Developing Corporate Governance Structures to promote Corporate Social Responsibility

Content

List of Figures

List of Abbrevations

1 Introduction
1.1 How to escape the vicious circle of mismanagement?
1.2 Objectives and Outline

2 Conceptual Basics
2.1 Corporate Governance
2.2 Corporate Social Responsibility

3 Promotion of Corporate Social Responsibility through Corporate Governance Structures
3.1 Transparency and accountability as cross-cutting functions of Good Corporate Governance
3.2 Management and the Board of Directors
3.2.1 Board Structure
3.2.2 Board Diversity
3.3 Stakeholder Engagement

4 Summary and Future Prospects

List of Literature

Abstract

The seminar paper examines which corporate governance structures promote Corporate Social Responsibility (CSR) in joint stock corporations. The stakeholder perspective links the concept of Corporate Governance with CSR. Transparency and accountability represent cross-cutting functions of Corporate Governance which in combination may enhance CSR. In terms of Corporate Governance structures, board heterogeneity and the engagement of stakeholder impact on CSR and in the long-run on a corporation’s overall performance

List of Figures

Figure 1 : The Three-Domain Approach of CSR

Figure 2: The Shareholder Perspective of Corporate Governance and CSR

Figure 3: The Stakeholder Perspective links Corporate Governance with CSR

List of Abbrevations

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1 Introduction

1.1 How to escape the vicious circle of mismanagement?

High profile corporate scandals, such as with the energy combine Enron in 2001 or the US second larges phone operator Worldcome, in 2002 raised the public’s attention for Corporate Governance issues.^[1] Recently, the Financial Crisis, starting off in the US finance sector and spreading all over the world and affecting different branches of business showed, once again that Corporate Governance matters. The provision of checks and balances, one of the main goals of good Corporate Governance, failed drastically and entailed negative consequences for companies involved and for their interest groups. Hence, trust in publicly traded companies is shaken to the core and needs to be built up slowly.^[2]

Besides past scandals and the Financial Crisis, society’s expectations of companies have changed drastically: ethical, social and environmental issues gain importance besides basic legal and economical preconditions.^[3] Moreover, challenges come from information and communication technologies as well as globalization, on the one hand. Huge differences in systems and principles, with regard to Corporate Governance and CSR exists in each country on the other hand.

For corporations the question arises how to regain the trust of its stakeholder groups, how to generate sustainable growth and good reputation, and how to avoid future cases of mismanagement in a complex environment. A means of preventing new scandals, coping with changing expectations and growing complexity might be the development of Corporate Governance structures, which promote Corporate Social Responsibility (CSR).

1.2 Objectives and Outline

Corporate Governance and CSR are both, strongly discussed concepts in the world of business today. At the first sight, one could think that Corporate Governance and CSR are quite the contrary, since financial interests and social responsibilities might not fit very well together. Nevertheless, when taking up a more sophisticated position, interdependences and mutual influences between Corporate Governance and Corporate Social Responsibility become visible. In point two, Conceptual Basics, different approaches to Corporate Governance (see point 2.1) and CSR (see point 2.2) are explained. In doing so, the most suitable definitions for this discussion are chosen.

As marked in the entry paragraph the meaning of CSR is growing for businesses of all branches. In contrast to legal binding Corporate Governance principles, there are no obligatory standards, which explicitly promote CSR. However, corporations could take action: Point three elaborates on developing corporate governance structures to promote CSR. At this point, it is important to mention that the relationship between Corporate Governance structures and CSR depends on a broad amount of variables, which are influenced from each other and from external factors as well. This is why the named structures do not necessarily need to promote CSR but have to potential to do so. The following structures are taken into account: Firstly, the linkages between Corporate Governance and CSR are identified. Secondly, general cross-functional principles (see point 3.1), which are the base for most of the actions in Corporate Governance and CSR, are demonstrated. Point 3.2 deals with selected Corporate Governance structures, which could be developed for the promotion of CSR. This includes issues of the areas Management and Board (see 3.3.1) as well as Stakeholder Engagement (see 3.3.2). The reasons for this choice, lie in society’s risen expectations towards boards^[4], in current media discussions about diversity in companies and in stakeholder theory itself, which links Corporate Governance and CSR .

The summary in the end (see point 4) delivers an overview of the most important results and gives implication for combining Corporate Governance and CSR in the future.

2 Conceptual Basics

The variety of definitions of the terms Corporate Governance and Corporate Social is remarkable, due to different perspectives and underlying theories. For the purpose of the thesis appropriate definitions of Corporate Governance and Corporate Social Responsibility (CSR) are identified. They represent the point of reference for the main topics in point three.

2.1 Corporate Governance

The concept of corporate governance is generally applied to large publicly held companies listed at the stock exchange, which are consequently not run by their legal owners.^[5] However, recent movements indicate that Corporate Governance principles are also incorporated in private companies e.g. family-owned businesses.^[6] Since publicly-traded companies impact significantly on the economy and provide more information (e.g. financial statement), they are in the focus of the thesis. Furthermore, they are to some extent obliged to incorporate CG and are more probable to have the resources and capacities necessary to perform good CG.^[7] A general and often cited definition of Corporate Goverance is:

"Corporate governance is the system by which companies are directed and controlled.”^[8]

The definition indicates that Corporate Governance represents a framework for publicly traded companies, to minimize the problem of separation of management and ownership in companies by means of controlling and giving directions. In order to conduct a combined analysis of Corporate Governance and CSR, a more detailed categorization of the term Corporate Governance is necessary.

Two main categories of Corporate Governance definitions, the shareholder perspective and the stakeholder perspective, exist. The shareholder perspective, which used to be common in Anglo-American settings concludes, that Corporate Governance focuses on organizing and controlling the relationship between financial investors and the managers of a company.^[9] Accordingly, the parties involved in Corporate Governance are shareholders, the board of directors and the management of a company.^[10]

For the purpose of this discussion, which is to deliver an integrative view on Corporate Governance and CSR, a broader definition needs to be examined. This is why the stakeholder view is gaining momentum. It assume that not only shareholders, but also the relationships between managers and stakeholder as well as the relations among the stakeholder groups have to be taken into account and need to be managed.^[11]

Tirole (2001) defines corporate governance as used in this seminar paper:

"I will, perhaps unconventionally for an economist, define corporate governance as the desing of institutions that induce or force management to internalize the welfare of stakeholders.”^[12]

Stakeholders are interest groups, which affect the company and are affected by it. This includes shareholders, competitors, employees, customers, suppliers, the local community, the media, the government, etc. They have interests, which might be dependent on the company’s development and thus have to be considered in a company’s Corporate Governance. Therefore, Corporate Governance processes and structures have to assure them a voice and devote its structure towards them (see point 3.3).^[13]

2.2 Corporate Social Responsibility

Different definitions and concepts of CSR, similar to the different definitions of Corporate Governance, developed over the years. The reasons for the variety lie in a focussed view in terms of content, time, geography or specific interests.^[14]

Many attempts to categorize these definitions exist in the literature, however, distinguishing between the shareholder and the stakeholder approach, seems most suitable for this discussion, due to its extensive use in the literature at hand and its ability to make the interdependences between CSR and Corporate Governance visible (see point 3).

The narrow approach, which is also called shareholder approach of CSR, concludes that a company’s single responsibility is to maximize financial returns to the company and its shareholders. Legal boundaries are taken into account, whereas ethical aspects play an inferior role.^[15]

The second set of definitions of CSR take a broader approach on an organization’s obligations towards society. It includes that taking responsibilities for stakeholders and the broader society is crucial because they strongly impact on companies and in return are impacted by them.^[16]

Several alternative concepts evaluating the single components of CSR exist. One of them is the Three-Domain-Approach of Carroll and Schwartz, which orginates from Carroll’s CSR-Conceptual model of 1979 and the Pyramid model of CSR.^[17] Its original goal was to bridge the gap between the two sets definitions, the narrow and the broad view on CSR, above. For the purpose of this the discussion Carroll’s definition of CSR is adopted:

"For a definition of corporate social responsibility to fully address the entire range of obligations business has to society, it must embody the economic, legal, ethical and discretionary categories of business performance.”^[18]

Despite its extensive use by theorists and empirical researches, the models of 1979/1991 had several weaknesses, which had been eliminated by the introduction of the Three-Domain-Approach in 2003, which combines the discretionary and ethical categories.^[19] The Three-Domain Modell’s use in practice, its improvements since 1979 as well as the clearly-arranged conceptualization of the major CSR-components are the determining factors for choosing Carroll’s and Schwartz’s concept for the following discussion.

The Three-Domain Approach consists of a company’s economic, legal and ethical responsibilities. It is illustrated (see Figure 1) that the three responsibilities are overlapping and therefore, equally important. The ideal of CSR is the consistent fulfilment of economic, legal and ethical responsibilities.^{[20] [21]}

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Figure 1 : The Three-Domain Approach of CSR21

The economic domain includes activities having a positive impact, such as maximizing profits and/or shareholder value, for the organization. The majority of CSR activities can be assigned to this domain. Society’s expectations in terms of the law are referred to in the legal domain. They are captured in federal, state and local jurisdictions as well as in legal principles. Three categories of legality exist: compliance, avoidance of civil litigation and anticipation of the law.^[22] The stakeholders’ and the general population’s expectations originate from the ethical domain, which includes the conventional, the consequential^ and the deontological ethical standards. Within the conventional standard, all moral principles are justified by virtue of their cultural acceptance.^[23] With regard to the Three-Domain Model, conventional standards are those standards, which are accepted by the organization, the industry, the profession, or society. Society consists of stakeholders, such as shareholders, employees, costumers, competitors, suppliers, the community and general citizen. The consequential^ standard stresses the outcome of an action, thus, its consequences. Producing the greatest benefit for the greatest amount of people is considered ethically correct. The deontological standard is focused on the activities themselves and thus, embraces the ethical principles, moral rights and justice.^[24]

[...]

^[1] Bloomberg Business Week (10.12.2001); BBC News (01.07.2002)

^[2] Tricker (2009), p. 22; Buchholtz/Brown/Shabana (2008), p. 327f.

^[3] Marsiglia/Falautano (2005), p. 485f.

^[4] Tricker (2009), p. 17

^[5] Blowfield/Murray (2008), p. 211

^[6] Tricker (2009), p. 101; Mishra/Randoy/Jenssen (2002), p. 235ff. ; Yin-hua/Tsun-siou/Tracie (2003), p. 21ff.; Klein/Shapiro/Young (2005)

^[7] Cadbury (2000), p. 8

^[8] Cadbury (2000), p. 8

^[9] Shleifer/Vishny (1997), S. 737; Lehmann/Weigand (2000), S. 159f.; Macey (2008), S. 1

^[10] Tricker (2009), S. 40

^[11] Downing (2004), p. 18; Dunlop (1998), p. 3; Werder (2003), p. 8; Gerum (2004), p. 9f.; Tirole (2001), p. 4

^[12] Tirole (2001), p. 4

^[13] Keasey/Thompson/Wright (2005), p. 3

^[14] von Marrewijk (2003), p. 96

^[15] Friedman (1970), p. 173; von Marrewijk (2003), p. 96

^[16] Carroll (1979), p. 499

^[17] Carroll (1979), Carroll (1991)

^[18] Carroll (1979), p. 499

^[19] Carroll/Schwartz (2003), p. 503f.; Carroll (1979), p. 499f.

^[20] Carroll (2003), p. 505, 513

^[21] Carroll/Schwartz (2003), p. 509

^[22] Carroll/Schwartz (2003), p. 509 f.; Carroll (1979), p. 500; Carroll (1991), p.227f.

^[23] Pojman (2005), p. 16

^[24] Pojman (2005), p. 102; Carroll/Schwartz (2003), p. 51 Iff.