What Leads to Better CSR Performance in China?

How board composition, ownership and top management team composition influence Chinese listed firms’ CSR performance? Researchers at CUHK Business School attempt to examine the effects of these corporate elements on the CSR performance of Chinese listed firms

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK 

To facilitate the performance of Corporate Social Responsibility (CSR) in a company, a firm should diversify its board and top management team in terms of background and expertise, according to a research conducted by Prof. Lau Chung-ming at the Department of Management of the Chinese University of Hong Kong Business School and his collaborators Yuan Lu, a former professor from CUHK Business School as well and Qiang Liang from the Shantou University, China.

The study investigated how the composition of boards and top management teams influences Chinese listed firms’ CSR performance. According to the researchers, the study is among the first to examine this issue from a large dataset. Collecting data from a sample of 471 Chinese listed firms, the study looked into the composition of boards and top management teams of these companies, using the data provided by a publicly available database for listed companies. Measuring a firm’s CSR performance is not an easy task. The researchers used CSR measurements based on the content of various CSR reports, which was provided by a rating agency with data reliability verified. These 70 indicators of CSR performance can be grouped into three major categories: social responsibility and innovation; disclosure content and; technical sufficiency.

Effects of Board and Top Management Team Compositions

The study finds that the experiences of directors of a firm in foreign countries have a positive relationship with the firm’s CSR performance. To be specific, the higher number of board members having overseas experiences would increase the initiative to launch CSR activities and care more about a firm’s social performance.

“Many Chinese firms have not much knowledge about CSR practices,” Prof. Lau says. “The exposure of board members to CSR concepts and practices through experiences in foreign countries would help the firm to emphasize more CSR activities. Thus being educated or working in a foreign country would imply that the board member has been exposed to foreign business thoughts, which will help to develop more diversified thinking about CSR in the board and hence better CSR performance.”

Similar to board composition, a top management team with more individuals who have experiences of exposure to foreign CSR activities would also help the firm to take on more CSR activities. In other words, if there are more top management team members who have foreign education and working experiences, they are more likely in favor of CSR activities and would be able to inject CSR mindset into the team, leading to higher social performance for the firm.

“Top management team diversity in foreign exposures will have similar effects on CSR performance, like those found in the board,” says Prof. Lau. Hence, the study concludes that the education background and working experience in foreign countries of the top management team members within a firm also have positive relationship with the firm’s CSR performance..

However, is there a direct link between the ratio of foreign directors in the board and top management team of a firm and the firm’s CSR performance?

The answer is no, according to Prof. Lau. “At first, we assumed that the presence of foreigners in a board or top management team would also help improve a firm’s CSR performance, but we did not find such evidence,” he says. “In regard to a firm’s CSR performance,demographic attributes of both board and top management team members are not so important, but rather their background and experiences.”

Ownership Matters

Besides the composition of board and top management team, the study also shows that ownership is another factor that has an impact on a firm’s CSR performance, as it reveals that the percentage of state ownership of a firm has a positive relationship with the firm’s CSR performance.

In transitional economies, such as China, the presence of state ownership is a major characteristic that has a significant effect on a firm’s behavior and performance, according to the researchers. As such, in the case of socially responsible actions, it is anticipated that a firm with higher government ownership would engage in more of such activities as it is deemed necessary for a ‘state’ firm to be a role model for its counterparts.

“Our study finds evidence for that,” says Prof. Lau. “These state-owned firms must be seen by the society as ‘socially responsible’ and serve as leaders in the market. They have a duty to perform for the good of the society. So these firms would then have a signaling effect to all other firms in the society in regard to CSR.”

This finding contradicts the intuition that state-owned firms are not responsive to customers, says Prof. Lau. “This shows that the state background in China is still an institutional legacy that serves as an incentive for these firms to perform better socially, when compared to firms with lower state ownership.”

“Being educated or working in a foreign country would imply that the board member has been exposed to foreign business thoughts, which will help to develop more diversified thinking about CSR in the board and hence better CSR performance.” – Prof. Lau Chung-ming

However, the study finds that the percentage of ownership concentration of a firm has a negative relationship with the firm’s CSR performance. Why is that the case? Past research has shown that concentrated ownership has a positive relationship with a firm’s financial performance since the dominant shareholder has a greater interest in maximizing their investment value in the short run. When ownership is concentrated, the board will not be able to function well as board decisions will be influenced by the dominant shareholder who will be focusing on short-term financial performance. Therefore, a higher concentration of ownership will not allow for a wider discussion of longer-term value to stakeholders, particularly CSR activities.

“Our study supports the idea that a state-controlled firm will help the firm to perform better in CSR but it is not the case in concentrated ownership which would reduce diversity and limit CSR activities. This may imply that private firms with higher ownership concentration are not in favor of CSR performance,” explains Prof. Lau.

Implications for Policy Makers

In conclusion, the researchers emphasize that actually the study supports the idea that corporate governance mechanisms at the board level are more effective than top management team to elicit social performance among Chinese listed firms, because board members serve as external monitors or representatives of stakeholders, while top management team members are more internal and socially connected to each other. Hence, the board is more effective in eliciting CSR activities for the benefits of the public.

According to the researchers, this finding carries an important implication for policy makers; it means that a firm’s adoption of CSR is more likely a result of the board’s influences rather than that of the top management team, especially in China. From a stakeholder’s point of view, shareholders represented by the board are also interested in CSR performance of a firm, not just financial performance. Moreover, state ownership has more influences and hence government policies should therefore focus more at the board level. Environmental and other social legislation should start with board members. This observation is a noteworthy phenomenon for firms from emerging economies, including but not limiting to China.