Philosophy and Approaches to
Strengthen Corporate Social Responsibility in China
Liu Junhai
Contents
1. Introductory remarks
2. Case study on the performance of corporate social responsibility
2.1 Voluntary corporate social responsibility movements
2. 2 Increasing roles of government agencies and NGOs
2.3 The significance of global compact in Chinese business community
2.4 Royalstar Group and Harmonious Business - Pioneer of Fair competition
2.5 Beijing Sanlu Corporation: Home of disabled employees
2.6 Benxi Steel Corporation: Good example of collective bargaining
2.7 Sinopec Corp: successful HSE system
3.The justification for recognizing corporate social responsibility?
3.1 economic powers
3.2 Other hypothetical justifications
4. Analysis of some doubts about the implementation of corporate social
responsibility
4.1 Crucial market competition?
4.2 Lack of ability and authority of the management?
4.3 Whether the traditional legal protection to the non-shareholders corporate
constituencies is sufficient?
4.4 The investors will be discouraged from investing in corporations?
4.5 Confrontation with the government policies in favor of the investment?
5. Legal and policy suggestions for strengthening corporate social responsibility

Professor of Institute of Law, Chinese Academy of Social Sciences.
1
1.Introductory remarks
Generally speaking, the notation of "corporate social responsibility" is a relatively
new concept for the business and academic community in China. Before this author
started to venture into this field in 1996, almost no serious and scientific work was
published on this topic in China. However, some Chinese corporations have begun to
claim they are socially responsible corporate citizens. Then, what is the meaning of "
Corporate social responsibility ".
Corporate social responsibility does not simply and only mean traditional corporate
altruism or corporate philanthropy. As a process concept, it demands the corporate
decision-making processes to consider and reflect social interest and social rights. As
a substantial concept, it demands the outcomes of the corporate decision-making to be
reasonably accountable to social interest and social rights.
According to different points of view, corporate social responsibility can be classified
as legally based social responsibility and morally based social responsibility,
profit-sacrificing responsibility and profit-promoting responsibility, relational
responsibility and social activism. Relational responsibility includes responsibility
involving a shift from the goal of profit-maximizing and constraint-based
responsibility. Unlike relational responsibility, social activism means that
corporations take positive measures to address social problems existing independently
of the way the corporations run their business, including charitable giving, political
donations, involvement in the local community with education and arts sponsorship
and support. Generally speaking, corporate social activism is characterized with an
expected profit pay-off and a pure altruistic activism.
Corporate social responsibility is closely connected with the human rights. They have
the common highest values to safeguard. Corporations should serve the construction
of a moral and truly human world, and not a world of selfishness, evil, deviation,
fraud, lies, violence and hate. Strengthening corporate social responsibility so as to
promote the progress of social rights as human rights, will be a worldwide agenda
among both human rights and business community in the 21st century. However,
linking corporate social responsibility and social rights as human rights together
means a real challenge for both human rights and business community.
China is experiencing economic boom, great corporate energy has been released. The
emergence of private corporations, the corporatization of large and medium-sized
state-owned enterprises, the increasing number of listed corporations in the Stock
Exchanges, are undoubtedly favorable to promoting the growth of the productive
forces in a socialist society, increasing the overall national strength and raising the
people's living standards.
2
However, socially irresponsible corporate performances have produced some negative
effects. Some corporations make profit at the expense of sacrificing morality and
social justice. They pollute the environment. They produce and sell impure foods and
other dangerous or defective products to consumers. The labor rights such as the right
to health and safety are unable to be effectively guaranteed against plant explosion
and industrial disasters issues. Ignorance of corporate social responsibility is also
accountable for high incidence of corporate wrongdoing, increasing corporate crimes,
redundancy, vicious closure of plant in a local community, etc. This kind of negative
effects can be summarized as lack of sense of corporate responsibility.
The main philosophy for ignorance of corporate social responsibility can be
summarized as the followings: profit-maximization is the supreme and only purpose
of corporations; corporate profit expansion necessarily mean the growth of general
social interest; corporate interest is equivalent to the shareholder's interest; and the
market is competitive, perfect, therefore totally reliable. As far as the institutional
arrangement is concerned, the conventional formula of profit maximization within
law is generally the guiding star for traditional corporate law. Social expenditure not
designed to benefit the business is either prohibited by the law or is open to challenge
from the shareholders using the doctrine of ultra vires.[1] Beside corporate law,
traditional private law and public law framework are primarily designed for
individuals, at best, for the abstract personality without fully considering the
substantial differences between corporations and human beings. Despite the efforts
made by the legislature and the judiciary in recognizing and adopting corporate social
responsibility, difficulties exist in this regard.
2. Case study on the performance of corporate social responsibility
2.1 Voluntary corporate social responsibility movements
In recent past years, more and more listed corporations have started declaring that
they would take corporate social responsibility seriously, and will enhance the
interests of the stakeholders. Some corporations amend their articles of incorporation
to incorporate corporate social responsibility policy, some corporations disclose their
actual performance of corporate social responsibility in their annual reports. [2] While
the wording is different, the philosophy is roughly the same. For instance, Hengda
Real Estate Co. declared under the headline of "stakeholders" in its report as the
followings: "This corporation shall respect the legitimate interests and rights of banks
and other creditors, employees, consumers, suppliers and local community. This
corporation shall practice sustainable development strategy, take care of the issues of
the community well-being, environmental protection and public interests."[3]
2. 2 Increasing roles of government agencies and NGOs
3
In Addition to voluntary acceptance of corporate social responsibility, the government
is also very keen to promote the awareness of corporate social responsibility. In late
2002, Li Rongrong, the Director of the State Commission of Economy & Trade urged
the listed corporations controlled by the State shareholder to give due regard to
corporate social responsibility and protect the legitimate interests of the stakeholders.
[4]
Some NGOs of listed corporations are motivated to encourage corporate social
responsibility movement. For instance, the Association of Board Secretaries of Shan
Dong Province pledge the listed corporations in Shandong Province to build honesty
image, and treat the non-shareholder constituencies equally. [5]In 2002, China
Enterprise Associations drafted Code of Self-Regulation of Honest Business. Article
19 of Code of Self-Regulation of Honest Business says," The corporations shall
undertake the corporate social responsibility, pay sufficient attention to the
environment protection, and promote sustainable development. Measures shall be
taken to prevent the pollution of the soil, the air and the social environment by
polluted water, wasted airs, wasted fuels, noises and radioactive elements, so as to
maximize the social benefits as a whole. It is forbidden to pursue the business
interests at the expense of direct emission of pollution or sacrificing social
environment".[6] The National Confederation of Industry and Commerce also
encouraged private enterprises to take social responsibility.
2.3 The significance of global compact in Chinese business community
It is well known that Mr. Kofi Annan, United Nations Secretary-General, first
proposed the Global Compact in an address to The World Economic Forum on 31
January 1999. One year later, the Global Compact's operational phase was launched at
UN Headquarters in New York on 26 July 2000. The Secretary-General challenged
business leaders to join the Global Compact, which would bring companies together
with UN agencies, labor and civil society to support nine principles in the areas of
human rights, labor and the environment. The Global Compact seeks to advance
responsible corporate citizenship so that business can be part of the solution to the
challenges of globalization. In this way, the private sector can help realize a more
sustainable and inclusive global economy. The goals of the Global Compact are to
make this Compact and its principles part of business strategy and operations, and to
facilitate cooperation among key stakeholders and promoting partnerships in support
of U.N. goals. [7]
The Global Compact's nine principles in the areas of human rights, labor and the
environment are derived from the Universal Declaration of Human Rights, the
International Labor Organization's Declaration on Fundamental Principles and Rights
at Work and the Rio Declaration on Environment and Development. Among the nine
principles, two principles are relevant to the human rights,[8] four principles are
relevant to the labor standards,[9] and three principles are relevant to the
4
environment.[10] Since the Global Compact is a voluntary, instead of mandatory,
corporate citizenship initiative, the extent of the influence of the Compact depends on
the willingness of the business community to endorse and implement the goals set by
the Compact. As far as China is concerned, such an international innovative has
received very quick and positive response from Chinese business community. In April
2002, Mr. Chen Jinhua, Chairman of China Enterprise Associations, urged all Chinese
corporations to be engaged in the Global Compact for the purpose of meeting the
challenge of globalization .[11] It is expected that more and more Chinese
corporations will submit letters to the UN Secretary-General as a first step in a
process of meeting the requirements of Responsible Corporate Citizenship.
Of course, many corporations are very committed to endorse the requirements of the
Global Compact, yet have not submitted letters to the UN Secretary-General. To
disseminate the experiences of implementing the Global Compact requirements,
China Enterprise Association and UK Embassy in Beijing co-sponsored the
Symposium on the CSR Cases in Beijing on December 6,2002.
2.4 Royalstar Group and Harmonious Business - Pioneer of Fair competition
Confucian believes that profit shall result from harmonious business. Hefei-based
Royalstar Co., a listed corporation, has set up an example in this regard. Royalstar has
introduced a brand new philosophy of Harmonious Business based on its operation
and sales experiences for over ten years. The core concept of Harmonious Business is
mutual respect, equality, mutual benefit, co-development, credibility, regularity,
fairness and honesty. In 1997, Royalstar published the first business competition
statement in China - Royalstar Self-discipline Statement for Competition, which has
initiated the campaign to build a fair competition environment and urged enterprises
to conduct self-discipline. The philosophy of Harmonious Business has guided the
business operation activities and the employee behavior as well. It is well praised by
the relevant government and won support among the whole society. The Statement
has built up a model for the business to conduct fair competition. In 1998, Royalstar
Group composed another discipline - Royalstar Ethic for Competition, which was
based on the Royalstar Self-discipline Statement for Competition. Once again, it won
support and praise from the public. Today, Royalstar continues to create new
contributions to the society guided by the Harmonious Business philosophy. [12]
2.5 Beijing Sanlu Corporation: Home of disabled employees
Beijing Sanlu Corporation was established in 1958. The original purpose of this
corporation is to offer employment opportunities to the disabled. Right now, this
corporation has 1139 employees, among which there are 463 disabled employees. It
means that 40.6% of the employees are disabled. Due to the hard work of the
employees, the total turnover of this corporation is 0.75 billion Chinese Yuan, and the
revenues paid to the government amounts to 0.32 billion Chinese Yuan. [13]
5
Theoretically speaking, Beijing Sanlu Corporation has no obligation to employ
disabled people. Since 1994, this Corporation has continued to employ disabled
people on a regular basis. This Corporation established an association of disabled
employees, which serves as a bridge between the disabled employees and the
management. The director of this association is appointed as the assistant to the CEO
of this Corporation. 10 disabled employees take the positions of middle level
executives, 104 disabled employees are appointed as the employee monitors and
supervisors responsible for the product quality. Beijing Sanlu Corporation has
distributed housing to 351 disabled employees. This corporation also set up a
foundation, called "DA BAO" Scholarship, available to the children of the disabled
employees in Beijing. Up to now, this corporation has distributed 3 million Chinese
Yuan as the Scholarship. [14]
2.6 Benxi Steel Corporation: Good example of collective bargaining
Benxi Steel Corporation started collective bargaining and collective agreements in
1995. This corporation organizes collective negotiation with the employees annually,
and execute collective agreement annually. The draft of the collective agreement is
prepared by the trade union of this corporation. As the employees are encouraged to
participate the drafting process, the terms of the draft of the collective agreement is
able to deal with extensive issues relevant to the interest of the employees, such as
medicare reforms, housing benefits, salaries and allowances, reduction of redundant
employees, the quality and quantity of the labor protection productions. [15]
When the collective negotiation begins, each of the two parties have 10
representatives. In other words, the employees elect 10 representatives, headed by the
chairman of the trade union. The collective negotiation is also observed by the mass
media. After the collective agreement is executed, great efforts are made in
implementing the agreements. First, the collective agreement is published in the
corporation circulations, and therefore made available to the employees. In this way,
the employees know exactly every article of the collective agreement , and is able to
supervise the operation of the agreement in the practice. Second, the different
departments of the management is responsible for endorsing the collective agreement.
Third, employee representatives and professionals are organized to inspect and
supervise the implementation of the collective agreement.
2.7 Sinopec Corp: successful HSE system
China Petroleum and Chemical Corporation (Sinopec Corp) is a publicly listed
company with integrated upstream and downstream operations and a complete
marketing network . The company was set up on February 28, 2000, pursuant to the
Company Law of China and in line with the principle of "separation of core business
from the ancillary, good assets from the bad, and enterprise functions from the social".
6
Sinopec Corp. issued 16.78 billion H shares in Hong Kong, New York and London on
Oct. 18th, 2000. The Company floated 2.8 billion A shares in Shanghai Stock
Exchange on August 8th, 2001. The Company's exiting total number of shares is
86.702349 billion, of which 55.06% is held by the state through Sinopec Group,
22.36% by domestic banks and assets management companies (AMCs), 19.35% by
foreign investors and 3.23% by investors at home.[16]
While trying to maximize its profits, Sinopec Corp. takes an integrated approach to
health, safety and environment (HSE). On April 4th, 2001, the HSE system of
Sinopec was officially announced to the public. Their HSE principle is "Safety first,
precaution important, all-involvement, comprehensive improvement, better
environment, health protection, scientific management and sustainable development".
Their HSE objectives are "Minimizing major accidents, harm to health and
deterioration of environment so as to give world-class HSE performance". Their HSE
commitment is "Anywhere in the world, Sinopec follows the local laws and
regulations, respects local customs and religions. They keep a constant attitude
towards HSE in all their businesses. All levels of senior management of Sinopec are
the first people to take the HSE responsibilities. Every employee is responsible for
HSE. HSE performance is an important indicator for bonus, employment and
contracting. Protect the ecological environment, achieve clean production in plants
and realize sustainable development. Disclose their HSE performance to the public for
comments and advise so as to improve the HSE management. Sinopec will invest
necessary talents, materials and funds to realize these objectives". HSE management
system is under implementation in various subsidiaries. Safety monitoring is
enhanced and the operational conditions greatly improved. [17]
As environmental protection is concerned, the company has been increasing its
investment in environmental protection while growing its business, continuously
strengthening environment management and promoting clean production.
Consequently, although production has been growing steadily, total contaminants
emission has been decreasing. Thus, more cordial relations with the community, a
better corporate image and reputation, and an improved external environment for the
growth of the company has been secured. Environmental protection management is
specialized and standardized. The responsibility of every plant manager on
environmental protection is clearly defined. Rules and regulations are formed for
project management and supervision of environmental protection. Special efforts are
made to treat key sources of pollution and to effectively supervise and control
emission. Sinopec pays great attention to pollution control and clean production. They
have the plan and objectives for clean production in the 10th 5-year plan. Selected
plants for clean production test starting from 2001 will be checked and accepted.
Subsidiaries for clean production demonstration will be accepted by end 2002 and
2003.In 2001, the COD in discharged waste water decreased by 8% over 2000, and
COD per RMB 10,000 of output value (1990 constant value) was lowered by
9.5%.[18]
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Sinopec Corp. attaches great importance to safety. The company has a sound safety
management system. Not only the corporate headquarter and each enterprise have a
safety and environment department, but also major production plants are staffed with
safety engineers, responsible for technical and management issues relating to safety.
The company also has a "safety commitment system" and a safety responsibility
system in place, the latter specifying the responsibilities for each position. The
company has set up a complete set of safety regulations, by which each position has
its rules to follow. For some important operation sites, for instance, fire-use
operation, in-facility operation, working high above the ground, and equipment
maintenance, a "work permit" and a confirmation are required. A safety inspection
network covering E & P, refining and chemical, and marketing sectors has been set up.
Every year, different levels of general and specific safety inspections are carried out.
In 2001, they completed the safety pre-evaluation for 36 new or upgrading projects,
including BYC ethylene cracker project. For new, revamping and expansion projects,
the design, construction and operation of safety facilities, fire-fighting facilities and
labor safety devices are done simultaneously with the project. The company pays
special attention to hidden perils, and has a program to remove hidden safety perils
from existing plants, facilities and utilities. In 2001, Sinopec completed 492 projects
for hidden safety perils removal, which helped to guarantee the safe production of
existing facilities. [19]
3. The justification for recognizing corporate social responsibility
3.1 Economic powers
In a modern market economy, corporations are the best and biggest place to integrate
and combine capital, labor, management and other production means. Corporations
are the most important distribution machinery for social and economic resources. It is
difficult for employees, consumers, local community and governments to avoid the
far-reaching impact of corporate power, which is pervasive almost over every corner
in the society, including the economic, political and social field. From the global trend
of development, corporate economic power is becoming stronger and stronger, and
more and more social wealth is concentrated surrounding the corporations.
As demonstrated in the 10 great findings publicized by two American researchers,
Sarah Anderson and John Cavanagh, of the 100 largest economies in the world, 51 are
corporations, only 49 are countries, Toyota corporation is bigger than Norway,
General Motors is bigger than Denmark. More important, the inequality in the world
between those who benefit from expanding corporate activity and those who are being
left behind, is fueled by accelerated corporate concentration.[20]
8
As far as the other national or regional corporations except the top 200 multi-national
corporations are concerned, they also posses tremendous economic power, and are
quite influential at the national or regional level, although their influence on the global
scale seems trivial comparing with that exercised by the top 200 Multi-national
corporations. That is the case with Chinese 120 large corporate groups, the listed
corporations, and the state-owned railway, Oil, steel, electricity and energy
corporations. Private corporations will be more influential in terms of their size of
capitals, employments and turnovers, as the 16th Congress of Chinese Communist
Party encourages the growth of private sectors by offering equal protections to private
sectors and public sectors. In addition to the domestic corporations, China will
continue in attracting great number of multinationals as China entered WTO in 2001.
For instance, China attracted overseas investment of US$ 46.4 billion in the first 10
months of 2002, up 19.6 per cent year on year. More than 400 of the world's top 500
enterprises have invested in China, and more than 400 research and development
centers have been built in the country by multinationals.[21] Therefore, the economic
powers of multinationals towards corporate social responsibility cannot be denied.
Corporate economic powers can find many different ways to express themselves.
They substantially determine the fluctuation of the main products market, the capital
market, the service market, they control the fate of employment of millions of
thousands of labors, they are the geese laying down golden eggs for the government
revenue, they are a decisive factor in the development of the economy of the local
community where they reside. The modern corporations can be described as super
stars in the platform of market economy, or intangible empire. The modern market
economy can also be called corporate economy.
Corporate economic power is not the only way to demonstrate the corporate
competence. Many corporations have been involved in extending their economic
powers into the political life. Different from the other interest groups, they influence
the legislation and governmental policy through two effective ways, one is lobbying
through interest groups, the other one is change the environments within which the
legislatures and governments make their decisions by the corporate decision. Since
the prospect of the re-election of the current governments in many countries depends
on their performance with the improvement of the economic situation at the national
or regional level, and their performance needs the close co-operation from the
corporations, the governments have to take into consideration of how their policy will
be perceived by the corporations. The necessary result is that the legislation or
governmental policy has to be shaped and diluted under the influential corporate
power. Multi-national corporations are also easily involved in the international
politics.
Corporate economic powers can also influence the progress of the sciences,
technologies, education, art, literature and culture as a whole in the society. Many
corporations have their own team of technicians to develop the innovative
9
technologies to be applied in the production process and products, which are always
the first rate in some industries, such as computer industry, automobile industry. Not
only the fate of the solicitation of the sponsorship from the corporations by the
universities and research institutes depends on the preferences of corporations, but
also the opportunities for the new technologies developed by the universities and
research institutes to be transformed into the production are up to the corporations.
Some corporations are also ambitious to shape the consumers' attitude so as to
increase their market share. It is also possible for the culture to be commercialized or
colonized by corporate interest.
Despite whatever effect the corporate powers have on the society, the corporate
powers are just the result of implementation of corporate decision-making by the
corporations on the basis of their economic powers. So, the key issue here is whether
absolutely free corporate decision-making power is justified?
As a civil or private right, corporate decision-making power is freely enjoyed by
corporations as private actors in the civil society without ungrounded intervention
from any third parties including the governments and NGOs. However, the
tremendous social effects arising from corporate decision-making power have been
far beyond the traditional framework of private autonomy and the private sphere
within which corporate power is supposed to operate.
Considering its substantial social impacts, corporate decision-making power cannot be
regarded as purely private right, and cannot be treated in the same way with the other
general private rights, such as freedom of contract enjoyed by common individuals.
Instead, corporate decision-making power should be considered as a special private
right with significant social effect, which is supposed to make profits in a socially
responsible way, and consequently further social policy and the non-shareholders'
interest.
The very nature of right and power, obligation and responsibility implies that social
obligation is inherent in almost every legal right, legal power or actual power.
Following the evolution history from French Civil Code of 1804 to German Civil
Code of 1896, and then to Chinese General Principles of Civil Law of 1986, we can
identify the internationally and increasingly penetration of social obligation or
social responsibility into the private property and private autonomy from the function
of good faith, reasonableness and fairness obligation. Absolute concepts of private
property, private autonomy or private rights are gone forever.
It's fair to say that the social obligation inherent in private rights should be
commensurate with their practical effects on the society. No social effect, no social
obligation. More social effects, more social obligations; vice versa. Corporations
cannot exist in a social vacuum. Since they extract profit from society, they should
bear the responsibility to address the social issue and take care of social law and
10
social policy. The extraordinary social effect the corporations have, determines that
corporate decision-making power contains heavier and more pervasive social
obligations than the ordinary individuals. Corporate social responsibility should also
be closely connected with the size of corporate power.
3.2 Other hypothetical justifications
The corporate power, especially the corporate decision-making power is by far the
most important justification for holding corporations socially responsible. Careful
examination of traditional theory about the nature of corporations, including
concession theory, contract theory, doctrine of nexus of contract, theory of legal entity,
theory of artificial entity, theory of social enterprise, theory of political system, could
lead us to redefine the nature of corporation as a social enterprise with legal entity
which can provide a another legal justification for corporate social responsibility. It is
important to notice that, corporate interest is not simply equal to shareholders' interest,
and shareholders are not the only stakeholder with regard to corporation interest,
non-shareholder groups are also entitled to shape the direction and process of
corporate decision-making, to share the benefit from the success of corporations. The
separation of the ownership and the management, and the emerging of modern
management-controlled corporations, are revolutionary steps in modern corporate
history. However, it aims to increase wealth in the aggregate for shareholders. Social
rights and social justice mandate the corporate law reform in the direction of taking
care of the non-shareholders' interest at the levels of both decision-making and
distribution of corporate gains.
This conclusion could be drawn from various perspectives in addition to the
perspective of jurisprudence. For instance, it is justified for corporate power and
corporate system to be expressed in public-interest terms from the perspective of
system theory, since corporation is only a sub-system within the larger system of
society, and a desirable system model mandate these two different levels of systems to
be interdependent and interactive which requires the feed back from corporations to
the society through their social performance.
In fact, corporations are most suitable actors to respect and promote certain social
rights, such as right to work, right to a clear environment, right to breath fresh air, etc.
The existence of market failure and limited capacity of legal control determines that
the enforcement of corporate social responsibility will definitely increase the overall
social wealth and efficiency, promote the realization of the social rights. And bona
fide performance of corporate social responsibility will in return provide the
justification for the overall long-run interest of all corporations and even the existence
of corporation system.
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4. Analysis of some doubts about the implementation of corporate
social responsibility
The worldwide debates over corporate social responsibility among the scholars have
lasted for several decades especially in US A. The first debate in the modern sense
can be traced back to that between Professors Adolf Berle and Merrick Dodd in the
1930s.[22]And it is significant for Professor Berle to concess in favor of Professor
Dodd's contention for corporate social responsibility in 1954. [23]The rising of
non-shareholder constituency statutes in US and the theory of stakeholder interest in
the debate in 1980s implies a further step toward strengthening corporate social
responsibility. [24]There are also arguments against corporate social responsibility.
For instance, a famous American economist, Friedman once put forward his
efficiency argument, and declared that the social responsibility of business is to
increase its profit for its shareholders. [25]It seems necessary to deal with some
typical doubts about corporate social responsibility.
4.1 Crucial market competition?
Some people may doubt that, corporate social responsibility itself is incompatible
with the crucial market competition: if you demand corporations to undertake
corporate social responsibility, they will lose to their competitors not practicing
corporate social responsibility. Therefore, corporations seem have no choice but to
compromise their socially responsible behavior or continue practicing corporate social
responsibility and risk the fate of bankruptcy or closing down.[26]
Generally speaking, the market is indeed crucial in the sense that the winners in the
competition for market shares can survive and become stronger, while the losers have
to lose some market shares or go bankrupt. In the crucial product market, the quality
and price of product are the key factors in deciding the future of corporations. In the
crucial capital market, the most important information for investors or their agents
and brokers, is corporate financial performance. While the information concerning
corporate social responsibility has not been given top priority by traditional corporate
and securities exchange legislation. Therefore, traditional stock market seems not so
sensitive to corporate social performance as to the corporate financial performance.
Every corporation has to play the universal games in the market. In my opinion, the
key factors determining the fates of competitors are two: one is whether the games are
fair and accepted by all of the competitors; the other is the individual competition
strength. If out-of date games are reformed, and new rules encouraging corporate
social responsibility are formulated, negative business results will be avoided.
Moreover, socially responsible corporations can acquire better reputation, more users
and consumers, expanded market shares and profit. Due to increased corporate profit,
12
more investors will put in their capital, more skilled and capable management experts
and other professional workers will come to contribute to the further corporate
prosperity. Can you believe socially responsible corporations will be losers in the
market?
4.2 Lack of ability and authority of the management?
Some people may argue that executives of corporations are not endowed with some
magic knowledge that makes them capable of determining a proper allocation of
resources in the economy, and they have not been elected to make political allocations
of wealth. Therefore, they lack both of abilities and authority of the management to
make corporate decisions regarding corporate social responsibility.[27]
The ferry of corporations sailing in the risky ocean of market economy needs first-rate
navigators of the first rate, namely directors and managers. If the qualified directors
and managers have seriously and honestly accepted the idea of the corporate social
responsibility, it is not very difficult for them to transform the idea into more detailed
and clearer corporate goals relevant to their corporation, and finally turn these goals
into reality. Additionally, it's the corporate social obligation to promote the realization
of social rights that is strong enough to provide the authority for the directors and
managers. Further more, lack of authority by the management is only reasonable
when it is viewed from the narrow and traditional legal framework of public law and
private law. If we put the newly emerging social law into the legal framework, it is
unnecessary for the directors and managers to possess the public law authority as a
precondition to enforce corporate social responsibility. To make corporate decision in
a socially responsible way is an issue within the category of social law and corporate
law, and has not much to do with the public law.
4.3 Whether the traditional legal protection to the non-shareholders corporate
constituencies is sufficient?
Some people hold that the traditional legal protection to the non-shareholders
corporate constituencies is sufficient, no good reason exists to demand enforcement of
corporate social responsibility. As Professor Hanks puts it, the economic interests of
employees are protected by minimum wage, safety, health and plant-closing laws, and
in many cases, collective bargaining agreements. Creditors are protected by fraudulent
conveyance, preference and bulk transfer statutes, as well as contract law.
Furthermore, many non-shareholder constituencies are politically well organized and
influential in the legislative process. There is no need to confer on them a gratuitous
additional opportunity to share in the assets of the corporation after their statutory and
contractual claims have already been satisfied.[28]
In fact, the shareholders and directors of corporations, especially the large
corporations have more political and economic influences than the non-shareholders
13
corporate constituencies. Both of the legislative measures and administrative ones are
influenced by corporate powers with regard to either the direction or the strength of
these measures when they are expected to keep corporations more socially
accountable. There are many cases for the large corporations, large business people to
interfere the political life, even in the national presidential election campaign in some
western countries. If the traditional legal protection to the non-shareholders corporate
constituencies were sufficient and perfect, the modern legal framework would only
need a contract law and a property law, the corporation law would be unnecessary, the
institutional arrangements concerning the social legislation, the social policy and the
social rights would also have no sound ground to exist.
4.4 The investors will be discouraged from investing in corporations?
This doubt is understandable but unnecessary. Once corporations take more corporate
social responsibility, the economic, social and cultural environment within which the
corporations exist and operate will be improved, the good corporate image will be
established, the long-term shareholders' interest will be guaranteed. As a small
sub-system within the general and large social and economic system, corporations can
not exist without the loans, labors, management, raw material, market, natural
environment, cultural environment, social justice, and social public goods and
services. Since corporate growth depends on the care and supplying from the society,
corporate social responsibility should be undertaken in return. Generally speaking,
performance of corporate social responsibility will benefit the corporations and their
shareholders, as well as the society.
Even though some performances of corporate social responsibility will further neither
long-term nor short-term interests of corporations and their shareholders, they can
maintain the image of thousands of millions of corporations as a whole, and ensure
the popular confidence in the due value of corporate mechanism and even the market
economy system, which is fundamental to the investment interest of each and every
shareholder. If corporate legal mechanism has proved to be contrary to social interest,
people with modern civilization, advanced conscience and morality, strong ability for
social reform and control, have sound reasons to substantially change the current
philosophy and legal framework of corporation law, to impose heavier cost for
establishing and operation of corporations, so as to facilitate the allocation and
floating of social and economic resources in the social interest. Corporations may be
replaced by other forms of firms, such as the state-owned enterprises,
workers-autonomous enterprises, and consumers-autonomous enterprises. The
possibility of this alternative will exist in the 21st century ,even in the longer future.
Thus, it is wise for corporations and their shareholders to accept the philosophy of
corporate social responsibility and integrate it into the corporate goal side by side with
the profit-maximization for the shareholders before the society determines to change
the current corporate legal norms totally and completely. If this reasoning can be
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understood by the shareholders, the fear of discouraging from investing in
corporations will have no feet to stand.
4.5 Confrontation with the government policies in favor of the investment?
Some people especially in the developing countries and regions fear that, the idea of
corporate social responsibility could possibly defeat or counteract the government
policies in favor of the investment, finally destroy the economy in the developing
countries and regions.
To attract direct foreign investment, some local governments in China used incentive
policies and measures, such as tax holidays or lowered rates tied to export
performance. These local policies are always focus on stimulating, encouraging,
protection and enabling instead of regulation, control and supervision. Therefore, the
rights and interests of foreign-funded enterprises enjoyed full protection, but guidance
to and regulation of these enterprises were not enough. In some areas, foreign capital
were stimulated at the price of sacrificing the environment quality and social interests
including the interest of labors and consumers. Additionally, many foreign investors
from the developed countries have not brought their domestic labor protection and
democracy machinery to China, such as worker's participation at the board level, or
collective bargaining.
The economic growth is important and fundamental to every nation or local
community, but it's not the whole story. Money cannot replace the welfare of human
being, the human rights, especially social rights. It's extremely selfish and immoral for
the current generation to make profit by depriving the next generation's general
interests in environments and resources. The purpose of attracting foreign investment
is to improve the people's living standard and social rights situation. If the local
policies have been unable to achieve these goals, it's fair and proper to reform them
and strengthen the corporate social responsibility. In fact, implementation of corporate
social responsibility will not necessarily deteriorate the investment environment. In
the contrary, it will encourage more and more workers, consumers, residents in the
locations of corporations and the whole community to establish strong mutual trust
and partnership with the socially responsible corporations.
5. Legal and policy suggestions for strengthening corporate social responsibility
It's necessary to popularize the idea and guidelines of corporate social responsibility
among the business community, the human rights community and the whole
international community. The directors, managers, auditors, majority shareholders
including institutional shareholders in large corporations, especially the listed
corporations, should be aware of the significance of building corporate conscience in
favor of the social justice and social rights. Considering that the philosophy of
traditional corporate law is to maximize profit for the shareholders while ignoring
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corporate social responsibility, it is more important and fruitful to institutionalize the
corporate social responsibility into the legal framework systematically and
comprehensively.
It is most important to reform the traditional philosophy, and recognize both profit
maximizing as a commercial goal and corporate social responsibility as a
non-commercial goal as the dual purposes of corporations. The traditional doctrine of
ultra vires could be re-interpreted so as to defeat the challenges from shareholders
against corporate resolutions for taking corporate social responsibility especially
profit-sacrificing social performance. In fact, the first paragraph of Article 14 of
Chinese Corporation law of 1993 can be interpreted as the umbrella provision
requiring corporate social responsibility.[29] The idea of corporate social
responsibility can be extended to the domestic legal framework as a whole, including
social security law, labor law, consumer law, environment law, corporation law.
Corporations should be assigned with important roles to play in pursuing the social
rights. For instance, the financing of the social security system and corporate social
responsibility are closely connected each other. To deal with the possible crisis of
welfare states, it is justified to reform corporate tax and social security tax system so
as to improve the social security finance system.
As corporate governance structure is concerned, social policy, social rights and social
justice should be given top priority through corporate decision-making process.
Employees, consumers and other non- shareholders' representation on the corporate
governing bodies should be made more effective. Like Norwegian corporate assembly
system, traditional general meeting of shareholders can be reformed to compose of
both shareholders and minimum percentage of other non-shareholder groups. Routine
representation from employees, consumers, users(including computer users,
pollution-making fertilizer users), local community, governmental agencies and other
non-shareholder groups can be introduced into the board of directors. Senior
executives with specific responsibilities of social characters can be appointed and
removed by the society. Corporate audit mechanism can be reformed in the line of
securing more socially responsible management. A reasonably fair, detailed and
practicable guideline for striking balance between shareholders' interest and
non-shareholder groups' interest is undoubtedly necessary. Needless to say, it is very
interesting to re-examine the nature of corporate statutes, namely the corporate
memorandum of association and articles of association, which are traditionally made
by shareholders or their representatives, and allow corporate statutes to be shaped by
non-shareholder groups and the public.
The corporate social responsibility toward the workers' interest is an important part of
modern industrial democracy. The employee's interest has a very essential room in the
range of corporate ends and purposes. To safeguard the employee's interest, many
different channels can be introduced. China has a long tradition for encouraging
worker involvement in the enterprise decision-making process. In 1960, Chairman
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Mao Zedong encouraged enterprises to implement the famous "Angang Constitution",
which emphasized on the workers participation in the enterprise governance structure.
Relying on the working class wholeheartedly has been a principle for the governance
structure in public owned enterprises.
Chinese Corporation Law introduced the employee representative system on the
corporate governing bodies, aiming at giving employees a say in the corporate
decision making process. This is an important respect of industrial democracy, which
has not been stipulated in the Labor Law. However, there are a lot to improve with the
employee representation on the corporate governing bodies. For instance, only wholly
state-owned corporations and limited liability corporations invested by two state
enterprises or State-authorized institutions or government departments are required to
have the employee representatives to the board of directors. While the publicly held
corporations are required to have the employee representatives to the board of
supervisors, the percentage of the employee representatives in the board of
supervisors is fixed by the corporate constitution instead of the legislation. Thus, it is
important to strengthen employee's right to participate in corporate governance bodies
especially in the publicly held corporation. The worker's participation has a history of
several decades in Norway and some other European countries, and models of
participation generally correspond to different corporate structures, such as one-tier
system and two-tier system. Yet, it is controversial globally even today. The worker's
right to be informed and consulted is also quite essential. The European works
councils may also offer some useful experience to Chinese legislation.
As a financial participation, employee share ownership scheme serves the same
purpose of industrial democracy with the decision-making participation. Since it is an
incentive measure open to every employee in certain corporations, the employees can
show considerable enthusiasm and interest in it. The system of employee share
ownership has been experimented in some corporation for several years in China. In
addition to encourage employee share ownership, other employee financial
participation schemes could be encouraged. For instance, in China, there have
appeared a large number of diverse forms of joint stock cooperative ventures in the
urban and rural areas. They are new things arising in the process of reform. They have
the advantages of both corporations and cooperatives. In these enterprises, each and
every member has double status of employee and shareholder. Under the political
report of the 15th Chinese Communist Party Congress, the government should support
them, give them guidance, constantly sum up their experience and improve them. And
it is considered one of the major strategies for reforming the small-sized
state-enterprises. Of course, the structure of employee share ownership program and
the status of the employees holding their corporation shares need further examination
by the legislature. In the future, the collective economy that features, in the main, the
association of workers in labor and their association in capital, will be specially
advocated and encouraged by Chinese government.
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Directors' traditional duties, such as the duty of due diligence, care and skill, the duty
of loyalty, including not engaging self-interested transaction, are owed to the
shareholders' interest and aims at securing the management efficiency. It appears to
deserve reform so as to maximize the effect of non-commercial goals on the director's
powers and duties, and encourage directors to undertake corporate social
responsibility to substantial extent. Detailed legal rules regulating the conflicts of
interest between shareholders and non-shareholder groups arising from corporate
socially responsible performances might be enacted for the management to follow.
Corporate social responsibility is a reasonable price to pay in exchange for
maintaining corporate legal personality and shareholders' limited liability. Whenever
corporations use certain tricks to avoid their due social responsibility, such as the
salaries owed to their employees, the monetary debt owed to their creditors, the duty
of establishing trade unions, their corporate veil shall be pierced, and the immunity
enjoyed by shareholders, including parent corporations, shall be deprived so as to
oblige corporations and their shareholders to fulfill social responsibility.
To encourage corporations take socially responsible initiatives, strict and systematic
legal requirements about social disclosure of corporate affairs especially corporate
social responsibility issues might be introduced and enforced.
The
remarkable success of sunshine campaigns in the political life in holding governments
and politicians accountable to the people has been constantly reminding us of the
significance of public disclosure about corporate affairs. However, the current
disclosure principle in corporate and securities legislation is basically concerned with
corporate financial performance with a view to protect shareholders, securities
investors, and at best creditors. Therefore, public disclosure norms can be redesigned
in order to promote social interest in addition to the interest of creditors, shareholders
and public investors. The range of right-holders entitled to have access to corporate
information shall be broadened so as to include every citizen, every member of the
grass-roots people. Of course, a balance should be struck between public disclosure
and protection of business secrets possessed by corporations.
It is justified and practical for the government to introduce a package of incentive
measures to encourage corporations to take social responsibility more voluntarily and
comprehensively. The government may mobilize its available resources to grant
subsidies and tax privileges, or help to build popular corporate image at local, national
or global level for the socially responsible corporations. The national governments
and international organizations have a very active role to play in developing and
executing the incentive programs. The re-examination of the market-related factors
that link manager's income to shareholder welfare, such as the option for shares
scheme, may lead us to consider linking manager's income to corporate social
performance.
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Punishment and reward measures are equally useful for enforcing corporate social
responsibility. It is well known that the targets pursued by the legal liability system
are deterrence, compensation and education. For the reform of criminal liability
system, equity fine is an effective leverage to ensure the non-profitability of
non-compliance in every occasion. The imposition of equity fine would require a
corporation to issue shares to a public body which would sell them in stock market,
finally resulting in diluting the market value of shares and share option enjoyed by the
management staff, and making it possible for the corporation to be taken over.[30]For
the reform of civil liability system, punitive compensation mechanism recognized by
article 49 of Chinese Consumers' Rights and Interests Protection Act can be extended
to all corporate commercial wrong doing in favor of the affected non-shareholder
groups. The range of plaintiffs of derivative action mechanism can be enlarged from
shareholders to stakeholders, especially non-shareholder groups. The application
scope of non-fault civil liability can be broadened. The administrative liability system
can also be reformed accordingly.
Additionally, proper state intervention and regulation of the state-owned public utility
enterprises for social interest are also influential and indispensable. In my opinion, the
state-owned corporations, especially the public utility enterprises should behave in a
more socially responsible way than the general private corporations do. As a first step,
the role of state intervention into market and corporate affairs should be re-oriented.
The other crucial issues to be discussed include the forms of state intervention and the
dilemma between the social responsibility and the efficiency in the state -owned
corporations.
Governments and courts assume crucial roles in enforcing corporate social
responsibility. Relevant government agencies, such as social affairs agency, corporate
registration and supervising agency, state planning agency, charity supervising agency,
environment agency, labor agency and state-owned corporations supervising agency,
might pay more attention to watching, monitoring and supervising corporate
performances to guarantee socially responsible corporate citizens. Judges and
attorneys might be competent and experienced enough to deal with the disputes
concerning corporate social responsibility. NGOs in favor of corporate social
responsibility could also be encouraged. The employers' organizations have a lot to do
in strengthening corporate social responsibility through their self-disciplining
machinery. Industrial or professional business associations, trade unions, consumer
organizations, environment organizations and other non-shareholder groups could
also make their considerable contributions.
International co-operation enforcing corporate social responsibility should be
strengthened further. In addition to domestic legislation, the international instruments
concerning social rights, including but not limited to CESCR, should clearly and
firmly recognize corporate social responsibility. And the international instruments on
multinational corporations, international investment and international trade, should
19
change the traditionally indifferent or inactive attitude toward corporate social
responsibility. Since the Global Compact's nine principles are proposed only based on
three international human rights instruments, broader social rights and interests of
consumers, the community and other stakeholders of the business, shall be recognized
by the Global Compact's principles. Considering the serious social problems caused
by some multinational corporations, the weakness of current legal control, the
strategies employed by the multinational corporations to escape social responsibility,
it is time that the requirement of social responsibility is integrated into foreign
investment legal system at the level of host states and international jurisdictions.
Considering the standard of corporate social responsibility requirements in the home
country of multinational corporations is possibly higher than that in the host country,
it is justified to impose a medium standard on the multinational corporations who
conduct business in developing or less developed host country. For instance, if the
minimum wage standard for workers in the home country is 1000 USD, while that
standard in the host country is 200 USD, 600 USD shall be the minimum wage
standard for workers in the multinational corporations operating in the host country. If
the environmental protection requirements in the home country are stricter that in the
host country, the same rules shall be applied. In this way, the social responsibility
requirements on multinational corporations are neither too hard nor too soft, therefore
reasonable, fair and practicable.
As a further step, the concept of corporate social responsibility can be expanded and
extended into more comprehensive and advanced one, "social responsibility of the
businessmen including the partnerships and proprietorships". Of course, sufficient
financial and personnel resources should be devoted to research on the solutions to the
legal and social problems with regard to corporate social responsibility.
-------------------------------------------------------------------------------[1] For the evaluation of the court holding in Dodge v. Ford Motor Co. and its
subsequent development, see James J. Hanks, "Playing With Fire: Non-shareholder
Constituency Statutes in the 1990s", 21 Stetson Law Review 97 (1991).
[2]For the annual report issued by China Textile inc., see
http://202.84.17.28/csnews/20020423/221511.asp; for the annual report issued by
Shen Zhen Haiwang Biological Engineering Inc.,see
http://202.84.17.28/csnews/20020423/221475.asp.
[3] http://202.84.17.28/csnews/20030122/323634.asp.
[4]Li Rong Rong, The State-owned Enterprises Reforms shall target at the Listed
20
Corporations, December 27, 2002.
[5] Chen Yu, The proposal on building honesty image made by the Association of
Board Secretaries of Shan Dong Province, see at
http://202.84.17.28/csnews/20020415/216795.asp.
[6] http://www.cec-ceda.org.cn/body/talk/chenglantong/2002_8_10.html.
[7] http://www.unglobalcompact.org/Portal/.
[8] Principle 1: Businesses should support and respect the protection of internationally
proclaimed human rights within their sphere of influence; and Principle 2: make sure
that they are not complicit in human rights abuses.
[9] Principle 3: Businesses should uphold the freedom of association and the effective
recognition of the right to collective bargaining; Principle 4: the elimination of all
forms of forced and compulsory labour; Principle 5: the effective abolition of child
labour; and Principle 6: eliminate discrimination in respect of employment and
occupation.
[10] Principle 7: Businesses should support a precautionary approach to
environmental challenges; Principle 8: undertake initiatives to promote greater
environmental responsibility; and
Principle 9: encourage the development and diffusion of environmentally friendly
technologies.
[11] http://202.84.17.28/csnews/20020412/215886.asp.
[12] http://www.rongshidagroup.com/english/welcome/index.php.
[13] For the detailed figures, see the CSR Report issued by Beijing Sanlu corporation,
and presented to the Sino-UK Symposium on the CSR Cases in Beijing on December
6,2002.
[14] For the detailed figures, see the CSR Report issued by Beijing Sanlu corporation,
and presented to the Sino-UK Symposium on the CSR Cases in Beijing on December
6,2002.
[15] For the detailed figures, see the CSR Report issued by Beijing Sanlu corporation,
and presented to the Sino-UK Symposium on the CSR Cases in Beijing on December
6,2002.
[16] http://www.sinopec.com/english/en-company/en-chairman/files/10000276.html.
21
[17] http://www.sinopec.com/english/en-business/en-hse/files/10000159.html.
[18] http://www.sinopec.com/english/en-business/en-hse/files/10000159.html.
[19] http://www.sinopec.com/english/en-business/en-hse/files/10000159.html.
[20] Sarah Anderson & John Cavanagh, "The Top 200------The Rise of Global
Corporate Power ", Institute for Policy Studies, 25 December 1996.
[21] Wu Gang, "Developing first-class enterprises", China Daily, December 24, 2002.
[22] Dodd, "For Whom Are Corporate Managers Trustees?", 45 Harvard Law Review,
1145,1153-54(1932);Berle, "For Whom Corporate Managers Are Trustees: A Note",
45 Harvard Law Review, 1365,1367-68(1932).
[23] Adolph Berle, "The 20th Century Capitalist Revolution", 169, New York:
Harcourt Brace(1954).
[24] About the case law and statutes regarding corporate social responsibility in USA,
see James J.Hanks, "Playing With Fire: Non-shareholder Constituency Statutes in the
1990s", 21 Stetson Law Review 97 (1991).
[25] Friedman, "The Social Responsibility of Business is to Increase its Profits", in
T.Beauchamp and N.Bowie, Ethical Theory and Business(Englewood
Cliffs,NJ,1988).
[26] Also see, James J. Hanks, "Playing With Fire: Non-shareholder Constituency
Statutes in the 1990s", 21 Stetson Law Review 97 (1991).
[27] Also see, James J. Hanks, "Playing With Fire: Non-shareholder Constituency
Statutes in the 1990s", 21 Stetson Law Review 97 (1991).
[28] Also see, James J. Hanks, "Playing With Fire: Non-shareholder Constituency
Statutes in the 1990s", 21 Stetson Law Review 97 (1991).
[29] This paragraph reads as the followings: " A corporation must in conducting its
business operations abide by the laws, follow professional ethics, strengthen the
development of the socialist spiritual civilization, and accept the supervision of the
government and the public".
[30] See also, J. E. Parkinson, Corporate Power and Responsibility: Issues in the
Theory of Company Law, Oxford University Press, First Edition(London, 1993)p357.
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