My MBA Journey

Record of my personal journey completing an MBA

Corporate Governance Week 6 – Stakeholder’s Interests and Corporate Social Responsibility

Donations to the Community reflecting good Corporate Social Responsibility

Shareholders vs Stakeholders

Historically, directors were accountable only to shareholders. That view has changed over time, and directors are now accountable to stakeholders and shareholders. Stakeholders include anyone or anything upon which the organisation can have an impact. Examples include:-

  • Employees
  • Environment
  • Government
  • Trade Unions
  • Communities
  • Contractors and Suppliers

It is interesting to note that Larcker and Tayan (2020, p. 2)[1] consider that the governance of companies in the US does not consider the interests of stakeholders and that their governance is shareholder focused:-

  • Board’s fiduciary duty is to shareholders.
  • Strategy is designed to create shareholder value.
  • Risk management minimises loss to shareholders.
  • Compensation provides incentives to increase value.
  • Efficient markets transfer assets to those who derive the highest value.

The level of accountability to stakeholders then becomes almost a cultural question within a social construct. Larcker and Tayan (2020)[1] also cite Friedman (1971) who argued that the only social responsibility of a firm is to increase profit.

According to Stakeholder Theory which has been discussed earlier, the expectations of society have changed to the point where it is expected that organisations will behave in a manner that reflects higher integrity and a strong moral compass. If an organisation has an impact somewhere, it needs to take responsibility for it (Carroll, 1979, cited in Tricker, 2019)[2].

Corporate Social Responsibility (CSR)

Who Determines Business Ethics?

People often say they will not bank with a certain bank or never deal with a particular company again. This attitude is problematic because companies do not make decisions; people do. The board is made up of people, the organisation is made up of people, and those people make decisions and interact with others.

Consequently, the board must determine the organisation’s business ethics. As the board determines corporate strategy, it needs to consider the impact such strategies will have on others. Some organisations’ ethics and moral codes are intrinsic to the corporate culture. Other organisations will document codes of conduct that declare how the organisation will treat the shareholders and stakeholders.

Corporate Social Responsibility (CSR)

Everything around an organisation’s ethical and moral behaviour is a part of Corporate Social Responsibility (CSR). Such behaviour is also often called Environmental, Social and Governance (ESG) or Socially Responsible Investing (SRI). It is becoming more important and expected in today’s culture that organisations are good corporate citizens and behave in a responsible and ethical manner when considering the interests of shareholders and stakeholders.

According to Larcker and Tayman (2020)[1], pressure has come from different sources to encourage ESG, including:-

  • Money flowing into sustainable investment funds
  • Shareholders sponsoring ESG related proxy proposals
  • Institutional investor activism and rankings (Corporate Knight Global 100)
  • Employee, third party and NGO activism.

The above video is but one of many on Youtube around ESG reporting. The video mentions the term “greenwashing” which can be defined as a company claiming to practice sustainable environmental management but not doing so in reality.

CSR practises can vary considerably from one country to another, but Tricker (2019)[2] suggests that there are common themes to consider.

  • Societal Perspective – takes the view that organisations have a responsibility beyond compliance with the law because their behaviour can impact a wide range of society.
  • Strategy Driven Perspective – takes the view that an organisation’s social responsibility is integral to its generation of wealth. The CSR strategies employed are focused on driving the business.
  • Stakeholder Perspective – organisations using this perspective consider that CSR is the alignment of its values and behaviour as being in line with the expectations of its stakeholders.
  • Ethical Perspective – Holds the view that organisations are no different to individuals an are obliged to act in the best interest of society as a whole.
  • Political Perspective – Some groups, often with an agenda against business, suggest that CSR is nothing more than an exercise in public relations with no foundation.
  • Philanthropic Perspective – Consider that the organisation must give back to society through support and donations. Often will provide a reputational benefit to the organisation.

Some organisations claim that CSR policies and reports have provided them with benefits in various ways (Tricker 2019, p. 246)

  • Improved the recognition of their brand as well as their reputation
  • Improved the regard in which they are held by existing and prospective employees.
  • Executive management, as well as board strategic thinking, has benefited
  • Has been responsible for driving innovation in operations
  • Helped them respond to customers’ demands
  • Reflected the increasing expectations of stakeholders and society.


One survey considered the financial impact of meeting stakeholders’ interests which demonstrated the following results:-

Figure 1: Survey on shareholder versus stakeholder interests

Source: 2019 Larcker, Tayan, Trivedi and Wurzbacher 2019, p. 6[3]

CSR Strategies and Policies

A board needs to include the concept deep within the organisation’s strategies to be effective with CSR. These then become the basis on which policy is written, reflecting CSR. CSR then becomes endemic throughout the entire organisation at every level.

Enlightened Shareholder Value

The concept of Enlightened Shareholder Value (ESV) takes the view that an organisation that caters to the needs of all stakeholders is essential to success and sustainability. The concept forms a bridge between shareholder-focused and stakeholder-focused approaches to corporate governance. The ESV approach is that by generating profits, shareholder value is created, and stakeholder interests are satisfied at the same time.

Sustainability and CSR

In today’s environment, some organisations recognise the importance of creating value for shareholders and society as a whole. Over the long term, such attitudes lead to sustainable development, which the United Nations World Commission defines on Environment and Development (WCED) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED 1987, p. 41)[4].

A term often used in relation to sustainable development is “triple bottom line”, which includes economic, social and environmental aspects. Some organisations will report based on this model in their annual reports to highlight their attention to these areas. Another similar term used is “profits, people and planet”.

In addition to the corporate world reporting on a sustainable development basis, it has also been adopted by government bodies (Tricker 2019, p. 248)[2], including:-

  • the European Union’s fishing quotas and limits;
  • China’s Guangdong Province’s requirement that polluting companies clean up or close down;
  • South America and the European Union control of forestry products to protect the rainforest environment and ensure replanting takes place;
  • Australia’s climate change strategy, the three pillars of mitigation of reducing gas emissions, adapt to unavoidable climate change and global solutions to help shape an international response;
  • attempts to reduce the world’s greenhouse gases below 1990 levels to reduce global warming, which produced the Kyoto Protocol to the UN Framework Convention on Climate Change (1997) and continuing rounds of negotiations.

More and more, we are witnessing increased demand for organisations to report beyond profits and disclose their non-financial performance as well. CSR/ESG reporting is a mandatory listing rule on the Australian stock exchange and in China and Malaysia. Even in countries where it is not required, many organisations still report on this basis, possibly to improve their reputational standing.

Christensen, Hail and Leuz (2021) contend that ESG reporting “should have tangible capital-market benefits in the form of improved liquidity, lower cost of capital, and higher asset prices”.

Summary

This module has reviewed the relationship between a company, its shareholders and its stakeholders. Traditionally, companies have only considered shareholders. However, there is now a greater expectation that companies will consider all stakeholders in their operations. Reports that reflect such expectations are Sustainability Reports and a level of behaviour reflecting good Corporate Social Responsibility (CSR). Such behaviour relates to triple-bottom-line accounting, which includes economic, societal and environmental aspects.

References
  1. Larcker, D & Tayman, B 2020, ESG and Stakeholders, CGRI Quick Guide Series, Stanford Graduate School of Business, viewed 17 November 2022, <https://www.gsb.stanford.edu/faculty-research/publications/esg-stakeholders>.[][][]
  2. Tricker, B 2019, Corporate governance : principles, policies, and practices, 4th edn, Oxford University Press, Oxford ; New York, Ny.[][][]
  3. Larcker, DF, Tayan, B, Trivedi, V & Wurzbacher, O 2019, 2019 Survey On Shareholder Versus Stakeholder Interests, Stanford Graduate School of Business, viewed 22 November 2022, <https://www.gsb.stanford.edu/faculty-research/publications/2019-survey-shareholder-versus-stakeholder-interests>.[]
  4. Our Common Future: Report of the World Commission on Environment and Development (un.org)[]

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Ric Raftis

Ric Raftis

Find out more about me on my About Me page.

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