MHC International Limited – News Item

January 2001

What, if any, is the Relation between Corporate Governance and Corporate Social Responsibility?

“Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, cialis corporations and society” (Sir Adrian Cadbury in ëGlobal Corporate Governance Forumí, World Bank, 2000)

The basis for recent international work (see, for instance, the World Bankís work in www.gcgF.org) on Corporate Governance is the OECD “Principles of Corporate Governance” (www.OECD.org) which cover the rights of shareholders, the equitable treatment of shareholders, the role of stakeholders in corporate governance, disclosure and transparency and the responsibilities of the board. The World Bank notes, however, that there is no single model of corporate governance with systems varying by country, sector and even in the same corporation over time. Among the most prominent systems are the US and UK models, which focus on dispersed controls; and the German and Japanese models which reflect a more concentrated ownership structure.

Corporate social responsibility is concerned with treating the stakeholders of the firm ethically or in a socially responsible manner. Stakeholders exist both within a firm and outside. Consequently, behaving socially responsibly will increase the human development of stakeholders both within and outside the corporation. This definition (from glossary) is much wider than the stakeholder definition used, to date, by the OECD and the World Bank. For instance the OECD principles imply that a key role for stakeholders is concerned with ensuring the flow of external capital to firms and that stakeholders are protected by law and have access to disclosure. While the World Bank have been intrigued by a June 2000 Investor Opinion Survey of McKinsey (survey) that finds that investors say that board governance is as important as financial performance in their investment decisions and that across Latin America, Europe, the USA and Asia investors (over 80% of those interviewed) would be willing to pay more for a company with good board governance practices. ëPoor governanceí was defined by McKinsey as a company that has:

• Minority of outside directors
• Outside directors have financial ties with management
• Directors own little or no stock
• Directors compensated only with cash
• No formal director evaluation process
• Very unresponsive to investor requests for information on governance issues

‘Good governance’ was defined by McKinsey as:

• Majority of outside directors
• Outside directors are truly independent, no management ties
• Directors have significant stockholdings
• Large proportion of director pay is stock/options
• Formal director evaluation in place
• Very responsive to investor requests for information on governance issues

Given the questions, it is not surprising that the figure of 80% was arrived at, but the point is that ‘Good Governance’ has a very narrow fit to the OECD principles and even narrower when compared with corporate social responsibility sentiments.

Nevertheless, there is increasing advocacy of a broader and more inclusive concept of corporate governance that extends to corporate responsibility and has a wider concept of ‘stakeholder’ than that used by the OECD (see schematic). These ideas are reflected in the King Report for South Africa, the Commonwealth principles of business practice, the UK’s Tomorrow’s Company etc.

In conclusion, the notion of corporate governance fits well into current concerns of management structure at the top of corporations and is becoming increasingly better defined thanks to the work of the World Bank and OECD etc., but hardly encompasses the concerns of corporate social responsibility notions. On the other hand, notions of corporate social responsibility have not advanced as far as the corporate governance school with its agreed set of principles. There is light on the horizon thanks to work by King and others and also in the Cadbury definition itself that notes that the aim of corporate governance is to align as nearly as possible the interests of individuals, corporations and society.

[Contributed by Michael Hopkins with thanks to an interview with Alyssa Machold of the Private Sector Governance Group, World Bank, Washington, DC]