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Corporate Governance and Social Responsibility Essay

Corporate Governance and Social Responsibility

             “There are fundamental values that international companies must uphold them”.

Thomas Donaldson

            “Corporations must learn to work with an even stronger sense of ethics and of responsibility of their own actions”.

Schoichiro Toyoda

The means of corporate governance is to assess options by measuring them against the goal of defending individual liberty, maximizing wealth in a sustainable way and managing change, which needs a balance of power between the distinct elements of the corporation (Monks and Minow, 1996).

Today, environmental impact is considered in product development, manufacturing, packaging, and marketing all over many other industries. And due to international trade all industrial democracies have recognized regulatory regimes to control the testing, manufacture, and marketing of pharmaceutical, biological, and medical device products. The damaging side effects of products such as thalidomide demonstrated that consumers and health care professionals cannot completely evaluate the safety of products that they use on a daily basis, and that liability law can not always provide sufficient added incentives for manufacturers to test for and retain the highest standards of quality control. Government regulation attempts to fill up that gap for therapeutics by requiring extensive pre-market research and testing concerning the safety, quality, and effectiveness of

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new pharmaceutical and biological products, as well as controls on sanitary conditions and quality assurance throughout manufacture.

“International trade can be a powerful driver of economic growth and poverty reduction. It is not, however, a magic bullet for achieving development. The slogan “trade, not aid” is misguided, particularly in the poorest countries. Trade reforms are complementary to other development policies, especially scaled-up investments in infrastructure and human capital, macroeconomic stability, and institutional development”. (United Nations, 2005)

http://www.unmillenniumproject.org/documents/MainReportChapter14-lowres.pdf

From this point of view, corporations are seen as having multiple responsibilities, requiring balancing competing conditions, such as a long- and immediate notion of gain, profit and sustainability, cash and accounting concepts of value, democracy and ability, power and accountability (Cadbury, 1990; Monks and Minow, 1996). Thus the center is on the way enterprises are governed, as discrete from managed, highlighting the relationship between boards and their shareholders, the company controllers, the auditors and other legitimate stakeholders inside and outside the enterprise, and between directors and top management. Lawful stakeholders are considered to be those who have somewhat to risk, either voluntarily or involuntarily, as of the existence of the firm and/or those who can affect or are affected by the firm and thus, sequentially, require managerial deliberation and response (Clarkson, 1994; Phillips, 1999). On this basis, terrorists, for instance, fall outside the bounds of deliberation as legitimate stakeholders.

Basically, Social responsibility as a social reaction is based on the basis that a corporation reacts to established social norms, values, and performance expectations. This view underlines that society’s expectations of corporations go beyond the provision of goods and services. At minimum, corporations should be accountable for the ecological, environmental, and social costs incurred by their actions; at maximum, corporations should react and contribute to solving society’s problems (de Sadeleer 2002). This view is construed, in a narrow sense, as linking corporate voluntary actions only. This interpretation seeks to separate corporate actions that are requisite by economic or legal imperative and those that are instigated voluntarily. Whether corporate actions are voluntary or involuntary, a broader interpretation of the social action view identifies as communally responsible those actions that go beyond the law. Characteristically, these actions are reactions to the expectations of specific corporate constituents shareholders, social activists, unions, and so on. as the expectations of these constituents go beyond legal minimums, businesses can decide to not retort to such circumstances. Favorable reaction, however, is measured socially responsible.

            The earliest and most continuing normative formulation has underlined the responsibilities of business corporations to those affected by a company’s decisions and policies. From the beginning, it has been felt that business has fiduciary duties and compulsions of performance that extend beyond the company’s legal boundaries and economic goals. This view is identical to declaring that those who own the company should run it, or hire professional managers to run it, with an eye to the interests of others as well as their own. Therefore, business owners and managers are said to have a range of social responsibilities additionally to being responsible for the normal economic functions that one expects to find in a well-organized and well-run firm (Shaw, W. H. & Barry, V. 2004).

            To maintain and diminish this perspective, its advocates have drawn on various economic, political, ideological, and socio cultural sources, though rarely acknowledging them as such.

            The business mind easily transmogrified this hoary maxim into the corporate context by adopting for executives the mantle of “steward” of the public interest, “trustee” of business resources, and “corporate statesman” anticipated to manifest a broad social vision, while not refuting their company’s economic purpose and objectives (nor, it might be added, did it disturb their power). For the most part, these attributions of moral peerage were what might be called self-coronations or simple declaration, since no visible public selection process had elevated these corporate worthies to such vaunted peaks of public influence and function.

            Thus capable with self-anointed, regal-like responsibilities, corporate executives everywhere were advocated to adopt an “enlightened self-interest” perspective in approaching business decisions and originating corporate policies. To act otherwise was to risk serious inroads on business-as-usual.

            As the Committee for Economic Development put it, “The policy of enlightened self-interest is also based on the intention that if business does not accept a fair measure of responsibility for social improvement, the interests of the corporation might actually be jeopardized. . . . By acting on its own initiative, management preserves the flexibility needed to conduct the company’s affairs in a positive, efficient, and adaptive manner.” The report averred that looking beyond today’s bottom line would pay off in the long run by reducing social costs, dampening radical antibusiness protest, and attenuation the likelihood of government intervention into business affairs. certainly, the stability and public acceptance of business itself were said to be at risk: “Indiscriminate opposition to social change [by business] not simply jeopardizes the interest of the single corporation, but also affects negatively the interest all corporations have in maintaining a climate conducive to the effective functioning of the entire business system.” (Frank Abrams, 1951, p. 33).

The socially responsible investment movement grew out of a desire from individuals and organizations such as churches to invest their money in a way compatible with their own beliefs about what responsible behaviour means. (STERN REVIEW: The Economics of Climate Change http://www.verticalfarm.com/pdf/articles/STERN%20REVIEW%20-%20The%20Economics%20of%20Climate%20Change.pdf )

A collective sense of responsible behaviour and public acceptance of policy measures requires a shared understanding of action around the world. Governments also tend to look to the actions of neighbouring countries and key trade partners to benchmark the level of effort they are willing to make.

(STERN REVIEW: The Economics of Climate Change http://www.verticalfarm.com/pdf/articles/STERN%20REVIEW%20%20The%20Economics%20of%20Climate%20Change.pdf

Frederick, Post, and Davis ( 1992) provide to some extent comprehensive definition of corporate social responsibility. “Corporate social responsibility (CSR) means that a corporation must be held accountable for any of its actions that affect people, their communities, and their environment. It entails that negative business impacts on people and society should be recognized and corrected if at all possible” (p. 30 ).

“There is a wider strategic imperative, of course, for companies to adopt reporting and other CSR practices: developing long-term markets; protecting natural assets; and ensuring an educated and diverse source of labour. But these incentives don’t necessarily pay off in the 6 month to two-year time horizon that most businesses, through demands of the stock market, require. Thus, the ‘business case’ cannot be expected to deliver when the short-term demands of the stock market provide perverse incentives for not addressing sustainability. Reporting is just one facet of this argument. Delivering on the broader sustainable development agenda through voluntary means seems a naïve ideal at best and a manipulated half-truth at worst, proffered only by those who want to avoid so-called “red-tape” where it is in their best interest”. (Doane, D. 2002) http://www.neweconomics.org/gen/uploads/Reporting%20article%20March%202002.pdf

While the idea of CSR as defined by the numerous authors has been unstable to some extent, the status of profits in the framework of social responsibility has never been seriously challenged. in contrast, the notion of profit as “the basic economic mission of business” has been a main supposition for almost all authors. The term socially profitable business refers to all types of payoffs necessary to congregate expectations of those interacting with business–including economic profit expectations.”

Steiner and Steiner ( 1994) define CSR as follows:

The major social responsibility of a company is to work profitably and utilize efficiently the resources at its disposal. as important, other activities linking to the use of corporate resources to further national goals, employee and community welfare, or other social interests, are today subsequent to this purpose, and except for a limited number of cases are pursued to put in to the achievement of the first purpose in the short and in the long run. (p. 163)

Steiner and Steiner also concede that profit maximization is not an effective doctrine for business any more. They suggest, “But the economist’s strict concept of profit maximization is not a suitable operational goal for today’s larger corporation” ( 1994, p. 122).

Carroll (1993) pronounces the importance of economic performance in defining corporate social responsibility. He suggests a four-part definition of social responsibility: financial, legal, ethical, and discretionary responsibilities. To elucidate the relative importance of each responsibility, he suggests a pyramid of corporate social responsibility in which economic responsibilities are explicated as “the foundation upon which all others rest” (p. 36 ).

Carroll ( 1979) argues that the base of social responsibility is economic. He states that, “The first and foremost social responsibility of business is economic in nature. Before anything else, the business institution is the essential economic unit. . . . All other business roles are predicated on this fundamental assumption (p. 500). It is interesting to note that Carroll talks concerning the responsibility of the “business institution.” In addition, he does not make a distinction between business as a social organization and individual businesses as organizational entities. Carroll’s model is the founding model of corporate social responsibility.

Peter Drucker ( 1974) argues against Friedman ( 1962) strong resistance to corporate social responsibility. Concerning Friedman’s argument that management has only one responsibility, to exploit the profits of its owners and stockholders, Drucker states, “Friedman’s pure position to eschew all social responsibility is not acceptable. . . . Business and other institutions of our society . . . cannot be pure, however attractive that may be. Their own self-interest alone forces them to be concerned with society and community and to be prone to shoulder responsibility beyond their own areas of task and responsibility” (Drucker, 1974, p. 349). This statement shows that Drucker recognizes the necessity of corporate social responsibility. His following statement tells us that he also believes that there is a limit to this responsibility. In other words, Drucker thinks that the business institutions first and leading responsibilities are economic in nature:

The first task is to make the institution . . . perform the function and make the involvement for the sake of which it exists. . . . Performance of its function is the institution’s first social responsibility. (p. 343)

In his 1963 book, Business and Society, McGuire, one of the earliest proponents of corporate social responsibility, states that,

The idea of corporate social responsibility implies that the modern business corporation should distinguish that, in this day and age, it can no longer hungrily pursue the single goal of profits to the complete neglect of its table manners. . . . The corporation today must take an interest in politics, in the welfare of community, in education, in the “happiness” of its employees–in fact, in the whole social world about it. In a sense, therefore, it must act “justly” as a suitable citizen. (p. 144)

All in all, theorists are still struggling to turn up with a universal definition of corporate social responsibility. This author takes a contingency approach view to corporate social responsibility; as agreeing with Carroll’s four-part definition to CSR, the relative significance of the parts should change contingent upon internal and external environmental conditions.

CSR is also recognized as a useful risk management strategy, as it requires managers to communicate with a range of stakeholders to identify longer-term social, economic and environmental risks, and incorporate thinking about those risks into strategic development (U.K. Department of Trade and Industry, 2004).

CSR has found recognition among enterprises, policy-makers and other stakeholders, as an important element of new and emerging forms of governance, which can help them to respond to the following fundamental changes:

Globalization has created new opportunities for enterprises, but it also has increased their organisational complexity and the increasing extension of business activities abroad has led to new responsibilities on a global scale, particularly in developing countries.

Considerations of image and reputation play an increasingly important role in the business competitive environment, as consumers and NGO’s ask for more information about the conditions in which products and services are generated and the sustainability impact thereof, and tend to reward, with their behaviour, socially and environmentally responsible firms.

Partly as a consequence of this, financial stakeholders ask for the disclosure of information going beyond traditional financial reporting so as to allow them to better identify the success and risk factors inherent in a company and its responsiveness to public opinion.

As knowledge and innovation become increasingly important for competitiveness, enterprises have a higher interest in retaining highly skilled and competent personnel.

(European Commission 2002) http://europa.eu.int/eur-lex/en/com/cnc/2002/com2002_0347en01.pdf

Thus, to develop a social corporation, individuals should hold themselves socially responsible for the jobs they were hired to do, and they should hold others socially responsible for doing their individual jobs. If the corporation is understood as a community, a culture of social responsibility can be formed in which social conduct is institutionalized all through the organization. Where this takes place, there is more probable to be constancy between social actions on the part of individuals and social actions that are the consequence of collective action on the part of the organization. Such a firm would have a social reliability that is more than the sum of the integrity of the individuals who comprise the organization. The organization itself could be said to be social in that it has accepted its accountability and distinguishes the social dimensions of its policies and actions.

            If corporations and their interrelationships are understood in terms of community somewhat than power and/or competition, if they are understood as joined jointly in the common goal of helping direct the course of the continuing growth of community life in all of its richness, then not only is the link among corporations drastically rethought, but so also is the relation between corporations and public strategy. For the public policy process now becomes not an external interruption constituting fill infringement upon corporate independence and power, but part and parcel of a community attempt of cooperative experimental inquiry intended at providing the most fruitful paths for ongoing independent community growth.

The motivation for CSR activities is in no way associated to increased government control over economic decisions. CSR is often imprecisely classified with interventionist economic policies and programs. While numerous of the proponents of CSR also advocate government policies that limit corporate decision making and redistributionist solutions to professed inequities, there is nothing inherent in CSR that would lead to these types of policies.

In fact, CSR would seem to be more closely linked to a libertarian perspective. Most importantly, the concept of CSR should, at its foundation, emphasize the legitimate role of the corporation within the capitalist system. If corporate decision makers are to take the notion of social responsibility seriously, they require a serious understanding of the role of the corporation. They require a theory of the corporation that legitimizes it as a feasible economic arrangement.

The ironic result is that CSR may guide to less government intervention, not more. In a society that more willingly recognizes both the value and the limits associated with corporate behavior, one might anticipate a diminished call for government intervention in the marketplace.

Reference:

Cadbury, Sir A. (1990) The Company Chairman (London: Director Books).
Carroll A. ( 1979). “A three-dimensional model of corporate social responsibility.” Academy of Management Review, vol. 4, pp. 497-505.
Carroll A. ( 1993). Business and Society: Ethics and Stakeholder Management, 2nd ed. Cincinnati, OH: South-Western Publishing Co.
Clarkson, M. B. E. (1994) A Risk Based Model of Stakeholder Theory, The Centre for Corporate Social Performance and Ethics, University of Toronto.

Doane, D. (2002) Market failure: the case for mandatory social and environmental reporting, New Economics Foundation, March, 1-2. http://www.neweconomics.org/gen/uploads/Reporting%20article%20March%202002.pdf
Drucker P. ( 1974). Management: Tasks, Responsibilities, Practices. New York: Harper & Row.
European Commission (2002) Corporate Social Responsibility: A business contribution to Sustainable Development, Brussels 347 final, July. http://europa.eu.int/eur-lex/en/com/cnc/2002/com2002_0347en01.pdf
Frederick W., Post J., and Davis K. ( 1992). Business and Society: Corporate Strategy, Public Policy, Ethics, 7th ed. New York: McGraw-Hill.
Frederick W., Post J., and Davis K. ( 1992). Business and Society: Corporate Strategy, Public Policy, Ethics, 7th ed. New York: McGraw-Hill.
Friedman M. ( 1962). Capitalism and Freedom. Chicago: University of Chicago Press.
Monks, R. A. G. and Minow, N. (1996) Watching the Watchers: Corporate Governance for the 21st Century (Cambridge Basil: Blackwell Publishers).

Phillips, R. A. (1999) ‘On Stakeholder delimitation’, Business and Society, vol. 39(1): 32–4.

Sadeleer, Nicolas de. Environmental principles : from political slogans to legal rules / Nicolas de Sadeleer. New York: Oxford University Press, 2002.
Steiner G. A., and Steiner J. F. ( 1994). “Business, Government, and Society: A Managerial Perspective”, 7th ed. New York: McGraw-Hill.
STERN REVIEW: The Economics of Climate Change http://www.verticalfarm.com/pdf/articles/STERN%20REVIEW%20-%20The%20Economics%20of%20Climate%20Change.pdf
U.K. Department of Trade and Industry (2004) Corporate Social Responsibility: A Government Update, DTI/Pub 7201/1k/05/04/NP, May.
United Nations, 2005 http://www.unmillenniumproject.org/documents/MainReportChapter14-lowres.pdf

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