Corporate Governance And Corporate Social Responsibility Accounting Essay


CG and CSR

Corporations have shown an growing level of awareness in Corporate Governance and Corporate Social Responsibility in the recent years. Many authors have claim that CSR is an extended model of CG and therefore in order to be successful in its CSR program, a firm must be successful in its CG. While CG deals with the internal aspects of handling a company, like accounting guidelines and business ethics, CSR complement this by specifically dealing with the external aspects of doing business like the environment and the public. From the research they carried out, Dima Jamali, Asem M. Safieddine, and Myriam Rabbath claimed that there is an overlap between corporate governance and CSR in that both concepts give importance to the concepts like accountability, transparency and honesty (Jamali et al., 2008).

Actually corporations and leaders of the business world started to recognize the importance CG and CSR in the late 1970s. According to Boli and Hartsuiker, in 1977 not even half of the Fortune 500 corporations listed CSR in their annual reports, but that number increased to almost 90% by 1999 (Boli and Hartsuiker, 2001). But the true worth of CG and CSR acknowledge at the beginning of 21st century when corporations started to truly complied to Codes of Conduct which they established (Lee, 2008). The main reasons behind the rising interest in these two concepts are due to the recent financial scandals and increased shareholders activism. Financial scandals like Enron and WorldCom earlier this decade not only caused public indignation around the world, but also drove a concern for proper accountability and greater transparency. This forced leaders of investment and business community to review the entire "set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled" in order to win back the confidence of both customers and investors. Secondly, recently corporations must face shareholder activism through growth of Social Responsible Investors. In fact it is the growth of ethical investment which persuaded corporations to give greater attention to CSR (Lydenberg and Grace, 2008).

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In the aftermath of financial scandals which caused the chronic loss of trust in systems that were in place, it became very difficult for Corporations to ignore their ethical responsibilities. In the years after the collapse of business giants like Enron and WorldCom, good corporate governance implied corporate morals and ethical behavior which could be illustrated in accountability mechanisms, transparency, and disclosure.

Recently the term "corporate governance" has been described as "the set of processe successful s, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled".

Adrian Cadbury defined Corporate Governance as "a system by which corporations are directed and controlled." (Code of Corporate Governance, p.7)

From the traditional view of the firm i.e. the shareholder view, the shareholders are the owners of the company, and as such the firm has to put their needs first and to increase value for them. By this model, firms only address the needs of those four parties: investors, employees, suppliers, and customers. The Neo-Classic theorists were for this argument. In this direction the eminent economist and former Nobel Prize winner Milton Friedman maintained that businesses' sole purpose is to generate profit for shareholders. In a Times magazine article published in 1970, he stated "actions in accord with 'social responsibility' reduce returns to stockholders" and companies spending on social actions are depleting shareholders' money.

However, another school of thought also known as the stakeholder theorists argue corporate governance extend to other parties like governmental bodies, trade associations, trade unions, communities, , prospective employees, prospective customers, and the public at large. In 2004, Monks and Minow provided a list of constituents in which they include directors, managers, employees, shareholders, customers, creditors, suppliers, community members and the government (Monks and Minow, 2004, p. 9)

Corporate governance can be defined as being the ways in which all parties interested in the welfare of the firm try to ensure that managers and other executives don't take full advantage of weak code of practice and business procedures. Thus CG should guarantee that executives take measures or adopt mechanisms that safeguard the interests of the stakeholders.

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In the wake of the financial scandals, corporate governance has call attention to issues that go beyond this traditional focus to touch on corporate ethics, accountability, disclosure, and reporting. Wanting to reassure regulators and investors that they are fully transparent and accountable, corporations have increasingly pledged their commitment to honest and fair corporate governance principles based on the firm belief that good governance and leadership will help regain trust. A report produced by Professor Stephen Cheung of Hong Kong's City University has found that companies with better corporate governance standards have a higher market value and therefore more attractive in the eyes of investors.

Cadbury even states that "in its broadest sense, corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals" (Code of Corporate Governance, p.7)

To include the interests of non-investing stakeholders in corporate governance is in fact very challenging.

The Ethical Investment Research Services gave a wider definition of CG by stating that (Maier, 2005, p. 5): "Corporate governance defines a set of relationships between a company's management, its board, its shareholders and its stakeholders. It is the process by which directors and auditors manage their responsibilities towards shareholders and wider company stakeholders. For shareholders it can provide increased confidence of an equitable return on their investment. For company stakeholders it can provide an assurance that the company manages its impact on society and the environment in a responsible manner". In this definition of Corporation Governance, direct allusion is made to Corporate Social Responsibility in the sense that the corporate social responsibility (CSR) movement laid greater emphasis on idea of using corporate governance as a mean for pushing management to consider broader ethical considerations.

In view to bring about greater investor accountability and stakeholder of these processes, large public companies have recently created mechanisms of corporate governance. Some of these mechanisms include CSR board committees, company units dealing with business ethics, corporate codes of conduct, non-financial reporting practices, and stakeholder complaint and dialogue channels, among others. All of these governance strategies are normally applied on a voluntary basis to constitute what is referred to as "corporate self regulation,"


In fact it is CSR that brought about the dramatic progress made by companies in recent years in balancing shareholder goals with the need to reduce externalities that impact other stakeholders. corporations that are socially responsible are more familiar to public, environmental, and social needs and more to it by pursuing corporate governance as a framework, boards and managers are encouraged to treat employees, consumers, and communities similarly to, if not the same as, shareholders.

This can be indicative of a convergence between corporate governance and social responsibility. While corporate governance is gradually becoming a framework for ensuring the public interest in business and demonstrating its good citizenship, CSR is increasingly basing itself on corporate governance as a window on the company's conscience and long-term commitment to stakeholder accountability.

For many years, CSR has been a very controversial topic in the fact that the practice of CSR has been much debated and criticized. While some say that it distract corporations from its primary aim of making profits for its shareholders, others maintain it is there only for window dressing mainly used as a marketing campaign to enhance corporate reputation and public relations. CSR is also perceived as a barrier to free trade.

The phrase "corporate social responsibility" was first used in 1953 by Howard R. Bowen in his book 'Social Responsibility of Businessmen'. Bowen argued that Businessmen ought to assume responsibility of the system of free enterprise and act thereafter for the system to flourish (Maak, 2008).

On one side, the Neo-Classic theorists argued that the only responsibility of a firm to society is to increase profits. This view is perhaps best illustrated by the opinion of Friedman (1970) who argued that "the social responsibility of business is to increase profits." He claimed that shareholders would suffer because of higher costs associated with

Friedman viewed CSR as an extension of firms' efforts to maximize shareholders' wealth but also conformed to basic rules of society (Friedman, 1970).

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On the other hand, R. Edward Freeman and others argued it is impossible to disconnect business from ethics (Freeman, 1994). In 1984, Freeman introduced the Stakeholder theory; he defined stakeholders as anyone that affects or is affected by corporate policies and activities (Freeman, 1994).Freeman believed that he believed that all stakeholders need to have their voices heard. In 1995 authors Donaldson and Preston further expand Freeman's ideas were further expanded to a new focus on moral and ethical dimension (Donaldson and Preston, 1995). In spite of the fact that the concept of corporate social responsibility is not a novel and has changed considerably in the last few decades, no universally acceptable definition of corporate social responsibility exists. Many academics have tried over the years to define CSR because lack of proper definition has made theoretical development and measurement difficult (Godfrey and Hatch, 2007). A recent, but widely accepted definition was created by McWilliams, Siegel and Wright (2006, p.1) and they believed that CSR can be defined as " situations where firm goes beyond compliance and engages in actions that appear further some social good, beyond the interests of the firm and that which is required by law"

Many authors maintained that CSR is motivated either by altruistic arguments or by profit maximization motives. They maintained that many corporations undertake CSR programme in the aim of capturing ethical investors looking for companies with positive reputation and to improve their image. Through their research and experience acquired a leading non-profit organisation, Business for Social Responsibility, also involved in CSR services, has concluded that companies have earned benefits from engaging in CSR activities. Benefits would include "stronger brand positioning, corporate image, market share and sales." It also helped to increase their ability to attract and retain employees and appeal to investors and financial analysts. By reducing conflicts with their stakeholders CSR eventually help companies build on their reputation, boosting stakeholders' confidence in dealing with them.

CSR framework

Hill, Ainscough and Manullang (2007) define CSR as the economic, legal, moral, and philanthropic actions of firms that influence the quality of life of relevant stakeholders. In general, CSR describes how firms manage the business processes to produce an overall positive impact on society and refers to serving people, communities, and the environment in ways that go above and beyond what is legally and financially required of a firm.

Hence it can be said that CSR promotes a vision of business accountability to a wide range of stakeholders, apart from shareholders and investors, who are more concerned about the protection of the environmental protection, the right of employees and the community. This is underpinned by the idea that corporations can no longer perform detached from the broader society, from which they take their resources without giving anything in return. Traditional views about competitiveness, survival and profitability are being carried away. One of the main drivers for pushing business towards CSR is the exigency of stakeholders for corporations to be more transparent and provide greater disclosure. Stakeholders, mainly customers, suppliers, employees, investors, and the society are asking for greater corporate disclosure. Better disclosure and greater transparency of information have become essential for business survival.

Studies conducted on developed countries have shown that Corporate Social Disclosure (CSD) in annual reports has increased over time in response to a number of factors. Some of the reasons may be attributed to increases in legislation, activities of pressure groups, ethical investors, economic activities, media interest, societal awareness, and politics. This is also due to greater customer interest and growing investor pressure. There is clear evidence that the ethical conduct of companies wields a growing influence on the purchasing decisions of customers. In a survey carried out by Environics International, they found out that more than 20% of consumers reported having reacted against or for companies based on their perceived social performance. Moreover Investors are changing the way they assess companies' performance, and are making decisions based on criteria that include ethical concerns. These aim at encouraging companies to develop a corporate conscience

There is also a number of particular issues that the companies see as important and hence disclose them in the annual report. It was found that the environment, employment opportunities, product safety, educational aid, donations, employee benefits and community involvement were frequently mentioned areas. Researchers found that the highest disclosures were by the human resource theme followed by the community involvement and environmental theme.

The CSD process is also seen as a strategy aiming at diminishing the gap between management and shareholders via non-executive directors.

Information on location of the disclosures is significant in conveying the relative importance of the disclosure. The location of the disclosure does show the importance placed by the company on its choice of disclosure. The common locations of these disclosures are: (a) The chairman's report,

(b) The financial statements and notes to accounts,

(c) The directors' report and (d) The review of operations. In fact the location of the disclosure indicates the importance placed by the company on disclosures. Accordingly from the viewpoint of the authors of the annual report and of many readers of the report, it seems that CSD contained in the Chairman's statement is likely to carry more weight than that contained in the detailed notes to accounts.

In 1986, Freedman and Jagi drew the conclusion that the main medium of disclosure is the annual report.