Law6158 Topics in Company Law & Corporate Governance

Introduction

In the last decade, corporate social responsibility (hereinafter, ‘CSR’) movement is the most remarkable development in the global economy. CSR can be defined as corporate self regulation mechanism of a company synchronized with its business model. Due to a plenty of reason, such as the position of corporation’s responsibility has been a conflict with its profitability and there hasn’t been a consensus definition, range and method for CSR, the debate has become more and more popular within different participators from different countries. It is a quite controversial question whether the CSR can render a solution for social cost without increasing agent cost in a corporation, but it can make some business firms for virtue indeed. Thus, in this essay, it is argued that CSR is not just a simple window-dressing, designed to make people feel better, rather it contributes to the improvement of our society as a whole. The thinking of CSR seems to be the most effective approach to providing a better solution for governing externalities created by the corporation at a lower cost than law. More and more relevant international organizations and leading enterprises have recognized the importance of CSR. In the Green Paper by European Commission, CSR can play a role in ‘the strategic goal decided in Lisbon to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion’.

Firstly, this essay discusses the history of CSR in the UK. After that, CSR’s models, motives, effects, and definitions shall be analyzed in detail. Additionally, it will compare and evaluate the features from two different model of CSR in the UK and the US. Some examples discussed to justify that CSR is capable of making business sense in particular circumstances. Even though the CSR is still in developmental stage, no country can afford to neglect its significant value for economy and society.

The concept of CSR has been presented with the economic growth, social progress and the extension of corporate influence. The concern of CSR and development of relevant theory and practice were proposed much later in England than American. Before the 1970s, the CSR was unvalued in England as their primary concern was a relationship between shareholders and directors at that time. Under the influence of American and goal of European Community about the emphasis on society when entering into EC, British began to pay attention to CSR in the early 1970s, which was embodied in English common law and statutory law.

Not only the CSR started late in the UK as there wasn’t any integrated system theory to guide it, but also, there were some legal impediments for the practice of CSR. In case, Ashbury Railway Carriage v Riche, House of Lords established ‘ultra vires’ which means directors could only make a decision complied with the articles and memorandums of association. Any other behaviours beyond the corporate constitution could be illegal even be authorized by shareholders. Thus, the English common law had limited the practice of CSR due to strict implementation of ‘ultra vires’ in that period.

However, with the rapid economic and social development, ‘ultra vires’ couldn’t meet the needs of corporate management as not all ultra vires actions were against shareholders and creditors. More strictly will be the rules enforced by the law, less efficient corporate operation would be. Thus, the rule had been reformed to expand the powder of corporation, and it supplied some spaces for the development of CSR.

Firstly, Business Judgment Rule has been valued by case law. It means that once directors make a rational decision based on credible information, they are not liable for any loss from the implementation of that decision. Moreover, it can be a valid decision, which is binding on the corporation; shareholder cannot make a claim against it. By this rule, when the CSR actions are on behalf of the corporation, the court will uphold them. Thus, there have been many cases in favor of CSR in the UK after this rule.

Furthermore, the improvement of employment relationship has been regarded more and more. According to ultra vires, any endowment to employees, which do not fall under the articles of association, won’t be allowed. Afterward, English courts had changed their attitudes toward corporation endowing employees into supports. Despite endowment being non-reimbursable, it can benefit the company by promoting the relationship between company and employees as enhancing their trust in company and increasing their working enthusiasm.

Since the 1970s, under efforts of UK government and legislators, more and more statutes have been enacted. In the 1980s, some leading companies started to advocate CSR to help disadvantaged group in the community under the influence of global economic recession and rising unemployment. In Company Act 1985 s. 309, the board of directors should consider the benefit of company as a whole including all employee and other stakeholders. After the 1990s, more and more large corporations have realized that a modern company’s ability to preserve its dominant position in the market depends not only on profitability but also taking stakeholders into account. In the Company Act 2006, a noticeable reform can be the duty of directors to consider some matters in making decisions, which including all other stakeholders (such as employees, suppliers, customers, creditors, community, and environment).

The organization has transformed its business hugely, and it allows them to sustain in the market and to outrun its competitors. The value system of the company is so high that enables them to develop goodwill among the customers as well as among the employees. It is something which also indicates towards the strong presence of company within the industry. Overall, the company is doing well, and it has high growth potential in future (Cole, 2003).

There are particular challenges or needed changes which must be addressed by the company. The major problem that has been noticed is that the company needs to come out of the tag of the family business so that the portfolio could be increased and the trust of investors could be gained. Further, there is a need for improving the working skills of the internal workforce. It may be helpful immensely on the ground of bringing the innovation and employee participation. The self-motivated employees could provide an edge to the company and could be useful in implementing the new strategies (Suppiah and Sandhu, 2011).

With the passage of time, more attention is being paid to CSR. There are two different perspectives on the concept from two different opinions on the corporation. One classic view is that corporation should not be operated to look after its influences on society. The other view is to advocate CSR in consideration of long-term corporate success. As early as the 1930s, the function of management in the corporation (or purpose of the corporation) has been debated between Professor Berle and Dodd.

In the article of David Millon 2011, those two models were regarded as ‘constituency’ and ‘sustainability’ model as the two different views on the corporation. The corporation is a structural organization constituted of ‘management, shareholders, employees, creditors, consumers and communities in which the corporation operates’. It is inevitable that the relationship between interests of each constituency can be both positively and negatively correlated. As soon as the interests of its constituencies have conflicted with each other, the corporation needs to rank those interests in the order of importance to the corporation. Normally, this view of CSR can be termed as ‘constituency’ model, which supports that the interests of non-shareholder might take priority over the interests of the shareholder. This model has suffered numerous disagreements from the shareholder value supporter.

The second perspective regards the corporation as a separate legal person distinct from other members. To keep it profitable, the sustainability of corporation must be sufficient, which embodies supports of stakeholders such as investors, customers, environment and so on. There isn’t any conflict between the interests of shareholders and non-shareholders as it treats the interest of corporation as a whole for surviving. Thus, the second model can overcome the problem of the first model. As the external reason can easily affect the success of Corporation, CSR should be encouraged in consideration of management to take care of stakeholders.

Also, the dynamical mechanism will be discussed to find out the inception of the CSR. It can be divided into two theories, which is the internal and external motive. As for internal motive theory, the reasons to carry out the CSR actions come from internal management. No matter the external environment requires it or not, the corporation will choose to be socially responsible for self-development. From this angle, CSR can be an implement for corporate growth. When the mid-term or long-term social goals are being achieved through exercising CSR, it can create a competitive advantage for the long-term interest of the corporation. If the

corporation wants to be more competitive than adversaries, it will rely on special, valuable, scarce and unique resources. The CSR can be one of the ethical resources. The benefits for a corporation can be indirectly earnings, such as customer satisfaction and loyalty, or direct return in account or business opportunity

With respect to external theory, the CSR is required by the external environment, namely government factor, market factor and so on. Corporation has no incentive to take CSR but is liable to it. Thus, CSR can be the standard for corporate conduct because corporation will not exist without any support from stakeholder group. It is necessary to concern stakeholders and balance the interests between them. As various countries’ political environment is different from each other, the government factor should be studied on a particular country. In American, the free economy theory has been upheld, and government inclines not to interfere in method or content of socially responsible activities in the corporation. In another word, the American government is more willing to treat CSR as a voluntary corporate action for its development and it is a lateral guild to provide a legal basis for practicing CSR by the corporation. In comparison to the American government, the UK government can be a driver of CSR. It is indicated that the duty of the government is to promote international or national CSR by supervising the impact on the economy, society and environment by the various organization in the UK and by working together with other corporations or NGOs. Obviously, the requirements on CSR in these two countries are different from each other.

According to market factor, for example, the environmental awareness of the modern people has been upgraded unceasingly, so customer or social media shows great attention to whether the corporation undertakes CSR to be environment-friendly or not. Thus, the corporations bear a lot of pressures.

Once corporation takes the social responsible actions, it will have much effect on financial performance (hereinafter, CFP), customers and employees. Firstly, there have been many debates on the relationship between CSR and CFP within last 30 years. Most scholars have believed that CSR is positively correlated with CFP in recent years. Corporate social responsibility ranking is highly correlated with the average age of corporate assets. However, some studies investigated the relationship referred to specific industries, such as hotel, gambling or lottery, restaurant. It noted that the relationship between CSR and CFP was diverse from each other. Additionally, CSR can raise the corporate value through improving the corporate popularity, increasing the diversity of product and credit rating.

As customer can be the key stakeholder for a corporation, more scholars have paid attention to this area. CSR is capable of promoting the relationship between corporation and stakeholders, which means they can emotionally sympathize with corporate value. Once assuming CSR, consumer behaviour can be influenced as the customer may consider not only the price and quality but also the performance of the corporation, which can be termed as a spillover effect. For example, Starbucks supplies the fair-trade coffee. It can be a certificate for the corporation, and customers are more willing to buy it even the price is a little higher than normal one (maybe the quality is better). Because customers believe the fair-trade policy can bring some advantage for them as the quality of purchased coffee can be assuredly. On the other side, the customer can get the gratification when the purchase action can help other people. However, not all reports endorse that customer will advocate the corporation with CSR. There are some researches prove that customers shall care more about price and product itself so that they are unwilling to take additional costs to support CSR. For instance, every purchaser of a bottle of ‘Innocent’ juice will give 10% for charity. However, more people buy it just because of its taste, not the CSR. Therefore, CSR is simply an accommodating factor, not a decisive factor for the purchase of customers.

The trend in studies for CSR has been on external stakeholders and external effect. The research on the relationship between CSR and employees’ attitude has become more and more common. If the corporations implement social responsible policies, to some extent it can encourage its employees to work hard and improve efficiency when they feel pound of joining the corporate activities. Thus, the demission rate can be reduced under the influence of CSR. However, CSR cannot work for everyone as each employee has a different understanding of CSR activities.

After explaining different models and effects of CSR, it is necessary to find out a precise definition, which can be most acceptable to everyone. In 1923, Oliver Sheldon was the first person to put forward the word of CSR. The concept of CSR has thus existed over 70 years. However, as to the diversity of understanding from so many different angles, the definition has been kept changing and not been a consistent perspective until now. Three aspects of the reasons for the absence of a commonly accepted definition shall be illustrated in detail. Firstly, every region has its economic tradition; thus, it can cause the explanation about which social responsibility the corporation should assume will be different. Secondly, the intentions to adopt CSR initiatives can be various, such as enhancement of reputation, capital for benefits or political CSR as a corporation can be a political actor living in the community. Thirdly, there are no clear demarcation lines between CSR, sustainable development, and so on.

Even though the differences in each definition are wide, there are some points in common:

1. Corporation cannot develop without society. Corporation is a part of society as a whole;
2. Corporation can only be operated within the law and regulation;
3. Corporation is an economic organization so that corporate operation must consider economic interest;
4. It is necessary for the corporation to take account of not only shareholders but also stakeholders.

In 2010, International Organisation for Standardisation, which is a non-governmental and international private body, has issued ‘Guidance on Social Responsibility’ in ISO 26000. It defines social responsibility as ‘the responsibility of an organization for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour that

• contributes to sustainable development, including health and the welfare of society;
• takes into account the expectations of stakeholders;
• is in compliance with applicable law and consistent with international norms of behaviour; and
• is integrated throughout the organization and practiced in its relationships.'

Even though more and more corporations have recognized this new definition, there are still some flaws about this Standard. In these non-mandatory rules, there are seven principles, two fundamental practices and seven ‘core subjects’ of social responsibility, it is too broad to guide organizations in practice. Furthermore, it has not solved the conflict when there is ‘a clash between two principles or a principle and a core area’.

Apart from a cluster of a different definition, the content of CSR has been massive and complicated. The researchers have mentioned that it shall, at least, include climate change, CSR movement, development of the community, fair trade, green food, human rights, renewable source of energy and so on.

The debate on meaning and definition of CSR has been continuous. Achieving an integrated notion can be a well-nigh impossible mission in this field. It has been seen that a lack of accurate definition and purpose can be an obstacle to further development of CSR. However, the essential target for researchers may not be to find the most acceptable concept of CSR in comprehensive range but to present an appropriate definition in each particular research area.

Although there is disunity within the definitions until now, administering upon corporation according to social interests can be a matter of great urgency. Many reports mention that large-scale enterprises have amassed huge fortunes and power, thus, it is possible for them to subordinate the society to its interests. Moreover, trust in corporations by the public has been decreased, which can be attributed to a series of major corporate scandals, such as Enron and BP. It is important to find out the best efficient approach to reduce the ‘legal’ disservice to society from economic activities by the corporation.

Inevitably, some decision from the corporation can bring social costs to society, which can be called corporate externalities, such as selling tobacco can cause problem for people. If the externality has been governed by the government through taxation or regulation, the costs of framing a new law can be unavoidable, and it is hard to measure how much CSR should be assumed by the corporation. Voluntary CSR action to govern its externalities seems to be a more cost-efficient methodas corporation can be liable for its social costs and meanwhile obtain benefits from sustainability.

However, voluntary CSR cannot be the real CSR for governing externalities but a strategic CSR for corporate development. Although corporate management

understands reputation is related to whether a corporation can be responsible for its externalities, they might not take CSR as a corporation is more willing to satisfy shareholders with more profits. Thus, if the law does not require CSR for its externalities, they would not do it. It will easily cause the agent cost and reduce the profits so that shareholders may sell shares and takeover shall happen when share price being declined. It seems impossible to change a corporation, which is formed by a businessman for private profits, into a creator of public interest. Despite CSR can be the better approach to reducing social cost, there are many obstacles needed to overcome. So far, supervision by the government has been necessary for assuming CSR by companies.

To conclude, there are many critiques for CSR in definition, effect and so on, that it is argued that CSR is just a window-dressing design as it depends more on corporate self-regulation, and supervision system needs to be further researched and improved. As mentioned above, it is hard to be self-regulating in a company while facing a choice between social costs and benefits due to the nature of the corporation is an economic organization. However, CSR did make some corporations being more ethical, such as some leading corporations have their annual CSR report and form a code of conduct. The managers of the medium and large-sized corporation can feel the pressures from CSR as to make more decisions for society, such as for benefits to employees, customers, environment and so on. In the meantime, the corporation can be benefited from those decisions directly or indirectly. Therefore, the meaning of CSR has been profound as it can bring advantages to each member of society.

Journal articles