Corporate Governance
In the last decade or so, there has been a paradigm shift in various aspects related to business. On one hand, the business environment in which the organisations operate have increasingly become more volatile driven by the forces of globalisation while on the other there have been concerns about the underlying business practices and the adverse impact of these on the various elements of the society. The net result of the above factors is the increased risk associated with businesses which at the turn of century had led to incidences of corporate bankruptcy (Ho, 2005). As a result, this highlighted the need of a overhaul in the risk management practices existing at the time. The focus as a result was on corporate governance which came into prominence into the last decade of the 20th century. It became apparent to the businesses that with enhanced business risk prudent management of these risks would be required going forward. Besides, there was increased focus on the falling investor confidence due to high incidence of corporate frauds both in Australia and elsewhere. Strengthening the corporate governance framework for organizations provided an optimum solution which acted as a win-win situation for all the stakeholders (Huse, 2005). The new corporate governance framework relied on increased role on non-executive independent directors, formation of various committees such as remuneration, audit and nomination besides including the sections on these in the annual report, rotation of auditors coupled with greater emphasis of wider set of stakeholders while taking business decisions so as to tackle sustainability concerns (Elkington, 2006).
The stronger corporate governance framework received support from the shareholders as it meant better management of business risks through the formation of risk management committees and improvement in internal monitoring processes besides leading to a reduction in incidence of corporate fraud (Dey, 2008). With the increased role of independence directors at the board level, the businesses could hope for decision making which was aimed towards sustainable growth rather than short term growth. However, the concept of sustainability was pivotally linked to the corporate social responsibility model (Beltratti, 2005). Thus, this required that the organisation be viewed as an entity which ought to maintain harmonious relation with the stakeholders existing in the ecosystem. This essentially meant that the businesses would have to integrate with the society and environment and pay attention to the concerns in this respect. More importantly, there is this need to incorporate the environmental and social aspects in decision making besides relying on economic aspects. This need is apparent from the increased proliferation of various non-financial performance measures led by the GRI (Global Reporting Initiative). Driven by the shareholders and the shift in social outlook, environment has assumed a vital agenda for the businesses coupled with society.The net result is that businesses tend to actively invest in various environmental and social causes and also to release information to stakeholders about such initiatives (Aguilera, Rupp and Ganapathi, 2007).
Clearly, the current practices within the CSR ambit go against the notion of CSR which was propagated by Milton Friedman as per whom the responsibility of businesses is to make money for the shareholders. While the current CSR practices may seem incompatible, it is not the case (Jensen, 2002). Friedman expressed his version of CSR at a time when the management was driven by the shareholder view as per which the actions and decisions of the management must be driven only by the interests of the shareholders. However, there has been the shift in the management decision making focus from the shareholder to the stakeholder view. As a result, it is pivotal for the management to consider the interests of a wider set of stakeholders apart from shareholders (Munilla and Miles, 2005). While the current notion may seem drastically different, but in actually it is not as focusing on stakeholders ensures sustainable growth in shareholders’ wealth. Further, in the wake of conflicting interest, for most of the companies, it is shareholders interest that still matters more. The end result is that CSR has been reduced to mere tokenism meant for creating goodwill for the business and thereby furthering wealth creation for shareholders (Jamali and Mirshak, 2007).
Corporate Social Responsibility
However, the role of corporate governance cannot be undermined which has been reinstated after the Global Financial Crisis and the crumbling of the global behemoth such as Lehmann Brothers. It has been exposed that the modern organisations have severe governance issues which is making them vulnerable especially in wake of the dynamic environment where risk is inherent. As a result, poor decision making and imprudent risk management practices could seal the fate of the organisation causing massive loss to investors. But with sound corporate governance practices, it has been observed that there is better management of the various risks associated with the business as there is conscious effort to understand it (Clarke, 2004). Also, placing the decision making in the hands of the non-executive directors ensures that the outlook of the business decisions is essentially futuristic and not limited by the vested management interests in the short run (Chen and Jaggi, 2001). This also results in better risk management as it has been observed that one of the reasons for the various modern corporate bankruptcies such as ABC, HIH Insurance, Enron has been the desire to have massive short term growth without adequate checks and balances and total lack of sound governance practices (Galbreath, 2010).
In the various corporate collapses witnessed in the last decade or so, one common observation has been defunct corporate governance norms which ensured that unethical and risky business practices continued with the aid of auditors which eventually lead to the organisation becoming bankrupt. Thus, the utility of corporate governance in keeping the various risks under check besides enhancing the overall investor confidence cannot be understated (Elkington, 2006). Also, with the increased presence of non-executive directors at the helm of affairs, there is a greater concern and focus on CSR issues as there incentives are not linked with the short term performance of the company. Thus, their presence acts as a perfect foil to the interests of the top management and acts as a potent check and balance while ensuring that the long term vision and organisational objectives continue to act as basic guiding force for decision making (Said, Zainuddin and Haron, 2009). Also, CSR allows for greater integration of society and environment in decision making as these stakeholders and their concerns are better understood. The business decisions thus undertaken are more harmonious and less risky, thereby creating higher value for the firm in the long run. A case in point would be the spending of CSR funds by a mining company on rehabilitation and extension of various services to those communities that are adversely impacted through mining. A conscious effort by the company would result in lower resistance from the people and smoother operations. This would have a positive impact on profits in the long run (Galbreath, 2010).
The above discussion clearly establishes that risk is an inevitable part of modern businesses which cannot be avoided and hence require prudent management. The role of sound corporate governance practices in this regard is apparent from the existing literature and empirical evidences drawn from various corporate collapses. Further, with the shift of management decision making to stakeholder, there is increased emphasis on CSR which also ensures that risk is lowered as the business decisions tend to be more sustainable. Collectively, corporate governance and CSR as risk management practices tend to enhance investor confidence and improve business decision making.
References
Aguilera, R., Rupp, D. and Ganapathi, J. (2007), ‘Putting the S back in corporate social responsibility: A multilevel theory of social change in organizations’, Academy of Management Review, Vol. 32 No.2 , pp. 836–863
Beltratti, A. (2005), ‘The complementarity between corporate governance and corporate social responsibility’, Geneva Papers on Risk & Insurance, Vol. 30, pp. 373–386
Clarke, T. (2004), ‘Cycles of Crisis and Regulation: the enduring agency and stewardship problems of corporate governance’. Corporate Governance: An International Review, Vol.12 No.2, pp. 153-161.
Chen, C. J. P. and Jaggi, B. (2001), ‘Association between independent non-executive directors, family control and financial disclosures in Hong Kong’, Journal of Accounting and Public Policy, Vol.19 No. 3, pp. 285-310
Dey, A. (2008), ‘Corporate governance and agency conflicts’, Journal of Accounting Research, Vol. 46 No.3, pp. 1143-1181
Elkington, J. (2006), ‘Governance for sustainability’, Corporate Governance: An International Review, Vol.14, No.2, pp.522–529
Galbreath, J. (2010), ‘How does corporate social responsibility benefit firms? Evidence from Australia’, European Business Review, Vol. 22 No.2, pp. 411-431
Ho, C. (2005), ‘Corporate governance and corporate competitiveness: An international analysis’, Corporate Governance: An International Review, Vol.13 No. 3, pp. 211–253
Huse, M. (2005), ‘Accountability and creating accountability: A framework for exploring behavioral perspectives of corporate governance’, British Journal of Management, Vol. 16, No.1, pp.65–79
Jamali, D. and Mirshak, R. (2007), ‘Corporate social responsibility: Theory and practice in a developing country context’, Journal of Business Ethics, Vol. 72 No. 3, pp. 243–62
Jensen, M. (2002), ‘Value maximization, stakeholder theory, and the corporate objective function’, Business Ethics Quarterly, Vol.12 No. 2, pp. 235–256
Munilla, L. S. and Miles, M. P. (2005),‘The corporate social responsibility continuum as a component of stakeholder theory’, Business and Society Review, Vol.110 No.3, pp. 371–387
Said, R., Zainuddin,Y. and Haron, H. (2009), ‘The relationship between corporate social responsibility disclosure and corporate governance characteristics in Malaysian public listed companies”, Social Responsibility Journal, Vol. 5 No.2, pp.212-222
