Corporate Social Responsibility, Corporate Restructuring and Firm's Performance

The study of corporate social responsibility (CSR) and its relationship with firm's financial performance has been the hot topic in the academic world; however the interests of researchers have focused on investigating the phenomena of CSR more in the developed countries than in the developing world. Little study has been done in investigating the relationship between socially responsible restructuring and financial performance.

This study empirically explores the phenomena of CSR, enterprise restructuring and the relationship with firm’s performance in the context of economic reforms in China from the three important perspectives. The first investigates how Chinese managers perceive CSR, whether managers’ attitudes toward CSR influence the extent of managers’ socially responsible behaviours in restructuring. The study also examines relationship between socially responsible restructuring and financial performance in the listed firms. Finally the study ends up analyzing the case study of enterprise restructuring in China defence industry.

This chapter will analyze the phenomena of SOE restructuring and privatization over the past years in China, particularly the issues and problems arising from the restructuring, and the social impact of restructuring on the stakeholders. Against the background and context, the research questions are developed and justified.

This chapter focuses on review of the theory and literature with a view to provide theoretical framework for defining the concept of socially responsible restructuring, and to develop the methodology for examining the relationship between socially responsible restructuring and firm’s performance.

The literature review is organized around and related directly to the research questions. I look at issues of theory, methodology in the fields of CSR, enterprise restructuring, corporate governance and socially responsible restructuring. It is done by a guiding concept – stakeholder theory. The stakeholder theory is a core concept in this study, because gaining a better understanding of the firm’s performance and social responsibility has been accounting for and managing the interests or “stakes” of key players inside and outside of the organization. Difference in and conflict among various stakeholders can have a dramatic effect on the ability of any organization to perform efficiently and in socially responsible way (Becker and Potter 2002). The stakeholder theory is applied to evaluate corporate social performance in restructuring by analyzing corporation’s relationships with its stakeholders. The concepts of CSR, and corporate governance and restructuring are also developed and defined against stakeholder theory.

As a prelude to the empirical study of relationship between socially responsible restructuring and firm’s performance, this chapter presents the macro-economic background and policies, in particular, its impact on economic reform and enterprise restructuring. The important turning points of economic reform and policymaking since 1978 are reviewed to give us with assessment of environment in which enterprises are restructuring and developing, and to identify the progress and constraints in enterprise restructuring and privatization in China. This chapter also analyzes China’s enterprise reform process and its impact on corporate governance and social welfare.

The enterprise reforms in China have three main components; the first component comprises SOE privatization and restructuring to alleviate the problems that are impairing enterprises’ ability to compete. A second component is to improve enterprise behavior by establishing effective corporate governance mechanisms and strengthening financial discipline. A third one is provision of supporting institutions and infrastructure needed for a market based enterprise economy. Key in this regard is the development of social benefit programs to deal with the economy adjustments entailed by reforms, allow enterprises to focus on their commercial objectives, and provide for the longer term needs of the population.

This chapter is organized as following a brief overview of economic background, Sect. 2 examines the main elements and characteristics of enterprise reforms in China, Sect. 3 reviews reforms to bolster enterprise performances and to restructure and privatize the SOE sector; to establish effective corporate governance mechanisms (Sect. 4). Finally in Sect. 5, the social impact of SOE reform and restructuring is also investigated.

In the preceding chapter, I examined alternative models of enterprise restructuring and relationships between CSR, corporate governance and firm performance. Draw ing on the models and theories from the literature, in this Chapter, the theoretical framework and the hypotheses are developed. In Sect. 4.1, the theoretical framework is set up based on the stakeholder theory, and Sect. 4.2 describes the hypotheses with regard to relationships between corporate social performance (CSP) and financial performance (FP) during pre- and post-restructuring.

This chapter presents the research methodology and data analysis for the study. In Sect. 5.1, I describe the methodology and research design including what research methods and why I use them in the study; Sect. 5.2 suggests the sampling strat egy in the survey. Section 5.3 discusses the qualitative and quantitative data, and in Sect. 5.4, I present the data analysis techniques to interpret the collected data.

This chapter presents the empirical study on how the managers perceive and interpret CSR in the context of China’s economic reforms, and especially, whether managers with socially responsible value-oriented tend to undertake restructuring in a more socially responsible manner. The data for this analysis was collected by the survey conducted in 2003–2004 (see Chap. 5). I believe that the study in this area is particularly important, as it provides greater insight on the extent to which CSR has developed and is interpreted in recent years in China. By comparing with other studies in this area, this research also shows the difference in interpretation and perceptions of CSR in the different cultural and economic context between China and other countries.

This chapter empirically explores the relationship between corporate social performance (CSP) and financial performance (FP) of 318 firms which have undergone restructurings from 1997 to 2003, and to test the hypotheses in Chap. 4 about whether there are positive or negative associations between socially responsible performance and financial performance. In addition, I attempt to further investigate whether the financial performance was improved after restructuring by comparing pre- and post-restructuring financial and operating performance, and to identify the factors which influence changes in financial performance over the same period.

The 318 sampled firms were selected from the firms listed in domestic stock market (Shanghai and Shenzhen Stock Exchanges). The rationale for choosing listed firms for the study is that listed firm is a typical modern corporate, the financial and accounting data are easily available and reliable, it is standardized against the international accounting standard, and comparable. Second, all the sampled firms were transformed from SOEs and partially privatized through ownership restructuring and shareholding reform. After listing in the stock markets, the listed/partially privatized firms have undergone aggressive asset restructuring to configure and optimize industrial structure and improve profitability and efficiency. Third, in the process of transformation and asset restructuring, the social performance and financial performance have been kept recorded by the China Security Regulatory Commission (CSRC), and two Stock Exchanges, where I was able to collect the data for measuring corporate social performance and financial performance. However, the selective bias should be taken into consideration for financial data of listed firms, because falsification and fabrication of financial data take place in listed firms very often.

This chapter presents a case study which is typical model of enterprise restructuring in the defense industry. The main purpose is to illustrate how Chinese firms respond to expectations of employees, community and other stakeholders by balancing the economic and social value in restructuring activity, how Chinese firms integrate principles of CSR into restructuring strategy and mitigate negative impacts of restructuring on the stakeholders, and in turn how the socially responsible firms are rewarded by the gains in firm’s performance.

The case study was analyzed in two parts. The first part discusses the survey on the attitudes of the managers toward CSR. The survey was designed with the structured questionnaires, conducted in 2003–2004 and 55 executives and managers with CSIGC have participated in the survey. The second analyzes the data collected from the field visits and interviews with managers in 2004.

The financial performances of enterprises in China have deteriorated markedly over the past years. The majority of SOEs are at best marginally profitable and a large portion of collective enterprises were also in serious financial difficulties. The poor financial performances were attributable to a range of factors. These include excess capacity built up during the investment boom earlier in the 1990s; heavy financial burdens from high debt loads, surplus labor, and social welfare expenses normally borne by government or society at large in other countries. The government, therefore, came up with a new restructuring strategy to speed up China’s enterprise reform. One strategy was to improve financial performance by getting rid of bad debts, laying off redundant workers, and hardening budget constraints in the short term; with the ultimate goal of achieving sustained improvement in efficiency and competitive viability in the long term.

Radical restructuring and privatization, coupled with irresponsible actions of firms, brought severe problems of social instability, and a wide range of stakeholder reactions like labor protests. Issues of social responsibility arising from restructuring, therefore, have increasingly gained the attention of governments, management and academic researchers. Against that background, this study set out to empirically explore the phenomena of CSR, socially responsible restructuring and firm’s performance in Chinese enterprises.