Stakeholder Engagement and ESG in China

Conventional accounts of stakeholder engagement in China describe it as largely formalistic. Concentrated ownership, pervasive state control and an immature capital market are said to leave little room for genuine participation by anyone other than controlling shareholders. Our forthcoming paper challenges this assessment. Drawing on a dataset of 28 documented shareholder activism cases, semi-structured interviews with practitioners across China’s corporate governance ecosystem, and a comparative reading of the US, UK and EU frameworks, we show that China has developed a distinct model of state-led stakeholder empowerment.

The article addresses three questions. First, what forms of stakeholder engagement currently predominate in Chinese corporate practice. Second, what motivations and structural features underpin them. Third, what institutional conditions determine whether engagement produces substantive effects, and how the legal infrastructure should evolve to strengthen it.

Our central argument rests on disaggregating the state into three functions. As rule-setter, the state creates statutory entitlements, such as shareholder rights and mandatory employee directors, that stakeholders can invoke regardless of shifting political preferences. As stakeholder proxy, bodies like the China Securities Investor Service Center (CSISC) aggregate the otherwise unenforceable claims of dispersed minority investors. CSISC secured RMB 24.59 billion for over 50,000 investors in the Kangmei Pharmaceutical case and has since gone on to nominate independent directors at listed companies through public proxy solicitation. As political gatekeeper, the state decides through official media and selective enforcement which bottom-up mobilisations succeed and which are suppressed. The first two functions generate genuine stakeholder agency. Only the third constitutes the model’s real vulnerability, and it should not be allowed to eclipse the other two in how we assess the system as a whole.

A second argument concerns institutional complementarity. The single most reliable predictor of whether engagement produces substantive outcomes is the density and coherence of its legal embedding. This explains a sharp contrast in our findings. CSISC representative litigation works because opt-out registration and designated representation solve a genuine collective action problem. Employee directors and trade unions, by contrast, remain largely nominal. The 2023 Company Law mandates employee directors in firms with 300 or more employees, but a supervisory board loophole lets private firms sidestep the requirement, and Article 180’s duty of loyalty gives no guidance on how an employee director should weigh labour interests against shareholder value. The result is legal recognition without institutional substance, what one of our interviewees called a tick-box exercise with a democratic veneer.

Third, we identify a structural feature specific to China’s ownership concentration. Because direct labour, consumer and civil society pathways remain underdeveloped, non-shareholder stakeholders tend to advance ESG claims through shareholder-channel proxies rather than directly. This is why our sample of activism cases skews toward financial and governance demands rather than environmental or social ones. It is a structural feature of the system, not a sampling artefact.

Two further findings deserve mention. Policy primacy shapes China’s ESG architecture in ways with no close Western analogue. The State-owned Assets Supervision and Administration Commission of the State Council (SASAC)’s performance evaluation system converts sustainability commitments into direct career consequences for SOE executives, and this proves more immediate than any statutory duty. Reputational governance, meanwhile, remains high-variance. The Arc’teryx fireworks incident in September 2025 produced a rapid corporate apology and a HK$10 billion market value loss once official media amplified it. The Shanghai school lunch scandal that same month, involving insect contamination in student meals, drew relatively little regulatory follow-through. The difference lay in whether the Party-state chose to amplify the story.

On this basis we propose a reform agenda organised around institutional complementarity rather than legislative expansion. Three deficiencies need addressing. Procedural indeterminacy should be resolved by specifying election mechanisms and information rights for employee representation. Collective action infrastructure should be extended beyond securities litigation, potentially through a Chinese stewardship code built around the principal-principal conflict rather than the dispersed-principal problem that shapes the UK Code. Enforcement credibility should be extended to labour and environmental claims, where China’s current architecture remains far weaker than its securities enforcement regime.

The broader implication reaches beyond China. State-led stakeholder empowerment is not a transitional stage on the way to liberal market governance. It is a distinct model with its own logic, and the binary choice between market discipline and administrative command may be the wrong frame altogether. What determines whether stakeholder engagement generates durable governance outcomes is institutional architecture, not regime type. That insight may travel well beyond the Chinese case.

The authors’ full paper, ‘Stakeholder Engagement and ESG in China’, is available here. 

Tianxiang He is a PhD Candidate at Faculty of Law of the National University of Singapore.

Lin Lin is an Associate Professor at Faculty of Law of the National University of Singapore.