Corporate Governance and Corporate Social Responsibility

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Introduction

Corporate social responsibility (CSR) is a form of corporate self-regulation incorporated into the business, which functions as an instrument by which a corporation examines and ensures its active conformity with the provisions of the law, ethical norms, and global practices.

The main role of social initiatives is to uphold responsibility and promote a positive impact through its conduct towards the environment, customers, staff, the immediate community, and all members of the public domain (Pearce & Robinson, 2011). In addition, CSR actively promotes the community’s growth and development, and eradicates norms that harm the public, irrespective of legality.

Although there is no single universally accepted definition of CSR, it can be summarized as the intentional inclusion of public interest into corporate decision-making processes, and the honoring of the three corporate pillars: people, planet, and profit.

CSR ensures that a corporation goes beyond its normal requirements so as to handle staff with dignity, operate with integrity and ethics, respect human rights, sustain the environment for future generations, and be responsible in the community (be a good ‘corporate citizen’).

A study conducted by the Fleishman –Hillard in association with the National consumers League came up with the following results regarding the importance of CSR:

From the table, it is evident that CSR programs are very important towards communities and the corporation’s staff.

On the other hand, corporate governance generally refers to the rules, processes, or laws by which corporations are managed, regulated and controlled, and can refer to the internal processes agreed upon by the officers, stockholders or constitution of a corporation, as well as external forces such as consumer groups, customers, and government directives (Brown and Dacin, 1997, pp. 81).

A fundamental theme of corporate governance is the nature and extent of responsibility and accountability of specific individuals in the corporation’s hierarchy, and mechanisms that attempt to eliminate or mitigate the problems that arise due to a lack of corporate governance (Freeman and Jeannen, 1991, pp. 122).

A clearly defined and implemented corporate governance provides a structure that benefits all stakeholders and ensures that the corporation holds onto standard ethical norms and best practices in addition to the formal laws.

Their has been a recent focus on corporate governance among international firms due to the high-profile scandals involving misuse of corporate power that have at times led to the collapse of these corporations. Some of these corporate scandals include the Enron Corporation scandal of 2001 and MCI Inc (previously WorldCom) scandal.

The scandals led to the collapse of these corporations and reminded governments and corporations of the significance or corporate governance. A primary element of corporate governance includes provisions for civil or criminal prosecution of staff who are found guilty of unethical and/or illegal activities due to the power bestowed upon them by the corporation (Gobe, 2002, pp. 12).

Both corporate governance and corporate social responsibility are becoming increasingly important to organizations, governments, and service providers as they strive to meet the challenges of social and economic problems while altering welfare environments and this can be attributed to a number of factors, economic, social, cultural, and legal, and so on.

However, progress in these two areas is often hampered by the fact that the fields are under researched even as corporations face new demands to improve their accountability, transparency, integrity and ethical behavior while observing the interests of its staff and that of the general public (Pearce & Robinson, 2011, pp. 5).

The paper will present a critical analysis of factors that have led many international firms to focus on corporate social responsibility and corporate governance in recent years.

Factors that have led to the increase of Interest in corporate social responsibility and corporate governance

Economic Factors

The importance of corporate governance lies in its contribution both to the success of the business and to accountability. Companies that have embraced corporate governance, mostly public companies, are today regarded as the most accountable companies.

They make their trading results public, and they are required to disclose as much information as possible about their dealings, relationships, remuneration and government arrangements. The importance of accountability was evident in the prosperity made by Cadbury Inc.

However, business prosperity cannot be forced or commanded, it requires the collective contribution of people through teamwork, effective leadership, enterprise, experience and skills (Cochran and Wood, 1984, pp. 43).

There is no single strategy for bringing these elements together, and it is risky to encourage the notion that rules and regulations on structure will automatically deliver success. On the other hand, accountability must be accompanied by rules and regulations, in which disclosure is the central facet.

Therefore, since corporate governance emphasizes on accountability, an international corporation or business will be able to bring together the above-mentioned elements to ensure prosperity in its operations in various locations around the world (Pearce & Robinson, 2011, pp. 122).

Rules and regulations instituted by the committee at the home country are relayed across all divisions, branches and franchises around the world and this results in success in these individual locations, and of the international organization in general.

Besides, good corporate governance can considerably reduce malpractice and fraud in an organization, although it cannot totally eliminate them.This reduces financial losses incurred by the organization whenever such malpractices occur.

A final economic factor that has made international organization increase their interest in corporate governance is related to confidence among investors.

Logically, a very small number of investors will be attracted to an organization that offers weak investor protection, however, for an organization that embraces corporate governance, investor confidence levels are up and this has the potential of attracting investors and raising extra cash through activities such as public listing, sale of shares, stocks, debentures, and so on (Cooper, 2004, pp. 76).

In a similar fashion CSR is of great importance to the economic success of any business organization, be it local or international. CSR not only involves doing the right thing(s), it entails responsible conduct, and also dealing with suppliers, distributors and other constituents of the supply chain network who do the same.

When a corporation implements CSR programs, then this can become known by the customers, suppliers and the local community.

This publicity can contribute significantly to the business in terms of winning contracts. Besides, customers often want to buy from corporations and businesses that are responsible in the way they treat them and in general those corporations that conduct their activities in in an ethical manner as dictated by the CSR policies.

Some clients do not only prefer to deal with responsible corporations, they insist on it (McWilliams and Siegel, 2000, pp. 608). For instance, the Co-operative Group, a consumer co-operative in the UK, attaches a significant importance on its CSR and publishes in depth reports on its performance on a wide range of measures, from animal welfare to the quantities of salt in its pizzas.

And in a study conducted in 2001 by Hill & Knowlton/Harris Interactive showed that 79 per cent of US citizens take into account CSR practices in their decision to buy from a given company. Overall, 36 per cent of those interviewed believe that CSR is a primary factor in deciding to buy a product.

Indeed, 91 per cent of the respondents said that they will switch loyalty to another company if the company has a negative image (Gobe, 2002, pp. 96). In another study conducted by The Aspen Institute Initiative for Social Innovation through Business among students, more than 50 per cent of the respondents said that they would quit their positions if the corporation did not support their values.

In conclusion, CSR programs increase a company’s sales turnover and thereby increases the returns on investments (ROI) besides improving cash flows. Therefore, corporations that implement CSR programs achieve more economic growth and become more competitive in the rapidly changing international business environment (Herremans et al. 1993, pp. 689).

Social factors

The importance of effective CSR strategies and corporate governance in the social spheres cannot be overemphasized. The role that businesses can play in the development of society is very important, and has been underestimated at times.

In fact, the activist community has been very instrumental in pushing organizations to implement CSR programs and corporate governance, and most of these programs are implemented with an aim of improving the organization’s image in the eyes of the public.

In other words, businesses and organizations introduced CSR reports and programs to reduce the damage inflicted on their activities and reputation by attacks from activist social groups who benefitted from 24-hour news media that mainly focus on corporate misconducts.

While, on one hand, this makes a captivating news item, it puts pressure on corporations to give back part of their wealth to society in return for what they have obtained from it (McWilliams and Siegel, 2000, pp. 608). Hence, it not just important for organizations to make profits, the way the profit is made and how it is used is a deep concern for social activists and the general public (Pearce & Robinson, 2011, pp. 75).

An organization must not be seen to be engaging in unethical or illegal practices in any area of its operations such as market conduct, trade policies, staff relations, obtaining raw materials, human rights, and environmental laws.

Whenever any of these offences are detected or observed in any organization, the activists put pressure on them through various forms of media and other channels such as boycotts, sabotage, and protests (Burke and Logsdon, 1996, pp. 501).

Therefore, in implementing CSR programs, a company aims to improve its image and this results into numerous advantages such as increase in sales of the organization’s products and the ability to attract and retain competent staff.

Indeed, a study conducted in 2008 by the Grant Thornton Grant Thornton International Business Report (IBR) revealed the desire to recruit and retain staff is one of the major drivers of CSR as shown below.

*Table 2: IBR Report on drivers of CSR.*

CSR also help a corporation differentiate itself by creating a strong corporate brand through CSR programs. Even among competitors, CSR can be significant in helping a corporation stand out. For instance, Wal-Mart, an international corporation, is famous as a business owned by its workers. Its CSR activities are directed to customer service, sales and profits.

Corporate governance also has a similar effect of improving the company’s image in the eyes of the public. The primary role of corporate governance is its transparency and accountability principles. An advantage of corporate governance is that its benefits, or the outcome of failing to implement it, can be assessed and measured by the public.

For instance, when Enron Corporation failed to fix poor financial reporting and a lack of conformation to standard accounting principles, the outcome was evident to all: the bankruptcy of the corporation. On the positive end, companies such as Coca Cola have continued to win public support due to their strong corporate governance policies (McWilliams and Siegel, 2000, pp. 607).

Legal Factors

Another reason for the increasing interest of international corporations in corporate governance and CSR is the need to conform to legal provisions and requirements. Central and state labor offices investigate compliance with all matters pertaining to employment such as wages, working conditions, working hours, discrimination, child labor and other human rights violations, and so on (Linton et al, 2004, pp. 230).

Other authorities also investigate issues pertaining to the environment with respect to the operations of the operations such as environmental pollution and degradation, use of toxic substances in the manufacture of products meant for human consumption, use of non-biodegradable materials, and so on.

These organization fine companies found to be flouting any rules, and in serious situations, such organizations can be shut down temporarily or permanently (Herremans et al. 1993, pp. 704). Other punishments may include profit disgorgement from firms found to be selling goods obtained from corporations that do not comply with the legal requirements.

However, implementing and monitoring CSR programs and corporate governance policies can be significant in helping a corporation comply with the various regulatory requirements, especially in an international market where the management may not have adequate information regarding the requirements.

Implementing a CSR aimed at ensuring that staff works in humane conditions and the wages equal or exceed the minimum wage requirements. Such a move can ensure that the firm does not violate legal requirements relating to these issues (Pearce & Robinson, 2011, pp. 56).

Other business processes that may lead to legal action against the corporation include the failure to have an effective Foreign Corrupt Practices Act compliance program and this may result into investigation and if found guilty, the corporation may be fined millions of dollars.

Insufficient knowledge of the corporation’s supply chain may result in the use of an unauthorized contractor, leading to hefty fines. Besides, corporations that do not sufficiently monitor suppliers’ product safety systems can be sued (Brown and Dacin, 1997, pp. 75).

With a strong CSR program that is employee focused in place, legal actions relating to staff discrimination, abuse, or issues relating to wages can be mitigated.

A customer and environment oriented CSR program can lead to an improvement of product safety and use of green technologies in manufacturing processes that ensure environmental protection and compliance to environmental laws both at home and in international locations.

Similarly, corporate governance policies can result in transparency regarding the corporation’s handling of issues relating to staff, production methods, supply chain processes, and so on.

This may result in a review and evaluation of these policies by external persons and bodies and this may assist a corporation in identifying areas that have not conformed to the legal provisions in the country of operation (McWilliams and Siegel, 2000, pp. 607).

Cultural Factors

The influence of culture in setting CSR programs and corporate governance policies is considerable. International corporations such as Bayer AG are known for having a culture of corporate citizenship dating back more that a century ago.

For example, the company has supported community sporting activities since the early 20^th century, the most evident of these activities is its supporting of Bayer 04 Leverkusen soccer club, which it has supported since 1904 to date. Bayer AG has continued with its corporate citizenship activities through the support of disabled athletes, evident during the Beijing Olympics in 2008 (Bayer, 2011, para. 3).

Cultural influence to implementing corporate citizenship policies are seen when a corporation moves into a country or community where specific aspects of business operations and values are observed.

For example, when Coca Cola began production of its products in the Saudi Arabian market in 1988, it had to conform to the Muslim ways of doing business and in the process, embraced CSR activities aimed at fulfilling its corporate citizenship objectives (McWilliams and Siegel, 2000, pp. 605).

These shifts included the use of decently dressed persons in its advertisements to reflect the Muslim tradition and use of halaal materials in its production processes. Incidentally, these activities represented people-directed CSR activities in respect of their tradition and culture. The company also embraced corporate governance principles such as ethical and transparent accounting procedures.

Conclusion

Both corporate governance and corporate social responsibility are very important towards the overall success of a business entity operating in numerous countries. These two aspects of large organizations are important in a number of business processes and can be used as marketing, tools.

Economically, corporate governance enables firms to bring together elements of business success such as teamwork, effective leadership, enterprise, experience and skills. Besides, good corporate governance can considerably reduce malpractice and fraud in an organization and improve investor confidence. Customers other groups in the supply chain network prefer to deal with companies that embrace CSR.

Socially, in implementing CSR programs and embracing corporate governance, a company can improve its public image and this results into numerous advantages such as increase in sales of the organization’s products and the ability to attract and retain competent staff.

CSR and corporate governance are important in legal spheres as they ensure that a corporation conforms to the legal requirements in the country if operation regarding wages, workplace conditions, discrimination, environmental issues, product manufacturing processes, and supply chain networks, among others.

CSR and corporate governance can also be of importance in conforming to the culture and traditions of a community, or the country in general.

References

Bayer. (2011). Social Initiatives: Working on behalf of a better life. Web.

Brown, T. J., and Dacin,. P. A. (1997). The Company and the Product: Corporate Associations And Consumer Product Responses. Journal of Marketing, Vol. 61, No. 1, pp. 68-84.

Burke, L., and Logsdon, J. M. (1996). How Corporate Social Responsibility Pays Off. Long Range Planning, Vol. 29, No. 4, pp. 495- 502.

Cochran, P. L., and Wood, R. A. (1984). Corporate Social Responsibility and Financial Performance. The Academy of Management Journal, Vol. 27, No. 1, pp. 42-56.

Cooper, S. (2004). Corporate Social Performance: A Stakeholder Approach. Ashgate: Burlington.

Freeman, R. E., and Jeannen, L. (1991). Corporate Social Responsibility: A Critical Approach. OH: Business Horizons.

Gobe, M. (2002). Citizen Brands. New York: Allworth Press.

Herremans, I. M., Akathaporn, P. and McInnes, M. (1993). An Investigation of Corporate Social Responsibility Reputation and Economic Performance. Accounting Organizations and Society, Vol. 18, No. 7/8, pp. 687-705.

Linton, A., Liou, C. C. and Shaw, K. A. A (2004). Taste of Trade Justice: Marketing Global Social Responsibility via Fair Trade Coffee. Globalizations, Vol. 1, No. 2, pp. 223-246.

McWilliams, A., and Siegel, D. (2000). Corporate Social Responsibility and Financial Performance: Correlation or Misspecification? Strategic Management Journal, Vol. 21, No. 5, pp. 603-609.

Pearce, J. A., & Robinson, R. B. (2011). Strategic management: Formulation, implementation, and control. (12th ed.). Boston: McGraw-Hill/Irwin.

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