The Sichuan Earthquake and the Changing Landscape of CSR in ChinaPublished: April 20, 2009 in Knowledge@Wharton
Multinational corporations have embraced the concept of corporate social responsibility (CSR) and have introduced global policies to ensure best practices in every market. In China, however, firms that had operated under the perception that international CSR doctrines could be simply applied cookie-cutter style received a rude wake-up call in the aftermath of the May 12, 2008, Sichuan earthquake.
This massive earthquake, measuring 7.9 on the Richter scale, not only left 70,000 people dead and five million homeless, but also forever changed the landscape of CSR in China. The scale and timeliness of aid response by both domestic and multi-national corporations crafted Chinese attitudes towards companies to an unexpected degree. Firms doing business in China can learn from the public's reaction following the disaster, and can incorporate tailored CSR principles into their core strategy for the Chinese market.
In the days and weeks following the Sichuan earthquake, many MNCs pursued a global CSR policy in line with their international standard. While some multinationals pledged cash, many others pledged a combination of cash, equipment and services. Domestic firms, by all accounts, out-donated multinationals. By May 20, Chinese companies had donated more than US$645 million in cash and goods. The popular perception was that international firms' relief contributions not only did not match those of local Chinese companies in terms of scale or timeliness, but also were not commensurate with their presence in the Chinese market. Chinese consumers quickly seized upon this disparity by openly attacking major MNCs, calling for a boycott of their products and publicly condemning companies that donated too little. For multinational companies used to operating under a global CSR framework, the ensuing consumer backlash came as a shock.
The Chinese public soon gave these affected MNCs the nickname of "international iron roosters." The term refers to a bird that will not give up a single feather, and its usage highlights the perceived stinginess of these international firms. The list of "iron roosters," first appearing on May 14 included the following notable MNCs: Samsung, Nokia, Coca Cola, McDonald's and KFC. In the face of such negative publicity, many MNCs responded quickly. Nokia increased donations on May 17 from 3 million RMB to 10 million RMB (US$430,000 million to US$1.43 million) and Coca Cola raised donations from 5 million RMB to 17 million RMB (US$710,000 to US$2.4 million). Despite these additional donations, "iron-rooster" MNCs continued to face angry consumers throughout China, resulting in severe public backlash, including protests at several McDonald's and blockades at KFCs throughout Sichuan province and the rest of China.
On May 27, the affected multinationals met with the Chinese Ministry of Commerce (MOC) to discuss response efforts to both the earthquake and the publicity aftermath. More than 40 companies attended the meeting, originally intended to include only 10. To address the lack of transparency related to contributions, the U.S.-China Business Council began recording donations of its member companies -- which were sent to the Ministry of Foreign Affairs (MFA), the MOC, and the media -- and published them on its official website.
Though sensing the need to move quickly to avoid further negative publicity, many MNCs were hampered in their movements by overseas corporate offices that simply referred to corporate global CSR policies. Nokia, for example, donated 3 million RMB (US$430,000) and 5,000 mobile phones immediately after the quake, yet ranked second on the initial "iron-rooster" list. With the backlash intensifying, the vice president of the Chinese office of Nokia, Xiao Jieyun, flew to Finland to request additional donations from the home office. Management in Finland, however, noted that the company's contribution was equal to those following similar disasters in Indonesia and Myanmar, and questioned why China should be an exception. Only after showing the "iron rooster" list to home officials and describing the severity of the situation in China did Xiao gain approval to increase company contributions.
Local firms soon found that CSR crises in China do not depend on the nationality of the firm. Despite its positive image in a notoriously corrupt industry, VanKe, China's largest real estate development firm, met with immediate criticism from netizens (Internet users) in response to chairman Wang Shi's initial pledge of only two million RMB (US$290,000) and his insistence that company employees donate no more than 10 RMB each (US$1.40). Wang apologized with a second donation of 100 million RMB (US$14.3 million) on June 6, admitting his comments and actions had affected the brand image and share price negatively. He committed not only to elect a spokesman to avoid similar situations in the future, but also to "resign immediately, if VanKe's performance suffers because of my personal comments."
On the other hand, firms that acted quickly and generously enjoyed an extremely favorable public response. Wang Lao Ji, an herbal tea soft drink, quickly became one of China's most well-known and highly esteemed brands after its parent company, JDB, donated 100 million RMB on May 18. After the news was released, enthusiastic netizens encouraged others to purchase the drink, comparing Wang Lao Ji's generosity to that of rivals' miserliness (e.g., Coke and Pepsi). By May 24, demand for Wang Lao Ji was so high that JDB struggled to fill the shelves of China's groceries and restaurants.
In general, domestic firms that contributed generously were singled out by Chinese netizens, who encouraged their compatriots to use only these brands. Local firms and their contributions were glorified in the following widely spread message, proliferated through text messaging and online BBS (electronic bulletin boards) postings: "In the future, drink Wanglaoji (100 million RMB), save your money at the Industrial and Commerce Bank (87.26 million RMB) ... drive Geely cars (10 million RMB)."
The response described above was fueled in large part by feelings of nationalism. According to Scott Kronick, president of Ogilvy PR China, "The whole event was indicative of a sort of social contract that Chinese consumers have made with corporations. They look to the business community in addition to the government for support in times of need." As foreign companies see profits from China grow, Chinese locals demand an increasing obligation to Chinese society. The perceived failure of multinationals to respond quickly to the disaster perpetuated the belief that foreign companies exploit China without giving back.
The unique nature of CSR in China has cultural roots. Historically, China has been shaped by Confucianism, which values family first before support for the wider community. In addition, the communist ethos and state ownership of resources from the mid-20th century prevented accumulation of wealth and, to some extent, reduced the need for private philanthropy. Hence, Western philanthropic traditions, from volunteerism to philanthropic magnates, have not been as common in China. Currently, no meaningful charitable sector exists to effectively mobilize and support disaster relief efforts in times of crisis. Therefore, aid and relief efforts are coordinated primarily by the government and jointly funded by the public and private sector, suggesting that the corporate sector plays a significant role in modern day Chinese philanthropy. Moreover, as the Confucian ideal of righteousness over profit guides how the public views donations, companies donating too little relative to their means are seen to value profits over morality.
CSR initiatives in China are also affected by word-of-mouth to a greater extent than in other markets, and this effect has been magnified as Internet use has rapidly increased. As Internet public relations firm CIC's founder and chairman Sam Flemming notes, "the world wide web now serves essentially as an amplifier, vastly increasing the reach and influence of the word-of-mouth conversations on brands that previously took place offline. The migration online has not only increased the potential readership of comments on brands to some 250 million Chinese netizens; these comments are also now archived, so that they are rarely forgotten and can be easily referenced again later." Nonetheless, the spread of the Internet is also true outside of China. What is unique to the country, however, is that there is a notable lack of a trusted traditional media to which Chinese consumers can turn for reliable information. Therefore, the role of electronic bulletin boards in China has taken on astounding importance, with users more numerous and more active than in other countries. For companies looking to develop their CSR policies in China, they have to be very careful about how they market their initiatives online.
China's important young market, a cultural propensity to link CSR and company image, and a highly vocal and active online population make CSR critical in China. Accordingly, MNCs may need to rethink their approach in China, where CSR and company performance may be more closely aligned than in other countries. MNCs need to recognize that a thoughtfully developed CSR strategy is not merely conducive to doing business in China: It's a precondition. Three key factors are crucial to formulating an appropriate CSR strategy in China.
The first element involves organizational structure and processes. CSR requires creating the right escalation mechanisms and organizational reporting lines. Many MNCs in China were hamstrung by bureaucratic red tape and simply could not react as quickly as many local companies. Samsung, for instance, donated 30M RMB (USS4.3 million) to the Red Cross within three days of the earthquake -- by which time they were already being publicly disparaged as an "iron rooster." MNCs need to have well-established escalation mechanisms as a core part of their CSR strategy, perhaps with a set of decision criteria to determine whether a particular event can be rushed to senior management for urgent consideration.
Second, MNCs must understand the cultural context. Companies must realize that they are expected to give, and failure to do so can result in serious public relations damage. Due to the necessity of prompt action in times of crisis, it may be prudent to have set aside a predetermined budget for CSR issues. Moreover, companies should expect to make their donations public. As shown above, companies that donated discreetly risked being mistakenly accused of not donating. Some MNCs took to posting a live tally of their employee donations on their websites.
Last, as Internet word-of-mouth plays such an important role in China, companies should pursue a highly active online brand management strategy, including tracking online opinion and working to stem any PR issues before they become disasters. As Flemming notes: "Tracking online opinion not only allows a company to react quickly when an online public relations crisis is brewing -- such as Carrefour in the recent Sichuan earthquake -- but also helps the company identify key online stakeholders. These stakeholders, who are sometimes simply fans of the brand, can be very helpful in managing the company's brand online." Online PR companies have been working with both multinationals and Chinese firms to avoid PR disasters and harness the power of the Internet, and are a good option for companies doing business in China where online image management is of critical importance.
Corporations have been forced to reevaluate their assumptions of how to do business in China. Facing the force of the public's reaction after the Sichuan earthquake, company executives need to equip themselves with a well thought-out strategy for confronting CSR issues, as well as a policy to harness the collective power of netizens. In implementing these measures, MNCs may find it beneficial not only to allocate a greater amount of their marketing budget to CSR efforts, but also, given the importance of first-mover advantages, to allow local managers more autonomy to act quickly in response to future situations. As Scott Kronick remarks: "CSR is in many ways the future of public relations [in China]. Companies would do well to acknowledge this new reality."
This article was written by Ariel McGinnis, James Pellegrin, Yin Shum, Jason Teo, and Judy Wu, members of the Lauder Class of 2010.