I believe you will agree with me when I say Corporate governance principles play a major role in an organisation’s ability to gain a competitive advantage in the industry and become successful.

Well, this statement is not just a myth but true in reality and you can relate to this as an individual.

And in today’s post, I am going to explain exactly these Corporate governance principles and how they help an organisation to gain competitive advantage.

So you will ask: “what are the principles of Corporate Governance?”

CORPORATE GOVERNANCE is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance principles essentially involve balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

SOME ELEMENTS OF CORPORATE GOVERNANCE

• Risk management: A need for a new look

Boards of directors are increasingly willing to take firm managerial action to mitigate the downside risks of strategic change. In February of 2005, for example, the directors of Hewlett Packard suddenly removed Carly Fiorina as CEO because of her management of the risks and slow progress of the complex HP-Compaq merger.

• Effectiveness and Efficiency
  Good governance means that the processes implemented by the organization to produce favourable results meet the needs of its stakeholders while making the best use of resources – human, technological, financial, natural and environmental – at its disposal.
• Accountability
  Accountability is a key tenet of good governance. Who is accountable for what should be documented in policy statements. In general, an organization is accountable to those who will be affected by its decisions or actions as well as the applicable rules of law.
• Equity and Inclusiveness
  The organization that provides the opportunity for its stakeholders to maintain, enhance, or generally improve their well-being provides the most compelling message regarding its reason for existence and value to society.
• Rule of Law
  Good governance requires fair legal frameworks that are enforced by an impartial regulatory body, for the full protection of stakeholders.
• Transparency
  Transparency means that information should be provided in easily understandable forms and media; that it should be freely available and directly accessible to those who will be affected by government policies and practices, as well as the outcomes resulting therefrom; and that any decisions are taken and their enforcement are in compliance with established rules and regulations.
• Responsiveness
  Good governance requires that organizations and their processes are designed to serve the best interests of stakeholders within a reasonable timeframe.

 SYMPTOMS OF POOR CORPORATE GOVERNANCE

• Domination by a single individual

A feature of many corporate governance scandals has been boards dominated by a single senior executive with other board members merely act as a rubber stamp.  Sometimes the single individual may bypass the board to action his own interests. This can result in management and directors awarding themselves remuneration and company perks that do not align with company performance or shareholder interests. This is an inherent problem in agency theory.

• Lack of involvement of the board

Boards that meet irregularly or fail to consider systematically the organization’s activities and risks are clearly weak. Sometimes the failure to carry out proper oversight is due to lack of information being provided.

•  Lack of adequate control function

Another potential weakness is a lack of adequate technical knowledge in key roles, for example in the audit committee or in senior compliance positions. A rapid turnover of staff involved in accounting or control may suggest inadequate resources and will make control more difficult because of a lack of continuity.

• Lack of supervision

Employees who are not properly supervised can create large losses for the organization through their own incompetence, negligence or fraudulent activity. The behaviour of Nick Leeson, the employee who caused the collapses of Barings bank was not challenged because he appeared to be successful, whereas he was using unauthorized accounts to cover up his large trading losses. Leeson was able to do this because he was in charge of dealing and settlement, a system’s weakness of lack of segregation of key roles that featured in other financial frauds.

• Lack of independent scrutiny

External auditors may not carry out the necessary questioning of senior management because of fears of losing the audit, and internal audit does not ask awkward questions because the Chief Financial Officer determines their employment prospects. Often corporate collapses are followed by criticisms of external auditors, such as the Barlow Clowes affair were poorly planned and focused audit work failed to identify illegal use of client monies.

• Lack of contact with shareholders

Often, board members grow up with the company and lose touch with the interests and views of shareholders. One possible symptom of this is the payment of remuneration packages that do not appear to be warranted by results.

• Emphasis on short-term profitability

Emphasis on success or getting results can lead to the concealment of problems or errors, or manipulation of accounts to achieve desired results.

• Misleading accounts and information

Misleading figures are often symptomatic of other problems (or are designed to conceal other problems) but clearly poor quality accounting information is a major problem if markets are trying to make a fair assessment of the company’s value. Giving out misleading information was a major issue in the Enron scandal as discussed previously.

CORPORATE GOVERNANCE THEORIES

The debates about the place of governance are founded on four differing views associated with the ownership and management of organisations. These theories include:

• Stewardship theory

This theory means that management is the steward of the assets of the organization and good governance requires active participation from all members. Management will act primarily as stewards of the organization.

• Stakeholder theory

This means that management has a duty of care to the organization, its owners, and to its wider stakeholders.

• Agency theory

This means that management will act in an agency capacity, seeking to serve their own self-interest and looking after the performance of the company only where its goals are co-incident with their own. Agency theory aims to ensure that managers pursue effectively shareholders’ best interest.

• Transaction cost theory

This theory means the way the company is organized or governed determines its control over transactions. Management will be opportunistic. Like agency theory, transaction cost theory aims to ensure that management effectively pursues shareholders’ best interest.

STAKEHOLDERS

Stakeholders can be defined as anyone affected by the organisation. It’s important to know who your stakeholders are and what they want, because if the stakeholders are unwilling to cooperate you may find it difficult to put a strategy into action.

 Stakeholders include:

• Shareholders
• Employees
• Managers/directors
• Suppliers
• Customers
• Competitors
• The government
• The local community

Stakeholders can be classified as:

• Internal Directors: managers and employees
• Connected Shareholders: lenders, suppliers, customers
• External: Government, local populace, pressure groups, trade unions, non-governmental organisations, regulatory agencies.

BOTTOM LINE?

Corporate governance is about ensuring that companies are run well in the interests of their shareholders and the wider community. The following points explain gives us an idea

• The need to improve corporate governance came to prominence in the

The UK in the 1980s, following the high profile collapses of a number of large companies (Maxwell, Polly Peck, BCCI, etc.).

• Poor standards of corporate governance had led to insufficient controls being in place to prevent wrongdoing in the US in the 1990s, as demonstrated by the collapses at Enron and WorldCom.
• The authorities internationally have now been working for a number of years to tighten up standards of corporate governance.
• Good corporate governance is particularly important for publicly traded companies because large amounts of money are invested in them, either by ‘small’ shareholders or from pension schemes and other financial institutions.
• The well-publicised scandals mentioned above are examples of abuse of the trust placed in the management of publicly traded companies by investors. This abuse of trust usually takes one of two forms (although both can happen at the same time in the same company):

– The direct extraction from the company of excessive benefits by management, e.g. large salaries, pension entitlements, share options, use of company assets (jets, apartments etc.)

– manipulation of the share price by misrepresenting the company’s profitability, usually so that shares in the company can be sold or options ‘cashed in’.

DEVELOPMENT OF CORPORATE GOVERNANCE

The need for regulation of how companies are run in a Good Corporate Governance manner came to implementation in the year 1991 in the UK.

During the 1990s in the UK, there were three separate committees set up to consider aspects of corporate governances which each produced a report.

These were:

The Cadbury Report in 1992, which focused on the control functions of boards and on the role of auditors

The Greenbury Report in 1995, which focused on the setting and disclosure of directors’ remuneration

The Hampel Report in 1998, which brought together the previous recommendations and submitted a proposed code to the Stock Exchange which listed companies, should comply with.

The Stock Exchange published the final version of its ‘Principles of good governance and code of best practice’ (known as the Combined Code) in June 1998. Listed companies now have to disclose how they have applied the principles and complied with the Code’s provisions in their annual report and accounts. The auditors have to express an opinion on this statement.

Then the Financial Reporting Council in June 2010 revised and renamed the code as The U.K. Corporate Governance Code. Which applies to all quoted entities and every entity must report on:

• How it has applied the code
• Whether or not; if not why?

THE UK COMBINED CODE

There are 45 ‘code provisions’ which include the following:

Board members

• The roles of Chair of the Board and Chief Executive should be separated unless the company publicly justifies reasons for not doing so
• The identification of a senior independent director
• Not less than one-third of the board comprises non-executive directors
• The majority of non-executive directors should be independent

Board structure and function

• There should be a nominations committee (unless the board is small)
• The formalisation of the role of Chairman in ensuring that all directors are properly briefed on issues arising at board meetings
• The audit and remuneration committees must only be of non-executive directors
• Directors should, at least annually, conduct a review of the effectiveness of the group’s system of internal controls and should report to shareholders that they have done so.

Remuneration of directors

• Performance-related elements should form a significant proportion of the total remuneration package

Conduct of AGMs

• Announcement of proxy votes at AGMs
• Unbundling of resolutions
• sending out the notice of the AGM and the related voting papers at least 20 working days before the meeting

There is also a requirement that companies consider:

• A reduction of the notice period of directors to one year or less
• Early termination arrangements
• The extent to which the principal shareholders should be contacted about directors’ remuneration
• Whether the remuneration report should be voted on at the AGM

GOVERNANCE PRINCIPLES

Most corporate governance codes are based on a set of principles founded upon ideas of what corporate governance is meant to achieve. This is based on a number of reports.

1) To ensure adherence to and satisfaction of the strategic objectives of the organisation, thus aiding effective management.

2) To minimize risk, especially financial, legal and reputational risks, by ensuring appropriate systems of financial control are in place, systems for monitoring risk, financial control and compliance with the law.

3) To promote integrity, that is straightforward dealing and completeness.

4) To fulfil responsibilities to all stakeholders and to minimize potential conflicts of interest between the owners, managers and wider stakeholder community.

5) To establish clear accountability at senior levels within an organisation. However, one danger may be that boards become too closely involved with day-to-day issues and do not delegate responsibility to management.

6) To maintain the independence of those who scrutinize the behaviour of the organisation and its senior executive managers.

Independence is particularly important for non-executive directors, and internal and external auditors.

7) To provide accurate and timely reporting of trustworthy/independent financial and operational data to both the management and owners/members of the organisation to give them a true and balanced picture of what is happening in the organisation.

8) To encourage more proactive involvement of owners/members in the effective management of the organization through recognizing their responsibilities of oversight and input to decision-making processes via voting or other mechanisms.

Organisation for Economic Co-operation and Development

OECD PRINCIPLES OF CORPORATE GOVERNANCE:

1. The right to shareholders:

Shareholders should have the right to participate and vote in general meetings of the company elect and remove members of the board and obtain relevant and material information on a timely basis. Capital markets for corporate control should function in an efficient and timely manner.

2) The equitable treatment of shareholders:

All shareholders of the same class of shares should be treated equally, including minority shareholders and overseas shareholders impediments to cross-border shareholding should be eliminated.

3) The role of stakeholders:

Rights of stakeholders should be protected. All stakeholders should have access to relevant information on a regular and timely basis. Performance-enhancing mechanisms for employee participation should be permitted to develop. Stakeholders, including employees, should be able to freely communicate their concerns about illegal or unethical relationships to the board.

4) Disclosure and transparency:

Timely and accurate disclosure must be made of all material matter regarding the company, including the financial situation, foreseeable risk factors, issues regarding employees and other stakeholders and governance structure and policies. The company approach to disclosure should promote the provision of analysis or advice that is relevant to decisions by investors.

5) The responsibilities of the board:

The board is responsible for the strategic guidance of the company and for the effective monitoring of management. Board members should act on a fully informed basis, in good faith, with due diligence and care and in the best interest of the company and its shareholders. They should treat all shareholders fairly. The board should be able to exercise independent judgement; this includes assigning independent non-executive directors to appropriate tasks.

WHAT IS THE PURPOSE OF OECD PRINCIPLES?

The OECD Principles of Corporate Governance are intended to:

• assist Member and non-Member governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries
• to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance.

Other reads

Internal Control and Audit OECD

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Internal Control and Audit relates critically to corporate governance. Corporate governance principles can effectively and efficiently be practice by companies with strong internal control and audit policies.

Corporate Governance In Action

When we talk about Corporate Governance in Action, three things come to mind.

These are; Segregation of roles, Committee & Internal Audit.

Segregation of roles

Best practice and strongly recommended under corporate governance codes in many jurisdictions (e.g. the ‘Combined Code’ governing listed companies in the UK) is that the roles of:

• Chairman of the board and
• Chief executive officer; should be held by different individuals.

The chairman’s role

• Non-executive.
• Ensures full information and full discussion at board meetings.
• Ensures satisfactory channels of communication with the external auditors.
• Runs the board of directors
• Ensures the effective operation of subcommittees of the board.

The Chief executive’s role

• Ensures the effective operational functioning of the company.
• It is important that there is a distinction between the chief executive and chairman as effectively one person assuming both roles is a conflict of interests. The chief executive heads up the executive directors and the chairman heads up the non-executives.
• Not only that, but having one person in both roles means there is a lot of power vested in that one person. They would be able to sway the decisions taken by the board. Those decisions may not be made in the best interests of the shareholders but in the best interests of the directors.

Audit Committee

An audit committee is a committee consisting of nonexecutive directors which is able to view a company’s affairs in a detached and independent way and liaise effectively between the main board of directors and the external auditors.

Best Practice for Listed Companies:

• The company should have an audit committee of at least three nonexecutive directors (or, in the case of smaller companies, two).
• At least one member of the audit committee should have recent and relevant financial experience.

The Objectives of the Audit Committee

• Increasing public confidence in the credibility and objectivity of published financial information (including unaudited interim statements).
• Assisting directors (particularly executive directors) in meeting their responsibilities in respect of financial reporting.
• Strengthening the independent position of a company’s external auditor by providing an additional channel of communication.

The Function of the Audit Committee

• Monitoring the integrity of the financial statements.
• Reviewing the company’s internal financial controls.
• Monitoring and reviewing the effectiveness of the internal audit function.
• Making recommendations in relation to the appointment and removal of the external auditor and their remuneration.
• Reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process.
• Developing and implementing policy on the engagement of the external auditor to supply non-audit services.
• Reviewing arrangements for confidential reporting by employees and the investigation of possible improprieties (‘whistleblowing’).

Advantages

In addition to meeting the objectives stated above, audit committees have the following advantages.

• It may improve the quality of management accounting, as it is well placed to criticise internal functions.
• It should lead to better communication between the directors, external auditors and management.

Disadvantages

Audit committees may lead to:

• fear that their purpose is to catch management out
• non-executive directors being overburdened with detail
• a ‘two-tier’ board of directors
• additional cost in terms, at least, of time involved.

Audit Committee and Internal Audit

Best practice is that the audit committee should:

• Ensure that the internal auditor has direct access to the board chairman and to the audit committee and is accountable to the audit committee.
• Review and assess the annual internal audit work plan.
• Receive periodic reports on the results of internal audit work.
• Review and monitor management’s responsiveness to the internal auditor’s findings and recommendations.
• Meet with the head of internal audit at least once a year without the presence of management.
• Monitor and assess the effectiveness of internal audit in the overall context of the company’s risk management system.

Other committees

• The nomination committee.
• The remuneration committee

The nomination committee:

The function of the nomination committee is to suggest suitable candidates for appointment to the board and other senior posts.

The nomination committee should ensure that the best person is chosen for the job.

The remuneration committee:

The function of the remuneration committee is to determine fair rates of pay and other compensation – pension rights, share options etc. – for management and other senior employees.

• The remuneration committee should ensure that directors are not paid excessive amounts.
• They should be paid enough to attract good people to the role but not too much.

Risk Committee: Risk management

Business risk

All companies face risks of many kinds.

• The risk that products may become technologically obsolete
• The risk of losing key staff.
• The risk of a catastrophic failure of IT systems.
• The risk of changes in government policy.
• The risk of fire or natural disaster.

Companies, therefore, need to:

• identify potential risks and
• decide on appropriate ways to minimize those risks.

Ways of reducing risk include:

• Identify the risks a company faces and maintain a risk register.
• Risks can be of many types – e.g. operational, financial, and legal.
• The company should then assess the relative importance of each risk by scoring it on a combination of its likelihood and potential impact.

This could take the form of a ‘risk map’.

• insurance
• implementing better procedures, e.g. health and safety provisions outsourcing
• discontinuing especially risky activities
• improving staff training.

Sometimes the company may be forced to accept the risk as an inevitable part of its operations.

Internal controls and risk management

One way of minimizing risk is to incorporate internal controls into a company’s systems and procedures.

Examples might be as follows:

• One person checking another person’s work.
• Locking important documents in a safe.
• Restricting access to places with security systems.
• Restricting access to information and systems held on computers through passwords etc.
• An internal audit department which checks that procedures and systems are operating as they should.

But they may be able to:

• reduce the risk that financial statements contain material errors
• reduce the risk of theft of the company’s assets
• reduce the risk that your business secrets might be handed over to a competitor.

Internal audit and corporate governance

What do internal auditors do?

Internal auditors provide assurance to the company’s management:

• systems are operating effectively
• internal controls are effective
• laid down procedures are being followed
• financial and other information being produced is sound and reliable.

Internal auditors do this by:

• carrying out assignments and
• producing reports of their findings.

If the internal audit department is to be effective in providing assurance it needs to be:

• Sufficiently resourced in terms of budgets and people.
• Well organised so that it has:

– well developed work practices

– competent staff who receive high-quality training.

• Independent and objective.

Limitations of the internal audit function

The main limitations of internal audit are:

• Independence (or lack of) – an internal audit be truly independent of the organisation of which it is a part?
• Variation of standards – not uniform across the profession. Compare this with external auditors who, on a global basis, have ISAs against which their performance can be measured.
• Relatively new profession – still evolving.
• Expectations gap – the problem of what the internal auditor’s role is perceived to be.
• Understanding of internal audit – negative view by some – perhaps seen as ‘checking up’ on other employees on behalf of ‘the bosses’.

Consideration of outsourcing the internal audit function

In common with other areas of a company’s operations, the directors may consider that outsourcing the internal audit function represents better value than an in house provision. Local government authorities are under particular pressure to ensure that all their services represent ‘best value’ and this may prompt them to decide to adopt a competitive tender approach.

Advantages

• Greater focus on cost and efficiency of the internal audit function.
• Staff may be drawn from a broader range of expertise.
• Risk of staff turnover is passed to the outsourcing firm.
• Specialist skills may be more readily available.
• Costs of employing permanent staff are avoided.
• May improve independence.
• Access to new market place technologies, e.g. audit methodology software without associated costs.
• Reduced management time in administering an in house department.

Disadvantages

• Possible conflict of interest if provided by the external auditors (In some jurisdictions – e.g. the UK, the ethics rules specifically prohibit the external auditors from providing internal audit services).
• Pressure on the independence of the outsourced function due to, e.g. threat by management not to renew the contract.
• Risk of lack of knowledge and understanding of the organisation’s objectives, culture or business.
• The decision may be based on cost with the effectiveness of the function being reduced.
• Flexibility and availability may not be as high as with an in house function.
• Lack of control over the standard of service.
• Risk of blurring of roles between internal and external audit, losing credibility for both.

Minimising these risks

Some general procedures to minimise risks associated with outsourcing the internal audit function will include:

• Controls over the acceptance of internal audit contracts to ensure no impact on independence or ethical issues.
• Regular reviews of the quality of audit work performed.
• Separate departments covering internal and external audit.
• Clearly agreed scope, responsibilities and reporting lines.

Internal audit assignments

We consider below examples of Internal Audit assignments.

In this section we look at generic types of assignment:

• Value for money/best value assignments.
• Assignments dealing with IT.
• Project auditing.
• Financial audit.

Value for money (VFM) is concerned with obtaining the best possible combination of services for the least resources. It is, therefore, the pursuit of

‘Economy’, ‘Efficiency’ and ‘Effectiveness’ – often referred to as the 3Es.

• Economy – least cost. Accomplishes objectives and goals at a cost commensurate with the risk.
• Efficiency – best use of resources. Accomplishes goals and objectives in an accurate and timely fashion with minimal use of resources.
• Effectiveness – best results. Providing assurance that the organisation objectives will be achieved.

Examples of local government indicators are given below:

• Economy – the cost of waste collection per local taxpayer.
• Efficiency – the number of households (premises) covered per waste collector.
• Effectiveness – % of waste recycled measured against the target for the year.

The 4Cs

Best value is a requirement for local authorities to demonstrate achievement of the ‘4C’ principles, as well as demonstrating service delivery and meeting customer needs through effective performance management systems.

• Challenge – review internally the different options for providing services and question the status quo.
• Compare– compare with other service providers to review options for improving performance.
• Consult– consult all users of services and those affected by services.
• Compete– demonstrate through performance management and continuous improvement that the most efficient and effective service is being provided.

Project auditing

Best value and IT assignments are really about looking at processes within the organisation and asking:

• were things done well?
• did the organisation achieve value for money?
• were the objectives achieved?
• was the project implemented efficiently?
• what lessons can be learned from any mistakes made?

Financial internal audit

Financial auditing was traditionally the main area of work for the internal audit department. It embraces

• the conventional tasks of examining records and evidence to support financial and management reporting in order to detect errors and prevent fraud
• analysing information, identifying trends and potentially significant variations from the norm.

Operational and internal audit assignments

Operational auditing covers:

• Examination and review of a business operation.
• The effectiveness of controls.
• Identification of areas for improvement in efficiency and performance including improving operational economy, efficiency and effectiveness – the three E’s of value for money auditing.

We will now look at operational internal audit in practice, considering four of the main areas where such an approach is commonly used

• procurement
• marketing
• treasury
• human resources.

Internal audit reports

Key principles

Who is the report for?

With any report, the most important person in the process is the reader, not the writer.

• If the report does not address the objective of the assignment.
• If the recipient of the report cannot understand its recommendations and the reasoning behind them, then the report might as well never have been written.

Purpose and structure of the report

Short and sweet

Clear, concise, easy to read format will mean it is more likely to be read and understood.

Measurable/quantifiable outcomes

It is easy to recommend in a report that something should be improved, but without;

• clear recommendations about how this is to be done
• some way of measuring whether the recommendations have been successfully implemented

Prioritisation

The important content needs to be readily accessible, not buried in the back of an appendix somewhere.

Avoid surprises

Discuss with management as points arise. This will mean less argument over facts or detail when the draft report is issued and will allow management to take steps promptly.

Fairness

Balanced and constructive reporting will be welcomed by management and the organisation. For example, recognising where controls are good and how they could be used elsewhere within the organisation. Ensure consistency across reports, particularly where ‘ratings’ are used. If management feels unfairly treated or criticised, they will respond negatively to the report.

Other related reads

Corporate Social Responsibilities

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Corporate Social Responsibility (CSR) is an “organisation’s obligation to maximize positive stakeholder benefits while minimizing the negative effects of its actions.”

It is the idea that businesses and other organisations occupy a significant space in society and that responsibilities are not owed only to shareholders.

The basic element of Corporate Social Responsibility (CSR)

• Staff development via training and education
• Equal opportunities statements
• Written anti-discrimination policies
• Commitment to reporting on Corporate Social Responsibility (CSR)
• Policies for restricting the use of child labour by suppliers
• Commitment to the protection of the local community.

Obviously laws must be obeyed (for example on employee safety and welfare), but proponents of Corporate Social Responsibility (CSR) go further and say that organisations should go further than prescribed by law so that they become good corporate citizens.

For example:

• Release less pollution and greenhouse gasses than permitted so that the local population and world resources are safeguarded.
• Offer enhanced welfare and training opportunities to employees.
• Support local charities.

Merits of Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) is claimed to offer the following advantages to businesses, all of which might lead to profit increases:

• Goodwill and reputational improvements
• Brand strengthening and protection
• Differentiation so as to attract particular customers, talented employees and high-class collaborators.
• Lower costs e.g. saving energy, less waste.

Corporate Social Responsibility Stances

These refer to the approaches that organisations take to CSR. Different organisations take very different stances on social responsibility, and their different stances will be reflected in how they manage such responsibilities.

JSW identify four CSR stances, these include:

1. Laissez Fair Stance – Short-term shareholder interest:
   Limit ethical stance to taking responsibility for short-term shareholder interest on the grounds that it is for government alone to impose wider constraints on corporate governance. It is a minimalist approach to respond to the demands of the law but would not undertake to comply with any less substantial rules of conduct. The ground here would be that going beyond it can challenge government authority.
2. Enlightened self- interest – Long-term shareholder interest:
   A wider view of ethical responsibilities enhances the organization’s image. The cost of undertaking such responsibilities may be justified as essentially promotional expenditure. This can prevent a build-up of social and political pressure for legal regulation
3. Multiple stakeholder obligations:
   Accepts the legitimacy of stakeholders other than shareholders and build those expectations into its stated purpose.
4. Shaper of society:
   Largely the concern of public sector organizations and charities. Accepts a wide responsibility to stakeholders.

Limits of corporate social responsibility:

Milton Friedman argued against CSR on the basis that “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”  That’s

• Businesses do not have responsibilities, only people have responsibilities. Managers in charge of corporations are responsible to the owners of the business, by whom they are employed.
• These employers may have charity as their aim, but generally, their aim is to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical customs.
• When management as according to the definition of CSR, it means they act in some way that is not in the interest of the employee (shareholders).
• If management undertakes any CSR, then they are generally spending the employer’s money on purposes other than those they have been authorized.

A second argument against CSR is that maximization of wealth is the best way that society can benefit from a business’s activities. That’s

• Maximizing of wealth has the effect of increasing the tax revenue available to the state to disburse on socially desirable objectives.
• Maximising shareholder value has a ‘trickle-down’ effect on the other disadvantaged members of society.
• Many company shares are owned by pension funds, whose ultimate beneficiaries may not be the wealthy anyway.
• Approaches to Social Responsibility

SUSTAINABILITY REPORTING

Sustainability reporting has emerged as a common practice of 21st-century business. Where once sustainability disclosure was the province of a few unusually green or community-oriented companies, today it is a best practice employed by companies worldwide.

Sustainability: Involves developing strategies so that the company only uses resources at a rate that allows them to be replenished such that the needs of the current generation can be met without compromising the needs of future generations. At the same time, emissions of waste are confined to levels that do not exceed the capacity of the environment to absorb them.

The triple bottom line (TBL) is sometimes summarized as People, Planet, and Profit. It consists of:

• Social justice: fair and beneficial business practices towards labour and the community and the region in which a corporation conducts its business. A TBL company conceives a reciprocal social structure in which the wellbeing of corporate, labour and other stakeholders’ interests is interdependent.
• Environmental quality: a TBL company endeavours to benefit the natural order as much as possible, or at the least do no harm and curtail environmental impact.

In this way, the company tries to reduce its ecological footprint by, among other things, carefully managing its consumption of energy and non-renewable resources, and by reducing manufacturing waste, as well as rendering waste less toxic before disposing of it in a safe and legal manner.

• Economic prosperity: the economic benefit enjoyed by the host society. It is the lasting economic impact the organisation has on its economic environment.

Importantly, however, this is not as narrow as the internal profit made by a company or organisation.

A focus on sustainability helps organizations manage their social and environmental impacts and improve operating efficiency and natural resource stewardship, and it remains a vital component of shareholder, employee, and stakeholder relations.

Sustainability reporting requires companies to gather information about processes and impacts that they may not have measured before. This new data, in addition to creating greater transparency about firm performance, can provide firms with the knowledge necessary to reduce their use of natural resources, increase efficiency and improve their operational performance.

 The Value of Sustainability Reporting

Sustainability disclosure can serve as a differentiator in competitive industries and foster investor confidence, trust and employee loyalty. Analysts often consider a company’s sustainability disclosures in their assessment of management quality and efficiency, and reporting may provide firms with better access to capital.

The benefits of reporting include:

• Better reputation
• Meeting the expectations of employees
• Improved access to capital
• Increased efficiency and waste reduction

A sustainability report is an organizational report that gives information about economic, environmental, social and governance performance.

 Other reads

Building A Business, Wikipedia, 

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