The "2007 Report on China's Corporate Governance: Stakeholders & Corporate Social Responsibilities" by the Research Center of the Shanghai Stock Exchange (SSE) has been published recently in due form.
As Chairman Shang Fulin of the China Securities Regulatory Commission (CSRC) put it in the prelude of the report, with the deepening of the reform of China's corporate governance, the connotation of corporate governance has been expanded and extended continuously. It has become an important task to protect the stakeholders and fulfill social responsibilities for improvement of listed companies' governance mechanism.
The idea of corporate social responsibility, originated from America, emphasizes the companies' responsibilities to stakeholders (creditors, employees, clients, suppliers, financial institutions, local communities and local governments etc.) apart from shareholders. Through decades of development, the idea, gradually influencing the world's major economic entities, has drawn wide attention from governments, inter-governmental organizations and non-governmental organizations. In 2004, the Organization for Economic Cooperation and Development (OECD) amended its "Rules for Corporate Governance", which greatly extended the definition of "stakeholders" and stated clearly the corporate social responsibilities, including protecting stakeholders' interests. Meanwhile, the concept of social responsibility investment is also flourishing on the market. Institutional investors pay more and more attention to listed companies' social responsibilities. Pressured by the external market, the companies' management has to make more responsibility-highlighted decisions in their daily operations.
In China, harmonious society has become a new concept of social construction. The development mode has gradually evolved from unilateral economic growth into a sustainable one that combines balanced environmental and social development. Under the circumstances, the corporate social responsibility is gradually blooming, with relevant laws and systems being improved. The Article V in the new "Corporation Law", put into force on January 1, 2006, clearly states that companies should "assume social responsibilities" in their operation, i.e., they should assume responsibilities to their employees, creditors, suppliers, consumers, local residents, natural environment and resources, national safety and overall social development. Besides, a series of system innovation on corporate social responsibilities has also been seen in the newly modified "Law of the People's Republic of China on Enterprise Bankruptcy", "Law of the People's Republic of China on Environmental Protection" and "Law of the People's Republic of China on Employment Contracts".
So, it is of great theoretical and practical significance for the SSE Research Center to make corporate social responsibilities the theme of the report. The report, from a view of globalization, analyzes the current situation and problems of social responsibility fulfillment by China's listed companies. Besides, it probes into the system background and market environment that influences the social responsibility fulfillment. Finally, it proposes some pertinent and feasible reform suggestions on promotion of social responsibility fulfillment.
According to the report, since China is under the economic and social transitional period, the corporate governance system awaits further improvement, with the awareness and concept of corporate social responsibilities to be cultivated. Therefore, five major problems still occur in social responsibility fulfillment by listed companies.
Firstly, although China's governmental departments, securities regulatory authorities and regulatory organizations have taken various measures to protect the legitimate rights and interests of medium and small investors, it's still not news when listed companies damage their rights and interests. The reason is that neither the legal system at the macro level nor the listed companies' governance structure at the micro level is perfect. For instance, listed companies tunnel corporate resources into the pockets of major shareholders through connected transactions or carry out selective or unfair disclosure, resulting in asymmetric information between medium and small investors and major shareholders, and between companies and public investors. All this has led to the damage of rights and interests of medium and small investors.
Secondly, enterprises seldom consider employees' rights and interests in its production and operation. The employees' participation, supervision and sharing in enterprises' development and operation cannot be effectively guaranteed. Based on a 2007 sampling survey on 135 listed companies, the SSE found that 77% listed companies have no employee representatives in their directorates, and 59.2% listed companies' employee representatives are lower than 1/3 in their board of supervisors.
Thirdly, influenced by the traditional planned economy, the old legal system and the defects of the corporate governance system, creditors' interest protection is very weak in China. Enterprises' application for bankruptcy needs to be examined and approved by appropriate authorities, thus creditors are in fact blocked from the bankruptcy procedures. Moreover, protected by local governments, bankruptcy fraud can hardly be rectified and punished, which largely restricts the bank's influence on insolvent debtors.
Fourthly, the capital and product markets haven't formed powerful restriction on enterprises' environmental control. The environment-related decision and supervision by civil and non-governmental environmental protection organizations are not adequate. Therefore, listed companies are indifferent to environment protection. Except several large enterprises, cost in the environmental control by listed companies is very little. Serious environmental pollution by listed companies happens from time to time.
Fifthly, most listed companies have weak awareness of public responsibility. Some companies are even indifferent to charity donation. In 2006, about 90% companies' donation didn't reached RMB1 million, with 40 listed companies zero.
The above situation is directly related with 3 factors:
Firstly, the system for social responsibility fulfillment is far from perfection. On the one hand, under the development mode that governments guide economy, the local governments regard GDP growth as their major objective. Social responsibilities including improving enterprises' environmental control and paying attention to employees' rights and interests almost always conflict with the objective. On the other hand, although laws and systems related to corporate social responsibility have been gradually established, law execution and implementation still need to be enhanced.
Secondly, the market hasn't formed powerful restriction on companies' social responsibility. From the perspective of the product market, China's middle class is relatively small. Consumers' awareness of social responsibility, though improved, is not powerful enough to reject products and services by the enterprises seriously breaking the social responsibilities or to purchase products that strictly follow social and environmental standards. From the perspective of the capital market, whether listed companies should fulfill their environmental responsibilities still not gets much concern from the investors and analysts. The value investment pursued by the market pays attention to enterprises' financial (or economic) performance rather than their social, environmental and ethic performance as one of the references for investment decisions.
Regarding the current conditions and existing problems of the domestic listed companies' fulfillment of social responsibilities, the report puts forward the following six suggestions:
Firstly, constructing a more complete legal system and social culture as well as actively steering enterprises toward voluntary embracement of corporate responsibilities. Relevant administrative departments should enhance the contact with international organizations, foreign government agencies and non-governmental organizations to learn the content, standards and latest progress in the corporate responsibility concept. Then, they can provide domestic enterprises with relevant information and strengthen the training of enterprises concerning the corporate responsibility.
Secondly, strengthening the comprehensive assessment of corporate social responsibilities. Relevant government authorities should promulgate new assessment systems to substantiate and systemize the assessment indicators of the companies' shareholders' responsibilities and the social responsibilities. It could be taken into consideration that the "Guide for the Articles of Association of Listed Companies", the "Rules for Listed Companies Governance" and the "Listing Rules" can be amended in order to enforce the compulsory disclosure of such information as major environmental or social risks by listed companies in their fulfillments of social responsibilities.
Thirdly, actively encouraging institutional investors to take social responsibility investment as part of value investment. Especially under the current favorable atmosphere of institutional investors' value investment, it is even more advisable to encourage them to pay more attention to the corporate social responsibilities of listed companies and to refuse or shun, on a selective basis, investments in listed companies lack of social responsibilities.
Fourthly, implementing relevant articles in the "Corporation Law" concerning employee participation among listed companies; based on the actual conditions of listed companies, formulating corporate social responsibility pact of listed companies and making systemized arrangements for employees to participate in the inspection and corporate development. Only through these efforts could the corporate social responsibility and the methods and requirements of employee participation be further promoted in the whole society and among all the enterprises.
Fifthly, accelerating relevant legal system construction and guaranteeing legal rights and interests of creditors through the improvement of relevant legislation and strict law enforcement. Specifically, the safeguard mechanism for debt repayment and legal relief mechanism for creditors need to be established and perfected, with an aim to enhance the debt repayment responsibilities of companies' controlling shareholders and other insiders as well as to form a healthy and all-round company bankruptcy liquidation and reorganization system.
Sixthly, promoting the companies' environmental protection capabilities through such comprehensive policies as financing, credit and taxation in addition to strict legal rules and regulations and their enforcement. For instance, the environmental protection conditions of listed companies should be directly linked with their stock issuance and listing. Once behaviors of environment pollution and destruction are uncovered, the companies' re-financing will be prohibited for a certain period of time.
The enterprises' fulfillment of social responsibilities is of utmost significance in the concept of corporate governance and requires active participation and promotion of all society. The publication of the "2007 Report on China Corporate Governance", helping to foster and promote the awareness and concept of corporate social responsibilities, will exert a positive influence on the fulfillment of social responsibilities of domestic listed companies and the improvement of the corporate governance mechanism.
Prelude to the "2007 Report on China Corporate Governance: Stakeholders & Corporate Social Responsibilities"
By Shang Fulin
The corporate social responsibility and stakeholder theory was born in America at the beginning of the 20th century, which, in the 80s and 90s, gradually influenced major economies around the world and received extensive attentions from state governments, inter-governmental organizations and non-governmental organizations. In 2004, the OECD had its "Rules for Corporate Governance" modified, expanding the definition scope of "stakeholders" and clearly putting forward such social-responsibility-related requirements as perfection of the incentive mechanism for employees' participation in the corporate governance and safeguard of the interests of stakeholders. Afterwards, countries around the world, one after another, raised more concrete requirements by formulating such regulatory documents as the corporate governance rules or the corporate social responsibility guides in accordance with their own conditions.
After the 16th National Congress of the CPC, the social and economic development assumed invigorating momentum under the guidance of the concept of scientific development. The harmonious society and sustainable development has become the keynote in the new period. Under the promotion by domestic social and economic development and the influence of the global wave of corporate social responsibility, China began to underscore the companies' stakeholders and social responsibilities through legislative means. In January 2002, the CSRC and the former State Economic and Trade Commission (SETC) jointly promulgated the "Rules for Listed Companies Governance", stipulating that "listed companies should respect the legal rights of stakeholders including banks and other creditors, employees, consumers, suppliers and communities", and that "listed companies, while continuing development and maximizing shareholders' interests, should pay due attention to issues within their communities including the welfare, environmental protection and commonwealth, and attach importance to their social responsibilities". The Article V of the new "Corporation Law", taking effect in January 2006, also clearly stipulates that "when undertaking business operations, a company should comply with the laws and administrative regulations, social and business morality. It should act in good faith, accept the supervision from the government and the public, and shoulder social responsibilities."
However, in economically less developed countries, definition of corporate social responsibility is, to a large extent, subject to overall economic conditions. In China's planned economy period, an enterprise is not only a producer and operator, but also deemed the carrier of social welfare. As a result, "Enterprise Running Society" was a very common phenomenon, with the enterprises burdened with too many social responsibilities. But the phenomenon gradually receded along with the acceleration of China's marketization reform, which, however, had led to the enterprises' indifference to their social responsibilities due to excessive emphases on profiting goals. Nevertheless, following China's economic and social development, the whole society's awareness of environmental protection, food sanitation and safety, production safety has been on constant elevation. Corporate-social-responsibility-related issues are gradually becoming hot topics of the public, governments, enterprises and social groups.
In the past six years, the CSRC has continually regarded the perfection of corporate governance as one of its key exertions. Through various highly effective measures taken on such aspects as independent directors, information disclosure, connected transactions, shareholders' meetings, mergers and acquisitions, investors' protection, it has greatly promoted listed companies' governance level. In response to the continuous deepening of China's corporate governance reform, the connotation of corporate governance will be constantly expanded and extended, making the protection of stakeholders and fulfillment of social responsibilities one important issue for further improvement of the listed companies' governance mechanism.
Every year, the SSE conducts researches to probe into the key problems concerning corporate governance and brings forward suggestions for improvement through the "Report on China's Corporate Governance". The practice plays an active role in popularizing the fundamental concepts, elevating comprehensive capabilities and resolving the difficulties and vital problems in corporate governance. All this not only works positively on listed companies but also serves as a good example for the companies not yet listed.
In today's society, it's imperative for enterprises to voluntarily fulfill social responsibilities and initiatively contribute to the building of a harmonious society. Under such a background, the SSE put the corporate social responsibilities and stakeholders as the study subjects of the "2007 Report on China Corporate Governance", which doubtlessly will help publicize the concept of social responsibilities in China. The report systematically discusses the social responsibilities of China's listed companies from such perspectives as outside investors, employees, business partners, environment protection, communities, social responsibilities and corporate values, and gained a series of valuable research results. The study shows that some obvious problems still exist in the course of enterprises' fulfillment of their social responsibilities. For example, the division between the social responsibility of enterprises and that of governments is not clear; the responsibility of shareholders is less emphasized in enterprises; the interests of creditors don't get enough protection; enterprises concerned little about their operation's impact on the environment; the interests of employees and consumers don't receive enough respect. The report focuses on the above problems and proposes many feasible suggestions, in the hope that China's listed companies could better fulfill their social responsibilities in the future.
The building of a harmonious society calls for a large number of reputed enterprises in social responsibility. Wish the publication of the "2007 Report on China Corporate Governance: Stakeholders & Corporate Social Responsibilities" bring out more reputed enterprises in social responsibility.
