This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
There are plenty of working definitions for corporate governance. Some of them are coming from the academic field, but most are coming from international organizations and committees. Shleifer and Vishny (1997:737) state that: "Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.". Konzelmann, et al. (2006:543) note: "Corporate governance legally structures stakeholder relations and prioritizes the interests that corporate managers are required to serve". Xanthakis, Tsipuri and Spanos (2003:12) describe "corporate governance as a system that is particularizing the conformation of the rights and the obligations between the several participants of a company, the board of directors, the executive officers, the shareholders and the stakeholders of the firm". The most commonly used definition is the one provided by OECD (2004: 11): "Corporate governance is one key element in improving economic efficiency and growth as well as enhancing investor confidence. Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring." This definition is also adopted by the European Commission at the "Green Paper" (2010). The Cadbury Committee (1992:15, 2000:8) issued one of the earliest definitions: "Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company's strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board's actions are subject to laws, regulations and the shareholders in general meeting". In the last version of "The UK Corporate Governance Code" (2010:1) is stated: "The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.". This last version is an update of the Cadbury Report (1992). All the above definitions are not very different but they present the corporate governance issue from different perspectives and often according to their field of action.
Corporate Governance became better noticed after some major financial corporate scandals broke out at the beginning of the decade. Huge corporations, such as WorldCom and Enron, collapsed due to insufficient systems of internal control and misunderstanding of the risks that the managers were taking (Deakin and Konzelmann, 2004). That led to a more active corporate governance movement. The first serious reaction to the uprising problem of corporate scandals was the Serbanes-Oxley Action that was adopted by the US Congress in 2002. Deakin and Konzelmann note (2004:134) "The Sarbanes-Oxley Act, is the most significant measure of federal securities and corporate law since the New Deal legislation of the 1930s". A different opinion is stated by Wells (2006): "Sarbanes-Oxley Section906, which quadrupled the penalties for mail fraud, is simply "feel good" legislation.". Wells (2006) stresses out that if the penalties are not serious enough, they are unlikely to prevent executives from committing crime. Especially when the penalty is, financially, cheaper than the profit from the fraud. Tirole (2001) identifies as a major issue the efficient monitoring. He divides the problem in four main questions. The first one is how should directors be selected and compensated. Secondly, how should institutional investors be active investors and take part in management. Then he argues whether there should be encouragement of a market for corporate control; meaning friendly or hostile takeovers. Last he poses the question (2001:2): "should banks be active in corporate governance as in Japan and most of continental Europe or mostly silent as in the United States?".
In 1999 OECD published its "Principles of Corporate Governance". These are universally accepted and are used as a manual for good corporate governance (Jesover and Kirkpatrick, 2005). Jesover and Kirkpatrick (2005) believe that these principles perform as a benchmark with high adaptability by different law systems, cultures and market practices. These principles are focused on five main areas.
First are the rights of the shareholders. A corporate governance system should, first of all, protect these rights. All countries have the appropriate legal frame to protect these rights. The rights of the shareholders are the foundation for an effective stock-market (Xanthakis, Tsipuri and Spanos, 2003). The level of the protection of these rights depends on the form of the legal system and on the tradition of each country (La Porta et al., 1998). In EU and US there are plenty of codes in each country that cover these rights. Many of these codes promote the one-share-one vote notion. Many codes also adopt measures for effective communication with the shareholders (Preda Report, Italy 1999).
Secondly OECD promotes the equitable treatment of shareholders. That means that minority shareholders or foreign shareholders should have the same rights as any other shareholder. Measures should be taken to prevent insider trading. This is also protected by the one-share-one vote notion.
The third principle is the existence of a framework that assures accurate disclosure and transparency in all actions of the corporation, especially those concerning financial and operating results or the company's strategic objectives. External auditing is crucial and its independence should be assured.
The role of stakeholders is also a subject of discussion in corporate governance. Internal stakeholders such as the employees are crucial for the well being of the corporation. Human Resources Management can help the corporation to create the bonds with its internal stakeholders (Konzelmann, et al, 2006). Corporate Social Responsibility strategies can also assist the relations with the external stakeholders such as the local community and the NGOs.
Last, but maybe more practical and crucial for many cases, are the responsibilities of the board. The members of the board are responsible for monitoring every action of the management. It is their responsibility to be sure that everything is working towards the shareholders (and stakeholders) interests. The board is responsible for transparency, equal and fair behavior towards all shareholders and for monitoring and assessing management's actions. Deakin and Konzelmann (2004) argue that in Enron's case the problem started when the board failed to understand the risks that the management was taking. From that point on they couldn't monitor efficiently what the corporate officers were doing and what risks they were creating for the company. Lack of information and maybe conflicts of interests in the board led the company to its collapse.
These were in brief the dominant principles of corporate governance. Now I will mention the two main corporate governance theories: the Agency Theory and the Stakeholder Theory.
Corporate governance is connected with the economic development of industrial capitalism (Clarke, 2004). Clarke (2004:2) supports that "different governance structures evolved with different corporate forms designed to pursue new economic opportunities or resolve new economic problems". These new opportunities led to new corporate structures. The need for capital led to widespread ownership and separation of management from the ownership of the company (Clarke, 2004). Chandler (1977) listed multiple reasons for the move from the "invisible hand of market forces" to the "visible hand of management". These changes of the markets and the corporate environment created the profession of the manager, a person who developed a career by running other people's businesses. The separation of ownership from control created problems that didn't exist before. The managers should work for the interests of their bosses, the shareholders of the corporation. The problem was how to check that they were doing it.
Most of the existing literature is focused on the principal-agent problem or in short the Agency Theory. The essence of the agency problem is the separation of management from finance (Jensen and Meckling, 1976). Managers control the investors' money and that is giving precedence to their rights. Jensen and Meckling (1983) spot the problem on the management-ownership contracts that are not analytical enough to specify the rights and obligations of each part. With legally loose agreements, management is able to act at will without sufficient supervision. The agency problem is to effectively control and monitor the managers, to make sure that they will not take actions that are not for the interests of the shareholders. As for the contribution of the agency theory, I quote Eisenhardt (1989) "Agency theory reminds us that much of organizational life, whether we like it or not, is based on self-interest".
The stakeholder theory is a more "social" approach to corporate governance. Clarke (1984, 1991) supports that the philosophical origin of stakeholder theory is the co-operative movement of the 19th century. Freeman and Reed (1990) defined organizations as agreements between the firm and its stakeholders. These stakeholders are divided in internal and external stakeholders. The internal stakeholders are the managers, the employees and even the owners. These relations are most of the time legally bonded. In the stakeholder theory the external stakeholders are also important. External stakeholders are the clients, the suppliers, the competitors and also special interest groups such as NGOs. These stakeholders have informal relations with the firm. Another external stakeholder with a formal connection to the company is the government, which also dictates the laws in which the firm operates (Freeman, 1994, Post et al., 2003).Clark (2004) notes about corporate decisions: "If the job of corporate management is to maximize the total wealth created by the enterprise rather than just the value of the shareholders stake, then management must take into account the effect of corporate decisions on all stakeholders in the firm". Clarkson (1994) also argues: "The firm is a system of stakeholders operating within the larger system of the host society that provides the necessary legal and market infrastructure for the firm's activities. The purpose of the firm is to create wealth or value for its stakeholders by converting their stakes into goods and services".
The benefits from good corporate governance strategies are plenty. I will now mention some of those. Hirschman (1970) supports that good corporate governance is attracting loyal investors. The loyal investors are less possible to "leave" the company and sell their shares. Xanthakis, Tsipuri and Spanos (2003) also note that transparency and good flow of information attracts the investors, because they have a stronger role and an active part in monitoring. In the Enron case there was a list of major failures that was due to lack of corporate governance. There was no transparency to allow investors and stakeholders to monitor their interests. There were conflicts of interests of the external auditors since they were also the consultants of the firm (Clarke, 2004). There was deception of the shareholders and the stakeholders originated by the lack of morality and the lack of respect for the company's own codes of conduct. All these could be avoided by developing a solid corporate governance system with efficient monitoring, transparency and ethicality on the actions.
Corporate Social Responsibility
In recent years there has been a growing debate over CSR from academia and practitioners. Preuss et al. (2009:955) explains: "there is now a growing awareness of environmental problems and persisting social inequality, often induced by campaigning efforts of activists groups.". Freeman (1999:479) also notes: "Government regulation has proliferated. Investors and investment fund managers have begun to make investment decisions on the basis of social responsibility as well as pure economics. Consumers have become increasingly sensitive to the social performance of the companies from which they buy.". In addition Goyder (2003:5) notes: "Corporate progress towards greater responsibility has always been the result of both push and pull. Visionary leaders in business pull their organizations to higher standardsâ€¦ The push comes from the society, from anti-slavery campaigners like William Wilberforce, from leaders of trade unions, from consumer leaders like Ralph Nader, from environmental activists like Greenpeace.".
There is also a continuing debate on how we define CSR. Oosterhout and Heugens (2006:2) argue: "The case for CSR as a theoretical concept in social science and the humanities is weak if not outright fatal". They support that it is not clear what CSR is, what the cause and the consequences of CSR are and finally we don't know what we need or should ask from the business towards society. Visser et al. (2007:IX) note: "while the idea has been around for some five decades now, the last15 years have seen an unprecedented rise of CSR language, tools, actors, strategies and practices in industry all over the world.". Carroll (2007) argues that: "The definition of CSR has evolved over the decades, generally becoming more precise as to the types of activities and practices that might be subsumed under the concept. Early definitions were often general and ambiguous.". Carroll' s (2007) definition for CSR is: "It encompasses the economic, legal, ethical, and discretionary or philanthropic expectations that society has of organizations at a given point in time.". The economic and legal obligations of a corporation are the things that are expected from a company by definition. The existence of a company is based on laws, so a company should obey them. Profit making is also something that society expects from a company. This is the reason of its existence, to provide goods and services for a profit. The society is also profiting from the economic development that a company offers in general through providing jobs. The ethical expectation is the compliance of a company to ethical norms and behaviors of the society. The last part of Carroll's definition concerns the step that companies are not obliged to take and society is not clearly expecting. This step includes philanthropic and discretionary responsibilities. Savitz and Weber (2006:xi) argue that they prefer the term sustainability: "Because responsibility emphasizes the benefits to social groups outside the business, whereas sustainability gives equal importance to the benefits enjoyed by the corporation itself.". The notion of sustainability is growing and the debate is still going on. Visser (2007:446) notes that: "sustainability may be defined as a values-laden umbrella concept about the way in which the interface between the environment and society is managed to ensure that human needs are met without destroying the life supporting ecosystems on which we depend.". Wan Saiful (2000) suggests that there are two ways that CSR is perceived, the first is as an ethical position and the second as a business strategy. And he adds (Wan Saiful, 2000:182): "Those who take CSR as a business strategy do so under the belief that CSR can ultimately help achieve and/or enhance profitabilityâ€¦Those who see CSR as an ethical stance will also see profitability and serving shareholders as important because companies may not otherwise be able to continue exercising their social responsibility.". For Kitchin (2003: 312) "CSR is a confusing thing. One moment it seems to mean the engagement of NGOs, the next it is all about charitable donations, and five minutes later it seems to mean the ethical treatment of employees. One minute the NGOs are calling the shots, the next the accountants are in on the act selling "reputation assurance".". And he suggests as CSR definition (2003:316) : "The brand-specific duties and resultant actions of commercial organizations in relation to their communities of need - defined and delivered outside the core transactional context of the business.". Sparks (2003) suggests that CSR is the companies' judgment on how they should make their profits.
There are also some definitions created by international organizations. For the Chartered Institute of Personnel and Development (2003:4): "CSR is about the way in which companies meet their wider obligations, both to employees and to the wider community." The World Business Council for Sustainable Development defines (2000) CSR as "the business commitment and contribution to the quality of life of employees, their families, the local community and the society overall to support sustainable economic development.". One last definition of CSR is offered by ISO (2002): "CSR is a balanced approach for organizations to address economic, social and environmental issues in a way that aims to benefit people, communities and society". From the above definitions we can safely conclude that CSR is a voluntary "program" or initiative from the sight of business organizations (including the public sector and all the forms of companies), which aims to "give back" to the community and behave ethically.
This has raised an argument by Friedman (1970) and from his follower Manne (2006) that there is no place for CSR in free market capitalism and that "using corporate resources for purely altruistic purposes basically amounts to socialism". Friedman (1970) famously noted: "There is one and only one social responsibility of business-to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.". Sternberg (1994, cited in Sparks, 2003) also supported that "using business resources for non-business purposes is theft". In addition Henderson (2002) stressed that the main role of business in the modern world is as an agent of economic progress and their duty is to pursue profits. Lantos (2001,2002) also argued against CSR. He notes though (Lantos, 2002:205): "for a private firm and for managers using their own resources, altruistic endeavors are commendable and consistent with certain secular as well as Judeo-Christian teaching on the meaning and purpose of work.". But at the same paper (Lantos, 2002:205) he argues: "Altruistic CSR violates shareholders property rights, unjustly seizing stockholder wealth, and it bestows benefits for the general welfare at the expense of those for whom the firm should care in close relationships".
We can see that the debate on CSR is constant and the arguments from both sides are strong. The final decision is usually in shareholders' hands. But we should not forget that shareholders are not independent entities. They are also stakeholders of their own company as they are stakeholders of every company that affects them.
Reasons, Fields and Challenges
Leonard and McAdam (2003) list specific issues in which CSR is engaged, some of them being: human rights, environmental behavior, community, social development, employment issues and unfair business practices.
Kotler and Lee (2005) listed the reasons why should a company introduce CSR strategies. They didn't focus on any of the obvious reasons such as helping poor people or protecting the environment. They listed six reasons that make economic sense and would probably satisfy Friedman and his followers. First they argue that CSR increases the market share. They also believe that "social marketing" attracts more high-income and highly educated customers. Secondly they support that CSR strengthens the brand name of the company. A good example is the "Body Shop", whose name is connected with animal protection. The third reason to embed CSR is the improvement of the corporate image and the expansion of the corporate influence. The next reason has to do with the HR department. Kotler and Lee argue that companies with CSR policies attract and keep higher levels of employees. These employees are happy to work for a responsible company and they tend to stay longer. The final proposed reason is that by following CSR strategies, companies can reduce their costs. Especially costs that have to do with energy consumption and waste management.
Kotler and Lee (2005) also point out some challenges that corporations will face during their involvement with CSR. How to choose your social subject and how to choose your way of promoting it are the first two challenges. Then is the planning and execution of your programs. Finally is the constant and serious monitoring and evaluation of the actions and the results.
Stages & Classification
Zadek (2004) proposes five stages that an organization will go through in the process of adopting CSR policies. The first stage is the one during which the company doesn't recognize any responsibility towards the problem: "defensive stage". The second is called "compliance stage". The company will do only as much as it is required to be done. In the third stage the company will realize that by fixing a long-term problem benefits will come. This stage is known as the "managerial stage". Next stage is the "strategic", when the company learns how to make CSR a strategic approach and gain competitive advantage. The last stage is the "civil" one, when the company promotes collective action towards a solution.
Carroll (1979,2000,2001) classifies the responsibilities of a company in four categories: economic, legal, ethical and philanthropic. As a response Lantos (2001, 2002) proposes his own classification: Ethical CSR (moral mandatory fulfillment of corporation's economic, legal and ethical responsibilities), Altruistic CSR (going beyond "ethical CSR" and engaging philanthropic action) and Strategic CSR (philanthropic actions that will benefit the corporation through publicity). Kotler and Lee (2005) offer a different classification that serves more the marketing needs of the corporation. For them the six categories or ways to offer are: Promotion of a cause, Marketing of a cause, Corporate social marketing, corporate philanthropy, volunteering to the community and Corporate practices of social responsibility. The first two are focused on a certain cause by donating money, products or a percentage of their sales (marketing of cause). In corporate social marketing the company is promoting a certain attitude or action. By adopting corporate philanthropic actions a company is making donations towards the social cause. By volunteering the company engages its employees and its stakeholders towards a cause. Finally with Actions of CSR it is supporting the stakeholders usually by protecting the environment or supporting local communities. The last action is usually long term and requires devotion and strategic planning. All the previous scholars mentioned the notion of philanthropy or strategic philanthropy. Porter and Kramer (2002:57) note about strategic philanthropy: "the terms is used to cover virtually any kind of charitable activity that has some definable theme, goal, approach, or focus. In the corporate context, it generally means that there is some connection, however vague or tenuous, between the charitable contribution and the company's business.". Carroll (1991:42) also specified: "the distinguishing feature between philanthropy and ethical responsibilities is that the former are not expected in an ethical or moral sense. Communities desire firms to contribute their money, facilities, and employee time to humanitarian programs or purposes, but they do not regard the firms as unethical if they do not provide the desired level".