Corporate Governance and Ethics - Essay Example

Corporate Governance and Ethics Currently, there has been a burgeoning interest in corporate governance, acknowledging it as a crucial component of the CSR concept. Corporate controversies and the need to protect minority shareholders’ interests, for instance, are reasons behind the development of corporate governance codes in several countries and corporations. Majority of corporate governance codes provide recommendations to promote good corporate governance and increase transparency and disclosure (Mallin, 2002). Apart from this, the concepts of sustainable development”, “corporate responsibility and “corporate citizenship” have taken root in the corporate world. Although comprehensive research treats the fields of corporate governance and sustainable development individually, less attention has been paid to the interaction between these fields. Ricart, Rodriguez and Sanchez (2005) tried to close the gap by studying how corporate governance systems are transforming in order to integrate sustainable development thinking into them. The researchers did so by analyzing the governance systems of the 18 corporations that are market sector leaders considered by the Dow Jones Sustainability World Index (DJSI World). In general, the objectives of the paper are twofold: to analyze in depth how and to what extent DJSI World leaders are incorporating sustainability into their corporate governance systems; and to develop a model for sustainable corporate governance based upon corporate governance and sustainable development theories, and built upon empirical research of the DJSI leading companies’ corporate governance systems (Ricart et al, 2005). In order to integrate the sustainability dimension, the most important insights related to corporate governance systems from stakeholder and sustainable development theories (Freeman, 1984; Gladwin et al., 1995; Bansal & Roth, 2000). Drawing from these issues on the governance systems of DJSI World leaders were considered. Corporate Governance Systems Corporate governance systems present four main approaches, namely agency theory (Jensen & Meckling, 1976; Fama & Jensen, 1983), the legalistic perspective (Williamson, 1964; Berle & Means, 1968; Mace, 1971; Budnitz, 1990; Bainbridge, 1993; Miller, 1993; Cieri et al., 1994), resource dependence (Pfeffer, 1972, 1973), and class hegemony (Mills, 1956; Domhoff 1969); their theoretical origins are, respectively, economics and finance, corporate law, organizational theory and sociology, and Marxist sociology. The agency theory views the modern corporation as a nexus of contracts between principals and agents (e.g. Jensen & Meckling, 1976) and has made valuable insights into many aspects of the manager-shareholder conflict (Daily et al., 2003) and, as so, into the role of boards (Aguilera & Jackson, 2003). The legalistic view discusses that boards contribute to the performance of their firms by accomplishing their legally mandated responsibilities, that is to say, corporate leadership without actual interference in day-to-day operations (e.g. Williamson, 1964). The resource dependence perspective views boards as important boundary spanners that provide information to executives and are able to achieve resources for company operations (e.g. Pfeffer, 1973). Finally, the class hegemony perspective views boards as a means to perpetuating the powers of the ruling capitalist elite and its control of social and economic institutions (e.g. Mills, 1956). Two of the issues that these perspectives have tackled with have been the roles that boards of directors have to fulfill and the attributes these boards have to encompass in order to contribute to the performance of the firm (Zahra & Pearce,1989; Johnson et al., 1996; Daily et al., 2003). Board composition suggests the size (number of directors), director types (inside and outside directors) and minority representation (ethnic minorities and females) (Hillman et al., 2000). Board characteristics possess two basic parts – directors’ background (age, educational background, values and experience) and board personality (Zahra & Pearce, 1989). Board process represents the approach the board takes in making its decisions, embodying the frequency and length of meetings, the CEO-board interface, the formality of board proceedings, and the extent to which the board is involved in evaluating itself (Mueller, 1979; Vance, 1983). The strategy role refers to the board’s essential contribution in formulating strategy and monitoring its effective implementation (Baysinger & Butler, 1985; Kosnik, 1987). The service role deals with improving company reputation, making contacts with the external environment, and providing counsel and advice to executives (Carpenter, 1988; Louden, 1982; Pfeffer, 1972). The control role refers to the assessment of firm performance, evaluation of the CEO, and the definition of executive compensation policies (Brindisi, 1989; Brossy, 1986). The resource role implies the view of the board as a means for facilitating the acquisition of resources critical for the firm’s success (Pfeffer, 1972; Pfeffer & Salancik, 1978). Sustainable Development and Stakeholder Theories Corporate governance is investigated in literature from varying perspectives. While producing precious insights into several facets of the manager-shareholder conflict, agency theory has failed to put ample attention to interdependencies among other stakeholders of the firm (Aguilera & Jackson, 2003). Thus, this predominant perspective has prevented a deeper analysis of new peculiar relationships of today’s organizations. Stakeholder theory asserts that the capacity of an organization to yield sustainable wealth over time (i.e. its long-term value) is dependent on its relationships with crucial stakeholders (Carroll, 1989; Donaldson & Preston, 1995). Under this framework, the corporation is depicted as a socio-economic organization whose rationale for existence is to create wealth for multiple constituencies. The stakeholders of any organization are usually diverse, but the relationships between the firm and each of its shareholders have many underlying, common features. Moreover, the stakeholders have common interests (as well as prospective conflicts) among themselves (Mitchell, et al., 1997). Based on this view, the crucial challenge is for modern management to acknowledge the mutual interests among the firm and its stakeholders. In management, sustainable development theory has tried to broadly redefine the international societal role of the business corporation (Gladwin et al, 1995; Sharma et al., 1994). Scholars have asserted that our future depends on building sustainable enterprises and an economic reality that links industry, society and the environment (Hart, 1997). Elkington (1997) proposes that the organization’s ultimate objective is not exclusive and singular; that is, to create value for its shareholders); instead, it is three-prong – to create economic, ecological and social value. Thus, the primary value of the sustainable organization is not profit growth, but rather sustainable development. 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