Mandatory Corporate Social Responsibility? Legislative Innovation and Judicial Application in China

Corporate social responsibility (CSR) often refers to ‘companies voluntarily going beyond what the law requires to achieve social and environmental objectives during the course of their daily business activities.’  CSR is typically considered voluntary and beyond compliance with the law. Yet, a few countries such as China, India and Indonesia have taken a progressive approach to CSR under corporate law, a legal area where CSR has been deemed highly controversial. Their corporate statutes expressly state that companies shall engage in CSR activities.

China is probably the first country in the world that expressly writes the phrase of ‘corporate social responsibility’ into its corporate statute. China’s 2006 Company Law provides that ‘[i]n the course of doing business, a company shall comply with laws and administrative regulations, conform to social morality and business ethics, act in good faith, subject itself to the government and the public supervision, and undertake social responsibility.’ 

The recent emergence of such CSR legislation has raised controversies. Advocates of shareholder primacy denounce this CSR legislation, believing that any deviation from shareholder interests would just do more harm than good. While CSR advocates generally welcome this legislative endeavor, their acceptance comes with reservations. A common concern is that although the CSR law appears imperative, it is probably merely aspirational in practice given that the statutory language of CSR is too vague to be operational. 

As the CSR law has become an emerging legal reality, there is an urgent need to look beyond the theoretical debate and examine the law’s real world application. In practice, how have courts applied the CSR provision under the corporate statute? Existing literature generally presents a depressing picture primarily with the analysis of the statutory language and the common perception of incompetent courts in developing countries that have adopted the law.  This picture appears so pessimistic that empirical research on the judicial application of the CSR law is not something worth pursuing.

Nevertheless, my article ‘Mandatory Corporate Social Responsibility? Legislative Innovation and Judicial Application in China’ shows some hopeful lights shining from the generally negative image through an empirical analysis of Chinese court cases. The Chinese CSR law has been more than a decade old, which provides a long enough time span to evaluate its effects. The empirical research reveals what the CSR provision means in judicial practice, whether CSR is in fact mandatory, and in what types of disputes CSR is relevant or determinative of the outcome.

Since 2006, at least 169 unique Chinese court cases have explicitly referenced the CSR provision or the CSR concept. Although the judicial application of the CSR law remains limited, the law is not useless or simply expressive. Chinese courts have used it in a legally consequential manner. Moreover, the substantive interpretation of CSR is contingent on the political, economic and social situations in China. For instance, Chinese courts take social stability as an important dimension of CSR. The judicial use of CSR has been made possible because the CSR law has a certain fit with China’s macro and micro institutions including relevant legal infrastructure.

The recent development of the CSR law provides a practical lens to revisit the purpose of the corporation from a comparative perspective. The traditional debate about the corporate purpose tends to be firm-based, theoretical and insulated from real-world macro institutions including politics. The CSR law reveals the institutional forces in shaping corporate purpose in legal terms. In addition, the article provides insights into the multi-faceted relationship between CSR and corporate law. Existing corporate law scholarship, mainly based on the experience of Anglo-Saxon countries, takes CSR analysis to be exclusively tied with directors’ fiduciary duties. However, Chinese courts have innovatively applied CSR in other corporate law contexts unrelated to directors’ fiduciary duties. The Chinese experience suggests that the CSR law is more of a judicial review standard than a corporate behavior standard. It further evidences that interpreting CSR places high demands on the judiciary.

Li-Wen Lin is Assistant Professor at the University of British Columbia Peter A. Allard School of Law.