Practical analysis for investment professionals
04 December 2012

CSR in China Likely to Improve with Rising Income

Where do Chinese corporations stand with respect to corporate social responsibility (CSR), and how is CSR in China likely to change? According to “The Corporate Social Responsibility of Chinese Corporations,” a new research paper by Ye Cai, Carrie Pan, and Meir Statman of Santa Clara University, the levels of CSR are relatively low but likely to rise with the rising income in China.

As the authors explain, the notion of CSR in China has both similarities to and differences from the notion of CSR in developed countries. They cite a study conducted by Shangkun Xu and Rudai Yang, which reported that though Chinese CEOs and CEOs in the Western world have similar perceptions about the importance of some CSR features — including economic responsibility, legal responsibility, environmental protection, customer orientation, employee relations, and charitable donations — Chinese CEOs place greater importance on such features as national employment rate, ethics, and social stability.

Cai, Pan, and Statman found that Chinese companies exhibit relatively low levels of CSR compared to both developed countries (such as the United States, the United Kingdom, and Japan) and developing economies in East Asia (such as South Korea, Hong Kong, and Taiwan). Their findings are based on regression analysis that uses both company-level data (2,807 companies from 36 countries) from the MSCI ESG Intangible Value Assessment and country-level indicators from a variety of sources, including the World Bank and Transparency International. They list low income-per-capita, high corruption, low civil liberties and political rights, and cultural factors as determinants of the low CSR levels in China.

According to the authors, culture can promote socially responsible corporate behavior or hinder it. They point out that age-old Confucian principles contain aspects of modern CSR: “Confucian values, such as righteousness, sincerity, morality, fairness, and benevolence, are respected in China even if such values might have been sacrificed for profits during the recent decades.” The authors examine different dimensions of culture: harmony, egalitarianism, autonomy, power distance, and individualism. Relatively high levels of power distance and low levels in the other dimensions are associated with low levels of CSR.

Regulation in China is attempting to address issues related to CSR. Citing other papers, the authors explain that the Company Law of the People’s Republic of China (enacted in 1993 and revised in 2005) reflects an emphasis on the interests of workers, requiring companies to include employee representatives on their boards and to consult with trade unions and employees when making decisions concerning employees’ interests. In 2008, the State Environmental Protection Administration (SEPA), the main national regulatory agency of environmental issues, promulgated a number of environmental regulations, and China also launched the Ministry of Environmental Protection. The two Chinese stock exchanges have also released guidelines on social responsibility for listed companies.

The key point made by the authors is that rising income levels are likely to improve CSR. “The need for food is most pressing when income is very low,” the authors write, “but the need for clean water and air becomes increasingly pressing as income increases.” Higher income will also bring other demands, such as for greater civil liberties and political rights, which the authors find are associated with higher CSR levels. They give the example of the 2012 protests against a plan for a metal plant in Shifang, a small city in Sichuan province, that led to the abandonment of the plan. “The Shifang demonstrations have drawn great attention on Weibo (Chinese Twitter),” the authors note, “revealing deep environmental, social, and political concerns in the Chinese public.”

This key point is intuitive: With rising incomes, society is likely to change, and CSR practices are likely to change with the society. But one can argue that there is a catch here. Large corporations in the West are now blamed for actively using their power to try to change politics, law, and society in their favor rather than change with them. Over time, the balance of power between governments, society, and corporations seems to shift in the favor of corporations. Incomes are relatively high in the developed world, but many seem to be very far from satisfied with the level of CSR they observe. Since the start of the financial crisis in 2008, large financial institutions in the West, be it Goldman Sachs or the now-defunct Lehman Brothers, have received severe criticism for the crisis and how it has affected the society. This raises an important question: With the rising income in a society, do the observers of CSR develop unreasonable expectations from large corporations or do large corporations become too big to be held accountable? What do you think?

You can download the paper “The Corporate Social Responsibility of Chinese Corporations” by Cai, Pan, and Statman. If you have views on the paper or on this blog, please share your views using the comments section below.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Usman Hayat, CFA

Usman Hayat, CFA, writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals;" the literature review, "Islamic Finance: Ethics, Concepts, Practice;" and the research report "Sustainable, Responsible, and Impact Investing and Islamic Finance: Similarities and Differences." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in development economics. He has served as a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP) and former CEO of the Audit Oversight Board (Pakistan). His personal interests include reading and hiking.

4 thoughts on “CSR in China Likely to Improve with Rising Income”

  1. Gerald says:

    Well researched. The question does remain why the same multinationals behave different in different countries. Irrespective I do agree with the author.

  2. Corporate Social Responsibility is being considered by governments all over the world. It is the need of the hour. With increasing income and availability of global news, Corporate Social Responsibility in India, China and other countries is likely to be incorporated in the policies formed by them.

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