Understanding what drives social and
environmental disclosure by corporations in
China: does Western thinking apply?
Dennis Taylor (Prof)
School of Accounting
RMIT University
RMIT@Asia Seminar Series
October, 2010
The Research Issue
• Are Western-derived theories from socio-political and
economics-based perspectives able to provide predictable
explanations of the extent of voluntary corporate social and
environmental reporting (CSER), or lack of, by companies
operating in China?
• Or does the business and socio-political context in a nonWestern culture reveal a lack of support for, or even anomalies
in, these theoretical explanations of CSER?
• If so, can alternative explanations of CSER embedded in the
business context of a transitional economy and the sociopolitical context of China, be developed?
• To address this issue, seven Western-derived theoretical
perspectives on incentives for CSER are modelled.
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Objectives
1.
Identify the type, extent and quality of social and
environmental reporting in the annual reports of large
Chinese-controlled companies (Red-chip and A-Share)
2.
Test hypotheses about the relationships between
elements of Western-developed legitimacy, stakeholder
and signalling theories and the quantity and quality of
CSER by Chinese companies.
3.
Discuss whether:
(a) various Western-developed theoretical perspectives
on CSER are sufficiently robust to be transferable to the
setting of China;
(b) implications of relying on these Western-developed
theories to drive growth in the practice of CSER in
China.
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MOTIVATION
• China’s heavy dependence on burning coal to fuel its
rapid economic growth.
If emission trends are left unchecked, “in 25 years
the carbon-dioxide from China alone will be double
that which comes from all the OECD countries
put together” (Bezlova 2007, p.9)
• Gap in the literature on up-to-date evidence of
patterns of CSER by listed companies controlled by
shareholders from mainland China.
• Evidence of the transferability of Western-derived
theories as determinants of CSER can contribute to
the policy debate about regulation of CSER.
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Socio-political and economic theories of CSER
• Socio-political theories
• Socio-political theories including political economy, legitimacy theory, and
stakeholder theory suggest that CSER is a function of social and political
pressures facing the corporation (Patten, 2002).
• Under stakeholder theory, there is literature about the debtholder power
perspective where management is reliant on debtholders finance.
• Under legitimacy theory, there is literature on several theoretical
perspectives, including strategic posturing by management, political cost of
failure to disclose, media attention given to companies, and paroxysmic
incident responses by companies.
• Economic-based Theories
• Economic-based voluntary disclosure theory (Dye,1985; Verrecchia, 1983)
predicts that firms with superior economic performance (in terms of financial
returns and financial risk) will convey their quality ‘‘type’’ to investors.
• Under signalling theory, there is literature referring to a profitability success
reinforcement perspective, and stability reinforcement perspective.
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Literature and Hypotheses using Western thinking; the
context in China
1. Debtholder power perspective in stakeholder theory
•
Stakeholder theory posits that managers will formulate and implement
strategies to manage the potential demands of the more powerful
stakeholder groups (Freeman, 1984).
•
Debtholders can be salient stakeholders. Roberts (1992) states “the
greater the degree to which a corporation relies on debt financing to
fund capital projects, the more corporate management would be
expected to respond to creditor expectations concerning a corporation’s
role in socially responsibility activities” (pp. 602-603).
•
H1: The greater a firm’s reliance on debtholder finance, the higher the
quantity and quality of CSER disclosure in the firm’s annual report.
•
In China, Shirai (2002) found favourable banks’ lending biases toward
large, less profitable firms with greater State ownership, particularly
after initial public offerings of A-shares. Such favourable financing
conditions from banks mean management has low incentive to diversify
into equity finance despite rising stock prices.
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2. Strategic posture perspective in legitimacy theory
• Ullmann (1985) conceptualizes that when stakeholder power is
high, strategic posture by management will be active and CSER
will be high.
• Roberts (1992) argues that corporate charitable contributions can
be viewed as representing the strategic posturing of management
in order to mitigate demands of stakeholders on the company.
• H2: The existence of active strategic posturing by reporting
charitable donations during the year is positively related the
quantity and quality of CSER disclosure in the firm’s annual report.
• In China, philanthropic giving has traditionally involved the
concept of “clan associations … in a culture that emphasizes face”
(Acs and Dana, 2001, p. 72). This is compatible with a top
management practice of strategic posture through corporate
contributions to ‘ancestral villages’ for themselves personally
rather than their company.
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3. Profitability success reinforcement perspective of
signalling theory
• Management in high profitable firms are motivated to signal
their quality or success, not only through profit reports but
also through their effective management of corporate social
and environmental responsibility (Wallace & Naser, 1995).
• H3: The higher a firm’s profitability, the higher the extent
and quality of CSER disclosure in the firm’s annual report.
• Whether management of firms with high profitability in China
have more incentives to signal to the market and show-off
their other successful activities in social and environmental
areas to gain favour with is a matter to be tested.
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4. Stability reinforcement perspective of signalling theory
• Roberts (1992) establishes a relationship between a firm’s equity
systematic risk and level of CSER disclosure. The reasoning is firms
with lower beta have a more stable pattern of share-market returns,
allowing more steady discretionary spending on social and
environmental activities and, through through greater CSER,
enhance the firm’s image of being a responsible community
contributor and able to manage both its economic and social risks
well.
• H4: The lower a firm’s equity systematic risk, the higher the extent
and quality of CSER disclosure in the firm’s annual report.
• Whether lower equity systematic risk by a Chinese company
translates into management undertaking more stable discretionary
spending on social and environmental activities and, in turn,
providing greater CSER, particularly when most listed companies
have high government ownership and control, is a matter to be
tested.
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5. Political cost perspective of legitimacy theory
• Larger firms will have a greater incentive to mitigate political
costs and manage their ‘social contract’ than smaller firms.
(Dowling & Pfeffer (1975); Deegan & Carroll (1993); Hossain
et al. (1995); Cullen & Christopher (2002); Haniffa & Cooke
(2005)).
H5: The larger the firm size, the higher is the quantity and
quality of CSER disclosure.
• However, the Western-developed assumption that larger
companies will face greater potential political costs in the
form of public resentment, consumer hostility, militant
employees and the attention of government regulatory bodies
may be questionable in China’s corporate and social context.
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6. Media attention perspective of legitimacy theory
• Legitimacy theory research extends to examining the
role that media coverage plays in increasing the public
policy pressures faced by companies (Patten, 2002).
Brown and Deegan (1998) and Deegan, Rankin and
Voght (2000), Liu & Taylor (2008)).
H6: The higher the print media attention specific to a
firm’s CSER during a year, the higher is the extent and
quality of CSER disclosure in the firm’s annual report.
• Would this hypothesis be expected to be supported in
the context of media agenda-setting in China?
Government continues to keep tight control of
newspapers (the State Press and Public Administration)
and business enterprises can ‘manage’ journalists
(‘three-warranty reporting’).
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7. Paroxysmic incident response perspective of legitimacy
theory
• Public dissatisfaction (threat) with a firm’s event (incident) can result
in a decline its legitimacy in society. This dissatisfaction not only
relates to the particular firm responsible for the specific incident, but
also to the general impact on other firms in the society (Patten, 1992).
• Prior empirical studies conclude that a paroxysmic environmental or
social incident resulting from a firm will produce greater CSER
disclosures by that firm and others in the industry or country (Patten,
1992; Gray, Kouhy & Lavers, 1995; Deegan, & Rankin, 1996; Li,
Richardson & Thornton, 1997; Hutchings & Taylor, 2000;
Cunningham & Gadenne, 2003).
H7: The Songhua River pollution spill incident significantly increased
the quantity and quality of CSER disclosure in firms’ annual reports.
• The Songhua River water pollution incident in northern China
revealed the limited capacity of local environmental protection
bureaus to regulate industrial environmental activities and a failure to
enforce the relevant national policies and regulations created by
SEPA.
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Research method
The model
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Definition and measurement of variables (Table 2)
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Definition and measurement of variables (Table 2) continued
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Definition and measurement of variables (Table 2) continued
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Sampling
• Drawn from the H-Share and Red-Chip companies listed
on the Hong Kong Stock Exchange (HKSE) in 2005 and
2006.
• The annual reports for both years of H-Share and RedChip companies were progressively searched for
evidence of any CSER disclosures, working through these
companies in order of size (capitalization).
• Beyond the largest 56 companies, the incidence of CSER
disclosure by smaller H-Share and Red-Chip companies
was found to be almost completely absent in annual
reports.
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Results
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Panel regression analysis to test hypotheses
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Panel regression analysis to test hypotheses continued
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Summary of findings
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Conclusions (1)
Implications for the use of Western-derived theoretical
perspectives to understand or seek to change CSER practices in
China. The findings suggest:
1. Two anomalous theories that provide misleading predictions.
–The power of debtholders (major banks in China) as a
stakeholders to demand greater CSER disclosure from
corporate management. In fact, in their collusive
relationships, major debtholders prefer less CSER.
–The signalling by management of the ‘quality’ of their firm
through the reinforcement of successful profit results with
greater CSER disclosure. In fact, signalling of financial
success only appears synonymous with ‘quality’ of
management in China’s economic growth ethos. Disclosures
such as emissions controls and work safety are substitute
signals for ‘quality’ of management, used mainly when quality
cannot be conveyed in financial performance.
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Conclusions (2)
2. Three legitimacy theory perspectives are found to motivate
CSER disclosures by corporate managers, but they are largely
beyond the bounds of on-going stakeholder or regulatory control
of CSER in China.
–The strategic posturing by top managers in providing
company donations is related to higher CSER. However, this
relationship may not reflect a top management incentive to
mitigate stakeholder pressure, but instead reflect the use of
company donations to ‘buy’ clan prestige and leadership
positions.
–A paroxysmic incident (because of a wide-spread surge in
public dissatisfaction that reduces firms’ legitimacy) is
related to higher CSER. However, such incidents are one-off
occurrences which probably have a short-term impact on
CSER in China.
–The very large companies (because of their concern about
exposure to potential political costs) are related to higher
CSER. However, company size is a variable that is
confounded.
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Conclusions (3)
3. Two Western theoretical perspectives are found have no
motivating influence on CSER disclosures in China.
–The signalling by management of the ‘quality’ of their
firm through the reinforcement of financial and market
stability with greater CSER disclosure. The Western
belief that management that achieves more financial
stability will budget more discretionary expenditure to
social and environmental performance and signal this
through higher CSER, is not evident in China.
–The extent of media attention to corporate social and
environmental activities is found to not affect CSER in
China. This is lack of media impact is expected to
continue while government in China continues to keep
tight control of newspapers and where business
enterprises can ‘manage’ journalists.
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Limitations and Further Research
Limitations include:
•
Sampling – small number of companies
•
Source of CSER – only from annual reports of HKSE
listed red-chip and A-share companies
•
Proxies for IVs – limited face validity for ‘political cost’,
‘strategic posture’, ‘debtholder power’.
Further research suggestions:
•
Qualitative multiple-case-study research into CSER
decision-making by corporate management in China
•
Replicate this study on a larger sample of
environmentally sensitive and work-practice sensitive
industries in China where companies are grouped into
those providing and not providing CSER.
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