Economic Shifts in Michigan and China Dictate Need for Socially Responsible Businesses

Amy K. Bergstraesser, Vol. 36 Associate Editor

Introduction The experience of large economic shifts often sparks the need for more than some governments can or are willing to deal with. Social welfare systems deteriorate and the gap between the rich and the poor grows, causing concern and strife. Recently, businesses have been called on to pick up the pieces. Eastern Michigan, on the brink of recovery from a huge economic downturn, has looked to smaller-scale grassroots ways of revitalizing the economy. By encouraging social entrepreneurs and their businesses to not only launch in “Pure Michigan,” but also to contribute to local social issues, Michiganders hope to slowly rejuvenate the struggling eastern half of the state. On the other side of the globe, China has struggled with many of the same social problems, including high levels of poverty, after the country began shifting from a state-run economic system to a private system aimed at economic growth.[i] To address these problems, China has taken social entrepreneurship to a new level, mandating corporate social responsibility. The following is a comparative piece about how Michigan and China, both dealing with their own unique economic crises, have encouraged and even mandated social responsibility. Social Entrepreneurship in Eastern Michigan Eastern Michigan is in the midst of an array of social issues – there are high levels of unemployment, poverty, homelessness, crime, and illiteracy.[ii] American businesses often say that the innovative, wealth-driven entrepreneur is the hero of the current generation, but eastern Michigan needs more than just the average entrepreneur to solve more delicate, deep-rooted problems.[iii] Eastern Michigan has begun to cultivate a new type of entrepreneur: one that is not only innovative, but also takes on local socially responsibly.[iv] Branded the “social enterprise,” this new breed of business is poised to play a significant role in revitalizing the state. To encourage and fund social entrepreneurship, Michigan has united Universities and impact investors. Wayne State University, located in Detroit, encourages social enterprise with its Blackstone LaunchPad business incubator.[v] This resource functions as a comprehensive start-up business aid for university students.[vi] In addition to workshops, networking events, consulting sessions, and brick-and-mortar business locations, Blackstone LaunchPad encourages young entrepreneurs to become actively involved in Metro Detroit’s social issues.[vii] New socially-conscious businesses can then find monetary support at the University of Michigan’s Social Venture Fund.[viii] This student-run capital fund, the first of its kind in the United States, has a triple bottom line – profit, environment, and social impact – and invests in a variety of areas from health to urban revitalization.[ix] With the capacity to invest $250,000 per company (the money comes from the university, educational foundations, and high-net-worth individuals), the Fund also offers assistance with business planning and organizational skills.[x] Additionally, social entrepreneurs can draw funding from social impact investments. Social impact investing, as defined by the G7 Social Impact Investment Task Force, is financing businesses “that intentionally target specific social objectives along with a financial return and measure the achievement of both.”[xi] The investment seeks a blended return, combining social impact with an often smaller-than-market-rate return.[xii] Many are beginning to realize that this type of investing, although still in its infancy,[xiii] is a worthy third option to business investments or charitable donations.[xiv] Predictions from a recent G7 Task Force policy paper indicate that, at its current growth rate, social impact investing could soon become a force capable of solving several of the world’s hardest problems.[xv] In Michigan, increasing the capital available to fund social entrepreneurship is necessary and could be provided by social impact investing.[xvi] Michigan only has about $9.8 billion in philanthropic donations but needs tens of billions of dollars.[xvii] On the other hand, Michigan households have $880 billion in investable assets that could be tapped for social investing.[xviii] Some Michigan businesses have already pioneered social enterprises, providing a valuable model for future social entrepreneurs. Zingerman’s, an Ann Arbor sandwich shop turned group of local businesses, exercises an employee-centered approach to achieve social good.[xix] Using a unique method developed over 30 years, employees are involved in business and restaurant decisions, provided higher than average wages and benefits, paid for taking in-house professional classes, and encouraged to develop business plans for unique branches of Zingerman’s.[xx] Another business, En Garde Detroit, provides lessons in fencing at the same time as teaching lessons in financial literacy, health, and nutrition.[xxi] The Empowerment Project employs formerly homeless women to make coats/sleeping bags for the 30,000 homeless Detroiters.[xxii] As one social entrepreneur expressed hopefully, Detroit is developing into the “Silicon Valley of social entrepreneurship.”[xxiii] Corporate Social Responsibility in China Faced with many of the same issues, poverty and a dearth of adequate philanthropic donations being two of the largest, the Chinese government (PRC) has decided to address the situation with large-scale mandatory social entrepreneurship.[xxiv] Historically, the Confucian-influenced communal structure of Chinese society led to a sense of business responsibility for large-scale charitable works and social services.[xxv] But, after the Communist Party rose to power, public philanthropic volunteerism became unnecessary; the government took responsibility for social aspects of society. [xxvi] In the 1990s, multinational corporations (MNCs) operating in China were severely criticized for labor, safety, and human rights abuses, so social responsibility in business was reintroduced.[xxvii] Despite this, there remains a great need for social responsibility and organizations (like the Red Cross) that can mobilize and bring businesses together in times of crisis.[xxviii] Like eastern Michigan, China is currently shifting economically. In 1978, the PRC started market reforms designed to reorient China from a centrally-planned to a market-based economy.[xxix] This shift spawned rapid economic and social development and GDP growth averaging ten percent per year, establishing China as the second largest world economy.[xxx] On the other hand, China now has the second largest number of poor in the world, and 98.99 million people still live under the PRC national poverty line.[xxxi] High levels of inequality, urbanization, environmental change, and resulting social disruption have germinated from the rapid economic growth.[xxxii] In addition, social welfare services previously provided by the PRC are now left to the private sector, which has yet to pick up that burden.[xxxiii] Instead, the past decade has been characterized by corporate recklessness and social irresponsibility.[xxxiv] Following the 2008 Sichuan earthquake that left 70,000 dead and 5,000,000 homeless, the public discovered that MNCs did not provide aid commensurate with their presence in the Chinese market and some local firms even hampered aid.[xxxv] Similar more recent situations, like the 2013 Qingdao oil pipeline explosion, gave rise to safety concerns and public outcry that corporate greed and financial excesses caused the lack of adequate remedies and aid.[xxxvi] Further, these incidents sparked public and government discourse about the corporate-consumer social contract.[xxxvii] To address recent public outcry and unrest regarding economic changes and corporate malfeasance, the PRC began mandatory corporate social responsibility (CSR).[xxxviii] CSR is a business model, much like social entrepreneurship, where businesses pursue social goals in addition to profit maximization.[xxxix] These social goals, which are traditionally voluntary in the United States, often include ethical behavior, contribution to economic development, improving employee quality of life, and community responsibility.[xl] The PRC started transitioning to mandatory CSR by enhancing labor rights, business ethics, social responsibility, and government supervision with the 1994 Company Law.[xli] This law created a mandatory double bottom line, where profits and morality were pari passu and companies were forced to implement responsible business practices.[xlii] Furthering this goal, in 2005 Premier Hu Jintau “publically stated that China would implement a new policy vision of building a ‘harmonious society.’”[xliii] In 2006, Chinese stock exchanges created CSR disclosure initiatives, and in 2008, the PRC implemented a slew of CSR laws and initiatives including the “Labour Contract Law,” “Instructions for CSR in State-Owned Enterprises,” and the Chinese Academy of International Trade and Economic Cooperation “Guidelines for CSR Compliance for Foreign-Invested Enterprises.”[xliv] Finally, the PRC’s 12^th Five-Year Plan (2011-2015) highlights, among other things, a need to expand social protection.[xlv] The World Bank is helping support China’s goal of a “harmonious society” and the Five-Year Plan by promoting increased access to health services and social protection.[xlvi] As of June 2014, the Bank had lent about $54 billion to China for these purposes.[xlvii] Conclusion Eastern Michigan and China have each looked to private actors to help implement social change after experiencing large economic changes. Shifting from a centrally planned to a market-based economy had many social repercussions[xlviii] and, according to the World Bank, “[s]ignificant policy adjustments are required in order for China’s growth to be sustainable.”[xlix] In Detroit, the aftermath of the recession and the American auto industry collapse led to large amounts of poverty. Both locations are attempting to fill the philanthropic void with social entrepreneurship. Social issues are the basis for law – China responded to this principal with vigor, mandating corporate social responsibility, and eastern Michigan responded with grassroots startup social enterprises. At the same time, changing economics in both regions provide a base for the expansion of the legal profession. In China, lawyers will be necessary to help businesses navigate the new regulations. Relatively unexplored by U.S. law and regulatory regimes, social enterprise could bring on the next surge of legal jobs. Not only will these social enterprises need help with entity formation, the U.S. government will also invariably need attorneys to draft legislation to address issues emerging from the burgeoning field.

[i] See Afra Afsharipour & Shruti Rana, The Emergence of New Social Responsibility Regimes in China and India, 14 U.C. Davis Bus. L.J. 175, 195 (2013). [ii] See Sarah Schmid, Could Detroit Become the Silicon Valley of Social Entreprenuership?, Xconomy 1, 1 (Nov. 11, 2011), http://www.xconomy.com/detroit/2011/11/07/could-detroit-become-the-silicon-valley-of-social-entrepreneurship/. [iii] See Casey Gerald, Our Superman in Detroit: How a Social Entrepreneur Convinced us That the Motor City Will Rise Again, The Huffington Post Blog (Oct. 5, 2013, 5:12 AM), http://www.huffingtonpost.com/casey-gerald-/our-superman-in-detroit-h_b_3705239.html. [iv] See Schmid, supra note 2, at 1. [v] See id. [vi] See id. [vii] See id. at 2. [viii] See id. at 1. [ix] See id. [x] See id. [xi] Carla Javits, Five Reasons to Prioritize Social Impact Investing, The Huffington Post Blog (Oct. 14, 2014, 5:59 AM), http://www.huffingtonpost.com/carla-javits/five-reasons-to-prioritiz_b_5966294.html. [xii] See Impact Investing 101, Mission Throttle, http://missionthrottle.com/impact-investing-101/ (last visited March 27, 2015). [xiii] See Javits, supra note 11. [xiv] See Impact Investing 101, supra note 12. [xv] See Javits, supra note 11. [xvi] See id. [xvii] See Impact Investing 101, supra note 12. [xviii] See id. [xix] See Jennifer Conlin, Pastrami and Partnership, to Go, N.Y. Times, Jul. 6, 2014, at BU1, available at http://www.nytimes.com/2014/07/06/business/at-zingermans-pastrami-and-partnership-to-go.html. [xx] See id. [xxi] See Schmid, supra note 2, at 2. [xxii] See id. [xxiii] Id. [xxiv] See Ariel McGinnis et al., The Sichuan Earthquake and the Changing Landscape of CSR in China, KNOWLEDGE@WHARTON (Apr. 20, 2009), http://knowledge.wharton.upenn.edu/article/the-sichuan-earthquake-and-the-changing-landscape-of-csr-in-china. [xxv] See Afsharipour, supra note 1, at 193; see also McGinnis, supra note 24. [xxvi] See McGinnis, supra note 24. [xxvii] See Afsharipour, supra note 1, at 197. [xxviii] See McGinnis, supra note 24. [xxix] China Overview, The World Bank, http://www.worldbank.org/en/country/china/overview (last visited March 27, 2015). [xxx] See id. [xxxi] See id. [xxxii] See id.; see also Afsharipour, supra note 1, at 195. [xxxiii] See Afsharipour, supra note 1, at 196. [xxxiv] See id. at 177. [xxxv] See McGinnis, supra note 24. [xxxvi] See Afsharipour, supra note 1, at 176-177. [xxxvii] See McGinnis, supra note 24. [xxxviii] See Afsharipour, supra note 1, at 175, 195. [xxxix] See id. at 178. [xl] See id. at 179. [xli] See id. at 178. [xlii] See id. at 201-02. [xliii] Id. at 199. [xliv] See id. at 203-204. [xlv] See China Overview, supra note 29. [xlvi] See id. [xlvii] See id. [xlviii] See Afsharipour, supra note 1, at 195. [xlix] See China Overview, supra note 29.