Essay on "Corporate Governance and Social Responsibility"

Essay 6 pages (1946 words) Sources: 3

[EXCERPT] . . . .

Corporate Governance and Social Responsibility

Corporate Governance can be defined as the principles which guide the interactions between the managerial directors, stakeholders and shareholders of a company. These are determined by the related doctrines stated in the company's corporate charter, the internal laws and implied policies expected to be formally followed by the employees. It deals with supervising the top sectors of the management and conducting regular checks to verify that the approaches followed by the higher authority, comply with the corporate mission statement. Corporate Governance incorporates a collection of conventions, regulations and associations which steer the lines along with a particular organization is managed. It ensures that the individuals involved develop a solid rapport with each other. The directorial board, managerial committee and the shareholders can be considered as the main participants in these interactions. The employees working in the various sections of the company, customers using their services, banks dealing with their funds and other regulators are some of the other stakeholders. (Description of Corporate Governance, n.d.)

The functions of corporate governance can be broadly classified into three parts. Firstly it plays a major role in developing the corporate mission. Managing the accounting issues, improving the trust-based financial relationship between the related parties and organizing effective audits are other functions associated with this. In short, corporate governance needs to adhere to all the rules which help out its essential components. Secondly, it works on enhancing the company performance by analyzing the ideas put forth by the higher authorities and proposes additional policies to serve the proceedings while creating the business strategy. It works on introducing external and internal economic efficiency. In this regard, the corporate governance strategy should be devised to produce optimal outputs so as to incorporate sufficient stakeholder interest along with what the shareholders want. Thirdly the corporate governance plan should adhere to all sections of the mission statement. The way in which corporate governance is administered varies from country to country. There are three major factors associated with it -- the arrangement of its board (single or double tier), the constitution of the board members, and the responsibilities assigned to different parts of the board. Corporate governance show seasonal variations in their policies. Markets with low stock options have better chances of receiving priority while executing governmental activities. (Description of Corporate Governance, n.d.)

Corporate Social Responsibility (CSR) can be defined as the belief of companies based on which they spend a part of their resources to serve their social responsibilities apart from focusing on gathering profits. The company representatives look for ways to improve their employee relations, adhere to the expected ethical values, stay transparent and fulfill the legal regulations in the areas they serve. This is more than a rare instance of community service to fulfill their social liability. Corporate Social Responsibility can be considered as a philosophy governing the hiring techniques, corporate decision making and brand enhancement. This includes the expectations put forth by the society with regards to the ethical, social and legal issues. CSR can be understood by breaking down the three terms which constitute it -- Corporate, social and responsibility. (Corporate Social Responsibility, n.d)

There are three primary reasons which make Corporate Social Responsibility relevant to the businesses nowadays. New technologies have caused consumers expectations to rise. Regular occurrences of corporate fraud have shaken their beliefs to some extent. There has been a rise of wealthy consumers, especially in developed countries. They are capable of choosing higher priced commodities. A community which has a greater number of individuals in the working class would have lesser investors. This implies that a business would not have strict rules enforced on them which could lead to their downfall. Globalization is another major factor which makes corporate social responsibility so important. The media has grown over the years into a powerful tool which can make or break the success of any company. It is capable of presenting company fallacies to the public and allows them to have a way to deal with it. The internet is the leader in this kind of media which acts as a platform for individuals all around the world to communicate with each other. A simple message (good or bad) about an organization can spread from one corner of the world to the other in a flash, affecting its branches everywhere. (Corporate Social Responsibility, n.d)

Firms are usually set up as a strategically connected association of individuals working towards a common goal. Sorting out their issues requires an understanding of how all of them work rather than considering the organization as a single entity. A majority of these issues ignite on account of a clash of interests of these individuals. This brings us to the principal agent problem which can lead to the need of developing motivational schemes to solve it. The shareholders (termed as the principal) provide marketability to the executives (termed as the agents) they assign, for different jobs. This is done in order to utilize their expertise in generating assets for that firm. This is termed as the principal agent theory which is applicable in several situations. Some instances are as follows. A client facing some kind of problem in life such as criminal activities, social issues etc. looks for and hires a lawyer to help him out and present his or her situation such that his problems stop. A patient suffering from some ailment seeks out a doctor for help and expects him or her to cure him successfully. A student registering at an educational institution hunts for the one which suits his or her needs the best, so that the lecturers working there can impart knowledge to help them in their career. In each of these cases one party helps out the other party in return for some form of compensation. Hardly any of these services can be considered as charity. The agents (the lawyer, doctor or lecturer) have sufficient expertise in their respective fields which helps them address the issues faced by the principals. (Roy, 2006)

In formal organizations, the "principal" make the necessary investments wherever needed, in exchange for increased equity in their market shares. The reimbursement of the entire amount put in by their efforts is however never assured, as the managerial board does not make it mandatory. This is where the problem creeps in. The shareholders making their investments need to ensure that, the corporations they are counting on, will provide them with a consistent dividend while making efforts to increase their equity in the future. The chief executives and managerial directors usually get a higher rate of bonuses. These kinds of approaches for short-term profits tend to bring the corporation at risk. It affects the progress of the corporation in the long-term which can diminish possible profits. The conflicts between shareholders cause them to face a lot of loss with regards to managerial bonuses. Any attempts made to connect the shareholders' views with the lines of thought of the company employees can backfire and intensify the clashes. One fundamental approach which can work is to allow the managers to have stock options which let them use stocks as a guarantee for some years after they quit working for that company. This would induce chances of long-term progress, hence a balanced boost in equity, ultimately leading to more bonuses for the executives. (Roy, 2006)

The board of executives responsible for the company proceedings and the management connected with them has more targeted knowledge about company than the shareholders or stakeholders. They are better aware of the position of the company in the industry, their success relative to the other companies, the changes in their state of affairs and chances of future growth. On a larger scale, the government of a country (including their political and military representatives) has more accurate information on how to make global decisions than a single citizen. They are better equipped to guide the progress in the country's economy and politics. The individuals casting their vote to assign the representatives, who work as a part of the government, expect them to deliver the necessary actions such that their needs are met. (Roy, 2006)

The principal is usually not informed about how the agents work on their responsibilities and have to rely on trusting their potential. This brings forth the obvious corporate governance issue where agents can take advantage of the ignorance of the principal and break the terms of the deal they had agreed on initially. Having control over the finances of the principal, now accessible to them, agents can misuse them. Considering the previous examples, lawyers and doctors can perform below their potential exempting their clients and patients from the benefits which they could have achieved. Lecturers can modify their system of teaching to suit their personal benefits causing the students end up learning hardly anything. The board of executives on which the shareholders rely on, can misuse their expertise such that the output of their actions fall short of the extent possible. A fraudulent… READ MORE

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