J Bus Ethics
DOI 10.1007/s10551-014-2513-0
Corporate Social Responsibility in China: A Corporate
Governance Approach
ChungMing Lau • Yuan Lu • Qiang Liang
Received: 13 August 2013 / Accepted: 15 December 2014
Ó Springer Science+Business Media Dordrecht 2014
Abstract This study examines the effects of corporate
governance mechanisms on CSR performance in an
emerging economy, China. Because of the need of gaining
legitimacy in the new institutional context, Chinese firms
have to adopt global CSR practices in order to remain
competitive. Using the corporate governance framework,
this study examines how board composition, ownership,
and TMT composition influence corporate social perfor-
mance. The propositions are tested using data gathered
from 471 firms in China. By and large, empirical findings
supported the hypothesized relationships.
Keywords CSR
China
Corporate governance
Introduction
Despite the recent call for a study of a firm’s social per-
formance through an integrative approach (Aguilera et al.
2007; Starik and Marcus 2000), not much integrative
empirical work and theoretical advancement are seen in the
literature yet. Most work so far is done from one single
perspective. Further, a number of corporate social perfor-
mance studies are currently conducted among firms in
emerging economies, besides Western countries, including
C. Lau (&)
Y. Lu
Department of Management, Chinese University of Hong Kong,
Hong Kong, China
e-mail: cmlau@cuhk.edu.hk
Y. Lu
e-mail: ylv@stu.edu.cn; yuanlu@baf.msmail.cuhk.edu.hk
Y. Lu
Q. Liang
Business School, Shantou University, Shantou, China
e-mail: stuliangqiang@hotmail.com
Russia, Brazil, Mexico, India, and China (Arevado and
Aravind 2011; Bansal and Gao 2006; Cruz and Boehe
2010; Jamali and Mirshak 2007; Moon and Shen 2010;
Muller and Kolk 2008; Preuss and Barkemeyer 2011).
Hence, two major issues in the study of corporate social
performance are observed: the need to use a more inte-
grative framework to examine corporate social responsi-
bility (CSR) issues and to examine these issues in the
context of emerging economies.
While there are several perspectives and approaches
used to study corporate social performance, the dominant
views focus on the institutional environment and firm-level
attributes (Campbell 2007; Margolis and Walsh 2003). In
an emerging economy context, the institutional view is by
far the most popular perspective taken by researchers to
examine firm behaviors (Hoskisson et al. 2000). The
institutional view emphasizes the external legitimacy and
mimetic pressures in forcing firms to behave in socially
responsible ways. Nevertheless, a firm’s corporate social
performance is also a function of some firm-level factors,
such as a firm’s environmental strategies and past financial
performance (Arevado and Aravind 2011; Child and Tsai
2005; Hoffman 1999; Montiel 2008). By combining both
institutional and firm-level approaches, we should be able
to provide more in-depth insights into a firm’s corporate
social performance. The current study will adopt this
integrative approach to examine the CSR performance of
firms in China.
In another line of research about emerging economies,
corporate governance issues are also popular in the litera-
ture (Lau et al. 2007; Tian and Lau 2001; Young et al.
2008). Most corporate governance studies, however,
examine financial performance as organizational outcome
only, and not that many governance studies are on corpo-
rate social performance in the emerging economy context
123

(Zhang et al. 2013). Some examples of those studies con-
ducted in Western context are as follows: Aguilera et al.
(2006) compared the relationship between corporate gov-
ernance and social responsibility in the context of US and
UK firms, and Flammer (2013) examined shareholders’
reaction to a firm’s CSR announcements in US publicly
traded companies. In addition, Prado-Lorenzo and Garcia-
Sanchez (2010) examined the role of boards in the degree
of dissemination of environmental information from a
sample of global firms, but not specifically on firms in
emerging economies.
Recently, we have seen some studies done on emerging
economies (Esa and Mohd Ghazali 2010; Gao 2009;
Marquis and Qian 2014; Khan et al. 2013), though they are
more descriptive in nature. Despite some progress, the
conceptual development of CSR in emerging economies is
still not adequate. The relationship between corporate
governance as an antecedent and CSR performance as the
organizational outcome has not been examined much.
Since governance structure is institution based, and there
are variations in the governance structures among firms,
corporate governance is therefore a useful perspective to
examine a firm’s social performance in order to echo the
call for multiple lenses (Aguilera et al. 2007). This
approach will provide us an integrating perspective to
study a firm’s social performance through both institutional
and firm-level characteristics, especially in an emerging
economy context.
The extant literature in the CSR area of firms in
emerging economies often adopts a qualitative approach by
studying cases or analyzing annual reports. This approach
is useful to obtain a description of what firms are doing in
the area of CSR. However, one imitation of this approach is
that the performance side of CSR cannot be investigated
much, especially without relatively more comprehensive
data. A review of corporate social performance studies in
China indicates that there is virtually no large-scale
empirical study published in major journals so far, except
some qualitative and conceptual discussions (Moon and
Shen 2010; Zu and Song 2008). The study by Marquis and
Qian (2014) represents a breakthrough, but it is analyzed
from a political perspective and based on earlier data. The
issue of limited work is partly due to the availability of
databases and the novelty of this line of study.
The current study complements this line of research by
analyzing the social performance of listed Chinese firms in
recent years by utilizing a large dataset. With more
‘explicit’ CSR activities as a result of institutional iso-
morphism (Matten and Moon 2008), more data on the
behaviors of Chinese firms are now available. It is now
possible to address this issue from a quantitative and
empirical angle by utilizing a large dataset. Thus, this study
makes a contribution to the CSR literature by improving
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C. Lau et al.
the understanding of the antecedents of social performance
of firms in China, the fastest growing and biggest emerging
economy. The focus on China is also interesting since there
are various recent reports on the malpractices of Chinese
firms. These malpractices are reported in popular press,
including infant milk formula, unsafe toys, and toxic pork
(Leung 2014). Not only state-owned enterprises (SOEs) are
involved, but also private and foreign-invested firms. Thus,
an understanding of how firms are governed could have
important policy implications on corporate social
performance.
Moreover, this study extends the work of corporate
governance by taking corporate social performance into
consideration in an emerging economy (China) context. It
has been argued in the management literature that emerg-
ing economy posits an interesting research background that
investigates both conventional research issues as well as
unique phenomenon in order to advance the literature
(Wright et al. 2005; Xu and Meyer 2013). Hence, this study
is able to tie three strands of research together: corporate
governance, emerging economy, and corporate social per-
formance. By examining both institutional requirements
and firm-level attributes through corporate governance, this
study advances the conceptual development of a firm’s
corporate social performance.
Institution, Corporate Governance, and CSR Studies
Institutional theory is widely used in the study of CSR
because a firm’s social behavior is by and large influenced
by institutional requirements such as regulations, laws,
industry standard, and public awareness (Campbell 2007).
A majority of empirical studies examining the effects of
environmental and other CSR strategies on corporate per-
formance including financial and social performance focus
on factors in the institutional environment (Bansal and Gao
2006; Montiel 2008). For example, scholars have examined
the evolution of corporate environmentalism in the US
from an institutional perspective (Hoffman 1999). In
addition, some other studies have started to include cor-
porate governance as a key variable in the research. For
example, Jo and Harjoto (2012) examined the causal effect
of corporate governance on CSR using US data, and Zhang
et al. (2013) specifically studied the effect of board com-
position on CSR after the Sarbanes–Oxley Act was passed
in the US.
However, most of these studies focus on firms in either
Europe or the United States. Recently, some studies were
conducted in non-Western settings. For example, Esa and
Mohd Ghazali (2010) studied Malaysian government-
linked companies, while Khan et al. (2013) studied cor-
porate governance and the extent of CSR disclosures in
A Corporate Governance Approach
Bangladeshi companies. Huang (2010) further investigated
the intertwined relationships among corporate governance,
CSR, and financial performance of Taiwanese companies.
Some random work are also found in studying CSR prac-
tices and social performance in other emerging economies
such as India (Arevado and Aravind 2011; Kannabiran
2009), Mexico (Muller and Kolk 2008), Brazil (Cruz and
Boehe 2010), Dubai (Rettab et al. 2009), and Russia
(Preuss and Barkemeyer 2011). While these studies con-
firmed the importance of CSR activities in leading to firm
performance, they are however not systematic and their
examination is not specifically related to corporate gover-
nance, nor approached from an institutional perspective,
unlike some Western studies.
In China, there are only a handful of studies about CSR
behaviors of Chinese firms. For example, Child and Tsai
(2005) studied multi-national firms in chemical industries
and found they led standard setting and influenced local
policies of environmental protection by leveraging their
global experiences. The studies by Lu and Tsai (2006) and
Child et al. (2007) focus on the development of environ-
ment protection system. Branzel et al. (2004) examined
green strategies of Chinese firms. They found top leaders in
Chinese firms were more likely motivated to launch
executive champions if they recognize ecological values.
They also identified a loop between performance and
motivations: if an early initiative is perceived successful,
executives are more likely motivated to increase their
investments in ecological strategies. Recently, it seems that
more studies are employing the institutional framework.
Luo et al. (2013) examined institutional linkages and vol-
untary disclosures of firms. Marquis and Qian (2014) have
also argued from an institutional perspective that firms in
China respond strategically to government signals regard-
ing CSR issues. Nevertheless, none of these studies are
done through a corporate governance approach.
Conceptually, See (2008) has developed a framework to
understand how a harmonious society should encourage
firms to do more CSR behaviors. Moon and Shen (2010)
argued that as Chinese firms are going international, more
and more firms adopted this practice in view of the pres-
sures from globalization. Chinese firms however have a
different business system, and hence it is expected that
mainstream findings may not be found in China.
The study of CSR issues in China has also been
approached from a qualitative angle. Gao (2009) used a
content analysis approach to report the social performance
of large companies based on information obtained in offi-
cial websites. Yin and Zhang (2012) adopted a case study
approach to study the influences of institutional dynamics
of Chinese context on CSR philosophy. Zu and Song
(2008) on the other hand adopted a micro approach by
studying managerial values on CSR and firm economic
performance. These are preliminary studies that provide a
foundation for researchers to understand the CSR phe-
nomenon in China. They nevertheless do not address the
issue of how CSR affects a firm’s financial performance
nor CSR performance. Wang et al. (2011) has made an
attempt to link CSR with investor behaviors and stock
market returns. This represents a step forward to explain
the relationship between a firm’s CSR behavior and out-
come. Nevertheless, this study is based on a case study, not
using large-scale quantitative dataset. Therefore, there is a
void in the literature and a need to develop a more com-
prehensive corporate social performance model and test it
empirically with large-scale dataset.
The void in current ‘‘CSR in China’’ studies is not only
in empirical data, but also in conceptual development. The
stakeholder theory perspective has been adopted in some
studies in the area of business ethics and irresponsible
practices (Miles 2012; Surroca et al. 2013) and in corporate
governance literature (Hillman et al. 2001). However, it has
been pointed out that the stakeholder concept is not without
limitation because of possible conflicts of stakeholders
(Friedman and Miles 2002) and the dominance of share-
holders’ wealth maximization objective (Laplume et al.
2008). Jo and Harjoto (2012) compared the applicability of
stakeholder theory and agency theory in the causal effects
of corporate governance and CSR engagement. They found
that corporate financial performance is a function of CSR
engagement based on a stakeholder argument, rather than
agency perspective. While the stakeholders’ view has been
affirmed by Jo and Harjoto’s (2012) study, it can be further
expanded by incorporating the corporate governance con-
cept. The corporate governance approach proposed here
integrates the agency problem and stakeholders’ concern,
and hence will be useful to examine CSR issues from a
grounded theory with a narrower focus. It is therefore a
viable starting point for researchers to better understand
CSR in China.
Theoretical Development
In the study of emerging economy firms, scholars have long
been argued that institutional theory is a good starting point
to examine firm behaviors (Hoskisson et al. 2000; Wright
et al. 2005). From an institutional perspective, firms in any
particular society have to face institutional constraints. These
institutional forces give rise to isomorphic pressures and
practices which firms have to adopt in order to gain legiti-
macy in the industry and/or the society (Scott 2002). The
reforming Chinese firms are no exception (Tsui et al. 2004).
Past studies have confirmed that Chinese firms are under
institutional pressures at various levels, including individuals
(Lau et al. 2002) and organizations (Ma et al. 2013). Both
123

individuals and firms are subject to isomorphic practices in
order to have a legitimate role in the reforming economy.
Because of the need of obtaining legitimacy globally,
Chinese firms therefore have to adopt practices which are
accepted by the international community in order to have a
role in the global economy. The legitimacy can be used as a
strategic resource to obtain the approval or support from the
constituents such as local governments, public, as well as
international stakeholders. Thus, company law with rigor-
ous governance regulations was developed when China
entered the international arena. With the promulgation of the
Company Law, listed firms are required to set up gover-
nance structures and regulations similar to those in the West
(Lau et al. 2007). All listed firms have to follow these
institutional requirements in order to remain competitive.
Further, there are external legitimacy pressures, such as
complying customers’ and alliances’ requests and gaining
public recognition. CSR practices are hence followed,
among many other international practices (Child and Tsai
2005; Marquis and Qian 2014; Wang et al. 2011). Following
an institutional theory argument, the legitimacy needs have
driven firms to follow both corporate governance and CSR
practices similar to those developed in the West.
Nevertheless, financial performance is also an important
consideration for a firm in sustaining its competitiveness,
especially in this fast changing emerging economy. Huang
(2010) found that financial performance is an antecedent of
social performance in Taiwanese firms. In China where the
top priority is often given to the pursuit of high economic
growth, it raises a question of whether firms with strong
CSR are able to maintain superior financial performance
due to an increase in investments in facilities associated
with social and environmental issues. However, this is
exactly what an effective governance mechanism should be
about. A well-governed firm should be able to maintain
financial performance, which in turn should affect the
firm’s corporate social performance. The board and top
management should pay attention to the needs of a firm’s
stakeholders (Branzel et al. 2004; Jo and Harjoto 2012).
CEOs and board members are to a great extent involved in
making CSR decisions. Regardless who initiated CSR
activities and programs, CSR initiatives and investments
are to certain extent assessed and endorsed by the board of
a firm. The submission of CSR reports by public listed
firms to the government is also made by the board. Thus we
may expect that a properly designed governance structure
should lead to both financial and social performances.
Corporate Governance and Corporate Social
Performance
From the literature of corporate governance studies in
China, we understand that some arrangements are effective
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C. Lau et al.
in monitoring top management behaviors, while some
others may not have conclusive results (Firth et al. 2007;
Hu et al. 2010; Peng 2004). The governance mechanism
required by the Chinese Company Law certainly is mod-
eled after Western concepts. The effectiveness of this new
type of governance system has been studied in past
research (Lau et al. 2007; Lu and Yao 2006; Tian and Lau
2001). It is generally accepted that it is possible for Chi-
nese firms to have such structure, but not always have the
substance. There are cases that an effective board can
improve firm performance and cause poor performing
CEOs to leave, along with cases of null effect. These
studies are approached from a variety of perspectives
already, including agency theory, resource-based view,
stewardship theory, and institutional theory. Thus, it is not
wise to say corporate governance in general is effective or
ineffective in China. In a recent review of corporate gov-
ernance research in China, it is noted that a more holistic
approach should be used (Wei et al. 2014). Therefore, we
need to consider the effects of specific type of governance
mechanisms on corporate social performance indepen-
dently with special consideration of the Chinese context
(Bruton and Lau 2008).
We do not advocate that all predictions found in Wes-
tern samples, especially those from agency theory, are
valid in the Chinese context. However, since the boards of
Chinese firms are designed according to the Western
models, we have to examine those factors in governance
structure and mechanisms. Specifically in this study, we
focus on the composition of board of directors and the
ownership of a firm, along with the characteristics of top
management team (TMT) in hypotheses development.
Board Composition
In general, board composition is the primary internal
governance mechanism (Walsh and Seward 1990). Jo and
Harjoto (2012) examined the effects of corporate gover-
nance on CSR engagement from both stakeholder’s
approach and agency perspective based on US data. They
found that there is a positive association between CSR
engagement and corporate governance mechanisms,
namely board characteristics and ownership. Following this
line of argument, we develop hypotheses along major
board characteristics first in terms of board composition.
Board composition is examined from two dimensions in
this study: independence and diversity.
Independence of the board by far is the most researched
and well-accepted board attribute. From an agency per-
spective, the presence of independent outside directors
serves as a control over top management behavior on
behalf of shareholders. Since corporate social performance
is now used by many firms as an indicator of effective
A Corporate Governance Approach
management, this should be on the board’s agenda. An
effectively governed firm should perform better in this
dimension (Jo and Harjoto 2012) than firms with weak
governance. This is because outside directors will take
precautions if the management has plans to reduce social
performance, even unintentionally. This view is consistent
with the conventional argument that outside directors are
more vigilant in monitoring management behaviors (Lau
et al. 2007). In the study of the role of boards in dissemi-
nating information on greenhouse gases among global
firms, Prado-Lorenzo and Garcia-Sanchez (2010) found
that outside directors do make a difference. This is in line
with findings made by Ibrahim and Angelidis (1995) in a
much earlier study on board members’ CSR orientation.
The same is found in a Malaysian study of CSR disclosure
(Mohd Ghazali 2007).
In China, the effectiveness of an independent board is
questioned by some researchers. They cast doubts on their
ability to monitor and control of CEO behaviors and sub-
sequent firm performance (Wei et al. 2014). However, CSR
activities are not directly related to a CEO’s performance.
The practice of which is good to the firm and to all board
members, as it can gain reputation from the public. Hence,
it can be said that more CSR activities would reflect the
monitoring ability of outside independent directors to
influence a firm’s good citizenship behavior. Outside
directors are more motivated to support or initiate CSR
activities in the firm than other directors.
Therefore, it is expected that the higher the number of
outside directors as compared to inside directors in a firm,
the higher the likelihood to improve the firm’s social per-
formance. We would therefore hypothesize a positive
relationship between outside director ratio and CSR
performance.
H1 The ratio of outside directors in a Chinese firm has
positive relationship with the firm’s CSR performance.
In addition, board diversity has been argued to have
positive effects on firm performance. A more diversified
board would be able to establish more networks, enhance
information processing, and make better decisions (Zhang
et al. 2013). A more diverse board may also import a
broader view of corporate performance such as high sense
of philanthropy (Coffey and Wang 1998). Thus, in the case
of CSR performance, several diversity types are relevant.
For instance, many Chinese firms have not much knowl-
edge about CSR practices. The exposure of board members
to CSR concepts and practices through experiences in
foreign countries would help the firm to emphasize more
CSR activities. Through education or work in the past,
board members gained experiences of how foreign firms
operate and how they respond to competitive market. This
understanding of foreign practices should be able to shed
light on what Chinese firms have to do in order to remain
competitive in the international arena. Thus being educated
in a foreign country would imply that the board member
has been exposed to foreign business thoughts. This will
help to develop more diversified thinking about CSR in the
board, and hence higher CSR performance.
Moreover, discussions from the TMT and upper ech-
elon theory studies also show that international experi-
ence is instrumental in developing board diversity and
hence more innovative thinking (c.f. Finkelstein and
Hambrick 1996; Klotz et al. 2014; Reuber and Fischer
1997; Sambharya 1996). These studies confirmed that
international business experiences of TMT members and/
or board members are conducive to internationalization
and other new initiatives of a firm. While this argument
is not directly related to CSR, it nevertheless leads to the
idea that diversified thinking is more acceptable by a
board with more international exposures. In the past, not
that many Chinese firms and board members have the
exposure to foreign experiences and practices. Now, with
more and more international connections, such experi-
ence can be a positive force for them to follow good
CSR practices done in other countries. Thus, the higher
number of board members having overseas experiences
would increase the initiative to launch CSR activities
and care more about a firm’s social performance. We
therefore hypothesize that higher exposure of board
members to foreign country experiences would lead to
higher CSR performance.
H2a The experiences of directors of a firm in foreign
countries have positive relationship with the firm’s CSR
performance.
Moreover, board diversity can also be in the form of
more foreign nationals. The presence of minority in the
board such as foreigners would also enrich diversity in top
leadership. It is found that this type of diversity provides
resources necessary for effective decisions and more
importantly affects the reputation of firms (Bear et al.
2010). The presence of foreign nationals in the board not
only signifies the international image of the firm, but also
leads to higher emphasis on social performance as people
often assume that the ethical standard in western firms is
higher. These foreign nationals would complement the
diversified thinking made by those Chinese who have
overseas experiences as argued above. From a cultural
standpoint, more non-Chinese in the board should facilitate
the development of diverse views in board decisions.
Thinking and practices related to socially responsible
activities thus have a platform to share in the presence of
more foreign nationals. Hence, higher board diversity in
terms of foreigners in the board should enhance a firm’s
CSR performance.
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 C. Lau et al.

H2b The ratio of foreign directors in the board of a firm pressure of disclosure, these firms with higher state own-
has positive relationship with the firm’s CSR performance. ership must do something in order to echo the call of State
Council. The first batch of firms publishing CSR reports
In summary, board composition in terms of ratio of
were in fact SOEs. The number of firms publishing CSR
outside directors, board members’ foreign experiences, and
reports has increased dramatically from 12 in 2006 to 644
the presence of foreign nationals are expected to have
in 2013 (Xu et al. 2013). Marquis and Qian (2014) also
positive effects on a firm’s CSR performance.
found that government signaling is an important influence
in Chinese firms’ CSR reporting. Mohd Ghazali (2007) had
Ownership
similar findings in government-linked Malaysian firms.
Thus, it is not surprising that firms with higher state
Ownership is another major internal governance mecha-
ownership will be more CSR active.
nism besides board composition. The types of owners and
This is especially relevant today as the media has put a
how ownership is concentrated are two common features
lot of attention on the social behaviors of state firms. They
explored in the corporate governance literature (La Porta
may be more lenient toward private firms in corporate
et al. 1999; Walsh and Seward 1990). Most of the time,
social performance expectation. The image of a state firm
more concentrated ownership and increased holdings of
being socially responsible therefore is a key target for the
major stakeholders would have effects on firm perfor-
top management of firms in China. When state-owned
mance. Neubaum and Zahra (2006) found that institutional
firms engage more in CSR activities, their social perfor-
ownership has a positive effect on corporate social per-
mance should be higher.
formance. The findings of Jo and Harjoto (2012) also
supported the relationship between institutional ownership H3a The percentage of state ownership of a firm has
and CSR engagement. This is because they have a longer- positive relationship with the firm’s CSR performance.
term horizon on a firm’s performance, which may be
Concentrated ownership is seen to have positive rela-
beyond short-term financial returns.
tionship with a firm’s financial performance in the gover-
In China and in other transitional economies, the pre-
nance literature (Fan et al. 2002; Wei et al. 2014) because
sence of state ownership is a major characteristic that has
they have a greater interest in maximizing their investment
great effects on firm behaviors and performance (Fan et al.
value in the short run. However, a firm with higher own-
2002; Tian and Lau 2001). While corporate governance
ership concentration will reduce the diversity in views
studies do not necessarily confirm that higher state own-
which may not be good for CSR activities. When owner-
ership has positive effect on a firm’s financial performance,
ship is concentrated, the board will not be able to function
we cannot refute that higher state ownership often means
well as board decisions will be influenced by the dominant
that the government has a higher stake in this firm. In the
shareholder by focusing on short-term financial perfor-
case of socially responsible actions, it is anticipated that a
mance, per agency perspective (Fan et al. 2002; Johnson
firm with higher government ownership would engage
and Greening 1999). Higher concentration therefore limits
more in such activities as it is deemed necessary for a
information processing and does not allow for wider dis-
‘state’ firm to be a role model for its counterparts. From an
cussion of value to stakeholders, especially CSR activities.
institutional perspective, this type of normative pressures
In this case, CSR activities may be seen as not so beneficial
would lead a firm to higher involvement in CSR activities,
to shareholders. This is consistent with the stakeholder idea
and hence higher CSR performance. These firms must be
proposed by Jo and Harjoto (2012). Thus, higher ownership
seen by the society as ‘socially responsible’ and serve as
concentration would have negative effects on CSR
leaders in the market. They have a duty to perform for the
performance.
good of the society. These state-owned firms would then
have signaling effects to all other firms in the economy. H3b The percentage of ownership concentration of a firm
Moreover, most large firms in environmentally sensitive has negative relationship with the firm’s CSR performance.
industries (such as petro-chemical) have high percentage of
state ownership. These firms, from a practical view, have to Top Management Team
do more in protecting the environment, and hence CSR
activities. Furthermore, TMT is in the forefront of a firm’s leadership
Moreover, corporate social reporting in China was who are directly involved in designing and implementing
introduced by multi-national corporations as well as SOEs CSR activities (Wei and Lau 2012). Besides the board, they
in the early days. In 2007, the State Council encouraged are the ones who actually plan and implement firm activ-
SOEs to publish CSR reports. In fact some SOEs in certain ities, including CSR actions. Past studies on governance
‘core’ industries must report their CSR activities. With the and CSR often focus on board composition and give less

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A Corporate Governance Approach
attention to TMT. If a firm possesses a more socially
sensitive TMT, the likelihood of engaging in CSR activities
and subsequently having social performance should be
higher (Branzel et al. 2004).
Similar to board composition, a TMT with more indi-
viduals who are in favor of CSR would lead to higher
social performance. Thus we can expect that the presence
of minority in the TMT would help to facilitate the deci-
sions to take more CSR actions (Huse et al. 2009; Zhang
et al. 2013). As argued by Finkelstein and Hambrick (1996)
and Klotz et al. (2014), TMT with more diversified expe-
riences should help a firm to appreciate innovative think-
ing. As such, foreigners in the TMT would therefore be
able to provide fresh insights in firm behaviors. The pre-
sence of these minority groups will be favorable to CSR
activities. Higher social performance is therefore expected.
H4a The ratio of foreign national members in the TMT
of a firm has positive relationship with the firm’s CSR
performance.
Moreover, the experiences of exposure to foreign CSR
activities would also help to take on more CSR activities. If
there are more TMT members who have foreign education
and working experiences, they should be able to inject CSR
mindset into the team. Thus, TMT diversity in foreign
exposures will have similar effects on CSR performance,
like those found in the board.
H4b The education and working experiences of TMT
members in foreign countries of a firm have positive
relationship with the firm’s CSR performance.
Methods
The proposed relationships were empirically tested using
data from listed Chinese firms. It is recognized that mea-
suring CSR performance is a difficult task (Hackston and
Milne 1996; Krippendorff 2004) because of both methods
and disclosure incentives. Thus, this study used CSR mea-
sures provided by a rating agency with data reliability veri-
fied. The dependent variable CSR performance is based on
scores provided by the Rankins CSR Ratings (RKS). This
rating is recently developed in China by an independent firm
who reviewed CSR performance of all listed firms. The
rating firm adopted practices commonly used in other
international agencies doing CSR ratings. A total of 70
indicators were used to analyze the content of various CSR
reports issued by publicly listed firms, following the frame-
work of KLD and standard of Global Reporting initiative
(GRI3.0), but adapted to the Chinese context. These 70
indicators are grouped into three major categories: social
responsibility strategy and innovation (14 items), disclosure
content (45 items), and technical sufficiency (11 items). The
firms were assessed by experts along these indicators using
an anchored scale of 0 to 4, with an interval of 0.5 point. A
composite CSR performance score was developed based on
the weighted average of the scores of these three categories
(30, 50, and 20 %, respectively). The RKS dataset was used
in previous CSR studies on China (c.f. Luo et al. 2013;
Marquis and Qian 2014) with satisfactory results. Validity
tests of the measures were also done by these two studies.
RKS continues to refine the ratings and publishes company
rankings annually to the public.
Data on board composition and TMT characteristics for
this study were provided by a publicly available database
for listed Chinese firms namely WIND. WIND is a leading
provider of financial databases in China. The database
contains all accounting, board, and TMT information of
listed Chinese firms coded from their annual reports.
Besides complete company profiles, WIND also provides
market and macro-economic databases which are used by
financial and research institutions. A number of manage-
ment and strategy research studies have used this database,
including Jia et al. (2009), Lin et al. (2009), and recently
Xia et al. (2014).
Altogether these two datasets gave us a total of 551
listed Chinese firms for the years of 2010 and 2011 for the
current study. However, only 471 firms provided complete
CSR reports with ratings calculated in 2011. Thus the
effective sample size of this study is 471 firms. The
demographics of these 471 firms are presented in Table 1.
About half of the firms are manufacturing firms. The mean
size of these firms is 173 billion RMB in terms of assets
and 17,129 in terms of number of employees. The mean
percentage of state ownership is 27 %. It is also noted that
some CSR reports are provided by these listed firms on a
voluntary basis. The two exchanges required certain
selected firms to submit CSR reports since 2009. However,
not all of them complied with this requirement. On the
contrary, some firms provided reports on a voluntary basis.
In our sample, 339 firms submitted their reports per
exchanges’ requirement, and 132 firms submitted theirs
voluntarily.
Dependent Variable
CSR Performance was measured by the CSR composite
ratings in the year 2011, provided by RKS. This score
reflects how firms perform in the CSR domain in that
particular year. The maximum score is 100 points.
Independent Variables
Independent variables include board composition and
ownership of the firms, and demographics (foreign
123
 C. Lau et al.

Table 1 Demographics of Industry breakdown Number Percent

sample firms
Extractive and mining 25 5.31 %
Communication and cultural 4 0.85 %
Electric power, gas, and hydraulic production and supply 22 4.67 %
Real estate 32 6.79 %
Construction industry 12 2.55 %
Warehousing and transportation 34 7.22 %
Finance and insurance 30 6.37 %
Agriculture, forestry, husbandry, and fishery 5 1.06 %
Wholesale and retailing 21 4.46 %
Social Services 7 1.49 %
Information technology 23 4.88 %
Manufacturing 238 50.53 %
Other industries 18 3.82 %
Total 471 100 %
Mean Median

State ownership 26.4 % 22.5 %

Institutional ownership 50.6 % 51.9 %
Assets (billion RMB) 173.14 8.44
Number of employees 17,129 4,097

experiences) of board members and TMT members. They TMT Diversity

were measured using information gathered from WIND.
Information as of the year 2010 was used so as to give a
one-year time lag for the effects to be recognized in the
2011 CSR performance. This is also consistent with Jo and
Harjoto’s (2012) study in using lagged data.
Board Composition
Ratio of outside directors is expressed in terms of the
percentage of outside directors in the board. The ratio of
foreign directors is based on the number of foreign
nationals indicated divided by the total number of board
members, respectively. The percentage of board members
having foreign experiences is coded from information
obtained in company annual reports. A degree from a
foreign university is an indication of overseas education.
Short visits and training are not counted as education. It is
expressed in terms of the percentage of board members
having such experiences.
Ownership
State ownership is the percentage of shares held by the
state, while ownership concentration is the percentage of
shares controlled by the first major shareholder.
Similar to board diversity, the number of foreign nationals in
the TMT is counted and expressed as a percentage of the total
number of TMT members to indicate foreign TMT members.
TMT members with foreign experiences are counted if TMT
members have either education or working experiences from
overseas, based on information obtained. It is expressed as a
percentage of the number of TMT members.
Control Variables
Control variables include firm size in terms of the natural
logarithm of number of employees in 2010, past firm
performance (net profit in 2010, also in natural logarithm),
as well as industry (manufacturing versus non-manufac-
turing). Manufacturing firms are dummy coded as 1 and
zero otherwise. Since the size of board would affect the
information flow in the board, we also control for the effect
of board size (the total number of directors in the board) in
this study. The presence of women in the board and TMT is
argued by some researchers to be significant as they may
pay more attention to relationships with stakeholders (c.f.
Wang and Coffey 1992; Zhang et al. 2013). Thus the ratio
of women in the board as well as in the TMT are also
controlled for in the regression analysis.

123
A Corporate Governance Approach
Results
The means, standard deviations, and inter-correlations of
major variables are shown in Table 2. The CSR perfor-
mance score is positively related to most of the indepen-
dent variables. Correlations among independent variables
are not high, and hence multi-collinearity is not an issue.
The highest correlation is between foreign experiences of
board and the number of foreign members in board
(r = .594). The mean CSR score of the sample is 35.2,
with a standard deviation of 14.0. It seems the mean CSR
score is on the lower side, but this reflected the novelty
nature of CSR activities and reporting in China.
Regression results for hypotheses testing are shown in
Table 3. The control variables were entered first as shown
in model 1. Four control variables are significant (industry,
past performance, firm size, and board size). Non-manu-
facturing firms have higher CSR performance scores, while
past performance in terms of net profits and firm size have
positive relationships with CSR performance. Larger and
better performing service firms have a higher likelihood to
score higher in CSR performance. Larger board also has
positive effects on CSR performance. The women ratios,
however, are not significant.
The hypotheses were separately tested in Models 2–4.
Model 2 shows the results of hypotheses related to board
composition (H1, H2a, and H2b). Only the variable ‘for-
eign experiences of board members’ is significant in the
regression. Conventional agency variable, such as outside
director ratio is not significant, and the presence of foreign
members in the board is not significant as well. Thus, only
Hypotheses 2a gained support from the data.
Model 3 depicts the regression results of ownership
variables. The coefficient of state ownership is significant.
The coefficient of ownership concentration is significant at
.1 level only. They are nevertheless in line with the pre-
dicted directions. Higher state ownership implies better
CSR performance scores, while higher concentration
results in lower CSR performance. Hence both Hypotheses
3a and 3b are supported.
Model 4 shows the results of TMT variables. Only
foreign experience of TMT members is significant in this
regression. The ratio of foreigners in the TMT is not sig-
nificant. Thus, only Hypothesis 4b is supported.
Model 5 shows the regression results of all board
composition, ownership, and TMT attributes variables
when they are entered in the equation together. All previ-
ously significant variables remain significant, except for-
eign experience of TMT members. This perhaps is due to
the high correlations of the foreign experiences of board
and TMT members. Besides the effects of some control
variables (such as industry and sizes), most board and
ownership variables are influential in determining the
corporate social performance of Chinese firms in the
sample. Relatively, state ownership and foreign experi-
ences are more important than the mere number of people
in the board and TMT.
Since some firms submitted their CSR reports on a
voluntary basis, it is legitimate to control for the submis-
sion motive. Our post hoc regression analysis after
including the submission motive (mandatory vs. voluntary)
as a control variable indicated that the results of Models 1
to 5 remain intact. The coefficients of the new control
variable have no statistical significance in all five regres-
sion analyses. Hence we can conclude that submission
motive did not influence much the CSR scores in our
sample.1
Discussions
Based on an analysis of the data, we have found significant
and meaningful regression coefficients for several lagged
board composition and ownership variables when they
were regressed on the dependent variable of CSR ratings in
the year 2011.
Those related to board composition including the ratio
of outside board directors and foreign board members are
not significant. This is somehow contradictory to the
agency predictions. The conventional corporate gover-
nance view of having more vigilant members in the board
does not gain empirical support as far as corporate social
performance is concerned in this study. This shows that the
mere number of outside board members or ‘‘minority’’
board members is not sufficient to make a change in the
board. This, nevertheless, is also in line with other corpo-
rate governance studies that board composition may not
lead to corporate financial or market performance (Lau
et al. 2007). Perhaps, explanation and prediction based
solely on agency theory is not so relevant in the case of
China. This is an issue already raised by some corporate
governance studies, and now confirmed again in CSR
issues.
The percentage of board members having foreign
experiences nevertheless has positive effects on CSR
activities, and hence social performance. In addition, it is
also noted that the size of the board though as a control
variable was also found to have significant effects on CSR
ratings. A larger board is linked to higher CSR perfor-
mance. Some board composition factors especially in lar-
ger boards are at work here in eliciting CSR performance.
1
We would like to thank one reviewer who specifically asked us to
consider this effect. Since the regression results are the same, we do
not present regressions results of this post hoc analysis. Statistical
results, however, can be provided upon request.
123
123
Table 2 Means, standard deviations, and correlations of major variables
Mean s.d. CSR score 1 2 3 4 5 6 7 8 9 10 11 12

1 Industry (manufacturing) .561 .496 -.139**

2 Past Performance (ln) 19.75 1.77 .578** -.123**
3 Firm size (ln) 8.28 1.55 .512** .130** .670***
4 Women in board % .088 .103 .010 -.049 -.050 -.136**
5 Women in TMT % .136 .145 -.042 -.042 -.119* -.190** .346**
6 Board size 9.96 2.44 .385** -.041 .402** .335** -.037 -.115*
7 Outside director ratio .357 .08 .064 -.033 .055 .064 -.050 -.066 -.201**
8 Foreigner in board % .020 .058 .153** .036 .198** .191** -.051 -.023 .218** -.062
9 Board foreign exp % .062 .112 .362** -.027 .378** .353** -.025 -.047 .220** .044 .594**
10 State ownership .270 .261 .347** -.023 .347** .297** -.164** -.192** .192** .080 -.028 .095*
11 Ownership concentration .387 .169 .113* .075 .230** .191** .061 -.097* -.072 .094* -.062 .045 .460**
12 Foreigner in TMT % .008 .396 .044 .082 .045 .013 -.024 -.006 .128** -.006 .450** .325** -.065 -.022
13 TMT foreign exp % .074 .131 .231** -.019 .212** .133** .027 .023 .073 .064 .281** .527** .033 .036 .348**
* p \ 0.05, ** p \ 0.01, *** p \ 0.001
C. Lau et al.
A Corporate Governance Approach

Table 3 Regression results Dependent variable 2011 CSR performance

Model 1 2 3 4 5

Control variables
Industry (manufacturing) -.108** -.092* -.099* -.108** -.086*
Past performance (ln) .336*** .301*** .310*** .312*** .269***
Firm size (ln) .270*** .223*** .249*** .266*** .222***
Women in board % .031 .044 .066 .030 .045
Women in TMT % .047 .042 .060
Board size .162*** .178*** .137** .165*** .156***
Independent variables
Outside director ratio .051 .042
Foreigner in board % -.073 -.056
Board foreign exp % .183*** .150**
State ownership .187*** .189***
Ownership concentration -.073? -.072?
Foreigner in TMT % -.011 .006
All independent and control TMT foreign exp % .112** .045
2
variables were measured in the R .409 .431 .432 .421 .458
year 2010 Adjusted R2 .401 .420 .422 .410 .441
* p \ 0.05, ** p \ 0.01, F Value 48.72*** 39.82*** 45.67*** 38.23*** 26.99***
*** p \ 0.001, ? p \ .10

The background or expertise of board members hence is
relatively more important in facilitating CSR performance
of a firm. The diversity view therefore should not be lim-
ited to natural demographic attributes such as gender or
nationality, but actual experiences. The size of a board also
reinforces this view in the sense that a larger board implies
higher diversity. This also echoes the problems raised
earlier by strategic management researchers that focusing
too much on demographic attributes is not helping research
much (Priem et al. 1999). The focus rather should be on
what they think and what they can do, instead of just who
they are. With these results, it is not that the corporate
governance approach based on agency theory is incorrect,
but rather we should put emphasis on how governance at
the board level is correctly conceptualized.
The ownership hypotheses however are all supported.
State ownership is positively related to CSR performance.
Relatively, the magnitude of state ownership is the largest
among all variables. This shows that the state background
in China is still an institutional legacy that serves as an
incentive for these firms to perform better socially, when
compared to firms with lower state ownership. This con-
tradicts the intuition that state-owned firms are not
responsive to customers. This institutional force however
helps the firm to better serve stakeholders and behave
responsibly which is reflected in higher CSR scores. This is
particularly important in the study of firms from emerging
economies. In fact, this is consistent with the results found
in Malaysia (Mohd Ghazali 2007) and Russia (Preuss and
Barkemeyer 2011). In many other firms operating in
emerging economies, such as those in BRICS, state influ-
ence is still high, although state ownership may not be as
high as those in China. Thus, we may expect that state
ownership or government-influenced firms will perform
better socially in other emerging economies.
Concentrated ownership would reduce diversity and
limit CSR type of activities. Thus a state-controlled firm
but not concentrated ownership would help the firm to
perform better in CSR. This may imply that private firms
with higher ownership concentration are not favorable to
CSR performance. Financial performance incentive could
be one explanation, but firms in developed countries which
have no state ownership can still perform well socially.
Thus, more investigation into the CSR activities of private
firms in emerging economies, especially those in BRICs is
needed. From a policy standpoint, the state should be aware
of the fact that dominating ownership may not be good to
CSR performance.
Lastly, the composition of TMT is relatively not as
influential as the board. Foreign experience clearly has
some effects, rather than the mere presence of foreigners.
This is consistent with the findings in board composition.
We can therefore conclude from the above analyses that
demographic attributes of both board and TMT members
are not so important, but rather their background and
experiences. The idea that foreigners are more inclined to
push for CSR activities is not supported empirically in this
study. From the results of control variables, we also see

123

that gender (women ratios) does not have any effect.
Diversity may be better conceptualized as differences in
experiences, not in demographic attributes, as evidenced in
this study. From the above findings, the managerial
implication is therefore to focus more on the experiences of
both board and TMT members if CSR performance is the
concern. Foreign experiences are relatively more important
to inject new thinking into firms in emerging economies so
that they can be a member of CSR-conscious community.
Using corporate governance as the integrative frame-
work of institutional and firm-level factors, this study by
and large confirmed the propositions regarding the effects
of some internal governance mechanisms, but not all fac-
tors. Foreign experiences are instrumental to induce posi-
tive CSR performance. Board composition and TMT
composition are important, but not all are determining
factors. Ownership, however, is found to have effects on
CSR performance. Thus, the major stakeholder plays an
important role in affecting CSR performance. This is
consistent with many institutional studies. In future gov-
ernance research, especially when CSR is involved, con-
ceptual development should focus more on the ‘process’
side of governance, rather than solely what the mechanism
is (Priem et al. 1999). This requires a step beyond the
stylized agency model. A combination of agency, stake-
holder, and perhaps stewardship approaches, or even multi-
level analysis, seems necessary (Aguilera et al. 2007).
The current study supports the idea that corporate gov-
ernance mechanisms at the board level are more effective
than TMT to elicit social performance among Chinese
firms. This is not just a test of the agency perspective in
conventional governance research, but also supports the
view that board directors are relatively more important in
the Chinese context. Board members serve as external
monitors or representatives of stakeholders, while TMT
members are more internal and socially connected to each
other. Hence, the board is more effective in eliciting CSR
activities for the benefits of the public. Thus, this finding
has an important implication to policy making. It means a
firm’s adoption of CSR is more likely a result of the
board’s influences rather than that of the TMT, especially
in China. From a stakeholder’s point of view, shareholders
represented by the board are also interested in CSR per-
formance of a firm, not just financial performance. More-
over, state ownership has more influences and hence
government policies should therefore focus more at the
board level. Environmental and other social legislation
should start with board members. This observation perhaps
is a noteworthy phenomenon for firms from emerging
economies. This may not be limited to China, but also in
other BRICS countries. As noted by Preuss and Barke-
meyer (2011), Russia is different from other BRICS
countries in CSR priorities. Based on institutional
123
C. Lau et al.
arguments (Campbell 2007; Hoskisson et al. 2000), there
are institutional differences among BRICS countries and
hence future studies are worthy to pursue.
Conclusions
The results of data from China indicate that the concept of
corporate governance is appropriate to explain a firm’s
CSR performance, which was not yet well understood in
the literature, especially in the context of emerging econ-
omies. While more conceptual and empirical work has to
be done in the future, this study has taken the lead to
address this research gap.
Future studies can make use of a longitudinal dataset to
study the lagged effects of governance variables on CSR
activities and subsequently social performance. This study
is among the first to examine this issue from a large dataset.
Further studies along this line can enrich our understanding
with more comprehensive data. Since the CSR rankings we
adopted in this study were new at the time when analysis
was done, a longitudinal panel data analysis could be done
when we have more ranking data in future years. Currently,
only internal governance variables of listed firms are used
to examine their effects on CSR performance, it may be
possible to look for data of external governance mecha-
nisms, such as market for corporate control (Walsh and
Seward 1990) and investigate their effects on CSR
performance.
Moreover, Jo and Harjoto (2012) investigated the
interesting relationships among corporate governance,
financial performance, and CSR performance. They found
empirically the support of stakeholder theory but not
agency theory in the complicated causal relationships. In
the current study, we did not examine the reciprocal rela-
tionships as we believe performance is an outcome of firm
structure and behaviors. This, however, is an issue that
future studies can explore, especially in an emerging
economy context.
This study relies on published data to examine the
causal effects of governance variables on CSR perfor-
mance. The actual CSR activities are not measured. This
‘process’ variable may be the focus of future investigation.
Firms with different CSR activities may have similar CSR
performance as rated by an outsider. Their effects, how-
ever, could be different to other stakeholders. Thus a more
comprehensive model of activity–performance linkages is
needed. Conceptually, the links between governance and
CSR activities and then CSR performance can be devel-
oped from both resource-based view and institutional view
and taking stakeholders into consideration. Nevertheless,
data availability in an emerging economy is a major con-
cern even if we have a theoretically sound model. More
A Corporate Governance Approach
effort should be devoted to establish larger databases with
sufficient governance and CSR activity data.
Furthermore, the RKS CSR Ratings database is devel-
oped from CSR reports furnished by listed firms. There are,
however, listed firms who do not submit their CSR reports.
The social performance of these non-participating firms
cannot be determined by the current study. It could be
argued that these firms might have performed below the
norm and hence chose not to submit the reports. This could
be true but we have no evidence to substantiate this view.
The CSR motives and performance of firms with manda-
tory and voluntary submission is also an area worthy to
pursue, although the effect of such on CSR scores is not
obvious in our current analysis. Future study of these firms
is needed, and perhaps from a policy perspective the
government and regulatory bodies may have to require all
listed firms to submit CSR reports.
Conceptual development of CSR performance in an
emerging economy context is still not emphasized in many
studies. Stakeholder approach is often adopted, but as an
overarching framework only. Not much discussion of
antecedents and effects at firm level are done. The current
suggestion of adopting an integrative approach by com-
bining institutional and firm-level factors in the corporate
governance framework seems acceptable, but it is not
comprehensive enough yet. Future studies can focus more
on how top management responds to both institutional and
stakeholder pressures. Thus, with the encouraging findings,
fine tuning this theoretical lens is needed in the future. This
is especially needed in new contexts like China (Xu and
Meyer 2013).
To conclude, in general, corporate governance studies
can be extended beyond financial and market performance,
such as CSR performance as exhibited in this study.
Emerging economy also has the characteristics of having
state ownership, which has been found to be a major factor
in facilitating CSR performance. Diversity in board and
TMT in terms of experiences is also critical. Thus, we can
see that this study has helped to advance CSR research
along this line of inquiry. More CSR studies in emerging
economies from a governance approach would help us to
develop a better picture of CSR of firms in emerging
economies.
Acknowledgment This project is partially supported by a Grant
(CUHK 448109) from Research Grant Council of the HK SAR.
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