View from China: Stakeholder Capitalism

In an era of unchecked growth, China's CFOs could use a lesson in stakeholder capitalism.
Wu ChenMarch 15, 2006

Karan Bhatia, the deputy U.S. trade representative, urged China in late January to become a “responsible stakeholder” in its trading relationships with the United States. Here in Shanghai, her remarks created a frenzy as people strove in vain to find a translation for the word stakeholder. That’s because in China, the concept of a company’s responsibility to society, beyond what is owed investors, is absent.

The current Chinese administration frequently offers up slogans about “creating a harmonious society” or “attaining sustainable growth” to enhance social welfare and conquer pollution. But enterprises have turned a deaf ear. Gone are the days of lifetime employment. Workers now take care of their own medical care, education bills, and rising housing expenses. While lip service is paid to corporate social responsibility on environmental issues, the reality is that pollution in China is at a crisis level yet companies seem unconcerned.

When a PetroChina chemical plant in northern China exploded in December, huge amounts of toxic waste poured into the Songhua River, forcing the shutdown of the water supply in Harbin, a major city downstream. Neither the government nor the local plant told the public about the danger for more than 10 days. Within the city, panic spread while taps went dry for 4 days.

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“We’re willing to shoulder all the responsibility in order to control the damage at whatever cost,” PetroChina CFO Wang Guoliang told CFO China a month after the disaster. But, he added with a shrug, “how can you be sure that there is no problem somewhere?” emphasizing the difficulty of managing a corporation of more than half a million people.

His response might seem flippant to U.S. readers, but it reflects a not-unrealistic assessment of the challenges. State-owned companies — including PetroChina, which trades on the New York Stock Exchange and boasts Warren Buffett as a shareholder — remain largely a hodgepodge of semi-independent provincial corporations. Local governments and local interests intertwine to create a wedge against central control. In many cases, top management doesn’t get the information it needs to quickly address environmental damage or other problems.

Most Chinese companies are still struggling to enforce more internal controls to protect shareholder value. It is high time for them to address the needs of other stakeholders, such as communities that suffer via environmental mishaps or unchecked pollution. Soon enough, a disaster could emerge that will cause even the most growth-hungry China investors to vote with their feet.

Wu Chen is editorial director of CFO China.

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