Corporate Social Responsibility Essay

Corporate Social Responsibility and Corporate Governance are the two important inevitable corporate practices all over the world today. Once voluntary acts, these practices have now been made mandatory in the wake of various corporate scandals that shook the corporate world in the past decade. 1. 1 Aims and Objectives With the above background, it is proposed enquire into the corporate practices in the realms of Corporate Social Responsibility and Corporate Governance that are prevalent in the U. K. and to ascertain how effective the practices are in achieving the objectives behind the said concepts and finally conclude whether U. K has established standards of these practices or still lagging behind. This paper shall be a proposal to determine feasibility of such an exercise. 1. 2 Problem Statement As the term suggests Corporate Social Responsibility is an obligation of the corporate entity in addition to the duties owed to its shareholders. Maximising profit for the shareholders is not the only goal of a company. It owes responsibility to all the stake holders in the company. The group of stake holders are share holders, employees, suppliers, customers, Government agencies, and Environment. It implies that while maximising the value of the firm for the sake of shareholders, interests of these stake holders should not be sacrificed in the process. Hence ensuring the social responsibility of a corporate entity is part of Corporate Governance. Corporate Governance is a wider term encompassing the corporate social responsibility also. Hence the managers of the companies must establish sound standards of corporate governance based on the combined code of corporate financial reporting. A corporate entity must comply with code or explain why it has not, in its annual reports as per the guideline set out by Cadbury report. Prior to the Cadbury report, there was no requirement as such on the part of the U. K. Corporates. It was only after the surfacing of corporate scandals in U. K, that the Cadbury report was required to be made by the Government. This proposal therefore gains significance to make a study on the practices of UK companies complying with their social responsibility and other aspects of corporate governance. That there is a Minister in the U. K. for corporate social responsibility would show the importance attached to it by the Government. The two aspects of CSR and Corporate Governance are part of business ethics. Chapter2 Literature Review Literature review is an exercise to justify this research proposal. This involves examining the literature available on the subject of this proposal which will form part of secondary data for the study. 2. 1 Corporate Governance It is a system by which the corporate entities are directed and controlled. Thus accountability is required on the part of the board to make sure that te corporates are managed in the best interests of their shareholders. (Higgs 2003) There must be an effective board which while providing for entrepreneurial leadership should also at the same time control the incumbents of the board. To achieve this, the board must consist of a balanced structure of directorship with executive, non-executive, independent non-executive in right proportion to ensure against concentration of power and at the same time ensure balanced decision making. Where there are conflicts of interests likely, the board should appoint sub-committees for nomination and remuneration of directors and auditors to make proposal to the board for approval. The board is expected to deal with shareholders effectively ensuring transparency and accountability. The combined code issued by the Financial Reporting Council and revised from time to time prescribes general principles and procedures of Corporate Governance for listed companies. (CSR) However Corporate governance is not a new concept. Adam Smith’s(1776) ‘An Enquiry into the Nature and Causes of Wealth of Nations’ gave rise to Berle and Means’(1932) agency theory which enunciated separation of corporate ownership from control. Corporate Governance is precisely that. Bruce (2006) states that it is a myth that concentration of power improves firm value. Rather dispersed ownership enhances firm performance. This warrants corporate governance. 2. 2 Corporate Social Responsibility (CSR) Rather than shareholder interests, CSR principle requires companies to have a wide range of stakeholder interests. In pursuit of its business activities, a company should keep in mind the interests of the stake holders as well so that maximisation of firm value in the long run is consolidated. In the process, key relationships with consumers, employees, and other stakeholders are improved. Interaction with consumers results in better understanding of their needs and improvement in the quality of the products besides becoming more competitive in the market. Efficiency increases through cost minimisation. Corporates such as BT and Cooperative Bank are in the practice of giving feed back on their competitiveness as a result of their CSR initiatives. Similarly showing the company’s concern towards its employees in whatever ways possible including facilitating their work-life balance and giving of additional benefits to physically challenged employees would result in increased productivity and over all improvement in the company’s image. Company’s environmental concern also is demonstrated through its practice of energy saving , participation in greening projects, compliance with pollution control requirements, minimising carbon consumption and taking part in carbon credit programs. Desisting from giving bribes to Government officials is also considered a part of CSR. 2. 3 Corporate Governance Practices in UK The Corporate governance gained more significance in the U. K. ever since the collapse of BCCI bank and the Robert Maxwell pension funds during 1991. In order to put its own house in order, Government set up a committee under the chairmanship Sir Adrian Cadbury which gave a report known as Cadbury Report with ‘comply or explain’ directives. It was later followed by Greenburg Report in 1995 concerning remuneration to directors. And both the reports together were integrated to make a combined code in the year 1998. And this has been twice updated once in 2003 after Enron and World com scandals of the U. S. and again in 2006. The Financial Reporting Council enlists the following as key aspects of corporate governance in the U. K. There is a single board of directors with collective responsibility to the company’s success. A balancing act is achieved by a separate chief executive and chairman. A right proportion of executive and non-executive directors to ensure balanced decision making in the affairs of the company. Presence of independent audit and remuneration committee. Evaluation annually by the board of its own performance. Maintaining transparency in the matters of appointments and fixation of remuneration. ‘Comply or explain’ are the basic guidelines when making annual reports for compliance or failure to comply any of the codes recommended by the financial reporting council as regards corporate governance. As a result, the U. K. is the leading country with best standards of corporate governance as per the report by FISE ISS in 2005. National Association of pension funds as also certified in the same year that 94% of the U. K. pension funds complied with corporate governance measures in more efficient manner. Compliance cost for companies is also reported to be lower than in other countries. This positive corporate governance makes investors to prefer the U. K. for listing their companies in preference to the U. S stock exchange as per the Oxera report of 2006 (FRC 2006) As a part of its corporate social responsibility, the company Procter & Gamble has introduced a product ‘turn to 30’ as a substitute to its own ‘Ariel’ in order to reduce carbon consumption while people washed clothes. This is as part of their commitment towards removing carbon foot print in their product. The company was awarded with Ethical Marketing Prize by the U. K. marketing society. The company found that rather than the presence of carbon foot print in their product, the carbon emission took place when people washed clothes in hot water. So the company developed ‘turn to 30’ which could be used for washing in cold water without giving rise to emission of carbon while washing. As a result the percentage of population using cold water for washing rose from 2 percent to 17 percent. This could amount to a great deal in terms of carbon emissions that were saved. (Baker 2008) Chapter 3 Methodology The methodology for the research chosen will be qualitative. The literature review will be the major contributor for arriving at conclusions though about 25 companies will also be randomly selected for the sake of primary data to gain first hand knowledge of the subject of research. And to corroborate the findings in the secondary data gathered through literature review. Chapter 4 Conclusion The Brief literature review above proves to be of immense value as an indicator of practices in the U. K. as regards Corporate Social Responsibility and Corporate Governance. Commitment of the companies and the Government in the U. K. towards the CSR and Corporate Government encourages further detailed research in the discipline so as to understand the implications fully and suggest measures to increase the present compliance rate in the U. K. by identifying bottle necks still faced by the corporates in that connection. With this in view, the researcher hopes to make a substantial contribution to the field through this proposed research. References Baker, Mallen. 2008 How to make friend and influence customers: Buisness Respect issue 129 June 10 Berle, A. A, & Means, G. C. (1932) The Modern Corporation and Private Property, Larcourt, Brace & World Inc. , New York, N. Y. Bruce N Douglas. , 2006 Corporate Governance, Capacity Utilisation and Growth CSR Corporate Social Responsibility: A government update. Accessed 17 June 2008 FRC 2006 Financial Reporting Council: The UK Approach to Corporate Governance Higgs, Derek. 2003 Review of the role and effectiveness of non-executive directors. Accessed 17 June 2008