Corporate Governance and Corporate Responsibility - Article Example

Corporate Governance and Corporate Responsibility The unprecedented rise in cross border investment by multinational corporations has been the mainstay of global business in the last decade. However, there have been controversies about the mode and objective of these investments. Globalization has been named as the evil capitalism by some schools of thought and of late has also attracted negative attention from non profit organizations in certain countries. MNCs have in certain instances have actually used resources of other countries in a detrimental manner for their own economic gains. This has further fuelled the controversy and the negative belief all the more. Companies have been also accused of resorting to unfair and unethical means to maximize monetary gains. This becomes all the crucial when public money and belief is involved in the process. It is imperative that the role of the management of a company has become important. Stakeholders and members of the board are expected to act in a synchronized way so that an equitable distribution of wealth is achieved. Further, the interests of both majority and minority stakeholders must be taken care of. Corporate governance provides the framework according to which a company must be controlled and directed and how managers and the members of the board should act. (Stapledon G. P., 1996) The concept of corporate governance started in California in the mid nineties and gradually spread to the other parts of the world. It was made famous by California Public Employee Retirement System (CalPERS). In addition to this, worthwhile contribution from individuals like Bob Monks and Dale Hanson have been instrumental in shaping up corporate governance as it is today. Incidentally, Bob Monk, the founder of Institutional Shareholder Services (ISS), is called as the grandfather of American Corporate governance. The first corporate event that led to generation of the idea of corporate governance was the one sided treatment of the managing board of directors of Texaco in its corporate restructuring. The subject gathered momentum in its capacity to provide directives as to how different techniques of corporate restructuring should be dine so that stakeholders’ interest is optimized. (Carlsson R. H., 2001) It has been believed that the way a company is run has significant implications. The famous scandals that rocked the 1980s like junk bonds, derivative trading, LBOs etc was mainly due to misused funds, insider trading, and window dressing of books of account that presented a glossy picture of the company financials than it was actually. The most lethal among these allegations is about companies destroying evidences purposely to avoid legal penalties. In all these, the management and the Board of Directors have been equally guilty. While the former found ways of doing wrong, the latter either supported it or remained a passive spectator to it. In certain cases, accounting firms have been roped in to make their case stronger. Even the current financial crisis that had its root in the Subprime crisis of USA is also a causal effect of poor corporate governance practices. (Guerra J. E., March 2004) The world is divided into two schools of thought when it comes to the concept of corporate governance based on the role of shareholders/stakeholders; the Anglo American and the European type of stake holding forms the basis of this difference. The concept of corporate governance in Japan is markedly different from that of UK. In UK, corporate governance practices are aimed at maximizing the wealth of share holders; in Japan it has been replaced by the wealth maximization of stakeholders. While shareholders are those individuals or institutions who have investment interest in the company, stakeholders are all those entities that are directly or indirectly affected by the activities of the company. Since markets are never perfect, the stakeholder model of Japan provide for an equitable distribution of the wealth among stakeholders. An example of this is Toyota whose management believes that aiming for the benefit of stakeholders will help in the most efficient resource allocation. In fact, Japanese companies take very little responsibilities towards their shareholders. Even the wage structure in Japan allows room for family allowances and children allowances. On the other hand, in UK wages are determined on the nature of the job done. The Board of directors in a Japanese company is relatively free from shareholder influence. However, globalization has brought changes in the structure of the Board which is getting increasingly similar to the lines of UK firms. There exists startling difference in terms of remuneration of senior management as well; executives in Japan are among the lowest paid in the world. The Board of directors also bears legal responsibilities for negligence in performance of their duties. (Allen F. and Zhao M., May 13, 2007) The difference in the application of corporate governance practices in UK and Japan is exhibited through the mechanism of corporate control. In UK, the shareholders elect the board of directors which consists both of independent and executive directors. It is these directors who frame the business policies of the company and implementation of the same lies with the management. Once the directors are elected and the board of governors is formed, minority shareholders have minimal influence on the course of action of the company. In contrast to this, shareholders can directly nominate directors in a Japanese company. The size of an average Board of Directors of a Japanese company is greater than that of its UK counterpart. It is the CEO who nominates the position of directors. The CEO is the main power holder of a Japanese company and major decisions are taken by the CEO and his team. However, the rising influx of globalization has brought parity in the composition and structure of board of directors in Japan with that of UK. Corporate responsibility is a framework that encompasses all the aspects of a business. Most importantly, it forms the guiding force towards ethical decision making with an effort to ensure that none is worse-off. Managers are expected and should act in the greater interests of the organization. Though some theorists view it as against the fundamental economic objective of shareholder wealth maximization, it is not actually so. The legal courts in Delaware, under its view have declared that shareholder wealth maximization is only deemed necessary when an existing company breaks up or there is a change in control in the management of the same (Tishler C., 2003).Corporate laws demand managers and directors to act legally and choose between right and wrong, even if that means a lesser degree of maximization of shareholders wealth. At present, one of the most significant landmarks in corporate governance has been achieved through the Sarbanes Oxley Act of 2002 that has been designed to protect investors’ interest by making corporate disclosures mandatory. (Tishler C., May 5, 2003) It is also about designing day to day operational strategies that serve the needs of the environment in which the company operates. Unlawful activities are condemned under any circumstances, but they do not fall in the domain of corporate responsibility. It is mainly concerned with the philanthropic activity of giving back something to the society. Today, the concept of social responsibility has become a strategic importance and is supposed to provide advantage to companies resorting to them. The economic support towards incorporation of corporate responsibility measures looks beyond the present to the future success that the organization is likely to enjoy. (Lanzarotta M., February 9, 2006) The Body Shop, the natural and ethical manufacturer of cosmetics in U.K. is probably the best example of how the governance of a company with ethical and social directives pays off. So much so, it has set new industry standards for itself. (Xiao S., November 17, 2000)The ‘natural way ‘ of doing business has been so innovative a s a concept, that even after the acquisition by L’Oreal, The Body Shop was kept as a separate unit whose managers reported directly to the CEO of L’Oreal. Starting as a cottage industry in coastal UK, it now operates in 2265 stores across 56 markets, employing more than 10,000 employees. (Values Report, 2007) The Japanese companies have undergone a sea change as far as the governing pattern is concerned. Companies formed a conglomerate with a tie up with some financial institutions and had cross shareholdings and mutual trade relations. This pattern of holding was known as “keiretsu” (Mullerat R., Brennan D., 2005).The traditional model of governance gave an upper hand to long term gains over short term profits. Following globalization, these patterns went a change as foreign share holding in the so far closely knit companies increased. Over time, the Japanese corporate world experienced some scandals that brought it under the pressure from CalPERS to adhere to global corporate governance standards. Scholars and researchers increasingly feel that the concept of corporate governance and social responsibility is complementary, and should be pursued in totality to attain best results. Corporate responsibility is about how a business manages its core activities. The aspect of corporate governance designs the framework that manages the activities of a business. To harness a greater market share and increase the bottom-line, a company should maintain a clean image. This is of paramount importance; one major why Tata could acquire famous companies like Corus, Landrover was its stainless corporate image. The trade union and stewards working for Ford supported the buyout by Tata. They felt that their interests would be safeguarded only if the acquiring partner has proven expertise in manufacturing sector. “The stewards agreed that the Tatas best fit these criteria” (Tiger by the Tail: The Tatas Are Closing In on Jaguar and Land Rover, November 29, 2007) In Japan, corporate responsibility and corporate governance are seen as two aspects of the same issue. (Mullerat R., Brennan D., 2005) The recent developments in Japanese companies in the field pertain to developing compliance management strategies and internal auditing. This is mainly because of the composition of the board of directors of companies where the onus of implementation of corporate governance is on the external directors. Corporate responsibility, in contrast is a value based approach to the similar problem of dealing with stakeholders, generally the external parties and enhancing the brand image of the company. (Lanzarotta M., February 9, 2006) UK is thought of being ahead of US as far as implementation of corporate responsibility is concerned, but the same cannot be said about its governance practices. This is mainly the outcome of scandals like Enron and the implementation of Sarbanes Oxley Act that has made companies in the United States act with greater caution. A survey of eight European companies revealed that almost half of them took to corporate responsibility as a strategy; even then, experts feel there is still more to achieve, given that about only a third of the European companies actually pursue responsibility as a part of governance (Hurst N. E., 2004). Unfortunately, it is only till the scandals and frauds that shake the public belief, do companies realize that it takes activities beyond corporate social responsibility to re-establish the lost faith. Across countries, social responsibility is increasingly regarded as a secure method to rise in the eyes of the general public, and the best way to reap the optimum benefits is to incorporate it methodically through the guidelines of corporate governance. References: 1. Allen F. and Zhao M., May 13, 2007, The Corporate governance Model of Japan: Shareholders are not Rulers, retrieved on March 29, 2009, from 2. Carlsson R. H., 2001, Ownership and Value Creation: Strategic Corporate governance in the New Economy, John Wiley & Sons, New York. 3. Guerra J. E., March 2004, The Sarbanes-Oxley Act and Evolution of Corporate governance, The CPA Journal, retrieved on March 29, 2009, from 4. Hurst N. E., 2004, Corporate Ethics, Governance and Social Responsibility: comparing European business practice to those in the United States, retrieved on March 29, 2009, from 5. Lanzarotta M., February 9, 2006, Interview of Jane Nelson on Corporate Social Responsibility, Harvard Kennedy School, retrieved on March 29, 2009, from 6. Stapledon G. P., 1996, Institutional Shareholders and Corporate governance, Clarendon Press Oxford. 7. Tishler C., May 5, 2003, Sharing The Responsibility of Corporate governance, Harvard Business School Working Knowledge, retrieved on March 29, 2009, from 8. Tiger by the Tail: The Tatas Are Closing In on Jaguar and Land Rover, November 29, 2007, Strategic Management, India Knowledge @ Wharton, retrieved on March 29, 2009, from 9. Values Report, 2007, The Body Shop, retrieved on March 29, 2009, from 10. Xiao S., November 17, 2000, FACE OF THE BOARD OF DIRECTORSY: An Insight into the Cosmetic Giant, TED Case Studies, retrieved on March 29, 2009, from Bibliography 1. Dunning J. H., 2003, Making Globalization Good: The Moral Challenges Of Global Capitalism, Published by Oxford University Press, ISBN 0199257019, 9780199257010. 2. Mullerat R. and Brennan D., 2005, Corporate Social Responsibility: The Corporate Governance Of The 21st Century, Published by Kluwer Law International, ISBN 9041123245, 9789041123244. 3. Should Tata Motors Buy Jaguar and Land Rover? September 20, 2007, India Knowledge @ Wharton, Strategic Management, retrieved on March 29, 2009, from 4. Werther W. B. and Chandler D., 2006, Strategic Corporate Social Responsibility: Stakeholders in a Global Environment, Published by SAGE, ISBN 141291373X, 9781412913737. Read More