Ethical Performance
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Growing pains and CSR in the People's Republic

April 2012

China's rise to industrial powerhouse has not been painless, with pollution, freedom of speech and workers' rights regularly hitting the news. But CSR could play a critical role in creating economic value. Tristan Edmondson reports

Since 1978, China's economic growth has lifted hundreds of millions of its people out of poverty, creating social progress unlike any seen before in history. But China's economic miracle has not been without cost. Many think it is built on foundations which will not be able to maintain economic development for the next 30 years. But is CSR part of the solution for making China's economic growth sustainable, or an irrelevant Western import?

Certainly, this question is increasingly relevant to the many Western companies which now rely on serried ranks of Chinese workers in factories run by Foxconn et al to manufacture and assemble their branded items of desire.

Some commentators, for instance, believe that Apple's decision to review its Chinese suppliers' operations demonstrates  just one of the many tensions in the inevitable social realignment that comes with being a fully-fledged capitalist economy – even if it's a state capitalist one. Given its history and culture, it should be no surprise that a multinational's CSR practitioners will find particular challenges in China.   

The most effective form of CSR helps companies capture the value they bring to society, and this value should be economic, social and environmental. According to Michael Porter of Harvard Business School, in his paper Creating Shared Value, companies who use their core competencies to contribute to a healthy economy, society and natural environment will be more profitable.

This conception of CSR could be crucial for China. According to Michael Pettis, finance professor at Peking University, China's rapid GDP growth is not contributing value to its economy. In the Financial Times, Pettis has described how this is not a new story. "In Brazil, the USSR and Japan, very high levels of investment and GDP growth led to misallocated capital and eventual economic stagnation."

He says the biggest problem is that "as you keep propping up investments, the value you're creating in many cases is actually negative, although it continues to show up as rapid growth because the way we calculate GDP doesn't distinguish between investments that have a positive net present value from those that have a negative net present value."

Pettis doesn't just limit this lack of value creation to the economic sphere. "It is easy to show economic growth today from a factory that is able to throw chemicals in the river – but putting chemicals in the river reduces the value of the land and water for the future. It doesn't show up as a reduction in the value of GDP, so if you add these two things together you can say that real GDP growth is much less than nominal GDP growth."

China's economic model is built on investment-led growth that fails to prioritise investments according to their value to society, or even to their investors. These investors are state-owned banks which pour capital into state-owned enterprises (SOEs) that dominate the economy. Stephen Frost, executive director at CSR consultancy CSR Asia, tells us that "companies that only have one major stakeholder – the government – have little motivation to engage with stakeholders to develop a CSR strategy."

But China's mandarins understand the problem. Li Xiaosong, a researcher at the Centre for International Business Ethics (CIBE) in Beijing, says that "the Chinese government is realising that GDP growth is not the solution to everything, and that they must listen to other stakeholders. Three or four years ago, if you asked SOEs about CSR, they would hang up the phone. Now they are writing CSR reports. This is because they are told to by central government, but the process of implementing CSR makes them realise its value."

CIBE gives seminars to officials at the Central Party School and Dr Stephen Rothlin, the centre's secretary general, emphasises how the tenets of Confucianism are a useful reference in order to make CSR relevant and palatable. "It is important to appeal to cadres' understanding of the Chinese ethical tradition."

Stephen Frost describes Chinese CSR development as "CSR with Chinese characteristics". He says that "at one end of the spectrum, companies like China Mobile have a CSR strategy and reporting process that looks very similar to its Western competitors. But at the other end of the spectrum, many companies conflate CSR with government relations – donating to causes the government has designated as priorities. However, Chinese companies operating offshore are learning about Western CSR as well and integrating that into practices and policies back home. It's not simply a case of learning from Western multinationals in China."

Rothlin says that the Chinese philosophical tradition is crucial. "China must open up to international rules of transparency but, in order to do that, we must engage in traditional Chinese ethics. A key issue is that China joined the World Trade Organisation and must conform to international rules. It is no good to say 'we are China, we are different'."

Perhaps one of the best ways to show the potential value of transparency and CSR in China is by examining the tremendous environmental pollution caused in large part by the use of coal. In its report The True Cost of Coal, Greenpeace estimates the total external impact of coal used in 2007 to be in the region of Yuan 1.75tn (£175bn, €209bn), equivalent to 7.1% of China's GDP. This price is borne by society through healthcare costs, lost income, decreased agricultural production, water pollution and mining accidents.

More immediately pressing than coal pollution or climate change, a lack of water threatens to undermine China's food security targets and food price controls. China has around 7% of the world's water resources and roughly 20% of its population.

Frost points out that while companies are responding to this challenge, this may be coming too late. "Many businesses dependent on water already know that managing and ensuring a clean supply is crucial. But with so many water resources stretched to the limit, a growing number of businesses are facing a serious risk.

"If China wants to develop economically, it not only needs to liberalise interest rates or to ensure a more flexible exchange rate, but it also needs to reform how companies use increasingly scarce resources."

Although China's economy is predominately state-controlled, Frost thinks that private enterprise and CSR is part of the solution. "There are still an enormous number of private and other companies in China, many of which are indeed starting to understand the benefits for business of developing sustainability strategies."

Here, perhaps, lies the key to China's sustainable development. "More and more people realise that if there's economic development, it's not given by the government," says Dr Liu Yu, political scientist at Tsinghua University. "It's their own labour and entrepreneurship."

In order for Chinese entrepreneurs to incorporate theories of creating shared value into their business practices and to articulate this kind of CSR using traditional Chinese values, there needs to be the conditions in place for rewarding investment that creates the 'right' kind of economic growth.

This is some way off in China, where coal is cheap, privileged elites benefit from household wealth transfers and the Communist Party cannot do without the dependable but flawed GDP growth generated by state-owned enterprises.

However, as energy prices and labour costs rise, as the Chinese government is threatened by the instability that environmental degradation and social inequality brings, those private Chinese companies that have financial, social and environmental sustainability at the core of their business will profit more than their inefficient peers.

Certainly, they will need to draw heavily on ancient Chinese traditions of consensus and acting for the public good. But whether this happens quickly enough and at a large enough scale to stave off a crash or Japanese-style 'lost decade' of growth remains to be seen.

Tristan Edmondson is a senior project manager for CSR Asia and is based at its London office.
tristan.edmondson@csr-asia.com




Tristan Edmondson | Asia | CSR

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