Global Perspectives on Corporate Governance and CSR

Güler Aras, David Crowther

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9780566088308
• eBook ISBN: 9781317127475
• Topic: Business
• Subtopic: Business General
• Index: Business

Good governance is good PR, it is important in every sphere of society, whether it be the corporate environment, the political, or wider society. When resources are too limited to meet the minimum expectations of the people, it is a good governance level that can help to promote the welfare of society. Enlightened companies recognise that there is a clear link between governance and corporate social responsibility and make efforts to link the two. Unfortunately this is too often no more than making a claim that good governance is a part of their CSR policy as well as a part of their relationship with shareholders. Corporate Governance and CSR are significant issues in all parts of the world, huge amounts of time and energy are devoted to its global interpretation. Most analysis however is too simplistic to be helpful as it normally resolves itself into simple dualities: rules based v principles based or Anglo-Saxon v Continental. The editors of this book argue that this is not helpful - that the reality is far more complex. They show that Corporate Governance and CSR cannot be understood without taking geographical, cultural and historical factors into account. It is necessary, they say to understand the concerns of people in different parts of the world. Therefore, by using a wealth of case studies, theoretical models, and drawing on the knowledge and perspective of experts from around the world, the editors have produced this valuable book. Global Perspectives on Corporate Governance and CSR discusses issues such as regional and cultural similarities and differences, the contexts of differing legal frameworks and governance codes, differences between large companies and SMEs, governance in new environments (companies and economies) versus stable environments, and the changing environment affecting corporate social responsibility around the world. The editors then synthesise this in a way that will be helpful to business people as well as to academics.

1
Corporate Governance and Corporate Social Responsibility in Context

Güler Aras and David Crowther

Introduction

It will be readily acknowledged that as a concept, governance has existed as long as any form of human organisation has existed. The concept itself is merely one to encapsulate the means by which that organisation conducts itself. Recently however the term has come to the forefront of public attention and this is probably because of the problems of governance which have been revealed at both a national level and in the economic sphere at the level of the corporation. These problems have caused there to be a concern with a reexamination of what exactly is meant by governance and more specifically just what are the features of good governance. It is here therefore that we must start our examination.

When considering national governance then, this has been defined by the World Bank as the exercise of political authority and the use of institutional resources to manage society’s problems and affairs.

This is a view of governance which prevails in the present, with its assumption that governance is a top down process decided by those in power and passed to society at large. In actual fact the concept is originally democratic and consensual, being the process by which any group of people decide to manage their affairs and relate to each other. Such a consensual approach is however problematic for any but the smallest of groups and no nation has actually managed to institute governance as a consensual process. With the current trend for supra-national organisation1 then this seems even more of a remote possibility; nor is it necessarily desirable. Thus a coercive top down form of governance enables a society to accept leadership and to make some difficult decisions which would not otherwise be made.2 Equally of course it enables power to be usurped and used dictatorially – possibly beneficially3 but most probably in a way in which most members of that society do not wish.4

This top down, hierarchical form of governance is the form of governance which normally takes place in large monolithic organisations such as the nation state. Conversely the consensual form tends to be the norm in small organisations such as local clubs. There are however other forms of governance which are commonly found. One of these is governance through the market (see Williamson, 1975). The free market is the dominant ideology of economic activity and the argument of course is that transaction costs are lowered through this form of organisation. From a governance perspective however this is problematic as there is no automatic mechanism and negotiation is used. The effect of this is that governance is decided according to power relationships, which tend to be coercive for the less powerful (e.g. consumers). Consequently there is a need to impose some form of regulation through governments or supra-national organisations such as the World Trade Organisation, which thereby re-imposes the eliminated transaction costs. The argument therefore resolves into an ideological argument rather than an economic one.

An increasing number of firms rely upon informal social systems to govern their relationship with each other, and this is the final form of governance. This form is normally known as network governance (Jones, Hesterly and Borgatti, 1997). With this form of governance there is no formal rules – certainly none which are legally binding. Instead social obligations are recognised and governance exists within the networks because the different organisations wish to continue to engage with each other, most probably in the economic arena. This form of governance can therefore be considered to be predicated in mutual self interest. Of course, just as with market governance, power relationships are important and this form of governance is most satisfactory when there are no significant power imbalances to distort the governance relationships.

Although in some respects these different forms of governance are interchangeable they are, in reality, suited to different circumstances. Whichever form of governance is in existence however the most important thing is that it can be regarded as good governance by all parties involved – in other words all stakeholders must be satisfied. For this to be so then it is important that the basic principles of good governance are adhered to.

The Principles of Governance

There are eight principles which underpin every system of governance:

TRANSPARENCY

As a principle, Transparency necessitates that information is freely available and directly accessible to those who will be affected by such decisions and their enforcement. Transparency is of particular importance to external users of such information as these users lack the background detail and knowledge available to internal users of such information. Equally therefore the decisions which are taken and their enforcement are done in a manner that follows rules and regulations. Transparency therefore can be seen to be a part of the process of recognition of responsibility on the part of the organisation for the external effects of its actions and equally part of the process of redistributing power more equitably to all stakeholders.

RULE OF LAW

This is a corollary of the transparency principle. It is apparent that good governance requires a fair framework of rules of operation. Moreover, these rules must be enforced impartially, without regard for power relationships. Thus the rights of minorities must be protected.5 Additionally there must be appeal to an independent body as a means of conflict resolution, and this right of appeal must be known to all stakeholders.6

PARTICIPATION

Although participation by all stakeholders is of course desirable, this is not an essential principle of good governance. The ability of all to participate if so desired is however an essential principle. Participation of course includes the freedom of association and of expression that goes along with this. Depending upon the size and structure of the organisation, participation can be either direct or through legitimate intermediate institutions or representatives, as in the case of a national government. Participation of course would involve everyone, or at least all adults, both male and female.

RESPONSIVENESS

This is a collorary of the participation principle and the transparency principle. Responsiveness implies that the governance regulations enable the institutions and processes of governance to be able to serve all stakeholders within a reasonable timeframe.

EQUITY

This principle involves ensuring that all members of society feel that they have a stake in it and do not feel excluded from the mainstream. This particularly applies to ensuring that the views of minorities are taken into account and that the voices of the most vulnerable in society are heard in decision-making. This requires mechanisms to ensure that all stakeholder groups have the opportunity to maintain or improve their well-being.

EFFICIENCY AND EFFECTIVENESS

Efficiency of course implies the transaction cost minimisation referred to earlier whereas effectiveness must be interpreted in the context of achievement of the desired purpose. Thus, for effectiveness, it is necessary that the processes and institutions produce results that meet the needs of the organisation while making the best use of resources at their disposal. Naturally this also means sustainable use of natural resources and the protection of the environment.

SUSTAINABILITY

This requires a long-term perspective for sustainable human development and how to achieve the goals of such development. A growing number of writers over the last quarter of a century have recognised that the activities of an organisation impact upon the external environment. These other stakeholders have not just an interest in the activities of the organisation but also a degree of influence over the shaping of those activities. This influence is so significant that it can be argued that the power and influence of these stakeholders is such that it amounts to quasi-ownership of the organisation. Central to this is a concern for the future which has become manifest through the term sustainability. This term sustainability has become ubiquitous both within the discourse globalisation and within the discourse of corporate performance. Sustainability is of course a controversial issue and there are many definitions of what is meant by the term. At the broadest definition sustainability is concerned with the effect which action taken in the present has upon the options available in the future (Crowther, 2002). If resources are utilised in the present then they are no longer available for use in the future, and this is of particular concern if the resources are finite in quantity. Thus, raw materials of an extractive nature, such as coal, iron or oil, are finite in quantity and once used are not available for future use. At some point in the future therefore alternatives will be needed to fulfil the functions currently provided by these resources. This may be at some point in the relatively distant future but of more immediate concern is the fact that as resources become depleted then the cost of acquiring the remaining resources tends to increase, and hence the operational costs of organisations tend to increase (Aras and Crowther, 2007a).7 Sustainability therefore implies that society must use no more of a resource than can be regenerated (Aras and Crowther, 2007b). This can be defined in terms of the carrying capacity of the ecosystem (Hawken, 1993) and described with input – output models of resource consumption.

ACCOUNTABILITY

Accountability is concerned with an organisation recognizing that its actions affect the external environment, and therefore assuming responsibility for the effects of its actions. This concept therefore implies a recognition that the organisation is part of a wider societal network and has responsibilities to all of that network rather than just to the owners of the organisation. Alongside this acceptance of responsibility therefore must be a recognition that those external stakeholders have the power to affect the way in which those actions of the organisation are taken and a role in deciding whether or not such actions can be justified, and if so at what cost to the organisation and to other stakeholders. It is inevitable therefore that there is a need for some form of mediation of the different interests in society in order to be able to reach a broad consensus on what is in the best interest of the whole community and how this can be achieved. As a general statement we can state that all organisations and institutions are accountable to those who will be affected by decisions or actions, and that this must be recognised within the governance mechanisms. This accountability must extend to all organisations – both governmental institutions as well those as the private sector and also to civil society organisations – which must all recognise that they are accountable to the public and to their various stakeholders. One significant purpose of this is to ensure that any corruption is eliminated, or at the very least minimised.

Systems of Governance

It is probably true to say that there is a considerable degree of convergence8 on a global scale as far as systems of governance are concerned, and this convergence is predicated in the dominance of the Anglo-Saxon model of the state, the market and of civil society. As a consequence there tends to be an unquestionning assumption (see for example Mallin, 2004) that discussions concerning governance can assume the Anglo-Saxon model as the norm and then consider, if necessary, variations from that norm (see Guillen, 2001). In this chapter we take a very different position – which explains the significant contribution of this book – that there were historically three significant approaches to governance. Each has left its legacy in governance systems around the world and any consideration of global convergence cannot be undertaken seriously – certainly as far as any prognosis is concerned – without a recognition of this. Thus for us the Anglo-Saxon model is important but just one of the three models we wish to examine. The other two we have described as the Latin model and the Ottoman model. We start by outlining the salient features of each.

THE ANGLO-SAXON MODEL OF GOVERNANCE

The Anglo-Saxon model of governance is of course familiar to all readers of this book. It is founded on rules which must be codified and can therefore be subject to a standard interpretation by the appropriate adjudicating body. It has a tendency to be hierarchical and therefore imposed from above; and along with this imposition is an assumption of its efficacy and a lack therefore of considerations of alternatives. In this model therefore the issues of governance, politics and power become inseparably intertwined.

The abuses which have been revealed within this system of governance9 have exposed problems with the lack of separation of politics from governance. This has led to the suggestion that there should be a clear distinction between the two. The argument is that politics is concerned with the processes by which a group of people, with possibly divergent and contradictory opinions can reach a collective decision which is generally regarded as binding on the group, and therefore enforced as common policy. Governance, on the other hand, is concerned with the processes and administrative elements of governing rather than its antagonistic ones (Solomon, 2007). This argument of course makes the assumption that it is actually possible to make the separation between politics and administration. For example both the UK and the USA have governance procedures to make this separation effective for their national governments – and different procedures in each country – but in both countries the division is continually blurred in practice. Many would argue, and we concur, that the division is not possible in practice because the third factor of power is ignored whereas this is more important. Indeed it is our argument that it is the operation of this power in practice that brings about many of the governance problems that exist in practice. We discuss this in greater detail later in the chapter but part of our argument is that theories and systems of governance assume that power relationships, while not necessarily equal, are not too asymetric. If the relationship is too asymetric then the safeguards in a governance system do not operate satisfactorily whereas one of the features of globalisation is an increase in such power asymetries. We will return to this later.

As we have already identified, the Anglo-Saxon model is hierachical but other forms of governance are allowed and even encouraged to operate within this framework. Thus the market form features prominently in the Ango-Saxon model while the network and consensual forms can also be found. It is therefore apparent that it is not the form of governance which epitomises the Anglo-Saxon model; rather it is the dependence on rules and adjudication which distinguishes this system of governance.

THE LATIN MODEL OF GOVERNANCE

The Latin model of governance tends to be less codified than the Anglo-Saxon model and finds less need for procedures for adjudication. This is because it is founded in the context of the family and the local community. In some respects therefore it is the opposite of the Anglo-Saxon model, being based on a bottom up philosophy rather than a hierarchical top down approach. Thus, this model is based on the fact that extended families are associated with all other family members and therefore feel obligated. And older members of the family are deemed to have more wisdom and therefore assume a leadership role because of the respect accorded them by other family members. As a consequence there is no real need for formal codification of governance procedures and the system of adjudication does not need to be formalised – it works very satisfactorily on an informal basis. Moreover, this model is extended from the family to the local community and works on the same basis.

In many ways the network form of governance described earlier is based on this Latin model, insofar as it is predicated in informal relationships of mutual interest, and without the need for codification: this need is not required because of the interest of all parties in maintaining the working relationships which exist. Thus tradition can be said to play a part in this model of governance – trust based on tradition because it has worked in the past and can be expected to continue working into the future. The network form however is based on a lack of significant power inequalities whereas the Latin model definitely does have a hierarchy and power is distributed unequally. The power is distributed according to age however, and therefore it is acceptable to everyone because they know that they will automatically rise up the hierarchy – thereby acquiring power – as they age. The process is therefore inevitable and deemed to be acceptably fair.

THE OTTOMAN MODEL OF GOVERNANCE

The Ottoman Empire existed for 600 years until the early part of the twentieth century. Although the Empire itself is well known, few people know too much about it. Throughout Europe, at least, the reality is obscured by the various myths which abound – and were mostly created during the latter part of the nineteenth century – primarily by rival states and for political propoganda purposes. The reality was of course different from the myths and the Empire had a distinct model of governance which was sufficiently robust to survive for 600 years, although much modern analysis suggests that the lack...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Biographies of Editors
• Biographies of Contributors
• Foreword
• Chapter 1 Corporate Governance and Corporate Social Responsibility in Context
• PART 1 REGIONAL PERSPECTIVES AND DIVERSITY
• PART 2 LOCAL PERSPECTIVES
• PART 3 THEORETICAL PERSPECTIVES
• Index