What is the relationship between corporate governance and corporate social responsibility?

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Roshima Said (Based at the Universiti Teknologi Mara, Sugai Petani, Malaysia)

Yuserrie Hj Zainuddin (Based at the School of Management, Universiti Sains Malaysia, Penang, Malaysia)

Hasnah Haron (Based at the School of Management, Universiti Sains Malaysia, Penang, Malaysia)

Abstract

Purpose

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The purpose of this paper is to examine the relationship between corporate governance characteristics, namely the board size, board independence, duality, audit committee, ten largest shareholders, managerial ownership, foreign ownership and government ownership and the extent of corporate social responsibility disclosure.

Design/methodology/approach

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The content analysis was used to extract the CSR disclosure items from annual report and companies' web sites. Then, a CSR disclosure index was constructed after combining CSR disclosure items disclosed both in annual reports and in companies' web sites. Hierarchical regression analysis was used to examine the relationship between the corporate social disclosures index and the independent variables, namely the board size, board independence, duality, audit committee, ten largest shareholders, managerial ownership, foreign ownership and government ownership after statistically controlling the effects of a firm's size and the profitability of the companies.

Findings

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Results based on the full regression models indicated that only two variables were associated with the extent of disclosures, namely government ownership and audit committee. Government ownership and audit committee are positively and significantly correlated with the level of corporate social responsibility disclosure. The most significant variable that influences the level of CSR disclosure is government ownership.

Research limitations/implications

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The findings are limited to the context of the study and it was limited to Malaysian public listed companies, January to December 2006. The sources of data in this study were companies' annual reports and web sites only.

Practical implications

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The study is useful to organizations and statutory bodies to take into consideration in identifying the corporate governance characteristics that will enhance CSR disclosure, since it had been shown in previous studies that corporate social responsibility reporting in Malaysia is generally low. The government can determine how important it is that a company should be willing to allocate their costs towards corporate social responsibility activities. Thus, this study will emphasize the level of activities through corporate social responsibility reporting in Malaysian public listed companies and help the government to ascertain the level of corporate social responsibility activities through corporate social responsibility reporting among Malaysian public listed companies.

Originality/value

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The study reveals the extent of the disclosure of corporate social responsibility to companies web sites and constructed the CSR index based on two sources of data, namely companies' web sites and annual reports.

Keywords

Corporate social responsibility
Information disclosure
Corporate governance

Citation

Said, R., Hj Zainuddin, Y. and Haron, H. (2009), "The relationship between corporate social responsibility disclosure and corporate governance characteristics in Malaysian public listed companies", Social Responsibility Journal, Vol. 5 No. 2, pp. 212-226. https://doi.org/10.1108/17471110910964496

Publisher

Emerald Group Publishing Limited

INTRODUCTION

Time and again, it has been observed that Corporate Governance and Corporate Social Responsibility are two terms and concepts that have been focused on in the corporate world. A lot of significance has been placed on successfully understanding and implementing these two concepts. Throughout the years, many developments have taken place that paved the way for the adoption of these concepts into the business practices of corporations globally. Here, an attempt is made to understand the difference and similarities between Corporate Governance and Corporate Social Responsibility.

MEANING OF CORPORATE GOVERNANCE

What exactly does Corporate Governance mean?

Corporate governance is a system of rules and practices, which help direct and control an organization. A good governance system with sound governance practices takes into account the interests of all stakeholders, such as customers, suppliers, employees, etc. The board of directors of the organization shoulders the central responsibility of having a good corporate governance system. It involves the various practices that are put in place and managed by the board to ensure efficient management of risk, the existence of transparency, and ethical practices. It also includes the rules, regulations, and practices through which the overall company is controlled and subsequently, governed. Sir Adrian Cadbury (Cadbury Report) defines corporate governance as “the system by which organizations are directed and controlled.”

The corporate governance structure specifies the distribution of rights and duties among various stakeholders in the corporation, such as the board of directors, managers, shareholders, and other stakeholders, and spells out the rules and protocols for making all the important decisions on business activities. By doing so, it also provides the structural framework through which the objectives of the organization are set and the methods of achieving those objectives and monitoring performance. Essentially, it is concerned with how exactly a company and its management functions. It deals with the various ways in which the company is to be governed. It consists of an extensive variety of methodologies and ethical patterns of conduct that are embedded into the fabric of the corporation. This can be seen through how they deal with various stakeholders.

MEANING OF CORPORATE SOCIAL RESPONSIBILITY

What exactly does Corporate Social Responsibility mean?

A business organization does not exist in a vacuum. It exists in a societal environment. By using resources like labor, natural resources, and capital from the surrounding environment and society, the business organization depends on it. Due to these reasons, it is only fair that the organization contributes to the societal environment in which it exists. Such an aim can be achieved through Corporate Social Responsibility (CSR) activities.[1] It may be noted that, at present, there are a lot of ways in which CSR can be defined and there is no one definition that is accepted all over the globe. It can be explained as a management mechanism for business organizations that are generating profits by utilizing the precious resources of the society to pay back to the society through sustainable and conscious efforts. Through CSR activities and efforts, these business organizations can keep a tab on their practices, hold themselves responsible as well as ascertain the impact that their activities have on society and the environment at large.

While doing so, these businesses are enhancing their interests and considerations but at the same time, not putting the environment in harm’s way. Corporate Social Responsibility is a management concept wherein companies incorporate social and environmental concerns into their business activities and processes as well as into their interactions with all stakeholders. CSR is usually made out to be how a company maintains an equilibrium between economic, environmental, and social imperatives (“Triple-Bottom-Line- Approach”), while simultaneously addressing the concerns of all the stakeholders. Here, it is important to point out that CSR is a strategic concept of business management and it is not the same as charity or philanthropy. The concept of Corporate Social Responsibility (CSR) is much broader than just that. Important CSR issues are related to the management of the environment, interaction with stakeholders, good working conditions, and labor standards, diversity and inclusion, good relations between employees and the community, and showing no tolerance for business malpractices. Business organizations that carry out a proper CSR plan have a competitive edge over the ones that do not. It boosts market expansion and access to capital, reduces the cost of processes and operations, reduces risks and threats, increases efficiency, helps in making better decisions, and finally, it helps to maintain a loyal customer base due to having a better brand image. Corporate social responsibility programs are a great way to boost employee morale in the workplace.

ISO 26000 clearly explains the meaning of social responsibility and helps corporations to convert CSR principles and theories into practical efforts. The standard is aimed at all types of organizations, regardless of their activity, size, or location. The standard shows a global consensus since a lot of stakeholders from across the globe have chipped in to develop this standard.[2] As an example, let’s take a look at the ‘Starbucks’. Starbucks’ goals for 2021 onwards consist of hiring 5,000 veterans and 10,000 refugees, decreasing the environmental impact of its cups, and engaging its employees in environmental leadership. Thus, it would be appropriate to say that CSR acts as a link between business corporations and the surrounding society.

THE DIFFERENCE BETWEEN CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

From all of this information, we can deduce that the most evident difference between the two mechanisms is that on one hand, Corporate Governance functions in a way that is distinct and material, and structured. Whereas, on the other hand, Corporate Social Responsibility does have rules and regulations but when we compare it to Corporate Governance, we can see that it functions more freely. Additionally, it is pertinent to recognize that Corporate Governance is the most far-reaching mechanism for control under which a business organization takes its governance decisions. Whereas Corporate Social Responsibility is more concerned with internal aspects such as self-governance or self-regulation that are related to external regulatory and legal processes. While such a difference exists, it may be noted that a certain type of symbiosis can also be detected between these two mechanisms.

SIMILARITIES BETWEEN CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

Essentially, it would be appropriate to say that the biggest similarity between the two mechanisms is that both Corporate Governance and Corporate Social Responsibility are concerned with concentrating on ethical business practices. These mechanisms have a common interest at their core as they are both concerned with transparency, efficient disclosures, sustainability, and the kind of impact that an organization has on all the stakeholders and consequently, the environment.

It can be observed that both of these mechanisms:

1) Increase the value for shareholders as they disclose reports that increase the overall transparency of reporting which leads to gaining the confidence and trust of the public at large.

2) Aid in the development of the surrounding area of the business activity.

3) Sustain and enhance the existing relationship with stakeholders.

4) Preserve a prominent market position by engaging with the stakeholders and addressing their concerns and grievances.

5) Substantiate a solid brand name of the organization.

CONCLUSION

It would not amiss to say that the concept of corporate social responsibility falls under the ambit of corporate governance. The overall value (both tangible and intangible) for all the stakeholders involved, is enhanced by deploying the mechanisms of corporate governance and corporate social responsibility. While there are differences between the two, similarities also exist. Thus, we can say that ultimately, they are interconnected.

Author(s) Name: Shreya Puranik (ILS Law College, Pune)

References:

[1]Kshama Kaushik, CSR in India: Steering Business Towards Social Change, (1st ed, LexisNexis 2017)

What is the relationship between CSR and corporate governance?

CSR is based on the concept of self-governance related to the external stakeholders and external regulatory mechanism whereas corporate governance is the widest control mechanism which the company undertakes in relation to its management decisions.

Corporate social responsibility is a business model by which companies make a concerted effort to operate in ways that enhance rather than degrade society and the environment. CSR helps both improve various aspects of society as well as promote a positive brand image of companies.

(Corporate governance is the system of rules, practices, and processes by which an organization is directed and controlled; corporate social responsibility refers to an organization's initiatives to assess and take responsibility for its impacts on environmental and social wellbeing.)

What is corporate governance and corporate responsibility?

The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company. Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.