Corporate Governance and Social Responsibility

Table of Contents

Executive Summary

1.0 Introduction

2.0 Corporate Governance and Corporate Social Responsibility Overview
2.1 Corporate Social Responsibility Framework

3.0 Why Corporate Governance and Corporate Social Responsibility

4.0 Johnson & Johnson Overview

5.0 Johnson & Johnson’s Strategies
5.1 Customers
5.2 Employees
5.3 Communities and the Environment
5.4 Shareholders

6.0 Conclusion

7.0 Recommendations

Appendices

References

Executive Summary

The purpose of this report is to discuss the reasons behind the increased interest in Corporate Governance and Corporate Social Responsibility (CSR) in recent years and how Johnson & Johnson’s (J&J) utilizes the two concepts in its day-to-day business.

CSR is an extended model of Corporate Governance, to be successful in its CSR program; a company must be successful in its Corporate Governance.

The two main reasons for the increased interest in the two concepts are recent scandals and shareholder activism. First, the recent accounting scandals caused public outrage around the world; executives took full advantage of weak Corporate Governance oversight and guidelines, and deliberately exploited the agency-principal trust. Second, recently corporations must face shareholder activism through the growth of Social Responsible Investors.

Johnson & Johnson’s focus on Corporate Governance and CSR goes back to its founding family. Chairman Robert Wood Johnson, son of company founder Robert Wood Johnson, wrote J&J’s Credo in 1943. The Credo, written long before the term CSR was coined, is a true piece of Corporate Governance and CSR guidelines, because it explains in clear terms that J&J is responsible to its customers, employees and the environment before its shareholders. Its strong commitment to Corporate Governance and CSR has earned them numerous awards for excellence in these areas.

J&J have satisfied owners by providing 75 consecutive years with increased sales and 45 consecutive years with increased dividends. The company proofs to the neo-classical theorists that Corporate Governance and CSR are not purely associated with high cost.

J&J exemplifies why corporations in the future will continue their efforts in taking all stakeholders into account when decisions are made. This report presents the development of Corporate Governance and CSR over the past century with a focus on historic overview, recent scandals and J&J.

1.0 Introduction

The purpose of this report is to discuss the reasons behind the increased interest in Corporate Governance and Corporate Social Responsibility (CSR) in recent years and how Johnson & Johnson (J&J) utilizes the two concepts in its day-to-day business. First, the report gives an overview of Corporate Governance and CSR, and discusses the recent scandals in the corporate world. The second part focuses on J&J’s Corporate Governance and CSR practices. The company communicates its Credo through its actions towards its customers, employees, communities and environment as well as its shareholders.

2.0 Corporate Governance and Corporate Social Responsibility Overview

CSR is an extended model of Corporate Governance, to be successful in its CSR program; a company must be successful in its Corporate Governance. While Corporate Governance deals with the internal handling of the company, like accounting procedures and general business ethics, CSR specifically deals with stakeholders like the environment and the communities.

CSR has evolved from a controversial topic to one of the most accepted concepts of today’s globalized and business oriented world (Lee, 2008). It is argued that the father of CSR is Howard Bowen with his book Social Responsibilities of the Business Man from 1953 (Carroll, 1999). Bowen argued that business men ought to assume responsibility for the system of free enterprise and act thereafter for the system to flourish (Maak, 2008). The ongoing debate whether corporations should be socially responsible has lasted since the publication of Bowen’s book (Enquist, Johnson and Skalen, 2006). On one side, the Neo-Classic Theorists, led by former Nobel Prize winner Milton Friedman and CEO TJ Rodgers, argue that the only responsibility a firm has to society is to increase profits (Enquist et al., 2006; Boatright, 2001). In 1970, Friedman argued that shareholders would suffer because of higher costs associated with CSR (Maak, 2008). On the other side, R. Edward Freeman and others argue that disconnecting business from ethics is impossible (Freeman, 1994). In 1984, Freeman introduced the Stakeholder Theory; he believed that shareholders are not the only part of the equation corporations ought to listen to; all stakeholders need to have their voices heard (Freeman, 1994). Furthermore, in 1995 Freeman’s ideas were expanded, with a new focus on moral and ethical dimension by the authors Donaldson and Preston (Donaldson and Preston, 1995). Many academics have tried over the years to define CSR, but the increased popularity the past 20 years has caused academics to argue that lack of definition has made theoretical development and measurement difficult (Godfrey and Hatch, 2007). A recent, but widely accepted definition was created by McWilliams, Siegel and Wright (2006, p.1) and they believe CSR can be defined as “situations where the firm goes beyond compliance and engages in actions that appear to further some social good, beyond the interests of the firm and that which is required by law”.

2.1 Corporate Social Responsibility Framework

In 1991, Archie Carroll built a foundation for further development of the CSR field by creating “The Pyramid of Corporate Social Responsibility” (Appendix A) with four identified components: economic, ethical, legal and discretionary or philanthropic (Carroll, 1999). The model creates a framework that embraces the entire spectrum of society, but critics questioned the necessity of naming philanthropic as a single component (Malachowski, 2001). As a consequence, Carroll updated the model and renamed it “The Three-Domain Model of CSR” (Appendix B) where the three components are: economic, legal and ethical (Schwartz and Carroll, 2003). Carroll argues that the three components are all equally important and interact with each other, where some corporations might be labelled “purely ethical” or “purely legal” whereas other can be labelled as “economic/legal” and at last some can be also labelled as combination of all three, “economic, legal and ethical” (Schwartz and Carroll, 2003 p. 509).

3.0 Why Corporate Governance and Corporate Social Responsibility

Most leaders of the investment and business community did not recognize the importance of the concept of Corporate Governance and CSR until the late 1970s (Lydenberg, 2005). In fact, less than half of the Fortune 500 corporations listed CSR in their annual reports in 1977, however, by 1999, this increased to almost 90% (Boli and Hartsuiker, 2001). Even though corporations established Codes of Conduct, it was not before the beginning of the 21st century that corporations complied with their own guidelines (Lee, 2008). The two main reasons for the increased interest in the two concepts are recent scandals and shareholder activism.

First, the recent scandals at Enron, Ahold, Parmalat, HIH and others caused public outrage around the world; executives took full advantage of weak corporate governance oversight and guidelines, and deliberately exploited the agency-principal trust. As a consequence of the widespread abuse, both the U.S congress and the European Parliament passed legislation and directives in an attempt to strengthen the position of Corporate Governance (IFC, 2008). The United States passed the Sarbanes-Oxley Act in 2002 and the European Union passed the Action Plan for Modernizing European Company Law and Enhancing Corporate Governance in 2003 (IFC, 2008). As a result, Corporate Governance and CSR have grown to be major issues in every boardroom because of the dire consequences of breaking the law. The former CEO of Enron, Jeffrey Skilling, serves a 24 year sentence in prison, and recently Bernard Madoff received 150 years because of his ponzi scheme, which caused his clients to lose an estimated USD 65 Billion (Tse, 2009). Consequently, the scandals have launched a debate on the essential question of corporate governance: why does a corporation exist, who does it serve and who does it owe loyalty to? (Letza, Kirkbride, Sun and Smallman, 2008)

[...]