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Corporations will soon be held accountable by shareholders for their ESG performance. To respond, companies must publish a statement of purpose, share an integrated report with investors, increase the involvement of middle managers, and improve internal systems for measuring and reporting ESG and impact performance information.

Most corporate leaders understand that businesses have a key role to play in tackling urgent challenges such as climate change. But many of them also believe that pursuing a sustainability agenda runs counter to the wishes of their shareholders. Sure, some heads of large investment firms say they care about sustainability, but in practice, investors, portfolio managers, and sell-side analysts rarely engage corporate executives on environmental, social, and governance ESG issues.

That perception is outdated. We know of no other research effort that involved so many senior leaders at so many of the largest investment firms. We found that ESG was almost universally top of mind for these executives. Of course, investors have been voicing concerns about sustainability for several decades. But not until recently have they translated their words into action.

Most of the investment leaders in our study described meaningful steps their firms are taking to integrate sustainability issues into their investing criteria. The numbers back up the view that the capital markets are in the midst of a sea change. According to a global survey by FTSE Russell, more than half of global asset owners are currently implementing or evaluating ESG considerations in their investment strategy.

Yet many corporate managers seem to be unaware of this new reality. Sustainable investing encompasses a menu of strategies that can be used in combination. Here are seven common ones:. The first step corporate leaders can take to prepare for this shift in focus is to recognize the forces driving it. Once they understand why investors now care so much about ESG issues, they can make changes within their organizations to maximize long-term value for shareholders.

Over the past five years or so, investors have become increasingly interested in ESG issues. Six factors are acting as tailwinds for this heightened focus. The investment industry is highly concentrated. The top five asset managers hold Large investment firms are now so big that modern portfolio theory—which holds that investors can limit volatility and maximize returns in a portfolio by combining investments from asset classes with varying levels of risk—cannot be used to mitigate system-level risks.

But firms that have trillions of dollars under management have no hedge against the global economy; in short, they have become too big to let the planet fail. Many corporate managers still equate sustainable investing with its predecessor, socially responsible investing SRI , and believe that adhering to its principles entails sacrificing some financial return in order to make the world a better place. That view is outdated. In a different study, Serafeim and his colleagues demonstrated the positive relationship between high performance on relevant ESG issues and superior financial performance.

In , Bank of America Merrill Lynch found that firms with a better ESG record than their peers produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, and were less likely to go bankrupt. For European portfolios, governance is particularly important for determining outperformance. For North American portfolios, environmental factors are the most significant. Sustainable investing is about materiality.

Materiality varies by industry. For example, material issues for companies in food retail and distribution include greenhouse gas emissions, energy management, access and affordability, fair labor practices, and fair marketing and advertising. For internet and media services the list includes energy management, water and wastewater management, data security and customer privacy, diversity and inclusion, and competitive behavior. A study by Mozaffar Khan, George Serafeim, and Aaron Yoon provides empirical evidence that good performance on material issues contributes to higher financial returns.

Most tellingly, the researchers found that whereas firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on those issues, firms with good ratings on immaterial issues do no better than firms with poor ratings on those issues. Asset owners such as pension funds are increasingly demanding sustainable investing strategies from their asset managers.

Not only are sophisticated asset owners aware that sustainable investing improves returns, but many of them, including high-net-worth individuals, are also focused on the nonfinancial outcomes. Firms with trillions under management have become too big to let the planet fail. The demand for ESG investment options is so high that many asset management firms are rushing to pull together new offerings. Asset owners no longer have to be convinced that sustainable investing is important. A corollary to the mistaken belief that sustainable investing means sacrificing some financial return is the belief that fiduciary duty means focusing only on returns—thereby ignoring ESG factors that can affect them, particularly over time.

However, more recent legal opinions and regulatory guidelines make it clear that it is a violation of fiduciary duty not to consider such factors. Although adoption of this new understanding has been slow in the United States, other countries, such as Canada, the UK, and Sweden, are taking steps to redefine the fiduciary duty concept. It is one thing for the CEO or chief investment officer of a major investment firm to espouse sustainable investing and quite another for it to be practiced by the analysts and portfolio managers who make the day-to-day investment decisions. Historically, the ESG group at investment firms was separate from portfolio managers and sector analysts on both the buy side and the sell side in much the same way that corporate social responsibility groups were historically separate from business units.

Now senior leaders are making sure that ESG analysis is being integrated into the fundamental financial activities carried out by analysts and portfolio managers. This has been an internal cultural evolution. This shift will change the way investors engage with companies—and the way corporate executives view sustainability.

Tariq Fancy, the chief investment officer of sustainable investing at BlackRock, equates integrating ESG considerations into traditional financial analysis to an exercise in behavior change. Given the size of BlackRock, changing investor behavior across the organization will require time and hard work.

Making the job of Fancy and other chief investment officers easier is the fact that the workforce is increasingly made up of Millennials, for whom ESG is central to any business analysis. Shareholder activism is on the rise in financial markets—and ESG is increasingly becoming a focus of these interventions. But active managers who intend to hold a stock for a long time and passive managers who hold a stock forever have an incentive to see that companies address the material ESG issues that will improve their financial performance.

One form of active engagement is proxy resolutions and proxy voting, an aspect of the active ownership strategy for sustainable investing. Leading topics for these resolutions include climate change and other environmental issues, human rights, human capital management, and diversity in the workforce and on corporate boards. Even some activist hedge funds are moving into sustainable investing. Since Ubben joined the AES board, the company has accelerated its transition from coal to renewable energy sources and has become the first publicly traded U. As the company accelerates its carbon reduction goals, it is attracting European and Canadian ESG-oriented investors that had previously avoided it.

In , it worked with companies on 1, issues related to the environment, ethics, governance, strategy, risk, and communications, making progress on about one-third of them. Now companies are taking CSR much more seriously Crowther, not just because they understand that it is a key to business success and can give them a strategic advantage, but also because people in those organisations care about social responsibility. So it would be reasonable to claim that the growing importance of CSR is being driven by individuals who care — but those individual are not just customers, they are also employees, managers, owners and investors of a company.

So companies are partly reacting to external pressures and partly leading the development of responsible behaviour and reporting. So accountability — one of the central principles of CSR — has become much more recognised and is being responded to by increasing transparency — another of the principles of CSR. It is not coincidental of course that these are also central principles of corporate governance and attention is being paid also in the development of governance systems and procedures.

The third principle of CSR is that of sustainability and this is a term which has suddenly become so common as to be ubiquitous for business and for society. Every organisation mentions sustainability and most claim to have developed sustainable practices. A lot of this is just rhetoric from people who, we would claim, do not want to face the difficult issues involved in addressing sustainability. There is a danger therefore that sustainability has taken over from CSR itself as a target for greenwashing.

Nevertheless, although the relationship between organisations and society has been subject to much debate, often of a critical nature, evidence continues to mount that the best companies make a positive impact upon their environment. Furthermore, the evidence continues to mount that such socially responsible behaviour is good for business, not just in ethical terms but also in financial terms — in other words that corporate social responsibility is good for business as well as all its stakeholders.

Thus ethical behaviour and a concern for people and for the environment have been shown to have a positive correlation with corporate performance. Indeed, evidence continues to mount concerning the benefit to business from socially Foreword xxi responsible behaviour and, in the main, this benefit is no longer questioned by business managers. The nature of corporate social responsibility is therefore a topical one for business and academics.

The evidence for corporate governance being actually good for business — and therefore an essential platform for sustainability — is even more overwhelming. Strong governance procedures are generally accepted to be worth a premium in the market because of the benefits which will flow therefrom. Most people initially think that they know what CSR is and how to behave responsibly — and everyone claims to be able to recognise socially responsible or irresponsible behaviour without necessarily being able to define it.

Issues of socially responsible behaviour are not of course new and examples can be found from throughout the world and at least from the earliest days of the Industrial Revolution and the concomitant founding of large business entities Crowther, and the divorce between ownership and management — or the divorcing of risk from rewards Crowther, According to the European Commission CSR is about undertaking voluntary activity which demonstrates a concern for stakeholders.

But it is here that a firm runs into problems — how to balance up the conflicting needs and expectations of various stakeholder groups while still being concerned with shareholders; how to practice sustainability; how to report this activity to those interested; how to decide if one activity is more socially responsible that another. The situation is complex and conflicting.

Many would say that the situation for corporate governance is more simple because it is more straightforward, being merely concerned with how a corporation conducts itself while undertaking its business. This is overly simplistic and we have sought to show that corporate governance and corporate social responsibility and interrelated and overlapping concepts — hence we treat them together in this book, although some authors focus more one and some more on the other. This is personal preference rather than any serious attempt at differentiation: we are concerned equally with both concepts in this book.

This is one of the distinguishing features of the book. There have been many books which consider different governance systems and even make international comparisons. Equally there have been many books which investigate corporate social responsibility from one of a variety of different perspectives. Such books have a tendency to make comparisons through dichotomisation — dwelling xxii Global Perspectives on Corporate Governance and CSR upon differences to make distinctions.

Our book is different as we focus upon similarities; moreover we do not give superordinacy to the Anglo-Saxon approach. In an increasingly global business environment it does not seem to us to be apposite to adopt this approach. Our purpose in this volume is to show that there are issues which are global in nature, which is unsurprising in an increasingly globalised world, but that also there is a richness of cultural diversity see Aras and Crowther, a, b which prevents homogenisation. Some would see this as desirable while others would see this as undesirable, many would view it as transient.

We do not take any position on this — it is for each of us to decide our views — but we do finish the book by considering the prognosis and whether or not harmonisation can be expected to occur in the future. References Aras, G. Aras and D. Crowther, eds , Culture and Corporate Governance, pp. Aras, G. Crowther, D. Crowther and L. Crowther and N. Ortiz-Martinez, E. The concept itself is merely one to encapsulate the means by which that organisation conducts itself. Recently however the term has come to the forefront of public attention and this is probably because of the problems of governance which have been revealed at both a national level and in the economic sphere at the level of the corporation.

These problems have caused there to be a concern with a reexamination of what exactly is meant by governance and more specifically just what are the features of good governance. It is here therefore that we must start our examination. This is a view of governance which prevails in the present, with its assumption that governance is a top down process decided by those in power and passed to society at large. In actual fact the concept is originally democratic and consensual, being the process by which any group of people decide to manage their affairs and relate to each other.

Such a consensual approach is however problematic for any but the smallest of groups and no nation has actually managed to institute governance as a consensual process. Thus a coercive top down form of governance enables a society to accept leadership and to make some difficult decisions which would not otherwise be made. Conversely the consensual form tends to be the norm in small organisations such as local clubs. There are however other forms of governance which are commonly found. One of these is governance through the market see Williamson, The free market is the dominant ideology of economic activity and the argument of course is that transaction costs are lowered through this form of organisation.

From a governance perspective however this is problematic as there is no automatic mechanism and negotiation is used. The effect of this is that governance is decided according to power relationships, which tend to be coercive for the less powerful e. Consequently there is a need to impose some form of regulation through governments or supra-national organisations such as the World Trade Organisation, which thereby re-imposes the eliminated transaction costs.

The argument therefore resolves into an ideological argument rather than an economic one. An increasing number of firms rely upon informal social systems to govern their relationship with each other, and this is the final form of governance. This form is normally known as network governance Jones, Hesterly and Borgatti, With this form of governance there is no formal rules — certainly none which are legally binding.

Instead social obligations are recognised and governance exists within the networks because the different organisations wish to continue to engage with each other, most probably in the economic arena. This form of governance can therefore be considered to be predicated in mutual self interest. Of course, just as with market governance, power relationships are important and this form of governance is most satisfactory when there are no significant power imbalances to distort the governance relationships.

For example, the decision to abolish capital punishment in the UK in could not have been made consensually; nor too could the decision to invade Iraq in The ancient Greeks favoured beneficial dictatorship as a means of running their city states. Few would argue that, for example, power was usurped in the USSR by Stalin because of a centrally imposed governance; equally few would suggest that this power was used beneficially or in a way which most members of the society were happy about.

Whichever form of governance is in existence however the most important thing is that it can be regarded as good governance by all parties involved — in other words all stakeholders must be satisfied. For this to be so then it is important that the basic principles of good governance are adhered to. The Principles of Governance There are eight principles which underpin every system of governance: Transparency As a principle, Transparency necessitates that information is freely available and directly accessible to those who will be affected by such decisions and their enforcement.

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Transparency is of particular importance to external users of such information as these users lack the background detail and knowledge available to internal users of such information. Equally therefore the decisions which are taken and their enforcement are done in a manner that follows rules and regulations. Transparency therefore can be seen to be a part of the process of recognition of responsibility on the part of the organisation for the external effects of its actions and equally part of the process of redistributing power more equitably to all stakeholders.

Rule of Law This is a corollary of the transparency principle. It is apparent that good governance requires a fair framework of rules of operation. Moreover, these rules must be enforced impartially, without regard for power relationships. Thus the rights of minorities must be protected. This can be to national courts, trade associations, supra-national courts such the European Court of Human Rights, or to an organisation such as the United Nations. Whatever the body it needs to be appropriate and not just impartial but also seen to be impartial to all concerned in order to maintain the creditability to adjudicate disputes.

The ability of all to participate if so desired is however an essential principle. Participation of course includes the freedom of association and of expression that goes along with this. Depending upon the size and structure of the organisation, participation can be either direct or through legitimate intermediate institutions or representatives, as in the case of a national government.

Participation of course would involve everyone, or at least all adults, both male and female. Responsiveness This is a collorary of the participation principle and the transparency principle. Responsiveness implies that the governance regulations enable the institutions and processes of governance to be able to serve all stakeholders within a reasonable timeframe.

Equity This principle involves ensuring that all members of society feel that they have a stake in it and do not feel excluded from the mainstream. This particularly applies to ensuring that the views of minorities are taken into account and that the voices of the most vulnerable in society are heard in decision-making. This requires mechanisms to ensure that all stakeholder groups have the opportunity to maintain or improve their well-being.

Efficiency and Effectiveness Efficiency of course implies the transaction cost minimisation referred to earlier whereas effectiveness must be interpreted in the context of achievement of the desired purpose. Thus, for effectiveness, it is necessary that the processes and institutions produce results that meet the needs of the organisation while making the best use of resources at their disposal. Naturally this also means sustainable use of natural resources and the protection of the environment. Sustainability This requires a long-term perspective for sustainable human development and how to achieve the goals of such development.

These other stakeholders have not just an interest in the activities of the organisation but also a degree of influence over the shaping of those activities. This influence is so significant that it can be argued that the power and influence of these stakeholders is such that it amounts to quasi-ownership of the organisation. Central to this is a concern for the future which has become manifest through the term sustainability.

This term sustainability has become ubiquitous both within the discourse globalisation and within the discourse of corporate performance. Sustainability is of course a controversial issue and there are many definitions of what is meant by the term. At the broadest definition sustainability is concerned with the effect which action taken in the present has upon the options available in the future Crowther, If resources are utilised in the present then they are no longer available for use in the future, and this is of particular concern if the resources are finite in quantity.

Thus, raw materials of an extractive nature, such as coal, iron or oil, are finite in quantity and once used are not available for future use. At some point in the future therefore alternatives will be needed to fulfil the functions currently provided by these resources. This may be at some point in the relatively distant future but of more immediate concern is the fact that as resources become depleted then the cost of acquiring the remaining resources tends to increase, and hence the operational costs of organisations tend to increase Aras and Crowther, a.

This can be defined in terms of the carrying capacity of the ecosystem Hawken, and described with input — output models of resource consumption. Accountability Accountability is concerned with an organisation recognizing that its actions affect the external environment, and therefore assuming responsibility for the effects of its actions.

This concept therefore implies a recognition that the organisation is part of a wider societal network and has responsibilities to all of that network rather than just to the owners of the organisation. In view of the fact that many pharmaceuticals are currently being developed from plant species still being discovered this may be significant for the future. It is inevitable therefore that there is a need for some form of mediation of the different interests in society in order to be able to reach a broad consensus on what is in the best interest of the whole community and how this can be achieved.

As a general statement we can state that all organisations and institutions are accountable to those who will be affected by decisions or actions, and that this must be recognised within the governance mechanisms. This accountability must extend to all organisations — both governmental institutions as well those as the private sector and also to civil society organisations — which must all recognise that they are accountable to the public and to their various stakeholders. One significant purpose of this is to ensure that any corruption is eliminated, or at the very least minimised.

As a consequence there tends to be an unquestionning assumption see for example Mallin, that discussions concerning governance can assume the Anglo-Saxon model as the norm and then consider, if necessary, variations from that norm see Guillen, In this chapter we take a very different position — which explains the significant contribution of this book — that there were historically three significant approaches to governance. Each has left its legacy in governance systems around the world and any consideration of global convergence cannot be undertaken seriously — certainly as far as any prognosis is concerned — without a recognition of this.

Thus for us the Anglo-Saxon model is important but just one of the three models we wish to examine. The other two we have described as the Latin model and the Ottoman model.

Global Perspectives on Ethics of Corporate Governance

We start by outlining the salient features of each. It is founded on rules which must be codified and can therefore be subject to a standard interpretation by the appropriate adjudicating body. In this model therefore the issues of governance, politics and power become inseparably intertwined. This has led to the suggestion that there should be a clear distinction between the two. The argument is that politics is concerned with the processes by which a group of people, with possibly divergent and contradictory opinions can reach a collective decision which is generally regarded as binding on the group, and therefore enforced as common policy.

Governance, on the other hand, is concerned with the processes and administrative elements of governing rather than its antagonistic ones Solomon, This argument of course makes the assumption that it is actually possible to make the separation between politics and administration. For example both the UK and the USA have governance procedures to make this separation effective for their national governments — and different procedures in each country — but in both countries the division is continually blurred in practice. Many would argue, and we concur, that the division is not possible in practice because the third factor of power is ignored whereas this is more important.

Indeed it is our argument that it is the operation of this power in practice that brings about many of the governance problems that exist in practice. We discuss this in greater detail later in the chapter but part of our argument is that theories and systems of governance assume that power relationships, while not necessarily equal, are not too asymetric.

If the relationship is too asymetric then the safeguards in a governance system do not operate satisfactorily whereas one of the features of globalisation is an increase in such power asymetries. We will return to this later. As we have already identified, the Anglo-Saxon model is hierachical but other forms of governance are allowed and even encouraged to operate within this framework.

Thus the market form features prominently in the AngoSaxon model while the network and consensual forms can also be found. Similarly many people would, as far as the USA is concerned, blame failures in the governance system generally for the debacle of the Enron affair. These two countries are of course the principle exponents of the Anglo-Saxon model of governance. The Latin Model of Governance The Latin model of governance tends to be less codified than the Anglo-Saxon model and finds less need for procedures for adjudication.

This is because it is founded in the context of the family and the local community. In some respects therefore it is the opposite of the Anglo-Saxon model, being based on a bottom up philosophy rather than a hierarchical top down approach. Thus, this model is based on the fact that extended families are associated with all other family members and therefore feel obligated. And older members of the family are deemed to have more wisdom and therefore assume a leadership role because of the respect accorded them by other family members. As a consequence there is no real need for formal codification of governance procedures and the system of adjudication does not need to be formalised — it works very satisfactorily on an informal basis.

Moreover, this model is extended from the family to the local community and works on the same basis. In many ways the network form of governance described earlier is based on this Latin model, insofar as it is predicated in informal relationships of mutual interest, and without the need for codification: this need is not required because of the interest of all parties in maintaining the working relationships which exist. Thus tradition can be said to play a part in this model of governance — trust based on tradition because it has worked in the past and can be expected to continue working into the future.

The network form however is based on a lack of significant power inequalities whereas the Latin model definitely does have a hierarchy and power is distributed unequally. The power is distributed according to age however, and therefore it is acceptable to everyone because they know that they will automatically rise up the hierarchy — thereby acquiring power — as they age. The process is therefore inevitable and deemed to be acceptably fair. The Ottoman Model of Governance The Ottoman Empire existed for years until the early part of the twentieth century.

Although the Empire itself is well known, few people know too much about it. The reality was of course different from the myths and the Empire had a distinct model of governance which was sufficiently robust to survive for years, although much modern analysis suggests that the lack of flexibility and willingness to change in the model was one of the principle causes of the failure of the Empire. We do not wish to enter into this debate and will restrict ourselves to an analysis of this distinct model of governance.

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According to the fifteenth century statesman, Tursun Beg, it is only statecraft which enables the harmonious living together of people in society and in the Ottoman Empire there were two aspects to this statecraft — the power and authority of the rule the Sultan and the divine reason of Sharia via the Caliph Inalcik, In the Ottoman Empire these two were combined in one person. The Ottoman Empire was of course Islamic, but notable for its tolerance of other religions.

It has been argued Cone, , that the Islamic understanding of governance and corporate responsibility shares some fundamental similarities with the Rawlsian concept of social justice as mutual agreement among equals motivated by self interest. All parties must be fully aware of the risks attendant on a particular course of action and be accepting of equal liability for the outcomes, good or bad. Muslims see Islam as the religion of trade and business, making no distinction between men and women and seeing no contradiction between profit and moral acts Rizk, The governance system was effectively a form of patronage which operated in a hierarchical manner but with the systems and procedures being delegated in return for the benefits being shared in an equitable manner.

This enabled a very devolved form of governance to operate effectively for so long over such a large area of Asia, Europe and Africa. It is alien to the Anglo-Saxon view because the systems involved payment for favours in a way that the Anglo-Saxon model would interpret as corrupt but which the Ottoman model interprets simply as a way of devolving governance. It is interesting to observe therefore that the problems with failure of governance in the current era could not have occurred within the Ottoman model because there was no space left for the necessary secrecy and abuse of power.

The Concept of Global Governance All systems of governance are concerned primarily with managing the governing of associations and therefore with political authority, institutions, and, ultimately, control. Governance in this particular sense denotes formal political institutions that aim to coordinate and control interdependent social relations and that have the ability to enforce decisions.

Increasingly however, 10 Global Perspectives on Corporate Governance and CSR in a globalised world, the concept of governance is being used to describe the regulation of interdependent relations in the absence of overarching political authority, such as in the international system. Thus global governance can be considered as the management of global processes in the absence of a form of global government. There are some international bodies which seek to address these issues and prominent among these are the United Nations and the World Trade Organisation.

Each of these has met with mixed success in instituting some form of governance in international relations but are part of a recognition of the problem and an attempt to address worldwide problems that go beyond the capacity of individual states to solve Rosenau, To use the term global governance is not of course to imply that such a system actually exists, let alone to consider the effectiveness of its operations.

It is merely to recognise that in this increasingly globalised world there is a need for some form of governance to deal with multinational and global issues. The term global governance therefore is a descriptive term, recognising the issue and referring to concrete cooperative problem-solving arrangements.

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These may be formal, taking the shape of laws or formally constituted institutions to manage collective affairs by a variety of actors — including states, intergovernmental organisations, non-governmental organisations NGOs , other civil society actors, private sector organisations, pressure groups and individuals. The system also includes of course informal as in the case of practices or guidelines or temporary units as in the case of coalitions. Thus global governance can be considered to be the complex of formal and informal institutions, mechanisms, relationships, and processes between and among states, markets, citizens and organisations, both inter- and non-governmental, through which collective interests on the global plane are articulated, rights and obligations are established, and differences are mediated.

Global governance is not of course the same thing as world government: indeed it can be argued that such a system would not actually be necessary if there was such a thing as a world government. Currently however the various state governments have a legitimate monopoly on the use of force — on the power of enforcement. Global governance therefore refers to the political interaction that is required to solve problems that affect more than one state or region when there is no power of enforcing compliance.

Improved global problem-solving need not of course require the establishing of more powerful formal global institutions, but it would involve the creation of a consensus on norms and practices to be applied. Steps are of course underway to establish these norms and one example that is currently being established is Corporate Governance and Corporate Social Responsibility 11 the creation and improvement of global accountability mechanisms. Participation is entirely voluntary, and there is no enforcement of the principles by an outside regulatory body.

Companies adhere to these practices both because they make economic sense, and because their stakeholders, including their shareholders most individuals and institutional investors are concerned with these issues and this provides a mechanism whereby they can monitor the compliance of companies easily. Mechanisms such as the Global Compact can improve the ability of individuals and local communities to hold companies accountable. Good Governance and Corporate Behaviour Good governance is of course important in every sphere of the society whether it be the corporate environment, or general society or the political environment.

Good governance levels can, for example, improve public faith and confidence in the political environment. When the resources are too limited to meet the minimum expectations of the people, it is a good governance level that can help to promote the welfare of society. And of course a concern with governance is at least as prevalent in the corporate world. Good governance is essential for good corporate performance and one view of good corporate performance is that of stewardship and thus just as the management of an organisation is concerned with the stewardship of the financial resources of the organisation so too would management of the organisation be concerned with the stewardship of environmental resources.

The difference however is that environmental resources are mostly located externally to the organisation. Stewardship in this context therefore is concerned with the resources of society as well as the resources of the organisation. As far as stewardship of external environmental resources is concerned then the central tenet of such stewardship is that of ensuring sustainability.

Sustainability is focused on the future and is concerned with ensuring that the choices of resource utilisation in the future are not constrained by decisions taken in the present. This necessarily implies such concepts as generating and utilizing renewable resources, minimising pollution and using new techniques 10 See www. It also implies the acceptance of any costs involved in the present as an investment for the future. A great deal of concern has been expressed all over the world about shortcomings in the systems of corporate governance in operation and its organisation has been exercising the minds of business managers, academics and government officials all over the world.

There is more then one answer to this question and there are a variety of routes for a company to achieve this. Of equal concern is the question of corporate social responsibility — what this means and how it can be operationalised. Although there is an accepted link between good corporate governance and corporate social responsibility the relationship between the two is not clearly defined and understood.

Thus many firms consider that their governance is adequate because they comply with The Combined Code on Corporate Governance, which came into effect in Of course all firms reporting on the London Stock Exchange are required to comply with this code, and so these firms are doing no more than meeting their regulatory obligations.

The more enlightened recognise that there is a clear link between governance and corporate social responsibility and make efforts to link the two. Often this is no more than making a claim that good governance is a part of their CSR policy as well as a part of their relationship with shareholders. It is recognised that these are issues which are significant in all parts of the world and a lot of attention is devoted to this global understanding.

Most analysis however is too simplistic to be helpful as it normally resolves itself into simple dualities: rules-based versus principles-based or Anglo-Saxon versus Continental. Our argument is that this is not helpful as the reality is far more complex. It cannot be understood without taking geographical, cultural and Corporate Governance and Corporate Social Responsibility 13 historical factors into account in order to understand the similarities, differences and concerns relating to people of different parts of the world.

The aim of this book is to redress this by asking subject experts from different parts of the world to explain the issues from their particular perspective. One of the consequences of a concern with the actions of an organisation, and the consequences of those actions, has been an increasing concern with corporate governance. Corporate governance is therefore a current buzzword the world over. It has gained tremendous importance in recent years. There is a considerable body of literature which considers the components of a good system of governance and a variety of frameworks exist or have been proposed.

This chapter examines and evaluates these frameworks while also outlining the cultural context of systems of governance. Our argument in this chapter is that corporate governance is a complex issue which cannot be related to merely the Anglo-Saxon approach to business; indeed it cannot be understood without taking geographical, cultural and historical factors into account in order to understand the similarities, differences and concerns relating to people of different parts of the world.

In part therefore this chapter also serves as an introduction which sets the scene for the other chapters in the book as well as outlining the purpose of the book and the contributions within this theoretical and practical context. One of the main issues, therefore, which has been exercising the minds of business managers, accountants and auditors, investment managers and government officials — again all over the world — is that of corporate governance.

Often companies main target is to became global — while at the same time remaining sustainable — as a means to get competitive power. Early impetus was provided by Anglo-American codes of good corporate governance. Supra-national authorities like the OECD and the World Bank did not remain passive and developed their own set of standard principles and recommendations. This type of selfregulation was chosen above a set of legal standards Van den Barghe, After big corporate scandals, corporate governance has become central to most companies.

Investors are demanding that companies implement rigorous corporate governance principles in order to achieve better returns on their investment and to reduce agency costs. Most of the times investors are ready to pay more for companies to have good governance standards. Because of these reason companies cannot ignore the pressure for good governance from shareholders, potential investors and other markets actors. New international bank capital adequacy assessment methods Basel II necessitate that credit evaluation rules are elaborately concerned with operational risk which covers corporate governance principles.

In this respect corporate governance will be one of the most important indicators for measuring risk. Another issue is related to firm credibility and riskiness. If the firm needs a high rating score then it will also have to pay attention to corporate governance rules. Credit rating agencies analyse corporate governance practices along with other corporate indicators.

Even though corporate governance principles have always been important for getting good rating scores for large and publicly-held companies, they are also becoming much more important for investors, potential investors, creditors and governments. Because of all of these factors, corporate governance receives high priority on the agenda of policymakers, financial institutions, investors, companies and academics. This is one of the main indicators that the link between corporate governance and actual performance is still open for discussion.

In the literature a number of studies have sought to investigate the relationship between corporate governance mechanisms and performance e. Corporate Governance and Corporate Social Responsibility 15 studies have showed mixed result without a clear-cut relationship. But the most important point is that corporate governance is the only means for companies to achieve corporate goals and strategies.

Therefore companies have to improve their strategy and effective route to implementation of governance principles. So companies have to investigate what their corporate governance policy and practice needs to be. Corporate Governance Principles Since corporate governance can be highly influential for firm performance, firms must know what are the corporate governance principles and how it will improve strategy to apply these principles. In practice there are four principles of good corporate governance, which are: 1. Transparency; 2. Accountability; 3. Responsibility; 4.

Corporate governance principles therefore are important for a firm but the real issue is concerned with what corporate governance actually is.


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Management can be interpreted as managing a firm for the purpose of creating and maintaining value for shareholders. Corporate governance procedures determine every aspect of the role for management of the firm and try to keep in balance and to develop control mechanisms in order to increase both shareholder value and the satisfaction of other stakeholders. In other words corporate governance is concerned with creating a balance between the economic and social goals of a company including such aspects as the efficient use of resources, accountability in the use of its power, and the behaviour of the corporation in its social environment.

As can be seen, all of these issues have many ramifications and ensuring their compliance must be thought of as a long term procedure. We can evaluate corporate governance from different perspectives, such as that of the general economy; the company itself; private and institutional investors; or banking and other financial institutions. Some research results show that the quality of the corporate governance system of an economy may be an important determinant of its competitive conditions Fulghieri and Suominen, Authors suggest the existence of a reverse causality between corporate governance and competition and also examined the role of competition in the production of good corporate governance.

Van de Berghe and Levrau on the other hand investigated from the perspective of companies, investors and banks. Installing proper governance mechanisms may provide a company with a competitive advantage in attracting investors 18 Global Perspectives on Corporate Governance and CSR who are prepared to pay a premium for well-governed companies. Institutional investors put issues of corporate governance on a par with financial indicators when evaluating investment decisions.

Black et al. They found evidence that better governed firms pay higher dividends, but no evidence that they report higher accounting profits. Developing a Framework for Corporate Governance In the UK there have been a succession of codes on corporate governance dating back to the Cadbury Report in Currently, all companies reporting on the London Stock Exchange are required to comply with the Combined Code on Corporate Governance, which came into effect in It might be thought therefore that a framework for corporate governance has already been developed but the code in the UK has been continually revised while problems associated with bad governance have not disappeared.

So clearly a framework has not been established in the UK and an international framework looks even more remote. One of the problems with developing such a framework is the continual rules versus principles debate. The American approach tends to be rules-based while the European approach is more based on the development of principles — a slower process. In general rules are considered to be simpler to follow than principles, demarcating a clear line between acceptable and unacceptable behaviour.

Rules also reduce discretion on the part of individual managers or auditors. In practice however rules can be more complex than principles. They may be ill-equipped to deal with new types of transactions not covered by the code. Moreover, even if clear rules are followed, one can still find a way to Corporate Governance and Corporate Social Responsibility 19 circumvent their underlying purpose — this is harder to achieve if one is bound by a broader principle.

There are of course many different models of corporate governance around the world. These differ according to the nature of the system of capitalism in which they are embedded. The liberal model that is common in Anglo-American countries tends to give priority to the interests of shareholders. The coordinated model, which is normally found in Continental Europe and in Japan, recognises in addition the interests of workers, managers, suppliers, customers, and the community.

Both models have distinct competitive advantages, but in different ways. The liberal model of corporate governance encourages radical innovation and cost competition, whereas the coordinated model of corporate governance facilitates incremental innovation and quality competition. However there are important differences between the recent approach to governance issues taken in the USA and what has happened in the UK.

In the USA a corporation is governed by a board of directors, which has the power to choose an executive officer, usually known as the chief executive office CEO. The board of directors is nominally selected by and responsible to the shareholders, but the articles of many companies make it difficult for all but the largest shareholders to have any influence over the makeup of the board.

Normally individual shareholders are not offered a choice of board nominees among which to choose, but are merely asked to rubber-stamp the nominees of the sitting board. Perverse incentives have pervaded many corporate boards in the developed world, with board members beholden to the chief executive whose actions they are intended to oversee. Frequently, members of the boards of directors are CEOs of other corporations — in interlocking relationships, which many people see as posing a potential conflict of interest.

Publicly listed companies in the UK have to either apply those principles or, if they choose not to, explain in a designated part of their annual reports why they decided not to do so. The monitoring of those explanations is left to shareholders themselves. The basic idea of the code is that one size does not fit all in matters of corporate governance and that instead of a statury regime like the Sarbanes-Oxley Act in the US, it is best to leave some flexibility to companies so that they can make choices most adapted to their circumstances.

If they have good reasons to deviate from the sound rule, they should be able to convincingly explain those to their shareholders.

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A form of the code has been in existence since and has had drastic effects on the way firms are governed in the UK. A recent study shows that in , about 10 per cent of the FTSE companies were fully compliant with all dimensions of the code while by more than 60 per cent were fully compliant. The same success was not achieved when looking at the explanation part for non-compliant companies. Many deviations are simply not explained and a large majority of explanations fail to identify specific circumstances justifying those deviations. Nevetheless it still shows that there is more to be done to develop a global framework of corporate governance.

In East Asian countries, the family-owned company tends to dominate. In countries such as Pakistan, Indonesia and the Philippines for example, the top 15 families control over 50 per cent of publicly owned corporations through a system of family cross-holdings, thus dominating the capital markets. Familyowned companies also dominate the Latin model of corporate governance, that is companies in Mexico, Italy, Spain, France to a certain extent , Brazil, Argentina, and other countries in South America.

Corporate Governance and Corporate Social Responsibility 21 Corporate governance principles and codes have been developed in different countries and have been issued by stock exchanges, corporations, institutional investors, or associations institutes of directors and managers with the support of governments and international organisations.

As a rule, compliance with these governance recommendations is not mandated by law, although the codes which are linked to stock exchange listing requirements12 will tend to have a coercive effect. Thus, for example, companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their respective national codes, but they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices.

Such disclosure requirements exert a significant pressure on listed companies for compliance. The size of the premium varied by market, from 11 per cent for Canadian companies to around 40 per cent for companies where the regulatory backdrop was least certain e.

Other studies have similarly linked broad perceptions of the quality of companies to superior share price performance. On the other hand, research into the relationship between specific corporate governance controls and the financial performance of companies has had very mixed results. The Development of Corporate Social Responsibility There has been considerable debate about the relationship between corporate social responsibility CSR and corporate governance but in recent years the term corporate social responsibility has gained prominence, both in business and in the press to such an extent that it seems to have become ubiquitous.

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There are probably many reasons for the attention given to this phenomenon 12 Such as, the UK Combined Code referred to earlier. For many people the various examples of this kind of behaviour — ranging from BCCI to Enron to Union Carbide to the collapse of Arthur Andersen — will have left an indelible impression among people that all is not well with the corporate world and that there are problems which need to be addressed13 Crowther and Rayman-Bacchus, One of the implications of this current concern however is that this is a new phenomenon — one which has not been of concern previously.

Thus, for example, in the UK where the Industrial Revolution began , Robert Owen , demonstrated dissatisfaction with the assumption that only the internal effects of actions need be considered and the external environment was a free resource to be exploited at will. Furthermore, he put his beliefs into practice through the inclusion within his sphere of industrial operations the provision of housing for his workers at New Lanark, Scotland.

Thus there is evidence from throughout the history of modernity that the self-centred approach towards organisational activity was not universally acceptable and was unable to satisfactorily provide a basis for human activity. Since that time there has been a concern for the socially responsible behaviour of organisations which have gained prominence at certain times while being considered of minor importance to others. Thus during the s, for example, there was a resurgence of interest it socially responsible behaviour. This concern was encapsulated by Ackerman who argued that big business was recognizing the need to adapt to a new social climate of community accountability but that the orientation of business to financial results was inhibiting social responsiveness.

McDonald and Puxty on the other hand maintained that companies are no longer the instruments of shareholders alone but exist within society and so therefore have responsibilities to that society, and that there is therefore a shift towards the greater accountability of companies to all stakeholders. Recognition of the rights of all stakeholders and the duty of a business to be accountable in this wider context therefore has been 13 Some would argue that these cases are related to corporate social responsibility failures, some to corporate governance failures, and some to both.

Our view is that the two are too interrelated to separate. Corporate Governance and Corporate Social Responsibility 23 a recurrent phenomenon. The economic view of accountability only to owners has only recently been subject to debate to any considerable extent. Thus organisations are most concerned with shareholders, less so with customers and employees and very little with society and the environment.

CSR would imply that they are all of equal importance. Definitions of CSR abound but all can be seen as an attempt to explain and define the relationship between a corporation and its stakeholders, including its relationship with society as a whole. Many too are phrased in terms of the triple bottom line, in a way which we argue trivialises the concept. Because of the uncertainty surrounding the nature of CSR activity it is difficult to evaluate any such activity. It is therefore imperative to be able to identify such activity and Aras and Crowther b argue that there are three basic principles15 which together comprise all CSR activity.

These are: 1. For a few years now the concept of corporate social responsibility has gained prominence and is gaining increasing attention around the world among 14 See Crowther for a full discussion of these changes. There are probably many reasons see Crowther and Ortiz-Martinez, for the attention given to this phenomenon not least of which is the corporate excesses which continue to become manifest in various parts of the world. These have left an indelible impression among people that all is not well with the corporate world and that there are problems which need to be addressed. Such incidents are too common to recount but have left the financial markets in a state of uncertainty and have left ordinary people to wonder if such a thing as honesty exists any longer in business.

More recently the language used in business has mutated again and the concept of CSR is being replaced by the language of sustainability. Such language must be considered semiotically Barthes, as a way of creating the impression of actual sustainability. Using such analysis, when the signification is about inclusion within the selected audience for the corporate reports, on the assumption that those included understand the signification in a common way with the authors.

This is based upon an assumed understanding of the code of signification used in describing corporate activity in this way. Defining Sustainability Most analysis of sustainability e. Dyllick and Hockerts, only recognises a two-dimensional approach of the environmental and the social. A few e. Spangenberg, recognise a third dimension which is related to organisation behaviour. We argue that restricting analysis to such dimensions is deficient. Consequently most work in the area of corporate sustainability does not recognise the need for acknowledging the importance of financial performance as an essential aspect of sustainability and therefore fails to undertake financial analysis alongside — and integrated with — other forms of analysis for this research.