CSR Reviewed

CGIRThe September issue of Corporate Governance: An International Review is devoted to papers on corporate governance systems and corporate social responsibility. The opening editorial (accessible without subscription) begins with a civics lesson:

One cannot understand the CSR strategy and politics of organizations without understanding the nature of the institutional environments in which they choose – or are forced – to operate.

Although the topic of CSR “can be traced back to the earliest work on the origin of the firm,” lately discussion has bifurcated into regulatory/legal or the link between CSR and management. The current issue of the Review seeks to bridge this divide using a comparative/international approach and by emphasizing work that links governance and CSR endogenously. That is, researchers seek to address not two static phenomenon but to view both elements in the context of larger questions regarding the right to governance and the claims upon which those rights are put forth.

Putting the Good Back in Good Corporate Governance: The Presence and Problems of Double-Layered Agency Theory by Jonathan D. Raelin and Krista Bondy looks at agency theory is presented as consisting of two layers. One well understood layer rests on the assumption of oppositional shareholder–manager interests. The less explored layer rests on the assumption of supportive shareholder–society interests.

The authors propose use of “oversight boards” to safeguard societal interests, formalize how members of boards of directors are vetted, oversee societal claims to ensure that appropriate ones are sufficiently presented and addressed, supervise reporting, and sanction firms who fail to enact these duties. Additionally, they argue for revised founding documents to ensure that both economic and social goals are enshrined in the mission of incorporated firms.

My take: Creative exploration but even changing founding documents would take a 2/3 majority at most companies.  I don’t see it happening in my lifetime… but then I’m growing older by the day.

(Re-)Interpreting Fiduciary Duty to Justify Socially Responsible Investment for Pension Funds? by Joakim Sandberg seems to me an easier task. The author concludes: “There are conceptual limits to attempts at redefining fiduciary duty. But this does not mean that pension funds’ engagement in SRI is unjustified or unjustifiable more generally. A more promising way to legally mandate SRI may be through what is dubbed independent social and environmental obligations.”

Corporate Social Responsibility, Corporate Governance and Earnings Quality: Evidence from Korea by Bo Bae Choi, Doowon Lee and Youngkyu Park find CSR ratings are negatively correlated with the level of earnings management when all firms are considered. However, the relationship is weaker for chaebol firms and firms with highly concentrated ownership, which suggests that CSR practices can be abusively used by those firms to conceal their poor earnings quality.

Corporate Governance and Performance in Socially Responsible Corporations: New Empirical Insights from a Neo-Institutional Framework by Collins G. Ntim and Teerooven Soobaroyen is available without subscription. Using a sample of large listed corporations from 2002 to 2009, they find that, on average, better-governed corporations tend to pursue a more socially responsible agenda through increased CSR practices. Better-governed corporations are more likely to pursue a more socially responsible agenda.

Since our evidence suggests that better-governed corporations are more likely to be more socially responsible with a consequential positive effect on CFP, it provides corporate regulators, managers and policy-makers with a new impetus to develop a more explicit agenda of jointly pursuing CG and CSR reforms, instead of merely considering CSR as a peripheral component of CG or as an independent corporate activity.

Do Responsible Investment Indices Improve Corporate Social Responsibility? FTSE4Good’s Impact on Environmental Management by Craig Mackenzie, William Rees and Tatiana Rodionova finds that engagement combined with the threat of expulsion from the FTSE4Good index doubles the probability that a firm failing to meet the environmental management criteria in 2002 would comply by 2005, persisting until the end of their study in 2010.

Collective action inhibitors abound, as I discussed in a three part series on agency capitalism (Part 1) (Part 2) (Part 3). However, whereas most proposals depend on engagement where a few shareowners bear the burden of analyzing the need and pathway to change, these authors suggest that combining influence through use of a responsible investment index can be an effective way to influence management decision making.

Papers were recently invited for the following special issues of CGIR:



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