Why International Firms Are Showing Increasing Interests in Corporate Social Responsibility - Case Study Example

Running Head: Corporate Social Responsibility & Corporate Governance (CSR & CG) Why International Firms Are Showing Increasing Interests in Corporate Social Responsibility & Corporate Governance Name: Grade Course: Tutor’s Name: 3rd July, 2010 Why International Firms Are Showing Increasing Interests in Corporate Social Responsibility & Corporate Governance Introduction Management of a corporation or a business entails a lot. It involves management of the human resource which contributes to the performance of the organization, management of other resources, business reputation management, stakeholder management, corporate social responsibility management, corporate governance and so many more. In any business, the head, in most cases the CEO has to be aware of the factors that affect his business and those that contribute to its improved performance. Currently, international companies are developing increased interest in corporate social responsibility and corporate governance. There has to be a reason why or there are reasons why these companies are developing more interests in corporate social responsibility and corporate governance. The reasons are discussed below. The reasons are considered the importance of corporate social responsibility and corporate governance to the international companies. BP as an international company has been used to illustrate the reasons. Businesses may also have different aims, for example expansion to virgin markets, growth, profit making and so on. Corporate social responsibility and corporate governance are business issues that are important for the business in different ways and assist the companies in achieving their aims. Corporate Social Responsibility This is a concept where companies integrate environmental and social concerns into the business operations (Mullerat, 2009). It is all about treating the stakeholders of a company in a responsible or an ethically right manner. According to Gil Estallo (2007) & MacBeath (2008), responsible or ethical means obeying the international norms when treating the stakeholders. The stakeholders of a company are the shareholders, the suppliers, the consumers and the employees. The word social includes economic and environmental responsibility. Why International Firms Are Showing Increasing Interests In Corporate Social Responsibility There are so many aims of businesses in different departments formed to manage the business, but the main aim will always be to make profit and increase the shareholder value. A lot of factors affect the process of achieving increased shareholder value and profit. Poor payment of workers affects the performance of the organization and with low performance; the business’s competitive advantage is reduced. This may make it lose its position in the market and the aim of the business to increase shareholder value shattered (MacBeath, 2008). A business’s reputation is also another factor that affects its performance. The business depends on the people/buyers, and buyers have preferences. In most cases, they would not prefer products from a company with a bad reputation. Building a good reputation takes a lot more than just managing the business. It requires identification of what people think in the society of the business. This is where corporate social responsibility comes in. A business has to support the society economically, socially and environmentally. These factors are considered by consumers, investors, employees when selecting which company to buy from, which company to invest in and which one to work for. If a company is therefore interested in sustainability, it has to make sure that corporate social responsibility is considered as a strategy in managing the business operations and the shareholders of the company (Moskowitz, 2008). International firms generally have to be sustainable to survive in the current global markets and they have to also remain competitive. They have therefore to develop strategies that will enable them achieve such aims. The main reason why international firms are developing increased interest in corporate social responsibility is because they need buyers, they need skilled workers, they need investors and they need to be sustainable. Gil Estallo also indicated that “Long term socially responsible behavior can yield higher levels of profit for companies, which might become a competitive advantage” (2007). Research in the market has shown that buyers do not like going for companies that have little to do with the society’s welfare. This includes economic, environmental and social welfare. Without the buyers, the companies have nothing to do with the business (Mullerat, 2009 & MacBeath, 2008). Investors also go for companies that abide by government’s rules on environmental conservation and safety, which show signs of sustainability and those that contribute to the economy of the society. This decision is influenced by the buyer who determines if the business should exist or not because they are the target of the business. An investor knows that without the buyer, there is no business and so has to consider the factors that bring the buyer to the company’s products in order to invest in such a company (Mullerat, 2009 & MacBeath, 2008 & Moskowitz, 2008). The globalised world with its changes has also led to the development of agencies, which rate and evaluate other companies’ performances and commitments. One of the commitments measured is the commitment to social and environmental behavior (Gil Estallo, 2007). Investors look for companies with strict corporate social responsibility policies. In order to do this, they turn to the agencies that evaluate the companies based on their social responsibility practices. For international firms to attract more investors, they have to improve their corporate social responsibility purposes. Moskowitz indicated that investors turn to “index-based investments to help them navigate the CSR landscape and take the guesswork out of responsible investment. As a result, companies interested in capturing these investments are striving to improve their CSR practices and policies in order to be included and remain in these indexes” (Moskowitz, 2008). The success of a business depends on certain factors which are economic, social, cultural, legal and technological (Moskowitz, 2008). The effect of corporate social responsibility on these factors affects the business therefore they have to contribute to the factors affecting the factors affecting businesses. A good economy positively supports a business therefore any strategy of a business that aims at improving the economy supports the business. Corporate social responsibility as a business strategy aims at ensuring a company acts in a responsible manner in the society considering the economy and the environment. In this manner, it supports the economy and therefore positively affects the business. An international company has to integrate the culture and legal issues of a society in its business operations in order to remain in business. If a company violates the culture of a society in which it operates with its business dealings, such a company cannot be successful. The people of a community are the target of the business and without their support; the business has high chances of failing. An example of a company that has developed increased interest in corporate social responsibility is the BP. BP and Corporate Social Responsibility BP is an energy company and like all other energy companies, it is a long term enterprise that aims at sustainability. The company recognizes that it depends on the economic health and prosperity of the countries in which it operates just as the Vice President and Country Manager BP Algeria, Dai Jones noted in his 2004 speech. The company does not operate under illegitimate law or government but seeks to find the lawful government and a correct framework of law. This means that the company is ready to abide by the true laws and the correct government regulations for the sake of acting responsibly. The company needs a sustainable business that will operate in any region for a long time (Jones, 2004). In a speech about the role of BP in the Algerian society by the Vice President and Country Manager BP Algeria, he mentioned that BP has to recognize its impact on and its contribution to the society and has to manage the contribution and the impact. It means that the company has to develop a strategy that will enable it operate in the area to develop a competitive advantage and to create value (Jones, 2004). It has to develop a strategy that ensures sustainable operations in a sustainable world. The company has to make the society sustainable if it was not and has to implement strategies that ensure sustainable operations. According to the BP Vice President and Country Manager of Algeria, it required responsible operations and responsible development. In Algeria for example, the company developed responsible operations such as the world class oil and gas projects that were a joint operation with Sonatrach as a partner in different regions in Algeria. The projects incorporated: the world class safety standards that protect the environment of Algeria, the latest technology which adds to the technological development of the society and innovative management techniques that are also good for the company and the society (Jones, 2004). The company also implemented a social development program which aimed at responsible development as a corporate social responsibility. The program and the multi-billion dollar projects improve the economy of the region, engage the locals in some societal activities and also consider a safe environment for the people (Jones, 2004). Corporate Governance Corporate governance like any other governance is a system of managing an organization. It includes the processes, information and structures used to direct the management of an organization. The question arises therefore that, to which direction is the organization directed or what is the organization directed to achieve? The aims of the organizations guide the directors’ moves in directing the organization and the processes and structures they adopt to guide the management of the organization. Good or effective corporate governance ensures business prosperity and accountability between the management, shareholders and the board. It ensures the interests of all stakeholders of the company are protected and develops a power division structure for the organization (Central Bank of Barbados, 2006). Corporate governance is all about how companies can be governed effectively and efficiently (Strange et al, 2009). It can also be defined as a set of rules developed to guide the operation of the business and to define the relationship between the board of directors, stakeholders and the management of the company (Berghe & de Ridder, 1999). Why International Firms Are Showing Increasing Interests in Corporate Governance There are so many reasons why corporate governance is important. The main reasons are business prosperity and accountability (Colley, 2003). Others are due to previous experiences by other companies that had poor corporate governance. Every company would want to be successful and so have to look for ways to achieve that success. So many factors affect success and business managers have to work hard to recognize every factor that can contribute to the company’s success. Corporate governance is one of them. Good corporate governance (with strong governance standards) encourages economic growth and provides high chances for a company to access capital. Which company would not want capital to do business? International companies especially, need capital to expand to different regions of the world or to expand in regions that they are already established. With easy access to capital, the companies can easily expand and do business with a lot of ease (Berghe & de Ridder, 1999). This encourages effective management and efficiency in the business. Since corporate governance rules focus on values such as responsibility, transparency, accountability and fairness to stakeholders and shareholders, it leads to a transparent and fair business environment where companies are held accountable for their actions (Berghe & de Ridder, 1999). It is only through good corporate governance that sustainability and good business performance can be achieved. Poor corporate governance leads to mismanagement, corruption and wastage of resources (Berghe & de Ridder, 1999). Corporate governance influences the economic growth of a country. Good corporate governance can lead to higher economic growth since corporate governance affects productivity and growth of the economy. According to Gordon, good corporate governance gives savers the necessary information they need and the confidence to invest in such companies (2002). The corporate companies with strong system of corporate governance will therefore have increased investment which increases productivity and growth in the economy. One of the factors that buyers, investors and skilled workers consider (in corporate social responsibility) when selecting a company to buy from, to invest in and to work for; is the contribution of the company to the economy. With increased contribution to the economy, the company stands a better chance of performing better (Gordon, 2002). Gordon also indicated that there is a possibility of strong corporate governance reducing the occurrence of domestic financial crisis like the one that occurred in India, which led to investors losing confidence in their assets (2002). The Asian 1997-1998 financial crisis is also associated to poor corporate governance by the companies in the different Asian countries. Because of this experience, many companies would not want to suffer the consequences of poor corporate governance like currency depreciation experienced by the Asian countries (Nanto, 1998). Poor corporate governance is also linked to external crisis. Companies should therefore focus on financial stability or macroeconomic stability which supports business and avoid Strategies that lead to financial, external and internal crisis (Gordon, 2002). BP and Corporate Governance BP operates in different countries. The company would not want to operate in an area where there is domestic financial crisis. It would not want to operate in an area where it is not regarded as a company to be invested in by potential investors. The company would like to prosper in whatever country it operates in and would also not want to suffer the consequences of poor corporate governance as evidenced by those that have suffered due to poor corporate governance. BP is a large company and has to avoid issues that pose risk to the business operations and performance. In this discussion not all the corporate governance activities of BP will be described to show how the company is involved in corporate governance. The reasons why the international companies are engaging in corporate governance have been indicated and the only proof to show that such companies are indeed engaged in corporate governance is through selection of a region in which the international company operates and outline the issues about corporate governance. In BP for example, the selected area of operation is the United Kingdom. According to the information received from the company’s website, BP had the highest score of corporate governance ratings in 2002 which was done by a rating company known as Standard and Poor’s (BP Global, 2002). The company was awarded a score of CGS 9.6 under the scale of 1 being the lowest and 10 being the highest. This score gives investors and other stakeholders information about the extent to which BP (UK based) develops the guidelines and codes of good corporate governance and the extent to which the company abides by them. It also gives them information on how the company serves their interest (BP Global, 2002). Conclusion The importance of corporate social responsibility and corporate governance all lead to their impact on the consumer, the investor, the business and the skilled worker. It is evident from the discussion that without corporate social responsibility, the company’s reputation may be ruined and it may not get the buyers, the skilled workers, the investors and so the business may not perform. The business may not even grow depending on what aims the business managers have when setting it up in a specific region. Corporate governance also affects the business’s growth, the economy of the region where it operates and ability of the business to attract capital. They all contribute to the continued existence of the business or the company in a sustainable manner. References List Berghe, L. & de Ridder, L. (1999). International Standardization of Good Corporate Governance: Best Practices For The Board Of Directors, Springer, New York: US. BP Global. (2002), S&P Assigns BP p.l.c. Corporate Governance Score Of CGS-9.6. Central Bank of Barbados. (2006), Corporate Governance Guideline: 2006:02: Corporate Governance. Viewed on 30th June, 2010: Colley, J. L. (2003), Corporate Governance, McGraw-Hill Professional, New York. Gil Estallo, M., Giner de-la Fuente, F.& Griful-Miquela, C. (2007), The Importance of Corporate Social Responsibility And Its Limits Report, Journal of International Advances in Economic Research. Viewed on 30th June, 2010: Gordon, J. (2002), The Macroeconomic Benefits Of Good Corporate Governance, IMF New Delhi. Viewed on 30th June 2010: Jones, D. (2004), Trends and Innovations in Corporate Social Responsibility - The Case of BP in Algeria, Vice President and Country Manager BP Algeria’s Speech, At : 8th Africa Oil and Gas, Trade and Finance Conference and Exhibition, Palais des Congrès, Morocco. Held on 30th April, 2004. Viewed on 30th June, 2010: < http://www.bp.com/genericarticle.do?categoryId=98&contentId=2018495> MacBeath, A. (2008), Corporate Social Responsibility: A Necessity Not A Choice, A Grant Thornton International Business Report. Viewed on 30th June, 2010: Mullerat, R. (2009), International Corporate Social Responsibility: The Role of Corporations in the Economic Order of the 21st Century, Kluwer Law International, The Hague Area: Nertherlands. Moskowitz, J. (2008), The Growing Importance of Corporate Social Responsibility, Ethisphere. Viewed on 30th June, 2010: Nanto, D. K. (1998), CRS Report: The 1997-98 Asian Financial Crisis, CRS Report for Congress. Viewed on 30th June, 2010: Strange, R., Filatotchev, I., Buck, T. & Wright, M. (2009), Corporate Governance And International Business, Management International Review. Viewed on 27th June, 2010. Read More