Party Leadership in Corporate Governance—Perspective of Corporate Social Responsibility

This paper shows, theoretically and empirically, that the organizations of the Communist Party of China (CPC) play an important role in improving corporate social responsibilities (CSR). In the baseline model, the objective of enterprises is to maximize firm value, while the objective of the CPC is to maximize social welfare. Consequently, the free market system without the CPC's guidance leads to inefficient CSR commitment, and the leadership of the CPC could help to improve CSR by incorporating social welfare into the firm's objective function. The baseline model also reveals that the positive effect of the leadership of the CPC on CSR is more pronounced when the firm itself cares less about social welfare initiatively. Then in the extension model, considering the information asymmetry between the Central Committee of Party (CCP) and the enterprise-level committees of the party (ECP), we show that in an economy with the CCP only or the ECP only, the CSR cannot reach the social optimum either. Only when the CCP provides information on overall CSR demand, the ECP provide enterprise-specific guidance according to the CCP's information, and enterprises manage production activities under the ECP's guidance, can optimal CSR be achieved. The empirical results among A-share public firms provide support to the theoretical predictions. Overall, our paper highlights the important role played by the CPC in corporate governance.