onwards, the concept of CSR in the West has experienced five stages of evolution: social ethics-oriented stage, differentiation and prosperity stage, stakeholder stage, business-oriented stage, and sustainable development stage. After about 20 years of development, going through the evolution of the introduction period, chaotic period, plus the legal and ethical responsibility period, the concept of CSR in China achieved uni- fication with the West with an orientation of sustainable development in the late-2000s (Chu, Chatterjee, & Brown, 2013). There are some differ- ences between CSR concepts in China and the West. The CSR concept in the West had a social or ethical orientation in 1950–60s. It was fur- ther expanded in 1970s’ and shifted toward a business-oriented concept, based on the stakeholder theory in 1980s. It was not until 1990s’ that CSR concept incorporated a notion of sustainable development. In China, the CSR practices evolved from the legal dimension of CSR (low-level CSR). The next higher level of CSR in China is business-oriented (medium- level). The ethics and sustainability-oriented CSR is considered the high- est level of CSR in China (Yang and Guo, 2014).

4.3 EVOLUTION OF CSR INTO CS IN CHINA

CSR and CS are related concepts. With increased globalization and social awareness due to the evolution of web 2.0 (social media networks, user-generated content, and open source approaches), the notion of

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CSR has evolved into the present CS within the context of “global com- mons,” “stakeholder involvement,” and “innovative global partnerships” (Kolk, Hong, & Dolen, 2010; Pirnea, Olaru, & Moisa, 2011). The concept of CSR has evolved into a broader CS perspective to include the three pillars of profit, people, and planet (Wempe & Kaptein, 2002). The ultimate goal of CS is to “meet the needs of the present without compromising the ability of future generations to meet their own needs” (Bruntland Report, 1987).

CSR is a voluntary business initiative that represents a way of manag- ing a business in a sustainable and ethical manner to achieve the triple bottom line—financial, environmental, and social. CSR promotes sustain- able development. It is a partnership between the business, government, civil society, investors, and all the other stakeholders including employees and customers. Its voluntary initiative encourages companies to implement responsible business practices, develop new business models, innovations, and new technologies—leading to sustainable manufacturing processes and green supply chain management. CSR nudges companies to con- duct business ethically and beyond compliance within the laws governing product safety, environmental protection, corruption, human rights, labor rights, and giving back to society. CSR inspires firms to watch the inter- ests of both the shareholders and other stakeholders including employees, consumers, suppliers, and local communities. CSR involves not just pro- viding jobs but also the quality of life (Lin, 2010).

CSR is often used as a synonym to reference “sustainability,” “responsible business conduct,” or “business and human rights,” balancing the triple bottom line (profit, people, and planet). CS, however, is rooted in the wider concept of sustainable development, which can be characterized as a normative concept like freedom, democracy or social justice (Kraus & Britzelmaier, 2012). This sustainability is a dynamic process of change and constant improvement with intermediate achievable targets (Delai & Takahashi, 2011).

According to European Union, CSR refers to “Companies tak- ing responsibility for their impact on society. The European Commission believes that CSR is important for the sustainability, competitiveness, and innovation of EU enterprises and the EU economy. It brings ben- efits for risk management, cost savings, access to capital, customer relation- ships, and human resource management.” The EU-CSR strategy is based on UNGC, UN Guiding Principles on Business and Human Rights, ISO 26000: Guidance Standard on Social Responsibility, International Labor Organization (ILO) Tripartite Declaration of Principles Concerning Multinational Enterprises on Social Policy, and OECD Guidelines for

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Multinational Enterprises. CSR is a voluntary effort led by a company and is supported by complementary public (government) regulation. Companies become socially responsible by following the law and integrat- ing the social, environmental, ethical, consumer, and human rights con- cerns into their business strategy and operations. CSR is beneficial to the enterprise in its risk management, cost savings, access to capital, customer relationships, HR management, and its ability to innovate. CSR makes companies more sustainable and innovative, which contributes to a more sustainable economy. CSR builds a more cohesive society (EU-CSR, 2015; EU Multi Stakeholder Forum, 2015).

4.4 CSR/CS THEORETICAL FRAMEWORK IN CHINA

Historically, the CSR framework includes four domains—economic, legal, ethical, and philanthropic. The hierarchy of the importance of the four domains can be described by a pyramid, intersecting circles, or concentric circles. The Pyramid model of CSR includes four levels with the economic level as the base of the pyramid. The next levels, in order of importance are legal, ethical, and philanthropic activities from bottom to the top of pyramid. In both the pyramid and concentric circle mod- els, the hierarchy of domains is economic, legal, ethical, and philanthropic and there is no overlap between various domains. In the Intersecting circle model, the four circles of domains intersect and show overlap. All three models describe economic responsibility as the core responsibility. A firm must be economically profitable, must obey the laws, be ethical and be a good corporate citizen by contributing to society. The pyramid model does not include the influence of culture, peer-pressure, social needs, environmental responsibility, and political structure on CSR activi- ties (Carroll, 1991, 2004; Geva, 2008).

Adapting these CSR models in developing countries, such as China, needs some adjustments to reflect the culture, needs of the society and political structure. The philanthropic domain in both the pyramid and concentric circles models is in the last position. Philanthropy needs to be a higher priority in the CSR model to account for social needs and political structure. Philanthropy in a developing country can help toward improving infrastructure, schools, hospitals and housing developments. CSR in developing countries of both Asia and Latin America are more concerned with life threating diseases such as AIDS, improving work- ing condition, wages, and poverty. A more-inclusive CSR framework is

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necessary to address the social and environmental problems in a region, such as deforestation, unemployment, income, inequality, and crime. CSR, must be understood in the context of cultural ethics, institutional infra- structure, and political structure within a country. The national culture plays an important role in implementing and managing CSR practices in an organization National culture is the collection of shared values among people that determines how they perceive and reacts to its environment. Therefore, the concept of CSR, rooted in organizational culture, is highly influenced by the national culture. The short-term and long-term goals of the organization, peer-pressure, social pressure, and the evolving global sustainability norms further influence a firm’s CSR practices.

Based on multiple case studies of 16 Chinese firms, it was found that the Chinese understanding of CSR is largely grounded within the context of ethical and discretionary actions. Early CSR research focus in China was on ethical issues. It has expanded to social, environmental, and stakeholder concerns (Moon & Shen, 2010). The governmental leadership, the ethical leadership, and cultural traditions in Chinese CSR determine the focus of CSR in China. The absence of a conducive, socially normative environ- ment and positive peer pressure, and misalignment between CSR and organizational design further contribute to the lack of a systemic and insti- tutionalized approach to CSR in China (Yin & Zhang, 2012). The context- specific drivers of CSR/CS are illustrated in Fig. 4.1.

CSR/ CS

Cutlural ethics (National and Organizational Culture)

Normative and structural

(Political structure & government

regulations

Competitive

(Peer pressure, consumer-driven)

Social environment (Corporate philanthropy)

International CSR standards

(UN Global Compact, G4-GRI, ISO 26000)

Figure 4.1 Context-specific drivers of CSR/CS in a country.

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In China, CSR is not as driven by the consumer as it is in the United States. The SOEs play a large role in setting examples for CSR practices, and much corporate responsibility is driven by governmental organiza- tions; Philanthropy and volunteerism is slowly emerging again in China. During the early years of Communist China, volunteerism was limited to people helping out their own family members in accordance with the say- ing “Charity begins at home.” Culturally, volunteering to help others beyond one’s family is emerging again in the post-socialist China and many wealthy Chinese have established private foundations. For example, during the Sichuan earthquake in 2008, many Chinese businesses made donations to help the victims. Companies focus their philanthropic efforts on what the government wants and provide that on a voluntary basis. Companies in China often find that employee volunteerism encourages a sense of cama- raderie that boosts employee morale at the workplace (Mullich, 2011).

A management model for organizations to use when implementing CSR (both nationally and internationally) includes compliance with regu- lations, analysis of existing policies and performance in CSR. This requires identifying several factors including key aspects of business that influence the local community and the existing problems with the local commu- nity. One then has to define goals, strategies, and operational plans, provide necessary human and material resources, and develop a plan of action for implementation of programs and plans. During implementation, one has to measure and report the results to the internal and external stakeholders in order to influence the perception and attitudes toward CSR. This manage- ment tool will allow an organization to continually seek new ways of differ- entiating itself from its competitors—especially in the 21st-century business paradigm. CSR is affectively achieved by employing management strate- gies that are designed to create unique operating capabilities and a culture that embraces CSR. An organization’s culture should be considered when implementing CSR responsibilities (Bakić, Kostić, & Nešković, 2015).

4.5 INTERNATIONAL STANDARDS FOR CSR/CS

The major international CSR/CS standards include SA8000, UNGC, and G4-GRI and ISO 26000. The SA8000 is one of the “world’s first auditable social certification standards for decent work places, across all industrial sectors. It is based on the UN Declaration of Human Rights, conven- tions of the International Labor Organization (ILO), UN and national law, and spans industry and corporate codes to create a common language

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to measure social performance. It takes a management systems approach by setting out the structures and procedures that companies must adopt in order to ensure that compliance with the standard is continuously reviewed. Those seeking to comply with SA8000 have adopted policies and procedures that protect the basic human rights of workers” (SAI, 2015).

4.5.1 UN Global Compact Launched in 2000, UNGC is the largest international corporate sustain- ability initiative (CS). It is a public–private initiative with over 12,000 sig- natories, based in 145 countries. The UNGC proposes 10 principles in the 4 core areas of human rights, labor, environment, and anticorruption. The companies that adopt the Global Compact publish “Communication on Progress” (COP) through their annual report, CS report or a CSR Report. The UNGC helps ensure that business activity adds value to the bottom-line, to people, communities, and the planet. The COP is issued annually as part of a Sustainability- or CSR Report. It is certified to qual- ify for the Global Compact active level. The self-assessed COP includes a statement from the CEO regarding continued support for the UNGC and its 10 principles, a description of actions on relevant policies related to human rights, environment, anticorruption, and includes a measurement of outcomes (G4-GRI, 2015).

The UNGC engages civil society, investors, educators, consumers, and policymakers to help create an enabling environment for responsible busi- ness. It recommends five CSR practices: operating responsibly in align- ment with universal principles, taking strategic actions that support the society around them, pushing sustainability deep into the corporate iden- tity, commitment at the highest level, reporting annually on their efforts, and engaging locally where they have a presence. The UNGC is a holistic approach, recommending that responsible businesses enact the same values and principles wherever they have a presence and that good practices in one area do not offset harm in another (Cetindamar, 2007; Rothlin, 2010; UN Global Compact, 2015).

The ultimate goal of CSR is to embed social responsibility into the DNA of companies on a voluntary basis. The main role of the regula- tory agencies should be to provide guidance and firms should comply voluntarily. Laws should help monitor enforcement. The media needs to be engaged in CSR; it must play a more-proactive role—documenting developments, progress, and setbacks. There should be open platforms for exchanging dialogue, best practices and collaboration among stakeholders.

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Firms should follow international CSR frameworks including the UN Guiding Principles on Business and Human Rights. Firms should publish substantive CSR reports voluntarily following the international standards (EU, 2015; EU Multi Stakeholder Forum, 2015).

The UNGC global opportunity report identifies and ranks 15 sus- tainability opportunities, according to public and private sector interest and potential impact on societies and business. With the new sustainabil- ity mindset, the global sustainability challenges and risks can be seen as opportunities. The report recommends an open innovation platform where stakeholders worldwide can explore and capture sustainability opportunities and solutions across risk domains and regions. These include: extreme weather, lack of fresh water, unsustainable urbanization, noncom- municable disease, and fossil fuels (Global Opportunity Report, 2015).

4.5.2 G4-Global Reporting Initiative (GRI) The interpretation of the CSR/CS concept and reporting framework is context-specific. In preparing CSR/CS reports, key challenges include reporting content selection, data collection and transparency in report- ing (Searcy & Buslivich, 2014). The G4-GRI sustainability reporting guidelines offer reporting principles, standard disclosures and an imple- mentation manual for the preparation of sustainability reports by organiza- tions—regardless of their size, sector, or location. These guidelines provide an international reference for the disclosure of governance approach and environmental, social, and economic performance and impacts of organiza- tions. These guidelines were developed through a global multistakeholder approach including inputs from business, labor, civil society, financial mar- kets, and governmental agencies in several countries. The G4-GRI offers the guidelines for CSR or CS reporting, based on UNGC. Globally, G4-GRI is the most widely used and comprehensive sustainability report- ing standard (G4-GRI, 2015). The G4-GRI is aligned with the guidelines of Organization for Economic Co-Operation and Development (OECD) for multinational enterprises, the UNGC Principles, and the UN Guiding Principles on Business and Human Rights. By using the GRI Guidelines, reporting organizations disclose their most critical impact, both positive and negative, upon the environment, society, and the economy. G4-GRI- based reports generate reliable, relevant, and standardized information. This helps to assess opportunities and risks, and enable more informed decision-making within the organization and among its stakeholders. Some firms use third-party sustainability reporting such as the Dow Jones

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Sustainability Index (DJSI). The DJSIs are based on RobecoSAM’s inter- nationally recognized Corporate Sustainability Assessment methodology (DJSI, 2015). RobecoSAM has developed the DJSI in order to help us identify those companies that are best equipped to recognize and respond to emerging opportunities and risks resulting from global sustainability trends (DJSI, 2015).

Any company that does not submit a COP for two consecutive years is labeled as “inactive” on the UNGC website. In October 2015, the United Nations delisted 335 companies including China Petroleum and Chemical Corporation. By delisting companies, the Global Compact is demonstrating its credibility and interest in upholding its standards of cor- porate responsibility. The Global Compact is a voluntary initiative, but it is important for companies to take their sustainability commitment seri- ously and demonstrate performance. To regain their “active” status, delisted companies are simply required to submit the missing COP (World Watch Institute, 2015).

4.5.3 International Standard, ISO 26000 ISO 26000 provides guidance, rather than requirements, so it cannot be certified to, unlike other well-known ISO standards. Instead, it helps clar- ify what social responsibility is, helps businesses and organizations translate principles into effective actions, and shares global best practices relat- ing to social responsibility. It is aimed at all types of organizations regard- less of their activity, size, or location. The standard was launched in 2010, following 5 years of negotiations between many different stakeholders across the world. Representatives from government, NGOs, industry, con- sumer groups, and labor organizations around the world were involved in its development, which means it represents an international consensus. Other related international standards include ISO 14000—Environmental management, ISO 50001—Energy management, and ISO 45001— Occupational Health and Safety (ISO, 2015).

4.6 CSR/CS REPORTING IN CHINA

CSR reporting focuses on the disclosure of information regarding sus- tainability practices, environment, human rights, and anticorruption (UN Global Compact, 2015). The information reported, however, is all too often determined by what the company itself deems important. To improve the reliability of CSR information and to enhance stakeholders’

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confidence, CSR reports are now often reviewed by third parties includ- ing certified public accountants. According to accounting experts, key fac- tors in Chinese CSR were identified, with data obtained from interviews and analyzed using the decision making trial and evaluation laboratory (DEMATEL). The dimensions and subfactors of China’s CSR were estab- lished, to determine the impact of each dimension, and to ascertain the mutual impact among the subfactors, from which to construct an influen- tial network relation map. Based on the analysis of these expert interviews, it is suggested that CSR improvements should be made in the follow- ing order: (1) Safe Production, (2) Product Quality, (3) Environmental Protection, and (4) Employee Promotion. These four CSR dimensions were found to be mutually influential. The “Safe Production” dimension was the most influential dimension (Chen and Chi, 2015).

Leading Chinese and global companies operating in China commu- nicate their CSR practices to the Chinese and global stakeholders on their websites. It was found that the companies follow one of the three approaches to CSR reporting: ad-hoc public philanthropy, strategic phi- lanthropy, and ethical business practices. Chinese and global companies present their CSR principles and practices differently because of their dif- ferent relations with major Chinese and global stakeholders. The nature of the CSR communication was determined more by whether a firm is targeting businesses or consumers, than whether the firm is Chinese or global (Lu & Hingmei, 2009).

Large Chinese firms have increasingly adopted formal CSR report- ing, especially the SOEs. For example, COSCO, the Chinese shipping giant, was awarded Model Practice Company by the UNGC in 2010. In 2013, Chinese Academy of Social Sciences released a blue book (official report), on the state of CSR in China, which recommended improved reporting guidelines. Because the purpose of CSR reporting is to share information about a business’s social and environmental impact with the public., the publication of such reports often leads to transparency, enhanced aware- ness and better sustainability practices. According to a Chinese sustain- ability consultant Syntao, State Grid was the only company in China to file a CSR report in 2006. Six years later, in 2012, 1722 Chinese com- panies filed CSR reports. According to Syntao, 22.6% of central gov- ernment-led enterprises issued CSR reports in 2012, compared with only 9.4% of private enterprises. This suggests that the CSR reporting in China trend is being driven by SOEs, which are owned by the cen- tral government. Publishing CSR reports, however, does not necessarily

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mean that these reports are presenting a full and accurate picture of the firm’s operations and it is not clear whether publishing an increasing number of CSR reports has resulted in more sustainable business prac- tices. For example, Baogang Group, a steel company in Inner Mongolia claims to have invested tens of millions of dollars a year in environmen- tal protection and waste processing. It has been publically recognized for its CSR and sustainability activities. In early 2013, however, the company was reported to emit large amounts of heavy metals and other chemicals into the air, leaking into surface and ground water. Studies carried out in one of the worst affected villages confirmed there were unusually high rates of cancer, along with high rates of osteoporosis and skin and respi- ratory diseases and the radiation levels are ten times higher than in the surrounding countryside. Another example of discordant CSR reporting is, China National Petroleum Corporation (CNPC). CNPC has received awards for its outstanding performance in CSR reporting. In 2013, it was sued by All-China Environment Federation (ACEF) because its emis- sions polluted soil and ground water in Jilin province. A few leading CSR companies in China have already adopted internationally accepted frameworks. For example, Baosteel, a state-owned iron and steel company based in Shanghai, has disclosed information according to GRI standards since 2006. Moreover, as a high energy-consumption enterprise, it also reported information related to energy consumption, water consumption, greenhouse gas emissions, and wastewater discharge, which are beyond the standard requirements. According to Syntao’s report, among 2012 reports, only 17% supplied such critical information (M. Ho, 2013; Marquis & Chen, 2013).

Based on interviews with 30 executives from 20 foreign MNE’s in China, 95% focused on the legal compliances of charity, internal employee conduct, internal technical and operational efficiency of environmental activities in their CSR programs. The firm’s main priority was the eco- nomic responsibility. The CSR programs are used to gain political legiti- macy with the Chinese government and CSR is used as a public relations management tool to create good brand images in the local and interna- tional media, without ensuring their Chinese suppliers’ CSR perfor- mance or paying the cost of the environment being damaged by their Chinese suppliers. The CSR practices in China must be driven through corporate commitment as the system in China allows many companies to easily bypass the legal environmental requirements at low cost (Lam, 2011; Tan, 2009).

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4.6.1 Role of Chinese Government in CSR Reporting In China, the government plays a major role in how business firms com- ply with CSR reporting. Based on a database that includes all CSR reports issued by approximately 1600 publicly listed Chinese firms between 2006 and 2009, it was found that government signaling is an important mechanism of political influence. The firms strategically respond to government signals on monitoring CSR activities. The private- versus-state ownership, executives serving on political councils, political legacy, and financial resources affect the likelihood of firms issuing CSR reports. State-owned firms are more likely to issue CSR reports. In addi- tion, the government monitoring leads to firms issuing substantive CSR reports (Marquis & Qian, 2014).

Corporations in China are increasingly expected by the public and government to be more socially responsible. A mandate from the govern- ment for CSR reporting does not necessarily lead to high quality CSR reporting. The firms publishing high quality CSR reports tend to have better financial characteristics including market valuation, ownership, and leverage. Based on data from 613 CSR reports by corporations listed on both the Shenzhen and Shanghai stock exchanges (SSE). The CSR behav- ior of listed corporations in China was evaluated using in-depth and mul- tifaceted quality CSR scores (overall, and segregated into macro-social, content, and technology). The CSR report quality scores were gathered from HEXUN (website) and the financial and stock market informa- tion from the China Stock Market and Accounting Research (CSMAR) database. It was found that the quality of a (mandatory) CSR report was positively related to corporate financial characteristics, including: market capitalization (corporate size), shareholders’ concentration of powers, and corporate financial leverage (implying bondholders/debtors’ influence). It was also found that CSR reporting was not associated with corporate profitability or with state-ownership. The presence of independent direc- tors (in China) seems to have negative influence (Li et al., 2013). Based on a recent review of the CSR literature in China and an in-depth critique of two major Chinese CSR studies conducted by the Chinese Academy of Social Sciences, it was found that Chinese firms tend to use self- developed CSR indicators instead of international CSR standards (Guan and Naronha, 2013).

The issues of CSR in China are evolving from a latent to an emerging stage but have not been consolidated and institutionalized.

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The CSR responses and performance levels of corporations are evolving from defensive and compliance stages to a managerial stage but are far from the strategic and civil stages. The multiple dimensions and dynam- ics of CSR can be explored using an aggregate methodology of obser- vation, comparison and estimation, and a fuzzy analytic hierarchy process can be constructed. In a case study of a state-owned corporation, it was concluded that CSR has a dual nature, consisting of both objective and subjective aspects.

Corporations need to be adaptive in taking social responsibilities that are appropriate to their context and capacity. Both the national and cor- porate approaches are necessary for CSR risk mitigation and capacity building (Zeng, Xu, Yin, & Tam, 2012; Zhao, Zu, Li, & Li, 2014).

CSR is often understood as the voluntary actions firms take beyond legal compliance. In China, however, both the national and subnational governments in China advance CSR. This reflects broader governance trends that embrace “soft law” and quasi-voluntary standards to nudge companies toward and beyond minimum regulatory goals. It is not clear how the “soft law” will work within the formal legal institutions and tra- ditional regulatory monitoring and enforcement structures, which are weak in China. The interaction of the national and subnational CSR poli- cies in China and the role of alternate regulatory tools are still evolving (M. Ho, 2013; V.H. Ho, 2013).

4.7 CSR/CS ACTIVITIES OF CHINESE FIRMS IN VARIOUS SECTORS

CSR activities in China are driven by several factors, including structural and normative factors (political structure and government regulations), competitive factors (peer-pressure and consumer-driven), social environ- ment (corporate philanthropy), cultural ethics (national culture and orga- nizational culture), and international CSR standards including UNGC, G4-GRI, and ISO 26000 (Kolk et  al., 2010). A statistical analysis of 146 questionnaires showed that Chinese state-owned companies implement four types of CSR practices under the ISO 26000 framework includ- ing employee rights, consumer issues, fair operation, and labor practices. Chinese state-owned companies lead CSR practices, except those related to charity and employee rights. Corporate philanthropy, or charity, is a specific CSR dimension in China, but it is usually implemented based on guidance from the government. Normative drivers like regulations moti- vate most CSR practices. The consumer issues-related CSR practices are

Evolution of Responsible and Sustainable Corporate Identity for Chinese Firms 87

driven by the competition. Peer-pressure from external institutional to drive CSR practices is relatively low (Zhu & Zhang, 2015).

As part of CSR activities, many corporations in China contribute toward social development. Based on a review of 52 corporate foundations set up in China, it was found that the corporate philanthropy in China is at an early stage of development; Corporate philanthropists participate in social development mainly through donation to government and gov- ernment-organized NGOs. The corporations are more enthusiastic about supporting infrastructure projects and the Chinese nonprofit sector needs to become more professional (Zhou, 2015). The Chinese firms are becom- ing more sensitive to codes of conduct in curbing the labor abuses and codes of conduct represent a privatized form of global labor regulation. They are effective in some respects, but are ineffective in others, improv- ing labor standards in the global production system, for example. Based on an in-depth case study about the implementation of codes of conduct at a Chinese supplier for Reebok, a leading global footwear brand, it was found that the effectiveness of codes of conduct in curbing labor abuses must be understood in terms of overlapping international, industrial, national, and local contexts (Yu, 2015).

International pressure groups and customer expectations are forcing the Chinese textile and apparel industry to implement CSC900T, which is based on a consumer-oriented and sustainable development philosophy. The CSC9000T standard has similar features as the standards SA8000 and ISO 26000. The main focus is on social aspects but has relatively vague environmental guidelines and lack of third-party audits. An initial inter- nal focus is placed on education and company policies. The role of the Chinese government and authorities is to strengthen and legitimize the industry (Chen, Larsson, & Mark-Herbert, 2014).

Based on the responses of food company managers in 161 compa- nies in China, a company’s attitude (defensive/passive/proactive) to CSR influences its performance with respect to food risks: A food company experiences less risk with better CSR performance. Of course, food risk management is influenced by budget  allocated, the managers’ perception of the importance of food risk management, and their actions to affect organizational behavior to reduce food risks. CSR, however, tends to miti- gate any food risks due to the goodwill generated by CSR activities of the firm (Zhang, Gao, & Morse, 2015).

Table 4.1 lists the top 15 Chinese companies ranked by Fortune 500 Global. Most of them are state-owned and have joined Global Compact and are active in reporting the COP.

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Table 4.1 Top 15 Chinese companies ranked by Fortune 500 Global Chinese company Fortune

500 Global Rank

Ownership Joined global compact

Next COP in

1 Sinopec (oil) 2 State 2004 2016 2 China National Petroleum

(Petro China) 4 State 2007 2016

3 State Grid (utilities) 7 State 2006 2016 4 Industrial and Commercial

Bank of China (ICBC) 18 State 2012 2016

5 China Construction Bank 29 State n/a Yes 6 Agriculture Bank of China 36 State n/a n/a 7 China State Construction

Engineering 37 State n/a n/a

8 Bank of China 45 State n/a 9 China Mobile

Communications 55 Private 2007 2016

10 SAIC Motor 60 State n/a n/a 11 China Railway

Engineering 71 State n/a n/a

12 China National Offshore Oil

72 State n/a n/a

13 Noble Group (Trading) 77 Private n/a n/a 14 China Railway

Construction 79 State 2010 2016

15 China Development Bank 87 State 2006 2016

Source: Fortune 500 Global. (2015). <http://fortune.com/global500/> Retrieved on December 29, 2015.

Sinopec is the top-ranked Fortune 500 Global Company and is state- owned. It became a participant in UNGC in November 2004, being one of the first Chinese institutions to join UNGC. Since 2005, Sinopec has estab- lished a comprehensive CSR assurance system to comply with UNGC’s 10 principles in the areas of human rights, labor, the environment, and anticor- ruption. Its annual sustainable development report has been submitted to UNGC and released to the public since 2006 (Sinopec, 2015).

The China National Petroleum Company (CNPC) is technically a pri- vate corporation. However, CNPC is a state oil company of the People’s Republic of China, a central SOE that is the direct successor to the Ministry of Petroleum Industry. Although there is an official split between the Chinese Communist Party (CCP) and the Chinese national oil companies, they do maintain a symbiotic relationship: many of the key company execu- tives also hold positions in the Central Committee of the CCP.

Evolution of Responsible and Sustainable Corporate Identity for Chinese Firms 89

CNPC reports on its sustainability initiatives and compliance with various human rights, labor, and environmental standards. Self-reporting alone only reflects a company’s self-analysis of its current programs. It does not provide an independent source of analysis, and does not provide a standard to which the company should aspire in its future activities. In order to show its commitment to international norms, CNPC should consider opening itself to third-party auditing under SA8000, or explic- itly adopting the external obligations created by the VPs and the Global Compact (Wolfe & Evans, 2011). Thirteen out of 15 top Chinese com- panies as ranked by Fortune 500 Global are state-owned. The two private companies are China Mobile Communications (9th) and Noble Group (13th) (Fortune 500 Global, 2015).

China Mobile was the first telecommunications company in China to release a CSR report in 2007. It is ranked 9th in the Fortune 500 Global list and is privately owned. It changed the name of the report to “sustainability report” in 2010, and integrated sustainability management with operational management. In 2011, DJSI recognized China Mobile for the fourth con- secutive year and were still the only company from Mainland China listed on the DJSI. China mobile actively engages their stakeholders, including: employees, shareholders and investors, government authorities and regula- tors, customers, value chain partners and community, and environment.

Many MNCs in China equate the concept of CSR with stakeholder management. The stakeholders are defined as: shareholders, employees, government, community, customers, suppliers, and environment. The key responsibilities toward shareholders include financial returns, information disclosure and transparency, sustainable growth and legal compliance. For employees, the key responsibilities included competitive wage and sal- ary, employee engagement in CSR programs, training, and career devel- opment. Toward government, key responsibilities include public–private partnership/collaboration, government capacity building, alignment with government initiatives and concerns, legal compliance, and tax payment. For community, the responsibilities involve investment in community education, cross-sector collaboration, community engagement and dia- logue. Toward customers, they are: product quality and service excellence, customer engagement in CSR programs, CSR education, and meeting customer expectations. For suppliers, responsibilities include win–win partnership and inclusion of social- and environmental criteria in sup- plier selection. With regards to environment, there are responsibilities to green workplace/factory, environmental policies, environmental educa- tion and management (Yin, Rothlin, Li & Caccamo, 2013). Firms with

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more-concentrated block ownership are less likely to issue CSR reports (Trifilova, Bessant, Fu, & Gosling, 2013; Zheng, Balsara, & Huang, 2013).

4.8 CONSUMER RESPONSE TO CSR IN CHINA

The CSR practices of a firm positively influence the consumers purchase intention of products and services. In China, consumers who have a high level of awareness and trust of CSR, transform good CSR record into positive corporate evaluation, product association and purchase intention. Across different product categories, the consumer response to CSR varies: Firms selling experience products (vs search and credence products) tend to gain positive product association and purchase intention through CSR practices and middle-age consumers with good income tend to respond to CSR more positively (Tian, Wang, & Yang, 2011). For Chinese consumers, a good CSR record is more likely to be transformed into positive corpo- rate evaluation, product association and purchase intention if they have a high level of awareness and trust of CSR. Consumer responses to CSR vary across different product categories. Middle age and income level con- sumers respond to CSR more positively (Zhilong, Wang, & Yang, 2011).

The consumers in China are becoming increasingly aware of the CSR. Based on the factor analysis in a study of 4980 sports lottery con- sumers, two factors were identified associated with consumer percep- tions of CSR in China’s lottery administration—Regulatory/Prevention Responsibilities and Product Development Responsibility. These two fac- tors influenced the consumer behavior of relative and absolute expendi- ture, purchasing frequency and time commitment The originally Western CSR construct seems possible to generalize in China, but consumers across all regions perceive two, rather than four components: combin- ing economic and legal responsibilities (labeled “required CSR”), and combining ethical and philanthropic responsibilities (“expected CSR”). Consumers expect local Chinese firms to take more responsibility than foreign firms, particularly for required CSR (Kolk, Dolen, & Ma, 2015).

4.9 PERCEIVED BENEFITS OF CSR/CS—COMPANY IMAGE AND FINANCIAL PERFORMANCE

CSR helps with the public relations management of a firm. In a survey on CSR accountability and transparency of corporate communication/public relations executives in China, four topical areas were investigated: drivers

Evolution of Responsible and Sustainable Corporate Identity for Chinese Firms 91

for CSR engagement, areas of practice, importance of CSR communica- tion, and preferred channels of communication. It was found there was a strong concern for corporate image and culture in pursuing CSR. Among the society’s many problems, disaster relief was given an overwhelming priority, perhaps to earn goodwill with the government. The Chinese firms did most of the CSR communication on their website and Internet media (Wang & Chaudhri, 2009).

CSR activities are often considered as cost to a company and there is not a clear-cut financial payoff. Based on a study of 30 domestically listed Chinese Petroleum enterprises, it was found that the CSR increased their enterprise value in both the short term and long term. CSR investment of the petroleum enterprise had positive correlation with equity return, profit margin and growth rate of major business, and liquidity ratio. It had negative correlation with debt-to-asset ratio and no relationship with enterprises ownership (Xiantao, Wang, & Jian, 2014).

Many multinationals operate their subsidiaries in China. Although CSR is still new to China, being socially responsible nevertheless brings financial benefits. To achieve sustainability with a stakeholder-based CSR assessment, foreign invested enterprises need to improve on awareness and communication between different stakeholders (Shengtian, Fu, & Li, 2010). The MNC’s CSR practices can influence the firm’s performance in the host country at the subsidiary level. Their global and local CSR strategies must adjust based on local cultures and economic levels. It was found that the MNCs’ CSR performance influences the performance of the subsidiary in China and there are moderating effects of institutional and geographic distances. The subsidiaries’ CSR is associated positively with their profit in China. The greater the cultural, economic and geo- graphic distances between the home countries and China, the less likely a subsidiary will benefit from CSR (Zou & Zhao, 2015).

4.10 CONCLUSIONS

There are differences in the process of CSR development between China, Europe, and the United States. The differences are due to the history, eco- nomics, and development of corporations (Hou & Li, 2014). The largely western concept of CSR is beginning to emerge in China in a unique way that is context-specific (Wang, 2015). The drivers of CSR in a coun- try can be viewed in a framework of environmental constraints and dis- cretionary responses. The evolution of reporting CS practices for firms in

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China has to be viewed within the context of planned economy where the state plays a major role in economic strategy and policy management (Wong, 2009). The Shanghai and Shenzhen stock exchanges emphasize to the listed firms the importance of CSR practices in manufacturing oper- ations and green supply chains. A global movement for social and envi- ronmental sustainability reporting has encouraged companies to be more transparent in documenting their social and environmental impacts. Such information disclosure makes companies more aware of their own impact on environment and society, and they are more open to monitoring by the government, society, and investors. The UNGC is an international forum to promote and self-report CS in the four core areas of environ- ment, human rights, labor standards, and anticorruption The UNGC and G4-GRI are becoming the internationally accepted frameworks for com- panies to follow when measuring and reporting on their environmental and social performance (Bitanga & Bridwell, 2010).

CSR practices in China are converging with those of the West regard- ing sustainable development. The CSR research in China started in the late 1980’s and the CSR concept has been evolving for over 30 years. The Corporate Social Responsibility (CSR) reports are now called “Corporate Sustainability (CS)” reports (Yang and Guo, 2014). There are differences in the process of evolution of CSR in China, Europe, and the United States. The differences result due to the political structure, social environ- ment, economics, and development of corporations (Hou & Li, 2014). China’s former global image of cheap labor, sweatshops, human rights abuses, cutting corners, unethical practices, substandard products, and serious environmental pollution, is changing toward people- and planet- friendly. Many local CSR initiatives have emerged in China, including environmental laws and regulations, governmental instructions and guide- lines, NGOs and standards (Lin, 2010). Since 2005, the business sector in China has been recognized as a key sector to deliver better social services through CSR. The most important driver of the development of CSR in China is the Chinese government itself (Lam, Lam, & Lam, 2010). The government is interested in establishing competitive business environ- ments, promoting social cohesion, and fostering collective responsibility for the betterment of society through business practices. Chinese policy- makers have encouraged more corporations to practice CSR in China through the provision of a better institutional environment. The CSR/CS can become a social change agent in China when enlightened public con- cerns are brought back to business operations through the involvement

Evolution of Responsible and Sustainable Corporate Identity for Chinese Firms 93

of nongovernment organizations, local government, local citizens, and a greater degree of transparency of information and international reporting guidelines (Bai, Sarkis, & Dou, 2015).

The majority of the CSR reporting so far has, however, been mainly symbolic due to the lack of monitoring mechanisms and enforcement by the government. Most companies do not follow the international CSR reporting standards and indulge in “greenwashing,” without actually prac- tising sustainability (Larson, 2013). Chinese firms tend to issue compli- cated reports using self-made criteria that can be confusing, rather than being transparent. Chinese CSR reports must adhere more closely to international standards that make them verifiable for stakeholders, both domestic and overseas, and independent, third-party verification of CSR reports can enhance this credibility (Memon et al., 2015).

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