1. Introduction
With the development of the social economy, emerging markets are increasingly paying attention to companies’ Corporate Social Responsibility (CSR) performance. Policies and regulations in these countries actively require companies to fulfill social responsibilities, strengthen credit management, and disclose financial statements with transparency. For example, In China, the revised "Corporate Governance Guidelines for Listed Companies" issued by the China Securities Regulatory Commission (CSRC 2018), and the "Rules of Listing" on the Science and Technology Innovation Board of the Shanghai Stock Exchange (CSRC 2019) require listed companies to actively assume social responsibilities, safeguard public interests, and abide by their codes of conduct. Additionally, enterprises have themselves realized that social responsibility has become a new element of global competition, and sustainable development has become a key to solving global problems. Therefore, undertaking and fulfilling social responsibilities is an inevitable choice for enterprises to enhance their global soft power and international competitiveness.
The strategic management theory proposes that a company’s corporate strategy is subject to its organizational form [
1]. However, current research on social responsibility rarely take organizational form or groupwide factors into their considerations [
2,
3,
4,
5]. Existing studies have shown that firm’s financial performance, financing cost, institutional environment, intellectual stimulation, consumer reactions and environmental sustainability are highly related to firm’s performance on corporate social responsibility [
6,
7,
8]. But almost all literatures simply lay emphasis on what matters for a “singular” firm to engage in CSR activities, ignoring the fact that firms may not operate as isolated units but have institutionalized relationships with each other and work coherently as an entity. A firm’s business decisions are usually determined by its higher layer management, rather than independently the collective discussion within the firm.
Business groups have played a pivotal role in emerging market countries, especially in compensating the imperfections in the external capital market and institutional environment [
9,
10]. The internal capital market offers companies several advantages in economies of scope, economies of scale, resource allocation, and risk-sharing, which helps them enhance their market value [
11]. Compared to an individual company, a business group has an additional management and control system at the group level [
12]. However, the asymmetric information between the group headquarters and the group members may lead to unnecessary transactions and cross-subsidization among members, which can cause inefficient internal resource allocations, excessive investments, and decline in corporate value [
13,
14].
Past studies on business groups seems to fall into the trouble in the argument of whether business groups are “paragons” or “parasites” [
15,
16,
17,
18], hence the relation of business group affiliation and firm performance and the role of the internal capital market are investigated among different countries in numerous literatures from different years, which still remains unsettled.
Presently, the topic of group affiliated firms and its CSR performance is highly relevant for emerging markets, which need more focus. During the last 50 years, many emerging markets have experienced major changes in economic reforms, which involves privatization and trade liberalization. An increasingly competitive business environment and sound institutional framework proposes higher demand and challenge to the role of business groups on undertaking responsibilities. Thus, it is interesting to study how business groups are responding to the fast change economies in fulfilling CSR.
Our research may contribute to explaining the role of business groups in the pursuit of sustainable development goals (SDGs) as well. The content and applicability of SDGs has been subject to heated discussion in recent years [
19]. Ref. [
20] pointed out that the private sector has a unique role in accelerating the progress of SDGs, due to their “financing sector-specific expertise and knowledge, managerial and enforcement capacity, and a higher willingness to take risks” (p. 16). Given its market power and scope of activity, business group is one of the most essential agents in the achievement of SDGs. Investigating how CSR strategies are implemented within business groups help u better understand the role of organizations in tackling sustainable development.
In this regard, we try to bridge this gap by addressing three specific questions:
What is the role of affiliation of business groups in affecting member companies in fulfilling CSR?
What mechanisms work for the group companies’ CSR performance?
What is the difference in detailed aspects of CSR between group companies and independent companies?
Based on existing studies, the implementation of CSR as a long-term strategy can be completely different in independent companies and group companies. First, in terms of focus areas, independent companies focus on fulfilling economic and a part of legal responsibilities, while business groups have a significant role in social responsibilities due to their advantageous position through industrial monopolies [
21,
22]. The public has relatively higher expectations from business groups, who not only expect them to be more charitable and morally responsible but also require them to have a higher level of social responsibility [
23]. Second, the fulfillment of CSR makes companies rely on their group’s support for material resources, social relations, and interpersonal connections [
24]. Therefore, compared to independent companies, business groups’ large size and diversified operations offer them greater access to material resources and increases their capacity to implement CSR. Third, gains in reputation and brand image through CSR are often collective; that is, reputation gain or loss is highly connected between business group and its members [
25]. Different from independent companies, business groups need to put social responsibility at a higher strategic height to maintain and enhance their corporate image. Fourth, while the business groups’ internal capital market brings various resource advantages to its members, it also increases the management’s scope for tunneling behavior [
26,
27], which may reduce the members’ agency and worsen the groups’ overall CSR performance.
Centering the perspectives of business groups, this study attempts to explore the relationship between CSR and group-affiliation and its operational mechanisms. For this, we used the A-share listed companies in China from 2010–2017 to test whether there is a significant difference between the CSR performance of listed companies attached to business groups and independent listed companies.
This paper is organized as follows.
Section 2 provides the literature review and research hypothesis.
Section 3 develops research methods and definitions of variables.
Section 4 presents the research results and tests for robustness, and finally,
Section 5 provides a discussion and conclusion for the results.
3. Research Design
3.1. Sample Selection and Data Sources
For this study, we considered A-shares companies listed on either the Shenzhen or Shanghai Stock Exchanges from 2010 to 2017. For the data on business groups, we manually sort out the control chain relationship diagram provided by CSMAR (China Stock Market & Accounting Research Database). The financial data of other listed companies also come from CSMAR and Wind databases. To arrive at our final sample selection, we exclude the samples of (1) financial companies; (2) PT and ST companies; (3) insolvent companies; and (4) the samples for which the final controller cannot be determined and the main variables are missing. To avoid the influence of extreme values, all of the continuous variables are winsorized at 1% and 99% levels.
3.2. Selection of Key Variables
3.2.1. CSR
There are several methods to measure CSR, including the content analysis method, the factor analysis method, and calculating the social contribution value per share. We mainly adopted Hexun’s CSR ratings (Hexun Social Responsibility Report Ranking 2019) (named “CSR”) and the social contribution value per share (named “CSR2”) as our substitute variables [
66,
67]. The higher the score, the higher the corresponding rating level, and the better the CSR. Additionally, this paper divides Hexun’s CSR score by 100, for a better comparison with the social contribution value per share.
3.2.2. Business Group Affiliation
The definition of business groups in this paper is consistent with that of [
13,
32]: if the parent company of a listed company owns other brokerage entities in addition to its subsidiaries, it is defined as a business group (Group = 1). If the largest shareholders are SASAC (State-owned assets supervision and commission) companies; finance bureaus or other government agencies; or other companies or individuals that do not themselves engage in any business operations, but only in investment holding, they are considered to be an independent business (Group = 0).
3.3. Model Design
To test hypothesis 1, drawing on the practice of existing research [
68], we build the following model to test the impact of business groups on CSR:
Among them,
represents a company’s CSR score of the year; Group represents whether the company belongs to a business group;
and
are used to control individual fixed effects and time fixed effects, respectively. The coefficient
of the interaction term is the focus of this paper. Between independent companies and group companies, if group companies have higher CSR levels, we expect
to be positive; conversely, if group companies have lower levels of CSR, then we expect
to be negative. Based on existing researches [
24,
53,
68], we selected the following as control variables (Controls): the holding company’s corporate size (Size); return on assets (ROA); capital structure (Lev); ownership concentration (SHRCR1); number of directors (Director); and the proportion of independent directors (Indep). Thereafter, we adopted lag processing for all the explanatory variables to reduce the impact of endogeneity. At the same time, to avoid the impact of the firm-level clustering effect on the standard error, we performed a regression clustering at the firm level.
To verify H2 to H4, namely the effectiveness of the three mechanisms in promoting business groups’ CSR, we used two different approaches which is designed as follows:
- 1.
for recourse allocation of internal capital market
To test the mechanism of the internal capital market, we examined whether the CSR level of a sample of the business group is significantly related to the cash flows of other members of the same group [
69]. The specific model is as follows:
In model (2), “OtherOCF” represents the operating cash flows of other companies in the same group and “OCF” represents the company’s operating cash flow. The other control variables are the same as in model (1). Model (2) focuses on analyzing whether the CSR level of listed companies depends on the operating cash flows of other companies within the group (OtherOCF). If the coefficient is significantly positive, it indicates that the group reasonably allocates group resources through the internal capital market and promotes the implementation of CSR.
- 2.
for rent-seeking & corporate reputation
We used the approaches outlined by [
70,
71] to test our mediation effect of rent-seeking and corporate reputation. Although Sobel’s procedure is commonly used and powerful, it works effectively unless ab is normally distributed, which is hardly tenable (“a” measures the effect between independent variable and mediation variable, “b” measures the effect between dependent variable and mediation variable). Hence, we further verify our conclusion through the application of bootstrapped confidence intervals.
For rent-seeking mechanism, drawing lessons from the research of Du, Chen, and Du (2010) [
72], the excess administrative expense (EAE) is used as a substitute variable to measure the rent-seeking behavior. The calculation method of EAE is as follows: First, the expected administrative expenses (
) of the company are estimated by constructing a model. The specific model is as follows:
Through regression, the fitted value of AE is obtained; namely . Then the difference between AE and is calculated to get the excess management expense EAE. Among them, “AE” represents the ratio of corporate administration expenses to the main operating income, while “Sales” represents the natural logarithm of corporate operating income; “Lev” the corporate leverage, and “Growth” the growth rate of total assets. “Director” and “Staff” respectively represent the size of the board of directors, and the number of employees, while “Auditor” represents whether the auditor is from the Big Four accounting firms. “Age” stands for the company’s listing age, “Prclevel” the average salary of employees, and “HI” the concentration of equity, which is equal to the Herfindahl index of the top five shareholders. Finally, “Margin” and “PPE” depict the company’s gross profit margin and the proportion of fixed assets in total assets, respectively.
For corporate reputation mechanism, we use the variable “Fame” to represent corporate reputation [
66]. That is, if a company enters the industry list from “Fortune Magazine” (Chinese version) in T+1 year, Fame is defined as 1, otherwise, it is 0.
Hexun’s CSR scoring system of listed companies facilitates our verification of the H5. According to different scoring indicators, Hexun’s CSR scoring system of listed companies is divided into shareholders’ responsibility, employees’ responsibility, supplier and consumers’ responsibility, environmental responsibility and social welfare. (“Shareholders’ responsibility” mainly includes corporate profitability, solvency, the shareholders’ ability to bring returns, information disclosure, and innovation capabilities; ”Employees’ responsibility” includes employee performance, employee safety, and concern for employees; “Supplier, customer and consumers’ responsibility” includes product quality and after-sales service and integrity evaluation; “environmental responsibility” evaluates the corporate environmental governance capability; ”Social welfare” measures the value of corporate contributions, including income tax and the amount of public welfare donations. Note: In order to avoid confusion, the original scoring system’s “Social Responsibility” component was renamed “Social Welfare.”). We consider shareholders’ responsibility as a performance of corporate economic responsibilities, while other responsibilities as non-economic responsibilities, to further test the performance differences between group companies and independent companies in fulfilling CSR.
The specific definition and calculation methods of the variables in this study are shown in
Table 1.
3.4. Descriptive Statistics
Table 2 shows the descriptive statistics of the main variables. It shows that the average level of CSR in the sample is 0.253 and the median is 0.221, which is far from the maximum value, indicating that most companies have room for improvement in terms of their CSR performance. The mean value of the dummy variable is 0.653, indicating that 65.3% of the sample businesses belong to business groups. In terms of control variables, the average leverage ratio is 0.395, indicating that the leverage ratio of the listed companies is not too high. The average shareholding ratio of the largest shareholder is 34.897%, showing the relatively concentrated equity of listed companies in China. The average value of the proportion of independent directors is 0.374, which means that the sample companies as a whole meet the basic requirements of China’s corporate governance code. The results of other control variables are consistent with the existing literature.
Table 3 lists the differences in the related variables between group companies and independent companies. The table shows that the level of social responsibility undertaken by group companies is significantly higher than that of independent companies, which is consistent with H1. Additionally, compared to independent companies, group companies are greater in terms of size, ROA, ownership concentration, and the number of board members. In independent companies, the duality is more commonly seen, and more emphasis is placed on the appointment of independent directors.
5. Discussion
The results have both theoretical and practical implications. From the theoretical perspective, although many studies have examined the CSR strategy in multiple aspects, very few have accounted for organizational form or group factors that could act on the decision making and the implementation of CSR potentially, especially in emerging countries like China. Our study enriches the literature in the field of business groups and provides a more complete view about how CSR strategies are implemented within a business group. By revealing the possible paths that lead to the improvement of CSR, our results inform other future related researches to further take group factors into their considerations, especially in emerging economies. Additionally, our conclusions may contribute to SDGs literature in better understanding the role of business groups in tackling sustainable development in emerging markets.
Our study has the following policy implications. First, our data shows a considerable gap between the average CSR rating score and that of the top one. It indicates that even though CSR has gained much more attention in recent years, CSR performance of most companies in China still underperforms. We also find that group companies are well performed in almost every aspects of non-economic social responsibilities, which indicates that most independent companies are devoted to the pursuit of economic returns, but lack of corresponding sense of social responsibility. The implement of a CSR activity is merely to meet the basic requirement from the government, or a pretense for tunneling of the management [
73].
Second, we have reconfirmed the role of internal capital markets in resource allocation for business groups in the perspective of CSR using robust empirical models. It reflects that an underdeveloped institutional environment and capital market lay a clamp on the development and decision making of a firm. Thus, governments in emerging economies should make progress constantly in enacting steps to strengthen external capital markets, create a sound economic environment which would enable enterprises to achieve a qualitative leap.
Our results also show that rent-seeking and corporate reputation mechanisms works in CSR assuming of group companies, which provides useful insights for policymakers and regulators on how they can further evaluate and enhance the CSR performances of firms from different organizational forms. Government could take advantage of this by offering preferential policies and direct favorable conditions to those leading companies, and in turn, actively guide and motivate the sense and responsibility of assuming CSR of the whole society.
This study inevitably has its limitations. The data used for this study was limited to business groups formed by A-share listed companies in China and does not cover the fulfillment of CSR in non-listed independent companies and non-group listed companies. This to a certain extent may have caused the study’s results to have problems of endogeneity. Therefore, with the availability of sufficient data, future studies may further focus on whether the group attributes of non-listed companies affect the development and implementation of their CSR strategies. Additionally, the extent of the impact of the business groups’ pyramid structure on the group companies’ CSR performance is also worth exploring.
6. Conclusions
The main aim of this paper was to explore the whether the affiliation to a business group benefit the firm’s CSR performance. In this regard, we investigate the impact of business groups as an organizational model on CSR, and systematically examine the mechanisms that cause the differences in CSR between group companies and independent companies. Specifically, we have further considered five aspects of CSR, namely shareholders’ responsibility, employees’ responsibility, consumers’ responsibility, environmental responsibility and social welfare, in relation to group affiliation.
The results show that the members of business groups bear an average 4% higher in CSR rating scores. Their incentives for assuming higher CSR mainly operate through three mechanisms: internal capital markets, rent-seeking and corporate reputation. In particular, the rent-seeking and corporate reputation considerations account for about 8% of the improvement of CSR performance. Moreover, Group affiliated firms are more interesting in engaging in non-economic aspects of CSR instead of economic responsibilities.