Archive for June, 2013|Monthly archive page

Corporate Governance and CSR

 

Corporate governance has gained a much higher profile in the last two decades in the wake of various corporate scandals and collapses. Corporate social responsibility (CSR) is now becoming much more a part of mainstream corporate governance as there is a recognition that a company cannot – in the long-term – operate in isolation from the wider society in which it operates. This view is encapsulated by Sir Adrian Cadbury: ‘The broadest way of defining social responsibility is to say that the continued existence of companies is based on an implied agreement between business and society’ and that ‘the essence of the contract between society and business is that companies shall not pursue their immediate profit objectives at the expense of the longer-term interests of the community’ (Sir Adrian Cadbury, 2002).

 

Directors, Shareholders and other Stakeholders

 

In the UK, directors are accountable to shareholders but should consider the views of other stakeholders. The Companies Act (2006) expects directors to disclose more information relating to the risks affecting the company, an analysis of the performance of the company over the year, and consideration of shareholder and stakeholder interests. Stakeholders, including employees, customers, suppliers, local community, interest groups, government, etc. may lobby directors, shareholders, governments, etc.

 

In terms of what investors might be looking to avoid when they invest overseas, the Organisation for Economic Co-Operation and Development stated: ‘In the global economy, sensitivity to the many societies in which an individual corporation may operate can pose a challenge.  Increasingly, however, investors in international capital markets expect corporations to forego certain activities – such as use of child or prison labour, bribery, support of oppressive regimes, and environmental disruption – even when those activities may not be expressly prohibited in a particular jurisdiction in which the corporation operates.’ (OECD, 1998).

 

Institutional shareholders in the UK are guided in their relationship with investee companies by the Stewardship Code (2012) ‘instances when institutional investors may want to intervene include, but are not limited to, when they have concerns about the company’s strategy, performance, governance, remuneration or approach to             risks, including those that may arise from social and environmental matters’ (Guidance to Principle 4).

 

CSR and corporate philanthropy

 

Both CSR and corporate philanthropy can help define a company’s reputation and image and create goodwill with its stakeholders. However CSR is generally more about the core business functions of a company. Shareholders will often be more understanding about a company spending money on CSR related to the core activities, rather than on peripheral activities. The wider stakeholder community is also making increasing demands that companies be held accountable for the social and environmental impacts of their operations.

 

Philanthropic giving is often in the form of donations to favourite charities or causes, sometimes via a foundation established by the company. Whilst philanthropic giving may involve a select group within the company, e.g. the directors, a company’s CSR is more company-wide and therefore effective implementation of CSR often requires a much higher level of commitment and engagement beyond that which is required for corporate giving programs.

 

A darker side?

 

Companies often genuinely engage in CSR, for example, Ben and Jerry’s uses hormone-free milk and cage-free eggs in its ice-cream; Puma places a lot of emphasis on its environmental impact and produces an environmental profit and loss account. However sometimes companies may use CSR more as a public relations exercise, or there may be something of a mismatch between what companies say and do, hence CSR may have a darker side.

Shell’s Sustainability Report 2012: ‘As we work to help meet the world’s growing energy needs, we aim to reduce the environmental impact of our operations.’   However Shell has polluted the Niger Delta and seems to fight against taking responsibility for oil spills. Monsanto’s CSR/Sustainability Report 2011 states it ‘is working for a better tomorrow by putting the right tools in the hands of farmers today. By equipping growers with better seeds, we can help protect our natural resources, fight hunger, improve nutrition and provide economic benefits to everyone involved in an improved system of agriculture.’

However their products have included Agent Orange, dioxin, recombinant bovine growth hormone (rBGH), and genetically modified seeds.

 

CEOs and corporate giving

 

There is mixed evidence regarding CEOs’ approach to CSR/corporate philanthropy, as the following two recent studies indicate.  Shapira (2012) finds that whilst cash donations can signal the company’s financial strength, corporate philanthropy can decrease firm value when corporate governance        mechanisms are co-opted (neutralised or over-ridden), eg. when companies donate to charitable causes affiliated with independent directors. Recently Masulis and Reza ( 2013) found that the choice and level of corporate giving is positively associated with CEO personal ties to charities and negatively associated with the strength of corporate governance; donations may be used to support CEOs’ preferred charities or those of independent directors (thereby strengthening social ties with them). It is perhaps not surprising then that they also find a negative price reaction to charity donation disclosures where executives/directors have personal ties.

 

 

Concluding thoughts

 

Corporate governance and corporate responsibility are intertwined. There is increasing influence from shareholders, other stakeholders, and also government/international legislation. Nonetheless it is worthwhile to note Devinney (2009), who astutely observed ‘The notion of a socially responsible corporation is potentially an oxymoron because of the naturally conflicted nature of the corporation.’

 

References

 

Cadbury Sir Adrian (2002) Corporate Governance and Chairmanship: A Personal View, Oxford University Press, Oxford.

 

Devinney Timothy (2009) Is the Socially Responsible Corporation a Myth? The Good, the Bad, and the Ugly of Corporate Social Responsibility, Academy of Management Perspectives, May 2009, Vol. 44. Available at SSRN: http://ssrn.com/abstract=1369709

 

Financial Reporting Council (2012) UK Stewardship Code, FRC, London.

 

Masulis, Ronald W. and Reza, Syed Walid, (2013) Agency Problems of Corporate Philanthropy, Available at SSRN: http://ssrn.com/abstract=2234221 or http://dx.doi.org/10.2139/ssrn.2234221

 

OECD (1998) Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets. Report to the OECD by the Business Sector Advisory Group on Corporate Governance, OECD, Paris.

 

Shapira, Roy, Corporate Philanthropy as Signaling and Co-Optation (2012), Fordham Law Review, Vol. 80, No. 5, 2012. Available at SSRN: http://ssrn.com/abstract=2061080

 

 

 

 

Chris Mallin 6th June 2013

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