Corporate Governance and Social Responsibility - A Strategic Imperative

May 2006 | Source: Imperative
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Today, a handful of companies command greater wealth than several countries put together. Neither are these companies limited by geographic or national boundaries, nor are they personal fiefdoms of any one individual. Instead, several shareholders who enjoy increasing power own these multinationals jointly. The wealth and value they create is truly of the society, for the society and by the society. Small wonder that corporate governance and social responsibility are not cast aside as yesterday’s buzzwords. They have endured and grown even as other fads faded away.

The spotlight is strongly on redefining the role of the private sector against a backdrop of environmental protection and ethical issues. Concerns over damage to the environment, protection of workers’ rights and risk to stakeholders and society at large on account of faulty manufacturing and accounting practices are assuming global proportions.  While attempts to tackle these issues by governments across the world have met with a mixed response, individual customers and shareholders have been better able to give both, voice and bite to the movement.

Elements of Corporate Governance and Social Responsibility
A good governance system in a company comprises two elements. They are the governance code that helps set goals and monitors performance, and the internal controls that ensure that these are carried out according to the code. Auditing, external reporting and regulatory compliance complete the picture.

Corporate social responsibility (CSR) has several definitions. Some see it as an obligation, while others see it as a commitment made by the company to behave ethically, be accountable to all the stakeholders, and above all aim for sustainable development.

In fact, the common thread that binds governance and CSR is this relentless pursuit of sustainable development. Senior leaders today, aim for optimization, and not maximization of profit. This shift in focus has a corollary – companies are now accountable to not just their shareholders, but also other stakeholders.

So are we talking of charity and benevolence here? Is this about random acts of kindness by business leaders and firms? But no, CSR moves beyond the realm of corporate philanthrophy and is an integral part of business strategy. It expands to role of businesses from being mere engines of profit for the good of shareholders to full partners in the community working towards sustainable development and being accountable to all stakeholders and the enviroment.

CSR can be viewed from three perspectives:

  • As a business strategy that helps build reputation, reduces risks and optimizes profits.
  • As an economic and social imperative whereby companies realize that environmental and social stability will lead them to untold riches. In other words, if they help poverty alleviation, they create new customers. And by stabilizing the political situation in a country, they ensure their own longevity as well.
  • Lastly, it recognizes the rights of stakeholders on the company. These diverse sets of people who have tied their fate to that of the company have a right to information about the company and its business.

And how is this transition possible? Through creation of good governance systems and reporting structures; investments in sustainable development and green technology; and working to create a better world for future customers through community programs and education. While recognizing that the private sector has the means, CSR aims to provide the ends or the business case for sustainable development.

The Business Case for Good Governance and CSR
It is easy to see that the private sector can play a bigger role than merely providing employment. It has the capacity to finance community programs and expertise to find innovative solutions. Multinational companies can bring in better human rights, environmental, regulatory and anti-corruption practices to countries they operate in. But why would they want to do it? Simply put, because the fortune is indeed at the bottom of the pyramid.

There is a case for good governance and CSR along each of the four Vedic tenets of management – profit, price, penalty and differentiation:

  • Contributing to education and community programs helps develop new markets as more people shift above the poverty line. Another direct benefit – easy access to cheaper funds in global markets and better market valuations.
  • Increasing public knowledge and media attention on the effects of irresponsible economic activity like climate change, environmental damage, corruption and human rights violations have forced companies to make amends. Companies are now aware that they have to build “reputation capital”.
  • Various studies across countries indicate that consumers are willing to pay a higher price for products from a company that has invested in community programs or green technology.
  • Globally, regulatory systems are being tightened and given more teeth. Financial, environmental or human rights violations are punished severely.
  • Lastly, it is becoming increasingly obvious that competing on price alone is not a sustainable strategy. Indeed, competing on quality is a far better differentiator in the long run.

Key Challenges
Like other path-breaking concepts, CSR too has its detractors. Companies, they say, exist to maximise profits and shareholder value at all costs. Naysayers also claim that good governance only comes with policing from the outside. Afterall, the fountainhead of ethical behaviour, the board of directors have increasingly displayed feet of clay in recent times.

Inspite of a strong case for good governance and CSR, there are some challenges. While they are not insurmountable, they are certainly formidable:

  • Lack of a strong regulatory framework, that is able to withstand the might of cash-rich corporations
  • Lack of corporate will to really adopt these concepts in totality and ensure ethical practices are followed at all levels and all interactions of the organization
  • Lack of measurement to effectively display that companies espousing ethical behaviour or investing in community programs stand to gain

While the challenges are substantial, so are the rewards. And the solution seems to have come from an unlikely quarter - customer and stakeholder pressure groups. This coupled with a concerted effort by Governments and industry bodies to improve awareness levels and provide consultancy to companies would certainly boost the movement.

Industry Best practices
Globally and in India there are several examples of companies working with the community they operate in.

  • Chevron Texaco in Nigeria through the Nigeria YES Alliance works to instil business skills, literacy and match proficiency for in-school youth and provides them with employment opportunities
  • Amanco, a manufacturer of pipe systems in Argentina works to keep the youth off the streets, drugs and crime though the development of learning and recreational activities along with Ecological Group Oasis
  • “Grameen community phones” where women in villages in Bangladesh offered “owner-operated” services of these mobile phones to the entire village, even as they gained economic independence. This is a pioneering social effort by Grameen Bank
  • General Electric’s Eco-Imagination initiative that would focus on developing products and markets through green technology for sustainable development. These include fuel cells, lower emission aircraft engines, hybrid locomotives and water purification technology
  • “Operation Muskaan”, the Smile Train project by Tata Steel’s community service arm aims at eradicating cleft lips and palates with free corrective surgery. Apart from dishing out smiles, the company also attacked the roots of the superstition that children with cleft palates are cursed and if treated, the curse would be transferred to the rest of the family
  • The Infosys Foundation, which receives 1% of Infosys’ post tax profits, ploughs it back into society through rural development, education and healthcare

Early and widespread adoption of sound governance and CSR would go a long way in bettering the lot of India Inc. as well as society at large. CSR has its roots in the fact that natural resources form the foundation of our economy, and sustainable development is the only way forward. Being a socially responsible corporate citizen is not only fashionable, but also profitable. Now, that is a potent combination.

CREDITS: Suresh Lulla, Founder & Mentor, Qimpro Consultants Pvt. Ltd.
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