Module 4: Corporate governance and social responsibility

1. Module 4: Corporate governance and social responsibility ACCT19083 by Dr Gerard L. Ilott.

2. LEARNING OBJECTIVES • Define corporate governance and corporate social responsibility, and explain the ethical linkages between the two. • Compare and contrast the narrow and broad views of CSR, especially the ethical issues involved in each view. • Explain the reasons for institutionalising ethics within corporations, and how it might be achieved.

3. What is a corporation? • A corporation is an entity that can endure beyond the natural lives of its members and that can sue and be sued as an entity. • The entity can own property and borrow funds for ventures of limited liability. • Limited liability means that the members are liable for the debts of the corporation only to the extent of their investments.

4. What is corporate Governance? • Corporate governance refers to the system of rules, practices and processes by which a corporation or company is directed, administered and controlled.

5. What is Corporate social responsibility? • Corporate social responsibility (or CSR) refers to an expanded set of expectations for a business (i.e. beyond financial and economic obligations) that incorporate the social and environmental impact of the business.

6. What is Corporate social responsibility?

7. Corporate moral agency • Corporations are legal agents, but are they moral agents? • Corporations enjoy the same status and functions in society as human beings. • They can own property, enter into contracts and make decisions. • Should corporations, then, be held morally responsible for their actions?

8. Diminished individual responsibility • The size and impersonal structure of the corporation can result in a diffusion of responsibility. • It is difficult to assign individual responsibility, because corporate structure envelops members. • Who should be responsible for actions? • Should we attribute moral agency to corporations? • Should we accept that people are willing to abrogate themselves of any personal responsibility? • These two options are not necessarily mutually exclusive.

9. Rival views of corporate responsibility (1) • The narrow view: Profit maximisation • ‘Business has no social responsibilities other than to maximise profits.’ • The purpose of any business is to make profits for its shareholders; management’s only duty is to protect the interests of the shareholders. • The only obligation that business has to others is to stay within ‘the rules of the game’.

10. Debating corporate responsibility • Arguments for the narrow view: • The ‘invisible hand’ • ‘Let government do it.’ • ‘Business can’t handle it.’ • ‘Corporations lack the expertise.’ • ‘Corporations will impose their values on us.’

11. The ‘invisible hand’ ARGUMENT

12. Criticisms of this approach • Modern corporations bear little resemblance to the self-sufficient farmers and craftspeople on whom Adam Smith based his theory. • Modern corporations operate in a political and social environment in which they are pressured by public opinion and other outside influences. • Socially responsible corporate behaviour is positively correlated with financial success.

13. THE ‘Let government do it’ argument

14. Criticisms of this approach • It is a blueprint for an intrusive government. • Many questionable activities will be overlooked. • Government can only prescribe behaviour for broad issues; it cannot anticipate specific moral challenges. • Is government a creditable custodian?

15. THE ‘BUSINESS CAN’THANDLE IT’ ARGUMENT • It is misguided to encourage corporations to address non-business issues. • They lack the necessary expertise. • They will impose their materialistic values on society. • Yet some corporations have demonstrated that they accept responsibility for the well-being of their immediate and wider communities.

16. THE ‘Corporations lack the expertise’ argument

17. THE ‘Corporations will impose their values on us’ argument • If corporations stray from purely economic matters, they will impose their values on society. • Rather than ‘moralising’ corporate activity, they will ‘materialise’society. • Yet corporations already exert considerable discretionary power over society.

18. Rival views of corporate responsibility (2) • The broad view: Social purpose • Corporations are a human creation invented to serve human needs. • Business has other obligations in addition to the pursuit of profit. • Corporations have an obligation to consider the interests of all groups upon which they have an impact. • The social contract: business has a duty to consider its impact on society.

19. Shareholders and the corporation: The narrow view • Corporations should be run entirely for the benefit of their shareholders. • Shareholders select corporate managers to act as their agents and advance their interests. • This argument only holds true for certain smaller companies and venture capitalists investing in start-up companies. • Management has a fiduciary duty to its shareholders.

20. Shareholders:the broad view • The duty to make a profit does not outweigh a company’s other responsibilities. • The agency relationship creates an obligation, but that obligation is not absolute. • Firms are so focused on the bottom line that they are willing to sacrifice all other values; they should take a broader view of their responsibilities.

21. Ethical codes and economic efficiency • There are limits to what the law can achieve, so it is important that companies examine their implicit and explicit codes of conduct, and their corporate moral culture.

22. Ethical codes and economic efficiency (cont.) • Although adherents of both the broad and the narrow views of CSR tend to assume that ethical behaviour means less economic efficiency, the most morally responsible companies are consistently among the most profitable.

23. Corporate moral codes • To institutionalise ethics, managers must: • articulate the firm’s goals • adopt an ethical code applicable to all • set up an ethics committee to oversee, develop and monitor the code • incorporate ethics training into all employee development programs. • For a code to be effective, it must be realistic.

24. STAKEHOLDER APPROACH • For whose benefit should the corporation be operated? • The narrow view contends that a business operates for the benefit of its shareholders. • But a business’ operations have an economic and social impact on society that stretches far beyond its shareholders. • The stakeholder approach attempts to consider the interests of all upon whom the business has an impact.

25. Stakeholder approach (CONT.) • Primary: • employees • suppliers • customers • shareholders. • Secondary: • government • legal bodies • local community