Does Compliance with Labour Laws Improve Corporate Governance - Coursework Example

?Does compliance with labour laws improve Corporate Governance and CSR? The success of Corporate Social Responsibility (CSR) policies of thecompanies in meeting its obligations towards the various stakeholders including the employees in their business operations hinges on effective policy framework in respect of labour relations in a country. The labour policies in various countries have evolved over the period of time by undergoing changes in tune with the developments taking place in the societies. The obligations of the corporate companies are however not restricted to statutory compliance; it also reflect in the corporate culture and cover various voluntary actions and initiatives taken by the management of the companies. The principles of fairness, transparency and accountability need to be incorporated in corporate governance for a sustainable development. The role of the government in providing the framework helps in establishing the benchmark or threshold for the companies to follow the best practices is very important because, it influences policy making in the corporate world and instill competition among the companies in the positive direction by reorienting their strategies to become good corporate citizens for a sustainable development in the long run. The paper seeks to study and analyse the impact of compliance with labour laws by the companies on corporate governance and corporate social responsibility (CSR), and the need for active regulatory intervention in tune with the environmental changes for economic development. Introduction Industrial peace in one of the important criteria for the development of the economy in a country, and the government through its policies provide the framework and regulate the industrial relations within the country. It is a prerequisite for the success of a business undertaking (or a not-for-profit organization or government department), because, the employees are the important stakeholders in an organization and their active cooperation is essential for the overall success of the CSR policies of the company and profitability. ‘Reflexive critique’ is one of the six key principles in action research: “An account of the situation through documentation such as notes, transcripts or official documents, in order to make implicit claims to be authoritative, i.e., it implies that it is factual and true. However, it must be noted that truth in a social setting, however, is relative to the teller.  The principle of reflective critique ensures people reflect on issues and processes and make explicit the interpretations, biases, assumptions and concerns upon which judgments are made.  In this way, practical accounts can give rise to theoretical considerations”. (O’Brien, 1998) In this paper, corporate governance and the corporate social responsibilities shouldered by the companies such as economic, legal, ethical and discretionary, in respect of labour relations and compliance with the labour laws have been analysed from this perspective. Liberalization and globalization of the economies and the consequent developments such as Business Process Outsourcing (BPO) in a large scale to the developing countries, the question of proper treatment of the employees with respect and dignity in these countries has also emerged in the backdrop of discrimination, child labour, poor wages and working conditions, in the recent years. Good corporate citizen (2007) states “Corporate citizenship recognizes that businesses have a responsibility to respect the individuals, the community and the environment in a way that when devising or implementing any rightful business strategy they will abide by laws and regulations, and adhere to high ethical standards”, and the role of employees is very important in this regard. This paper focuses mainly on employees as stakeholders, and seeks to answer the question ‘Does compliance with labour laws improve Corporate Governance and CSR?’ thereby improving the labour relations. It is also important to note that success in this area leads to overall success of the CSR policies of the company and improvement in efficiency and transparency in the corporate governance. Corporate Social Responsibility and Corporate Governance Corporate Social Responsibility (CSR) as understood by the various stakeholders needs to be appreciated, because the expectations differ from stakeholder to stakeholder. Proper understanding would dispel the conflicting views or expectations on the part of the stakeholders. Though management of labour is a not new, the concept of CSR has been evolving over the period of time internationally, and the organizations need to revisit their strategies and integrate CSR into the corporate policies in tune with the development taking place, for a sustainable development in the business. There are international standards evolved by various agencies for enhancing the role of CSR in the companies for economic development of the nations. Charles (2010) states, “Many of today's entrepreneurs are building their businesses based on the idea of fulfilling a new kind of social contract, one in which organizations voluntarily take responsibility for the "triple bottom line": people, planet, and profits. While corporate social responsibility (CSR) is not a new concept, it has new meaning in a Web 2.0 world…consumers are exercising their right to patronize companies with values that mirror their own”. It could be stated that CSR is considered to be the cornerstone for sustainability, and good labour relations in the economy is a prerequisite for the effective implementation of the policies. The governments are also under pressure to revamp the regulatory mechanisms to streamline the CSR practices of the corporate companies. Corporate Governance needs to reflect fairness, transparency and accountability in running the business of the company, and the decisions are taken in the best interests of the various stakeholders. The corporate governance measures include appointment of non-executive directors, imposing constraints on management power, placing restrictions on ownership concentration as well as ensuring proper disclosure of financial information and executive compensation. Akerstrom (2009, p.4) states “CSR is an extended model of Corporate Governance, to be successful in its CSR program; a company must be successful in its Corporate Governance”. Good corporate governance ensures confidence at all levels and active participation and cooperation of the employees in achieving the objectives or goals of an organization. Labour/Employment Laws Each country operates on a separate system of labour legislation and judicial enforcement, which is by and large in line with the social, economic and cultural development prevailing in the country.  For example, in the UK, there exists a labour market which is liberal in nature. There are several employment acts such as Employment Rights Act, 1996, National Minimum Wages Act, 1998, Human Rights Act, 1996, The Employment Relations Act, 1999, Disability Discrimination Act, 1995 and Protection from Harassment Act, 1997, governing several aspects which include working time, maternity, trade unions and minimum wages. Also, there are legislations policies which recognize good employment policies. The European Commission in its Communication ‘A special place for Children in EU External action’ states: ‘EU trade policy is formulated recognising fully the need to ensure that it is consistent with the protection and promotion of children’s rights’ (Oonk, G., 2008, p. 2) which emphasizes the fact that the ‘labour issue’ is international in nature and the countries’ policies should be in tune with the international developments in the backdrop of liberalization and globalization. It is also pertinent to note that the labour welfare, consequently, the employment and labour polices are central in the agenda of any government in a country whether it is developed, developing or underdeveloped. For instance, “The Labour Act came into operation on 1 December 2008 [in Namibia]. It deals with the fundamental rights and protections of employees, basic conditions of employment, health, safety and welfare of employees, unfair labour practices, trade unions and employers’ organisations, collective agreements, strikes and lockouts, prevention and resolution of disputes and labour institutions”. (Koep & Partners, 2011, p. 156) Statutory Compliance & Corporate Social Responsibility (CSR) Proper compliance with the statutory responsibilities by the company sends right signal to the employees as to its honesty and integrity and respect for the law of the country. This creates confidence in the minds of the employees and also encourages them to trust the management and resolve the misunderstandings if any, legally. Elimination of mistrust and suspicion will reduce labour turnover. This social responsibility on the part of the company would be appreciated by the society which would be beneficial in attracting new talents from the society. Therefore, the compliance with the statutory regulations eventually leads to improvement in Corporate Governance and CSR. For example, the resolution of disputes in accordance with the provisions contained in the ACAS Code of Practice 1 improves the companies’ relationship with the employees and reduces attrition level. The code of practice as enunciated by ACAS seeks to resolve the issues through informal procedures by prescribing set of standard procedures within the regulatory framework, stating that a quiet word is often all that is required to resolve an issue. The procedures are grounded on fairness and reasonable behavior on the part of the employers and employees for resolving the issues. Under ‘Information and consultation of employees: ICE’ ACAS states: Information and consultation are the basic building blocks of every effective organisation. These concepts are as crucial to the relationship between the individual workers and their line manager as they are to the parties on an employee council. Whatever the size or type of your organisation people need to talk to each other. They need to: exchange views and ideas issue and receive instructions discuss problems consider developments The Information and Consultation of Employees (ICE) Regulations reflect this by establishing what you should be doing about talking and listening to your employees. The ACAS Code of Practice encourages Mediation, Conciliation and Arbitration rather than legal proceedings to resolve the issues. Mediation is a voluntary process, and the mediation process is facilitated by two or more individuals who are impartial and acceptable to all concerned. Though the agreements under the ACAS process is not legally binding on the parties to the dispute, they can also enter into agreement based on the mediation. Conciliation is a voluntary process where the employee could also make complaint against the employer. However, the conciliator cannot seek evidence or call for witness. The conciliators have no power to make decisions or awards. This process is to ensure understanding among the parties in resolving the disputes among themselves. Arbitration as an alternative to legal proceedings aims to resolve the collective employment disputes or individual disputes with specific formalities and avoids tribunal proceedings which are expensive and time consuming. ACAS (Advisory, Conciliation and Arbitration Service) is governed by an independent council funded by the Department for Business Innovation & Skills (BIS), aiming to improve working life in the organizations through better employment relations. It could be understood that the government strives to attain industrial peace, and a socially responsible corporations would be largely benefited by the services of ACAS. Though properly following the statutes will minimize the chances for industrial disputes, in the event of dispute under certain circumstances, it needs to be resolved in a responsible manner both by the employers and the employees. Adhering to the statutory regulations enhances credibility of the organizations in the eyes of the employees, and gains support for the rightful actions taken by the company from the working community or the trade unions. The corporate companies are constrained to adhere to the statutes dutifully in discharging their responsibilities. Also, for many corporate companies, CSR means charity, because it is used as a vehicle to further their business. Their initiatives in the day to day activities are guided by the practical considerations, which might be in conflict with the social objectives. However, when the government announces statutory guidelines, the companies modify their strategies in tune with the developments as in the case of ‘approved carbon offsetting’. The government is instrumental through statutory or executive initiatives in carrying forward the social programs, and the subsequent enforcement procedures ensure the expected growth or development as envisaged in the government’s proposal. Frankental (2001) states “It can only have real substance if it embraces all the stakeholders of a company, if it is reinforced by changes in company law relating to governance, if it is rewarded by financial markets, if its definition relates to the goals of social and ecological sustainability, if its implementation is benchmarked and audited, if it is open to public scrutiny, if the compliance mechanisms are in place, and if it is embedded across the organization horizontally and vertically.” Implementation of the CSR policies Adherence to employment laws, being fundamental to the shift in corporate decisions, is an important factor in the organizations’ adoption of the best CSR policies. It is increasingly felt that the properly evolved CSR policies and its implementation in the right spirit will at least forms the basis for the public facade which aids labor recruitment and reduces governmental interventions in addition to increased labor productivity on account of increased wages and better working conditions. The companies identified as best corporate citizens outperform the other companies in terms of attracting investments. Social Investment Forum Foundation (2007, p. 6) states “Study after study has shown that socially screened portfolios have provided returns comparable to unscreened peers, with no necessary additional cost in performance… The Dow Jones Sustainability Index (DJSI) World, for example, has outperformed its unscreened benchmark, the MSCI World, by more than three percent in backtracking calculations since 1993 and by more than 150 basis points over the last year”. However, Deakin, S. & Hobbs, R. (2006, p. 14) in their case studies find that a high level of engagement with CSR issues, if understood in terms of the anticipation of new risks and competitive shocks, requires an organisational commitment which most British businesses have yet to make. From the regulatory perspective, there is doubt over the effectiveness of a strategy based on reflexive law, in the face of evidence that most firms are content with ‘basic compliance’ with standards, and that where a framework of hard law is entirely absent, voluntary responses from firms may not be forthcoming. There are also misgivings about the companies’ claim in respect of their labour policy. For instance, Lingen (2010) by way of criticism on HSBC’s employment policy says: On page 13, the bank writes “we are focusing on improving gender diversity among senior executives”. Good! Unfortunately -looking at the key facts on page 22 – I see that the number of females in senior management roles decreases from 82/18 in 2007, to 86/14 in 2008 and 87/13 in 2009”. Stringent regulations are justified to avoid unlimited power on the part of the managements, to inculcate confidence in the system. For instance, ‘Stock Options’ has become an area of concern among the public, and proved to be a breeding ground for suspicion and mistrust in the society due to insider trading. Schwartz (2010) writes “the rules of the game are rigged and that no matter what these guys do, they always come out ahead… American Express doled out another rich options package, even as it cut 4,000 jobs last year and got financial help from the government in the financial crisis.” Benefits of compliance with the labour laws The purpose of the statutory regulations needs to be understood properly to appreciate its impact on labour relations and its influence in shaping up the policies of the organizations from the management as well as the employees’ or unions’ perspective. The regulatory policies of the government ensure stability in the businesses and industries. The policy of following the standard and the best industry practices by the companies makes them to enjoy good reputation in the labour market as they will be in a position to attract skilled people in the industry. The retention ratio of the employees in the business compared to the industry will be good and this will lead to stability in the operations resulting in reduced cost of recruitment of new employees. The effect of good CSR policies followed by the management reflects well in the productivity of the business in comparison with the industry standards. This is because employment of experienced and more skilled labor in the operations increases quality of the products and reduces rejections or rework on the jobs. The increased productivity coupled with the reduced rejections and rework increases profitability of the organizations. The companies benefited in this process would be in a position to pay more wages and provide better facilities to improve the working environment. Therefore, an all-round economic benefit to the employees and the employers lead to economic development in the long run for the benefit of the nation. From the employers’ perspective, it should also be borne in mind that the statutory obligations are imposed based on the actual conditions prevailing in the nation as a whole. These obligations reflect the reasonable expectations on the part of the stakeholders and the society at large. Therefore, discharging these responsibilities in an honourable manner might not result into undue hardship to the companies CSR Standards CSR standards have been developed by various agencies mainly for the voluntary adoption of the best practices by providing benchmark for comparison. For instance, SA 8000 is considered very comprehensive for adoption by all types of organizations. “The UN Global Compact and the OECD Guidelines for Multinational Enterprises (“the OECD Guidelines”) are the world’s foremost comprehensive, voluntary corporate responsibility initiatives. In articulating principles of responsible business conduct, they draw on international standards enjoying widespread consensus”. (OECD, 2005) Conclusion The employees in an organization need to be considered as important stakeholders, due to the fact that the responsibilities of the company towards other stakeholders need to be satisfied with the active participation of the employees. This is essential for attaining the objectives of the company for a sustainable development. The practical considerations in the business weighs heavily in taking strategic decisions by the companies, and unless the economic activity in a society is guided by common principles for a sustainable development as against the growth of the individual companies with compromising attitude inherent in the human psychology when it comes to the question of ‘individual or society’, even the common minimum objective could not be achieved in a society. Hence, there is a need for adherence to regulatory frame work for achieving economic and social development with certain common minimum economic and social objectives. It is to be noted that not only the existence of labour laws, but also the compliance of the same assumes significance. Therefore, apart from enacting laws, ensuring compliance through proper enforcement mechanisms should improve the corporate governance and corporate social responsibility. Word count: 3047 excluding topic and the references. References ACAS (2009), Promoting employment relations and HR excellence, http://www.acas.org.uk/index.aspx?articleid=1598 Akerstrom, A., (2009), Corporate Governance and Social Responsibility, GRIN Publishing GmbH, http://www.grin.com/e-book/137651/corporate-governance-and-social-responsibility. Charles, A., (2010), Opinion: Traditional Philanthropy Gives Way to a New Power, Business Ethics, http://business-ethics.com/2010/10/15/1544-traditional-philanthropy-gives-way-to-a-new-kind-of-power/. Deakin, S. & Hobbs, R. (2006), FALSE DAWN FOR CSR? SHIFTS IN REGULATORY POLICY AND THE RESPONSE OF THE CORPORATE AND FINANCIAL SECTORS IN BRITAIN, Centre for Business Research, University Of Cambridge, Working Paper No. 333, http://www.cbr.cam.ac.uk/pdf/WP333.pdf Frankental, P., (2001), Corporate social responsibility – a PR invention? Corporate Communications: An International Journal, Vol. 6 Iss: 1, pp.18 - 23 MCB UP Ltd. Good corporate citizen, (2007), The Meaning of “Good Corporate Citizen”, http://www.goodcorporatecitizen.com/meaning.html. Lingen, S., (2010), COMMENTS ON THE HSBC SUSTAINABILITY REPORT 2009, 30 May 2010, http://www.csrinpractice.com/?p=452. Koep & Partners, (2011), The International Comparative Legal Guide to: Employment & Labour Law 2011, Global Legal Group, http://www.iclg.co.uk/khadmin/Publications/pdf/4377.pdf O’Brien, R. (1998), An Overview of the Methodological Approach of Action Research, University of Toronto, http://www.web.net/~robrien/papers/arfinal.html. Oonk, G., (2008), ‘Stop Child Labour – School is the best place to work’, 23 June 2008, http://www.europarl.europa.eu/meetdocs/2009_2014/documents/deve/dv/3childlabourtradeandcsr_/3childlabourtradeandcsr_en.pdf OECD, (2005), THE UN GLOBAL COMPACT AND THE OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES: COMPLEMENTARITIES ANDDISTINCTIVE CONTRIBUTIONS, http://www.oecd.org/dataoecd/23/2/34873731.pdf. Social Investment Forum Foundation, (2007), The Mission in the Marketplace: How Responsible Investing Can Strengthen the Fiduciary Oversight of Foundation Endowments and Enhance Philanthropic Missions, http://www.socialinvest.org/pdf/research/Mission%20in%20Marketplace%20-%20Resource%20Guide.pdf. Schwartz, N. D., (2010), Striking Gold in Stock Options, The Ney York Times, 3 April 2010, http://www.nytimes.com/2010/04/04/business/04shares.html?pagewanted=1&_r=1. Read More