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Corporate Governance has been interpreted in different ways among various companies. Over the years the meaning of the term corporate governance has widened and has covered a wider range of issues under it. According to Shleifer & Vishny (1997):
"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".
According to Luo (2005) and Monks & Minow (2004) the process of corporate governance starts from the internal stakeholders of the companies: directors, managers, employees of the company followed by external stakeholders: customers, shareholders, creditors, suppliers, regulatory bodies. The Ethical Investment Research Services, Maier (2005) defined Corporate Governance much broadly which clearly shows the inclusion of Corporate Social Responsibility within its parameters.
According to a study conducted by Charkham (2005) companies took notice of many factors within the company and the surrounding environment following the broadening of the term of Corporate governance The companies not only need to be profitable but also need to take care of the social and the ethical aspects followed with in the company. This has become more or less an obligation for companies irrespective of it being labeled under the CSR activities or not.
Corporate Governance & Corporate Social Responsibility
There are some co-relation between the corporate governance and the CSR activities that a firm indulges in. As per the definitions above, CSR is a part of the corporate governance policies of the company. But the extent to which the corporate governance and the corporate social responsibilities are related depends on the way these two terms are defined by any companies. There is one common platform on which corporate governance and CSR operate. They both revolve around the ethical, social and environmental implications of the company's policies and activities on the future activities. This effect has been emphasized by the study of Carroll (1999). In the opinion of Deakin & Hobbs (2007) the CSR is often limited to the external issues that the companies have to address. Most of these causes are the companies are focusing on are related to the ethical issues like fair trade, environmental problems, etc. However as per the European Commission (2003), there are few countries which take care of the internal aspects like the working condition of the employees, their issues and concerns, rights of equality within the company, equal respect to the women employees.
As per the study of Freeman & Reed (1983) the stakeholder's perspective was included to help the companies decide the scale of involvement in the internal and external CSR activities and the responsibilities that the companies should assume. Thus the companies need to go beyond the normal objective of just profit making and try to incorporate the interest of a larger audience. The companies are compelled to broaden their focus and look at the long term benefits of these activities. Thus, the companies are also considering the interest of the people other than the stockholders, therefore taking into consideration the demands of all the stakeholders of the company. According to Freeman (1984) the stakeholders have been defined as, "any group or individual who can affect or is affected by the achievement of the organization's objectives". Following the stakeholder's perspective would increase the complexities for the companies. As the number of stakeholders increases, there are chances of conflicting interest and may pose challenges to the companies following this approach (Daily et al., 2003).
What is Corporate Social Responsibility?
While there is no general definition of corporate social responsibility, it generally refers to transparent business practices that are based on ethical values, compliance with legal requirements, and respect for people, communities, and the environment. Thus, beyond making profits, companies are responsible for the impact on the community at large and also the environment.
In other words, CSR is understood to be the way firms integrate social, environmental and economic concerns into their values, culture, decision making, strategy and operations in a transparent and responsible manner and thereby set up better practices within the firm, create wealth and improve society.
The World Business Council for Sustainable Development has described CSR as the business contribution to sustainable economic development. Having as foundation compliance with legislation and regulations, CSR usually includes "beyond law" commitments and activities pertaining to:
corporate governance and ethics
health and safety
human rights (including core labour rights)
human resource management
community involvement, development and investment
corporate philanthropy and employee volunteering
customer satisfaction and adherence to principles of fair competition
anti-bribery and anti-corruption measures
accountability, transparency and performance reporting
supplier relations, for both domestic and international supply chains.
Overview of Corporate Social Responsibility (CSR)
Bill Ford, the great-grandson of Henry Ford, once observed, "A good company delivers excellent products and services, and a great company does all that and strives to make the world a better place."
Bill Ford has captured in this remark the true essence of what corporate social responsibility (CSR) strives to achieve. The initial belief that companies were created for the sole purpose of profit no longer holds true. Organisations now operate in an environment that involves larger political and social entities including employees, citizens and political authorities, who seek to enhance the environment they live in. With globalisation blurring boundaries across countries, organisations have multiple responsibilities. They not only have to operate in a socially responsible but also to stay competitive to increase shareholder returns.
CSR in the past
CSR, in the past, was considered to be limited as a part of corporate philanthropy, but today, the actual definition of CSR has changed. "Traditions of corporate philanthropy date back to the Victorian era with the activities of Quaker families such as the Cadburys, Rowntrees and Hersheys who sought to improve their employees' standard of living as well as enhancing the communities in which they lived" (Hancock, 2005).
The concept of CSR is quite a new one-this phrase has only been in wide use since the 1960s. While the economic, legal, ethical, and discretionary expectations placed on organizations may differ, it is probably accurate to say that all societies at all points in time have had some degree of expectation that organizations would act responsibly and in the best interest of the society.
History of Corporate Social Responsibility
In the eighteenth century the great economist and philosopher Adam Smith expressed the traditional or classical economic model of business. Basically, this model suggested that the needs and desires of society could best be met if individuals and organizations in the marketplace interact with each other. By acting in a self-interested manner, individuals would produce and deliver the goods and services that would earn them a profit, but also meet the needs of others. The viewpoint expressed by Adam Smith over 200 years ago still forms the basis for free-market economies in the twenty-first century. However, he recognized that the performance of free market was not perfect and he also stated that marketplace participants must be honest and act justly towards each other to achieve the ideals of the free markets.
Research published by the UK's Institute of Business Ethics, comparing companies in the FTSE 250, provides strong evidence that "those clearly committed to ethical behaviour perform better financially over the long term than those lacking such a commitment" (Alison Maitland, Financial Times, 3 April 2003). Furthermore, following the Enron, Andersen and WorldCom
scandals, there is a greater recognition by businesses that CSR can help to restore public trust in the corporate world.
The notion that business has duties to society is firmly well-established, although in the past several decades there has been a revolution in the way the relationship between business and society is perceived. Archie Carroll (1979) and other researchers believe that corporations should not just be judged on their economic success but also on non-economic criteria. Carroll (1979) proposed a popular four-part definition of CSR, suggesting that corporations have four responsibilities or "four faces" (Carroll, 2000, p. p. 187) to fulfill to be good corporate citizens: economic, legal, ethical, and philanthropic.
Be profitable. Maximize sales, minimize costs, etc.
Obey laws and regulations.
Do what is right, fair and just.
Be a good corporate citizen.
Figure 1: Business and Society: Ethics and Stakeholder Management, Carroll & Buchholtz
PRINCIPLES OF CSR
"CSR actually has its roots in the thinking of early twentieth century theologians and religious thinkers, who suggested that certain religious principles could be applied to business activities. Andrew Carnegie formulated a classic twofold statement of corporate social responsibility based on religious thinking.
Charity principle: requires more fortunate individuals to assist less fortunate members of society. However, by the 1920's community needs outgrew the wealth of even the most generous wealthy individuals, with the result that some people expected business organizations to contribute their resources to charities aiding the unfortunate.
Stewardship principle: a biblical doctrine that requires businesses and wealthy individuals to see themselves as stewards or caretakers, not just of shareholders' financial resources, but also of society's economic resources, holding their property in trust for the benefit of society as a whole". (Lantos, 2001)
THE TRIPLE BOTTOM LINE
The triple bottom line (TBL) approach is often synonymous with CSR. The financial, social and environmental reporting or the triple bottom line reporting can be used to measure the commitment of any company towards CSR which centers on societal and environmental matters. Focus on TBL ensures the sustainability of not only the company, but also the environment the company operates in (Figure 1).
TBL reporting has come into focus in recent times, as it helps companies meet the demands of investors and also gain recognition for its actions.
Figure 2: The Triple Bottom Line
Involvement in CSR activities helps a company address any potential problems that might attract legal attention. There are several laws in place to ensure that companies act in a responsible manner. Although no standard measures have been established that require a company to comply with CSR, it has become inevitable for companies.
THE KEY DRIVERS
There are many drivers of CSR programmes namely:
Bottom line effect: The most significant driver of CSR programmes is the bottom-line effect of incorporating a socially responsible element in a business practice.
Lower equity risk premium: A comprehensive CSR programme will lower a company's equity risk premium.
Reputation management: There is a direct correlation between reputation and financial outcome measures - share price and credit rating (Hancock, 2005).
Influence of the corporate disasters: The corporate scandals affecting Enron, WorldCom and the like have certainly increased the perception of greed among business officials in the corporate world. CSR is important in counteracting allegations of corporate greed.
Customer loyalty: A CSR programme can build customer loyalty and offer a competitive advantage in a marketplace where consumers demand goods and services ethically delivered or produced.
Further investment case: A strong investment case exists for the avoidance of expensive action suits and the ability to attract, motivate and have talented employees. In terms of a proactive strategy, CSR may give the opportunity for business to inform shareholders of potential risks and issues.
WHY HAS CSR BECOME SO IMPORTANT?
Some factors which have contributed to the increasing attention given to CSR are as follows:
Globalization is increasingly raising CSR concerns related to human resource management practices, environmental protection, and health and safety.
Governments have devised guidelines, principles and other instruments that outline social norms for acceptable conduct.
Advances in communications technology are making it easier to track corporate activities and circulate information about them. Private corporations regularly draw attention through their websites on ambiguous business practices.
Consumers and investors are showing increasing interest in supporting responsible business practices and are demanding more information on how companies are addressing risks and opportunities related to social and environmental issues.
Several breaches of corporate ethics have led to increased public mistrust of corporations and highlighted the need for improved corporate governance, transparency, accountability and ethical standards.
Citizens in many countries want corporations to meet standards of social and environmental care wherever they operate.
There is increasing awareness of the limits of government legislative and regulatory initiatives to successfully capture all the issues that corporate social responsibility addresses.
Effective approach to CSR reduces risk of business disruptions, open up new opportunities, and enhance brand and company reputation.
POTENTIAL BENEFITS OF IMPLEMENTING A CSR APPROACH
Better anticipation and management of an ever-expanding range of risk. Effectively managing social, environmental, legal, economic and other risks in an increasingly complex market environment, with greater oversight and stakeholder analysis of corporate activities, helps improving the security of supply and overall market stability.
Improved reputation management. Organizations having good performance related to CSR can boost goodwill whereas those performing poorly can damage brand image and company value.
Enhanced ability to recruit, develop and retain staff. Introducing "family-friendly" policies can be the result of improved human resources practices. It can also be the indirect result of programs and activities that improve employee morale and loyalty. Employees are motivated to operate in a workplace where they are proud to work.
Improved competitiveness and market positioning. This can result from organizational, process and product differentiation and innovation. Good CSR practices can also lead to better access to new markets.
Enhanced operational efficiencies and cost savings. Improved efficiencies resulting from systematic approach to management including continuous improvement.
Attracting and building effective and efficient supply chain relationships. Similar companies can establish long-term profitable business relationships. Each other can encourage the implementation of a CSR approach in their business.
Enhanced ability to address change. A company with its "ear to the ground" through regular stakeholder dialogue is in a better position to anticipate and respond to regulatory, economic, social and environmental changes that may occur.
More robust "social license" to operate in the community. Improved citizen and stakeholder understanding of the firm and its objectives and activities translate into improved stakeholder relations
Access to capital. Financial institutions are increasingly incorporating social and environmental criteria while assessing projects. Investors are looking for indicators of effective CSR management when making investment decisions.
Improved relations with regulators. In a number of jurisdictions, governments have expedited approval processes for firms that have undertaken social and environmental activities beyond those required by regulation.
Figure 3: How do companies allocate their CSR resources?
SOME CSR CONNECTED ISSUES:
Corporations face a great deal of social problems which are directly or indirectly associated to their operations. Below are the three major social issues namely: the environment, global issues, and technology issues.
Corporations have long been stigmatized in terms of adverse effect on the environment in terms of wasting natural resources and polluting the environment. There are both governmental and societal pressures on corporations to adhere to stricter environmental standards and to alter production processes to lessen the harm caused to the environment.
Critics suggest that globalization leads to the exploitation of developing nations and workers, destruction of the environment, and increased human rights abuses. Moreover proponents of globalization argue that open markets lead to increased standards of living for everyone, higher wages for workers worldwide, and economic development in poor nations. Multinationals will continue facing legal, social, and ethical issues brought on by the increasing globalization of business if they do not decide which socially responsible option to adopt, that is common worldwide standards or different standards of countries.
Issues related to technology and its effect on society, such as privacy and security of confidential corporations' information, must be clearly addressed to avoid far-reaching societal and ethical implications. As our technological capabilities continue to advance, it is likely that the responsibilities of corporations in this area will increase dramatically.
Research suggests that those corporations that develop a reputation as being socially responsive and ethical enjoy higher levels of performance. However, the ultimate motivation for corporations to practice social responsibility should not be a financial motivation, but a moral and ethical one.
ARGUMENTS AGAINST CSR
One of the most famous economists Milton Friedman wrote that corporations only have one responsibility, and that is to make money (cited in Frank, 2004). In this view, any extra efforts made by companies in attaining broader social goals, is just a waste of money according to him. Trevino and Nelson (1999) also outline, that the corporation is responsible to numerous stakeholders, and therefore has a responsibility to make a profit, simply to maintain their employees and satisfy the shareholders. A typical argument why organizations only have the responsibility to make money is because this classical view believes that "In a well-ordered society, corporations attend to business while government and other institutions fulfill their proper roles" (Boatright, 1993:94). The rise of the modern corporation created and continues to create many social problems. Therefore, the corporate world should assume responsibility for addressing these problems. Taking on social and moral issues is not economically feasible. Corporations should focus on earning a profit for their shareholders and leave social issues to others. In the long run, it is in corporations' best interest to assume social responsibilities. It will increase the chances that they will have a future and reduce the chances of increased governmental regulation. Therefore corporations should be well equipped to reduce societal problems.