Corporate Social Responsibility and Governance

1 Corporate Social Responsibility & Governance: an examination of Shareholder Relations

Table of Contents Corporate Social Responsibility & Governance: an Examination of Shareholder Relations..........3 Introduction..................................................................................................................................3 The meaning of CSR....................................................................................................................3 CSR versus capital.......................................................................................................................4 Insurance created by moral capital...............................................................................................6 CSR engagement and the resultant effects...................................................................................7 Stakeholder characteristics...........................................................................................................8 The characteristics of the firm.....................................................................................................9 Size of the firm in relation to CSR.............................................................................................10 Negative social impacts.............................................................................................................11 The Characteristics of Events........................................................................................................12 Competitive events.....................................................................................................................12 Stakeholder-based negative events............................................................................................12 Negative events resulting from integrity issues.........................................................................13 Demanding Stakeholders...........................................................................................................14 Governance and the green consumers........................................................................................15 The activist shareholder.............................................................................................................16 The civil society or NGO shareholder group.............................................................................17 The government as a stakeholder...............................................................................................18 The financial sector as stakeholders...........................................................................................19 Recommendations..........................................................................................................................19

2 Conclusion.....................................................................................................................................20 List of References..........................................................................................................................21

3 Corporate Social Responsibility & Governance: an Examination of Shareholder Relations Introduction Corporate social responsibility, CSR, is an aspect of organizational management where a firm seeks to show appreciation to all its shareholders for their participation in business.

Shareholders include both internal and external communities of the organization whose interactions enable the organization to attain its objective. The internal community mainly involves the employees, while the external community includes a host of groups, such as consumers, the neighboring community, government, as well as the stockholders of the company. A company must always ensure that it maintains good relations with these communities for the sake of continuity of business. By ensuring that their life quality is good, the organization is assured of available consumers in the future. This paper seeks to discuss the whole issue of corporate social responsibility, and will in particular dwell on the subject of shareholder relations.

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4 The meaning of CSR According to Sims (2003), businesses need to continuously commit themselves in acting ethically as well as making a direct contribution in economic development. In all these activities, the main corporate focus should be seeking to better the standard of life led by the workforce, their immediate families, and the overall community. Businesses have been roundly criticized over the years for their actions and activities, a situation that has led to improved corporate concern for the need to involve with society in managing social environment and pursuing a changed social contract.

There is no any universally accepted definition of CSR because many corporate bodies tend to describe it in a way that specially suits and addresses their own concerns. Some organizations, for instance, view it more in terms of a system, where the main sections are divided into internal as well as external shareholders of the organization. For others, CSR is simply a voluntary exercise that targets to improve the profile of the company in the eyes of the shareholders (Zu 2009). However, most societies have come up with government guidelines which specifically seek to control how CSR is done by corporate bodies. Such a kind of framework does not leave to the company’s administration and management to choose on how to conduct their CSR but rather lays out the overall CSR procedure.

CSR follows a number of principles which, if adhered to the latter, will likely bring positive results to the organization. Ensuring the organization manages the environment in a way that mitigates its resultant operation effect is one of the basic ideals of the program. Companies must also ensure they remit their taxes to the authorities accurately, and on time to enable the governments undertake their mandated jurisdictions effectively without any delay. Equally important, organizations must accord respect to their workforce by paying them promptly and in

5 a commensurate manner. In all their business dealings, like outsourcing of materials, companies must ensure that their partners also adhere to sound practices in terms of their environmental and labor practices. The dealings of the organization with the outside world should particularly follow ethical practices and codes (Mullerat & Brennan 2011).

CSR versus capital CSR captures the voluntary corporate actions that are meant at improving social conditions. These actions are not compelled by law but are willingly done in order to further social good to communities as the firm extends over explicit transactional interests. Thus, CSR’s voluntary nature implies that the activities can generally be looked at as grants or gifts extended to the numerous stakeholder groups by the corporation (Gottschalk 2010, p. 191). Nevertheless, CSR gifts come with attached strings. As noted by sociologists and anthropologists alike, the ‘strings’ emanate from ‘intangible requitment’ process, or, ‘unspecified reciprocity’ which generally underscores gift giving as an aspect of buying respect.

Additionally, CSR plays the role of rules maintenance by virtue of sending the firm’s information to different social actors that eventually lowers search, as well as evaluation costs. In this regard, it can be argued that CSR symbolizes willingness by the organization to act in an altruistic manner and not to simply act in an agonistic way. The shareholders, in determining the altruistic orientation of an organization, look at the CSR activities as part of the signals (Crane, 2008, p. 138). Further, businesses’ macro-institutional norms, in any case, are to make profits.

This is what all general public actors existing in capitalistic societies accept and live with. In order to make profits, behaviors that are self-serving, self-considering, and self-dealing are highly required. Together, these realities are what define a firm’s orientation of being either substantially or completely altruistic.

6 To the managers of the firm, the idea behind CSR and its effect is not really to showcase altruism in its complete fullness but rather to show how the firm is not wholly self-interested. It also aims at passing the information that the company’s leaders consider social good in whatever decisions they make. Whenever such signals are portrayed to the external stakeholders, the organizations accrue positive attributions in return, or what is referred to as moral capital. As such, the outsiders visualize their organization as being too much preoccupied in activities that aim at bolstering their social and moral lives (Fernando 2007, p. 22).

CSR activity has two features which, together, work towards determining the potential value or strength. Firstly, the activity must be in the knowledge of the public, either through the firm doing the actual reporting itself or through the analysis and reporting done by others.

Secondly, CSR activities must be well substantiated to the extent of creating a declaration that is both unselfish and reasonable. Once a company’s CSR activity gets coverage by the media, as well as the outside evaluators, it goes to show that the investment by the company is substantial enough that it can be recognized as commitment which is also credible. Thus, a noteworthy or substantial CSR is one that attains both criteria (Ihlen, Bartlett & May 2011, p. 374).

Insurance created by moral capital There are moments when business activity still impacts negatively to stakeholder groups.

This is despite the many efforts put in place by the company or firm to compliment the various shareholders. Some negative impacts, such as putting a halt to the distribution of a particular product or service, can be described as benign. Some consequences, such as closing down a plant, could be termed as local. Equally, some other negative impacts could be as a result of global activities, such as environmental disasters or market-destabilizing fraud. When such negative events occur, the response from the stakeholders often is to react by punishing the

7 organization. These could be by way of sanctions, where boycotts or badmouthing could be employed. In a more severe response, stakeholders could resort to such actions as revoking the firm’s right to conduct business. Such sanctions, however, ought to follow an approach that is legal in both derivation and application.

In meting out their punishment to the firm, stakeholders consider the negative effects of the firm’s act, as well as the offender’s intentions and perceived state of the offender’s mind. In instances where shareholders feel the firm has committed very bad acts, punishments are also likely to be severe. Many theorists in this area argue that the engagement of a company in CSR generates economic value since the moral capital derived as a result offers a mitigating factor as far as law process of attribution is concerned (Angwin, Cummings & Smith 2011, p. 48). The resulting goodwill should in itself be able to scale down the overall severity created by sanctions through the encouragement of stakeholders to offer some benefit of doubt to the firm. This is particularly in case ambiguity overrides the existing motive. In other words, CSR-based moral capital generates value if it, in turn, assists stakeholders to attribute or put a connection between negative impacts of the firm to managerial maladroitness, instead of malevolence.

Although it could appear difficult to measure the mental processes of stakeholders, it is possible to observe whether these shareholder groups, on the other hand, behave in a manner that is consistent with an attribution process put down in theory. Such consistency would go on to showcase the ‘insurance-like’ protection that CSR activity generates.

CSR engagement and the resultant effects CSR’s economic value can reasonably be termed or proposed to be contingent. By engaging in social activities, the firm signals a non self-serving course. Where a negative event occurs, however, the investors must act in a speedy manner to anticipate what the potential

8 actions of the other stakeholders will turn out to be. That is, how are customers, employees, suppliers, and regulators likely to react? What sanctions could they use to banish the organization in return? How severe could their actions be? In any case, negative events, however much they are unanticipated, or even if partially anticipated, will end up generating stock price reactions that are negative because investors are anticipating the stakeholders will react in a way that is negative (Freeman, Harrison & Wicks 2008).

To the investors, CSR activity will signify the incidence of moral capital which could also potentially temper with sanctions. Firms that lack CSR activity can be said to lack this kind of buffering goodwill, a scenario that exposes them a lot to impacts with even greater outcomes.

In this case, therefore, CSR activity is a signal to investors that tries to explain the probable ways through which stakeholders are likely to react.

Stakeholder characteristics Different scholars have attempted to draw a distinction line between the numerous stakeholder groups for firms. For instance, Freeman et al. (2008) identify primary stakeholders with groups that perform all essential activities supporting the operation of the organization. On the other hand, he points out secondary stakeholders have the necessary potential to influence the primary stakeholders of the firm. The primary stakeholders have the power to make legitimate claims, compelling the managers to act in a manner that addresses their interests. They have the power and urgency to ensure their claims are enforced. Secondary stakeholders, on the other hand, enjoy legitimate claims although they do not have urgency and the power enjoyed by primary stakeholders.

By virtue of their position to enjoy power and urgency advantages, primary shareholders are likely to be induced by CSR activities to an extent that they increase exchanges with the

9 organization. The firm’s main reason would be to forestall the negative economic consequences, or allow their managers a free and flexible room to pursue strategies with indirect interests of the primary stakeholders. When a firm is planning for CSR activities, it should ensure the activities produce exchange capital for the primary stakeholders. This will increase the firm’s potential to create advantageous exchanges with its primary stakeholders. However, such CSR activities have a limited likelihood of generating moral capital since the actions could only be regarded as being consistent with the profit-making interest of the firm. They can simply be viewed as selfserving and not other-regarding behaviors.

Nevertheless, CSR activities targeting the secondary stakeholders have a very opposite profile. Because they do not enjoy urgency and power advantages to further emphasize their claims to the managers of the firm, it is less likely that the activities of the firm will seem to be self-interesting, and designed to enhance exchange prospects with the primary stakeholders. The acts are more likely to be envisaged as voluntary social beneficence, whose basis is on normative, as well as pragmatic appeals. Thus, the managers can be looked at people with the concerns and plight of others at heart, compared to the case of primary stakeholders.

An exploratory factor analysis conducted by Mattingly and Berman (2006) uncovers a similar data pattern in as far as CSR activities targeting primary stakeholders are concerned. The writers refer to CSR activities targeting primary stakeholders as technical CSR, abbreviated as TCSR, while those directed towards secondary stakeholders as institutional CSR, ICSR. In actual sense, though, CSR activities are not different inherently. It is the difference among CSR stakeholders that brings about the perception in as far as the organization and its management is concerned.

10 The characteristics of the firm It is evident that the level of a firm’s intangible assets is likely to impact its CSR activity and value. This is in as far as the shareholder values discussed so far, and the risk management activities are concerned. Insurance, which is taken as a way of managing against risk, grows in value when the cost of financial distress also increases. Negative events that lower the cash flow of a firm, or those that raise the risk level may resultantly generate greater financial distress levels to an extent of compelling the shareholders to react in ways that raises risk levels. For instance, customers may decide to devalue the brand, while the key employees may quit altogether. For suppliers, their actions may range from increasing cost of capital, to tightening the terms of trade. In general, CSR activities that discourage stronger punitive responses should be more valuable to firms, particularly where the intangible assets realized and the stakeholder relationships play a significant role in value creation.

Size of the firm in relation to CSR Size plays a more significant role in as far as CSR activities of a firm are involved. The size of the firm influences the risk faced in the sense that those with a market presence that is large are likely to incur more risk. Size can either be looked at in form of its features, its dimension, or context within the operation of managers. When being regarded as a feature, a larger market presence would mean more transactions. More transaction, on the other hand, implies heightened probability of experiencing negative events. In other words, negative outcomes attract more opportunities. In this regard, therefore, larger firms should engage more in CSR so as to put a check on the increased risk as compared to smaller firms.

CSR engagement will also be of more value to a larger firm especially when size is considered to be the basis upon which managers operate. Larger firms, in contrast to smaller

11 ones, face greater scrutiny and coverage from the media, stakeholders, as well as other special interest groups. Additionally, larger firms enjoy comparatively higher profiles, a scenario that increases negative action risk from outside constituents. The negative events that are likely to be faced by a larger firm will, in turn, occasion a situation where the firm’s CSR will be considered by the numerous groups and individuals. Larger firms engaging in CSR are likely to consider the value because of the frequency with which it will be used (Gössling 2011, p. 43).

Negative social impacts These impacts may occur as a result of numerous reasons; it could either be because of a company’s membership to a certain industry, such as tobacco or nuclear power, or it may result from the actions of the firm that have gone on for a longer period of time. The moral capital that arises from engaging in CSR activities emanates from the non-self-serving intentions. The combination of the self-serving interests and the consideration of others’ interests end up weakening the commitment intensity that is perceived by the shareholders in the presence of the organization’s strong evidence.

Firms that already have negative social impacts may find it difficult deriving any benefits from their CSR activity because the general perception would be that the company in attempting to atone for previous sins. It could be assumed to be a compliment or substitute for the continued act of performing other negative practices. For instance, tobacco companies are viewed in this light whenever they try to offset the negative image that is associated with their products during their generous philanthropy acts. In such instances, the overall CSR value may be diminished, or worst still, just looked at as an attempt to ingratiation.

12 The Characteristics of Events Competitive events Aggressive competition in business is allowed for as long as all the tactics and moves employed remain within the confines of the law. When negative actions are committed by a company during competition, stakeholders expect their firms to turn out vigorously and aggressively and defend their competitive action in case a litigation process ensues. For the stakeholders to be able to benefit from competitive success of their company, such as customers enjoying quality goods, employees to retain and enhance their positions, governments as well as communities to receive tax benefits, together with investors to earn their dividends, a firm must remain committed to pursue its business interests and act in a manner that is self-serving.

Negative events that occur as a result of companies engaging in business competition often raise concerns, on the part of stakeholders, of whether the act was bad itself, or whether it was a mere misinterpretation of policy. The intention or motivation is framed with regards to realities that result from competition. The management of the firms needs to be a good actor in this regard by maintaining their self-serving interests, as well as defending the explicit interests of the firm (Banerjee 2007, p. 28).

Stakeholder-based negative events Negative events may occur when the stakeholder’s well-being is jeopardized in a way, for instance when product safety issues arise, or when violation of health and safety occurs at the workplace. In such instances, little ambiguity exists about the extent of the act’s badness. The existing evidence could be suggestive of the fact that the firm occasioned either a potential negative outcome or an actual event occurred, to the effect that some key stakeholder groups were actually affected negatively. The ambiguity in this case, however, comes from the

13 motivations of the involved actors. Two questions are likely to be asked in this regard; was the act deliberately done due to the pursuance of self serving interests of the management, or did it result from maladapted systems.

In the first instance, a bad act was caused by bad actors. In the second instance, good actors were somehow caught up and compelled, in a way, to committing a bad situation. In general, stakeholder-related negative events, intentions and determination of the actors is a weighty matter that goes a long way in determining what the appropriate punishment could turn out to be. The moral capital that is generated from the engagement of CSR activities, in this case, is supposed to play a significant role in estimating what negative stakeholder reactions could be.

Negative events resulting from integrity issues There are times when the moral character or integrity of the company is in question. For instance, the management can act in a way that violates ethics, like unfairly treating employees and other stakeholders of the company. In this case, as like the case with stakeholder-based events, the action’s status is considered unambiguous and negative. It is the moral characters of the involved actors that are questioned.

The ambiguity surrounds the core commitment of the management and their ability to abide by social principles, as well as the acceptable norms and ethics. In other words, stakeholders may begin to doubt the fundamental integrity of the firm. The firm’s engagement in CSR offers stakeholders with two choices on how to resolve the ambiguity; firstly, the CSR engagement can be viewed in good light as not having any bad mind, and evidence that there exists good character on the part of the management. Secondly, the CSR can be viewed in bad light, in the sense that the management has a bad mind and are only acting hypocritically. For the good interest of the firm, stakeholders should opt for the first choice of interpretation because of

14 a sustained goodwill relationship. This will result in a scenario where the stakeholders accord their firm the benefit of doubt in situations where ambiguity is noted. Equally, like in stakeholder-based events, CSR engagement and the resultant moral capital should play a major role in assessing the intentions of the management.

Demanding Stakeholders Companies should strongly focus on their own sustainability by listening to, and partnering with the diverse groups which, in one way or the other, are affected by the operations of the company. For any firm, its main stakeholders are the employees or labor unions, government ministries, consumers, suppliers, insurers, the media, banks, institutional and private investors, trade associations, competitors, the local community, first nations, non-governmental organizations, as well as the environment at large, often represented by government, NGO, or the community.

It is often noted that managers of firms tend to pay a lot of attention to relationships that touch on powerful stakeholders, those that touch on legitimacy, and those that touch on urgency (Hillebrand 2009, p. 52). The company executives build social capital through developing an organizational culture, as well as capabilities to communicate with an all inclusive network of the major stakeholders. For the firms and the managers, building social capital effectively also builds financial capital. In general, company managers need to treat all stakeholders as important players whose contributions and interests must be included in the strategic decision making process.

Governance and the green consumers “Green” consumers place their concerns more on social and environmental aspects. Their main concerns are climate change, depletion of natural resources like forests, and pollution

15 issues. Their concerns range from the effects of greenhouse gases, socio-environmental impacts that result from hazardous waste materials and company efforts in dealing in CSR. “Green” consumers make up quite a substantial number of clients or people buying from any firm and use their wallets to vote. These consumers can go to all extents to pay expensively for green products although they express their dissatisfaction at the failure by corporate organizations to express commitment in dealing with environmental matters. In other words, these consumers reward or punish companies by either buying their products or failing to buy them, basing on their social performance.

It is prudent for companies and their management to discover the fact that a majority of their consumers consider the environmental consequences before they buy their products or services. This describes the reason as to why there has been growing shift or turn from the processed products to alternative therapies, natural products and organic foods. Companies can turn to CSR as a reliable cushion to help them acquire the much needed competitive advantage.

As the awareness on social and environmental aspects grow among societies and communities, the governance of companies must explore on different ways through which they can win the confidence of these stakeholders. In particular, investor relations professionals, otherwise referred to as IRO’s must be hired by companies and regularly trained in order to keep pace with the ever changing demands and requirements of the subject. The mainstream investors for companies are more likely to consider social and environmental criterion in their analysis and assessment of the firm (Parry & Day 2010).

The activist shareholder Investor relation officers play a significant role in assisting the investors to appreciate the firm’s CSR and what its practical effects are in as far as the firm’s performance is concerned.

16 Additionally, CSR, sustainable development, and climate change have become some of the fastest-growing resolutions that are initiated by shareholders. As company investors use their votes as well as voices to demand for corporate governance that is more powerful, they graduate from passive stockholders to responsible owners who are also active. They know better the leverage that they enjoy as individuals or institutions with full investment of their faith and capital in the company. Using different channels such as proposals, dialogue, campaigns, together with strategic shareholder resolutions, their demands are pushed through to the corporate management for action.

The mainstream investors also use general meetings to introduce sustainable resolutions.

This has forced the actions of a majority of institutional index fund managers to be more transparent. In the past, such institutions operated in a lot of secrecy about their casting of proxy votes so as not to upset their potential corporate clients managing the pension fund services. New rules have also been put in place which requires fund managers to divulge information about their proxy-vote policies, as well as their voting ways in passing resolutions. In other words, the information about how fund managers voted with regard to relevant resolutions. The non-profit sector which encompasses CSR is experiencing a rise that had previously not been anticipated.

There are fears that with lack of controls, the non-profit sector could easily appear in retrospect of the idea and objective of business (Coombs, & Holladay 2011).

The civil society or NGO shareholder group A majority of the people are actually social activists who have high expectations on the company to solve their social problems while also acting ethically. Others are latent activists who may develop to become active and therefore demand that firms become environmentally

17 and socially responsible. These activists push their demands by protesting, lobbying, campaigning, and even boycotting the company goods and services.

Many activists also turn out to be members of civil societies, who belong to such nongovernmental organizations like environmental groups, labor movements, women’s network, civil rights organization, peace networks among many others. In general, civil society groups form a formidable force that pushes through their agenda by ensuring firms comply with the required stipulations without fail. Civil societies constitute a market force whose main activity is “naming and shaming” non-compliant players or participants. When dealing with influential stakeholders, corporations must ensure they include the demands of the civil society. Through nurturing of stakeholder relationships, firms are able to learn, acquire competitive advantage, build a good reputation, and grow their innovation (Aras & Crowther 2010). On the contrary, failing to nurture stakeholder relationships may result in adversarial relations which in turn consume a lot of resources and time than would be the case in a collaborative partnership relationship. According to the February 2003 edition of Columbia Journal of Environmental Law, there has been an increase of legal lawsuits that are holding companies answerable to climate changes being witnessed. The costs of these litigations are so immense that they threaten to eat into the profits of such companies.

In such instances, therefore, the companies have to protect their interests and those of their stakeholders by ensuring they put mechanisms into place that addresses pollution and environmental concerns. Although a CSR activity that looks into the environment may appear expensive, it is viable than ending up in a court of law to answer to charges of environmental degradation. The high cost of a legal fine slapped on a firm for environmental negligence would affect the prices of its goods and services. As such, the consumers are likely to suffer from

18 expensive goods. To the shareholders of the company, their dividend value will be reduced as the firm seeks to consolidate all funds available to pay up the fine. Equally, the spoilt reputation of the firm may mean it becomes very difficult for it to participate in business as there could be a possibility of consumers and investors alike to boycott its activities and goods.

The government as a stakeholder Governments control the activities of companies by formulating policies and regulations that check on environmental pollution and the dumping of hazardous waste material. The government also formulates legal requirements that ensure the working environment for the workers remains healthy. Government regulations have also been introducing new measures to try and keep checks on the climate change being witnessed. For instance, governments which are signatories to the Kyoto Protocol have been enacting laws that comply with the protocol. It is therefore a CSR activity and obligation for firms to adhere to all government regulation that intends to control the smooth performance of business.

The financial sector as stakeholders Mainstream investment decisions by corporations have taken a trend where CSR considerations are taken into account. The financial sector, which include financiers of the organization like commercial banks, investment banks, project financiers, pension fund managers, re-insurers, and many more appear to accept funding to projects that have a social appeal. As such, many companies are being forced to undertake projects that also put other stakeholders into perspective in terms of their interests (Sage Publications 2011).

Financial markets often base their decisions to finance company projects on financial capital. However, with the heightened awareness on environmental activities, financial companies are likely to shift their basis on social and environmental performance as part of

19 company valuation. Financial analysts recognize the fact that financial capital of firms ride on intangibles which represent between 50 and 90 per cent of the market value of a firm. On average, quite a substantial amount of information that is used by firms to justify investment decisions as well as predict share price often is non-financial. Thus, financial analysts must be in a position to recognize invisible intangibles, most of which are often sustainability-related risks, also known as value-driving sustainability opportunities (Willard 2005).

Recommendations Organizations can regulate themselves in CSR activity by making their executives responsible for overseeing their compliance systems. This can be tied to organizational, as well as personal liability. It is very prudent that the related outcomes are also presented to the corporate officials of the firm (Horrigan 2010, p. 162). CSR, like the core business activity of any firm, is an investment whose quality and efficiency will work towards improving the business performance of an organization. It is important for the management to reconcile contrary needs, given the competitive business environment, because there is a close connection between profitability and operating in a socially responsible manner. Independent organizations can be drafted to assist in auditing CSR activities and general performance. The management of organizations should give out reliable and more systematic information about how their business activities are affecting the general society. The company website would be the most appropriate channel to convey this message, through a special CSR section. Reports presentation should be in a universally acceptable format for easy communication (Sun, Stewart & Pollard 2010, p.

297).

20 Conclusion Corporate social responsibility has become an integral part of business which determines its success or failure. CSR activities normally aim at improving the social quality communities that involved, in one or the other, in the overall running and performance of the organization.

These communities include the consumers, employees of the organization, the neighboring community or society, government, financial sponsors, shareholders, NGO’s, among other groups. CSR makes the organization to appeal to the outside community and therefore create competitive advantage. It expresses the company’s commitment not only to serve its interests but also to involve the interests of the stakeholders. Organizations with bad reputation fail to attract investors and their goods and services can easily be boycotted by consumer groups. However, CSR activities act in a way that strengthens or cushion relations between the firms on the one hand and the stakeholders on the other hand.

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