A Handbook of Corporate Governance and Social Responsibility

Güler Aras, David Crowther, David Crowther

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317187950
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

The current economic situation has highlighted deficiencies in corporate governance while also showing the importance of stakeholder relations. It has also raised the profile of the debates regarding corporate social responsibility and shown the inter-relationship with governance. And the two together are essential for sustainable business. The social and environmental contexts of business are generally considered to be as significant as the economic and financial contexts and good governance will address all of these aspects. The combination of these aspects offers long term benefits for a firm, such as reducing risk and attracting new investors, shareholders and more equity as well as sustainable performance. Written by experts from all over the world, A Handbook of Corporate Governance and Social Responsibility is the most authoritative single-volume guide to the relationship between good governance and social responsibility and the reality of managing both. In addition to the theory and practice of governance and CSR, the book includes case studies from large and small organizations and NGOs to highlight examples of good and bad practice, and to show international and cultural similarities and differences while at the same time furthering the debate regarding the relationship between good governance and social responsibility.

CHAPTER 1
Overview

GÜLER ARAS AND DAVID CROWTHER

Introduction

National governance 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

Governance is however an issue which has come to the fore recently as a direct cause of problems associated with the financial and economic crisis. This applies to governance in general but to corporate governance in particular. Corporate governance can be considered as an environment of trust, ethics, moral values and confidence – as a synergic effort of all the constituents of society – that is the stakeholders, including government; the general public and so on; professional/service providers – and the corporate sector. One of the consequences of a consideration of the actions of an organisation, and the consequences of those actions, has been an increasing awareness of corporate governance (Hermalin 2005). Corporate governance is therefore a current buzzword the world over. It has gained tremendous importance in recent years. Two of the main reasons for this upsurge in interest are the economic liberalisation and deregulation of industry and business and the demand for new corporate ethos and stricter compliance with the law of the land. One more factor that has been responsible for the sudden exposure of the corporate sector to a new paradigm for corporate governance that is in tune with the changing times in the demand for greater accountability of companies to their shareholders and customers (Bushman & Smith 2001). There is a considerable body of literature which considers the components of a good system of governance and a variety of frameworks exist or have been proposed. We must stress also that we have taken a broad view of the definition of corporate governance both in terms of the aspects of corporate behaviour with which it is involved and also regarding the types of organisation with which it is concerned. Thus the term corporate governance has become ubiquitous in considering the governance of every type of organisation – corporate or not – in order to distinguish this from societal or civic governance. It is this broader interest with organisational governance which is the focus of this book.

Good governance is essential for good corporate performance and one view of good corporate performance is that of stewardship and thus, just as the management of an organisation is concerned with the stewardship of the financial resources of the organisation so too would management of the organisation be concerned with the stewardship of environmental resources. The difference, however, is that environmental resources are mostly located externally to the organisation. Stewardship in this context, therefore, is concerned with the resources of society as well as the resources of the organisation. As far as stewardship of external environmental resources is concerned then the central tenet of such stewardship is that of ensuring sustainability. Sustainability is focused on the future and is concerned with ensuring that the choices of resource utilisation in the future are not constrained by decisions taken in the present (Aras & Crowther 2007a). This necessarily implies such concepts as generating and utilising renewable resources, minimising pollution and using new techniques of manufacture and distribution. It also implies the acceptance of any costs involved in the present as an investment for the future.

A great deal of concern has been expressed all over the world about the operation of systems of corporate governance in operation – and the attendant problems – and its organisation and operation has been a major concern of business managers, academics and government officials all over the world. Often companies’ main target is to become global – while at the same time remaining sustainable – as a means to get competitive power. But the most important question is concerned with what will be a firms’ route to becoming global and what will be necessary in order to get global competitive power. There is more then one answer to this question and there are a variety of routes for a company to achieve this. Corporate governance can be considered as an environment of trust, ethics, moral values and confidence – as a synergic effort of all the constituents of society – that is the stakeholders, including government; the general public and so on; professional/service providers – and the corporate sector.

Of equal concern is the question of corporate social responsibility – what this means and how it can be operationalised (Aras & Crowther 2007b). Although there is an accepted link between good corporate governance and corporate social responsibility the relationship between the two is not clearly defined and understood. Thus many firms consider that their governance is adequate because they comply with The Combined Code on Corporate Governance, which came into effect in 2003. Of course all firms reporting on the London Stock Exchange are required to comply with this code, and so these firms are doing no more than meeting their regulatory obligations. Many companies regard corporate governance as simply a part of investor relationships and do nothing more regarding such governance except to identify that it is important to investors/potential investors and to flag up that they have such governance policies. The more enlightened recognise that there is a clear link between governance and corporate social responsibility and make efforts to link the two. Often this is no more than making a claim that good governance is a part of their Corporate Social Responsibility CSR policy as well as a part of their relationship with shareholders.

Globalisation and Corporate Governance

Two features describe the modern world – globalisation and the free market. It is widely accepted – almost unquestioningly – that free markets will lead to greater economic growth and that we will all benefit from this economic growth. Around the world people – especially politicians and business leaders – are arguing that restrictions upon world economic activity caused by the regulation of markets are bad for our well-being. And in one country after another, for one market after another, governments are capitulating and relaxing their regulations to allow complete freedom of economic activity. So the world is rapidly becoming a global market place for global corporations, increasingly unfettered by regulation. We have seen the effects of the actions of some of these corporations within the United States itself – the champion of the free market. We have seen the collapse of the global accounting firm Anderson; we have seen the bankruptcy of major corporations such as Enron and World.com with thousands of people being thrown out of work and many people losing the savings for their old age which they have worked so long and hard to gain.

One way to describe why this has happened is to acknowledge that there are problems with accounting, with auditing, and with peoples’ expectations. We must remember that the myth of the free market is grounded in classical liberal economic theory,⁵ as propounded by people such as John Stuart Mill in the nineteenth century, which, briefly summarised, states that anything is OK as long as the consequences are acceptable. The regulatory regime of accounting has been increasingly changed over time to serve the interests of businesses rather than their owners or society. Thus no longer is it expected that the accounting of a business should be undertaken conservatively by recognising potential future liabilities while at the same time not recognising future profit. Instead profit can be brought forward into the accounts before it has been earned while liabilities (such as the replacement of an aging electricity distribution network) can be ignored if they reduce current profitability. A study of the changes made in accounting standards over the years shows a gradual relaxation of this requirement for conservatism in accounting as these standards have been changed to allow firms to show increased profits in the present. This of course makes the need for strong governance procedures even more paramount.

Scandals, Failures, Problems

Every time society faces a new problem or threat then a new legislative process of some sort is introduced which tries to protect that society from a future reoccurrence (Romano 2004). The crisis which started in 2008 is resulting in much discussion of changes which are needed. Recently we have seen a wide range of problems with corporate behaviour, which has arguably led to prominence being given to corporate social responsibility (see, for example, Boele, Fabig & Wheeler 2001; Aras & Crowther 2007a). Part of this effect is to recognise the concerns of all stakeholders to an organisation, and this has been researched by many people (for example, Johnson & Greening 1999; Knox & Maklan 2004) with inconclusive findings. Accordingly, therefore, corporations, with their increased level of responsibility and accountability to their stakeholders, have felt that there is a need to develop a code for corporate governance so as to guide them towards appropriate stakeholder relations.

A great deal of concern has been expressed all over the world about shortcomings in the systems of corporate governance in operation: Britain, Australia, most other Anglo-Saxon and English-speaking countries, and many other countries, have a similar system of governance. Conversely, Germany is a good example of where the distance between ownership and control is much less than in the United States, while Japan’s system of corporate governance is in some ways in-between Germany and the United States, and in other ways different from both (Shleifer & Vishny 1997). By contrast, in India, the corporate governance system in the public sector may be characterised as a transient system, with the key players (namely, politicians, bureaucrats and managers) taking a myopic view of the system of governance. Such international comparisons illustrate different approaches to the problem of corporate governance and the problem of ensuring that managers act in their shareholders’ interest. Recently of course much attention to this issue has been paid by institutional investors (Cox, Brammer & Millington 2004).

Good governance is, of course, important in every sphere of society whether it be the corporate environment or general society or the political environment. Good governance levels can, for example, improve public faith and confidence in the political environment. When the 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. And, of course, a concern with governance is at least as prevalent in the corporate world (Durnev & Kim 2005).

The Relationship Between Governance, Social Responsibility and Business Success

Often the more significant the power that multinational corporations and some groups of stakeholders in a firm have, the more is spoken about corporate social responsibility. Thus a concept that was some kind of luxury some years ago, nowadays has reached the forefront of public opinion and discussion – often of a cynical nature – of CSR abounds in every public arena. Some steps taken in the corporation’s development, in the environment and in the human values can be the guilty causes of this CSR fashion. If in the beginning firms were small and there was no distinction between ownership and management, the economic development made that there was a necessity to attract more capital to set up bigger enterprises. Thus, there were owners who gave the funds and there were experts in management, who managed the company and were paid by the owners. Agency Theory establishes this relationship between the principal (the shareholder or investor) and the agent (the manager) bearing in mind that the goals of the principal must be achieved through the management of the agents. But when considering what are the shareholders’ objectives then the obvious answer is that they are mainly to increase the enterprise value through the maximisation of profits.

The agency relation of course creates its own problems and, some would argue, has been the cause of some of the corporate scandals referred to. This is a matter which is addressed in this book. At this point however we would like to emphasis that – just as we have taken a broad definition of corporate governance to really encompass organisational governance – we have taken a broad definition of corporate social responsibility to encompass the social responsibility of all organisations. It is unfortunate that the word corporate has become attached to the concepts of governance and of social responsibility as in some ways it provides a misleading picture of the issues. Nevertheless the terms, including the word corporate, have entered common parlance and therefore have been used in this book.

Corporate governance is fundamental to the continuing operating of any corporation; hence much attention has been paid to the procedures of such governance. A significant part of the reason for this is due to the developments brought about through globalisation. The phenomenon known as globalisation is a multidimensional process involving economic, politic, social and cultural change. However the most important discussion about globalisation is related to the economic effect it has upon countries and the corporations operating within and across these countries. There has been much written about globalisation – either positive or negative – and the effects which it is having. One consequence of globalisation though is manifesting itself in the structure and organisation of corporations. This is concerned with the harmonisation procedures and structures which will manifest itself through the emergence of global norms for corporate governance. We will see through the preceding chapters a variety of issues concerned with corporate governance. Equally we have seen examples of the central message of this book concerning the overwhelming importance of cultural issues in the operation of whatever systems of governance are introduced. Nevertheless some form of commonality and harmonisation continues to be a subject of debate. This chapter takes this debate and the arguments from the chapters in this book in order to consider what the future might hold for corporate governance procedures and mechanisms.

The relationship between good governance and business performance is, however, clearer. As shown in various chapters of this book, investors are increasingly willing to pay a premium for good governance in a business because of the expected improvements in sustainable performance which will, over time, be reflected in future dividend streams. And the relationship between social responsibility and governance is similarly clear and described by us previously (see Aras & Crowther 2007b, 2008a). In an attempt to satisfy the necessities of the stakeholders other conflicts can appear between the interests of the different groups included in the wider concept of stakeholders. Sometimes, because of this conflict of interests and its own specific features, the company tries to establish different levels between the stakeholders, paying more attention to those ones that are most powerful, but are there some goals more socially responsible than others? In the end the hierarchy will depend on the other goals of the company, it will give an answer to those stakeholders that can threaten the performance of the economic goals.

The difficulties in measuring the social performance of a company are also due to the ownership concept. This is because the concept of corporate social responsibility is really comprehensive. There are companies whose activities are really different but all of them have to bear in mind their social responsibility, and this applies not only to companies, but also to people in whatever activity they do. From a politician to a teacher: ethics, code of conducts, human values, kindness to the environment, respect to the minorities (which should not be understood as a dictatorship of the minorities) and so on, are values that have to be borne in mind and included in the social responsibility concept. A good example of this diversity can be seen in this book where experts discuss a variety of different topics such as ‘building and construction’ and ‘auditing’, although each has got a deep relationship with the others. The same can be said about the regions; besides the classification according to topics in the directory, another classification of CSR in accordance with regions has been included. The point of view of the concept can vary depending on the country or the region, because some important problems linked to basic human values are more evident in some countries than in others. These social problems cannot be isolated because they have an important relationship with the degree of development of the country, so in the end it is the economy that pushes the world. Capitalism allows the differences between people, but what is not so fair is that these differences are not only due to your effort or work but are also due to having taken advantage of someone else’s effort. And this can be the case with multinational corporations, which sometimes abuse their power, closing factories in developed countries and moving them to developing countries because the wages are lower, or, for example, because the security and health conditions are not so strict and so are cheaper to maintain for the company. Then the same companies obtain large profits to expense them in philanthropic ways...