Corporate Governance and Social Responsibility Investment - Essay Example

? Corporate governance and social responsibility investment al affiliation: Part A Question 2 Governance of public companies is regulated by governance codes that provide a frame of reference, which is based on best practices. Companies are expected to comply with the codes, or in the event of non compliance, such corporations are lawfully mandated to explain why they depart from the codes recommendations. Accordingly, comply or explain (CoE) and the quality of expectations in particular are anticipated to be the topmost priorities of the European action plan on corporate governance. The corporate governance codes across Europe were developed by the business fraternity in reaction to a series of corporate scandals and eventual collapse. It is conceivably foreseeable that crises lead to calls for improved regulation of business actors, such as the debate over the world economic predicament. Nevertheless, such methodical crises are unusual. On the other hand, company failure following a wrongdoing is a more frequent occurrence. For illustration, Maxwell and BCCI in the UK, WorldCom and Enron in the United States and Bayerische Hypo- und Vereinsbank of Germany are examples of corporations that have collapsed as a result of wrongdoing. Such corporate scandals have resulted in the establishment and improvement of company governance codes, which are put in place to monitor corporate conduct generally, and act of corporate directors in specificity (London stock exchange, 2012). The codes are either wholly voluntary such as the financial reporting council of 2008 in the United Kingdom, or a mixture of legal and voluntary elements like the 2008 German code. As thus, they may be taken as apparatus of flexible law or a mixture of soft and inflexible law. Within the code elements, individual rules might be flexible or rigid. Advocates of flexible law of explanation assert that it has fundamental flexibility, which is not present in rigid laws and the aspiration to conform to societal norms yields indisputable observance. Flexible laws are the rules of conduct that have no lawful obligatory force, which may have practical upshots. Though corporations and their directors may opt to conform or not match flexible law, a generally held supposition is that actions are more likely to be consistent with codified regulation and declarations of best practice. Since flexible law is not lawfully obligatory, its execution has to solely rest on the goodwill of those agreeing to and affected by it. Apparently, where such goodwill is not present, flexible law may result in flexible observance. Where benevolence and the aspiration to conform subsist, conformance may not be the most practicable alternative for corporations and their directors. They may set out that the doctrine supporting a specific regulation on bets practice will be best served by non-conforming. In addition, they might be safeguarded from conforming for reasons beyond their control (The European voice of directors, 2012; Australian council of super investors, 2010). The use of prudence to establish conformance or non-conformance may be helpful to both regulators and the regulatees. Comply or explain may assume several forms. Compliance means severe observance to every detail of the rule or to the primary rule, or both. Germany advocates the formation of an audit committee to act as the oversight of the entire audit process in a large company. Non conformance is commonly warranted by the resort to firm-or industry level specifics, or against the judgment of definite code terms. The flexibility of the laws, that is, “explain” might lead to corporate scandal and eventual collapse. For illustration, the yearly report by the Hypoereinsbank (Germany) vindicated its non-conformance (explain) with the certain rules necessitating that directors’ and officers’ responsibility insurance has a deductible with the plain statement: “responsible act is an understood obligations of the members, no deductible is needed for that. In the same way, the 2005 UK’s conformity statement proffers a blank explanation for four occurrences on non-compliance: “the exemptions are not seen by the board to impact the worth of corporate governance, and crop up from the distinct nature of the business”. Both Germany and the United Kingdom embrace the “comply or explain rules” but the two view the code differently. UK corporations view the code as symbolizing best practice and thus have a sense of ownership to the code. Nevertheless, German corporations view the code a political instrument to govern corporations from outside. The nature and extent towards full observance of the code in the UK is paradoxical. The reason is that whilst the code seeks to embody best practice, the “comply or explain code” might fall into abandonment. The danger is that if and when corporations need to reward themselves of the flexibility, regulations will be unexploited to its operation and react indifferently. German corporations, however, perceive the “comply or explain” environment as harsher as the responses are solely based on prospective punishment following deviant conduct (Waddock, 2008). The best practice for corporations to adopt is a mixture of non-discretionary regulations and unrestricted regulation and information. In the adoption of such a practice, a dilemma presents in that directors are in charge of making the strategic direction, as well as, overseeing the operations of executive management. This creates a scenario where the board marks its own exam. To combat this, the codes for company governance require independent directors to play a pivotal role. Independent directors are precisely needed to make sure that directors do not have any interest in the company, which may be viewed as affecting objective judgment. The independent directors should not have any connection with the firm in the downstream or upstream added value chains. For instance, the New York stock exchange (United States corporations’ regulator) set ten rules of corporate governance. In addition, directors should play their rightful role, that of increasing shareholders’ wealth that should not be repaid through accounting distortions and ambiguous financial revelation. Therefore, directors have to fulfill their roles to match expectations of corporate members. Participants of corporate governance bodies have to act professionally and be accountable for their activities. Corporation collapses in the 21st century has awakened and reinforced the concern by the society on the need for businesses to uphold ethics. As globalization effects continue to take effects on corporations, global finance, services and trade gain fresh momentum as each day dawns. As such, there is need for corporations to show concern for the effects of their acts on all stakeholders. PART B Question 2 Discuss the purpose of corporate giving. Is it apparent or misguided virtue? Would it be appropriate for corporate tax affairs be more closely regulated and companies to abandon so called philanthropic gestures? The aspect of corporate giving has increasingly gained prominence and importance from the business world and academicians alike. Corporate giving has steadily risen over the last few decades. Corporate philanthropy is the support that corporations and corporate foundations give to other sectors of the society through gifts like cash, equipment, supplies and other contributions. The underlying reason as to why corporations engage in corporate philanthropy is the conventional held belief that a healthy society will turn into a healthy corporate environment. The support of private action by businesses has been a fundamental part of the philosophical explanation, as to why businesses have supported nonprofit organizations; as a way to increase the quality of the environment for business. The justification that a healthier community results in more business is usually cited as the reason for corporate giving. Corporate giving towards the community creates an atmosphere where workers will be more content with life. This in turn, contributes to their overall physical and mental wellbeing. On the same note, customers will be attracted to societies and communities that are rich in services offered by non profits such as museums, churches and hospitals. As a result, a business operating in such a non-profit rich environment will immensely gain in various ways. There are four main theories mapping out the need and purpose for corporate philanthropy. Instrumental theory holds that corporations engage in charitable activities in a bid to create wealth, such as through cause related marketing. Political theory views companies as having social power and other related corporation duties as the reasons why firms engage in charitable activities. Integrative theories hold that firms need to incorporate social demands and social values for the purpose of growth and survival. Therefore, firms have to engage in corporate philanthropy to fulfill the role of public responsibility. Ethical theory focuses on the normative questions of the relationship that exists between the business and society; hence firms have to engage in charitable activities for sustainable development (Alves, 2009). There may be a self serving aspect to corporate generosity that coalesces with another serving component when supporting the society. In his book titled misguided virtue; false notions of corporate social responsibility, Henderson David argues that CSR is a misguided notion that adds extra liabilities, leaving no returns for shareholders. Henderson argues that a firm seeking for maximum returns cannot invest in CSR implementation. The reason is that implementing philanthropic activities drafts a business away from its ultimate efficiency. According to David, modern CSR wordings and CSR mission of creating long term benefits for shareholders, workers, customers and the society in general are open to doubt. Further, CSR activities are a misguided virtue as it has to be set in a larger context (Henderson & Institute of Economic Affairs, 2001). The corporate watch views corporate philanthropy as public relations tool for greenwashing a corporation’s image, and cover up the negative acts by supplying the media with positive images of an entity’s credentials. For illustration, the Nike case 2002 held that Nike should not have lied to defend itself against criticism. Submissions by Microsoft, Monsanto and ExxonMobil held that corporate speakers will find it intricate to address issues of public concern implicating their business operations; if a corporation’s every press release may be the center for legal actions. The case and its submissions reinforce the criticism against corporate philanthropy as nothing more than a public relations endeavor. The submissions reveal how corporations go to the extent of defending against a lawful ruling that would make it complex for companies to create false statements to safeguard their image (Corporate watch, 2013). In an analysis of Exxon Mobil Valdez oil spoil incident, the company holds in its report that it is socially responsible. Valdez spill occurred on March 1989 when Exxon Valdez hit the Bligh reef eventually dumping about 11 million gallons of crude to the Alaska’s pristine waters. The spill had gigantic environmental and economic impacts that are still felt to date. The incident had severe impacts on Exxon Mobil reputation, yet the company is usually ranks among the best corporate citizen. A KPMG repot on companies that issue reports on CSR stated that most companies are in industries that have greater potential for ecologic impacts. A study to examine stand alone CSR reports by Exxon Mobil found that the corporation does not state any news on the fateful incident anywhere in its reports. This leaves the question as to whether any events occurred in 2002-2008 during the litigation period that a stakeholder would take as material and necessary for the comprehensiveness and completeness of CSR. This clearly shows that CSR philanthropy and reports are indeed impression management, manipulative because they support the competitive position of the firm. Such reports increase competitive standing by increasing reputation and boosting stock valuation (Lundblad & Bell, 2011). The worldwide economic crisis has resulted in heightened research effort and global attention with regard to tax planning and tax avoidance. Corporations use the available legal loopholes like profit shifting techniques and aggressive planning to avoid paying tax. This act by corporations to avoid paying tax by engaging in transfer pricing activities is gaining significant attention in the United Kingdom. Crusaders against tax avoiders have taken actions against corporations deemed as avoiding payment of taxes through subtle ways in the name of corporate philanthropy. The actions have potential to affect corporations’’ reputations with experts saying that it is worrying impression that firms are not paying taxes in the way they should. This gives a misleading impression of the role of business in society. Sikka (2010) refers to corporate philanthropy as a dark side of transfer pricing, citing the case of Enron, Ernst & young and WorldCom. He further refers to corporate philanthropy by large firms as organized hypocrisy. The reason is that they promise to be responsible actors but engage in actual indulgence of tax avoidance and tax evasion. As such, research on effective tax rates and tax avoidance need executed in a bid to more closely regulate areas of tax avoidance. Areas requiring tax knowledge such as depreciation allowance, profit shifting and other areas that a firm may use to plan and avoid tax need to be closely evaluated (Hasseldine, Holland, & Rijt, 2012). When such loopholes are closed or/and minimized, firms can decide to undertake CSR philanthropy using shareholders money, or abandon it altogether. Part C The difficulties and problems associated with coming to an agreed definition of Socially Responsible Investing The aspect of corporate responsibility investment has for a long time been the center for discussion as to what constitutes the rightful meaning of CSR. Different people define CSR in different ways, making it intricate to have a universally accepted definition of CSR investments. The intricacies in precisely defining what corporate responsibility and investment are cover partially reflects the way in which the topic has developed. For some people, CSR investment has developed out of community investment, which is generally referred to as corporate philanthropy, and has a key emphasis on social improvements. On the other hand, others view CSR as being a broad but closely linked to, if not a surrogate for the sustainable development program instigated in 1992 UN’S earth summit. CSR is a fuzzy topic with unclear boundaries and debatable legitimacy. There is not yet any forum in the entire range of actors such as governments, business and civil society might come together to examine and create a comprehension of on some of the most complex areas within CSR agenda (Hopkins, 2012). There are numerous why there are difficulties in defining CSR. One, CSR is a contemporary phenomenon and is in its modern embodiment. Therefore, it is not a fully developed aspect and one definition may suit certain circumstances and fail in others. Additionally, the concept of CSR is rapidly evolving, thereby posing uncertainties as to when the concept is likely to mature. Secondly, the aspect of CSR has numerous faces. These are sustainability, where the goal of the firm is to have a whole society with economic development; environmental impact and social welfare are balanced. Sustainable development element of CSR focuses on CSR activities that cut across society, in a bid to attain sustainability (Mullerat, 2010). Corporate responsibility, which is the contribution a corporation may make through responsible business practices to achieve sustainable development. Corporate governance face, which is the implementation of strategies, processes and reporting measures to make sure the corporation understands and manages perils successfully. Corporate social responsibility facet, which is the component of a company’s responsible practice to improve the quality of life of societal sections, as well as, the working environment of its workers. Corporate community investment aspect of CSR, which is the support, fiscal or otherwise, offered by companies to undertakings sought to enhance the quality of life of sections of society (Crowther & Green, 2004). Another reason creating difficulties in the definition of CSR is the verity that corporations that are candidates of assuming CSR guidelines are diverse in terms of composition, nature of products and services produced, size and culture. Moreover, entities seek varying aims when implementing new doctrines of CSR. In addition, there is a lack of consent as to whether CSR entails non binding ethical principles and standards. There lacks consent as to whether CSR entails legal norms including public criminal and civil law rules (Bueble, 2009). In the 2002 Nike case for instance, the company issued a false statement in a bid to safeguard its image from undue criticism. When litigation was filed against the Nike Company, it defended its move saying that it had the right to free speech as set out in the First Amendment. Other companies like Microsoft and Pfizer submitted that corporations will experience difficulties in releasing information on CSR to the media if such message becomes the basis for criminal and civil actions. Finally, there are numerous elements intended to be encompassed in the CSR concept such as ethics and accountability. Nevertheless, ethics is a controversial subject since there is no absolute harmony with regard to what makes up ethical or unethical behavior. For illustration, deontological ethics holds that definite actions are correct or incorrect in themselves; thus, there are supreme ethical standards that require to be upheld. Teleological ethics separates “the right’ and “the good”, where ‘the right’ entails those acts that maximize ‘the good’. This leaves room for corporations to determine what ethical corporate responsibility is. Apparently, there will be no uniform application and implementation of acts that are ethically responsible (Hancock, 2005). Performance evaluation of SRI funds has been a subject prompting several studies across the globe. It is worth noting that conclusions of performance evaluation often typically depend on the choice of the reference index a research uses. Critical evaluation of SRI funds performs as compared to conventional funds shows mixed results (Chegut, Schenk & Scholtens, 2011; Sourd, 2012). Renneboog notes that SRI funds utilize positive and negative screen to select firms for their portfolios. Ethics, environment and society form the basis of these screens. He further notes that SRI funds could outperform conventional funds since SRI funds include more carefully chosen firms (Renneboog, 2012). Nevertheless, SRI funds could perform poorer than conventional funds since screening lessens the diversification ability that comes at a cost. Recent study reveals that social responsibility investment performance across the globe falls below the anticipated and that SRI funds do not outperform the conventional funds. A meta-analysis of the performance of SRI funds by Rathner (2012) tested three hypotheses using the asset pricing model. The “underperformance hypothesis” asserts that SRI funds yield poor financial performance than non-SRI funds. Main reasons for underperformance are the verity that screening hinders diversification potential that may change tradeoffs in contrast to conventional portfolios. The “outperformance hypothesis” holds that social responsibility investment generates superior funds if the screening process value relevant information that would not be otherwise available to fund managers. The “no effect hypothesis” views no noteworthy distinction between performance of social responsibility investment and non-SRI funds. The results of the test revealed a lower performance probability of underperformance of social responsibility investment compared to non-SRI funds. The test also supported the second hypothesis that SRI funds outperform conventional funds. Differences exist as a result of screening type, fund size, screening intensity and fund age. Mixed results were found on the third hypothesis in that there is no noteworthy difference in the average probability of an underperformance. The results also revealed a lower chance of underperformance of social responsibility investment as well as, supporting the hypothesis that there is no effect. 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