Monday, July 09, 2012

Corporate Social Responsibility With Chinese Characteristics--Part II

I have been considering the manner in which corporate social responsibility has become an important component of the social norms whose parameters shape corporate governance beyond law.  Yet even as corporate social responsibility, as a concept, goes global, it retains certain important regional differences. This is particularly so in China.

(Pix (c) Larry Catá Backer 2012))

So the question arises, ought Chinese CSR to be judged by its own terms or against global consensus at least as articulated by developed states?  My research assistant Shing Kit Wong (Penn State School of International Affairs, MIA '12) has begun to explore the socio-cultural and political bases of  corporate social responsibility and the human rights impacts of corporate behavior, in China.  His preliminary report was posted at:  Corporate Social Responsibility with Chinese Characteristics, Law at the End of the Day, Nov. 9, 2011. 

With this post, Mr. Wong continues his exploration; Shing Kit Wong, Corporate Social Responsibility in China (Part 2).

Corporate Social Responsibility in China (Part 2)
By Shing Kit Wong
Master of International Affairs Candidate
 Submitted to: Professor Larry Cata Backer
June 2012

Since Deng Xiaoping’s reform in 1980s, social development in China had lagged behind its economic development mainly because corporate social responsibility was not a major investment. A serial of scandals and social issues awakened the Chinese government that not only economic developments were essential to the society. The building a harmonious society and elimination of these society discord were as crucial, and therefore voices of all corporate must fulfill social responsibilities arise. In order to build a harmonious society, Chinese government believes that it requires maximization of mobilizing all labor, knowledge, management, capital and technology, energy, and exploration the source of all social wealth. As a member nation of World Trade Organization, China has had many discussions regarding corporate social responsibility across the country. While China focuses on economic development, social development and corporate social responsibility standards are also an area with great importance to develop in order to prevent falling behind and avoid foreign constraints over China’s development in its own pace.
Current Phenomenon
            Nonetheless, Chinese current corporate laws are just a matter of guiding principle declaring the value orientation and behavior standards. The concept of corporate social responsibility, nature, content, and legal consequences when corporate not fulfilling their social responsibilities are unclear. On the other hand, only a small amount of Chinese corporate publishes their social responsibility report. Within this small amount of CSR reports, most of them only acknowledge the positive impact the corporate have for the society. Instead, negativities are completely not mentioned, and false factors are usually presented. As mentioned, Chinese social development is by far lagging its economic development, yet most CSR reports present as if the stage of a harmonious society has been reached. The Department of Economics at Chinese Academy of Social Sciences conducted a research to discover reason behind the phenomenon. Researchers have found that 582 CSR reports were released by Chinese corporate in 2009, which accounted for approximately 15% of the total number of reports in a global scale. Within these 582 CSR reports, only 1/10 of them disclosed negative information. The only purpose of the vast majority of these reports was to highlight the corporate achievements. Information disclosure in these reports is very objectivity by the corporate, especially in electronics manufacturing, construction and retail companies. No negativities were ever mentioned. Foreign corporate regarding this matter is without exception. In addition to the financial deficiencies, other negative aspects of the corporate are also undisclosed.
            In contrast, Corporate Social Responsibility Research Center of the Chinese Academy of Social Sciences surveyed 335 A-shared listed companies. 14 percent of respondents believed that the negative information disclosure of social responsibility is extremely important; 68 percent of which believed it is important; and only less than 20 percent of companies did not think the negative information disclosure is important. Although the general public does not have a comprehensive understanding of the definition of corporate social responsibility, when they were surveyed whether corporate should take the initiative to disclose information, especially the negative impact of the society, over 90 percent of respondents believed that it is essential.
            In order to find out the reasons behind this phenomenon, researchers designed a questionnaire to discover the factors which have prevented the negative information from disclosure in CSR reports. The major concern regards blackening the reputation of the corporate. As one of the Chinese saying state: “good things do not get out, but bad news can travel thousands of miles”. Since the corporate social responsibility standard in China is unclear, there is no clear cut on what to disclose or how to disclose. In addition, as the competition in the between corporate becomes fierce, the possibility of negative contents of corporate social responsibility being used against them will be very high. The absence of regulations is another reason behind the phenomenon. Chinese currently legal system has been lacking the regulation on disclosing information of corporate social responsibility. Besides lacking of regulations, the majority of government agencies do not encourage a mandatory approach to the requirements. In fact, the absence of legal regulations and obstructions from state and local government “encouraged” a culture of anti-transparence. This is in particular happening among foreign corporate. Multinational corporate has to be relatively transparent in their home counties. Nonetheless, once these foreign corporate have entered the Chinese market, there is a double standard in regulating corporate behaviors as if they have entered a large black screen. The reason is that local governments want to provide more preferential policies to attract foreign investments. Since the political pressure of the foreign corporate is relatively, they would not likely to take the initiative to disclose negative information on corporate social responsibility under a liberal business environment.
            In contrast to government officials not regulating, the general public not concerning the issue is another important reason behind the phenomenon, although they believe that it is essential for such information being included in CSR reports. “China Corporate Social Responsibility Benchmark Survey 2010” showed that less than 50 percent of Chinese public use the official website, or marketing materials from the corporate as the main channel for understanding their social reputation. Nearly half of the survey respondents had not even heard of CSR report. In the end, the Chinese general public concern whether corporate would fulfill their social responsibility performance, but ignore the fact that corporate voluntarily disclose information. This contradiction shows that corporate social responsibility development is relatively short in China. The needs of stakeholders requiring corporate social responsibility disclosure is still insufficient, and meanwhile, stakeholders basically are lacking trust of the contents in CSR reports.
            This phenomenon in corporate social responsibility practices in China can be traced back in to Chinese business culture, economic policy since the reform in 1980s, and the current oversized Chinese population, which leads to numerous labor right concerns.
Chinese Business Practice
            Most western business people would agree that doing business in China, or with Chinese business people, requires an understanding of the country’s history and culture because of the role they factor out in how Chinese people think and react in business dealings. Inside Chinese Business: a Guide to Managers Worldwide, written by Ming-Jer Chen, and Chinese Business Etiquette: A Guide to Protocol, Manners, and Culture in the People's Republic of China, written by Scott D. Seligman, are two of the most famous books in which explain the uniqueness of Chinese business practices, and these practices affect and influence heavily on corporate social responsibility in China.
            In order to understand how business work in China, it is essential to understand the unique concepts of family, guanxi(关系) networking, communication, and negotiation that underlie Chinese business practices. These concepts are all strongly influenced by the foundations of Chinese culture, which developed mainly from Confucianism. The philosophy of Confucianism broadened the traditionally practical role of family by adding a moral dimension as well as encouraging mutually dependent societal relationships. As family is considered the foundation of Chinese organizations, one would refer their business as “business families” since the family comes first and the business comes second. In contrast, one often refers their business as “family businesses” in the West. Chinese would rather work with family member or at least people from the same region rather than with strangers. While this preference may still be theoretically true, it is disappearing since multinational corporate, the increased amount of migrant worker, and the need for better educated work force are forcing the change to a much more fragmented workplace. However, family will always come first in China ideally as they have in one of the Chinese sayings: “blood is still thicker than water”. In this model, each individual has an important role to play within the family as a link in society’s network. Although communist rulers attempted to replace family loyalty with loyalty to the Communist Party of China, the family-based model of business is not as visible. Nonetheless, the increased number of non-state businesses in China has helped the family model of business to reappear recently. There are still millions of Chinese that are just “going to work” on a daily base, but this business family model is still the idea and preference if available.
            An overview of this Chinese business family model includes four major features which are: family-directed operation, containing a dominant family head, consisting of enduring roles and family obligations, and family-financed and family accountable. A typical Chinese business family is always headed by a parental figure who is often the founder of the business. Chinese business is often family controlled even when it is a publicly held corporation. Furthermore, family members generally take a hands-on approach in the business affairs with informal decision-making process. As the businesses are usually are controlled by a dominant family head, he (in most cases the family head is men) would have the final say on significant decisions. The advisors are usually family members or close friends and such relationships are more important than the organizational chart. Thus lower level managers in Chinese business families will usually go straight to the head without going up through the chain of command, and therefore it is essential to find out who really is in power and has influence in a Chinese firm. In most cases, Chinese assets are divided among all of the sons who may branch off into different industries, and the heads of the businesses are usually succeeded by family members. Even if nobody has the skill to run the business, family members are still preferred over professional managers from the outside.
            The backbone of Chinese business is mainly created by family, and equally important, connections known as guanxi (directly translate as “relationships”). The Chinese business culture is based upon connections or relationships, whereas Western business culture is on a transaction-based. This guanxi concept consists of a more complete translation which is connections with mutual obligation, goodwill, and personal affection with family and shared experiences such as military service or school mates. Chen classifies the levels of closeness in this guanxi concept with a diagram. The closest relationships in guanxi are members of from the immediate family, and the next closest are the extended family or very close friends who are treated as family. The next level of guanxi is between people with shared experiences. The final level of relationship is that with strangers who often are looked upon with suspicion until they are known better. It is possible and easier to do business with the Chinese if one falls in any of these categories. The level of business that is carried out depends on the development of the relationship. Outsiders can reach into the more exclusive parts of the network through other people.
            Guanxi often results in favors that are expected to be returned but by no specific date. This indebtedness from such favors do not have a statute of limitations and sometimes would lasts for generations and Chinese people will remember for a long period of time when receiving a favor especially in a case when it was essential. When a favor is returned, it is often in a greater measure. This swinging of the balance strengthens the guanxi networks and carries it into the future. If one is outside of a guanxi network, it is wiser to create one’s own network since creator is already an insider in his or her own network. Therefore, rather than focusing on accessing another network, guanxi is more about cultivating one’s own network.
            Successful Chinese business people are very well connected with a vast network that goes beyond what is commonly considered as networking in the West. While Westerners focus more on professional, when Chinese first meet their counterparts, the first set of questions mostly would regard their origin and then other people that they might know from the area. This is an intention to determine whether there would be perhaps some more preexisting connections. This can be the basis of a very close guanxi network and thus generate much goodwill. When establishing a guanxi connection, it is ideal to verify the counterparts’ reputation first. A guanxi connection with somebody who has a bad reputation can ruin other guanxi.
            On the other hand, it is essential not to make one’s acquaintances believe that you are rushing in the development of a relationship. Showing sincerity and commitment to the relationship is more significant than throwing dinners. Many Westerners become what the Chinese would consider as “meat and wine friend” when they just put out a huge banquets as they know the Chinese appreciation of good food. Such generosity usually does not win any strong connections with the Chinese. Furthermore, guanxi networks are among individuals and not entities. When a person leaves a position, his replacement does not inherit the network. Therefore, companies will sometime appoint the replacement in advance in order for him to get introduced to the network. Because of this trend, it is advisable to extend the network beyond one person when dealing with a Chinese company.
            Another essential part in guanxi connections is gift-giving. The giving of symbolic gifts can strengthen the relationship, and this gift should be something that either considers the recipients interests or a symbol that shows one’s own background. The gift should not be expensive as it would be difficult to reciprocate and could potentially embarrass the recipient. On top of gift-giving, guanxi connection should be maintained through a steady exchange of favors as mentioned earlier. These favors should be repaid with slightly larger ones, yet not too much larger to break the natural strengthening of the relationship. The gift-giving and exchange of favors would go beyond the family of the guanxi partners. Chinese do not draw the distinction of family lives and business lives as Westerners would consider the two to be separated. In a Chinese business setting, family-like behavior is often practiced including asking about their parents, remembering their childrens birthdays, and then sending gifts to them. These practices will build and maintain the guanxi connection in Chinese businesses. Decision making in Chinese firms are usually not only impacted by one transaction, but also on the network as maintain the connections is more valuable than a single deal. Lastly, since relationships are the central focus of Chinese business, a firm seeking to do business in China ought to should make guanxi a part of its strategy starting point and not as just an incidental. Negotiations play another huge part in Chinese business practices. Chinese has the tendency to employ protracted and indirect negotiating methods to defer and delay the decision making process. It never ends regardless where contracts are signed. Chinese believes this outlook can offer valuable ways in utilizing long-term relationships to bring benefits during the negotiation process and beyond.
            The morality of guanxi connections is always questioned.  In fact, some of these Chinese cultural traits and guanxi networking would facilitate dishonesty and even illegal practices when applied in business as they are usually in conflict with the main stream of corporate social responsibility concept along with business laws in China, and not to mention, the norms of international CSR frameworks. Nonetheless, defendants argue that this concept of networking act is minor aberration in another moral system in protecting on another and no one loses in the long run, and that it is a valuable source of information on issues which the official channels are inadequate. In a society where laws are not enforced uniformly, guanxi does help when dealing with one another in businesses. Indeed, all these family-style business practices and guanxi are all embedded deep inside Chinese culture.
Economic Reforms
            The Chinese economic reform (改革开放) was started in 1978 by reformists within the Communist Party of China led by Deng Xiaoping. The economic reforms were carried out in two stages. The first stage involved the de-collectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start up businesses with most industry remained state-owned. The second stage of reform involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained. This program of economic reform principle is commonly known as “Socialism with Chinese characteristics”
            The path of socialism with Chinese characteristics takes place under the leadership of the Communist Party and with unique situation in China focusing economic construction as the center adheres to Four Cardinal Principles, in which: (1) upholding the socialist path; (2) upholding the people’s democratic dictatorship (人民民主专政); (3) upholding the leadership of the Communist Party of China; and (4) upholding Marxist-Leninist-Mao principles. Socialism with Chinese characteristics persists in reform and opening up, improve the socialist system, and develop the socialist market economy; and therefore ultimately achieving an advanced socialist culture and a harmonious socialist society. This socialist theoretical system includes the major strategic thoughts of Deng Xiaoping Theory, Three Represents, and the scientific concept of development including scientific theoretical system of socialism. This theoretical system is widely viewed as a continuous development of an open economic system, and is a common ideal in taking China in to its great rejuvenation under the leadership of the Communist Party. In general, under socialism with Chinese characteristics, the government has absolute control of vital economic sectors and domestic enterprise through the concept of state-owned assets. Although the existence of private equity and economy is allowed, private economic agents and state-owned economic entities are in accordance with generally accepted form of market economy. The two economic entities can be transformed into each other in certain circumstances.
            Indeed, China’s economic has grown rapidly since the reform at a rate of 9.5% per year since 1978. The increase in total factor productivity was the most important factor, with productivity accounting for 40.1% of the GDP increase. Chinese GDP per capita also increased from 2.7 percent to 15.7 percent. In contrast, absolute poverty declined from 41percent of the population to 5 percent from 1978 to 2000.  On the other hand, the private sector grew remarkably, accounting for approximately 70 percent of Chinese GDP. Chinas current economy has become the second largest after the United States.
            In fact, Chinese social and economic developments have been initiated from a series of Five-Year Plans (五年计划) since 1950s. These initiatives are shaped by the Communist Party of China through plenary sessions of the Central Committee and national congresses in mapping strategies for economic and social development, setting growth targets, and launching reforms. Since the first plan in 1953, there has been twelve Five-Year Plans initiated in guiding the economic and social development in China. Nonetheless, the goals and visions of these Five-Year Plans stress extremely heavily in only economic reform and development. In contrast, social developments have little to no mention in these plans. This phenomenon is easily reflected from corporate as well as many business men in China: “You need to become rich first before you can achieve anything”. CSR reports from the vast majority of Chinese corporate, including China Mobile Limited, Huawei Technologies Co. Ltd, and Shanghai Baosteel Group Corporation, stress heavily on the profile in which aligning with the Five-Year Plans.
            Nonetheless, socialism with Chinese characteristics is widely criticized as crony capitalism, in which success in business depends on close relationships between business people and government officials, allowing exhibition by favoritism in the distribution of legal permits, government grants, and special tax breaks. Despite reducing poverty and increasing Chinas wealth, the reforms have been criticized for increasing inequality and allowing private corporate to purchase state assets at reduced prices, and sometimes resulted in major conflicts including oilfield incident in Shanbei, Haimen protest , and the infamous protests of Wukan. Many of these conflicts occurred when the objectives of corporate being profile maximization, and neglected the welfares of the public. As economic developments are mainly driven by corporate, and Chinese government’s main objective stresses heavily in economic development, negative practices and behaviors that are contradicted with the concept of corporate social responsibility are usually ignored, and sometimes even covered up, by the government. As long as corporate contribute to the economic development of China, it is as if corporate social responsibility is fulfilled, and that disclosure of negative information can be neglected.
Issue in regard of Migrant Workers
With over 1.3 billion people in China, the large population is considered one of the greatest obstacles in economic and social development. Within the Chinese population, approximately 250 million to 300 million people are migrant workers, or floaters. These workers are mainly farmers from rural part of the country and factory workers who has been laid off. They go to more urban and prosperous coastal regions in search of work as they are the main force for urbanization in China. Nonetheless, the current household resignation system, or the hukou system (户籍制度), separates the migration between rural areas and urban areas of China, resulted in a large amount of injustice as migrant workers are lacking the basic rights which are protected by the Chinese Labor Law. Therefore, corporate social responsibility in China mostly neglects the concerns of this population.
            The household registration system is a class system residency permits required by Chinese law. A household registration record officially identifies the residence of a person and includes identifying information such as name, parents, spouse, and date of birth. It sometimes interchange with family registration since the registration record is issued per family, which includes information of births, deaths, marriages, divorces, and moves, of all members in the family. This system was in existence in China as early as in 2100 BCE for purposes of taxation, conscription and social control. Chinese government officially promulgated the household register system to control the movement of people between urban and rural areas in 1958. Individuals were categorized as “agricultural household” or “non- agricultural household. Workers categorized as “agricultural household” seeking to migrate from rural to urban areas for non-agricultural work would have to apply through relevant bureaucracies, but the number of workers allowed to make such moves was tightly controlled. Workers who worked outside their authorized domain or geographical area would not qualify for any benefits such as employer-provided housing or health care. Due to the large population of farm workers, the household registration system limits mass migration from the rural land to the cities to ensure some structural stability. The Chinese Ministry of Public Security continues to justify the household registration system on public order grounds and provide demographic data for government central planning. In addition, by regulating labor, it ensures an adequate supply of low cost workers to the plethora of state owned businesses. Nonetheless, urban citizens usually enjoy a range of social, economic and cultural benefits that rural citizens do not receive.
            Although individuals are technically required to live in the area designated on their permit, the system has largely broken down in practice. After the economic reforms, it became possible for some agricultural households to unofficially migrate to urban areas and get a non-agricultural job without a valid permit. In fact, economic reforms also created pressures to encourage migration from the interior to the coast. It also provided incentives for officials not to enforce regulations on migration. Export-processing zones are created by migrant workers, but the offspring of these migrant workers are not eligible to register in the urban areas, thus becoming what is known as “black household”. This population loses all the basic rights including education, work, marriage, and so forth. Currently, the “black household” accounts for 1 percent of the Chinese population---that is 13 millions of people. These “black households” are widely considered as “illegal” citizens in China, and thus illegible neither for any social welfare nor from the government nor protected by the law.
            Beside the issue with the “black household”, the working condition of these migrant workers is far below the contemporary standard of most developed countries. There are restrictions upon the mobility of migrant workers in which forcing them to live precarious lives in shanty towns where they are exposed to abusive treatment. Many of these migrant workers are made obsolete by modern farming practices and factory workers who have been laid off from inefficient state-run factories. The population includes men, women, and couples with children. While men often get construction jobs, women would work in cheap-labor factories.  Most migrant workers have traditionally gone to the capital city of Beijing, the coastal cities such Shanghai and Shenzhen, but more are heading to the interior cities like Chongqing where new opportunities are opening up with less competition.  Although overall the Chinese government has tacitly supported migration as means of providing labor for factories and construction, as well as the long term goals of transforming China from a rural-based economy to an urban-based economy, because of the household registration system, these migrant workers are technically against the law when working in non-agricultural jobs even though government officials are provided incentives for not enforcing regulations on migration. Therefore, migrant workers are treated in a condition similar in many ways to that of illegal immigrants.
Indeed, since the reforms in China in 1980s, huge amount of business appeared in the coastal areas, and these businesses brought full employment in the cities. The phenomenon became “business would get rich, working would earn money, and migrant workers are the cheap labor”. These migrant workers are seen by businesses as cheap labor force, and what they offers in this business equation is manual labor, and therefore their basic rights and development are mostly neglected. Since migrant workers come from extremely low educational background, and they are cut off all channels to the mainstream of the society, their opportunities accessing to wealth are limited. Therefore, the gap between the rich and the poor is so wide, and wealth is concentrated in a handful of people.
Migrant workers’ rights are one of the most contentious human rights issues. Even though China promulgated the Labor Law, corporate generally vary degrees of violations including wage deductions, extended labor time, labor safety, labor protection, discrimination and abuse. There have been several reports of core International Labor Organization conventions being denied to workers. One such report was released by the International Labor Rights Fund in 2006 documenting minimum wage violations, long work hours, and inappropriate actions towards migrant workers by management.
For long-term migrant workers living in the city, there is a huge gap between wage income and the level of the local economic development. They are always under the pressure brought by the huge income gap, as well as the poor working and living conditions. On the other hand, most of the children of migrant workers accept less than education in the city, and even cannot go to local school system or even participate in the local college entrance examination since they are considered “black household” in the city. Most of the insurance including medical, unemployment, industrial injury, maternity, housing provident funds and social welfare do not have coverage to migrant workers. As oppression often resulted in social problems causing by migrant workers, the mainstream media and scholars mostly ignore their contributions to the society. The concept of corporate social responsibility in China stresses compliance of Law Labor and other regulations on labor protection. In fact, most CSR reports in Chinese corporate put a lengthy amount of the matter. Nonetheless, as the social trend neglects the rights and concerns of migrant workers, corporate social responsibility in China widely neglects the issue as well, and that the matter is nonexistence in Chinese CSR report.
            In sum, Chinese government believes that in order to build a harmonious society, the nation needs to maximize its mobilization of all labor, knowledge, management, capital and technology, energy, and exploration the source of all social wealth. While China focuses on economic development since the reforms in 1978, social development and commitment to corporate social responsibility has been lacking behind most western countries. Nonetheless, current corporate laws in China are just a matter of guiding principle declaring the value orientation and behavior standards. The concept of corporate social responsibility, nature, content, and legal consequences when corporate not fulfilling their social responsibilities are unclear. On the other hand, only a small amount of Chinese corporate publishes their social responsibility report. Within this small amount of CSR reports, most of them only acknowledge the positive impact the corporate have for the society. Instead, negativities are completely not mentioned, and false factors are usually presented. The reasons behind his phenomenon in corporate social responsibility practices can be traced back in to Chinese business culture, the economic reform, and the issues with migrant workers. First of all, the unique concepts of family, guanxi networking, communication, and negotiation underlie Chinese business practices. However, the Chinese business culture would usually facilitate dishonesty and even illegal practices as they are usually in conflict with the main stream of corporate social responsibility concept, business laws in China, and the norms of international CSR frameworks. On the other hand, Chinese social and economic developments have been initiated from a series of Five-Year Plans. The visions of these plans stress extremely heavily in only economic reform and development, but social developments were usually put behind economic development. Since corporate is the driving force of economic development in China, their corporate social responsibility stress heavily on their economic accomplishments as if they are align with government policies. Lastly, as an over-populated nation, China’s population is considered one of the greatest obstacles in its development. Within the population, approximately 250 million to 300 million people are migrant workers mainly from rural part of the country to more urban and prosperous coastal regions in search of work. Nonetheless, the current household resignation system separates these migrations. Migrant workers are often lacking basic rights protected by the Chinese Labor Law, and that corporate social responsibility in China mostly neglects the concerns of this population.

(Pix (c) Larry Catá Backer 2012))

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