The role of political party in firm environmental governance: evidence from China

ABSTRACT

The importance of corporate environmental governance and compliance in China is on a noticeable rise. Meanwhile, as the sole governing entity, the Chinese Communist Party’s involvement in the business landscape has sparked extensive interest. In this paper, we use the difference-in-difference framework and show that the mandatory requirement to establish a Communist Party branch within a firm after 2018 significantly reduces the likelihood of receiving environmental penalties. Furthermore, our findings indicate heterogeneous effects across firms as the results are more pronounced for firms that belong to heavily polluted industries, operate in regions with low air quality, or have CEOs and executives without green experience. Additionally, we provide evidence that green innovation can serve as a strategy for firms to enhance their environmental initiatives, consequently leading to a reduction in the penalties they incur. Finally, we demonstrate that firms with Party branches undergo a simultaneous decrease in government environmental subsidies and a reduction in both air and water pollutant emissions after 2018, a series of parallel outcomes attributable to enhanced governance brought about by the Party branch. Our study offers valuable insights into the considerable influence the government has on corporate decision-making and contributes to the emerging literature on environmental compliance.

KEYWORDS:

• Chinese Communist Party
• environmental governance
• environmental penalty
• green innovation

JEL CLASSIFICATION:

• G30
• G38
• Q50
• Q58

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ See Article 5 in Code of Corporate Governance for Listed Companies (http://www.csrc.gov.cn/csrc_en/c102034/c1372459/1372459/files/P020190415336431477120.pdf), which states that ‘Organizations of the Communist Party of China (the Party) should be established in a listed company in accordance with the Company Law to conduct the Party’s activities. Listed companies should provide necessary conditions for the activities of the Party organizations.’ In addition, the media has reported this significant shift in corporate structure as well. For example, see https://asia.nikkei.com/Business/Companies/China-s-companies-rewrite-rules-to-declare-Communist-Party-ties and https://www.cnbc.com/2023/07/12/communist-cells-influence-companies-in-china-fbi-director.html.

² This is the resolution A/RES/70/1 adopted by the General Assembly on 25 September 2015. It offers a comprehensive policy blueprint where all nations can achieve economic prosperity, social inclusivity, environmental sustainability, and effective governance by 2030.

³ Gore (2019) points out that, unlike Western countries that heavily rely on shareholder rights and market forces to shape corporate behaviour, China intertwines political dimensions into corporate governance and decision-making.

⁴ Details see https://gjzwfw.www.gov.cn/fwmh/zqskfw/xyzgShow.do.

⁵ See https://www.mee.gov.cn/gkml/hbb/bgth/200910/t20091022_174891.htm.

⁶ See https://sites.wustl.edu/acag/datasets/surface-pm2–5/.