Oct 12, 2018 07:18 PM

Opinion: Hard Lessons Learned as Chinese Companies Embrace Social Responsibility

An exciting business trend is emerging in China as corporate enterprises strike a balance between pursuing profits and embracing social responsibility.

Enterprises of all stripes are recognizing their roles as members of the society at large whose business goals and social functions are closely intertwined.

Reflecting the trend’s growth is the widening inclusion of environmental, social and governance (ESG) reports as part of the annual financial statements filed by China’s publicly listed enterprises. According to the corporate social responsibility tracker Rankins CSR Ratings, a total of 852 A-share-listed enterprises have issued the reports so far this year, up from 371 a decade ago.

The late Peter F. Drunker, an author and management guru who laid the philosophical groundwork for the modern corporation, once wrote that every enterprise has a part to play as an intrinsic member of society. Since the late 20th century, enterprises have been slowly accepting this truism and realizing that each community in which they operate is an important stakeholder. Making connections as well as building and maintaining positive relations between businesses and communities matter not only to a corporation in terms of social responsibility, but also pertain to its business objectives.

This is a lesson that some Chinese enterprises have been slow to learn, as a few recent incidents have shown.

China’s car-hailing giant Didi Chuxing found itself in a social responsibility maelstrom recently after murders and rapes linked to Didi drivers. These incidents exposed problems with the company’s social networking product, an industry gray area for driver certifications, a chaotic customer service system, and a weak safety and risk management mechanism.

Eventually, Didi CEO Chen Wei and President Liu Qing apologized and promised to re-evaluate the company’s strategy for building long-term value. They said business growth and profits would no longer be the highest priorities, nor would measuring corporate development be solely dependent on scale and growth. Instead, they said security would become a key performance indicator, and that resources would be organized to focus on safety and customer service.

Belatedly, Didi’s executives realized that failing to prioritize social objectives such as safety would cost the company dearly. As one Didi insider frankly admitted to a media outlet, “Didi is already a large social platform that’s owned not only by management and shareholders. It should be responsible toward the community. In the wake of this incident, financial gains should be downgraded to second place.”

The need to regard the community as a company stakeholder also recently dawned on executives at Pinduoduo, a social e-commerce platform operator. Just one week after the company’s IPO, its stock price plunged against the backdrop of short selling, class-action lawsuits and a public relations crisis.

Pinduoduo apparently underestimated the power of intellectual property rights protection, the rise of consumer awareness, and the Chinese government’s determination to crack down on counterfeit goods. As a result, the company’s disregard for corporate social responsibility came to light, underscored by the fake and shoddy products being sold on its platform.

Now, Pinduoduo is not only embroiled in a public relations crisis, but it’s also struggling with a controversial business model and malfunctioning yet deeply rooted internal controls. Unless its business model improves and internal risk management strategy overhauled from the inside out, another public relations crisis could break out at Pinduoduo at any time. The company’s reputation is now on the line.

Even China’s giant search engine, Baidu, has run into trouble over health care advertising. The problems have persisted even since a 2016 scandal surrounding a college student who died after receiving a treatment promoted on the search website. A recent CCTV news report documented a resurgence of misleading medical advertising on Baidu.

Public safety issues can also make or break companies in the bio-pharmaceutical sector worldwide. In China, for example, senior executives at Changsheng Vaccine ran afoul of the law after the company was charged with making ineffective vaccines and falsifying production data. It’s expected that the company will be forced to delist from the stock exchange in the future.

An American bio-pharmaceutical company called Theranos also learned this lesson the hard way. Once a high-flying Silicon Valley blood-analysis startup, Theranos collapsed after authorities ruled that its laboratory tests were fraudulent. The company’s young founder, Elizabeth Holmes, was charged with “massive fraud” by the U.S. Securities and Exchange Commission. Theranos’ $9 billion valuation vanished after it ceased operations on Aug. 31.

Each of these incidents reveals the strategic importance of corporate social responsibility. Like companies around the world, Chinese enterprises have gradually awakened to the fact that social missions should be integrated into strategic plans. Social responsibility must be considered within the scope of every business strategy.

Enterprises simply cannot abandon social and moral responsibilities in pursuit of profits, efficiency, valuations or higher stock prices. No longer can an enterprise operate purely for profit. Corporate social responsibility is now indispensable.

For institutional investors such as private equity funds, university endowments and pension funds, ESG factors are commonly regarded within the context of company evaluations. But companies such as Changcheng Vaccine can present a moral-hazard headache for those long-term investors who follow investment cycles of between seven and 10 years. Thus, companies seeking support from institutional investors must learn to fly right.

Today, amid complex social and civil society issues, as well as conventional business model disruptions fueled by internet-related technology, Chinese enterprises are closer than ever to the communities in which they operate and society as a whole. For that reason, businesses should accordingly accept social responsibility and support social missions to an even greater degree. Those that do can achieve their financial and corporate goals.

Chinese executives and entrepreneurs eager to embrace socially responsible strategies in their business operations would be wise to follow the three “usefulness” steps spelled out in the Analects of Confucius. A gentleman should first “xiu yi ji jing,” then “xiu yi ji an ren,” and eventually “xiu yi ji an baixing,” according to Confucius. That means a gentleman should first be useful to a business, then apply himself to community, and finally to society as a whole.

These three steps of Confucius may also apply to running a business. A company that performs business tasks and then serves the community in order to benefit society is proving itself socially responsible, thus raising its social contributions to a higher level.

So if you are running an internet platform company that enjoys high valuations, don’t forget that every business becoming a leader in a specific field also bears a responsibility to act as a rule-maker. Your users and clients have the right to expect you to create for them a healthy, fair business environment in which their privacy is protected. This is what I refer to as corporate social responsibility, or social mission. Thus a company such as Didi, which has monopolized the ride-hailing digital platform in China, has found that its social responsibility and social mission are intertwined with its financial interests and business goals.

Finally, I would argue that social responsibility must be properly managed and that social goals, like business objectives, should be pursued with a sound strategy, an implementation plan and key performance indicators.

It’s thrilling to see that an increasing number of companies have described in their mission statements a shift from maximizing shareholder value to maximizing value for all stakeholders. Some may say they’ve done this for the sake of branding and public relations. But no one denies that committing to social responsibility is a trend and increasingly important component of corporate missions. I find this exciting.

Of course, few executives want or find it necessary to articulate a business activity’s or business operation’s social benefits. Neither do they generally want to quantify a company’s social impact. Entrepreneurs do, on the other hand, usually consider it rewarding to “do something good.” But if just one executive reads this article and starts to conscientiously think about strategically combining social and business goals, then half of this article’s objective will have been achieved.

Zhen Wang is managing director at Zhifei Impact Communications.

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