This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
This chapter gives the reader an overview on the literature and research on Corporate Social Responsibility (CSR) and Corporate Governance (CG). Its main purpose is to give the reader an insight in contemporary literature in the field and to compare it with the empirical work. The literature review is presented in three main sections. The first section traces the roots and presents an overview on the concept and theories of CSR and CG. The second section gives an insight on the state of CSR and CG in Mauritius. Finally, a review on the past studies on the relationship between CSR and CG is made. The third part also treats the hypotheses development of CSR disclosure and CG.
Concepts and theories of CSR
Corporate Social Responsibility has been widely defined by different authors over time. In this subsection the growth, development and some interesting definitions & theories is set out to enable an understanding of the CSR concept.
Historical evolution of CSR
The origin of CSR can be traced back to the twentieth century in the United States of America. As Carroll (1999) pointed out, the evolution of CSR has been hit by three important eras: the first era has been the entrepreneurial one where American businessmen were interested only with their profit and were making an abuse of their power as a result of the government had to pass laws to enforce against the anti-social and anti-competitive practices of businessmen. The government argued that businessmen have to play a greater role towards the society and not just maximise profit. Then came the depression era of 1929-1930s where large organisations ruled over the economy of USA and the government had to ratified laws and regulations to safeguard small businesses and investors. The social era of 1960s was the third turning point, whereby the government closely administered the activities of companies and clearly defined to whom the business is responsible and accountable to. These eras experienced the starting point of a radical shift in business focus from the company itself to people conscience (Bowen, 1953).
Nowadays, with the increase in public awareness on environmental and sustainability issues; CSR has found a new field of opening. With the proliferation of CSR and elaboration of theories; it is now that CSR plays its core role such that more and more companies are making voluntary corporate social disclosures.
Definition of CSR
Essentially, the idea of CSR is the way business is operated whereby organisations have a duty towards the community at large. The concern for CSR is explained by the fact that a company do not operate in isolation. Rather, it is dependent on major actors of the society- the environment, customers, and suppliers to name few. Thus, if businesses want to ensure their survival in the long-run, they should consider the interest of the wider society above their own interest The first definition of CSR was given by Bowen (1953), the father of CSR who argued that businessmen should act in the best interest of the society as a whole. Bowen's general argument is that a business is an instrument of society thus, it must consider social interest.
Afterwards, there have been many definitions of CSR. According to McComb (2002), CSR is the notion that firms look far ahead profit to the larger role in society. CSR is also linking business operation with employee relations, ethical values, transparency, conformity with legal requirements and esteem for the society as a whole.
The European Union (EU) defined CSR in the following terms "a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis". In other words, they should try to merge economic prosperity with social contribution and environmental integrity.
A contemporary definition of CSR includes the Triple Bottom Line concept which the EU Greenbook defined in the words to combine social and environmental concerns while undertaking business activities in inter-relation with the various stakeholders (such as shareholders, clients, employees, pressure groups, communities, etc) on a voluntary basis (European Commission, 2005). That is, companies should aim at achieving social, environmental and economic sustainability altogether as it is the way forward for sustainable survival. The term CSR is also connected with the concept of sustainability which the UN report Our Common Future termed as "meeting the needs of the present without compromising the ability of future generations to meet their own needs" (Brundtland, 1987). Today, CSR is an umbrella that encompasses political, ethical, social, environmental, economical and cultural factors.
CSR is the responsibility of business to play a part to sustainable economic development while working with workers, their families, the local community and the society at large to enhance their standard of living (World Business Council, 2005). Thus, it can be argued that CSR is the commitment of businessmen through their corporate policies and actions.
McWilliams and Siegel (2001:117), termed CSR as actions that seem to foster some social good afar the concerns of the firm and that which is imposed by law. In the same line, Johnson and Scholes (2002) defined CSR as the ways in which organisations surpass their least duty towards stakeholders as specified through regulations and corporate governance. According to these definitions, CSR activities of firms should go beyond the law and exceed their minimum obligations. Thus, a company that meets environmental legal requirements in terms of CO2 emissions is not necessarily a socially responsible corporation because it is merely abiding by law. If, however, it lowers its emission well below that required by law then it can be said to be socially responsible.
In light of the recent corporate scandals which have reduced public trust in corporations and changed social expectations, coupled with globalisation and climate change issues climbing high on corporate agendas; CSR has now become the way forward for business success- by providing corporate strategy and direction for day-to-day operation. Phases used in the report of the World Business Council for Sustainable Development on Corporate Social Responsibility such as 'business benefit', 'control risks', 'improving reputation', 'identify market opportunities' and 'maintaining public support' give a clear view of the important place that CSR plays in companies (WBCSD, 1999).
The proliferation of CSR concept has given way for a change in the traditional businessmen perspectives of profit maximisation as was pointed out by Friedman (1970), that the sole social responsibility of companies is to maximise profit. Companies are now aware of the wider aim of social responsibility which is to continuously improve the quality of life while safeguarding the profitability of the corporation for its stakeholders (Hopkins, 2003).
The communication of companies includes all the medium and tools used to portray themselves and their performance to particular interest groups within the society and to society at large in order to enable an interaction (Bruhns, 2005, p.2). The motive of such disclosures is to gain public trust and build a positive image and reputation. In the past, non financial reports did not paid much attention to businessmen as they were persuaded that their success lied only on profits and were interested only with the financial reports. It is in the late industrialised era of the 1990s, when the push of industrialisation increased the awareness of the limits to growth and made environmental issues prominent, that non financial reports gained the interest of businessmen.
CSR reporting is the process of communicating to the public the company's interaction with the environment, the community, its employees, its customers and the scarce resources while undertaking its activities. It provides a balance with the financial data in such a way that it helps shape the overall performance of a company.
Gray et al. (1987), defined CSR reporting as the process of communicating to particular target groups and the society at large the direct impact that an organisation's economic activities have on the society and environment. According to Hackston and Milne (1996), it is the provision of both financial and non-financial data on an organisation's contact with its natural and social environment, as disclose in annual reports or separate social reports. From these definitions, it can be seen that CSR is an extension of the tradition role of companies of making money for shareholders. Apart from shareholders, companies are accountable to a whole range of stakeholders.
Hackston and Milne (1996), in their definition pointed out that CSR disclosure includes details on five themes- physical environment, energy, human resource, products and community involvement matters. A number of studies  have been carried out on CSR in different countries. These studies showed that firms all around the globe use different items to disclose their CSR activities. CSR disclosures in annual report is the most common form of disclosing as evidenced by Adams et al.(1998) studies in Germany, France, Switzerland and UK firms. Based on these findings and the justification of Kent and Chan (2003) on the use of annual report, my study will focus on annual report as the main source of CSR in Mauritius.
Theoretical rationale behind CSR
Over the years, several theories have developed to explain the reasons behind CSR reporting, which the most common are: social contract theory, legitimacy theory, stakeholder theory.
Social contract Theory
Gray, Owen and Adams (1996) described society as a 'social contract' between the members which make a society and the society itself. The social contract theory emerged from the idea that the moment a company is incorporated, a social person is born and a social contact is established which entrails social interaction. This contract necessitates a condition which is best for all people. In other words, given that a company operates in the society, it has a contract with the society as a result of which it must best serve this social contract if it wants to secure its survival in the long run. That is, businessmen have an obligation to honor a business's contracts with its various stakeholders; responsibility not to involve in frauds, thefts, corruption, deception to name few; and to satisfy the claim made to the community (Younkins, 1948). The social contract theory can thus be said to have a link to the rationale behind CSR.
It is further supported by Deegan and Rankin (1996) who argued that an infringement of the social contract, that is, the inability to meet societal needs and expectations, runs the risk of a revocation of the contract. Under the social contract theory, a company gets a license to operate in the society and those who fail to favor this social contract lose the license and the right to use natural resources, employ workers which threatens their sustainable development.
The social contract theory to a large extent justifies Human Rights in the sense that, a company as a person has the same standing point as a natural person in the eyes of law. From this, it flows that companies have the moral and legal obligation to respect, avoid abuse and promote human rights recognized in law within their scope of activities (United Nations, 2006). Therefore, the social contract theory which is closely linked to Human rights explains why companies indulge in CSR activities.
Moreover, the use of the social contract theory to explain the relevance of CSR is illustrated by Edward Younkins in his say, "The Corporation, a possession of the community rather than of individuals, holds a social contract with the society from which it derives its power and, therefore, serves a constellation of interests". This implies that companies owe their existence to society and are accountable to the public as a result of which, they should behave in a socially responsible manner to best serve the common good.
Another theory closely related to the social contract theory which is useful to explain the relevance of CSR is the legitimacy theory.
Suchman (1995), defined legitimacy as a generalised view or notion that the activities of an organisation are pleasant, good, wanted and in line with the norms, beliefs and expectations of the society. The legitimacy theory is in fact an extension of the social contract theory. It stems from the idea that society gives an organisation a license to operate and consequently, it has to operate within the bounds set by the society. It has to adopt a socially responsible approach to serve the interest of the society. Given that companies use social information to show their involvement in CSR activities and to build a good corporate image. Society can hence use this social information to evaluate the legitimacy of an organisation by considering how far they meet the social norms and values (Parsons, 1956).
From the above, it seems that companies have an obligation to indulge in socially responsible actions in order to honor the social contract and guarantee their survival. And the provision of social information helps legitimate the corporate actions thereby, showing the significance of CSR reporting.
A widely debated theory which is related to the issue of CSR is the stakeholder theory which posits that the success of a company depends on its ability to meet the demands of its various stakeholders. Taking Freeman (1984, p.25) classical definition of a stakeholder "any group or individual who can affect or is affected by the achievement of an organisation's objectives". Clearly, a company has various stakeholders which include: shareholders who invest their money in businesses; employees invest their time and intellectual capital; customers invest their trust; government and communities provide infrastructure and market and suppliers provide stock of raw materials (Graves, waddock and Kelly, 2001). Thus, it can be seen that stakeholders play an important role of providing supply of needed resources which are crucial to the day-to -day operation of an organisation. As such, an organisation needs to support its' stakeholders by complying with their norms (Maignan and Ferrel, 2004). It has to undertake actions that best fit the interest of the various stakeholders. From this line of thought, it can be said that CSR has the main task of specifying the responsibility to meet or exceed stakeholder norms thereby shaping pleasant organisational behaviour (Lichtenstein et al., 2004).
To add to it, given that various stakeholders have an interest in an enterprise, the company is likely to provide social information to them (Blanchard, 1998).
The stakeholder theory just as the legitimacy theory, considers the organisation as part of the wider social system but under this approach, the society is mainly the various stakeholders- shareholders, employees, customers, suppliers and the community. As such, CSR is justified under the stakeholder theory as a duty to act in a socially responsible manner towards the various stakeholders.
Deegan et al. (2000) adopted a different approach to the theory: managerial and ethical stakeholder theory. Under the managerial approach, it is argued that organisations should respond to individuals and groups who have a direct impact on the success and survival of the firm (O'Dwyer, 2003). That is, the responsibility of business is not the society at large but to the powerful stakeholders. The ethical approach on the other hand, posits that all stakeholders are stakeholders irrespective of direct, indirect, primary or secondary and have a stake in an enterprise thus, all stakeholders have the right to be treated equally (Deegan et al., 2000). Both theories justifies the concept of CSR in the sense that the most common way that companies communicate with their stakeholders is through the provision of social information.
On the whole one can say that the above mentioned theories explain the motivation for disclosing CSR information. For this research, an investigation of the Mauritian listed companies CSR disclosures will be made base on Gray et al. (1996) assumption that organisations have a moral duty to make corporate social disclosures to its various stakeholders beyond that imposed by law.
Corporate Governance and CSR
Another concept which is relevant to the issue is Corporate Governance. Before continuing with the analysis let us first jump to the definition of and reasons behind Corporate Governance.
Corporate Governance practices root back to the eighteen century mainly because of the principle-agent problem in corporations. The basic problem was that corporations were owned by shareholders but managed by management thus giving rise to a separation of ownership and control and the resulting agency problems. That is, management were acting as an agent of the owner and given that they had the control of the business in their hands, they were concerned mainly with their own interest. Thus, they maximised their own benefits rather than that of the owner.
A system of corporate governance emerged as a result of this, under which the activities of management are administered and controlled to reduce agency costs and ensure that they are in line with the interest of the absentee owners (Messier et al., 2008). According to the Cadbury report, CG is "the system by which companies are directed and controlled" (Cadbury, 2000). The role of CG is to improve laws and regulations upon which companies operate; protect owners' right; balance the interests of all stakeholders and foremost promote ethics, transparency and fairness in all transactions (Page, 2005).
Various scholars perceive the concept of CG as double edge- the narrow and broader view of CG. What is important for this study is the broader view of CG which is concerned with an entity's responsibility towards the various stakeholders who directly or indirectly contribute to its success (MacMillan et al., 2004). This view is in line with the stakeholder theory of CSR. As such, it can be seen that CG and CSR are closely linked if not the same.
CG and CSR are related issue in that both emphasises on a firm's commitment to its stakeholders and contact with the society at large (Jamali et al., 2008). Also, according to Jones and Thomas (1995), CSR is a tool of CG which enables companies to meet their obligations towards their employees, suppliers, customers and communities. CSR as a dimension of CG is further illustrated through CG attributes which include board structure, stewardship, capital structure, strategic leadership as well as social responsibility.
Another link which is important is between the legitimacy theory of CSR and CG. Both are ingredients for creating sustainable value which is crucial to the acceptance and survival of an enterprise (Van den Berghe and Louche, 2005). On the one hand, good governance principles bring together the interests of all stakeholders; enhance public confidence which in turn improve firm competitive position and performance (Jamali et al., 2008). Similarly, CSR brings a company near to its stakeholders thereby gaining public trust, attractiveness and long lasting benefits.
The links can be illustrated as follows:
Connection: both focus on an entity's commitment to its stakeholders.
Broader view of CG: an entity's responsibility towards its various stakeholders (MacMiller et al., 2005)
Stakeholder Theory: companies are made up of a web of stakeholders and have an obligation towards them (Freeman, 1984)
CG principle: reconcile interests of all stakeholders and improve firm competitiveness
Connection: both boost a firm's relationship with its stakeholders to improve performance.
Legitimacy Theory: companies exist because of the society as such they have a responsibility to meet society's expectation with back wash long lasting benefits
Given that there is a clear link between CSR and CG, the Mauritian listed companies provide a floor for examining CSR and CG inter-relationships in practice. Moving to the next section, a brief background on CSR and CG practices in Mauritius is made.
The fact that, there exists a connection between CG and CSR, it is obvious that CG attributes such as board size, independent directors, ownership concentration to name few directly influence CSR activities and disclosures as various studies  have proved.
Based on empirical studies, 10 hypotheses are developed. Five corporate governance variables are examined to find if they have a correlation with CSR disclosures. Firm size, profitability, industry, ownership structure and leverage are included as control variables.
One of the fundamental of CG is board size which is directly related to the board's effectiveness. Generally, there is no recommended number of board members though; it is argued that a board should not be too small or too big. While it is evidenced by various studies (Lipton and Lorsh (1992); Eisenberg et al. (1998); Raheja (2003) that small boards alleviate agency problem between management and owners, Jessen (1993) found that large boards give rise to disagreements resulting in less valuable interaction, management and decision making. Poor coordination in interaction and decision making in turn gives rise to low quality disclosures (Said et al., 2009).