What Is The Likely Influence Of Institutional Investors On Corporate Social Performance - Essay Example

What is the likely influence of al investors on corporate social performance In your answer, consider both the likely preferences of suchinvestors regarding CSR activism and their ability to influence strategy. In today's competitive market atmosphere, business is dealing with a new set of challenges that are not merely economics-related. To endure and flourish, firms should link economic and social systems. And to achieve this aim a system was introduced known as Corporate Social Responsibility (CSR). The World Business Council for Sustainable Development proposes a definition for CSR which is " CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large". Reference (this definition was developed in 1998 for the first WBCSD CSR dialogue in The Netherlands.) There has been an increasing role of CSR in the community these days. This is because of the impact of globalization, where the effects of actions on the other side of the world are being debated in the press. There is also increasing attention from investors through the rise of socially responsible investment or SRI. Investment in ethical funds was given a boost when pension funds were obliged to state whether they took into account social and environmental impacts. The reason behind such an investment is that firms that closely manage their social and environmental conditions are subject to less risk, are possibly better managed and thus will also turn out as better investment, as well as satisfying a principled standard. To promote CSR it is necessary to enter into a trust based relationship with stakeholders. In such an environment the firm will need to think of themselves as being part of a network in which value is created and where co-operation is more vital. The scheme of CSR basically is about moving away from a business focused approach towards a one that explores the impact and value on society which then further has impacts on the business. And thus if a business recognizes that it is a part of society and its aim is to create value in the society it will be able to consider the value that is created both for the firm and for society. Business and society have an impact on each other. With the increasing focus on CSR, comes another scheme better recognized as Corporate Social Performance (also known as CSP) and which also enables to calculate and view the performance of business in the social ambit. The social performance needs to be handled and organized properly to get rid of other liabilities and to make the business move on the road to progress. CSP is not only a moral value but also helps the organization financially. CSP is highly correlated with the financial performance. It is connected and related with accounting return procedures rather than market return procedures. The reason of effectiveness of CSP seems to be due to status effects between a huge number of stakeholder groups, and not because of the organizational learning effects. In order to make CSP profitable and able to pay the full amount of a bill, debt or other financial obligations top administration must plan it with a tactical vision that is communicated all through the organization. To make a successful CSP policy, it should be kept in view that it must contain both "soft" and "hard" topics (soft topics like managerial trends and employee values and hard topics like social policies, programs and managerial structures.) Reference Each of us can probably name more than ten cases in which unprincipled organizational performance had created serious consequences for organizational efficiency, both during and after the managerial "ethics crisis." Until now, however, a small number of efforts have been made to standardize the way that we think about organizational principles and social responsibility, greatly lessen the financial performance inference of these issues. The CSP models enable us to put in to practice Corporate Social Responsibility in an organized way. To make us be realistic and be more precise in thinking about corporate social responsibility, a new concept called corporate social performance was introduced. Nowadays the institutional investors play a chief character in a nation's financial market. They can also be known as the corporate owners of a firm, and this helps them in pressuring the management of the firms whose shares they hold. The institutional investors category include investment companies, insurance companies, public and private pension funds, college endowments, charitable and religious endowments, bank administered trust funds, private hedge funds and non bank funds. Today the institutional ownership in large corporations is constantly increasing and thus is replacing the traditional individual investors. And these institutional investors in the recent years are getting involved in the important corporate decisions which affect their interests directly or indirectly. A remarkable change of the Chinese capital market over the recent years has been the expansion of the community of institutional investors. Limitations have been relaxed on market entry of social security funds, corporate annuities and commercial insurance funds. Since its trial operation in December 2002, the system of Qualified Foreign Institutional Investors (QFII) has developed rapidly, with many foreign institutional investors acquiring this qualification. By encouraging such institutional investors to enter the capital market, China has enabled rapid growth of the community of institutional investors, changed the previous mix that was dominated by small and medium investors, facilitated reform of investment philosophies and enhancement of efficiency to some extent and promoted market standardization and stability. With the increase in numbers, the institutional investors have begun using their influence and power in the area of corporate governance. As corporate shareholders, institutional investors can play a major role in benefiting the company by influencing and changing the corporate actions. Their awareness on how the corporations deal with their business can have a beneficial effect on corporate aims and processes. By participating in an effort to improve management, institutional investors can also provide steadiness to the market and develop accountability by corporate managers. But on the other hand the interference of institutional investors is not liked by the corporate managers. They often treat institutional investors as "short term" owners. Responsible institutional attention to the manner in which a corporation is managed offers increased attention to concepts of responsibility to shareholders. The involvement of the institutional investors has proved quite benevolent for the corporate firms and thus the corporate managers should realize the importance of the involvement of these investors. Institutional investors believe that better financial performance is achieved through better management, and better managers pay attention to Corporate Governance. Institutional investors play a vital role in improvising the corporate policy through their influence of votes. Due to the size of their shareholdings institutional investors can and do exert significant influence on corporate policy and take an active role in bringing under performing companies to task. In 2001, the relationship between institutional investors and companies was addressed with the Government commissioned Myners Review, 'Institutional Investment in the UK'. The objective of the review was 'to consider whether there were factors distorting the investment decision-making of institutions'. It included suggestions for the improvement of communication between investors and companies and encouraged institutional investors to consider their responsibilities as owners and how they should exercise their rights on behalf of beneficiaries. Many of the institutional investors have obligations to other individuals such as pension scheme holders, unit trust investors etc because it is their money that the investors invest. Instead of creating an agency problem via dispersed detached ownership the institutional investors present a possible solution to the problems a firm can encounter. In 2002 Institutional Shareholders Committee provided guideline to the investors in which they encouraged the investors to develop a policy on corporate governance and to apply this policy when voting in the company meetings1 (references). Large share holders can apply a greater pressure on the firm regarding any of their strategy. This is because if a large share holder sells it shares it would affect the over all market of that specific firm. And the same goes for the long term investors as they have a superior reason to apply pressure on managers to improve the CSR attributes of companies. Any firm which is to a great extent owned by long term institutional investors would be comparatively more pressurized concerning the issues of CSR then other firms. This is because they hold a huge amount of shares in the company and they prefer investing in companies which prove to profitable. Institutional investors such as Hermes in the UK use 'Focus lists' which help in identifying companies with the potential to improve corporate performance through investor pressure and keeping a vigilant eye. Companies are also ranked according to their corporate governance compliance policies. "This is achieved at S&P by measuring the degree to which companies practice corporate governance through indicators such as: (1) concentration, influence and transparency of ownership, (2) shareholder rights and stakeholder relations, (3) transparency, disclosure and audit, and (4) board structure and effectiveness. 25 of the most powerful institutional investors account for 75% of the world's listed company shareholdings" (Institute of Chartered accountants) 2(reference). Inevitably they use governance criteria as part of their investment strategies i.e. to invest or not to invest. So-called 'bad governance' also heavily impacts on the cost of capital: it can cause the premiums charged by institutional investors to reach levels of as much as 40% (reference). The role of the institutional investors in corporate governance processes seems to be critical. As a result they are expected to play an even greater role, then they have now in monitoring management and responding to corporate under performance (financial management or strategic). To conclude the Institutional Investors bear significant amount of shares under them and so to enhance the performance of the firm they have invested in they pressurize the firm to adopt processes like CSR. Bibliography. Cox, P., S.J. Brammer and A.I Millington (2004). "An Empirical Examination of Institutional Investor Preferences for Corporate Social Performance." Journal of Business Ethics, 52, 27-43. Graves, S.B and S.A. Waddock (1994). "Institutional owners and social performance." Academy of Management Journal, 37, 1034-46. Johnson, R.D and D.W Greening (1999). The effects of Corporate governance and institutional ownership types on corporate social performance." Academy of Management Journal, 42, 564-76 Ryan, L.V and Schneider (2002). "The antecedents of institutional investor activism." Academy of Management Review, 27, 554-73 "The Responsibilities of Institutional Shareholders and Agents - Statement of Principles", at http://www.abi.org.uk/Display/File/38/Statement_of_Principles.pdf Read More