While good CSR performance improves the overall performance of a firm, can it also be used as a gateway to different markets? Professors Haina Shi, Xin Zhang and Jing Zhou of School of Management Fudan University explore how firms in developing countries use CSR performance as an entry strategy to developed markets.
Cross-listing and CSR: Friends with benefits by CoBS Editor Pavan Jambai. Related research: Cross-listing and CSR performance: evidence from AH shares, Shi et al. Frontiers of Business Research in China, 12:11 https://doi.org/10.1186/s11782-018-0032-z
Can there be ‘A’ definition of CSR?
Even though CSR has been in the limelight of various stakeholders both in the business world and outside, it has been surprisingly difficult to arrive at a universal definition of CSR. The implication of this difficulty is indeed a characteristic of the concept itself.
One way of defining CSR is the firms’ considerations of, and response to, issues beyond the narrow economic, technical, and legal requirements for the firm to accomplish social and environmental benefits along with the traditional economic gains that the firms seek.
Yet another definition describes CSR as to how businesses engage their stakeholders, including shareholders, employees, customers, suppliers, governments, international organizations, and the natural environment through policies, processes, and procedures.
Regardless of the various definitions, the bottom line is straightforward. CSR encompasses activities that take into consideration social and environmental concerns. The definitions depict an intrinsic value to CSR but there has been a rapid increase in its recognition, especially in the developing markets.
Concern for society or shareholders?
It is a no-brainer that CSR is important to the environment and society as a whole. But why are businesses interested in CSR practices when, in most cases, it is going to cost them financially? Is it because the firms are concerned about their footprint or is it because such practices offer them a business advantage?
If someone is even vaguely aware of the history of businesses and firms, it is pretty easy to find out that they rarely partake in something that does not benefit them directly – and CSR is no exception, at least in most cases.
The primary reason for firms to focus on CSR practices is that these activities enhance the firms’ relationships with various stakeholders, and without their participation, firms cannot survive. It is becoming increasingly important for businesses to showcase their beliefs and values along with their products and services.
Internally, good CSR performance is found to improve employee relations and customer satisfaction/loyalty, increase firm competitiveness and product quality, lower the cost of capital and firm risk, and build reputation, all of which may, in turn, increase firms’ profitability.
Until now, the impact of CSR has been predominantly observed in developed countries with concentrated markets. However, being increasingly aware of the importance, firms in emerging markets are now actively participating in corporate social responsibility (CSR) practices.
Cross-listing – Expansion of (stock) exchanges
Cross-listing is the listing of a company’s common shares on a different exchange than its primary and original stock exchange. It allows firms to access more developed capital markets and achieve better valuation.
Apart from better valuation and access, there is also a perception premium associated with cross-listing. Foreign firms and Chinese firms cross-listed in the US and Hong Kong markets, respectively, are better valued than their non-cross-listed counterparts from the same country.
For the shareholders and investors, cross-listing is an advantageous proposition. In addition to increasing the firm valuation, it also decreases the risk by sharing the risk with foreign and domestic investors. It also offers the shareholders better information transparency, disclosure, and protection.
Cross-listing as a means for CSR practices
Having established the advantages of cross-listing for firms, it is understandable that firms would be interested in cross-listing. However, since developed markets demand better CSR performance, cross-listing requires firms to monitor financial intermediaries, such as analysts, underwriters, and auditors in a more stringent manner.
In a way, firms from emerging markets are thus using cross-listing as a means and motivation to improve their CSR practices. And the measures taken in the CSR domain in an effort for cross-listing have in fact proven that cross-listed firms perform better in CSR than otherwise similar non-cross-listed firms.
Apart from internal measures, cross-listing also subjects firms to the securities laws and accounting standards of the host country. As the laws and standards are more stringent in developed countries than in developing countries, it forces firms to comply with higher levels of CSR regulations.
When venturing into a new market, investors are looking for every possible information on a firm. One of the most important sources of non-financial information for investors is sustainability and CSR reports. Since foreign investors value such information, firms tend to perform better in this regard.
Looking at the phenomenon from the flip side, governments and organizations can propagate better CSR practices in developing markets using cross-listing as a tool. Indeed, CSR can’t be a strong enough incentive on its own – but coupled with increased valuation and reduced risk, it might do the trick.
CSR and cross-listing: Stepping stone or starting point?
Cross-listing is not without its problems. Given that investors of a foreign market have some requirements from the firm when it comes to cross-listing, those requirements may not always align with the requirements of the investors in the home country. This puts the firm in a tricky position to trade off one for the other.
Cross-listing, also, does not naturally extend to corporate social responsibility. It only acts as a small part of the vast ocean of CSR. And even though cross-listing enables the firms to employ better CSR practices, at the end of the day firms still operate in their host country and so are only constrained by its national environmental and labour laws.
Furthermore, CSR calls for firms to go beyond the minimum requirements of law. In fact, this is one reason for the difficulty in universally defining such a concept. Therefore, cross-listed firms should not look at CSR as a stepping stone that is forgotten once the objective is reached, but rather as a starting point for an impactful CSR mission.
Time to wake up
CSR can’t be treated as a trend or as a Key Performance Indicator (KPI) anymore. It is extremely important to focus on it now so that future generations don’t suffer from the irreversible consequences of our actions. It is worth noting that we have officially entered the phase of climate change where it can no longer be reversed with businesses having had a major role to play in this regard.
If cross-listing is going to encourage firms to better their CSR practices, it is indeed a tactic that many firms can use. However, if firms see CSR performance as a mere formality to enter a developed market, it defeats the whole purpose of the CSR concept. Are we headed towards impending doom or will CSR become an intrinsic part of businesses and save our future? It is just a matter of time.
- Read a related article: Can financial markets push for CSR?
- Consult Prof. Jing Zhou’s website
- Discover School of Management Fudan University
- Apply for the Fudan-MIT international MBA.
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