China corporate governance report: CSR and law

Euromoney guides, June 2009

Remarkable things are happening in the legislative framework around corporate and social responsibility in China. If some of the guidelines coming out of key Chinese agencies become law, China will have a more stringent and progressive environment for CSR than many western countries.

Anyone who has spent time in China can see what the most vital element of social responsibility is in the country today: the environment. Pollution is an immense and growing problem and in recent years China has sought to address it with legislation. Key examples along the way have included the Circular on Enhancing the Environmental Monitoring of Export Enterprises, in December 2007, and the PRC Law on the Prevention and Control of Water Pollution in May 2008.

The most comprehensive legislation was passed by the Standing Committee of the 11^th National People’s Congress in August, and took effect in January this year. Entitled the Circular Economy Promotion Law, the word ‘circular’ roughly equates to terms like sustainable or green in the west, and many of the provisions relate to more efficient use of resources, environmental protection and sustainable development. It defines circular economy as “reducing, reusing and recycling activities conducted in the process of production, circulation and consumption”, and makes a very clear explanation of how it wants these principles to find their way into practice: “Propelled by the government, led by the market, effected by enterprises and participated in by the public.” According to lawyers Faegre & Benson, from whose practice note that translation is sourced, “that mandate is to be factored into industrial, economic and social planning at every level of government.”

While this is welcome, some of the developments in other areas of CSR in China are perhaps more socially significant and, to western eyes, surprising. Few in the west have heard, for example, of the Guideline on Fulfilling Social Responsibility by Central Enterprises, issued by the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC). And, true, it’s not law. But in Chinese terms it is a landmark.

This guidelines aim to “promote scientific development, facilitate central enterprises in fulfilling social responsibility in the course of building socialism with Chinese characteristics, and to realise the harmonious and sustainable development of enterprises, society and the environment.” And if that seems a grand statement, consider a few of these lines in the guidelines: “Fulfilling social responsibility is a requirement by the entire society… not only the mission and responsibility of central enterprises, it is also an expectation and requirement by the entire society.” Or, “central enterprises shall take responsibility in energy saving and pollution reduction, develop energy-saving industry…” Or “Central enterprises shall sign employment contracts with employees according to relevant laws and regulations… they shall respect employees, treat them fairly, and fight against all forms of discriminations due to the difference of sex, nationality, religion, age, among others.” There are clauses on community welfare, legal operations on the basis of honesty and credit, and corporate governance. Granted, it is light on specific detail, and on mechanisms for censure, since it is not law. But guidelines do tend to be enshrined in legislation in time (and are generally just as important for enterprises to follow given that the people who issue the guidelines are government bodies or regulators) and it is remarkable to see such strident language on employee equality and social behaviour from an arm of the Chinese state.

For Clare Pearson, a CSR lawyer at DLA Piper in Beijing, developments like these reflect the fact that “Corporate governance and CSR is on the up in China. 2008 was designated as the year for CSR, but 2009 is when nice words are going to turn into legislative action.”

Pearson believes the Sichuan earthquake was a catalyst for what is happening in China today. She was struck not only by the sincerity of response in China, and the level of corporate and individual giving, but also the micro level at which individual attitudes towards companies were shaped by their response to the earthquake. She recalls seeing Coca-Cola taken out of office fridges and local brands put in, reflecting what was seen as the local companies’ greater financial commitment to earthquake relief. As an advisor to western businesses, she could also see that western responses were being watched closely too. A colleague told her a Chinese saying: “The longest race finds the strongest horse.” “It’s not about when times are good but when the chips are down,” she says. “It’s not about how much you sponsored the Olympics, but how your company contributed to the earthquake relief. You have to see the bigger picture in this country, and when you align your corporate interests with earthquake repatriation you are likely to see benefits for your company.”