Is corporate social responsibility China’s secret weapon?

Today, we hear a great deal about Chinese M&A deals, Chinese money and investment pouring into diverse markets, and even Chinese loans being used to bail out struggling economies.

Combined with press coverage of Chinese tourists and elites rushing abroad to spend lots of cash on real estate and luxury goods, the world must be wondering: Is China really that rich? The short answer is, yes – some Chinese companies and citizens have been able to use the country’s remarkable development momentum and trade surplus to accumulate tremendous financial assets.

When you look at the 2014 Global Fortune 500 list, 95 companies from China made it onto the prestigious ranking, a big jump from only nine in 2000. However, the majority of these companies are state-owned enterprises (SOEs) and three giants in monopoly industries – Sinopec, CNPC and State Grid – rank among Fortune’s top 10. So Chinese companies are getting rich, but are they actually competitive globally? This is perhaps a more important question when assessing the relative strength of Chinese companies in an increasingly globalized economy.

While the sales and financial assets of Chinese companies have continued to grow for the past decade, the spotlight has increasingly focused on their domestic and global performance in the realm of corporate social responsibility (CSR). While wealth has great influence, as reflected in the old saying “money talks”, the leading companies from China have been forced to make a fundamental change in their strategic thinking.

The days when organizations focused solely on becoming the country’s most profitable are long gone. Today, leading Chinese companies seek to become some of the world’s most reputable and pre-eminent brands and view CSR as a critical part of their transformation. During face-to-face interviews carried out by the United Nations Global Compact, some Chinese business leaders echoed this sentiment, saying that being on the Fortune 500 list is not sufficient in maintaining competitiveness in global markets and that their companies must evolve, particularly in the area of CSR, if they are to achieve their lofty goals.

“Social licence to operate” under threat

CSR is widely seen as the way to help companies operate responsibly and in an environmentally sustainable way. Positive performance in these areas in return for consumer and local community support, or a “social licence”, is viewed as an informal contract between companies and local stakeholders. For example, an area of recent interest to the Chinese public is product safety, particularly regarding food and drug safety. This topic has caused heated domestic discussion and companies have faced a backlash amid broad public scrutiny since 2003.

More recently, a popular documentary on air pollution, “Under the Dome” – regarded as the Chinese version of “An Inconvenient Truth” – has sparked debate among hundreds of millions of people on how to save China from environmental catastrophe. These debates have further challenged corporations about their lack of responsibility over social impacts, which reflects a new chapter in Chinese public discourse.

Chinese companies also face higher expectations as they look to expand globally. With the growing presence and influence of Chinese companies abroad, host countries increasingly expect Chinese companies to contribute positively to their sustainable development objectives and not to merely profit from their investments (particularly on resource-extraction projects). For instance, despite not being the biggest investor in Africa, Chinese investments are frequently criticized and their projects are labelled as a form of neo-colonialism.

In response to this negative image and disconnect from local communities, some leading SOEs – including Sinosteel, Sinopec, China Minmetals and CNPC – have begun to disclose publicly their social investment and impact in Africa through their CSR reports with dedicated efforts to address and showcase sustainability activities in the region.

The rise of more conscientious domestic and global consumers and investors, the prevalence of social media and the increasingly competitive global marketplace can all be viewed as key initial drivers for Chinese attention to CSR.

Beyond philanthropy

In most cases, and not only for Chinese companies, CSR is interpreted as corporate  philanthropy. Many examples published in CSR reports or examples from speeches at CSR-related conferences relate to a corporation’s donations to a charitable programme or participation in disaster-relief efforts. These actions are undoubtedly of great importance in aiding emergencies and helping those in great need. However, the core characteristic of CSR is not about how to spend money but, rather, about how to make money in a sustainable and responsible manner.

CSR is embedded in corporate policies and actions through respecting and protecting human rights, safeguarding the well-being of workers and communities, protecting the environment, and eliminating corruption through good governance. It is key for companies to strategically integrate environmental, social and governance issues into its core business and decision-making processes, which goes far beyond legal compliance and philanthropy.

In the past, when operating abroad, many new Chinese companies often worked in a silo due to language and cultural barriers. In addition, they often held on tightly to existing business practices as they viewed them as their key to success. But, it quickly became evident that companies from emerging markets like China had to make efforts to build a sound and stronger multi-stakeholder dialogue system and ensure timely communications with the communities affected by their operations.

Following suggestions, some of them started to change their business practices and took a bottom-up approach not only to focus on government relations with the host country, but more importantly, to build trust and long-term relationships with local residents, NGOs and other stakeholders. This bottom-up approach further minimized risks and helped to make sure operations ran more smoothly once the necessary support from the local communities was secured.

This also helped to foster a strategic alliance to advance business sustainability and prosperity for the entire community. It is encouraging to see, over the past years, that a growing number of Chinese companies have changed their practices and are more proactively leveraging two-way communications to respond to the concerns stakeholders raise instead of remaining silent. A number of Chinese companies have established an “Open Public Day” to allow relevant stakeholders and the general public to visit the company and voice their concerns and suggestions on their operations.

In overseas operations, an increasing number of local hires and more training opportunities ‒ instead of bringing staff directly from China ‒ have become the new trend. A more transparent and open corporate culture has started to shape up for Chinese companies and this has allowed CSR to further embed itself as a critical part of their businesses, particularly if they wish to succeed abroad.

Government support

The concept of CSR has been well supported by the Chinese government. The turning point came on 1 January 2006, when Chinese corporate law was revised to include formally the concept of CSR in legislation.

In the same year, the State Grid Corporation of China issued the first-ever CSR report by a Chinese SOE. On the one hand, the Chinese government was a strong supporter of the involvement of Chinese companies, mainly state owned, in advancing CSR to drive harmonious integration into the broader global market. But, on the other hand, China wanted to create its own CSR definition and guidelines that embedded its unique economic situation and business culture.

Besides including the concept of CSR in the Corporate Law of China and Labor Contract Law (effective 1 Jan 2008), the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) of China issued an important policy directive on Guidelines to the State-owned Enterprises Directly Managed under the Central Government on Fulfilling Corporate Social Responsibilities in 2008.

This directive was the highest priority for SASAC that year, reflecting a rapidly growing demand from society. In 2009, during a meeting with the leaders of SOEs, SASAC mandated that all SOEs under their management set up a CSR mechanism within their governance structures.

SASAC further mandated that all SOEs under its supervision publish their first CSR report by the end of 2012 if they had not already done so. This policy, and the subsequent momentum that was generated, led to the release of more than 1,600 Chinese sustainability reports. Half of these reports were from SOEs or listed companies and represented a significant jump compared to the 22 CSR reports from China between 1999 and 2005.

Today, SASAC is exploring how to build an internal system to evaluate the CSR performance of its member companies. This includes, for example, how a company’s impact on the environment will affect its top leaders’ remuneration, and setting incentives to serve as a next step to enhance corporate sustainability and global competitiveness.

Like many of their Western counterparts, Chinese companies faced a variety of societal and market pressures that prompted their CSR journey. However, perhaps more than their competitors, many Chinese companies view their futures as inextricably linked to their CSR performance and have begun viewing it as a potential competitive edge.

China has learned that CSR, in the current economic and political landscape, will help the country to become a leader, not a follower.

Author: Meng Liu is China Representative for the United Nations Global Compact and a member of the 2015 intake of World Economic Forum Young Global Leaders

Image: A man walks near Hutchison House (L) in central Hong Kong January 9, 2015. REUTERS/Tyrone Siu