(TIỂU LUẬN) corporate social responsibility (CSR)

The research provides a comprehensive evaluation and synthesis of the board of directors' accountability and suggest that two-tier board is a suitable structure for organizations and spe

Hoang Vu Minh - S3609253

11 Sept 2021

BUSM4403 Ethics & Governance

Hoang Vu Minh - S3609253

11 Sept 2021

BUSM4403 Ethics & Governance

Research

Report

Assessment Task 3 - Governance Research

Essay

Research

Report

Assessment Task 3 - Governance Research

Essay

Governance

Research Essay

The Royal Melbourne Institute

of Technology - Rmit

Executive Summary

The objective of this study is to see whether the ideas of Corporate Social Responsibility may offer future direction towards Corporate Governance theories The research provides a comprehensive evaluation and synthesis of the board

of directors' accountability and suggest that two-tier board is a suitable structure for organizations and specifically organizational boards be made more accountable, especially family-owned The strengths and limitations of existing governance models such as Agency, Stewardship and Stakeholders theories while the most common Corporate Governance structure is agency theory and the 4 barriers to a business attaining more environmentally beneficial outcomes Board accountability may be improved since directors are not exercising full power and control Due to the increasing significance of stakeholders, companies increasingly place a high priority on Corporate Social

Responsibility Also discussed are methods to reduce the limits of Corporate Governance principles The study concludes with suggestions for improving CSR and Corporate governance practice

Introduction

Corporate Social Responsibility (CSR) is often believed to imply that corporations, such as Volkswagen, described in

the preceding assignment, have responsibility not just for the economic consequences of their actions, but also for the social and environmental effects CSR has gained more importance as it emphasizes the board’s responsibility for its relationships with its stakeholders (Smith, 2003) Businesses can be understood as a set of relationships among groups that have a stake in the activities that make up the business (Freeman, 2007) A failed CSR practices can result in tremendous consequences such as shares and market value dropped, customer and shareholders turnover, legal penalty, brand reputation damaged or even destroy the business, such examples of these are not new in the business world like the scandals of Enron in 2001 (FBI database,2021) or Volkswagen (VW) in 2015 (EPA database,2021) and Vedan (VNS, 2009) Therefore, many companies take CSR practice as part of business sustainability strategy, and many have already pursuit CSR by actual actions like Johnson & Johnson – 100% using renewable sources energy by 2025 by purchased Texas Panhandle, or Google also received the top CSR 2018 score from the Reputation Institute, thanks to their data centers consuming 50% less energy than others, by using services like Gmail, companies may minimize their environmental effect (DMI, 2021)

On the other hand, Corporate Governance includes a set of interactions that exist between the company's

management, board members, shareholders, and other stakeholders (OECD, 2004) It offers a framework for

businesses to monitor and evaluate their risks As a result, the themes are now broadly applied in businesses

This study reframes the issue from the standpoint of Environmental Responsibility in order to establish a higher order

agenda for Corporate Governance, dedicating thought and well-founded arguments to a business like Volkswagen.

Findings:

1 How can organizations and specifically organizational boards be made more accountable?

There are two main types of board structure which are the unitary board and dual-tier boards

Transparency and accountability are key components of effective Corporate Governance (Keay and Loughrey, 2015) However, most of the time, the board is not held responsible Because they only hear about issues during board meetings, directors are essentially ‘rubber stamps' (Schillemans and Bovens, 2019) In the case of VW, the CEO said

he was “not aware of exact number of engineers and also this scandal was not corporate decision” even though nine

managers were suspended, and another 50 staff members confessed that they were “completely aware of emission scandal activities” (Boston, Varnholt, & Sloat, 2015; Mansouri 2016) Thus, VW should following a Germany Two-tier board structure which including Supervisory department (Employees/outsiders) that monitoring the management board to ensure such thing like this self-benefits of managers (for gaining salary bonus and keep issues in silence) did not come up with such an unethical decisions because this Supervisory board can appoints or remove management team’s member, keeping the monitoring role and managing role in complete separation with more clearer director’s responsibilities of each board, separate the role of Chairman and CEO(Hampel, 1998) to avoid something like Enron scandal happen and stakeholder have more chance of involvement Although this might have some disadvantages such

as power imbalance could result in potential board conflict (Hampel, 1998) or slower decision because decision is taken by two separate entities but it safer for the long-term survival of the business, and to save the time board meeting should consist of Supervisory member also where projects managers will present their solution to any issues for the boards to consideration

Conflicts between blockholders or with dispersed minority shareholders are common in family-owned businesses

(Young et al., 2008) Some examples like:

Photo: STR | AFP | Getty Images Left: Puma CEO Jochen Seitz Right: Adidas CEO Herbert Hainer

“Brothers Adolf and Rudolf Dassler founded a shoe company in their mother’s laundry room in the town of Herzogenaurach, Germany, in 1924 But it soon became apparent that the brothers had different personalities, and tensions between the two came to a boiling point during World War II.Rudolf was sent to the front, and after his return, was picked up by U.S soldiers and imprisoned for about a year He reportedly was convinced that his imprisonment was orchestrated by his brother”

Tor y Bur ch and Chr i s Bur ch i n 2005

Chr i Week s | Wi r eI mage | Get t mages

“Fashion designer Tory Burch famously fell out with her ex-husband, and co-founder of her eponymous

clothing brand, Chris Burch twice: First on a personal level back in 2006, when they divorced three years after founding her company and a decade after they wed, and then again—professionally—in late 2012, when the two sued and countersued each other.”

The cases of Asiatic Group Holdings (Singapore) where three directors were paid almost S$1 million per year despite the company's earnings totaling just $627,000 over the previous five years, since the executive payroll included family members of the directors (Koh and Wong, 2019) Or the case of Khanh Hoa Lottery Limited Liability Company where the CEO continuesly rised his nephew salaries above others (Công Hoan, 2020) Hence, independent directors are critical because they can check and balance the authority of the block holders Employees, creditors, customers, and suppliers should all be held responsible by the board of directors (Donaldson and Preston, 1995) Thus, a stakeholder-oriented board gains better effect for CSR, like Singapore Airline-SIA that has significant stakeholder representation

on its board of directors and effective stakeholder engagement (FY2019/20 SIA Sustainability Report) The board of directors should be dedicated to maintaining open lines of communication with all stakeholders this is why family-owned businesses should employ a dual-tier board structure to divide ownership and control A dual-tier board consists of a daily operation management board comprised entirely of executives and a supervising supervisory board comprised mostly of non-executive board members As a result, the management and monitoring roles are completely separated, with more clearly defined director duties at each tier In dual-tier boards, directors are held more

responsible, and the interests of all stakeholders are addressed utilizing stakeholder theory Minority shareholders will

be better protected since non-executive board members would have a voice in board meetings as well This also reduces the likelihood of family members taking on responsibilities, and there is a clear separation of powers and balances

2 From accountability and stakeholder perspectives, what are the strengths and

weaknesses of the extant governance models?

a) Agency theory

The board of directors serves as an oversight framework to keep self-serving managers in check and to enhance shareholders’ value The most frequent and significant theoretical framework in which Corporate Governance and its changes are discussed is undoubtedly agency theory (Psaros, 2008) Companies using the Anglo-American model have

a dispersed ownership structure and are obliged to provide more information than companies following the Japanese or German models (Ungureanu, 2012) Because the CEO and chairman are distinct, there is a separation of ownership and control, resulting in more transparency

This governance model is also simpler since it only includes three groups: management, shareholders, and the board of directors Each group's interests and responsibilities are distinct and consistent However, there are significant agency costs associated with resolving principal-agent issues in which managers act egoistically rather than maximize

shareholder profits Because managers' compensation is dependent on performance, they concentrate on short-term results rather than long-term results for higher incentives, hurting shareholder value (This is the case of VW and Enron scandal) As a result, it is suggested that managers be compensated in the form of shares rather than cash, as this would benefit both the managers and the shareholders from a win-win perspective

b) Stewardship Theory

According to stewardship theory, managers will not participate in egoistic behavior but will instead work in the best interests of their shareholders, and the job of the directors is to empower the managers The Japanese approach is directed on the banking market and does not emphasize the need of powerful capital markets (Ungureanu, 2012) CEO duality exists, insider directors are encouraged, and businesses have a concentrated ownership structure Rather of monitoring and controlling, the board should effectively support and empower stewards This approach is common in family-owned businesses and government-linked businesses This hypothesis, however, is impractical since human behaviors are not fixed, and executive behavior has often been shown to be opportunistic It may also cause tunneling and principal-principal conflicts Furthermore, family-owned businesses often fail when the founder departs (Morck and Yeung, 2003)

c) Stakeholder Theory

The idea is the board of a business should make choices that take into consideration the interests of all stakeholders Companies under the German model have concentrated ownership structures, and the shareholder shares the

organization's interests and participates in its administration and control This idea takes into account the long-term effect of a company's existence and is highly relevant today with the focus on Corporate Social Responsibility

However, it is difficult to identify genuine stakeholders, and if management is required to be responsible to a large number of stakeholders, it may ultimately end up being liable to no one

3 What are the barriers to a company achieving more environmentally beneficial outcomes?

Previously, the concept of attaining sustainability was restricted to the imaginations of scientists, social activists, as well as visionaries It gradually penetrated the corporate domain It is now regarded as one of the most essential elements of any forward-thinking and innovative business Renowned businesses not only prioritize sustainability, but also view it as a key contributor to success

Growing environmental concerns, strict laws and regulations, and public awareness have altered the business

landscape across the globe today Companies may play a significant part in attaining sustainability by developing and executing suitable strategies and functions such as green processes, innovation, energy conservation, and so on Companies are now effectively confronted with the issue of environmental sustainability

Still, archiving environmentally beneficial outcomes is not easy, some fundamental barriers still exist according to WRI and Fritsche(2015):

a) Most companies exist to earn a profit, and any extra expenses (even for a planning exercise) must be balanced

by either increased revenue (higher product/service pricing) or access to market advantages (e.g., in

procuring) From a resource perspective, businesses ignore sustainability problems because they lack internal resources or skills (e.g., money, expertise, employees, vision) Internal capital allocation policies do not put a priority on improved environmental sustainability Companies often lack the internal mechanisms necessary to appropriately assess the benefits of environmental sustainability management, such as decreased vulnerability

to energy price volatility, water hazards, and other environmental effects on operations and supply chains Managers often try to solve the problem when it occurred rather than try their best to avoid it if the plan conflict with profitability

b) Companies, especially SMEs, typically do not have the "human capital" to identify and reflect even cost-effective and profitable options, as they focus their investment on key (and short-term profitable) assets: "lean production" logic The long history of the energy efficiency investment gap tells the story in detail Corporate sustainability teams' and finance teams' objectives are not well matched Due to competing objectives,

sustainability and finance teams often fail to successfully collaborate As a consequence, sustainability teams are brought in too late to impact project design and are unable to make an effective argument to financial

decision makers.

c) Companies do not have Metrics in hand to account for external environmental expenses Companies cannot incorporate these "expenses" into standard decision making without a clear mechanism for pricing external costs, such as the danger of climate change to society Over time, businesses may discover that they are not completely aware of the true costs and hazards connected with their investments Sustainability is neither a

"firm" concept nor a simple optimization concept The process-oriented logic of sustainability is a huge barrier for smaller companies and those not close to the end-use (customer-wise) Like in Vietnam many companies

often do not have a specific environmental assessment and auditing department in the planning and

executing projects due to a costly cost or directors just lack the awareness of needing one, the job often accounted for project managers boards to assess and report to boards

d) Global environment factors such as global warming, green housing…etc often rise awareness of the

communities and sometime firm can not provide a satisfy solution to please the community due to various reasons, result in brand boycotting or worst An example is StarBuck use plastic straw and cups for takeaway while many customers aware of global pollution and some cities even banned the use of plastic straws, result

in brand boycott and they have to announce plan of stop using plastic for serving products, but still some people still hate Starbuck because they just following the majorities without any seft-sense

e) In Vietnam, legal terms lacks of power on penalize companies for polluting environment even Decree

154/2016/ND-CP still validated, due to the penalty cost is too small or smaller than the benefits gained some firms are ready to violate and pay the penalty cost in exchange for superior profits

No Charged pollution parameters Fee (VND/kg)

1 Chemical Oxygen Demand (COD) 2.000

2 Suspended Solids (TSS) 2.400

Source: National database of legal documents

Conclusion and Recommendations

In conclusion, I think that the ideas of Corporate Social Responsibility are more essential than Corporate Governance since they may offer better future direction for businesses There is no significant alternative to stakeholder theory that can embrace a socially oriented viewpoint on today's society, according to some (Donaldston and Preston, 1995) There is growing pressure on corporate executives and their organizations to provide more social benefit Stakeholder involvement must also be used appropriately (Smith, 2003) For improving CSR and Corporate Governance efficiency,

I suggest three recommendations

First, more stakeholder-oriented boards will promote long-term employee ownership This will also encourage

consumers, suppliers, financial advisors, workers, and community representatives to join the board Thus, considering all stakeholder interests Second, managing for stakeholders is generating maximum value for stakeholders without compromising (Freeman, 2007) Understanding their mission values and key business operations helps businesses create the appropriate CSR This will help managers identify important stakeholders Finally, Corporate Social

Responsibility initiatives may enhance stakeholder involvement External stakeholder interaction will likely lead to