CSR and Social Harmony in PRC Essay

China Begins to Take Corporate Social Responsibility Seriously: CSR and Social Harmony in the PRC©1 Edward F. Ahnert2 Abstract: This essay describes the evolution of Corporate Social Responsibility in the Peoples Republic of China. It links that evolution to the major shifts in Chinese economic policy and in particular to the call for a harmonious society since 2002.

It describes how since 2008 the government of China has become the major promoter of CSR not only to achieve a harmonious society but also to advance its global economic interest as Chinese companies seek to penetrate world markets and to buy up strategic resources such as petroleum reserves, iron ore and farm land. It argues that for the promotion of socially responsible business practices to be successful in China in the long run, CSR must move from a reactive, compliance-oriented activity driven by edicts from the central government to a key component of businesses’ strategies based on a continuing dialogue with stakeholders.

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It cautions against attention to corporate philanthropy and recommends close focus on eliminating externalities of core business practices. It points out CSR issues facing businesses frequently are the result of unmet needs or consumer preferences. Chinese businesses can gain advantage by spotting and supplying these before their competitors thereby creating competitive advantage through socially responsible practices. Political scientists and philosophers sometimes frame their analysis of politics as a contest between liberty and order.

The United States and China could be seen as two extremes with the U. S. tilting toward liberty and China toward order. The early history of the U. S. is a story about a struggle for liberty from the rule of a distant power. The foundational myth of the American republic emphasizes the triumph of the individual rights of the people and the restriction of the powers of the central government. On the other hand, the story of the origin of China is about unification and bringing order from chaos through the consolidation of power in a strong central government.

To maintain and reinforce this order much early Chinese political philosophy deals not with individual rights but with the obligations of key individuals or groups to each other: emperor O people, father O son, husband O wife. Confucian norms were the foundation of order in imperial China for over two millennia. Formal Confucian institutions and rituals were largely destroyed in the twentieth century: replaced briefly, brutally and incompletely by Maoist socialism/communism. Mao’s recipe for China’s economy dominated until two years after his death.

At the Third Plenum in December 1978 a group led by Deng Xiaoping launched economic reforms beginning with the decommunization of agriculture which were the death knell of that Marxist ideology. For the past thirty years China has been struggling to evolve a new identity in which the Communist Party maintains its position and order in the nation by opening the economy to the global market and to capitalism China Begins to Take Corporate Social Responsibility Seriously (with Chinese characteristics) to promote rapid growth while keeping a tight rein on political activity. To date China’s leaders have been remarkably successful.

However, their strategy contains a powerful internal contradiction that they have managed with great skill but that nevertheless continues to represent a real threat. Market economies and capitalism thrive on freedom. They depend on the ability of producers of goods and services to offer them wherever they are needed and at prices set by supply and demand. Availability of information is a precondition for efficient markets. To flourish the free market also needs the certainty provided by the rule of law, sanctity of contract, property rights and fair and transparent processes to resolve disagreements.

These conditions have been in short supply in China. As a result social and economic problems often go unaddressed until they reach the boiling point. Having few institutional channels for settling disputes, people have increasingly taken extra-legal action through what the Chinese government and media call “mass incidents. ” The Ministry of Public Security reported 87,000 such incidents in 2005. 3 This is more than double the 2000 report of about 40,000 incidents. 4 Most of these demonstrations have arisen in rural areas.

A frequent cause of discontent has been illegal confiscation of land by corrupt officials collaborating with unethical property developers. The rural population also has not benefited to the same extent as urban workers from the economic gains of the last decade. In the last few years the government has sought to ease tensions in the countryside by repealing the agricultural tax on farmers and abolishing school fees for students in the poorest regions. On March 5, 2007 Prime Minister Wen Jiabao announced the abolition of school tuition and fees for all rural students, the launch of a rural cooperative healthcare system and a new welfare rogram for the poorest people. There was a repeat of previous calls to crack down on corruption in the government. 5 The third plenary session of the 17th Central Committee of the CCP approved “Decisions on Major Issues Concerning the Advancement of Rural Reform and Development” in October 2008 and these measures became law in March 2009. These rural reforms gave farmers stronger legal title to their lands, allowed them to form new types of ownership structures for land and allowed them to sell their land provided it stayed in agricultural use. Unethical practices of Chinese businesses also undermine the international diplomatic and economic initiatives of the Chinese government. China has long been the biggest buyer of oil from the Sudan and since 2004 often has been criticized for supporting the Sudan government’s brutal repression of the inhabitants of Darfur. In 2007 there was an avalanche of bad news about unsafe Chinese exports (melamine in pet food, tainted seafood exports, dangerous truck tires, toxic lead paint on toys) and about practices in the domestic economy (child slaves in brick factories, violent private security forces guarding business sites).

In 2008 the blood-thinning drug Heparin made from pigs raised in China was taken off shelves in the West when it was discovered that the Chinese had not followed safe production processes. These matters play into the hands of protectionists in the West who blame China for the US’s trade imbalance and who lobby for trade restrictions and revaluation of the Chinese currency. These episodes receive wide media coverage in China as well and are the cause of a great deal of anxiety among the middle class.

Based on my discussions with mainland Chinese graduate students, it appears that they are 2 China Begins to Take Corporate Social Responsibility Seriously preoccupied with risks to their families’ health from tainted food and medicines and are willing to pay more for imported products that they feel are safer or more nutritious. 7 More recently, efforts by Chinese State Owned Enterprises to buy large controlling stakes in western mining companies has aroused opposition because the SOEs might act more like arms of the government of China than as profit maximizing commercial entities.

Furthermore, it was believed that the government of China would not allow a similar buyout by a foreign company of a major domestic miner. 8 In any case, irresponsible business practices are major contributors to social tensions in China and to the mass incidents that officials see as so threatening. Businesses are behind much of the confiscation of land, the uncontrolled pollution and the profligate use of energy that were targets of Wen Jiabao’s speech to the National People’s Congress in March 2007. Chinese leaders are dealing with these issues not only with specific new legislation and economic and social programs but also with a public campaign for “Social Harmony” that they have waged since early 2005. In May 2009 a Google search linking the terms “Hu Jintao” and “social harmony” returned about 150,000 references. This effort can be interpreted as an effort to voluntarily restore the order and balance that is the fulcrum of Chinese society. Unfortunately, until recently the business community has been slow to find a role for itself in the social harmony movement. A winner-take-all attitude dominates.

The persistence of this attitude and the resulting anti-social practices risk triggering a backlash that could result in harsh measures to counter business excesses and could slow the rate of development. Corporate Social Responsibility (CSR) can make a huge contribution to China’s social harmony. CSR means that businesses take voluntary responsibility for their impact on society, on the environment and on the broader economic order. Such voluntary action should reduce the need for government controls that are often unnecessarily restrictive, poorly engineered and have unintended consequences.

Since 2006 some advocates of CSR in China have begun to recognize the important link between CSR and social harmony. At an October 2006 conference in Beijing on “Corporate Social Responsibility and Innovation” the honorary chairman of the China Daily CEO Roundtable remarked that “the concept of a harmonious society is really China’s rephrasing of the concept of CSR, sustainable development and human rights in China. ” He went on to say that China’s social and economic burdens are “so great that economic development will stop somewhere if we (the business sector) do not try to do something about it. 10 His point is correct. Voluntary business reform can make a major contribution to the continued tranquil development of China. Failure to reform endangers social order. Introduction of CSR into China and the Reaction To understand the evolution of CSR in China it is useful to correlate it with the major shifts in the nation’s economic policies since the establishment of the People’s Republic in 1949. At the risk of over-simplifying the history of the post-revolutionary Chinese economy I group the periods as follows: 1. 949-1978: Total CSR—Communist Social Responsibility, 3 China Begins to Take Corporate Social Responsibility Seriously 2. 1979-1991: Limited Economic Reform 3. 1992-2001: Rapid Opening to the West—Capitalism with Chinese Characteristics 4. 2002-Present: Globalization of Chinese business 1949-1978: Total CSR—Communist Social Responsibility From the founding of the People’s Republic through 1978 production, whether rural farming or urban industrial activity, was organized by the work unit or danwei (??).

The responsibilities of danwei included not only economic production but also provision of a comprehensive range of cradle-to-grave social services plus political indoctrination. Indeed, during this first three decades of modern China’s history, one might say that the political and social objectives of these units took precedence over the economic/profit-seeking objectives, much to the detriment of economic development in the nation. Of course the danwei were not organized as corporations, partnerships or proprietorships—the common forms of business structure in the developed world.

And, there is not much evidence that these organizations thought of themselves as businesses. There is no basis for discussing corporate social responsibility in this era. 1979-1991: Limited Economic Reform The Third Plenum of the 11th Central Committee held in December 1978 was the official launch of a new period of economic experimentation in China. Through the Household Responsibility System peasants were given responsibility, if not ownership, of individual plots of land and were allowed to keep any production above a quota. They were also allowed to grow side crops for cash.

The government simultaneously raised the price it paid for grain and cut the price of farm machinery and agricultural chemicals. 11 At the same time four special economic zones (SEZs) were created in southern China to begin carefully controlled experimentation with new forms of industrial production. During the next thirteen years there was an explosion of economic growth largely fueled by increased agricultural output and (in the later years) rapid expansion of exports of Chinese manufactured goods. Foreign direct investment was limited mostly to the SEZs.

Outside the SEZs wholly foreign owned businesses were unheard of and joint ventures between foreign investors and Chinese partners required very high level reviews by the central government and were generally limited to large capital-intensive projects that met with uneven success. State owned enterprises continued to dominate the domestic economy outside of agriculture. Again during this period as during the initial thirty year span, there is no evidence of any awareness of, or concern for, CSR as it is now understood. Towns and counties took on many of the social services that had previously been organized by the agricultural communes.

The danwei system continued to dominate in the industrial sector and remained a source of social services in urban settings. Nevertheless, the restructuring of the agricultural economy that was such a prominent feature of this period and the limited reforms and experimentation within the industrial and urban economies created or exacerbated social problems that China is still grappling with. The restructuring of farming made it possible for millions of peasants to move off the land and seek 4 China Begins to Take Corporate Social Responsibility Seriously jobs in the increasing numbers of factories and in the construction industries.

A huge migrant workforce grew up. 12 The author vividly remembers the masses of unemployed migrants that congregated around urban train stations in the latter years of the period. There was a concomitant increase in crime of all types including official corruption. These problems were a major cause of the unrest that fuelled the Democracy Movement during the spring of 1989 that culminated in the June 4th Incident on Tiananmen Square and the deposing of Communist Party General Secretary Zhao Ziyang. 1992-2002: Rapid Opening to the West—Capitalism with Chinese Characteristics

The year 1992 was a watershed for the evolution of corporate social responsibility in the West and for economic reform in China. During the 1990s CSR burst from obscurity to center stage in the business world. The growth in CSR-related activities was closely linked to other important trends: the disintegration of the former Soviet Union, the decollectivization of the Chinese economy and its transformation into an export-driven machine, the globalization of business, the proliferation in non-governmental organizations (NGOs) and the spread of low cost telecommunications technologies.

The Global Context Changes in European Communist regimes in the late 1980s and early 1990s triggered a dramatic remaking of the world economic order. The tearing down of the Berlin wall in the last few weeks of 1989 signaled the opening up of the eastern European nations to the global economy. The dissolution of the Soviet Union two years later (December 1991) meant that a huge part of the world that had been cut off from free markets now entered (at different speeds and levels of enthusiasm) the global trading system.

The number of workers participating in the globalized economy is estimated to have quadrupled from 1980 through 2005. 13 Several wise observers saw that these political and economic changes would strain the social fabric of the nations that were moving into the global economy. In 1990 the Prince of Wales founded his International Business Leaders Forum to work in the post-communist countries of Eastern Europe. The IBLF has now expanded its field of vision to include the rest of the planet. The organization was one of the early advocates of CSR and effectively introduced the subject to CEOs of some of the world’s largest companies. 4 In June 1992 the United Nations Conference on Environment and Development (aka Earth Summit or Rio Conference) was held in Rio de Janeiro, Brazil.

The media coverage of the conference was unprecedented and moved the terms “sustainable development”, “climate change” and “biodiversity” from the pages of obscure scientific journals to the headlines of newspapers. 15 In preparation for the summit a new non-governmental organization, the World Business Council on Sustainable Development (WBCSD), was formed to give the business community a voice at the gathering. Today, the WBCSD has some 200 members drawn from more than 35 countries and 20 major industrial sectors, involving some 1,000 business leaders globally. ”16 The Council remains one of the major global advocates for responsible business practices. Business for Social Responsibility was also created in 1992. With about 250 large 5 China Begins to Take Corporate Social Responsibility Seriously businesses as members BSR also has been a major force in the CSR movement, particularly in North America.

It has recently increased its presence in Europe and Asia. 17 The organizations mentioned above were early advocates for CSR and remain among the most influential actors. However, the movement has spawned a cottage industry of both nonprofit and for profit entities. A recently published CSR Professional Services Directory lists 227 organizations in 46 different categories just in the United Kingdom18. Most elite business schools now offer courses, or in some cases whole programs, in corporate responsibility or sustainability.

The political transformations discussed above were accompanied by rapid evolution in the General Agreement on Tariffs and Trade and the formation on January 1, 1995 of the World Trade Organization (WTO). Members of the WTO agreed to further opening of their economies to international trade. As a result of these changes and simultaneous improvements in the costs and efficiency of both sea and air freight the importance of international trade and multinational businesses in the global economy was both quantitatively and qualitatively different from just a decade earlier.

Many human rights advocates, labor union leaders and environmentalists were alarmed by what they saw. Thus there was a concerted effort to strengthen “civil society”19 particularly in the developing world and in those countries recently freed from Soviet domination. Consequently there was a proliferation of nonprofit organizations addressing every imaginable social, environmental, economic and humanitarian problem. These groups are frequently grouped together under the term “nongovernmental organization” (NGO).

The term was coined in 1945 to describe organizations that were given consultative status with the newly formed United Nations Economic and Social Council. The number of organizations so classified rose from 893 in 1990 to 2236 in 2002. 20 However, in most settings “NGO” has come to be a general term for all nonprofit and informal organizations. Action without Borders counts over 66,000 organizations. 21 Even this figure is probably no more than a tenth of the actual number. 2 In the 1990s the immense growth in the power of NGOs was a product of their (i) increasing number and geographic spread, (ii) use of new low cost communications technologies (mobile telephones, email, worldwide web) to instantly disseminate their messages to their members, collaborators and the media, and (iii) credibility with the media and public due to their skill at presenting themselves as representatives of the downtrodden in opposition to greedy corporations and repressive and corrupt governments. Through the first half of the 1990s CSR was organized and carried out on three levels.

At the high end certain multilateral organizations such as the Organization for Economic Cooperation and Development (OECD) and the UN through, for example, its International Labor Organization drafted and promulgated sweeping sets of standards that had broad applicability to how corporations conducted their affairs. 23 While these efforts called attention to problems and urged businesses to act responsibly, they primarily were aspirational and lacked strong enforcement provisions. In the middle was a layer of new voluntary organizations dominated by groups already mentioned including the IBLF, WBCSD and BSR.

It would take a few years for these bodies to reach their full potential. Early on more concrete progress was being made by 6 China Begins to Take Corporate Social Responsibility Seriously individual companies which were responding to issues in their business processes with innovative codes of conduct and business standards. Two US family-owned companies that have been particularly ground breaking are S. C. Johnson & Son, Inc. and Levi Strauss and Company. In 1991 the clothing manufacturer published its Global Sourcing and Operating Guidelines. 4 Like many other name brand companies that outsource their manufacturing LS&Co now discloses all of their suppliers. In October 2007 they reported an astonishing 249 suppliers in China. 25, 26 During the late 1990s development of individual corporate codes of conduct gave way to the drafting of codes that applied to whole industries or even more broadly. In 1995 the International Organization for Standardization published its ISO 14000 series, a set of voluntary industrial standards dealing with environmental management systems, environmental auditing, environmental labeling, environmental performance evaluation, and life cycle assessment.

In 1997 Social Accountability International (SAI) was formed to promote fair labor standards in factories. SAI is best known for its SA8000, self described as a “comprehensive and flexible system for managing ethical workplace conditions throughout global supply chains. ”27 Also in 1997 CERES set up a working group to draw up standards for disclosing information about sustainability. This group quickly became known as The Global Reporting Initiative (GRI). In 1999 the United Nations Environment Program joined the initiative which published its first set of Sustainability Reporting Guidelines in 2000.

In 2002 GRI became a free standing NGO and relocated its headquarters to Amsterdam. In 2000 United Nations General Secretary Kofi Annan launched the Global Compact to promote CSR and to involve business in achieving the Millennium Development Goals. The Global Compact has evolved into the world’s largest CSR initiative and in January 2008 had 3380 active members. ISO 14000, SA8000, the GRI Sustainability Reporting Guidelines and the Global Compact are but four of dozens of codes of conduct, standards, norms and principles that have been adopted in the last two decades to promote responsible business practices. 8 However, these four share a set of attributes that have magnified their impact and ensured that they would be important in introducing CSR into China. All four sets were consultative and multilateral. That is, they were drawn up by groups of stakeholders that included not only businesses but also labor organizations, government representatives, environmental organizations, UN bodies, academics and many others. This process promoted buy-in and broader understanding of the principles.

Permanent organizations were created to administer each set of guidelines. These bodies naturally sought to build the widest possible audience for their work and recruited other special interest groups to promote adoption of the standards. Finally, three of the four sets involved some type of third party inspection, verification audit or assurance. Predictably, existing consulting and audit firms quickly established practices around these new standards and a large crop of new organizations soon appeared.

Since all of these standards in one way or another dealt with conditions in global supply chains and since China was establishing its uncontested position as the world’s factory, it was inevitable that the growing army of standards bureaucrats, crusaders, inspectors and auditors would turn their attention to the Middle Kingdom. 29 7 China Begins to Take Corporate Social Responsibility Seriously The Situation in China 1992 was also a momentous year for China. In January Deng Xiaoping took a trip to Guangdong Province to visit the Shenzhen Special Economic Zone. 0 Deng was impressed with the extent of development in the zone and returned to Beijing determined to apply the economic reforms he witnessed to the rest of China. The policy changes that he instituted unleashed an explosion of growth that is still underway and that has lifted more people out of poverty than any other program in history. These changes in effect constituted a development bargain between the Chinese Communist Party, the government and the people. The government would abandon Maoist socialism in favor of a mostly free market economy which would deliver rapid economic growth.

In return for delivering this growth the people would be loyal to the party and China would remain a one party state. During the early years of this period in China CSR was a matter of individual overseas purchasers being concerned about labor conditions in their suppliers’ factories. To protect themselves against charges of unethical conduct in their supply chains garment and footwear companies and some retailers followed Levi Strauss’s lead and began to draw up codes of conduct for their suppliers and employed teams of inspectors to enforce the codes.

These trends were given impetus when an “anti-sweatshop” movement sprang up in the US in 1996 and quickly spread to include church and consumer groups, labor unions, human rights organizations and college, high school and even middle-school students. Although this activity introduced many of the components of CSR into China through the supply chain management activities of foreign companies, there is no evidence of any coordinated effort to bring the full concept of CSR into China during this period or of any significant attention to the concept by the Chinese media.

However, many of the central ideas of CSR or business sustainability were clearly making their way into the thinking of Chinese leaders. Perhaps the most notable development for CSR in China during this period was the Code of Corporate Governance for Listed Companies in China issued by the China Securities Regulatory Commission, State Economic and Trade Commission on January 7, 2001. The sixth chapter of the code is particularly germane. The official English translation reads: Chapter 6.

Stakeholders 81. A listed company shall respect the legal rights of banks and other creditors, employees, consumers, suppliers, the community and other stakeholders. 82. A listed company shall actively cooperate with its stakeholders and jointly advance the company’s sustained and healthy development. 83. A company shall provide the necessary means to ensure the legal rights of stakeholders. Stakeholders shall have opportunities and channels for redress for infringement of rights. 84.

A company shall provide necessary information to banks and other creditors to enable them to make judgments and decisions about the company’s operating and financial situation. 85. A company shall encourage employees’ feedback regarding the company’s operating and financial situations and important decisions affecting employees’ 8 China Begins to Take Corporate Social Responsibility Seriously benefits through direct communications with the board of directors, the supervisory board and the management personnel. 86.

While maintaining the listed company’s development and maximizing the benefits of shareholders, the company shall be concerned with the welfare, environmental protection and public interests of the community in which it resides, and shall pay attention to the company’s social responsibilities. 31 This text is remarkably modern and goes further in recognizing the interests of “stakeholders” than many similar codes in the developed world. However, it also is somewhat vague and provides no details about how the very general principles should be implemented.

Therefore, it is doubtful that these provisions have had much impact on the governance of listed companies in China. A search of the administrative actions posted on the China Securities Regulatory Commission (CSRC) and other Chinese law databases showed no record of any disciplinary actions with regard to these guidelines. 32 2002 – Present: Globalization of Chinese Business China joined the World Trade Organization on December 11, 2001 and less than a year later Hu Jintao became General Secretary of the Communist Party of China.

These events are symbolic of a new role for China in the global economy and a new attitude toward CSR in China. While the centerpiece of China’s economy was still its role as the world’s factory, many of its companies were becoming truly global players. They began to market their goods in their own name outside of China (Lenovo, Haier, Huawei). State owned companies competed for rights to explore for and develop mineral deposits. Chinese banks and shipping companies offered their services not only to the PRC trade but to all comers. Under the provisions of the WTO, the huge domestic market gradually opened to foreign competitors.

Several world leaders in information technology established research centers in China (Microsoft, Intel, Google). With this opening to the world the global campaign for CSR was noticed by many parties in China. Whereas the many promoters of CSR that began to focus on China in the late 1990s were based elsewhere and conducted business in China as itinerants, at about this time some multinational organizations promoting CSR established permanent offices inside China. There also appeared a growing flock of new Chinese consulting firms, trade and professional associations and academic institutes that specialize in CSR. 3 The reactions were diverse and reflected the vested interests of the many parties that stood to gain or lose. Chinese manufacturers often viewed the new demands as confusing and intrusive. There are abundant stories of factories with several customers being subject to multiple and sometimes incompatible sets of standards. In extreme situations the standards may have imposed requirements that were inconsistent with local law. Business owners complained that compliance increased their costs which they were largely unable to pass onto their customers— often the very ones that were demanding the changes.

Government officials were concerned not only with the effect of the higher costs on China’s competitiveness in global markets but also with the possibility of igniting unrest in the labor force when factory inspectors drew attention to harsh working conditions that heretofore had been taken for granted. 9 China Begins to Take Corporate Social Responsibility Seriously Some Chinese critics of CSR adopted Maoist nomenclature and accused the movement of “values imperialism”. Others saw evidence of surrogate protectionism.

For instance, Madame Chen Ying, Deputy Secretary General of the China Enterprise Confederation, claimed that “Many developed countries have used CSR as a basic requirement for market entry, a way to restrict the competitiveness of countries undergoing development and greatly impacting the export economies of these developing countries. ”34 Certainly there was some basis for complaints of business owners that their costs were rising and their profits shrinking due to demands by customers and NGOs that they comply with CSR standards.

However, researchers have been unable to substantiate the claims that CSR materially diminished China’s competitiveness or that the movement was part of some protectionist conspiracy. More important, however, Chinese business leaders as well as public officials have begun to recognize the necessity of being viewed as responsible global citizens or stakeholders if they are going to sustain the economic development which is a precondition for maintaining the power of the Communist Party, i. . the development bargain. They have, therefore, begun to adapt the practices of CSR to their particular needs.

The first example of this trend was a made-in-China management system for the clothing industry: the CSC9000T Management System – China Social Compliance for Textile & Apparel Industry. This system was launched in 2005 by the Responsible Supply Chain Association (RSCA), an organization affiliated with China National Textile and Apparel Council (CNTAC). 5 CSC9000T is neither a code of conduct nor a CSR certification system for the textile and apparel industry. Rather it is a system that is being promoted by RSCA and CNTAC to raise the overall quality of management in the industry and also to improve the CSR practices in the industry. RSCA has a staff of seven and has trained a group of forty “external experts” who assist with training and plant inspections. Implementation of the system involves several stages of training, roll out and inspection/follow up by the experts.

To date about 120 factories have begun implementing the system and about 300 are awaiting the required training. RSCA has been communicating the details of the system to buyers in Europe and North America and to activists groups that focus on apparel and sweatshop related issues. 36 For CSC9000T to succeed these buyers and NGOs must believe that the results of the strengthened management practices will be substantially equivalent to the guidelines and/or requirements of standards such as SA8000 and of company-specific codes of conduct.

It is too early to judge whether the buyer side will be convinced. However, the team that is behind the effort has a sophisticated understanding of the challenges to success and also how the system will enhance the competitiveness of Chinese manufacturers who are facing rising costs and pressure from factories in other developing countries. Another important development was the revision of the Company Law of the People’s Republic of China which took effect on January 1, 2006.

Chapter 1 Article 5 requires companies to comply with “social morality and business morality” and to “bear social responsibilities. ” Article 17 requires a company to “protect the lawful rights and interests of its employees, conclude employment contracts with the employees, buy social insurances (sic), strengthen labor protection so as to realize safe production” and to “reinforce the vocational education and in10 China Begins to Take Corporate Social Responsibility Seriously service training of its employees so as to improve their personal quality. 37 These provisions are even more general than those in the Code of Corporate Governance for listed Companies in China and there is no means of enforcing these provisions in the legislation. However, this does not prove that they are without substance. A recent article by Benjamin L. Liebman and Curtis J. Milhaupt in the Columbia Law Review explains how in the securities markets Chinese officials have used “blame and shame” to enforce ethical business practices in the absence of effective formal mechanisms.

The author believes that a similar approach is often used in the broader business world and that the Company Law and the Code of Corporate Governance for Listed Companies serve as the foundation and backstop for officials to challenge wayward businesses. 38 Although China has made great progress in the introduction of CSR, the level of understanding of the concepts involved and their importance in building sustainable businesses is still rudimentary. The “China CSR Survey 2006” was conducted by the Beijing University Market Economy Academy with responses from 890 companies.

The survey results indicated that Chinese business leaders are only vaguely aware of CSR. They equated CSR with charitable activities and regarded it as applying only to large foreign companies. Some respondents thought that CSR was a burden and saw no connection between CSR and corporate culture, reputation or brand-building. 39 The summaries of the survey that are available do not comment on the need for safer workplaces or improved environmental practices. This disconnect is further evidence that the companies think of CSR as a public relations and charity-oriented activity.

Some of the most vocal advocates of CSR in China are public relations and media relations consultancies that share this misunderstanding of the field and that perpetuate misguided practices. But to be fair, the attitudes of Chinese business people revealed in the 2006 survey are not so much different from those still held by many American business leaders. A year later, however, there was ample evidence of growing sophistication in the thinking about CSR in China, at least among policy-makers and regulators if not among rank and file businessmen.

In November 2007 the Research Center of the Shanghai Stock Exchange published its “2007 Report on China’s Corporate Governance: Stakeholders ; Corporate Social Responsibilities”. 40 The report and the introductory remarks by Shang Fulin, Chairman of the China securities Regulatory Commission, clearly indicated a growing realization among Chinese leaders of the strong link between responsible, ethical business conduct and the preservation of a harmonious society that is the paramount goal of the government.

The report raised the possibility that CSR or sustainability reporting might be made a requirement for all companies listed on the exchange. The ink was hardly dry on the Shanghai Stock Exchange Report when the State-owned Assets Supervision and Administration commission (SASAC), the oversight organization for state owned enterprises, entered the conversation. On January 4, 2008 SASAC published its first “Red Header” document for the year titled “Guideline on Fulfilling Social Responsibility by Central Enterprises” (SOEs). 1 It is customary for the first such directive to set the highest priority objective for the group for the coming year. The issuance of this guidance therefore brought CSR to center stage as a key instrument of the central government in achieving its economic and social goals. The policy paper instructed the enterprises to study the practices of foreign firms and to actively participate in international dialog about CSR standards. 11 China Begins to Take Corporate Social Responsibility Seriously SASAC’s influence goes well beyond the state owned enterprises that it controls.

In April 2008 a group of eleven national industrial federations and associations (engaged in iron, steel, oil, chemicals, light industry, textiles, building materials, non-ferrous metals, electric power and mining) led by the China Federation for Industrial Economics released a set of CSR guidelines for member organizations. According to a report in China Daily the guidelines called on all of China’s industrial companies to set up CSR systems covering four areas—management, execution, information and supervision.

The federations and associations would have a major role is assisting the companies by establishing groups to promote, coordinate and supervise related companies fulfillment of their social responsibilities and to provide relevant services. 42 The central government’s promotion of CSR continued into the second half of 2008 when in August Chinese Academy of International Trade & Commerce (CAITEC), a subsidiary of the Ministry of Commerce issued draft guidelines on Corporate Social Responsibility for Foreign Invested Enterprises. 3 These guidelines, which might apply to any enterprise that has even one foreign shareholder, remain in draft form but many foreign law firms operating in China have advised their clients to take them seriously as they are likely to become law. The tsunami of CSR guidelines continued on into 2009 when in January the China Banking Association released CSR guidelines. 44 These codes apply to deposit taking institutions and several other types of financial organizations. The central government’s State Environmental Protection Administration (SEPA) also stepped up its efforts on behalf of CSR.

In 2007 it threatened to block companies from raising money in the stock markets if they failed to meet certain environmental standards, and in February 2008 it announced a new system for scoring and ranking the environmental performance of listed companies. 45 In March 2008 SEPA was upgraded to the Ministry of Environmental Protection, reportedly to increase its effectiveness in fighting the alarming acceleration in environmental damage in China. 46 In addition to issuing directives and regulations government agencies are beginning to encourage CSR in new ways. The Shenzhen Municipal Government made the first move.

It has committed to drawing up a set of “CSR standards with Chinese characteristics” and then using them to screen companies on government procurement lists. 47 Such a program, provided that it has teeth, will create a huge economic incentive for companies to adopt sustainable business practices or otherwise pass up trade with the largest customer in the neighborhood, the government. The Pudong New District in Shanghai has gone even further by adopting Responsible Competitiveness as the policy model for the district’s future growth. This paradigm goes beyond conventional formulations of CSR by applying similar principles to the public sector. 8 There is no doubt that such high level directives have great influence in China. By mid-May 2009 twenty-six of the large SOEs controlled by SASAC had already issued CSR reports49. The total number of companies issuing sustainability or CSR reports was much greater.

One commentator said that the number in 2008 was more than 190 compared with just 19 in 200650 while also in 2008 another well placed observer counted 290 listed companies that released CSR reports, including “Sustainable Development Reports” and “Enterprise Citizenship Reports”51. 2 China Begins to Take Corporate Social Responsibility Seriously Recent experience shows clearly that the larger Chinese companies (e. g. Lenovo, Haier, Huawei, COSCO, CNOOC, CHINALCO) wishing to develop global brands, to raise capital on overseas stock exchanges or to take over foreign companies have to pay attention to their CSR record as a critical component of their reputation.

The Chinese central government recognizes this situation and is using the outpouring of CSR codes, standards and guidelines that began in 2007 as a powerful tool to increase the global competitiveness of Chinese businesses. In a few cases the government of China has entered into formal commitments with other governments to promote sustainable business practices (e. g. Memorandum of Understanding on CSR between Sweden and China, signed during the state visit of President Hu Jintao to Sweden, June 2007).

There is no clearer evidence of where the government is going with CSR than in a multi-party study, Advancing Sustainable Competitiveness of China’s Transnational Corporations52, coauthored by the Development Research Center of the State Council of the People’s Republic of China and by AccountAbility, the respected UK sustainability think tank. According to the authors, the report is part of a larger research project on China’s “sustainable trade strategy” organized by the International Institute for Sustainable Development (IISD), the State Council’s Development Research Center, and the Chinese Ministry of Commerce.

The work is funded by the Swiss State Secretariat for Economic Affairs (SECO) and also partnered with the Chinese Central Party School, the Chinese Academy of Social Sciences, St. Gallens University, and the International Centre for Trade and Sustainable Development. The Chinese organizations are highlighted above because they coexist at the absolute pinnacle of administrative and political power.

Their prominent collaboration on this research is persuasive evidence that the collective leadership has made CSR a central element in both domestic development and in advancing China’s global trade objectives. The month following the high powered study on improving China’s international competitiveness through CSR the following month Ministry of Environmental Protection and the Ministry of Commerce announced that the government had “completed a draft of mandatory environmental measures for the increasing number of Chinese companies involved in overseas projects. 53 The rules are undergoing final review within the government and reportedly will require Chinese companies investing aboard to prepare environmental impact statement before final project approval, to observe the more stringent of local environmental standards and those for projects within China and to provide compensation for any damages from the project. The role that has been played since 2008 by the central government of China in promoting CSR is more prominent than that played by any of the governments of the advanced western nations.

This is in keeping with the state capitalism model of economic development in China. This topdown approach to CSR contains a number of risks. It will likely convert CSR from a flexible corpus of business values and practices that evolve through an ongoing dialogue between businesses and stakeholders into a rigid set of check lists. Indeed, stakeholder engagement has been a weak link in the Chinese version of CSR as it is at odds with the orthodoxy that the Party and the State know best. 13 China Begins to Take Corporate Social Responsibility Seriously

The cornerstone of corporate social responsibility is recognition that businesses and individuals have an ethical obligation to be aware of and take active steps to alleviate the unintended costs and other negative consequences of their actions (or inactions) on third parties. Economists call such costs “externalities”. It is not permissible for businesses to ignore or remain willfully ignorant of such consequences nor for them to assert that they are off the hook because they have not violated the law. This is where stakeholder engagement begins.

Chinese companies need to set up core business processes that address the following questions in an organized and continuous fashion: 1. How do we identify those who are impacted by our business (or industry)? 2. How do we conduct a conversation with our stakeholders about how our business touches them and what their expectations are? 3. How do we collect, evaluate, prioritize and communicate this information within the company? 4. How do we reconcile the often conflicting expectations of various stakeholders? 5. How do we change our core business practices as a result of the stakeholder engagement process?

China needs to encourage its business sector to maintain such a dialogue with stakeholders rather than promoting a paternalistic and compliance-focused version of CSR. At the other extreme the various Chinese CSR guidelines typically call on companies to support community development and to give to charities. Charitable giving or corporate philanthropy occupies a very small and shrinking place in western formulations of CSR. CSR in China needs to narrow its focus and stick closely to issues that are tied to a firm or industry. It is extremely difficult to run a business in today’s global world.

Business leaders have their hands full managing their enterprises ethically. They should not be expected to use corporate philanthropy to tackle social, economic or environmental problems unrelated to their businesses. Attention to such unrelated matters distracts management from its central task—to run a profitable and ethical business. And certainly, there are more than enough social, economic and environmental problems that are related to business. Few if any companies have the knowledge and skills or the attention span to take on social problems that are unrelated to their core business.

The most effective way to tackle most of these issues is by reforming basic business processes. The social, environmental and economic impacts generated by business, whether positive or negative, flow from the core processes of business. CSR must be embedded in the DNA of the line functions. It should not be anchored in a staff group that is primarily concerned with public relations and/or philanthropy. The cases are rare (but not nonexistent) where philanthropy is an effective treatment for an externality.

Besides coping with externalities, there are two other areas that deserve business attention within the realm of CSR. One is to use the knowledge generated in the stakeholder engagement process to forecast coming changes in community values that might impact the business climate, either positively or negatively, or might reveal a new business opportunity. One prominent global 14 China Begins to Take Corporate Social Responsibility Seriously business leader has noted that “Social pressures often indicate the existence of unmet social needs or consumer preferences.

Businesses can gain advantage by spotting and supplying these before their competitors. ”54 The second is to use CSR processes to overcome conditions in communities that are not created by business but that are barriers to business success and that also detract from the general welfare of the community’s population. These conditions might include a high level of illiteracy and resultant shortage of qualified workers, prevalence of diseases such as malaria or HIV that debilitate or kill the workforce or their families, etc.

The key here is focusing on the benefits to both the community and the business. It is in this realm where corporate philanthropy is most likely to be useful. However, companies have no responsibility to take on problems unless they cause them or unless solving the problem has a clear benefit to the business. The key to advancing the case for CSR in China is to move it from a reactive, complianceoriented activity to a central element of a business’s strategy: to transform Corporate Social Responsibility to Corporate Social Opportunity. 5 This approach to CSR can be applied in the domestic market in China as well as to foreign trade. In fact the growth of a large, educated and relatively prosperous middle class in China creates a perfect setting for forward thinking companies to strategically leverage CSR. As noted above, this middle class population is quite worried about the safety of locally produced foods and pharmaceuticals. Clearly companies operating in these two sectors could steal a march on competition if they could institute state-ofthe-art product quality and safety practices along with a credible assurance process.

However, Chinese consumers will be hard to convince as they are accustomed to businesses making unfounded claims. Managers who work to understand the interplay between their enterprise and society will discover many new ways to expand their business. In a developing country such as China there is a tendency to deflect calls for sustainable business practices with the contention that it is not at the stage of development where CSR is appropriate or affordable. These rebuttals often sound like excuses for unethical practices rather than persuasive arguments.

At the University of Michigan the distinguished business scholar C. K. Prahalad has documented how many companies operating in economies less developed than China’s have successfully established completely new business lines or opened new markets by applying sustainable business practices. 56 Prahalad illustrates how both global companies and smaller ones have found ways to increase profits by skillfully marketing to some of the world’s poorest people. And, he shows how the welfare of those previously overlooked customers has improved as a result.

Chinese business leaders are still largely focused on export markets and on the growing and relatively prosperous domestic urban market. Yet perhaps 750,000,000 people still live in rural areas in China and most of them remain poor. The application of Prahalad’s ideas and the other concepts of sustainable business practices to China could lead to a rapid improvement of those lives, the strengthening of social harmony and increased profits for the pioneering business entrepreneurs.

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