Corporate social responsibility (CSR)
In the early seventeenth century, Adam Smith discussed the idea of CSR for the first time in his book The Wealth of Nations. He pointed out that the social responsibility of a company is to offer goods and service to the society while pursuing maximum profit during the operation. In other words, the social responsibility of a company is a co-product when it is seeking to maximize profit.
In 1953, Howard Bowen introduced the theory of CSR in his research Social Responsibilities of the Businessman, in which CSR is regarded as a component of corporate management (Bowen 1953). Later, Wallich and McGowan argued that from the perspective of a narrow sense of optimizing stockholders’ earnings, it is not a good choice to take much social responsibility. Thus, early research in this field emphasized that the priority of a company is to create value for the shareholders and giving attention to CSR may impede the free growth of the company.
Recent research works however identify CSR as an important element in the operation of a company. In 1999, Richardson examined how CSR influences the stock market, drawing the conclusion that better CSR performance can stimulate market value in an upward trend. Brancoet investigated the implications of CSR from a resource-based-view, acknowledging that CSR is an important resource of a company that is expected to bring good reputation and higher employee morale (Branco and Rodrigues, 2006). Barnett applied the stakeholder theory and related influence model to explain the different impacts of CSR in various types of companies. Jamali also discussed the mutual influence and mutual promotion of CSR and operational performance (Jamali 2008). It can be said that CSR is looked upon as something that will promote positive performance of the company’s operational performance, through bringing better reputation, morale and consumer loyalty.
Even though abundant research has been conducted on CSR, there is still no generally accepted definition of it. The World Business Council for Sustainable Development stresses that “CSR is the continuing commitment by businesses to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families, as well as of the local community and society at large.” The European Union defines CSR as “… the concept that an enterprise is accountable for its impact on all relevant stakeholders. It is the continuing commitment by businesses to behave fairly and responsibly and contribute to economic development while improving the quality of life of the work force and their families as well as of the local community and society at large…”.
Thus, according to the generic definitions stated above, CSR aims to integrate corporate activity with the concept of social welfare to improve stakeholders’ benefits and to promote the sustainable development of society.
Corporate environmental management
Since the 1960s, the pollution problem has worsened, which led to increasing attention on environmental protection. With the active intervention of the governments and the environmental awareness of the public, more and more companies are bringing environmental management into their daily operation decisions, and are pursuing consistency in their environmental and operational goals.
The Brundtland Report which was published in 1987 as a result of World Commission on Environment highlighted the significance of CSR. Economist and business scholars have been grappling with the question of how and why corporations should incorporate environmental concerns into their own strategies.
Walley and Whitehead point out that companies should actively take into account environmental management when making a business decision. Klassen and McLaughlin think that environmental management encompasses all efforts to minimize the negative environmental impact of the firm’s products throughout their life cycle (Klassen and McLaughlin 1996). Environmental performance measures how successful a firm is in reducing and minimizing its impact on the environment. Timmins lists three goals of environmental management: 1) To minimize the operational impact on the environment; 2) To take every possible effort to efficiently use the available resources; and 3) Build up an environmental management system and stimulate the employees to consider the environment during their work. Shrivastava and Hart (1995) emphasize the concept of “total environmental management” and “sustainable organizational design”, meaning at each step of the value chain or lifecycle of products and services, every organizational activity from raw material usage (inputs), through production processes (throughputs), to the disposal of packages and used products (outputs) is associated with environmental problems (Shrivastava and Hart 1995). More and more companies regard environmental management as their responsibility (Hart 2000), and make special efforts to improve the environmental standards.
Thus, as a result of a lot of governments coming to put a strong emphasis on the stringent implementation of pro-environment regulations and also because of voluntary initiatives, many companies have now made environmental regeneration and protection their prime objective. The International Financial Corporation, in its report “Developing Value” noted that “businesses in emerging Markets have been involved in areas such as social development or environmental improvements, and have achieved cost savings, revenue growth and other business benefits”.
Porter noted that “in many cases properly designed legal environmental standards could still trigger innovations that lower the total cost of a product or improve its value. Such innovations allow companies to use a range of inputs more productively, from raw materials to energy to labor, thus offsetting the cost of diminishing environmental impact and ending the stalemate” (Porter 2000). Chinese scholar Chen’s summary of environmental management aptly encompasses this idea. He says “In the whole value chain, take the environmental issue in mind from the very beginning to the very end; through cooperation with different departments, to minimize the negative impact of environmental problems and finally realize the mutual promotion of environmental performance and financial performance”.
Among all of the discussions on environmental management, the “environment-as-a-recourse” view is the most commonly accepted. Porter argues that the environmental management of corporates will provide new and competitive resources (Porter 1991). Lovis, et all. Also supplement this understanding of the resource - based management. Through an analysis of corporate environmental management, their research suggests that enterprises should take a road of “extending return”, through technical innovation to realize the economic benefits and environmental benefits simultaneously.
Market value management
The theory of market value management was first raised in China, which is a theory focusing on the market value or specifically the stock value of public companies. Some scholars point out that this theory is rooted in the western classical value management theory.
In 1994, McTaggart published the paper The Value Imperative, and put forward the definition of value management or value-based management (VBM). In 1980, Porter published the book Competitive Strategy in which he produced an analysis based on value management and value chain. In the 1980s, Kaplan established the value evaluation process in his book Valuation: Measuring and Managing the Value of Companies. In the early 1990s, the American consulting company Stern and Steward raised the value management modes of Economic Value Added (EVA) and Market Value Added (MVA).
China initiated stock reforms in 2005 and basically realized the circulation of state owned shares in 2008. After the reform, the management methods under the planned economy could no longer meet the requirements of the capital market practice. So the idea of market value management emerged in response to the needs of the time.
Lots of scholars have tries to define market value management. For example, writes that market value management is to use market indexes as a tool, use the scientific and rational methods of value creation and value operation, and apply the ideas of management science, financial management, economics and so on, to maximize the value to shareholders. Points out in his study that, market value management is to take sustained, stable and effective operation and management to enhance the market value of a public company, and to make the market value reflect the company inherent value. Defines market value management as having the external goal of maximizing shareholders’ value, while also having the internal goal of maximizing stakeholders’ value.
Foreign academic advancement
Specifically on the topic of shareholders’ reaction to the environmental violations, some studies already exist. Some scholars point out that controlling pollution and strengthening environmental management will result in additional costs for the company and thereby reduce profit. Some others argue that focusing more on the environmental management will bring better reputation for the company, thus enhancing sales and profit. Most of the researchers, including Jaggi and Freedman (1992) find that shareholders react negatively to environmental violations. Klassen and McLaughlin (1996) provide the idea that the stock price will increase after the environmental improvement events and decrease after the environmental violation. Klassen and McLaughlin (1996) draws out the relationship between environmental performance and financial performance (Fig. 2).
There are two methods used to research the above topic: event studies and the structure environmental information index.
Event study method
Gupta and Goldar (2005) analyze the situation of the paper industry, car industry and chlor-alkali industry of India. They apply the index from the Delhi based Centre for Science and Environment to divide corporate environmental performance into five levels (L1 to L5), and count the corresponding reaction from the shareholders. They find that the negative impact can be as huge as −30%.
Ziegler et al. (2007) take a special look from the industry perspective by utilizing the CAPM model of. First they analyze the average industry performance and then examine every single company. The result reveals that the overall industry environmental performance does impact the shareholders’ reaction on individual companies in the industry. And the investment in environmentally friendly companies will lead to a long term positive return.
Xu et al. (2012) pay attention to the Chinese stock market in 2010, choosing variables such as industry fixed effect, event type, disclosure level and modernization rate. They show that water pollution, major media disclosure, high modernization rate, biggest ownership share of less than 25% and high state-owned share will contribute to significant negative reactions to environmental violations.
Uses the “environment-as-a-resource” view by Porter 1991 and relies on both the external and internal perspectives to build up a two dimensional framework. He selects related news from the Wall Street Journal from 1980 to 2009 and finds that shareholders react positively to environmental improvements and negatively to environmental violations. From the external perspective, the positive (negative) effect becomes weaker as time goes by, and from the internal perspective, the positive (negative) effect is weaker for companies with better environmental responsibility performance. This framework is a very important reference for this paper.
Structure environmental information index
Yamashita et al. (1999) structure an environmental awareness index, and observe that in the America stock market, companies with good environmental awareness do not have a stock return significantly higher than the market average, but companies with bad environmental awareness have a significant lower stock return.
King and Lenox (2001) give a comparison between environmental information disclosure and financial performance. They select Company Relative Emissions and Industry Emissions to measure environmental performance and select Tobin’s Q for financial performance.
Hayam Wahba (2008) starts from the stakeholder’s theory and environmental resource view, analyzing the situation of Egypt. He uses passing of the ISO 14000 as a binary measurement for environmental performance and Tobin’s Q for financial performance. And he concludes that companies have the necessity to invest in environmental protection.
Domestic academic advancement
Domestically, the same two methods mentioned above are used.
Event study method
Tested for the shareholders’ reaction on environmental violations, and proposes that Chinese shareholders do not react significantly to environmental problems. Only few special cases show the significance.
Collected the environmental violations of Chinese public companies from 2002 to 2008. He arrives at the result that Chinese shareholders react negatively to the environmental violations, but the duration is short and the negative impact recovers by the second or third day. The negative impact is stronger for compulsory disclosure than voluntary disclosure cases.
The chooses 113 events from 2003 to 2012. The result shows that Chinese shareholders react negatively to the events in a short period, but the influence will be felt in the following 10 days. Although the Chinese government gives more and more attention to environmental protection, pollution has little impact on the stock price for the long term.
Take the case of Zijin Mining as an example, saying that environmental performance will affect the decision of managers. Also focuses on the case of Zijin Mining. His result shows the negative impact for the whole mining industry is significant but short.
Researched the 62 environmental improvements and 45 environmental violations in the Chinese main board exchange market. They found that the shareholders’ negative reaction is significant and that the failure to pass environmental scrutiny has an especially significant influence. Between the years 2008 to 2010, the negative effect was most significant in 2011.
Has an investigation of 24 Chinese chemical companies, finding there is little impact of environmental disclosure and the impact of voluntary disclosure is stronger than the mandatory disclosure. Collects events from 2004 to 2013, revealing a negative reaction from the shareholders in a short period. And the general impact is not strong.
Structure environmental information index
Targets the Chemical companies in the Chinese main market from 2002 to 2003. The result shows that although the chemical industry is very sensitive to the environmental information, the environmental information disclosure is still in an early stage, which doesn’t lead to added value.
Assesses 161 public companies from 7 heavy pollution industries. There are only 10 companies that are given a ‘Good’ score, and 40 ‘Fail’. In general, the environmental performance of Chinese public companies is relatively poor. Companies’ size and development stage are the most important driving factors to improve environmental outcomes. But they should also enhance the environmental governance and environmental awareness.