Unmasking Chinese Business Enterprises

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9/28/2010 2Unmasking Chinese Business

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T here were Mass incidents of social unrest in the Chinese

economy.Since 2002, there was a 50% increase in number ofcomplaints.By 2004, the number reached 6,00,000.

In 2005, State Environmental Protection Administration(SEPA), issued its annual environmental reportproclaiming that China [has] made considerable progressin environmental protection work.Rural Villagers could not obtain environmentalinformation , thus were unable to participate in legaladministrative environment concerning land use matters.


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L ack of Democratic L egal Mechanisms to encourageChinese enterprises and government agencies to complyactively with and enforce measures designed to protectcitizens and the environment.Existing state of corporate disclosure laws and

regulations in China is insufficient to allow the Chinesepublic adequate access to environmental information.Citizens are unable to participate properly in crucialgovernment and corporate decisions that impact localcommunities and ecosystems.


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Know the enemy and know yourself; in a hundred battles you will never be in peril.

Information is a critical component of an effectivestrategy to engage a potential adversary.

Chinese citizenry requires substantially greateraccess to corporate information so as to unmask theiropposition due to their complexity and everdeveloping nature.


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Influential domestic and international policy advisorto the Chinese government, has characterizedChinas continuing economic growth as a peacefulrise to power.China has already modernized its economy to a large

extent, Chinas global influence continues to grow.


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Chinese interests have a substantial foothold in the

global marketplace.With recent laws and policies decoupling variousbusiness enterprises from the government, futureeconomic growth in China will turn on how theenterprises evolve organizationally and respond todomestic and foreign market competition.


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Chinas manufacturing based economy has a vastappetite for raw resources, which it demands inorder to satisfy a fast-growing domestic andinternational consumer market.

Environmental repercussions of the newmanufacturing based economy, combined with adecades-long legacy of pollution, endanger not onlythe Chinese people, but the future viability of localand trans-boundary natural resources.China, Home to 22% of the worlds population,captures only 8% of the worlds fresh water supply,much of which is unsuitable for human consumptiondue to heavy pollution.


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China Ranks 116 th with respect to water resourcepollution out of 133 countries.

Ranks 128 th out of 133 countries in terms of overallair quality ( T he worst among all Asian-Pacificnations).Environmental degradation directly impacts publichealth. Many diseases directly result fromenvironmental contamination.Poor outdoor Air quality leads to various respiratoryailments.

Unsanitary municipal water sources contribute todiarrheal diseases, hepatitis, cholera, and typhoid.


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In a 1995 survey, over half of urban residents andfour-fifths of rural residents identified Chinasenvironmental problems as very serious or serious .78% of urban residents and 90% of rural residentsconfessed that their command of environmentalknowledge could be regarded as very little orrelatively little. Public participation regulations and the presentbusiness model in China fail to make key

environmental information available, hinderingpublic efforts to meaningfully and critically engagebusinesses and the government on environmentalproblems.


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Chinese government has promulgated a host ofenvironmental enforcement laws in the last 25 yearswith increasingly harsh penalties,But the lack of transparency and formal involvementof the public has hindered the effectiveness of theselaws.Environmental Performance Information Disclosure(EPID) program, a World Bank initiative failed.Reveals a deeply-seated systemic problem embeddedin the Chinese social-industrial-legal complex.


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In 2006 the Shenzhen Stock Exchange (SSE) issuedSocial Responsibility Instructions for the purpose of:

Implementing a scientific outlook on social development.Building social harmony.Accelerating sustainable economic and social development.Promoting commitment to social responsibilities.

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Chinese corporate environmental reporting is still inits infancy and requires further development.Improvements are made in corporate governance

and the Chinese people become more engaged inenvironmental issues.Chinese domestic marketplace has generally notembraced the need for environmental reporting and

disclosure.Many enterprises try to release as little informationas possible. T hus the general public faces a difficultchallenge when seeking information.



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T he lack of available information and the concerns withthe veracity of information generates a situation whereinenterprises can manipulate the dissemination ofinformation to mislead the public.Barrier to direct citizen access to corporateenvironmental performance information is a general lackof uniformity in environmental accounting standards.Disclosure laws are often vague and laconic, poorlyenforced, lacking incentives, or embedded with anemicpenalty provisions that fail to deter noncompliance.Yet opportunities exist to transform these laws intoeffective conduits transferring vital information from thebusiness and government sectors directly to the public.



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V oluntary and involuntary compliance schemes to promotethe fair dissemination of necessary environmental

performance information directly from Chinese enterprisesto the public.

Enterprises should be mandated to provide access toinformation under certain circumstances, and evenbe given incentives to voluntarily provide access to

information in other circumstances.



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F acilitating Corporate Disclosures BeyondT raditional Obligations

China maintains laws and regulations compellingcorporations to seek permits or licenses for industrialor land-disturbance operations, particularly whenthe activities will involve the discharge of pollutantsthat may adversely impact public health or theenvironment.Moreover , China has enacted laws specificallyaddressing the need for industrial operators todisclose information in the event of an emergency.



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Examples of Mandatory Corporate Disclosure L awsin the United States

T he Emergency Planning & Community Right-to-Know Act of 1986Securities Act of 1933T he Securities Exchange Act of 1934



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Current Chinese L aws Governing Involuntary Reportingof Environmental Information

As the Chinese capital market continues to develop, theneed for greater access to reliable corporate informationis garnering more and more attention from society.T here is a legislative and regulatory focus on ensuring

compulsory disclosure, with voluntary disclosureopportunities as a secondary means of compellingcorporations to release critical corporate governance,financial, and liability information to the public.

Consequently, a number of securities laws andregulations and environmental laws and regulations nowrequire corporations to disclose environmentalinformation.



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F acilitating Corporate Disclosures Beyond T raditionalObligations.

Examples of Mandatory Corporate Disclosure Laws in the UnitedStates

T he Emergency Planning & Community Right-to-Know Act of 1986

Securities Act of 1933 & the Securities Exchange Act of 1934 Current Chinese Laws Governing Involuntary Reporting of

Environmental Information.



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One of the most important laws is the Cleaner ProductionPromotion Act, promulgated by the Standing Committee of the

National Peoples Congress in 2002.T

he Acts purpose is topromote cleaner production, improve the resource utilizationefficiency, reduce and avoid pollutants from production, protectand improve environment, safeguard human health, and promotesustainable economic and social development.

Also, environmental departments and local governments mayuse local media sources to publicly disclose heavily pollutingenterprises that violate pollutant discharge standards so as toprovide basis for the public to supervise enterprisesimplementation of cleaner production.



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Under DEID, enterprises that are identified by the government ashaving discharge pollutants in excess of national or regionaldischarging standards or that are otherwise responsible forseriously polluting the environment must compile disclosurematerials that detail the types and quantities of pollutantsdischarged, and the means of environmental release. T hesedisclosure materials must also include emergency plans anddescribe the condition of environmental protection facilitiesoperated by the enterprise. T his information is not merelydistributed to local or state environmental agencies, which in turn,disseminate it to the general public; rather, listed enterprises arerequired to directly release this information through local mainmass media and provide verification to the local environmentaladministration for archival purposes.



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Enterprises failing to comply with DEID requirements may besubject to a fine not to exceed 100,000 Yuan (RMB) pursuant to stateagency authority granted under the Cleaner Production PromotionAct. Additionally, under DEID Chinese citizens may petitiongovernment agencies to release a range of environmentalcompliance and enforcement information, including the list ofenterprises discharging pollutants in excess of reported limits,administrative enforcement actions, environmental protectionplans, and environmental impact evaluation documents forconstruction projects.More importantly, much of this information must be madeavailable in a manner calculated to provide easy access to thegeneral public. F inally, DEID permits citizens to file administrativelawsuits to compel agencies to comply with DEID when their rightshave been affected, while also compelling higher-level agencies topolice lower-level agencies by requiring the imposition of sanctionsfor recognized failures to comply with or implement DEIDdisclosure provisions.



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CSRC-Enforced EnvironmentalDisclosure Laws andRegulations



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Beyond SEPA, the CSRC is another important state agency thatrequires listed enterprises to publicly disclose environmentalinformation. Enterprises pursuing initial public offerings (IPOs)must prepare a prospectus which includes a demonstration thatthe enterprise has not been subject to an administrative penaltyfor violating any environmental protection provision underserious circumstances. T he enterprise must further warrant thatany investment funds raised will be used in a manner compliantwith environmental protection laws. F or enterprises classified asindustries of heavy pollution, documentation from provincialenvironmental departments is also required to support theenvironmental performance warranties made in the IPOprospectus. Enterprises must annually develop comprehensivereports that disclose, among other provisions , major litigations orother important matters.



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Recent T rends and Performance Data Related to ChineseEnterprises Disclosing Information to the Public

- Although Chinas movement toward a free market economy andthe recent enactment of new mandatory disclosure laws arefostering an understanding of the importance of transparency, anumber of factors haunting both market and regulatory systemsprevent a high level of transparency. A survey evaluating datafrom 827 Shanghai-listed A-share enterprises in 2004 revealed that60% of heavy-polluting industries publicly disclosed criticalinformation, as compared with only 23% for all other industries.



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- T he same survey, however, also revealed that market factors areplaying an important role in the corporate decision to disclose

environmental information. Such factors include direct marketpressure (44%) and the desire to build or sustain a positivereputation (55%). Although Chinas relatively new stock exchangesystem is gaining greater sophistication, lax enforcement andpoor corporate compliance with disclosure laws result in

continuing inefficiencies in the entire market system.

Recognizing the Need for Greater Regulatory Enforcement- Although China has an extensive set of environmental laws, lax

enforcement continues to haunt governmental efforts to compelpublic and private enterprises to consistently maintaincompliance with environmental performance standards,including public disclosure obligations.



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Recommendations for Reforming Mandatory EnvironmentalInformation Disclosure Requirements in China

1. Penalties for failure to comply with disclosure laws andregulations should be increased. Increasing the penalties will helpameliorate strategic avoidance decisions many enterprises makeby closing the gap between the cost of compliance and theeconomic risk of paying a fine for noncompliance. United Statessecurities laws permit the imposition of substantial civil,administrative, and even criminal sanctions for failing to complywith federal disclosure laws and regulations.

2. Systematically increase enforcement actions by both SEPA and

the CSRC and related lower-level agencies. Increased enforcementwill require a national effort to prioritize sustainabledevelopment, or at least a movement away from merely acceptingpollution as an inevitable or necessary byproduct of economicdevelopment.



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3. Efforts should be made to standardize reporting requirements,including the format and content of information contained in

documents made available to the public. Presently, there is nostandard on corporate environmental reporting and disclosureand the content of what is reported is diverse. Merelycompelling the release of more information may not necessarilyresult in more company transparency. In the United States,

EPA and the SEC provide substantial guidance and regulatoryprovisions detailing the material and format for most forms ofdisclosure.

4. An effort should be made to standardize how enterprisesdisclose information through media outlets. A number of

enterprises avoid proactively releasing securities information tothe public by using provincial newspapers rather than largerpublishers with a wider circulation, as well as generallydisregarding legal disclosure requirements with respect to bothannouncement timing and content.



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5. SEPA disclosure requirements specific to heavy-pollutingindustries should be expanded to cover most, if not all, industrialbusiness sectors. Additionally, the disclosure requirementsshould be mandated irrespective of whether a particularenterprise is in violation of a pollutant discharge threshold. Sucha proactive disclosure policy would allow the public to havemore consistent access to overall environmental performancedata.

6. Efforts should be undertaken to directly involve the localcitizenry in environmental and emergency planning.Environmental performance documents and emergency planscompiled by companies should be subject to public scrutiny

through public participation in the oversight organizations thatapprove, monitor, and enforce the compliance laws. In thiscircumstance, compliance, enforcement, and disclosureobligations are synergized through public oversight, whichempowers the public, while simultaneously encouraging greater

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Although any individual has the right to report on or filecharges against units or individuals that cause pollution ordamage to the environment under Chinas EnvironmentalProtection L aw, Chinese citizens generally still lack the ability todirectly raise public interest lawsuits without having to rely onprovincial authorities to file complaints on the publics behalf.

F OIA is a comprehensive legislative mandate empoweringindividual citizens to compel agencies to disgorge informationand to seek redress directly from federal courts when agenciesfail to comply. As with so many aspects of environmental andsecurities regulations, individual issues are intricately

intertwined within a larger public discourse. Implementation ofthese recommendations would offer a number of benefits notonly to Chinese citizens and NGOs, but also to the governmentand enterprises themselves.



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1 . Incentivizing Voluntary Disclosures Through Market BasedPoliciesMarket-based policies, encourage businesses to think creativelyabout pollution prevention as a means of achievingenvironmental goals. Second generation policies add carrots,or incentive programs, to entice corporations to improveenvironmental accountability and performance.

2. The Example of the U.S. EPA Audit PolicyT he purpose of the policy is to safeguard human health and the

environment by providing several major incentives for regulatedentities to voluntarily comply with federal environmental laws

and regulations. In order to avail themselves of these majorincentives, regulated entities must voluntarily discover,promptly disclose to EPA, expeditiously correct, and preventrecurrence of future environmental violations.



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T he nine conditions are :(1) Systemic discovery of the violation through an environmental

audit of a compliance management system;(2) Voluntary discovery;(3) Prompt disclosure;(4) Discovery and disclosure independent of government or third-

party plaintiff;(5) Correction and remediation;(6) Prevent recurrence;(7) No repeat violations;(8) Other violations excluded; and(9) Cooperation.



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3 . Current Disclosure Laws & Influences Compelling ChineseEnterprises to Voluntarily Disclose Environmental Information

Chinese enterprises are now recognizing the need to develop andmaintain a positive public image, and they are facing mountingpublic and government pressure to disclose importantinformation. Yet this increased voluntary transparency isprobably more a response to external pressures than an evolving

corporate management practice which, in many respects, remainswell-rooted within the more guarded communist-era mindsetbent on minimizing the disclosure of any information to thepublic.

Notwithstanding the lack of corporate interest in releasingenvironmental information to the public, Chinese governmentagencies have issued a number of regulatory and guidancematerials designed to encourage corporate disclosure.



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4 . A Proposal to Modify Existing Chinese Voluntary DisclosureLaws

T he EPID programs incentive of positive public publicitythrough local media outlets was not enough, and enterpriseswanted more substantial rewards like favorable loan treatmentfrom local Environmental Protection Boards for environment-

related projects or the ability to label their products as green.With respect to protecting corporate reputation, Chineseenterprises place great emphasis on avoiding unethical corporatebehavior and negative public attention by the media andcustomers, while they tend to have little regard for the potentially

adverse impacts associated with litigation judgments. In essence,market forces play a crucial role in motivating corporateenvironmental accountability, particularly when environmentalissues are linked to corporate image, behavior, products, orservices.



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EPAs program offers a direct economic incentive to corporations thatvoluntarily disclose environmental violations by providing either thereduction or waiver of gravity-based penalties. A similar program inChina would directly link voluntary disclosure with environmentalcompliance and incentivize self motivated enterprise environmentalperformance by reducing the economic impact associated with failuresto meet minimum regulatory standards. A proactive enforcementinitiative is necessary to demonstrate to corporations that disclosingviolations would be in the companys best interest from both a public

relations and profitability point of view. Moreover, EPAs Audit Policyprovides more than mere guidelines for participation. Enterprises mustmeet very specific requirements in order to remain eligible for penaltywaivers, including demonstration of an active internal environmentalmanagement. Such an audit policy would also lend legitimacy to theadministrative and judicial review process for enforcing environmentallaws by establishing a policy to aggressively pursue penalties againstenterprises that could have substantially reduced such penalties hadthey taken the initiative to seek waivers or mitigations under avoluntary audit program.



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In 1982, the National Peoples Congress adopted a new

constitution, one that exchanged an emphasis on class strugglefor an emphasis on economic development and modernization.Yet the constitution still proclaimed that all power in thePeoples Republic of China belongs to the people and the peopleadminister state affairs and manage economic, cultural and social

affairs.Moreover, Chinas new foundational charter, unlike the UnitedStates Constitution, also explicitly recognized the need to usedomestic natural resources wisely. Chinas constitution declaresthat the state will protect not only the Chinese peoples livingenvironment, but also the ecological environment and willotherwise prevent and control pollution and other publichazards.



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In terms of involuntary disclosure laws, there are a variety ofenvironmental and securities laws and regulations that address,albeit cursorily in most instances, corporate obligations to disclosevarious types of environment- related information to the public.T hese laws can be amended to require more effective enforcementof disclosure obligations, impose sufficiently severe penalties tocompel compliance, and standardize the types of information andthe means of public dissemination.T hese disclosure requirements fuel a more vibrant domestic free-market economy. Existing voluntary disclosure programs inChina are relatively ineffective due to the lack of sufficienteconomic incentives to overcome the increased costs born byenterprises to generate and disseminate the information.



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Ultimately, the Chinese government should consider acombination of voluntary and involuntary legal initiativestargeted specifically at ensuring a timely, accurate, and detailedsupply of environmental information directly to the public. T heselaws, regulations, policies, and incentive programs should bestructured to support the growth of a Chinese business modelthat recognizes the profit and public relations benefits that arisefrom keeping the public, enforcement agencies, and shareholders(present and potential) apprised of environmental performanceand liabilities. Such a paradigm shift will serve the best interestsof the Chinese people, Chinese businesses, and all levels of theChinese government.



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COMPI L ED BY:SHASHANK SINGHA L (09609178)RISHABH SHARMA (06502930)SNEHA ARORA (09609177)


Unmasking Chinese Business Enterprises

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