Relationship between Corporate Governance and CSR

According to Rahim, there is an evolving interplay between corporate governance and CSR, both of which hold economic and legal features that may be altered through socio-economic processes in which competition within the product market is the most powerful force.[1]  Rahim stressed that corporate governance and CSR are complimentary and closely linked with market forces and that while their objectives are not concurrent they may act as tools for attaining each other’s goals.  Winberg and Randolph also agreed that “CSR is related to and overlaps in some respects with the concepts of corporate governance and ethics”, however, they believed that: “it is nevertheless distinct….governance programs tend to be internally focused and generally retain heavy rules based favor. In contrast CSR tends to be more value-based and externally focused.”[2] The Australian Parliamentary Joint Committee on Corporations and Financial Services noted that the terms “corporate responsibility” and “corporate governance” were sometimes confused with each other and explained its position that corporate governance referred to broader issues of company management practices (i.e., the conduct of the board of directors;, the relationships between the board, management and shareholders; transparency of major corporate decisions; and accountability to shareholders) and that corporate responsibility is only one aspect of an organization’s governance and risk management processes.[3]

A somewhat contrary view of the relationship between CSR and corporate governance was taken by Walsh and Lowry, who wrote that “corporate governance is an increasingly important aspect of CSR…. to provide the more solid foundation on which broader CSR principles and business ethics can be further enhanced”.[4]  Their approach was based on the assumption that “corporate governance” was to be construed narrowly, thus limited to enhancement of shareholder value and the protection of the interests of shareholders, and that the obligations of corporations with respect to the environment, employees and consumers could be assigned to the separate domain of CSR even though some of those obligations were becoming based in law regulation.  All of this illustrates the importance of how corporate governance is conceptualized, narrowly or broadly, on the degree of overlap and convergence between CSR and corporate governance.

A number of commentators have suggested that there are actually two models of corporate governance.[5]  The first model, which is based in the economic tradition of Friedman, is the “shareholder governance” system in which the directors and managers of the corporation are the agents for the shareholders as the principals of the corporation and the responsibility of the agents is to maximize shareholder value.  The second model is the “stakeholder governance” system, which does not ignore shareholders but also extends the responsibility of directors and managers to different groups of stakeholders upon which the corporation is dependent for its operations and survival.  The second model has been used as the basis for the argument that CSR is, in fact, an extended corporate governance system whereby the responsibilities of corporations and their directors range from fiduciary duties towards the owners to the analogous fiduciary duties towards all of the firm’s stakeholders.[6]  Certain of these duties, primarily those that have been imposed by law, are enforced by litigation and activities of governmental regulators, while the “softer” duties associated with social and environmental issues are being enforced by self-regulatory codes of conduct and stakeholder activism (including pressure from institutional shareholders).

Jamali et al. examined several models that have posited a relationship between corporate governance and CSR.[7]  The first model depicted corporate governance as a pillar of CSR and requires that an effective corporate governance system be in place to serve as a foundation for solid and integrated CSR activities.   This model could be illustrated by Hancock’s “Key Pillars of Corporate Responsibility”, which was based on the argument that investors and senior management should focus their attention on four core pillars that account for most of the company’s true value and future value creation[8]:

  • Strategic Governance: Strategic scanning capability; agility/adaptation; performance indicators/monitoring; traditional governance concerns; and international “best practice”
  • Stakeholder Capital: Regulators and policy makers; local communities/NGOs; customer relationships; and alliance partners
  • Human Capital: Labor relations; recruitment/retention strategies; employee motivation; innovation capacity; and knowledge development
  • Environment: Brand equity; cost/risk reduction; market share growth; process efficiencies; customer loyalty; and innovation effect

In this model, corporate governance is one of the basic building blocks of CSR and suggests that when boards are exercising their responsibility over CSR they need strategic good corporate governance practices in place in order to effectively leverage the company’s crucial sources of capital: human, stakeholder and environmental.[9]

The second model visualized CSR as being an attribute or dimension of corporate governance, thus widening the scope of corporate governance to incorporate non-financial risks into the risk mitigation dimension of corporate governance activities.  This approach could be illustrated by Ho’s depiction of the following attributes of good corporate governance and the activities and topics associated with each attribute[10]:

  • Strategic Leadership: Set corporate objectives, direct competitive focus, make major decisions, measure performance and determine executive pay
  • Stewardship: Legislative safeguards, governance policy and governance committee, director participation, regular reviews and “ask tough questions and demand answers”
  • Social Responsibilities: Adopt policies, enforce and audit and report on conformance
  • Board Structure: Separate supervisory and executive roles, nonexecutive directors, election procedure and committees (i.e., nomination, audit and compensation committees)
  • Capital Structure and Market Relations: Capital concentration, satisfy shareholders and research and development, continuous dialogue with investors and markets

Ho explained that her framework viewed corporate governance more holistically and Jamali et al. observed that this was consistent with the work of other scholars, such as Kendall[11], who considered good corporate governance as “ensuring that companies are run in a socially responsible way and that there should be a clearly ethical basis to the business complying with the accepted norms of the society in which it is operating”.[12]   It is interesting to note that Ho’s study provided evidence that higher commitments to CSR were strongly and positively related to the qualifications and terms of directors, boards that exercise strong stewardship and strategic leadership roles and the management of capital market pressures, all of which are also hallmarks of good corporate governance.[13]

The third model, suggested by Bhimani and Soonawalla, portrayed corporate governance and CSR as complementary constituents of the same corporate accountability continuum that could be illustrated as follows[14]:

Corporate                                                                                                      Corporate

Conformance<———————————————————————->Performance

Corporate              Corporate              Corporate              Stakeholder

Financial               Governance          Social                     Value

Reporting                                              Responsibility       Creation

Jamali et al. explained that “the continuum reflected varying degrees of compliance with laws and legally enforceable standards, with stress placed on corporate conformance on the left end of the continuum and attention shifting to corporate performance on the right end, where codes/standards are extremely difficult to apply, and oversight mechanisms are much less evident”.[15]  The continuum approach also illustrates that companies approach their expanding corporate governance responsibilities must understand and balance “binding” legal requirements that require formal compliance and reporting and the self-regulatory initiatives commonly associated with CSR that, while still technically “voluntary”, have increasingly become expectations of investors and other stakeholders.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 21 (citing L. Mitchell, “The Board as a Path toward Corporate Social Responsibility” in D. McBarnet, A. Voiculescu and T. Campbell, The New Corporate Accountability: Corporate Social Responsibility and the Law (2007), 279).  See also M. Rahim, “Corporate Governance as Social Responsibility: A Meta-regulation Approach to Incorporate CSR in Corporate Governance” in S. Boubaker and D. Nguyen (Eds.), Board of Directors and Corporate Social Responsibility (London: Palgrave Macmillan, 2012).

[2] D. Winberge and P. Randolph, “Corporate Social Responsibility: What every In-House Council Should Know”, ACC Docket (May 2004), 72.

[3] Parliamentary Joint Committee on Corporations and Financial Services, Corporate responsibility: Managing risk and creating value (2006), 6-7.

[4] M. Walsh and J. Lowry, “CSR and Corporate Governance” in R. Mullerat (Ed.), Corporate Social Responsibility: The Corporate Governance of the 21st Century (Amsterdam: Kluwer, 2005), 38-39.

[5] See, e.g., C. Mayer, “Corporate Governance, Competition, and Performance”, Journal of Law and Society, 24 (March 1997), 152, 154.

[6] L. Sacconi, Corporate Social Responsibility (CSR) as a Model of “Extended” Corporate Governance. An Explanation based on the Economic Theories of Social Contract, Reputation and Reciprocal Conformism (UE Research Project, 2004).

[7] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 447-448.

[8] J. Hancock (Ed.), Investing in Corporate Social Responsibility: A Guide to Best Practice, Business Planning & the UK’s Leading Companies (London: Kogan Page, 2005).

[9] J. Elkington, “Governance for sustainability”, Corporate Governance: An International Review, 14 (2006), 522.

[10] C. Ho, “Corporate governance and corporate competitiveness: An international analysis”, Corporate Governance: An International Review, 13 (2005), 211.

[11] N. Kendall, “Good corporate governance”, Accountants’ Digest: The ICA in England and Wales, 40 (1999).

[12] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 447.

[13] Id.

[14] A. Bhimani and K. Soonawalla, “From conformance to performance: The corporate responsibilities continuum”, Journal of Accounting and Public Policy, 24 (2005), 165.

[15] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 447.

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