The role of CSR in the context of Corporate Governance, Firm Performance and Accountability

Corporate social responsibility remains a contentious issue in the contemporary business environment despite being practiced for centuries.  A clear framework for governing CSR is absent that leads to confusion when managers are making CSR decisions (Hildebrand,Sen,& Bhattacharya 2011,p.1353).   There are two main views of CSR and they provide substantially different perspectives. The classical view holds that the principle responsibility of a business is to deliver value to the shareholders meaning that the interests of other stakeholders are not important.  The modern view presents a different perspective to CSR since it recognizes the interests of different stakeholders. According to the modern view, managers should click a balance between the interests of key stakeholders when making decisions (Garriga & Mel 2004, p.51-52).  The fitness of two views is subjective since it depends on the values of the viewer.  Shareholders may prefer a business that is maximizing their value.  On the other hand, other stakeholders are only willing to engage businesses that are responsive the environment.  CSR has diverse roles in the context of corporate governance, firm performance, and accountability.

Today’s business environment is characterized by stakeholders that are aware of their rights regarding business operations (Schwartz & Carroll 2003,p.503-506). Businesses that seek to succeed in such a business environment must embrace sound business practices aimed at promoting good interactions with the environment. Corporate governance refers to the relations, mechanisms, and processes through which businesses are directed (Valor 2005,p.191).     The agency problem creates unique challenges in corporate governance since the owners of the company are not involved in its running. As a result, systems are created to ensure businesses consider the interests of different stakeholders when making decisions. Corporate image is of great importance in the modern business environment since it is a key business success factor.

Approaches to Corporate Social Responsibility

CSR is a key area of corporate governance as it influences how a company is governed.  Many studies have been carried out to provide perspectives of practicing corporate social responsibility in the contemporary business environment. There are three main approaches to corporate social responsibility that guide managers when making CSR decisions. The three main approaches are corporate social responsibility, stakeholder theory, and triple bottom line. (Chen et al. 2008,p.132-137).. These approaches help one to link CSR with business performance, corporate governance, and firm accountability.

The CSR Approach

CSR theory is a contemporary corporate social responsibility perspective that requires businesses to focus on the welfare of the broader community in the course of pursuing profit objectives. According to this approach, businesses have four main obligations that include legal responsibility, economic responsibility, philanthropic responsibility, and ethical responsibility (Du, Bhattacharya & Sen 2010,p.8-9).

Businesses have an economic responsibility that is directed towards making profits. The key concept in this responsibility is the ability of a business to operate in an economical manner.  A sensible business is one that generates enough resources to support its operations as well as generating enough profits for the  shareholders.  Emphasis is put on the ability to finance operations since there are many non-profit making organizations that create revenues that are directed towards financing operations without having a motive of making profits. For instance, a local company created to offer water and sanitation services can charge its services with an aim of financing operations. It implies that economic responsibility applies for both profit and non-profit making companies (Jamali & Mirshak 2007, p. 243).

Legal responsibility is a key business obligation. Businesses are governed by a legal framework that is created by the government to streamline business operations. The government creates regulatory agencies that are responsible for regulating government operations.  These agencies protect businesses from other businesses and also shield the environment from unethical business practices.   Legal responsibility is a crucial business success factor since it protects a business from unnecessary litigations.  Litigation costs are substantial and they are therefore damaging to profitability. Enron is a good example of how noncompliance with the legal framework can ruin a reputable organization. The company collapsed after its managers failed to comply with the financial reporting regulations leading to serious litigations (Li 2010,p.37). Noncompliance also dents the organization’s image that compromises profitability in the long run. Corporate governance focuses on both short-term and long-term success. Practicing legal responsibility, therefore, safeguards the organization’s short-term and long-term success.

Philanthropic responsibility is one of the major obligations of a business as per the CSR theory.  According to the CSR approach, businesses should contribute to community projects that are aimed at promoting the society’s welfare (Marrewijk, van & Marrewijk 2003,p.97). Companies are artificial persons and they enjoy the same privileges as private citizens. Private citizens engage in activities aimed at promoting the society’s welfare. Being members of the society, businesses should also behave responsibly by dedicating some resources in promoting the society’s welfare.  The society has many problems and businesses have an initiative of solving these problems.

Ethical responsibility is a crucial area of business obligation. Businesses are required to adopt corporate cultures that promote ethical behavior. Ethics is the principle that helps individuals and groups to differentiate good and bad. The law   can never provide a conclusive guidance to organizations requiring managers to be active in promoting ethical behavior in operations.  For instance, the commitment by Apple to the reduction of ecological footprint is an ethical obligation. Apple has been streamlining operations to ensure sustainability in the company’s interaction with the environment. The company established a solar plant People’s Republic of China to reduce the utilization of unclean sources of energy (Luke 2015,p.7).  These and other ethical responsibilities have strengthened the company’s brand position in the global environment.

Stakeholder Theory

Stakeholder theory was authored by Edward Freeman and it provides a clear perspective of the role of CSR in corporate governance, firm accountability, and performance.   This theory argues that there are many groups and individuals that are affected by the operations of a particular business.  Each of these entities has a claim on the business due to the consequences that a business has on the stakeholders. The theory argues that businesses should strive to serve the interests of the stakeholders. The stakeholders of a business are vast due to the complex interactions between a business and its environment.  It is, therefore, important to identify the main stakeholders that interact with the businesses more than others. Edward Freeman identified five main stakeholders that include workers, customers, community, shareholders, and suppliers (Tang & Tang 2012,p.436). Managers should strive to balance the interests of these stakeholders when making key decisions.

A business should behave responsibly towards the workers. Employees are the most important resources in the organization as they are the key determinant of the ability to realize organizational goals.  Managers should create employee friendly policies aimed at safeguarding the interests of employees in the work environment (Avetisyan & Ferrary 2013,p.117-119). These policies should ensure participative management, adequate compensation, and fair treatment of employees.  Employers should also invest in promoting the welfare of employees. Corporate governance involves promoting sustainable relationships with the employees that is a clear indication that CSR plays a crucial role in corporate governance.  Serving the interests of employees motivates them to put more efforts that translate into improved business performance emanating from increasing efficiency in human resources.

The stakeholder theory requires businesses to behave responsibly to the customers. A business can behave responsibly to customers by charging affordable prices, selling defective free products, conformity to stated measurements, and offering after-sales services. Behaving responsibly towards the customers increases customer loyalty that is a crucial business success factor. One of the main areas of corporate governance is promoting the interests of the customers and shareholders.  Satisfied customers make repeated purchases and also spread the good news about the organization’s services. Such acts increase sales that contribute positively to organizational performance.

The community is a crucial business stakeholder according to stakeholder theory. The community refers to the entities and people in the immediate environment that are influenced by the firm’s operations. A firm should factor the interest of the community when making key decisions.  Some of the organization’s outputs such as wastes products can lead to pollution that compromises the welfare of the community. Apart from managing the negative outputs, firms are required to make investments that promote the community’s welfare such as funding development projects. Behaving responsibly towards the community enhances business acceptance in the community that in turn improve performance.

The stakeholder theory recognizes the shareholders as some of the crucial stakeholders. Managers should engage in activities that safeguard the shareholders interests. One of the main principles of corporate governance is ensuring business sustainability. A business is only sustainable when its operations are self-sustaining. The theory requires managers to invest the shareholder’s resources in a way that lead to maximization of shareholder’s value.  Running a firm in a profitable manner encourages the shareholders to reinvest profits in the business. It also encourages them to commit more capital to business operations. CSR, therefore, plays a crucial role in corporate governance, accountability, and performance by serving the interests of shareholders.

Lastly, suppliers are recognized as some of the most important stakeholders by the stakeholder theory. The theory requires managers to pay attention to the interests of the suppliers to ensure they continue providing essential inputs to a business. The suppliers influence business performance to a great extent that makes it necessary for the managers to pay special attention to the interests of the suppliers. Firms should pay the suppliers on a timely basis to boost their faith in the organization. There should be a fair tendering system to ensure the suppliers are not unfairly treated during the tendering process. One of the main areas of corporate governance is building sustainable relationships with the suppliers. CSR, therefore, plays a crucial role in corporate governance by ensuring the suppliers remain satisfied.  Serving the interests of the suppliers ensures smooth operations in the organization as it motivate suppliers to make timely deliveries. Smooth operations emanating from cooperative suppliers promote good organizational performance (Brown & Forster 2013, p.301-306)..

Triple Bottom Line Theory

This theory is a combination of the works of different theorists. It argues that businesses should focus on realizing social, economic, and environmental balance.  The three elements are directly related to corporate governance, accountability, and business performance. Concerning economic sustainability, businesses have the responsibility of implementing measures that guarantee long term financial soundness.  The managers are therefore responsible for creating strategies aimed at enhancing business prosperity. Social sustainability focuses on creating lasting relationships with the society.  A company should identify imbalances in the society and seek to correct them. For instance, it is the responsibility of a company to promote economic equalities. Walmart , the world’s leading retailer offers low-cost products that helps in reducing the  cost of living that in turn  contribute towards correcting economic inequality (Kampf 2007,p. 41-45).  Lastly, the theory proposes that businesses should focus on realizing environmental sustainability.  Firms should engage in activities that have minimum ecological footprints.  Balancing the three elements ensures the creation of sustainable business models that is the key objective of corporate governance.

Recommendations

In conclusion, the three approaches to CSR prevent a good perspective of visualizing the role of CSR in corporate governance, accountability and business performance. Although the approaches provide reliable approaches to CSR, they have shortfalls that require some improvements. Firms should focus on the following to make the CSR mechanism work better:

  • Sustainability should be given emphasis- businesses should focus on creating sustainable business models
  • Decision making should consider the interests of main stakeholders- managers should be ready to make compromise so as to factor the interests of key stakeholders
  • CSR activities should be directed towards creating a good image for the business.
  • The impacts of the firm’s activities in the environment should be  considered when making decisions

List of References

Avetisyan, E. & Ferrary, M., 2013. Dynamics of Stakeholdersʼ Implications in the Institutionalization of the CSR Field in France and in the United States. Journal of Business Ethics, 115(1), p.115-133.

Brown, J.A. & Forster, W.R., 2013. CSR and Stakeholder Theory: A Tale of Adam Smith. Journal of Business Ethics, 112(2), p.301-312.

  1. Chen, J., Patten, D.M. & Roberts, R.W., 2008. Corporate charitable contributions: A corporate social performance or legitimacy strategy?Journal of Business Ethics, 82(1), p.131-144.

Du, S., Bhattacharya, C.B. & Sen, S., 2010. Maximizing business returns to corporate social responsibility (CSR): The role of CSR communication.International Journal of Management Reviews, 12(1), p.8-19.

Garriga, E. & Mel, D., 2004. Corporate social responsibility theories: Mapping the territory. In Journal of Business Ethics. pp. 51-71.

Garriga, E. & Melé, D., 2004. Corporate Social Responsibility Theories : Mapping the Territory Social Responsibility Corporate Theories : Mapping the Territory. Journal of Business Ethics, 53(1/2), p.51-71.

Hildebrand, D., Sen, S. & Bhattacharya, C.B., 2011. Corporate social responsibility: a corporate marketing perspective. European Journal of Marketing, 45(9/10), p.1353-1364.

Jamali, D. & Mirshak, R., 2007. Corporate Social Responsibility (CSR): Theory and practice in a developing country context. Journal of Business Ethics, 72(3), p.243-262.

Kampf, C., 2007. Corporate social responsibility: WalMart, Maersk and the cultural bounds of representation in corporate web sites. Corporate Communications: An International Journal, 12(1), p.41-57.

Li, Y., 2010. The Case Analysis of the Scandal of Enron. International Journal of Business & Management, 5(10), p.37-41.

Luke, R. and, 2015. Apple Inc. Strategic Planning, p.1-18

Marrewijk, M. van & Marrewijk, M.V., 2003. Concepts and definitions of CSR and corporate sustainability: Between agency and communion. Journal of Business Ethics, 44(2), p.95-105.

Murphy, P.E. & Schlegelmilch, B.B., 2013. Corporate social responsibility and corporate social irresponsibility: Introduction to a special topic section. Journal of Business Research, 66(10), p.1807-1813.

Schwartz, M.S. & Carroll, A.B., 2003. Corporate social responsibility: a three-domain approach. Business Ethics Quarterly, 13(4), p.503-530.

Tang, Z. & Tang, J., 2012. Stakeholder-firm power difference, stakeholdersʼ CSR orientation, and SMEs’ environmental performance in China. Journal of Business Venturing, 27(4), p.436-455.

Valor, C., 2005. Corporate social responsibility and corporate citizenship: Towards corporate accountability. Business and Society, 110(2), p.191-212.

 

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