Convergence of CSR and Corporate Governance

The growing importance of, and the relationships between, social and environmental issues and governance practices was emphasized in “Who Cares Wins: Connecting Financial Markets to a Changing World”, a report prepared by the UN Global Compact and released in 2004:

“In a more globalized, interconnected and competitive world, the way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully.  Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action or accessing new markets while at the same time contributing to the sustainable development of the societies in which they operate. Moreover these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”[1]

Rahim observed that the convergence of CSR and corporate governance has been slowly but surely evolving over a number of decades beginning with “the sophistication of consumers in the 1960s, the environmental movement of the 1970s and the increasing interest in the social impacts of business in the 1990s”.[2]  While these changes and movements did not always trigger specific CSR initiatives, they did set the stage along with “the global social urge to include the previously excluded social costs of production and the hidden costs incurred by the environment as a result of business activities with the corporate balance sheet; the lack of confidence in the institutions of the market economy; and the demand for ensuring sustainable development”.[3]  According to Rahim, the result of all this was increased pressure to update and extend the narrower meaning of corporate governance to enable companies to demonstrate their responsibility to all of their stakeholders and society in general through their performance.  As time has gone by, CSR has become recognized as “[a] business strategy to make the ultimate goals of corporations more achievable as well as more transparent, demonstrate responsibility towards communities and the environment, and take the interests of groups such as employees and consumers into account when making long-term business decisions.”[4]

Jamali et al. argued that the convergence of CSR and corporate governance could be illustrated by identifying and acknowledging discernable overlaps between the two concepts.[5]  For example, the broader concept of corporate governance, which entails responsibility and due regard to the wishes of all key stakeholders and ensuring that companies are answerable to all stakeholders, is quite similar to the stakeholder conception of CSR that views businesses as being accountable vis-à-vis a complex web of interrelated stakeholders that sustain and add value to the firm.  When corporate governance is viewed in a narrower manner, such as focusing on ensuring accountability, compliance and transparency, one can see the need for firms to meet their responsibilities to internal stakeholders by addressing issues related to skills, and education, workplace safety, working conditions, human rights, equity/equal opportunity and labor rights. Jamali et al. mentioned other links between CSR and corporate governance including the duty of companies to assume their fiduciary and moral responsibilities toward stakeholders; a common grounding in transparency, accountability and honesty; opportunities to regain the trust of clients and society at large; and sources of important long-lasting benefits and sustainability for the business.[6]

Szabó and Sørensen noted that corporate governance and CSR shared many common features that are likely to promote good governance while at the same time encouraging greater attention to, and improvements in, CSR initiatives.[7]  Some of the specific common features that they mentioned included regulatory approach, which is both cases has largely been based on voluntary codes and self-regulation; transparency, which has been integrated into corporate governance through reporting requirements on financial performance and now appears in connection with the voluntary disclosure and reporting on CSR initiatives and topics such as environmental, labor and human rights matters; independent directors, which have traditionally been used as a means for ensuring that the interests of shareholders are protected but could also be proponents for taking into account a broader group of stakeholder interests and could therefore play an important role in advancing CSR; greater diversity of board members, which could enhance both corporate governance and CSR; risk management, an obligation of the board of directors that have always been part of corporate governance but which has been expanded to include the risk and opportunities associated with key topics of CSR (i.e., climate change, the environment, health, safety, human rights etc.); and “whistleblowing” procedures for employees and other stakeholders that can be used to report both corporate governance and regulatory compliance problems and activities of the company that are unethical and/or  likely to have adverse environmental and/or social impacts.

Many agree that CSR principles are typically embedded into governance practices such as disclosure and reporting, risk management oversight, board composition and diversity and compensation.  Disclosure and reporting on social, environmental and ethical issues has become commonplace among larger companies and has expanded to include specific details on policy implementation and stakeholder engagement.  In addition, the main standards developed for non-financial reporting, such as the Global Reporting Initiative, have incorporate several disclosure items relating to the internal governance framework including the independence and expertise of directors; board-level processes for overseeing the identification and management of economic, environmental and social risks and opportunities, and the linkage between executive compensation and achievement of financial and non-financial goals.  Risk management is a fundamental duty of the board and CSR encourages directors to take a broad view of the challenges that their companies face in maintaining performance and surviving in the marketplace.  The growing emphasis on CSR also means that boards need to be able to draw on the skills, knowledge and experiences of a more diverse group of members, a requirement that is consistent with calls for better gender and ethnicity diversity in the boardroom.  Finally, boards need to develop new compensation and rewards systems that take CSR into account and prioritize metrics and success indicators that are broadly defined from a longer-term perspective.[8]

Strandberg interviewed a group of international thought-leaders regarding their views on the convergence of CSR and corporate governance and found the respondents to be divided into two groups: one group who saw convergence at the level of values, with good governance going beyond the traditional core governance functions and becoming more broadly defined to include ethical considerations due to a large number of significant governance oversight failures in the late 1990s and early 2000s and CSR being an external expression of ethical values; and the other group who believed that CSR only connected to corporate governance at the operational risk level and that engaging in CSR is part of the directors’ broader fiduciary duty to identify, address and manage the risks that impact the financial performance of the corporation.[9]

All of the respondents agreed that CSR was an emergent area of risk in the broadening portfolio of risk management and many of the respondents agreed that CSR had taken its place at the core of a new type of enterprise risk management that was more holistic in nature and used the tools of CSR, such as stakeholder engagement and non-financial reporting, to reduce operational risks.  For example, engaging with employees and customers and preparing and disseminating non-financial reports can reduce the risk that the company will be drawn down by work stoppages, lawsuits, boycotts and investor activism.  At the same time, focusing more on social and environmental issues can help companies identify new opportunities that will allow them to maintain competitiveness in the marketplace.  When viewed from this perspective, the portfolio of issues that may enter the boardroom expands significantly to include the kinds of products and services the company produces, how they are produced and the environmental and social impact of those decisions.[10]

Strandberg found that the further one got from shareholders and employees, the less widely accepted stakeholder engagement was as a pillar of governance, except perhaps as a derivative of the risks and strategic opportunities faced by a company.[11]  Among the thought leaders who preferred a values-based governance model there was more consideration of stakeholder engagement given the importance of measuring the impact of operational activities on society and the environment; however, at that point in time few boards were known to have a robust stakeholder relations policy.  The dominant view of the thought leaders at that time was summed in the following quote provided by Strandberg: “Companies are driven by one thing: share price. If doing something nice to stakeholders improves share price, they are all for it. If those stakeholders can damage share price the company will manage the stakeholders and if this means paying lip service or doing something more fundamental they will do it.”[12]

The drive toward, and pace of, convergence of CSR and corporate governance has turned on a variety of key factors.  Strandberg found that drivers of CSR at the values level included improvements in information technology and a surge of globalization that has resulted in greater interconnection between stakeholders and companies, recognition of the role that CSR and taking a values-based approach to governance and decision making on improving motivation and productivity among employees, the desire of companies to protect their reputation and build trust in an era of corporate scandals; the need to take steps to ensure that the benefits of globalization are shared more broadly and the ascendency of new types of corporate leaders dedicated to advancing CSR competencies in their organizations and linking CSR issues with mainstream business issues.  At the risk level, the main drivers of CSR have been the recognition of investors that CSR can and does have a positive impact on the financial and overall performance of their portfolio companies and the growing attention that directors have paid to social and environmental responsibility which developing their governance frameworks.  In addition, governments have become more involved with regulating activities in CSR areas such as the environment, labor relations and reporting, which means that companies have had to expand the scope of their compliance operations.[13]

Williams reported that the topic of corporate responsibility has been given increasing academic attention in the past decades, citing data collected and analyzed by Devinney that showed that the number of articles relating to the topic had risen significantly in various journals devoted to environmental sciences, economics, management, sociology, psychology and law.[14]  One of the most popular topics among academics has been the relationship between corporate responsibility and financial performance, an important question given the consistent need for advocates of corporate responsibility initiatives to make a strong “business case” beyond the ethical arguments.[15]  Williams noted that as studies have become more sophisticated in identifying the mediating variables and the quality of data has improved, the results have been more consistent in showing positive financial results from corporate responsibility, an outcomes that many who have studied the issue can be attributed to the fact that corporate responsibility strategies and operating procedures positively influence certain key intangibles that are significantly related to corporate financial performance such as innovation, human capital improvements, reputation and corporate culture.[16]  While studies have identified improvements on a range of performance metrics, such as lowering the cost of capital, positive influence on stock price performance and better operational performance, the specific linkages between particular corporate responsibility-related operational and managerial competencies and specific performance outcomes are still unclear.[17]

Researchers have also been interested in assessing the connection between board composition and committees and measurable corporate social performance.  While it can logically be assumed that creation of a specific board committee dedicated to corporate responsibility would have a positive impact on a company’s social performance, the results from studies have been mixed.[18]  William cited several factors that may come into play such as whether the committee was established to promote better environmental or social performance or as a reaction to a particular issue or problem.[19]  One survey found that independent, larger and less diverse boards were associated with worse environmental performance, an outcome that could be attributed to a lack of in-depth knowledge of the environmental risks confronting the company, and it has been suggested that environmental performance would be better improved by reducing board independence and oversight by a separate committee and allowing a powerful CEO to develop and execute his or her vision for positive environmental impacts through managerial strategies.[20]  On a related note, Williams observed that the presence of sustainability disclosures on company websites, just like the presence of corporate responsibility committees at the board level, should not be understood as an unambiguous signal of actual corporate responsibility, pointing out that companies had often touted their dedication to sustainability while being embroiled in real world controversies relating to income inequality, contribution to public health problems and illegal and unethical corporate behavior.[21]

Other areas of interest to researchers have included the relationship between the types of investors in a company and the company’s environmental and social performance and the impact of the corporate governance system in which the company operates.  For example, several studies have found that companies with higher percentages of long term, pension fund investors had significantly better environmental and social performance than companies with lower percentages and that environmental and social performance suffered when companies were forced to deal with short-term shareholder activism from mutual funds and investment banks.[22]  As for cross-jurisdictional research, one study found that: “among different legal origins, the English common law—widely believed to be mostly shareholder oriented—fosters CSR the least; within the civil law countries, firms of countries with German legal origin outperform their French counterparts in terms of ecological and environmental policy, but the French legal origin firms outperform German legal origin companies in social issues and labor relations. Companies under the Scandinavian legal origin score highest on CSR (and all its subfields)”.[23]  Williams observed that “where, as in the common law system, the state’s role in the economy is understood to be more limited in addressing economic inequality or promoting and protecting labor or environmental interests than among Scandinavian countries or those based on civil law legal families, there is more pressure for voluntary corporate responsibility issues to address these issues . . . [however] . . . evidence suggests those voluntary initiatives are less effective in promoting social and environmental social welfare than are the types of laws and institutional arrangements found in the Scandinavian and civil law legal contexts”.[24]

Writing in 2005, Strandberg summed up the state of convergence of CSR and corporate governance at that time as follows:

“There is an overall trend towards greater accountability of corporations, not just in financial matters, but regarding impacts on society. Institutional investors are pushing non-financial issues more and more.  As companies come to understand looking for loopholes will not serve them in the longer term they will drift to a principles-based approach to governance—the bridge between CSR and governance.  Up until recently a lot of resources and effort have been spent on spin—marketing CSR—getting the message out that companies are doing the right thing without necessarily doing so. It is becoming more important that a company’s decisions stand up to scrutiny than in the past and this will drive CSR convergence at both the risk management and the values level of a corporation.”[25]

Rahim summed up the evolution of corporate responsibility and its relationship to corporate governance as follows:

“The basis of corporate responsibility has transitioned from why companies must be socially responsible to how they can become socially responsible. CSR is now a major component of new business and CG models for long-term sustainability. It has converged with the new trend of CG and contributed to the shifting of the traditional notion of CG to a vehicle for pushing corporate management to consider broader social issues. CSR defines corporate responsibilities to society as follows: firstly, that companies have a responsibility for their impact on society and the natural environment, which on occasion goes beyond legal compliance and the liability of individuals; secondly, that companies have a responsibility for the behavior of others with whom they do business; and thirdly, that business needs to manage its relationship with wider society, whether for reasons of commercial viability or to add value to society.”[26]

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance. and an excerpt from Sustainability and Corporate Governance by Alan S. Gutterman, which is available for purchase at various online booksellers.  Readers may also enjoy the author’s book on Board Oversight of Sustainability: A Practical Guide for Directors and Their Advisors.

_______________

[1] Who Cares Wins: Connecting Financial Markets to a Changing World (UN Global Compact, 2004), i.

[2] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 22 (citing A. Bagi, M. Krabalo and L. Narani, “An Overview of Corporate Social Responsibility in Croatia” (2004); and T. Pinckston and A. Carroll, “A Retrospective Examination of CSR Orientations: Have They Changed?”, Journal of Business Ethics, 15(2) (1996), 199).  See also N. Kakabadse, C. Rozuel and L. Lee-Davies, “Corporate Social Responsibility and Stakeholder Approach: A Conceptual Review”, International Journal of Business Governance and Ethics, 1(4) (2005), 277, 279 (identifying ‘consumerism’ and ‘corporate scandals’ as the most important drivers underpinning the growth in interest and acceptance of CSR).

[3] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 22.

[4] Id. (citing A. Gill, “Corporate Governance as Social Responsibility: A Research Agenda” (2008)).

[5] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 446.

[6] Id. at 446-447.

[7] D. Szabó and K. Sørensen, “Integrating Corporate Social Responsibility in Corporate Governance Codes in the EU”, European Business Law Review, 2013(6), 1, 5-8.

[8] C. Strandberg, The Convergence of Corporate Governance and Corporate Social Responsibility: Thought-Leaders Study (Canadian Co-operative Association, March 2005), 9-10.

[9] Id. at 4-5.

[10] Id. at 6 and 13-14.

[11] Id. at 11.

[12] Id. at 12.

[13] Id. at 8-9.

[14] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 20, available at http://digitalcommons.osgoode.yorku.ca/scholarly_works/1784.

[15] For further discussion, see A. Carroll and K. Shabama, “The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice”, International Journal of Management Reviews, 12(1) (2010), 85.

[16] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 25, available at http://digitalcommons.osgoode.yorku.ca/scholarly_works/1784 (citing J. Surroca, J. Tribó and S. Waddock, “Corporate Responsibility and Financial Performance: The Role of Intangible Resources”, Strategic Management Journal, 31 (2010), 463).

[17] Id. at 26 (citing G. Clark, A. Feiner and M. Viehs, “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2508281; and T. Devinney, “Is the Socially Responsible Corporation a Myth? The Good, the Bad and the Ugly of Corporate Social Responsibility”, Academic Management Perspectives (May 2009), 44).

[18] Id. at 27.

[19] Id. at 27 (citing J. Walls, P. Berrone and P. Phan, “Corporate Governance and Environmental Performance: Is there Really a Link?”, Strategic Management Journal, 33 (2012), 885).

[20] Id. at 27 (citing J. Walls, P. Berrone and P. Phan, “Corporate Governance and Environmental Performance: Is there Really a Link?”, Strategic Management Journal, 33 (2012), 885, 902).  See also J. Surroca and J. Tribó, “Managerial Entrenchment and Corporate Social Performance”, Journal of Business Finance and Accounting, 35(5-6) (2008), 748 (arguing that corporate responsibility is a strategy for management entrenchment and that CEOs establish stronger ties with internal and external constituencies, such as employees and community elites, in order to insulate themselves from accountability mechanisms at the board level).

[21] Id. at 29.

[22] Id. at 30-31 (citing R. Johnson and D. Greening, “The Effects of Corporate Governance and Institutional Investor Types on Corporate Social Performance”, Academy of Management Journal, 42:5 (1999), 564; and D. Neubaum and S. Zahra, “Institutional Ownership and Corporate Social Performance: the Moderating Effects of Investment Horizon, Activism, and Coordination”, Journal of Management, 32:1 (2006), 108).

[23] Id. at 31-32 (citing and quoting from H. Liang and L. Renneboog, “The Foundations of Corporate Social Responsibility”, Tilberg Law and Economics Center Discussion Paper No. 2013-023, available at http://ssrn.com/abstract=2371103).

[24] Id. at 33.

[25] C. Strandberg, The Convergence of Corporate Governance and Corporate Social Responsibility: Thought-Leaders Study (Canadian Co-operative Association, March 2005), 13.

[26] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 44 (citing M. Blowfield and J. Frynas, “Setting New Agendas: Critical Perspectives on Corporate Social Responsibility in the Developing World”, International Affairs, 81(3) (2005), 499, 504).