Corporate social responsibility (CSR) has flourished as a major corporate trend since the 1990s. With no universally accepted definition, CSR generally refers to companies conducting business in a manner meeting or exceeding the ethical, legal and public expectations, mindful of the impact of their business practices on various stakeholders, which include employees, shareholders, investors, suppliers, consumers, regulators as well as non-government organisations. Under this scenario, companies try to integrate social and environmental concerns in their voluntary interaction with stakeholders.

A number of factors have over the years shaped the development of CSR, among which globalisation, trade liberalisation, stronger expectations of citizens in developed countries, growing use of international supply chains and supplier codes, especially by MNCs, and proliferation of CSR standards, are especially relevant for economies heavily reliant on external trade, such as Hong Kong. CSR standards promulgated by inter-governmental bodies concerning activities of MNCs on labour and environment, as well as those by NGOs and industrial associations (like standards by ISO, FLA and SAI), have helped articulate social norms of acceptable corporate conduct in all jurisdictions where companies do business. Meanwhile, ISO has begun its work to develop an international CSR standard, which will sit alongside other voluntary standards like the ISO9000 and ISO14000 series upon its completion by 2007.

As the world's 11^th largest trading economy, Hong Kong's trade sector cannot afford to overlook the sweeping CSR influence over business decisions of MNCs, especially their use of supply chains. As a matter of risk management, MNCs strive to ensure practices of other companies, including international suppliers, do not tarnish their reputation, with CSR initiatives undertaken to show that their operations meet or exceed legal requirements and societal norms in their home country or abroad. Failing that, acts of "punishment" by consumers and investors (including shareholder activism via pension funds) could lead to very negative repercussions. Conceptually, CSR practices are largely voluntary acts, though the translation of CSR principles into supplier code requirements leaves little leeway for Hong Kong's manufacturers and exporters - full compliance is expected or business relationship will be affected.

According to a local survey conducted in 2003, Hong Kong SMEs including those in the trading and manufacturing sectors focused their attention on compliance with mandatory government rules and environmental management, with CSR considered better suited to larger companies and such practices adopted when the economy was robust. Nevertheless, there seems to be a growing interest over the past couple of years among Hong Kong manufacturing and trading companies in CSR practices, which can take a variety of forms ranging from community investment, corporate philanthropy, to better codes of conduct and business ethics.

Introduction

As the world's 11^th largest trading economy, Hong Kong is a trading as well as sourcing hub for the international trade community. In 2004, Hong Kong merchandise exports amounted to US$259 billion (up 16% from 2003), of which 94% were re-exports. The Chinese mainland, Hong Kong's top trading partner, is the main location for Hong Kong's manufacturing. The mainland accounted for, respectively, 45% of Hong Kong's re-exports and 43% of imports in 2004. While the mainland is gaining importance as a consumable market for Hong Kong products, markets like the US, EU and Japan remain of paramount importance for Hong Kong's merchandise exports. In this context, Hong Kong's trade sector cannot afford to overlook the growing global phenomenon that CSR is having an increasing influence over the business decisions and operations of companies, especially those in developed countries with international supply chains.

As one of the biggest corporate trends since the 1990s, CSR is not an entirely new phenomenon. Key aspects of CSR have been identified and managed by certain members of the business community for quite some time. In its early incarnation, CSR often had strong religious and philanthropic aspects, whereby individual companies engaged in initiatives to further the interests of workers, the general community and the environment.

The modern concept of CSR focuses more directly on day-to-day business practices and their impact on a range of stakeholders. Under this scenario, companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. In other words, the development of CSR reflects the growing expectations of the community and stakeholders of the evolving role of companies in society and the response of companies to growing environmental, social and economic pressures. This means not only fulfilling legal expectations, but also going beyond compliance and investing in human capital, the environment and relations with stakeholders.

Through voluntary commitment to CSR, companies hope to send a positive signal about their behaviour to their various stakeholders, and in so doing make an investment in their future and help to increase profitability. In the broadest sense, stakeholders can be considered to be anyone affected by the activities of an enterprise, or whose activities affect the enterprise. Generally, stakeholders include, for example, employees, shareholders, investors, consumers, regulators and non-government organisations (NGOs). These stakeholders have taken an increasingly important role in promoting the concept of CSR and sustainability, especially through their efforts to develop standards and certification programmes.

Further, the modern concept of CSR has been developed against a backdrop of domestic legal regimes and international norms (including, for example, how companies find new ways of conducting business in the global marketplace). CSR in its modern form also reflects a heightened public desire to ensure that companies behave in a socially responsible manner in all jurisdictions where they do business, and that they report publicly on their behaviour. As a result, CSR policies and business practices have been developed in the areas of worker, consumer, environmental and human rights protection, sourcing guidelines, codes of conduct, ethics and compliance, community engagement, and corporate philanthropy.

As indicated by many international companies with global supply chains, they expect their business partners, including overseas suppliers, to act in ways that respect their core values and business practices, and attach a fair amount of emphasis to CSR principles. In other words, Hong Kong companies intending to succeed in establishing and cultivating cordial businesses relationships should strive to meet the expectations of their overseas business counterparts. In addition to meeting the minimum legal requirements in the concerned jurisdiction and complying with overseas buyers' supplier codes, Hong Kong companies would find it beneficial to demonstrate to their overseas partners their interests in CSR activities, which would be conducive to more constructive partnership relationships in the future.

This paper aims to provide a broad view of factors affecting CSR developments, the business case for CSR, promulgation of CSR standards and supplier codes, and how Hong Kong's trade sector is reacting to the global CSR phenomenon.

CSR Definitions

While the concept of CSR is widely accepted, there is no single, universally accepted definition of CSR. Generally, it refers to business decision-making linked to ethical values, compliance with legal instruments, and respect for people, communities and the environment. Below are some examples of CSR definitions espoused by international organisations.

• Business for Social Responsibility (BSR) defines CSR as "operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business". Elements of CSR include investment in community outreach, employee relations, creation and maintenance of employment, environmental stewardship and financial performance.
  
  
• The European Commission defines CSR in a Green Paper as a concept in which "companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis".
  
  
• The World Business Council on Sustainable Development's (WBCSD) definition of CSR is "the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life".
  
  
• The United Nations Conference on Trade and Development (UNCTAD) defines CSR as concerning essentially "how business enterprises relate to, and impact upon, a society's needs and goals". Specifically, CSR touches upon social responsibility standards and performance of multinational corporations, and their roles in developing a stable, prosperous and just global society.
  

Factors Influencing CSR Development

A number of factors and parties have influenced the current concept of CSR and will continue to shape its future development. Parties that are seen as stimulating businesses to adopt CSR practices include consumers, supply chain partners, insurers, banks, investors and shareholders, communities, workers, NGOs, governments, and inter-governmental bodies.

As multinationals, investment interests and NGOs in developed countries have played significant roles in promoting the modern concept of CSR, the impact they have will also be increasingly felt around the world, given growing cross-border trade and investment activities, as well as the use of global supply chains.

1. Trade liberalisation and Globalisation - Trade liberalisation and deregulation have created more leeway for businesses to pursue their economic objectives. The increased trade in goods and services across borders, including outsourcing, has been accompanied by the rising importance of multinational corporations (MNCs) and prevalence of global supply chains. Many MNCs operate and manufacture in countries with lower regulatory standards and sell their products in countries with stricter regulations. As the most important beneficiaries of globalisation and liberalisation of trade regimes, MNCs are increasingly seen as having obligations in the international arena in which they operate. Indeed, a lot of MNCs have adopted codes of conduct concerning their social, economic and environmental activities around the world.

2. Increased Expectations of Citizens - Citizens in many countries have recognised that corporations should exercise high standards of care not just in their home jurisdictions, but meet standards wherever they operate. They no longer accept corporations which behave well at home, while overlooking or even violating basic norms of consumer, worker, environmental and community protection elsewhere.

3. Shrinking Role of Government - While governments have relied on legislation and regulation to deliver social and environmental objectives in the business sector, shrinking government resources, along with a distrust of regulations, have led to the exploration of voluntary initiatives. Many CSR initiatives have resulted from civil society's frustration with the ability of governments to adequately address the world's growing social and environmental problems.

Further, there is a recognition that the capacity to enforce laws in overseas countries is inadequate given weak or non-functioning governance institutions. Thus, businesses are expected to demonstrate high standards of corporate behaviour consistent with citizen expectations. Businesses should also take on increasing responsibilities where government shows an increasing interest in supporting self-regulation initiatives and may rely more on public-private partnerships to further public policy agendas instead of more intrusive regulatory approaches. In short, there is a perception in some quarters that good CSR practices may decrease the need for new regulations.

4. Supply Chain and Labour Codes - Outsourcing and subcontracting, including to suppliers outside the home country, have become more commonplace. These activities, however, might make it easier for businesses to avoid responsibilities otherwise required of them. As such, companies need to demonstrate that their partners conduct themselves in a socially responsible manner, so as to take some responsibility over workers throughout the supply chain. Some have adopted codes of conduct to ensure their suppliers observe certain labour codes in light of poor or ineffectual compliance enforced by authorities (including those outside the home country).

5. Brand and Risk Management - Businesses are more aware these days that a company's value is also contingent on its reputation. Accordingly, implementation of CSR measures developed with stakeholder input can enhance the company's reputation and its brand image. When businesses take the initiative to publicly demonstrate that their operations meet or exceed legal requirements and societal norms, they can better communicate to interested parties that they are systematically reducing commercial risk and other disruptions. In so doing, they ensure other firms' policies or practices do not tarnish their reputation, and potentially open doors to new commercial opportunities.

6. Growing Customer and Investor Interests - Specifically, companies' ethical conduct has evidently exerted a growing influence over the purchasing decisions of customers, who demand more responsible consumption. Similarly, many investors are making decisions based on ethical criteria, assessing if the invested companies are socially responsible. In addition, there is a greater demand for corporate disclosure from stakeholders regarding CSR activities of businesses. Shareholder activism through pension funds and otherwise has been increasingly common in many developed countries.

Standards of Social Responsibility

Basically, there are two main strands of CSR standards. The first broad category defines what it means to be socially responsible by referring to governmental and inter-governmental standards. At the national level, this includes national and sub-national laws and regulations governing businesses. Laws and legal frameworks change over time to reflect changing social values and standards of behaviour, which has a clear bearing on setting the minimum regulatory standards for business behaviour. There are also examples where initial voluntary action has led to regulation (for example, health and safety standards in European countries.) At the intergovernmental level, this includes instruments like the OECD Guidelines for Multinational Enterprises.

The second category relates to private standards developed by NGOs. In many cases, these standards either select parts of existing governmental and intergovernmental standards, applying them to specific activities, or set guidance that goes beyond the existing governmental and intergovernmental standards. These standards may also complement existing requirements (for example, the International Chamber of Commerce Charter for Sustainable Development). On the other hand, there are private standards designed for adoption by the organisations that develop the standards, such as the Caux Roundtable Principles (which advocate a moral capitalism by applying fundamental ethical norms to promote better outcomes for globalisation and business decision-making).

Some of these private standards are designed to set socially responsible expectations for others, as seen in supply chain codes by institutions like Social Accountability International (SAI) and Fair Labour Association (FLA). They often include certification and accreditation processes, while integrating management system requirements similar in nature to existing ISO 9000 Quality and 14000 Environmental Standards.

As aforementioned, MNCs have adopted codes of conduct concerning their social and environmental activities around the world (including, codes concerning supply chains). At the same time, consumers and other NGOs have promoted the development of standards and certification programmes. The implementation and verification challenges of these supplier codes have given rise to a new industry of commercial services offering private inspections, and code compliance certification, including some form of private standard-setting and accreditation, along with CSR reporting and related consultancy services.

Social accounting is a relatively new concept for most companies, with increased adoption by bigger companies. Taking the UK for example, 98 of the FTSE 100 companies included information on CSR activities relating to their business on their websites in 2004, with 81 including a full report. However, the majority of FTSE companies did little to engage stakeholders in CSR activities via their websites.

In short, while private CSR standards may entail broad participation by diverse interests, they do not carry the weight or legitimacy of inter-governmental standards in defining substantive social expectations (for instance, the UN Global Compact). Further, private standards usually fall short of creating new substantive standards, and a "pick and choose" approach to interpreting governmental or intergovernmental standards may reduce or even obscure the full scope of the latter.

International CSR Standard by ISO

The idea of an internationally agreed CSR standard was raised as a serious possibility for the first time in 2001, with the International Organisation for Standardisation (ISO) then forming a taskforce to weigh the pros and cons of an international CSR standard. In June 2004, ISO adopted a decision to develop an international CSR standard - the objective was to produce "a guidance document, written in plain language which is understandable and usable by non-specialists" and not intended for use in certification.

The international CSR standard, which is planned for completion by 2007, will sit alongside other ISO voluntary standards such as the ISO 14000 and 9000 series.¹ Working on this CSR standard is another illustration of ISO broadening its scope from merely providing a growing portfolio of technical standards, to supplying solutions for social and environmental issues in the global economy.

In developing an international CSR standard, ISO has emphasised that it intends to add value to, and not to replace, existing inter-governmental agreements with relevance to social responsibility, such as those adopted by ILO and UN. The work, which will be carried out in a manner consistent with ISO's basic principles (including openness and transparency), will be of great interest to stakeholders such as consumers, workers, NGOs and regulators.

Other Concepts of CSR - Corporate Accountability

Given the common notion that CSR is understood to be a voluntary concept, it seems necessary to distinguish CSR from other concepts concerning the relationship between business and society (including, for example, business ethics).

Regulatory approaches are focused on securing compliance with minimum standards. Accordingly, the term "corporate accountability" is often used to refer to the legally binding obligations upon corporations imposed by governments and, additionally, to the corporate governance systems designed to hold management accountable to shareholders. However, the term corporate accountability is also increasingly construed to encompass the moral obligations of companies to report to stakeholders. In other words, companies are expected to operate according to the highest standards of business ethics and integrity for shareholders and other stakeholders, which necessitate companies putting in place proper internal control systems and other corporate governance measures.

While it is widely accepted that regulatory and corporate governance frameworks shape business behaviour more than CSR principles and practices, it is also recognised that voluntary initiatives and regulatory approaches may complement and reinforce each other. Indeed, one of the drivers for CSR is the demand for greater accountability of business in the regulatory sense. Some voluntary initiatives, such as the UN Global Compact with broad references to many universal principles, try to inspire innovative and practical solutions aside from compliance with the minimum standards. Attracted by its flexible structure, many large Japanese companies (more than 20 by November 2004, including Olympus Corp. and Shiseido), have joined the Global Compact framework, with a view to integrating the Compact principles into their corporate ethics.

A separate issue of corporate accountability relates to the need of stakeholders and consumers for independent verification of conformity with voluntary standards, which many consider crucial in ensuring public confidence in voluntary standards and processes. While there is room for voluntary frameworks to exceed regulatory requirements, it is imperative that voluntary initiatives, including the need for independent verification of conformity, should not be devised to undermine the regulatory frameworks.

CSR - Is There a Business Case?

The concept of CSR is underpinned by the idea that corporations can no longer act as isolated economic entities operating in detachment from broader society. Advocates for CSR typically state that there is a business justification for corporate responsibility. They focus primarily on the idea that CSR measures that are good for the environment or societal interests can also be good for a company's financial performance. In short, CSR advocates believe there is a "business case" for CSR and point to some positive outcomes that may arise when businesses opt for "compassionate capitalism" and adopt a policy of CSR.

Benefits Due to Practice of CSR Activities

The Economist identifies four types of CSR activities and explains "good management" as meaning companies closely associated with a strong commitment to good causes that benefit its employees and society at large while aiming to improve the company's bottom line. It sees "good management" benefits as some of those identified by Business for Social Responsibility. However, it argues that CSR would be unnecessary if there is a financial justification for businesses undertaking social responsibility activities.

According to this view, proper functioning markets and full information will prompt corporations to undertake CSR activates if there is a financial justification, without which these activities may constitute an inappropriate use of shareholder funds. In other words, the "invisible hand" will play out if businesses focus on activities that maximise their profit, with public interest also advanced concomitantly.

On the contrary, the financial justification for engaging in CSR activities rarely applies to many important social issues, which can only be effectively addressed through regulation and institutional mechanisms, and may not depend entirely on voluntary behaviour in light of business competition and competing societal interests. In other words, a business can be put at a competitive disadvantage, at least in the short term, if it undertakes social activities with no clear financial justification, which might be better handled by the regulators. Those making this case point to the scarcity of studies establishing a business case for most CSR activities and to the negligible impact CSR activities have had in addressing social problems aggravated by inadequate institutional frameworks.

Four types of CSR

By "borrowed virtues", The Economist refers in particular to CSR activities such as corporate philanthropy, financed out of corporate profit, which it considers morally dubious when undertaken by corporate management, which is supposedly the custodian of shareholders' financial interests.

While it is argued that corporations should focus on what they are best at (i.e. profit maximisation), and leave social policies and philanthropy, respectively, to government regulators and individual donors², Michael Porter postulates that a strategic approach to corporate philanthropy can align both social and economic objectives (see box below). In the same vein, corporations can make use of their charitable efforts to improve the competitive context, as focused corporate donations may provide greater social benefit than what is provided by individual donors.

The Economist considers most CSR activities as delusional, meaning that these activities would lead to a reduction in both profit and social welfare. While many of these activities may not in themselves entail substantial financial costs, the mere provision of them through a CSR establishment (e.g. dedicated CSR staff, and use of CSR consultancy services, etc.) without generating any positive outcomes for the corporation, would result in a loss of welfare. In this connection, corporations would not create greater social welfare than individual donors when it comes to philanthropic grants.

Astonishing though it may sound to many corporations engaged in CSR activities, increasing corporate profit does not always raise social welfare, as contended by The Economist when it refers to some "pernicious" CSR activities. Typical examples cited include MNCs offering above-market employment terms and benefits, or requiring their supply-chain partners to do so in meeting certain supplier codes. CSR activities as such would probably raise profit by helping customer relationships and avoiding negative publicity in association with companies running sweatshops and offering exploitative wages. Further, MNCs could even forgo investing in developing countries with weak governance institutions monitoring labour, environment and other conditions, with negative repercussions for developing countries that sorely expect inward investment for creation of jobs and other business opportunities.

As the argument goes, corporations seeking to mitigate any risk to reputation and to maximise profit may end up undertaking CSR activities with a negative welfare effect. Anti-competition practices packaged as CSR activities would little serve public interest either. It should be noted that, the "harmful" welfare effect of such CSR activities lies very much in the precise arrangement or structure of the CSR activity in question (for example, paying above-market wages to attract the best and most talented workers in overseas manufacturing operations appears perfectly justifiable from an economic welfare perspective). However, the precise effect may not be easy to assess, and may even appear less immediate contrasted with the positive publicity generated for the company in applying certain CSR standards (for example, SA8000) to business partners throughout the supply chain.

Having canvassed the different schools of thought above, one thing seems to be clear: no single accepted view on CSR has emerged, especially in light of the controversy over the financial justification for corporations undertaking CSR activities with a long term perspective. On the other hand, CSR advocates and economists may not see eye to eye on whether CSR activities would put a business at a competitive disadvantage, even in the short term. Nonetheless, the need to make a business case for CSR has led to the reinterpretation of many established social norms, including some private standard-setting activities (for example, through reference to CSR standards in relation to purchasing and investment decisions).

General Implications of CSR for Hong Kong's Trade Community

As the world's 11^th largest trading economy, Hong Kong is a trading as well as sourcing hub for the international trade community. Hong Kong exports rose 16% in 2004 to US$259 billion, of which 94% were re-exports. The Chinese mainland, Hong Kong's top trading partner, is a mainstay for Hong Kong manufacturing companies, accounting for, respectively, 45% of Hong Kong's re-exports and 43% of imports. While the mainland is an increasingly important market for Hong Kong consumable goods, markets like the US, the EU and Japan remain of paramount importance for Hong Kong's merchandise exports.

Aside from direct trade, Hong Kong companies are engaged in offshore trading activities, handling merchandise goods produced and sold to parties outside Hong Kong without the goods physically going through Hong Kong. It is estimated that the value of goods associated with such offshore trading activities is of a size similar to Hong Kong's re-exports.³ Simply judging from the sheer size of trade flows, Hong Kong's trade sector can hardly afford to overlook the fact that CSR is having a growing influence over business decisions and operations of companies, especially those in developed countries, including many with international supply chains.

Merchandise Trade Performance (US$ billion)

In this context, how should Hong Kong's trade sector react to the growing corporate phenomenon of CSR, especially the existence of a range of CSR standards? First of all, as aforementioned, CSR practices are diverse and presumably reflective of the national, regional as well as local context (including legal regimes, existing institutions, social and cultural attitudes, and environmental conditions). On top of many CSR standards developed by inter-governmental agencies and private parties, ISO is also intently developing an international CSR standard intended for application by corporations around the world.

Hong Kong companies should note that despite the diversity of CSR practices, they are to be understood as voluntary engagements by corporations, in addition to abiding by minimum legal requirements. In this connection, it is beside the point to look for any single CSR standard to prescribe practices that can be adopted most cost-effectively. The content and suitability of the CSR standard and relevance to the context are important considerations for adoption by any company. Even in the case of the ISO international CSR standard, the extent to which it will be adopted by MNCs eventually remains to be seen, not to mention the need for ISO to reconcile possibly contesting views emanating from local considerations and international norms.

However, negating the call for picking and choosing the "right" CSR standard to adopt does not inevitably mean that Hong Kong's manufacturing companies can exempt themselves from CSR considerations. Certainly, CSR standards are not legally mandated, but the implications would be very different depending on whether the corporation is at the buying or selling end of the supply chain. As business partners to MNCs and other international buyers, Hong Kong manufacturing companies are expected to observe the requirements imposed by many supply chain codes, in which there exist many CSR elements concerning labour and environmental considerations. Whether or not they will consider adopting any CSR initiatives on their own accord is another entirely different consideration.

Supplier Codes for Outsourcing and Manufacturing

Levi Strauss adopted its Global Sourcing and Operating Guidelines in 1992, after which companies involved in the manufacturing and marketing of brand name goods in developed countries have increasingly adopted codes of labour practice and applied them to their suppliers and sub-contractors. Needless to say, these companies have acted in response to a barrage of negative publicity due to reports of unsafe and unhealthy working conditions (including long hours and starvation wages), especially the use of child labour in the garment, footwear, toy and other labour-intensive manufacturing sectors.

Hong Kong companies should take note that MNCs, which may include many companies now buying products or receiving services from Hong Kong suppliers, pay immense attention to their reputation and corporate image. As a matter of risk management, these companies have to ensure other companies' policies or practices do not tarnish their reputation, while undertaking CSR initiatives to demonstrate that their operations meet or exceed requirements stipulated in laws and societal norms in their home country or abroad. For example, member brands of the US-based Fair Labour Association (FLA), including Adidas and Nike, have agreed to online publication of any non-compliance with the FLA standard in factories making goods on contract for them. In the case of Nike, its share price plunged in 1996 in response to revelations that the company used sweatshop labour in Vietnam for sportswear production. Nike's share price did not recover until the company initiated CSR programmes to improve working conditions for Vietnamese workers and provide charitable donations to the country.

Other leading brand-name MNC members of the FLA include Reebok, Liz Claiborne, Eddie Bauer and Puma. These companies produce in more than 3,000 factories in 80 countries, with sales totalling US$30 billion. In joining the FLA, these companies have committed to a rigorous programme of Code of Conduct implementation, internal and external monitoring, and remediation to promote compliance with international labour standards in their supply chains.

Since the 1990s, there has been a proliferation of these sourcing or supplier codes. In addition to many unilaterally adopted codes by sourcing companies, industry associations and multi-stakeholder initiatives involving NGOs and trade unions have promulgated many codes. However, these codes have generated considerable controversy and raised questions concerning their provisions, in particular pertaining to how well they could be implemented and their compliance verified.

In this context, the International Council of Toy Industries (ICTI) has sought agreement with major toy brands to sign on to its ethical manufacturing programme through its CARE Process.⁴ Major toy brands like Mattel, Hasbro and Leapfrog have signed on to the programme and agreed to stick to using certified manufacturing facilities from 2006 onward. To underpin the initiative, ICTI has appointed independent auditing firms (one of which is the Hong Kong Quality Assurance Agency) for industry use to better monitor compliance with the ICTI Code of Business Practices among toy factories worldwide.

Product Safety and Environmental Consciousness

In observing supplier codes, Hong Kong manufacturing companies have to pay close attention to aspects like product safety, and environmental friendliness of the products and production process, as well as labour and working conditions. In delivering ordered merchandise, Hong Kong suppliers need to meet the expectations of their overseas buyers in relation to product specifications, while complying with various consumer protection and environment regulations. An example can be found in Hong Kong's LTK Industries Ltd, which has become the first wire and cable company in the world to obtain Underwriters Laboratories' Restricted Substances Compliance Solutions approval. The approval will ensure the company's full compliance with the EU's upcoming Restriction of Hazardous Substances Directive to prohibit the use of such heavy metals as lead and cadmium in electronic industries.

Apart from this, Hong Kong companies can consider, in their voluntary CSR practices, adopting any of the well-established environmental standards for corporations (for example, the ISO 14000 series) to contribute to sustainable development. In Hong Kong, the Business Environment Council (BEC), with members from a variety of industries including banks, property developers, transport, utility and telecom companies, as well as local and international chambers of commerce, is also encouraging Hong Kong manufacturing companies concerned with cross-border air pollution controls to reduce harmful emissions from their plants on the Pearl River Delta. As such, winners of the BEC's 2004 Environmental Performance awards are committed to working with and modifying their manufacturing processes to reduce emissions of volatile organic compounds (VOCs) and greenhouse gases.

CSR Standard versus Supplier Code

At present, Hong Kong's manufacturing sector employs, directly or indirectly, around 10 million workers on the Chinese mainland, the bulk of which are in the Pearl River Delta. While Hong Kong manufacturing companies may not necessarily be dealing with MNCs or overseas buyers who explicitly demand certification of CSR involvement as a prerequisite for business partnership, imposition of some similar, yet basic requirements in supplier codes would be a business obligation that Hong Kong companies have to live up to (for example, labour requirements similar to SA8000).

According to Social Accountability International (SAI), about 50 manufacturing firms on the Chinese mainland had been certified as meeting the SA8000 standard⁵ by the end of April 2004 (out of around 400 companies worldwide), the majority of which were located in the Pearl River Delta. Still, this is a sign that uptake of SA8000 certification by manufacturing firms in the Pearl River Delta is slow, though many reasons are cited. Aside from a mix of lack of information and ignorance, some manufacturers are concerned about the costs involved in passing SA8000 certification, which is estimated to be more than US$27,000 for a firm with 1,500 workers for first-time accreditation and subsequent reviews for the next three years. More importantly, additional running costs based on SA8000 requirements would whittle away the competitive edge of mainland-made products, while a combination of falling prices and rising costs over the past year has heavily squeezed profit margins.

Nonetheless, some Hong Kong manufacturing companies on the mainland have noted that meeting the first eight of the nine elements of SA8000 would not present too much difficulty, though literal interpretation and strict application of the working hour code may be problematic during peak delivery times. On the other hand, some manufacturing companies are reportedly taking a wait-and-see attitude towards SA8000 certification out of fear of duplication of efforts, as some of the supplier codes of MNCs and international sourcing companies are perceived to be even more demanding than SA8000 requirements.

Despite the growing adoption of CSR strategies and related business practices among MNCs, there are also good grounds for arguing that CSR activities should be defined with a consideration of the local context, in conjunction with local stakeholders. Regarding standards like SA8000, researchers at the Chinese Academy of Social Sciences (CASS) said that it would be difficult to expect a developing country like China to adopt high-level labour standards as those prevailing in developed countries. As such, CASS researchers suggested that the mainland government should be prepared to work towards formulating "localised" standards, catering to Chinese conditions on one hand and complying with international norms on the other. It is further suggested that China should develop an early-warning system to trace the changes in international standards, and the Certification and Accreditation Administration of China (CNCA) should add SA8000 to its certification list and help firms on the mainland to familiarise themselves with the standard. According to certification experts, however, China has already formulated a set of laws, regulations and standards concerning labour and working conditions, and strict adherence to these local rules should be sufficient in helping manufacturers to meet some of the SA8000 requirements.

In light of the strong expectations of corporate citizens in developed countries that their suppliers and business partners comply with required codes of practice (together with verification of conformity, as found in some supplier or factory audits), Hong Kong manufacturing companies do not appear to have much leeway but to comply. Otherwise, they might risk losing the trust of their overseas buyers and thus the purchasing orders. Where SA8000 certification or another voluntary standard is not explicitly required as a pre-condition for business, most Hong Kong manufacturing companies are likely to keep a watchful eye on the development of global CSR standards with a clear bearing on labour and environmental conditions. In fact, there are concerns that adamant CSR advocates in developed countries might adopt standards like SA8000 as a lever to curtail Chinese imports, turning a voluntary standard into a trade barrier.

Over time, Hong Kong's manufacturing companies need to weigh the pros and cons of better integrating themselves within the global certification systems vis-à-vis the potential of long-term business benefits, as abiding by the current requirements laid down by overseas buyers may not necessarily be proactive enough in a global marketplace where CSR is having a stronger resonance in corporate quarters alongside the promotional efforts by NGOs and the CSR industry. While striving to satisfy supplier codes, Hong Kong manufacturing companies can reasonably anticipate that international buyers will become more, rather than less demanding for greater CSR commitment on the part of their global suppliers -- a challenge that the latter will have to reckon with continually in the foreseeable future.

CSR Practices in Hong Kong

A variety of Hong Kong-listed companies and MNCs based in Hong Kong have engaged in CSR activities that are similar to those undertaken by corporations in developed countries. These CSR practices range from simple charitable donations, award sponsorships, environment and energy-saving initiatives, to community work, gifts of computer software, and voluntary compliance with international standards and codes of conduct. Certainly, a recent CSR case in point is the quick philanthropic response of Hong Kong companies in lavishing charitable donations to alleviate the plight of people victimised by the Indian Ocean tsunami, which occurred in December 2004.

While bigger companies in Hong Kong appear to be at the forefront of engaging CSR activities, Hong Kong's small and medium-sized enterprises (SMEs), estimated to be around 300,000, are also increasingly aware that the business environment in which they operate is fast changing and becoming more challenging, with companies expected to demonstrate a greater commitment to social responsibility (which is in part connected with their buyers' growing CSR practices).

HSBC, the largest banking group in Hong Kong, conducted a survey of its SME customers in November 2003 with research support from ACNielsen. The HSBC study was aimed at gauging the perceptions of CSR among Hong Kong SMEs, with focus group discussions conducted on four SME categories, namely, trading, manufacturing, retail and wholesale and business services. Aside from helping the bank to better understand its customer stakeholders, in particular their priorities, the study revealed that Hong Kong SMEs would focus mainly on compliance with mandatory government rules and environmental management. While recognising that CSR would probably lead to positive publicity for the company, these Hong Kong SMEs pointed to the human and financial costs involved in CSR practices, which should be undertaken when the economy was robust.⁶ They also suggested that CSR would be better suited to larger companies.

In recognition of its social obligations to the Hong Kong community, HSBC has launched a Living Business Programme on the heels of the research findings, believing that CSR is as valuable for SMEs as it is for MNCs. The programme includes free seminars to educate SMEs about the benefits of CSR and good business practices, and launching an SME Living Business Awards 2005 to identify Hong Kong SMEs that successfully manage their businesses in a socially responsible manner.

On the other hand, Community Business⁷, a Hong Kong-based CSR advocate focusing on corporate community investment (CCI), believes that companies can demonstrate, most visibly, their commitment to good corporate citizenship by structured corporate philanthropy in community programmes. It has noticed a growing trend among MNCs and big family-controlled companies in Hong Kong to shift from ad-hoc charitable grants to making context-based philanthropy or investment. Essentially, the concept of CCI, as a subset of CSR, is synonymous with the context-based corporate philanthropy advocated by Michael Porter, who believes that business can adopt a strategic approach to corporate philanthropy, aligning both social and economic objectives with a view to enhancing its competitive context and long-term business prospects (see the box on Competitive Advantage Of Corporate Philanthropy).

While Community Business indicates that it works with SMEs as well as large companies, corporate citizens on board, around 20 of them, are essentially larger companies in Hong Kong. They include local companies like the MTR Corporation, Standard Chartered Bank (Hong Kong) Ltd, as well as MNCs like Walt Disney Company (Asia Pacific) Ltd. Community Business, an NGO registered as a charity organisation in Hong Kong, sees a business case in CCI, a vital component of a complete CSR strategy. It aims to lead, inspire and support corporate citizen members with a combination of programmes, measuring tools (e.g. CCI audit) and training, so that they can continually improve their positive impact on the wider community.

For its part, the Hong Kong Council of Social Service (HKCSS), an umbrella of non-governmental social service organisations, aims to build a caring community spirit by cultivating corporate citizenship and strategic partnerships between businesses and the social service sector.⁸ The HKCSS notes that many Hong Kong companies have expanded their perspective on corporate citizenship in recent years with enhanced community engagement. Compared to Community Business' more focused CCI approach to espousing CSR, the HKCSS engages a far bigger number of Hong Kong companies in CSR activities through its Caring Company Award scheme. After having satisfied no less than two of the Award's six qualifying criteria⁹, 679 Hong Kong companies that run ethically sound and legally clean businesses became Caring Company awardees in February 2005. While the number of 2005 awardees rose more than 160% from the 2003 number, SME awardees surged by 235% to 328 during the intervening years, with the share of SME awardees increasing from 38% to 48% of the total. According to the results of the 2005 Caring Company Award, more than 80 companies were from the manufacturing and trading sectors, ranging from SMEs to larger companies like sporting goods manufacturing behemoth Yue Yuen Industrial (Holding) Ltd, up more than 60% from the 2004 number -- an illustration of the growing interest among Hong Kong manufacturing and trading companies in CSR practices.

Conclusion

CSR has acquired a growing profile internationally over the past decade. Needless to say, CSR advocates point to a host of benefits arising from socially responsible corporate behaviour. The concern of businesses about risk management and brand reputation is also seen as a prime justification or strong component in the business case for CSR practices.

Whether one agrees with the business case for CSR practices, or conversely the idea that business should merely be concerned with maximising profit or return to shareholders (as attested by Nobel-winning economist Milton Friedman), the fact is that CSR has flourished over the past decade. Many factors have contributed to the greater acceptance of CSR among corporations, and the booming industry that it has helped create (see the section on Factors Influencing CSR Development). It is also a reality that a growing number of customers, investors and employees around the globe make decisions about what to buy, which companies to invest in and work for based on the socially responsible practices of companies and their overall involvement with the wider community. On the other hand, corporations, especially MNCs with international supply chains, do not hesitate to apply supplier codes to their business partners or suppliers which in, one way or another, mirror certain CSR principles or mimic CSR standards on labour and environment.

Hong Kong companies, the majority of which are SMEs, handle an estimate of well over US$400 billion of exports through direct and offshore trade each year.¹⁰ Customers comprising international buyers, MNCs and other trading companies are the single most important group of stakeholders. With the majority of Hong Kong companies having relocated their manufacturing facilities to the mainland, employing directly or indirectly around 10 million workers, another important group of stakeholders is mainland regulators, who lay down the minimum labour and environment conditions with which they need to comply. Invariably, many Hong Kong companies face more demanding compliance and verification requirements from their buyers, in particular reputable MNCs and brand-name holders in developed countries, which may have affiliated themselves with industry associations and/or NGOs in ensuring ethical sourcing and mitigating negative publicity, the consequences of which might have severe repercussions in view of the huge pool of socially responsible investment, estimated to be around US$3 trillion globally.

Against this background, the bulk of Hong Kong manufacturing companies, in their business endeavours, would focus on product standards, labour and environment requirements mandated by mainland regulators and those explicitly required in supplier codes. Larger Hong Kong companies (including some manufacturers) subscribe to the idea that there is a business case for their voluntary CSR activities, which outweighs the human and financial costs incurred. While manufacturing SMEs may not quickly jump on the CSR bandwagon, pressures from business partners over time will be a major driving force for them to eventually carry out production-side related CSR activities that would be considerably above and beyond the legal minimums. Surely, some manufacturing companies could find it beneficial to demonstrate to their overseas partners, proactively, their growing interest in voluntary CSR activities (for instance, participation in some global accreditation or certification schemes), which would be conducive to more constructive partnership relationships in future.

On the whole, the scope for greater voluntary CSR involvement by Hong Kong companies will improve over time in light of efforts by some Hong Kong-based NGOs (such as Business Environment Council, Community Business and the Hong Kong Council of Social Service) and corporate citizens (such as HSBC). If developments over the past few years are any guide, there will be a growing interest among Hong Kong companies to engage in CSR activities, in terms of structured corporate philanthropy, certain forms of community investment, and better codes of conduct and business ethics.

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