Corporate Governance and Sustainability

 

 

Introduction to Corporate Governance

 Increased amount of corporate scandals in the corporate world makes firms pay much attention to the significant impact of stakeholders on the corporation’s financial success and development. Scandals like Adecco , Parmalat, Toshiba, wells Fargo brough much needed attention towards corporate behavior of firms. (Hurst, 2004) Existing examples of misconducts by the corporate employees question how the corporate ethics efforts can be improved and also to be socially responsible and be sustainable as a business. Internally well governed and responsible organizations mean good corporate citizens. When an organization is not well governed and not being practicing proper corporate practices, those organizations are unlikely to be conscious about society which is the first step towards CSR. Corporations Image reflects its values and the way of doing business. The main elements of corporate governance can be identified as Corporate social responsibility, Ethics, Finance and will be looking into each component to analyze what needs to be done to become sustainable.

There are many different definitions for the corporate governance. OECD states that, corporate governance is the center of any organization in improving efficiency, growth as well as boosting the investor confidence. (OECD, 2014). Some considers CG as the ways of shareholders getting an assurance on the good return on their investment. (vishny, 1997). In simplest terms, corporate governance Is the way an organization is directed and controlled. The ongoing pandemic has shown how the corporates all over the world has shown mismanagements and not following the principles of corporate governance and therefore operating under huge losses or fallen bankrupt. However, last few years there are new and revised CG codes which ask for better alignment in corporate activities to achieve more sustainable and equitable economy. (pain, 2019). Corporate governance consists of many elements such as CSR, ethics, finance. Governance of all these elements is vital to achieve sustainability in business.

Corporate Social Responsibility and Sustainability

CSR is a continuous process with a vison to be responsible for corporate actions and encourage positive outcome to the environment, consumers, employees, society and in other words to all the stakeholders of the company. CSR is based on four factors. Those are accountability, transparency, competitiveness and responsibility. In some researches it is argued that CSR is an additional cost to the corporation which puts the firm in competitive disadvantage (friedman, 1970) Based on agency theory another study has shown that engaging in CSR with valuable company resources create managerial benefits rather than benefits to shareholder wealth. In reality evidence suggest that CSR can have many positive impacts as Generating investments, retaining and attracting higher quality employees and access to the valuable resources, brand recognition and most importantly to be sustainable in business. Consumers have already begun making their purchasing decisions based on firm’s social and environmental reputation. Consumers have shown greater purchase likelihood as well as longer term loyalty behaviors with the companies with greater CSR initiatives. Surveys have indicated that 61% of consumers would purchase products from a company with higher CSR score. Some organizations use CSR  as a marketing strategy to enhance customer satisfaction and using CSR as strategic component which  emphasizes the role of information asymmetry and how CSR is used as a product differentiation strategy. CSR is a framework of procedures and corporate policies which result in benefits of workplace, individual, organization and the community. Therefore, rather than pursuing profit, firms should invest in people & plant so the profits will automatically follow. To have sustainable competitive advantage and survival of a business, corporate governance, corporate commitment, social participation and environment protection elements are required. World corporate citizenship award is for the businesses that fulfill above mentioned 4 elements.

Pandemic can be the turning point of corporations. While corporations measure their success with revenue, profit and shareholder return countries use GDP growth. However, this is the time look back and think whether the approach is correct as we see considerable damage to the whole world including breaches in global boundaries. In next 25 years, global GDP is expected to be doubled. If the same growth pattern is continued, then the impact of environment and society is going to be extremely high. Pandemic has taught the lesson that thriving is more important than growing as the price to pay for growth can be devastating. Issues such as millions of people losing their jobs, extreme Income inequality are few examples of where current corporate governance practices has failed to bring sustainability to the organizations as well as to the society. (coilgton, 2020) The concept called doughnut economics (model shown in below figure) is designed to thrive while using the resources but regenerating and not abusing the global boundaries. Model consists of 2 rings which the inner ring is the basic society needs and outer ring is the global boundaries. Purpose of economic growth is to ensure people live in ecologically safe and better world but as currently we are far beyond it as per the model. In the business perspective leaders of any organization need to have better understanding of the purpose of the firm as well as need to make sure that has been communicated to the employees. Also need to make sure structure of the firm is not in breach of global boundaries. Firms need to make sure that all stakeholders are satisfied and fairly paid. CSR is to be practiced in everyday operations to thrive and be sustainable while practicing good CG.

 Corporate Ethics

In the context of modern world corporate ethics has become an important part to a good corporate governance. Since the firms have interdependent relationships between the society, maintaining the firm’s image is crucial toward al the stakeholders of the firm. Researchers have found that performance and capabilities are poor on the organizations where there are lack of ethics (leonard, 1998) . Ethics is the way to educate employees of the ethical culture of the firm. Communicating and enforcing them should be on the basis of strengthening the corporate culture

The incident of Watergate case brought the importance and popularity to the corporate ethics in 1977. (stevens, 1994) Since then and even in recent years there were corporate scandals of reputed firms due to unethical conduct. These resulted in reduction of their popularity, tarnishing of the firm’s reputation and consequence downturn in corporate value. Ethical conduct of an organization can help increase their performance as well as the image. Building relationships and trust inside and outside of the firm are the questions of corporate governance in the ethical point of view. Ethical approach can be defined as predefined set of principles and practices. Even though firms concentrate on maximizing profits, the means of maximizing should be with in ethical limits. There are studies which shows the difference between legal and ethical components. Legal approach can be considered as the set of limits of ethics (arjoon, 2005)

However, there are several studies done which highlights issues. Corporate codes of ethics can be very different from region to region and from country to country. Cultural differences also affect corporate behavior towards ethical conduct (enderle, 1997) subject of ethics get more complex due to the fact of different structures of ethics, therefore to succeed in implementing code of ethics, universal moral standards to be included. Therefore, it is difficult to define standards and establish correspondences as the subject of business ethics is strongly related to cultural and social context where firms operated and should consider all possible facts in implementing CE to maximize performance of corporations in order to be sustainable in business

Corporate finance

Corporate governance and finance are two sides of same coin. Main aim of proper corporate governance is for the benefit of entire organization, but to achieve this it is very important to organize finance in proper manner. All the efforts finally will be reflected in financial statements that can be relied upon. Importance of working capital is paramount. Planning and controlling of current liabilities and assets help prevent from working with less current assets which is not enough to fulfill the requirements (eda, 2009). Cash conversion cycle which is the transition of money to goods and back to money is the key component in analyzing efficiency of WC management. Working capital management is considered as simple and straight forward means which covers activities related a to vendors, customers and products. Depending on the company’s WCM policy, regardless of being conservative or aggressive, it is important to decide its impact on profitability. Most importantly by focusing on payments, collection and inventory holding period policies give better financial capability in this volatile, uncertain, complex and ambiguous world. The level of holding cash is a managerial discretion, however this can create unnecessary tension on shareholders because the managers can misuse the cash on interest of their own which benefits only them Current growth theories suggest that Everyone benefits by the growing economy due to trickle-down effect. However, in 2017 the average S&P 500 CEO compensation package was 312 times that of the average worker in the company. AstraZeneca CEO scandal is one example in recent present where he received a huge payment. In last 15 years the number of poor working people has significantly increased specially in US and EU. Trickle-down effect can’t be seen. . Effective corporate governance mechanisms concentrated on sustainability can prevent these conflicts of interest. (Saravanan, 2019) It is time to reset the clock towards achieving sustainability.

 

Finally, here are the million-dollar questions..

🔆What is your company’s corporate structures, operations management, finance management actions            and are they propelling your organization towards sustainability goals?

🔆What actions should organizations take to be responsible in corporate behavior and protect investors,         customers, employees, and the public from injury and loss caused by corporate acts?

 🔆Is your organization’s CSR,  just for the name sake or does your organization really want to make a           difference and create purpose

 

References

Anne anderson, P. g., 2009. A cross-country comparison of corporate governance and firm performance. Journal of Contemporary Accounting and Economics , Volume 5(2), pp. 61-69.

arjoon, 2005. Corporate Governance: An Ethical Perspective. Journal of business Ethics, 61(4), pp. 343-352.

Cernat, l., 2004. The emerging European corporate governance model: Anglo-Saxon, Continental, or still the century of diversity?. Journal of European Public Policy.

eda, m. &., 2009. Relationship between Efficiency Level of Working Capital Management and Return on Total Assets in Ise. International Journal of business management, Volume 4, pp. 109-114.

enderle, 1997. A Comparison of Business Ethics in North America and. A european review, pp. 33-46.

friedman, 1970. The Social Responsibility of Business Is to Increase Its Profits, New york: Newyork Times.

hart, 1995. Corporate Governance: Some Theory and Implications. The economic Journal, 105(430), pp. 678-689.

Hurst, 2004. Governance ans Social Responsibility: Comparing European Business Practices to those in the United States. corporate ethics, Volume 1, p. 68.

leonard, C. a., 1998. Can corporate codes of ethics influence behavior?. Journal of business ethics, Volume 17, pp. 619-630.

OECD, 2014. OECD Better policies for better lives. [Online]
Available at: https://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf
[Accessed 2021].

Saravanan, P., 2019. Does corporate governance influence the working capital management of firms: evidence from India. international Journal of corporate governance, Volume 10.

stevens, 1994. An Analysis of Corporate EthicalCodes Studies: Where do we go from here?. The journal of business ethics, 30(2), pp. 63-69.

vishny, s. &., 1997. A survey of corporate Governance. The journal of finance.