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Corporate Social Responsibility (CSR) allows organisations to make business decisions based on ethical values, compliance with regulatory requirements and respect for people, the environment and the community.
This report identifies that CSR and Corporate Governance (CG) are inextricably linked and details the benefits organisations can gain from investing in CSR as part of an overall CG framework. The report uses a number of case studies to bestow the virtues of investing and administering CSR and CG to the benefit of organisations, and how an organisation can use CSR and CG to create new opportunities that can add value and increase profit.
Corporate Social Responsibility
While there is no single commonly accepted definition of corporate social responsibility, or CSR, it generally refers to business decision-making linked to ethical values, compliance with legal requirements, and respect for people, communities and the environment. BSR (2010).
A company can ensure that it is operating in a safe, ethical and responsible way and is contributing to protecting the environment while maintaining the health and safety of employees, customers, suppliers and the community, by performing valid and functioning CSR policies.
Many companies have a number of polices that help define the overall commitment to CSR. Appendix A details a number of typical CSR polices.
Corporate Social Responsibility and Corporate Governance are equally as important to an organisation and therefore should be inextricably linked. Organisations that have a well defined and workable corporate governance program tend to find that this programme helps solve CSR issues. CG works more effectively if a corresponding CSR effort is undertaken. Organisations make decisions based on demands of stakeholders, which helps create value for those stakeholders resulting in increased profitability.
Thompson et al (2007) argue that it is vital that the strategic leader ensures that there is a strong, competent and balanced executive team at the head of the organisation.
Thompson et al (2007) also argue that the role and contribution of part time non executive directors is key, as they are responsible for providing reality checks as well as bringing experience and expertise.
A number of corporate governance principles and governance codes have been developed over the years to help organisations perform good corporate governance.
Cadbury issued the first corporate governance code in 1992. There have been a number of iterations of the code since, up to the UK Corporate Governance Code of 2010. Cadbury was the first organisation to:
Look after employee welfare.
Instigate Corporate Governance.
Live up to there CSR policy.
A timeline of governance code iterations is detailed in Appendix B.
The Cadbury report issued in December 1992 looked into the performance and rewards of boards and resulted in greater transparency and accountability in boardroom proceedings. It also recommended that the board should have three non-executive directors and the role of chairman and chief executive should be held by different people. CIPD (2010)
The report was designed to create a code of best practice with the main point concerning appointment of non-executive directors and audit committees to oversee financial aspects of an organisation and also the separation of chairman and CEO. This ensures that power is spread throughout a board and does not lie with one individual, such as Sir Fred Goodwin at RBS.
It is perhaps ironic that Cadbury has had a number of corporate governance and CSR issues over the last few years. "Kraft to switch Cadbury jobs to Zurich" BBC News (2010) and "Cadbury workers 'sacked twice" BBC News (2010) where ethical issues and a lack of corporate governance has had an adverse effect on how Cadbury employees are treated and the perception of the company has suffered a result.
The board of Cadbury accepted a takeover by Kraft in 2010, who immediately decided to close down one of the Cadbury's factories despite stating the factory would remain open during takeover negotiations. This is obviously a breakdown in corporate governance, and CSR ethics, which harms the reputation of Cadbury that they have built up over the years.
Smerdon (2004) developed the Shareholder Value theory that argues that unless companies look after suppliers, customers, members of staff and the environment, shareholder value is likely to suffer. Smerdon (2004) through the Stakeholder theory also argues that "shareholder value has failed". Cadbury, in the instances described above are obviously not looking after employees so according to Smerdon, shareholder value is likely to suffer.
Corporate Governance calls for ethical conduct. Corporate Governance relates primarily to the selection, remuneration, and conduct of the senior officers of an organisation. Slack et al (2007)
The Enron scandal of 2002 is a prime example of wrong corporate governance and not adhering to codes of ethics. Enron grew to be one of America's largest companies, employing 21,000 staff in more than 40 countries. BBC News (2002).
Enron's success transpired to have involved areas of an elaborate scam where Enron misled the authorities on the amount of profit it was making and concealing debts within the firm's accounts. Enron was forced into bankruptcy in December 2002.
Appendix C summaries the Enron scandal, and the practices that were undertaken within the firm.
At the heart of the Enron scandal is a failure of corporate governance. Financial Times (2002). The Financial Times (2002) argues that effective corporate governance is the only way that investors can protect themselves against executives who make mistakes and seek to cover them up.
Had Enron implemented a Corporate Governance and Ethics policy the scandal could have been avoided. Many of the issues within Enron were known to the board and many red flags were raised warning of irregular accounting practices. Had the board operated a corporate governance policy containing ethical values then the board would have been required too act on the red flags or risk breaching its own governance codes. Acting sooner could have saved the company from collapse.
Separating ownership and control is one way of ensuring that directors are accountable. The separation of ownership and control was first theorised by Berle-Mearns in 1932. Many companies have a clear separation between the executive directors who manage the business affairs of the company and the non executive directors whose task is to monitor management activity Slack et al (2007).
A number of other high profile corporate scandals that occurred around the same time as Enron, in 2002, are detailed in Appendix D.
One of the issues that transpired from the Enron scandal was that "Whistleblowers' complaints were ignored or whitewashed". Financial Times (2002).
Whistleblowing occurs when an employee or worker provides certain types of information, usually to the employer or a regulator, which has come to their attention through work. CIPD (2006).
Having an effective whistleblowing procedure for raising concerns will help to reduce the risk of serious concerns being mishandled, whether by the employee or by the organisation. CIPD (2010).
BBC News (2006) tells the story of Sherron Watkins' who in 1996, made her concerns known to Enron executives and the firm's auditors, Arthur Anderson, but says she was cold-shouldered.
Had Enron, and other organisations involved in corporate scandals, had an effective and fair whistleblowing procedure, then senior executives would have had a responsibility to ensure that action was taken to investigate and resolve any issues raised, potentially stopping the fraudulent accounting practices and saving Enron from collapse.
Why invest in CSR?
Even though there is a cost associated with CSR, that does not necessarily add value to the business, many organisations invest in CSR for a number of reasons.
One of the issues facing organisations is that organisations have to try to be viable economically while being socially responsible. Making a profit for the organisation is the key priority for most organisations. The power of the consumer and media scrutiny cannot be underestimated when defining company reputation..
A number of high profile scandals such as Enron and Citgroup have lead organisations to invest in CSR to avoid the same fate befalling them. Apart from the obvious benefit from avoiding scandal and potentially collapse, a number of other reasons to invest in CSR are apparent.
Investing in CSR has an obvious financial benefit through building customer loyalty and trust by creating close relationships with key stakeholders. CSR can also help organisations identify new ideas and find current issues. By undertaking equal opportunities, as part of CSR, organisations can retain and employ the best staff which leads to better innovation and product realisation.
CSR can also enhance the reputation of the organisation and boost perception of the company, again this reaffirms the positive image of the organisation.
In today's society many consumers/customers have there own ethical conduct and principles that they adhere to, and many expect organisations to follow these same principles.
Many individuals, or other organisations, adhere to principles that make them more responsible, sustainable, ethical and environmentally friendly. Consumers can select organisations to buy goods from, or do business with, that reflect the principles that they share. This in itself presents an obvious revenue opportunity for any organisation with clear corporate social responsibility and corporate governance polices.
As an example of the power of the media and consumers, BBC News (2009) exposed how clothes chain Primark, engaged with suppliers who were using unsustainable employment practices. One of Primark's suppliers were paying only two-thirds of theÂ UK National Minimum wage and effectively running sweatshops. Demonstrators were quick to target the company, for this practice, resulting in a loss of reputation for the retailer and ultimately loss of revenue and reduction in profit. The practice breached Primark's code of conduct that was introduced to improve the treatment of workers amid allegations of poor conditions and treatment.
The International Labour Organisation (n.d.) states that a 1995 poll of 30,000 consumers in the UK showed that one in three had boycotted stores or products in the past because of concerns about ethical standards, and six in ten were prepared to boycott in the future. This shows the power of the consumer and the need to have a robust CSR and CG policies, with codes of ethics included.
There are a number of organisations that have good corporate governance and CSR and benefit from this. Slack et al. (2007) define HSBC, Orange, John Lewis and Starbucks as organisations who invest in CSR and corporate governance. These organisations invest in CSR and CG as there are benefits including:
Financial benefit as described
Demonstrating commitment and serving the community
Building loyalty, trust and creating close relationships with stakeholders
Creating a positive image for the organisation
Keeping company focused on what needs to be done to maintain values
Helping identify issues and solutions to those issues
More employee engagement in the process leading to empowerment
Increasing the reputation of the company
Increased revenue possibilities as consumers adhere to own values that make them more green, ethical and responsible.
Issues with CSR
Even with an effective corporate governance and CSR framework in place, scandals still occur and reputations still suffer.
The UK has had a number of recent corporate scandals. Among the many failures that led to the disaster at the Royal Bank of Scotland, there was obviously a failure of corporate governance. The Sunday Times (2009).
RBS gives ammunition to those who criticise corporate governance in the UK. Many point out that RBS was a "model pupil" and "did everything by the book" ,The Sunday Times (2009), yet the bank still came close to collapse and required to be bailed out by UK taxpayers.
RBS had a separate non-executive chairman in Sir Tom McKilliop but he was unable to restrain the chief executive Sir Fred Goodwin, yet having a separate non executive chairman is one of the main criteria for UK corporate governance. This shows that having corporate governance in itself, does not guarantee that scandals will not occur. Boards have to monitor and ensure that rules are being put into practice and organisations are not just be "focused on ticking the boxes", Financial Times (2009).
Tricker (2008) created the stewardship theory which was based on the belief that the stewardship will be exercised by the directors to whom the company has delegated responsibility. Tricker (2008) also created agency theory to counteract potential abuses of power that can result from the stewardship theory. From the RBS example, it can be seen that abuses of power occurred at RBS and the stewardship of the directors was at best questionable.
Davies (1999) details the traditional CG approach where the basic concern is to improve current proactive and avoid further embarrassing scandals. Davies (1999) argues that the focus must be on the process rather than the philosophy and shareholders need to be encouraged to be more active. This theory was extended by Davies to form Inclusive CG, which involves stakeholders in the process that are not shareholders or members of the board. Again using RBS as the case study, it can be argued that RBS, even though it had an effective corporate governance policy and code of ethics and was a "model pupil", RBS was happy to "tick the boxes" without being proactive and taking responsibility. The stakeholders were also happy to go along with a lot of Sir Fred Goodwin's plans rather then get involved and challenge them.
Looking at the corporate governance codes, from Cadbury 1992 up to Quoted Companies Alliance Corporate Governance Guidelines for Smaller Quoted Companies of 2010, each code adds new regulations or tightens up existing ones, however, as the codes do not have any legal enforcement they do not require to be administered, although compliance is a requirement for entry into the stock exchange.
It could be argued that even with codes of best practice and CSR polices, that reputations are tarnished and scandals still occur, so why should companies invest in CSR and operate effective CG? Companies that invest time and money in CSR are less susceptible to scandals occurring, due to board monitoring, and also benefit from enhanced reputation by operating sound CSR polices that enhances the reputation of the organisation. This has to be seen as the true worth of operating an efficient and workable set of CSR and CG polices.
Work still requires to be done to ensure that scandals do not occur. Corporate governance and CSR, needs to be performed and invested in at corporate level and not just given "lip service". The Times (2009). As RBS proves, having effective policies does not guarantee that issues will not occur, if the policies are not correctly administered. CG and CSR must be seen as core activities and invested in by organisations. If boards are effectively monitored by Non Executive Directors (NEDs), CSR is monitored and maintained and whistleblowers are taken seriously, then scandals in any organisation should not occur and reputations remain positive.
Conclusions and Recommendations
Many organisations invest in CSR and operate effective Corporate Governance polices. The reason for investing is that organisations see the benefit of creating a positive image for their organisation. Even though there is a cost of implementing and administering the CSR, financial opportunities exist to exploit the positive image of the organisation through attracting customers who care about the environment, treatment of workers and ethical values, which they themselves adhere too.
Organisations must, however, not only invest in CSR and CG, but be proactive in its implementation and actually act on the policies therein. Organisations having effective CSR policies and CG codes of practice, does not guarantee that scandals and issues will not occur. Organisations must monitor and evolve the policies and ensure that rules are being put into practice and organisations are not just "focused on ticking the boxes". Financial Times (2009)
Even with a number of corporate governance codes having been developed over the years, scandals still occur as there is no legal requirement to have good CSR and CG polices, although this is a requirement to be listed on the stock exchange. Perhaps if operating good CSR and CG was a legal requirement for organisations the scandals would not occur. Companies should be monitored on their CSR and CG activities to ensure compliance of their own codes. Having NEDs monitor boards that they are a member of, is not an effective way to ensure compliance. Organisations also require taking whistleblowing seriously and should be obliged to investigate all issues raised by employees or anyone else connected with the organisation.