Essay Example on the Relationship Between Corporate Governance and Corporate Social Responsibility

2021-07-13 18:26:21
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University of California, Santa Barbara
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Essay
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The relationship between corporate governance and corporate social responsibility have been debated by researchers for the past twenty years. The researchers have tried to clarify the determinants of good corporate governance practices and how corporate governance relates to the performance of a firm. However, the study of the relationship between the two concepts has not been extensive. Thus, the primary objective of this paper is to examine the relationship between mechanisms of corporate governance and corporate social responsibility. The paper also presents a literature review of both corporate governance and corporate social responsibility. To achieve the objectives of the article, a sample data of 247 US-based firms are used to establish a correlation between the two entities. Results from the analysis indicate that firms with robust characteristics internal corporate governance are highly likely to invest more in their CSR activities. Based on the research findings, the paper concludes that larger firms are more likely to care about the reputation of their external market as compared to small firms. It is also imperative to note that the investment of the former corporate social responsibility is also likely to be related to their corporate image. Additionally, larger firms tend to invest more CSR as compared to small and medium firms since they have more resources in terms of capital and talent. The paper will begin by defining the two terms in the discussion that has common facts that relate to the management practices of companies.

Keywords: Corporate Governance, Corporate Social Responsibility, Sustainability, Disclosure Level, Globalization

Introduction

Corporate governance and corporate social responsibility are two terms whose roles closely relate in any firm. Corporate governance is a general term that refers to the rules, processes or laws that govern the operation of businesses. It entails internal factors defined by officers, stakeholders or constitution of a corporation. It also involves external factors such as consumer groups, regulations of the government and clients. An organization with a well-defined and enforced corporate governance ensures that it adheres to accepted ethical standards and formal laws. As defined by Thomsen in 2006, corporate social responsibility is a concept whereby companies integrate social and environmental concerns in their business activities such as interaction with stakeholders on a voluntary basis. It is a well-managed company that is aware of social issues and gives them a response that is based on ethical standards. May (2011) reasons out that the primary objective of corporate social responsibility is to treat stakeholders of the firm in a responsible and ethical manner. A broader objective of social responsibility is the creation of higher standards of living while maintaining the profitability of corporations. Corporate social responsibility is generally understood as the creation of responsible leadership behavior which pays attention to ecological and social responsibility actions in all levels of value creation chain in addition to making profit and contributions in the spirit of congruence to resolving societal problems. Corporations are channels of social purpose that are constructed within society to achieve effective social objectives. Corporate social responsibility and sustainability and its related concepts influence all aspects of business and determine the corporate governance.

Corporate governance and corporate social responsibility have experienced a gradual development since the 19th century which was described as the century of an entrepreneur. During that time, a foundation of the modern corporation was laid followed by the advancement of management in the 20th century. The 20th century marked the massive growth of theories of management, it's consultants and teaching, all indicated its advancement in business. However, the 21st century has experienced a paradigm shift of management to legitimacy and effectiveness of power over corporate entities across the globe, thus promising to be a century of governance (Dube, 2016). It is imperative to note that modern economies have not fully adopted the concept of corporate governance despite the fact that it provides an important step in building the confidence of market and encourages long-term investment flows. Corporate governance can also be useful to modern economies since it improves its dynamics, hence improving the overall performance of the economy.

A company that thrives to have a successful competition in a more globalized, interconnected and competitive world must develop effective means of managing environmental, social and corporate governance issues. Companies that perform better based on these issues are prone to increasing the value of shareholders by, for instance, formulating proper plans of risk management, accessing new markets or anticipating regulatory actions and contributing to the development of societies in which they operate. As noted by McIntosh (n.d.), these issues also affect the brands and reputation of a company, thus putting the value of the company at risk.

The debates on the concept of corporate social responsibility have generated numerous varying definitions due to its extensive nature. Initially, CSR was referred to as the ethical obligations of a company towards a society or the expectations of a society from a business environment. According to PJC (2006), CSR is a company that considers, manages and balances the economic, social and environmental impact of its activities. This clearly indicates that there is an interaction between the definitions of corporate governance and corporate social responsibility. Before establishing the relationship between CG and CSR, it is prudent to discuss the two concepts and eventually analyze the relationship between them.

A Literature Review of Corporate Governance

Corporate governance is a concept that does not have a precise definition despite its existence in the international market for a very long time. Several researchers have attempted to define corporate governance but the most outstanding definition is by Browning. Some of the essential components of CG that he mentions in his definition are; corporate strategy, accountability and oversight, and executive management. Corporate governance has played an integral role in economic growth since 1990. As discussed by Wagner (2013), CG is reflected in businesses by the creation of special groups within international institutions whose main objective is to ensure that there is good governance. Several other authors have attempted to define CG. For instance, Marnet (n.d.) describes CG has a system by which companies are controlled and directed. This is a very simple definition but it conveys the importance of control within companies since it excludes external factors that hugely affect the operations of each system.

There are different mandates of corporate governance. It ensures that an organization is effectively run by ensuring that there are accountability, transparency, and compliance in relation to its stakeholders. It is a set of legal, cultural and institutional arrangements that determine the activities of publicly traded corporations, how they are controlled, how the control is exercised and how the risks and returns are allocated from the activities undertaken by such corporations. One of the key attributes of corporate governance is its ability to equitably allocate resources among insiders and outside investors. According to Shleifer & Vishny (1997), corporate governance is a way of funding providers of the company to ensure that they receive the benefits accrued from the investment. According to them, finance plays a major role in corporate governance, hence it must be protected by all means to ensure the stability of corporations.

Another detailed definition of corporate governance was provided by the Organization for Economic Cooperation and Development (OECD, 2004), which stated that corporate governance identifies the distribution of rights and responsibilities among different participants in the organization and makes the rules and procedures for decision-making. These views are also shared by the World Bank which considers corporate governance as a tool for getting close to the interests of individuals, corporations, and society. It stipulates that corporate governance entails the conduct of board of directors and the relationship between the board, management, and shareholders. It further points out that the institutions of corporate governance are the mechanisms that allocate authority among the three and that affect, modulate and control decisions made by at the top of the firm.

Companies are basically being run by a board of directors. The role of shareholders is to appoint the directors and auditors and to ensure that the most appropriate structure of governance in place. Some of the responsibilities of the board are; supervision of business management, setting the strategic aim of the company, provision of leaders to put these objectives into effect and reporting to shareholders on their stewardship. Thus, corporate governance is about the operation of the board and how it sets the values of the company.

As pointed out by Edward et al. (2012), governance is used differently since it is a multi-dimensional concept and its usage depends on the analytical point of view of the observer. Good governance is hard to achieve and it requires proper planning. It is very integral in the creation of economic welfare of society but it takes a process that is writhed with economic, political and human implications. CG encompasses a wide range of activities, processes, rules, and procedures that ensure that the resources and corporate strategies are effectively used in meeting its objectives. Corporate governance can also be used in controlling different firms. For instance, the UK listed companies' corporate governance is part of the legal system that looks into the operations of companies under it. However, a new listing regime that was introduced in 2010 applies to all companies with premium listing equity shares regardless of their location. Good governance generally has wider impacts on the non-listed sectors since it is fundamentally about improving transparency and accountability within the existing systems. There are unique developments of corporate governance that have occurred in the recent past. Corporate governance label is currently being used in describing governance and accountability issues beyond the corporate sector. It is fundamental to note the confusing aspect of using corporate governance label in describing governance. For instance, the UK Corporate Governance was built and developed to deal with the governance of listed company entities and not designed to cover all organizational types that might have varying accountability structures. CG should ensure that the success of an entity is durable and creates value to the stakeholders. Organizations that enjoy massive success have a corporate governance and culture that does not just comply with regulations but also supports the efforts of the organization in improving performance.

After reviewing different definitions of corporate governance and its principles by different authors of different articles, it is crystal clear that CG is a very extensive concept in relation to the management of the process of a company that deals with both internal and external issues. These sentiments echo the ideas of Chi & Zeng (2008) who stated that corporate governance is an internal and external mechanism of control that aims at stimulating a proper and effective use o...

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