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In today's business environment, companies are giving more attention to their core values and the sense of corporate social responsibility (CSR). People invest their resources in companies and stocks where they find some confident that the business is sound and well manage, and will continue to be beneficial. They expect that companies will show transparency in the annual financial reports of business activities. In last few decades many of the organization collapse simply because not showing the true picture of the business activities. As result investors suffer heavy losses. All these aspects are cover by the field of "Corporate Governance", which deals with the way in which shareholder assure of getting returns on their investment (Shleifer & Vishny, 1997). In recent decades, companies have developed an effective change in the field of corporate governance by balancing the expectations of shareholder with the need to overcome the externalities' impact on other stakeholder.
Corporate governance describes the rules and regulation of a business that implement in the mechanism of the company. This shapes the work structure and communication among the board of directors, mangers, personnel and other stakeholders in order to resolve conflicts (Frank et al, 1991). Different authors describe the phenomena of corporate governance differently; however the main idea behind the all definitions is to have some set of systematic processes, rules and regulation, policies to run the organization in efficient way and other institutions that might affect the way company is directed and administrated (Gill A, 2008). The governance mechanism promotes the efficient utilization of organizational resources and transparency in reporting. The purpose is to support the interest of stakeholders, corporations and society.
Corporate governance strategies are useful in ensuring appropriate system of control and regulate, that also helpful in safeguarding assets of the company. It also valuable in preventing any single or group influence and power within organization and create a suitable effective relationship among the management, board of directors and different stakeholders. Corporate governance ensures the efficient management of organizational activities which build the trust among the stakeholder by encourages both transparency and accountability (Mallin, C.A. 2010).
Now the corporate governance is the matter of ethical norms that deals with the transparency in operations, accountability and corporate social responsibility that adapts to prevailing business practices. As once there were two different kinds of mechanisms, one is dealing with corporate decision-making and the other with people-friendly business strategies. The involvement of private sector plays a significant role in the convergent of corporate governance to CSR in shaping public policy and regulation (Lester M. S, 2002). Public friendly policies were initially imposed by the formal public regulatory bodies, such as workplace, discriminations act and environmental protections. But now theses regulations are developed and implement with the coordination and participation of private and public sectors (David H, 2007).
Theoretical Aspect of Corporate Governance
Agency theory, as the area of relative importance of corporate governance, by focusing on that area make it to accept the supremacy of shareholder primary model along with the policies, laws and economic view of economic strengthening and efficiency (Steven et al, 1999). This approach helps in clarifying the guidelines for the top management and board of directors based on the cost into benefit analysis and value maximization ends. Which often exclude the interest of the shareholder and ignore social and environmental aspects caused by corporate actions and operations (Kelman M, 1983).
In corporate governance the old school of thoughts was concern with agency conflicts which was overruled by new school of thought as it deals with the corporate ethics, transparency and accountability phenomena (Lawrence et al, 2004). The new public policy view of the corporate governance admit that, it is no longer the concept of stock maximization but keeping good relation with many players (stakeholders) and the goals for which the organization controlled and governed by involving them to have a stronger hold and rights in organizational matters.
Stakeholder theory does not take only shareholder into consideration but the other entire stakeholder as well, like employee, society, environment, customer etc. There are several reasons to manage shareholder as separate group. They might have interest in company's performance and regulations. Shareholders and other stakeholders may support diverse CG arrangement and evaluating mechanisms.
The field of corporate governance gains a significant attention as public policy issue after the major corporate scandal in early 2000s. it was proposed that new corporate reforms should be call off that not only describing and administer the rules and regulations but also requires an efficient governance and greater examination over financial information with transparency in performing the operations to prevent managers from engaging in fraud. As a result of new emergence of in the corporate governance, it has become focus point for business due process where management are required to make decisions with strong organizational monitoring system that protects the investment of the investors as the primary concern of the corporate policy (Gedeon J.R, 2005). After 2000 the change taking place in the corporate governance as it is considered as corporate morals and ethical issues which find their expression in accountability, regulator, transparency, and disclosure (Brian A. Warwick, 2003).
Corporate Governance & Corporate Social Responsibility
The focused of Corporate governance has transfer from traditional governance of agency conflicts (specifying rules and regulations) to corporate social responsibility (CSR), as a medium of integrating social, environmental, economical and ethical concern into the business management process. This shift is taken place due to the phenomena of benefiting not only investors but also other stakeholders like employees, consumers, and society. Increasingly, corporate governance is being engage more and more in stakeholder friendly business practices and policies to meet their expectations. Today the centrality of the corporate governance is to appeal the issues of ethics, transparency, accountability and disclosure (Gill A, 2008). Companies strive to pledge their commitment to transparent and fair business practices by assuring the regulators and financers are honest and accountable for their actions (Joel S. 2002).
The recent evolution in corporate accountability has also enhanced the tension between corporate governance's commitment with their shareholder and stakeholder interests. In reconciliation of these issues and tensions CSR movement has played a significant role in making corporate governance as a complete attuned to constituency concerns. The corporate socially responsibility gives more brief description and deep inside into theoretical aspect of the corporate governance. As Companies should not be treated as the sole property of shareholder' and investors' but as a semi-public enterprises based on transparent and relational contracts among investors, managers, and employees (Margaret et all, 1999). Social welfare aspect anticipate that corporate law and policies also acknowledge the environmental and social sides along with unfair distributive consequences of creating corporate surpluses (Lawrence E. M,1992).
The main challenge to the new corporate governance is to create the feasible environment and conditions for these tools which make it possible to work as effectively as possible. New Governance not only pin point the importance of public examination and enforcement as effective mechanism of regulation, but also demonstrate improve regulatory structures meeting the public expectations for accountability (John et al, 2005). Studies show that as compare to traditional command and control system, policies which emphasize on social responsibility through transparency and coordination are more successful in bringing about ethical corporate conduct. Moreover new governance structure rely more on public private collaboration and participation and rely less on state dictated preferences. Companies are more willing to consider effective way of enforcing to meet the expectations and they also shows more transparency in their performance when operate in a collaborative environment where they can more freely perform their monitoring(Cary & David, 2003).
According to Drucker (1954), communal responsibility is the area in which business objectives should take into account. The approach to CSR does not only covers the shareholder strategy (Roberts, 2001), but socially responsive CSR approach covers a broader spectrum of issues including ethical considerations (Roberts, 2003). Corporate governance and ethics are providing new form of approach to environmental, social, and ethical in addition to financial visibility (Roberts, 2001).
Corporate Governance & Global Bodies
In March 2000, European Union (EU) has declared the idea of CSR to promote the business practices in organizations with transparency, reliability, and legitimacy in participation with the stakeholder (COM, 2001). EU has demonstrated Social Accountability 8000 (SA8000) and evaluation mechanism that describe on conventional business strategies for confirming quality mention in ISO 9000 (COM, 2001). After recognizing the significance CSR as voluble business plans, many multinational companies are issuing social responsibility reports on regular basis. Although the content of these reports are not same as it varies, depending on approaches of company to CSR.
In 1997, Global Reporting Initiatives was commence in US by non-governmental organizations to promote transparency and regulation in reporting on economic, social, environmental issues (White, 1999). It was made possible to establish guidelines for GRI through the participation of different professionals belongs to area of accountancy, environmental, human rights, and labor unions (White, 1999). The Global Compact is based upon the communal accountability, transparency, and the objectives of the companies, labor, and civil society in order to practice its policies and principles. In collaboration with private sector, NGOs, other institutions and social groups responded to make self regulation more implementable and effective. The public view of corporate governance led by NGOs and other regulatory institutions to put more pressure to administer corporate accountability and social responsibility. They enforce companies by public monitoring campaigns, legal actions, focal point of which is human and workers' right violated by multinational corporations (MNCs) and other stakeholder legislation (Jonathan et al 2006). It improves relationship of corporation with CSR through the development of societal institutions and associations in determining the field (Morton 2002).
In today's business environment, it has been very much clear that CSR serve as the competitive strategy, which enables organizations to make more achievable goals that are transparent, exhibit responsibility toward society and environment. It also takes into consideration the interests of other stakeholder while making long term objectives.
Corporate Governance & Human Resource
I have selected the article of Human resource management in relation to the corporate governance. The reason behind this is that my previous studies are based on the area of human resource management and also I want to further explore the business activities of personnel department. Along with that I am also interested to do my future thesis in the same area, so the human resource article in relation to corporate governance will give me a greater insight into governance and management practices.
Human Resource Department is acting as a catalyst which enhances and improves the business activities that get grouped together to give synergic effect. HR Department can easily put important policy matters and information to the board. They also put good strong monitoring and evolutionary mechanism to maintain the proper check and monitoring system. HR can also build strong relationships with people who attend board meetings and being able to get the opportunity to influence them board of directors and decisions makers (JILPT, 2006). HR can provide an effective feedback and help in leading corporate strategy if HR is to be heard at the board table, because many of the large corporations are establishing links between the board of directors and HR through board committees. Human resource management is the area which provides the strong bond between corporate governance system and social preferences to achieve their overall goals and objectives (Davis P, 2006). Which can be illustrate through following fig:01, which shows that HR serve as the main central catalyst which strengthen the cooperate governance effectiveness through training and development of their employee. HR can also be effective through making excellent monitoring policies and regulations.
Figure: 01 Image of the link between Corporate Governance and HRM
(Source: JILPT Research report no 33 (2006),"transforming HRM and governance/corporate strategies" available on http://www.jil.go.jp/english/reports/documents/jilpt-research/no33.pdf)
It is very much essential for good effective corporate governance to have clear guidelines of responsibility and accountability and that could only be possible to achieve through efficient human resource of the company. For efficient human resource good human resource practices need to be gain through HR department which help to percolate this culture through the entire staff (Davis P, 2006). Corporate human resource is at the best position to facilitate and give you strong indication that employees will be more involve and committed in the barraging of corporate governance. Corporate governance is also about efficient utilization of the human capital of the organization as important stakeholders. There is no doubt the success in the organization comes through the team work of the staff that symbolize the efforts from the employees (JILPT, 2006). Therefore it is very important to have corporate governance that should devise a mechanism for employee to participate and be able to communicate freely regarding serious issues such as unethical or illegal practices.
The purpose of corporate governance is to maintain the appropriate policies and regulation within the organization with transparency in accountancy and business activities and giving the true picture of activities to stakeholders. It also use to ensure that corporate decision are made within the concerned of ethical norms and responsibly and meeting the expectation of stakeholders. Corporation also concerned with maintain the consensus and interest of top-level managers with the interests of the business stakeholders. Realizing the globalize world, where the issues of competitions, expectations of stakeholder, hunt for the talent and knowledge base economy has increase the importance of corporate governance. Effective human resource management practices can provide the strength in achieving the corporate governance goals with responsibility and ethics.