What is CSR?
The issue of corporate social responsibility has got a lot of attention in the business and political world since the early 1990's and the major reason behind this was corporate scandals. Organizations had started to realize that the basis on which they were achieving economic growth was unsustainable and hence there was a need to develop a process which would intend at balancing economic growth with environmental sustainability and societal expectations. In fact the origin of corporate social responsibility can be found in the 1950s and 60s whereby successful companies were trying to link corporate social responsibility to the power that business holds in society. The theoretical progresses were subdivided in ethical and accountability and the stakeholder approach to strategic management.
CSR can be distinguished from the three terms which are included in its designation phrase and these words are; 'Corporate', 'social' and 'responsibility'. Hence CSR can be explained as being the responsibilities that a company undertakes for the society within which it carry out its operations. To be specific, CSR require a business to identify its stakeholders and include their needs and values in the tactical day to day decision making process of the company. Consequently the society within which a business function and which identify the number of stakeholder to which the organization owe a responsibility can be broad depending on the type industry within which it operate. The different stakeholders to which a company is accountable can be illustrated using the figure below:
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Figure 1: stakeholder of a business
According to figure 1, a business must respond to two aspects which evolve during their operating process and these are:
The quality of management which is represented by the inner cycle and it is both in terms of people and processes.
The nature of and the extent to which their processes impact on the society in various areas.
The stakeholders who are outside take more interest in the activities undertaken by the company, i.e. most of them look at what has the company actually done. Their objective is to fid out if the company has done good or bad in terms of its product and services, the treatment it gives it its labour force and in terms of the impact of its activities on the environment and local communities.
There seems to be an infinite number of definitions of CSR, ranging from the simplistic to the complex, and a range of associated terms and ideas including `corporate sustainability, corporate citizenship, corporate social investment, the triple bottom line, socially responsible investment, business sustainability and corporate governance'. It has been suggested that `some researchers distort the definition of corporate social responsibility or performance so much that the concept becomes morally unintelligent, conceptually meaningless, and utterly unrecognizable'(Orlitzky 2005); or CSR may be regarded as `the universal remedy which will solve the global poverty gap, social exclusion and environmental degradation' (Van Marrewijk 2003).
Some definitions of CSR which are commonly accepted are:
The notion of companies looking beyond profits to their role in society is generally termed corporate social responsibility (CSR)..It refers to a company linking itself with ethical values, transparency, employee relations, compliance with legal requirements and overall respect for the communities in which they operate. It goes beyond the occasional community service action, however, as CSR is a corporate philosophy that drives strategic decision-making, partner selection, hiring practices and, ultimately, brand development.
South China Morning Post, 2002
The social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time.
Archie B. Carroll, 1979
CSR is about businesses and other organizations going beyond the legal obligations to manage the impact they have on the environment and society. In particular, this could include how organizations interact with their employees, suppliers, customers and the communities in which they operate, as well as the extent they attempt to protect the environment.
The Institute of Directors, UK, 2002
Why is CSR relevant today?
CSR has become famous in the language and strategy of business and by the growth of dedicated CSR organizations globally. Governments and international governmental organizations are increasingly encouraging CSR.
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CSR is rapidly becoming a major part of all business management courses and a key global issue because of three trends which are easily identifiable:
1. Changing expectations of the society
Following recent corporate scandals which have lead to the decrease in the trust that the public has on regulatory bodies and companies to control corporate excess, customers and the general public tend to expect more from the company whose product they are buying in general.
2. Rising affluence
This is true not only in developed countries but also in developing countries. Rich customers have enough money to select the product they want to buy and as the society need work and inward investment will not impose severe rules which will penalize companies which invest their money elsewhere. In other words if a company is investing its money in CSR activities and for this reasons its product become more costly, the affluent consumers will not punish the organization and they will buy its product.
Nowadays the least mistake made by companies is instantly brought to the attention of the public via the media. On top of that, increasing internet communication between people having the same opinion and the consumers, authorize them to spread their message and giving them the opportunity to take collective action that is they can boycott a product. In other words if a company is taking actions which is against the environment and the society, the public may takes action against the business.
According to these three trends, more importance is given to brand which lead to the success of companies and thus there is a shift in the relationship between companies and customers whereby the latter are better informed and feel more powerful to put their belief into action. From the standpoint of businesses, the parameters within which they operate are more and more affected by bottom-up, grassroots campaigns, NGOs and consumer activists leading to a change in the relationship between consumers and the company.
CSR is becoming more and more important in our fast developing world as brands are built on perceptions and concepts which appear to have higher values.
Theoretical Frameworks and CSR Disclosure
The Legitimacy Theory
While there is no generally accepted theory for explaining CSR disclosure practices, recent research in the CSR literature has primarily relied on legitimacy theory (Deegan 2002, p. 285). Indeed, "it is probable that legitimacy theory is the most widely used theory to explain environmental and social disclosures" (Campbell, Craven and Shrives, 2003, p. 559) while, according to Gray, Kouhy and Lavers (1995), legitimacy theory has an advantage over other theories in that it provides disclosing strategies that organisations may adopt to legitimate their existence that may be empirically tested.
The Legitimacy theory, according to Ness & Mirza (1991), argues that the voluntary disclosure of social responsibility information can be perceived as a strategy to reduce political costs. Social theory reporting has been explained from a Legitimacy Theory perspective
LT has been considered as widely accepted theory to shed light on social reporting practices of a firm. It states that firms will take actions to ensure that their operations are obvious to be legitimate from the point of view of the society within which the organization is assumed to operate. That is, they will attempt to establish resemblance between social values associated with or indirect by their activities and the norms of acceptable behavior in the larger social system of which they are part.
Legitimacy Theory specifies a social contract between the organisation and society. Legitimacy is defined by Lindblom (1992) as:
"...a condition or status which exists when an entity's value system is congruent with the value system of the larger social system of which the social system of which the entity is a part. When a disparity, actual or potential, exists between the two value systems, there is a threat to the entity's legitimacy".
Hence, Legitimacy Theory implies that managers will not undertake any actions that will be considered as illegitimate in society. By engaging in social reporting, they tend to enhance the relevance of the financial statement as well as that of earnings by making people to believe in the reliability of what is being reported in the financial statements and by providing additional information on issues other than earnings and financial information. This may however redirect the interest of users away from the earnings figure.
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Institutional theorists (e.g Fogarty, 1992) observe that organizations need to respond to social expectations. Public expectations have undergone significant changes in the last decades such that profit maximization is not the sole measure of performance expected from the economic entity. There are a lot of implicit and explicit expectations from society vis-a-vis the operations of the organization. According to Heard & Bolce (1981), with sensitive societal expectations, it is anticipated that successful businesses will react to attend to human, environmental and other social consequences of their activities.
In spite of being unregulated, social and green reporting has increased in annual reports of organizations. Empirical tests of the Legitimacy Theory by Hogner (1982) revealed that the extent of social disclosures in the annual reports varied in response to society's expectations of corporate behavior. Deegan & Rankin (1996) found that prosecuted firms for environmental charges increased their green reporting while Gray, Kouhy & Lavers (1995) found that firms use corporate social reporting to fill the legitimacy gap.
It is assumed that the economic entity will have the 'legitimate' right to continue to operate in society to the extent that it fulfils the societal expectations. Otherwise, there will be a breach in the social contract between the entity and the society, and sanctions, such as fines, legal actions, and a fall in the demand of its product, will be taken. Society may revoke the organization's 'licence to operate' or contract to continue its operations, for instance. Under Legitimacy Theory, not only the rights of investors are considered, but a much bigger picture of the public at large is considered.
Furthermore, it is also expected that the organisation for its survival will have to adapt to the changing expectations of society. Downling & Pfeffer (1975) refer to communication strategies, that the entity can use in order to legitimate or maintain the legitimacy of its activities. Reference is made to the public disclosure of information, in annual reports, for instance, to let the public know and educate them about the actions and performance of the firm and hence the manipulation of society's expectations, is made. In the same vein, they argue that one of the functions of annual reports would be to legitimate the existence of the organisation. Therefore, Legitimacy Theory proposes a relationship between corporate disclosures and societal expectations, as evidenced by a lot of research (Deegan & Ratkin (1996); Gray,Kouhy & Lavers).
Stakeholder theory (Gray, Kouhy & Lavers 1995b, p. 53) state that "the corporation's continued existence requires the support of the stakeholders and their consent are required and hence the activities of the business are adjusted according to that approval. The more powerful the stakeholders, the more the company must adapt. Social disclosure is thus seen as part of the dialogue between the company and its stakeholders".
Within the Stakeholder's point of view, the success of a business depends on its capacity to balance the differing demands of its various stakeholders. The definition of 'stakeholder' has altered considerably over the past four decades. At one end of the range the shareholder was believe the sole or principal stakeholder. This definition was based on arguments proposed by the Noble prize winner, Mr. Milton Friedman's view. According to him, the sole moral responsibility of a business is to maximize profits.
Freeman (1983), however, expands the definition of stakeholder to include a broader selection of constituents including opposing groups such as interest groups and regulators. He defines stakeholders as "any group or individual who can affect or is affected by the achievement of the organisation's objectives". Stakeholder Theory states that managers ought to serve the interests of all those who have a "stake" in the firm. Stakeholders include shareholders, employees, suppliers, customers and the communities in which the firm operates - a collection which Freeman terms the "Big Five". Therefore, all groups in an area in which the firm operates and all individuals in such area are stakeholders.
Given that CSR reporting is attempted to underline how the company relates to society in the course of its different social activities, the stakeholder theory can be seen as a guideline which will direct firms to have proper way of disclosing CSR as they will know what type of actions stakeholders are expecting from them.
Corporate governance is the set of procedure, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.
Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business know-how, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes.
An essential part of corporate governance is to make sure the accountability of certain individuals in a business through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world
Principles of corporate Governance
Fundamentals of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.
More important is how directors and management develop a model of governance that line up the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.
Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders: company should respect the rights of shareholders and help shareholders to implement those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
Interests of other stakeholders: Organizations should be aware of the legal and other obligations that all legitimate stakeholders have.
Role and responsibilities of the board: The board needs a variety of skills and understanding to be able to deal with various business issues and have the aptitude to review and challenge management performance. It needs to be of adequate size and have an apt level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.
Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations, but it is also a crucial part in risk management and avoiding lawsuits. businesses should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
Disclosure and transparency: Organizations should simplify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement measures to independently validate and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
Nevertheless "corporate governance," despite some weak attempts from various quarters, remains a vague and often misunderstood expression. For quite some time it was confined only to corporate management. It is something much broader, for it must include a fair, efficient and transparent administration and strive to meet certain well defined, written objectives. Corporate governance must go well beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment), and the commitment to run a transparent organization- these should be constantly evolving due to interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector.
CSR disclosure and CG
In our time awareness for CG has not only been increased but the concept has greatly been broadened. For example, it has started to envelop some areas normally viewed as being part of CSR. Following after accounting and ethical scandals in firms such as Enron, WorldCom, Ahold and Parmalat, firms are inclined to strengthen CG mechanisms concerning boards and its compositions, managers and auditors, control and risk, as well as the ethical aspects related to remuneration, managerial and employee behavior including whistleblower and complaint provisions for the organizations. In view of the fact that bank and other financial institutions generally experience higher stresses to be transparent and disclose information about major strategic decisions to stakeholders it has demanded increased requirements for other types of information above and beyond economic information.
In a preface to a report by the Global Corporate Governance Forum, Claessens states that ``in its broadest sense, CG is concerned with holding the balance between economic and social goals and between individual and communal goals'' (Claessens, 2003, p. 7). Maier (2005) suggested a broader definition of CG scope ``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'' ( p. 5).
While the message mentioned by Maier is very coherent, one could expect such an approach from representatives of the fair investment community. Given that stakeholder interests are accounted for, it has been suggested that firms are to be bear in mind their degree of dependence on a stakeholder for resources (McLaren, 2004). The literature revealed that CG has a considerable impact on CSR issues within the organizations such as employee conditions (Deakin and Whittaker, 2007) and ethical aspects related to remuneration, managerial and employee behaviour (Ryan, 2005; Wieland, 2005). Research studies (Dahya et al., 1996; Carter et al., 2003; Branco and Rodrigues, 2008) also documented the likely impact of CG elements on firms' CSR disclosure initiatives the detailed of which are addressed in the next section.
CSR Disclosure and Corporate Governance in Mauritius: an overview
CSR reporting has traditionally been observed in developed countries but now it is gaining more and more importance in developing countries as well. Currently, in Mauritius, CSR disclosure is receiving significant interest, especially after the law in the finance act which stipulates every company must invest two percent of its book profit, even though CSR reporting is not mandatory. However the main issue which arises is that there are many international standards which may help firms in Mauritius to implement CSR activities but there are no disclosure requirements for social reporting. CSR disclosure can be in a modest way as supplement to usual financial reports.
On the other hand the corporate governance has gained prominence in Mauritius since few years. In 2001, Tim Taylor was given the responsibility to enhance the corporate governance image of Mauritius, including the introduction of a code. Following the sequence of recent corporate scandals and failure in the US and the Europe, Corporate governance started to get more and more importance in theses countries and in Mauritius as well due to the fact that the latter has not been spared from corporate malpractice and to be able to restore public confidence in business practices, the corporate governance regime was reassessed.
Understanding Corporate governance may be easy, however it is hard to achieve. Firms must be able to make financial and non financial disclosures which are of higher quality and the management should increase the role and independence of directors and external auditors so that it can improve corporate governance. Following the listing Rules and Companies act 2001 which require companies to adhere to the international accounting and auditing standards, the level of financial and other disclosure has considerably been improved. Hence as CSR forms part of the non financial disclosures, this study will try to find out how corporate governance affects CSR Disclosure.