Corporate Governance and Corporate Social Responsibility Essay Example

fact, it is the growth of ethical investing that persuaded corporations to give more attention to corporate social responsibility (CSR) (Lydenberg and Grace, 2008).

CG

In the aftermath of financial scandals that resulted in a persistent loss of trust in existing systems, it became extremely challenging for corporations to disregard their ethical obligations.

During the past, corporate governance involved ethical behavior and adherence to accountability mechanisms, transparency, and disclosure following the downfall of major corporations like Enron and WorldCom. However, the concept of "corporate governance" now encompasses procedures, customs, policies, laws, and establishments that influence the management and control of a corporation. Adrian Cadbury defined it as a system for directing and controlling corporations. In the traditional perspective, shareholders are considered the owners of the company, and therefore, the company must prioritize their needs and enhance their value. In this model, companies solely address the demands of four parties: investors, employees, suppliers, and customers.

The Neo-Classic theoreticians supported this statement, with high economic expert and former Nobel Prize winner Milton Friedman stating in a 1970 article in Times magazine that companies' sole purpose is to generate profit for stockholders. He argued that actions taken in accordance with "social responsibility" reduce returns for shareholders and that companies using resources for social actions are using shareholders' money.

However, another school of thought, known as stakeholder theorists, believe that corporate governance should include other parties such as governmental bodies, trade associations, trade unions, communities, prospective employees, prospective clients, and the general public. In 2004, Monks and Minow created a list of parties involved in corporate governance, including managers, directors,
employees,
stockholders,
clients,
creditors,
suppliers,
community members,
and the government (Monks and Minow, 2004,p.9).

Corporate governance can be defined as the methods

used by all parties interested in the well-being of the company to ensure that directors and other executives do not take advantage of weak codes of practice and guidelines
and exploit the agency-principal relationship on purpose.

Corporate governance (CG) is crucial for ensuring that executives take necessary measures or adopt mechanisms to safeguard the interests of stakeholders. In light of financial scandals, CG has expanded its scope to encompass ethical standards, accountability, disclosure, and reporting. Companies strive to exhibit transparency and accountability by committing to robust corporate governance principles as they believe it will restore trust. A study conducted by Professor Stephen Cheung from Hong Kong's City University revealed that companies with more rigorous corporate governance standards tend to possess a higher market value and attract greater investor interest. According to Cadbury, corporate governance involves striking a balance between economic and social objectives, as well as individual and communal interests (Code of Corporate Governance, p.7). Nevertheless, achieving this equilibrium and involving non-investing stakeholders in corporate governance poses challenges. The Ethical Investment Research Services provides an all-encompassing definition of CG by stating (Maier, 2005, p.

5) Corporate administration encompasses the relationships between a company's direction, its board, its stockholders, and its stakeholders. It involves the management of duties towards stockholders and broader company stakeholders by managers and auditors. For stockholders, it provides confidence in receiving a fair return on their investment. For company stakeholders, it ensures responsible management of the company's impact on society and the environment. The definition of Corporate Governance directly references Corporate Social Responsibility, highlighting the use of corporate administration to consider ethical considerations. To promote investor accountability and stakeholder involvement, large public companies have implemented

corporate governance mechanisms.

Some of these mechanisms include CSR board commissions, company units covering with concern morals, corporate codifications of behavior, non-financial coverage patterns, and stakeholder ailment and duologue channels, among others. All of these administration schemes are usually applied on a voluntary basis to represent what is referred to as "corporate self-regulation."

CSR

In fact, it is CSR that brought about the dramatic advancement made by companies in recent years in balancing shareholder goals with the need to reduce externalities that impact other stakeholders. Corporations that are socially responsible are more familiar with public, environmental, and social demands. Moreover, by pursuing corporate administration as a framework, boards and directors are encouraged to treat employees, consumers, and communities similarly to, if not the same as, shareholders. This can reflect a convergence between corporate administration and social responsibility.

Corporate administration is evolving into a framework for promoting public participation in business and showcasing responsible corporate behavior. The integration of CSR into corporate administration serves to exhibit a company's ethical principles and ongoing commitment to stakeholder accountability. However, the implementation of CSR has sparked intense debate and criticism. While some argue that it diverts companies from their primary objective of generating shareholder profits, others view it as a mere marketing strategy aimed at improving corporate reputation and public relations. Moreover, CSR is perceived by some as an obstacle to free trade. The term "corporate social responsibility" was originally coined by Howard R. in 1953.

In his book 'Social Responsibility of Businessmen', Bowen advocated for businessmen to embrace the responsibility of the free enterprise system and strive for its prosperity (Maak, 2008). In contrast, Neo-Classic theorists argued that a company's only obligation to

society is to maximize profits. This perspective is exemplified by Friedman's belief that "the social responsibility of business is to increase profits." He acknowledged the necessity for businesses to follow societal norms but also warned that shareholders may suffer from increased costs associated with Corporate Social Responsibility (CSR) (Friedman, 1970). On another note, R.

Edward Freeman and others argued that concerns cannot be separated from ethics (Freeman, 1994). In 1984, Freeman introduced the Stakeholder theory which defines stakeholders as those who are affected by or affect corporate policies and activities (Freeman, 1994). According to him, all stakeholders should have a voice. Building on these ideas, Donaldson and Preston further explored the moral and ethical aspects in 1995 (Donaldson and Preston, 1995). Despite the evolution of the concept of corporate social responsibility over time, there is still no universally accepted definition.

Over the years, faculty members have made various attempts to define CSR due to the lack of a proper definition. This has posed challenges in developing theories and measuring its impact (Godfrey and Hatch, 2007). Recently, McWilliams, Siegel, and Wright (2006, p.1) established a widely accepted definition that states CSR involves companies going beyond compliance and taking actions that contribute to social good beyond their own interests and legal obligations.

Many authors argue that CSR is driven by either selfless motives or the desire to maximize profits. They suggest that numerous corporations engage in CSR programs with the aim of attracting ethical investors who seek companies with a positive reputation and are looking to enhance their image. Extensive research and experience from Business for Social Responsibility, a leading nonprofit organization providing CSR services, conclude that companies have benefited

from participating in CSR activities. These benefits include improved brand positioning, corporate image, market share, and sales.

It also helped to improve their ability to attract and retain employees and appeal to investors and financial analysts. By reducing conflicts with their stakeholders, CSR ultimately helps companies enhance their reputation, increasing stakeholders' confidence in dealing with them. According to A.B. Carroll and A.K. Buchholtz, corporate social responsibility (CSR) can be defined as "economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time". In 1991, Archie Carroll laid the groundwork for further development of the CSR field by creating "The Pyramid of Corporate Social Responsibility" with four identified components: economic, ethical, legal, and discretionary or philanthropic (Carroll, 1999).

The original model that encompassed all aspects of society faced criticism for treating philanthropy as a separate aspect. In response, Carroll updated and renamed the model to "The Three-Domain Model of CSR," which includes the economic, legal, and ethical components. Carroll emphasizes that these three components are equally important and interact with one another. Certain corporations may prioritize the ethical or legal aspects, while others concentrate on the economic and legal aspects. Ultimately, some corporations integrate all three dimensions: economic, legal, and ethical. Hill, Ainscough, and Manullang (2007) define CSR as the economic, legal, moral, and beneficent actions taken by companies that affect stakeholders' quality of life.

Corporate Social Responsibility (CSR) refers to a company's efforts to go beyond legal and financial obligations and have a positive impact on society. It involves businesses being accountable to various stakeholders, not just shareholders and investors. These stakeholders are particularly focused on issues like environmental protection, employee rights,

and the well-being of the community and civil society as a whole, both presently and in the future. This belief acknowledges that corporations cannot operate independently from society; they must give back while benefiting from its resources. Traditional concepts of competition, survival, and profitability are changing.

One of the main factors driving attention towards CSR is the demand for increased transparency. Stakeholders, including clients, suppliers, employees, communities, investors, and activist organizations, are demanding more disclosure from corporations. The need for better disclosure and greater transparency of information is vital for business survival. Studies conducted in developed countries have shown that Corporate Social Disclosure (CSD) has increased over time in response to various factors.

Some of the reasons for changes in companies' behavior are: additions in statute law, activities of pressure groups, ethical investors, economic activities, media involvement, social consciousness, and political relations. These factors are also influenced by increasing customer involvement and growing investor pressure. There is clear evidence that the ethical behavior of companies significantly impacts customers' purchasing decisions. According to a study by Environics International, more than one in five consumers reported either rewarding or punishing companies based on their perceived societal performance. Additionally, investors are changing how they evaluate companies' performance and making decisions based on ethical considerations. This aims to encourage companies to develop a sense of corporate ethics. The companies also address specific issues they consider important and disclose them in their annual report.

According to research, several countries frequently mentioned topics like the environment, employment opportunities, product safety, educational support, contributions, employee benefits, and community engagement. The study also found that the human resource subject had the highest number of discoveries, followed

by community engagement and environmental subject. Additionally, the CSD procedure is viewed as a strategy to reduce the gap between management and shareholders through non-executive managers. Knowing the location of these discoveries is crucial in understanding their relative significance.

The revelation's location demonstrates the company's emphasis on its choice of revelation. These revelations are commonly found in the president's study, the fiscal statements and notes to histories, the managers' study, and the review of operations. The company's focus on revelations is indicated by their locations. Therefore, according to the authors of the annual report and many readers, the CSD in the Chairman's statement is likely to be more significant than that in the detailed notes. Freedman and Jagi concluded in 1986 that the main medium of revelation is the annual report.

Mauritius

Mauritius has not been spared from the misdirection of shareholders' funds, and the country has experienced its fair share of financial scandals. In order to restore public confidence in business practices, both the government and business executives recognized the need to reassess the corporate governance framework of companies. As a result, a Code of Corporate Governance was established, known as the "Report on Corporate Governance for Mauritius." This Code was initially published in October 2003 and later revised in April 2004. Its primary objective was to enhance ethical conduct among managers and senior staff members in both the public and private sectors. The aim was to create a corporate landscape that would attract both foreign and domestic investors by assuring them that the country offers a corporate environment that safeguards their rights, secures their investments, and adheres to established standards of responsible business behavior.

Furthermore,

corporate administration should focus on enhancing accountability, transparency, and equity for all stakeholders. According to Hon. Sushil K.C. Khushiram, Minister of Economic Development, Financial Services and Corporate Affairs, who presented the state's Draft Code of Corporate Governance on May 26, 2003, corporate administration should prioritize the enhancement of accountability, transparency, and equity for all stakeholders. These stakeholders encompass shareholders, creditors, suppliers, customers, employees, and other parties involved in business with the company... .

It includes considerations related to sustainable development issues, environmental and societal concerns, stability of employment, and wealth creation that would benefit society. The premise is that a company that is well-governed is transparent and accountable to its shareholders and other stakeholders, including the wider community. This demonstrates the inclusion of CSR in our Corporate Governance model.

The codification of Corporate Governance in Mauritius follows a self-regulation approach, where companies are expected to comply or explain their non-compliance. Section 1 of the Code states:

The Code of Corporate Governance applies to the following business enterprises. In case of non-compliance, these enterprises must disclose and explain the reasons for their non-compliance. Due to the lack of transparency and accountability in public interest entities, and also to regain public trust, the government has become stricter.

The Finance Act 2004 was revised in July 2009, making it necessary for Public Interest Entities to adhere to Corporate Governance on a "comply and explain" basis in order to comply with Section 75 of the Financial Reporting Act. Section 75 states that public involvement entities must ensure that any financial statement or report they are required to prepare is in accordance with the financial reporting requirements of the Act, any relevant regulations or

rules made under the Act, and the International Financial Reporting Standards (IFRS). Additionally, every public involvement entity is required to adopt corporate governance in accordance with the National Code of Corporate Governance, unless exempted under Section 6A(5) of the Statutory Bodies (Accounts and Audit) Act. If a public involvement entity does not adhere to corporate governance as specified in Section 2, it must provide an explanation for this in any financial statement or report mentioned in Section 1.