Corporate Social Responsibility and Corporate Governance
Introduction
Corporate governance encompasses the importance of developing and maintaining effective intra and inter-business relations particularly for firms seeking internationalisation or already operating in the global market based on the context that cultural orientation and political standpoint constitutes the differentiating factor for international business players ( 2001). Applying a sound corporate governance system constitutes a motivating factor for the members of the organisation as well as investors. This then enhances the competitiveness of the company and the business position of the firm.
Recently, globalisation has resulted to the creation of an international business setting that considers the wider responsibility of companies extending to the natural environment and the community. The liberalisation of economies that boosted growth in business activities has resulted to global environmental issues such as the global warming phenomenon, natural resource scarcity, accumulating volume of non-biodegradable waste and social issues such as labour market abuses, community displacements, and health problems due to minimal safety standards in the workplace. Due to the growing propensity of these issues and the recognition that the business sector constitutes a big player in slowing down or addressing these issues, business competitiveness has to a certain extent included the acceptance of environmental and social responsibility by firms as a added value to the firm based on the perspective of some investors and consumers.
Financial & Non-Financial Objectives in Corporate Governance
In corporate governance, business firms apply important basic principles such as honesty, integrity, trust, accountability and responsibility (2001). Corporate leaders and decision-makers apply these principles in developing a governance model able to balance conflicts of interest based on the priorities of the company and enhance accountability in financial reports based on the parties in interest. These principles encompass not only the financial but also the non-financial aspects. This means that as much as the company wants to maximise its profit margin, it cannot do so based on the consideration of cost-saving activities alone because its social responsibility also has an influence on its profitability.
A case in point is the recent merger of the British retail company Body Shop and the French cosmetics company L’Oreal. The board of directors of Body Shop decided on the merger based on financial reasons. The value of the merger for Body Shops is £652 million ( 2006) and an added retail network for L’Oreal. At first glance, this is a good deal for both companies because of capital infusion and wider market reach translating into greater revenue. However, as the news of the merger spread, Body Shop has experienced criticisms especially from the green consumerism advocates. This is because of the differences in the corporate values of these companies that amount to the reversal of its previous advocacy against animal testing. Body Shop developed as a green company. One of its campaigns is against animal testing in the cosmetics industry so that in 1996 Body Shop petitioned the European Union to ban animal testing in European Union member countries ( 2007). L’Oreal emerged on a different light because it engages in certain forms of animal testing for its cosmetic products ( 1999). The irreconcilable divergence in business values, when widely recognised by Body Shop’s consumer base could cause a decrease in sales of Body Shop if the company does not address this issue. This case shows that financial and non-financial considerations are both necessary factors in corporate governance decisions. Unaddressed consumer concerns, which constitute a non-financial concern, regarding the company could affect its financial performance.
Corporate Social Responsibility
The policy reflection of the consideration of both financial and non-financial concerns in corporate governance is termed as corporate social responsibility. As a business strategy, corporate social responsibility encompasses the way that firms integrate economic and socio-environmental issues in their respective corporate culture, operations, and decision-making to achieve accountability and transparency (1995). As such, the existence of corporate social responsibility serves as basis of best practices of firms as well as the catalyst of value creation (2003) on the perspective of consumers and the community that the business firms directly serve.
Two views of corporate social responsibility exist that covers business firms. First perspective considers corporate social responsibility as “defensive and business focused” (2001) by focusing on improvements in firm operations and performance. Second perspective explains corporate social responsibility as “positive and broadly focused’ (2001) because the firm takes the responsibilities of a community leader concerned over socio-environmental issues. This means that corporate social responsibility of business firms depend upon the extent of responsibility that it assumes. This can be purely internal such as taking responsibility for the well-being of its employees and the environmental friendliness of its operations or including external concerns such as the environmental conservation, providing employment opportunities, and sponsoring children’s learning.
Another conceptualisation of corporate social responsibility is as the business “commitment to improve community well-being through discretionary business practices and contributions of corporate resources” (2005). This implies a voluntary action on the part of the business firm to take an active part in improving the community constituting their market or their immediate area of operation. Moreover, a voluntary and active involvement in community concerns requires resource allocation such as labour, time and money.
The essence then of corporate social responsibility is business firms consciously developing policies that address social and environmental issues within the business organisation or extending to the immediate community of the firm. The goal of engaging in corporate social responsibility is to develop consumer patronage to the company as well as acceptance especially on the part of international companies entering domestic markets.
A multinational company that engaged in corporate social responsibility is McDonalds, due to the rising concern over the escalating rates of obesity in children exposed to the fast food culture. The company also faced environmental concerns changing some of its food containers to biodegradable materials. In an attempt to support efforts against obesity, the company introduced healthy options in its menu. McDonalds also implemented other corporate social responsibility activities such as the exclusion of beef products in India because of the cultural reverence for cows and in Hong Kong, the company established the Ronald McDonald House that provides shelter to children and their parents from the rural areas or distant locations seeking medical care in a nearby children’s hospital. McDonald’s also provides scholarships, employment and skills development in various countries. (2006) Due to the implementation of corporate social responsibility, McDonalds experienced acceptance in the Indian and Chinese markets. These markets comprise the coveted consumers of most international companies because of the sheer size of the market. Since McDonalds was able to receive significant degrees of acceptance in these markets due to its corporate social responsibility activities, it stands to gain in terms of revenue and market base.
However, corporate social responsibility is not without criticisms, especially the perception that this is an unnecessary allocation of resources.(1970) explains that businesses only carry responsibilities towards stockholders because this group meets the capital needs of the firm. Any additional assumption of responsibilities is unnecessary. A business firm is amiss in its responsibilities only when it fails to meet its role relative to stockholders. (1991) adds that even the firm’s moral responsibility should be only towards stockholders. (2001) further provide that corporate social responsibility would likely “make people in general poorer” () because of the spread of resources. These perspectives indicate that the decision to engage in corporate social responsibility largely depends on the context of business needs and objectives. McDonalds applied corporate social responsibility because it served its purposes of gaining market entry.
Importance of Corporate Social Responsibility
Although, there are opposing perspectives on corporate social responsibility, there are important benefits derivable from engagement in this strategic policy-making. (2001) identify ten benefits that business firms can gain from corporate social responsibility. First is the ability to anticipate and manage risks. Business firms engaging in corporate social responsibility become aware of the social and environmental risks that it could potentially face by carefully studying changing community issues. Second is the capability to improve form reputation management. Researching on corporate social responsibility issues allows that firm to gather information on the perspective of the public about the company to derive areas requiring change to enhance its market reputation. Third is the capability to enhance human resource management particularly the development and retention of employees by strengthening business values targeting employee satisfaction and well-being. Fourth is the achievement of tools to improve the competitive position of products, brands or firm name through value adding CSR activities. Fifth is the capability to improve the operations and cost-efficiencies of the firm by allowing the firm to anticipate the impact of social and environmental issues and implement preventive actions. Sixth is the ability to enhance supply chain efficiency by developing good working relations with local suppliers, who constitute members of the community. Seventh is the ability to improve change management competence since engaging in corporate social responsibility would likely involve varying levels of change in business culture. Eight is obtaining legitimacy to operate within different communities by seeking the acceptance of its members as employees, consumers or investors. Ninth is the ability to make capital accessible since value-adding activities provide motivation to investors to contribute capital to the firm. Tenth is gaining the ability to improve links with regulatory authorities since compliance with social and environmental regulations places the firm in good business standing.
Engaging in Corporate Social Responsibility
Companies successfully implementing corporate social responsibility policies expect to incur one, more or all of these benefits, with the effect of improving competitive position and profitability. A number of general principles exist to ensure success of corporate social responsibility activities. The implementation of these general principles depends upon the contextual appropriateness of these principles in particular firms. The multi-stakeholder and holistic approaches encompass the various success factors of corporate social responsibility.
Multi-stakeholder approach pertains to the integration of business, government and community into a partnership to address social and environmental issues. Collaborative partnership is based on the recognition that no single sector can curb these issues on their own. ( 2001; 2001) As an example, the problem of obesity involves a number of parties in interest spanning the cause and solution to this problem. Parties in interest include families, schools, healthcare facilities, government departments, non-government organisations and other health advocates, and business firms especially in the food sector. The causes of obesity rests upon the failure of these parties in interest to recognise the risk early on or the allowance of the proliferation of activities that results to obesity in the long-term such as unhealthy food and lack of exercise. As such, the solution to this problem also depends upon the concerted action of these groups. From the perspective of the business firm such as McDonalds, the success of its corporate social responsibility rests upon its partnership with the other parties in interest for its activities to gain acceptance, support and following. From this, financial benefits ensue.
Holistic approach refers to the consideration of a string of preparatory and implementing programmes that support the achievement of the objectives for the planned corporate social responsibility activity ( 2001). As an example, Australia and New Zealand Banking Group Limited (ANZ) recognised the importance of a holistic approach in optimising the benefits derivable from corporate social responsibility. An important thing implemented by ANZ is changing its business perspective to perceive all its stakeholders as a single integrated system that experience issues in an interconnected manner. This allowed the company to develop policies directed towards sustainable results for all stakeholders. Moreover, this approach also flowed through its products and partnerships resulting to a strong and clear message of trustworthiness and social concern to the market. ( 2006) Again, improved financial performance followed.
Conclusion
Corporate governance systems primarily concern the responsibilities of the directors and board members in ensuring the effectiveness of corporate policies and practices and efficiency in its collaborative processes. Due to many key players, the challenge to corporate governance is the development of a sustainable and balanced relationship between and among key players, maintenance of the soundness and stability of its regulatory reforms, and application of accountability on the impact of its activities and business process results to the company, its investors and other parties in interest.
Businesses would at one time or the other engage in activities directed towards social and environmental issues. In these instances, it would be a rational corporate governance decision for firms to transform these efforts into corporate social responsibility exercises to maximise costs and optimise results, including the achievement of sustainable and balanced relationship with stakeholders.
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