Relation between CSR and Corporate Governance

Both CSR and Corporate Governance (CG) by definition feature as an issue of companys
management practices and therefore sometimes get confused with each other.1 The question
mainly moves round the fact whether the CSR and CG go the same way of companys
management or they have their respective way of management. Question also arises whether CSR
is part of CG or vice-versa. It is already known that CSR is based on self-regulatory principles
linked to internal and external management of the company. On the other hand the term corporate
governance indicates to an idea of companys governance and management issue. So a clear
understanding of the concept of corporate governance and its nature is a crucial matter in order to
point out the relation between CSR and CG.

According to the observation of Australian Parliamentary Joint Committee on Corporations and

Financial Services, compared to CSR, CG is a broad issue of company management practices. It
involves the conduct of board of directors and the relationship between the board, management
and shareholders.2 Transparency in corporate decision making and accountability to shareholders
are the core points of CR.3 Grant says, Corporate governance is a broad theory concerned with
the alignment of management and shareholder interests.4 Arthur Levitt defines it as the
relationship between the investor, the management team and the board of directors of a company.5
Corporate governance is concerned with holding the balance between economic and social goal
and between individual and communal goals.6 It virtually attributes importance to the efficient use

1
Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 4, 6.
2
Ibid.
3
Ibid.
4
Grant, G.H The Evolution of Corporate Governance and its impact on modern corporate America (2003) 41: 9
Management Decision 923,925.
5
Ahmmed, Momtaz Uddin amd Mohammad Abu Eusuf, Corporate Governance: Bangladesh Perspective (Nov.-
Dec. 2005) 33: 6 The Cost and Management 18, 19.

6
Ibid.
of resources and in the same way requires accountability for the preservation and stewardship of
those resources.7

Organisation for Economic Co-operation and Development (OECD) has provided a model
framework for corporate governance known as OECD Principles of Corporate Governance. These
principles have stated some fundamental aspects of companies governance. They are summarised
as follows;8
Distribution of duties and responsibilities among different supervisory, regulatory and
enforcement authorities ;
Protection and facilitation of the exercise of shareholder rights;
Ensuring equitable treatment of all shareholders, including minority and foreign
shareholders;
Recognition of the rights of stakeholders established by law or through mutual
agreements;
Encouraging active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises
Publication of regular and accurate disclosure concerning companys financial
situation, performance, ownership and governance and
Providing strategic guidance, composition and functions of the board of directors and
their accountability to the company and shareholders.

In the light of the synthesis of OECD principles of corporate governance and above mentioned
definitions of CG it becomes clear that the CG is a broad issue of companys management process
covering a plethora of internal and external management. The corporate governance framework is
the widest control mechanism, both internally and externally to stimulate the proper and efficient
use of corporate resources and in the same way to require accountability for taking care of those
resources.9 The aim of CG is to align the interests of individuals, corporations and the society

7
Ibid.
8
OECD, Principles of Corporate Governance (2004) < www.oecd.org/dataoecd/32/18/31557724 > 05 May 2007.
through an ethical basis and to fulfil the long term strategy of the owners. Corporate governance is
considered as a means to the maintenance of balance between economic and social goals as well
as between individual and community goals.

Against the said backdrop CG is the broader issue of management of a company than CSR.
Australian Parliamentary Joint Committee on Corporations and Financial Services considers CSR
as a part of total governance framework as it remarks corporate responsibility is only one aspect
10
of an organisations governance and risk management process. In addition, CSR has also been
mentioned as one the four pillars on which the edifice of corporate governance built. 11 The four
pillars are:
compliance with all regulatory requirements;
equitable treatment of all stakeholders such as suppliers, employees, consumers and so on;
full and fair disclosure of all material information with specific stress or emphasis on
accurate and objective presentation of financial information; and
respects for norms of business and social responsibility.

However, Mark Walsh and John Lowry in their joint article on CSR and Corporate Governance
under the head of relationship between CG and CSR hold the reverse opinion saying corporate
governance is an increasingly important aspects of CSR.... to provide the more solid foundations
on which broader CSR principles and business ethics can be further enhanced. 12 In fact both the
authors in their joint work have used the term corporate governance in its narrower sense to
draw an important distinction between CSR and corporate governance. To them the corporate
governance is more concerned with the enhancement of shareholder value and the protection of
the shareholder interests. 13 It encourages management to develop the business in the best interest

9
Imam, Mahmood Osman, Firm Performance and Corporate Governance through ownership Structure: Evidence
from Bangladesh Stock market( Paper presented a ICMB Conference on Corporate Governance Bangladesh
Perspective , Dhaka, Bangladesh, September 2006) 31.
10
Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 4, 124, p.7
11
Ahmmed, and Mohammad ,above n 128 , 18-19.
12
Walsh, Mark and Lowry, John, CSR and Corporate Governance In Ramon Mullerat (ed.) Corporate Social
Responsibility: The Corporate Governance of 21st Century (2005)38, 39.
of the shareholders and does not allow it waste, misuse or divert the corporate assets. 14 On the
other hand, despite legal underpinnings, the environmental, labour and consumer obligations are
more in connection with CSR than corporate governance.15

CSR expects from the companies to do more than what the concerned laws requires. 16 Corporate
governance more often moves round the narrower constituency, that is, the interests of the
shareholders.

The conflicting opinions as the relation of CG with CSR as revealed by above discussion chiefly
lie on how it has been defined. For example, if it is narrowly defined it concerns the relationship
of company to its shareholders. If it is broadly defined the relationship of the company extends to
the society. A careful review of the model governance framework of OECD shows that corporate
governance covers a range of issues for the protection of the interests of shareholders and
stakeholders.

Moreover, there are two models of corporate governance, shareholders and stakeholders. In the
shareholder model governance system, the responsibility for decision maker is to maximise
shareholders wealth as this model introduces classical principal and agent theory where manager
is considered as an agent of the shareholder principal.17 According to stakeholder model, it has
been viewed that the corporation in fact can not be run without the contributions of different
stakeholder groups like customers, employees, suppliers, the community of which it is a part and
the environment and therefore at the event of decision-making , the corporate should take into
account how their decisions impact these constituents.18 Although the shareholder model has the

13
Ibid.
14
Ibid.
15
Ibid.
16
Ibid.
17
Ahmmed, Momtaz Uddin amd Mohammad Abu Eusuf, above n 128, 134,p. 18-19; See also Colin Mayer,
Corporate Governance, Competition, and Performance (March 1997) 24: 1 Journal of Law and Society 152, 154.

18
Ibid.
preference over the stakeholder model which is growing slowly as a part of governance
framework, the exercise of both the models suggest that
there is no scope to look narrowly into the corporate governance aspects. Rather it is better to say,
CSR is a model of extended corporate governance whereby corporate responsibilities range from
its fiduciary duties towards the owners to the analogous fiduciary duties towards all the firms
stakeholders.19

It is admittedly a hard task to distinguish between CSR and CG. Erik Belfrage of Swedens SEB
Bank views corporate governance and corporate social responsibility are both extremely
important to a company. But it is not a natural thing to separate them. If you have a well formed
corporate governance programme in place, that would probably take care of most CSR issues.20

However, it can be argued that CSR issues are of voluntary or softer nature and it is based on the
self regulatory corporate codes and the corporate governance is more often mandatory based on
statutory provisions applicable at national level. For example, the company law of a country
defines the composition of the board of directors, their rights and duties towards shareholders,
duties of the managers and other organisational activities. Security and Exchange law provides the
principles regarding the mandatory financial disclosures, auditing and so on. The duties of the
managers and directors may be of softer issues when they concern the promotion of ethical
behaviour towards the shareholders.21

As regards the distinction between CSR and CG the views of Winberg and Randolph is
noteworthy. They said:

19
Lonerzo Sacconi, Corporate Social Responsibility (CSR) as a Model of Extended Corporate Governance. An
Explanation based on the Economic Theories of Social Contract, Reputation and Reciprocal Conformism (2004) UE
Research Project < www.biblio.liuc.it/liucpap/pdf/142.pdf> 15 August 2007.
20
SEB Bank Sweden Bank, A fine line between corporate governance and corporate social responsibility(2007) <
www.iccwbo.org/uploadfle/CG? Ew_stories/o60630_ICC_Belfrage520on%20CRS%20cg%20
nexus_0%20(3).doc> 15 August 2007.
21
Walsh, Mark and Lowry, above n 135, 38-39.
 Although CSR is related to and overlaps in some respects with the concepts of corporate
governance and ethics, it is nevertheless distinct.governance programmes tend to be
internally focussed and generally retain heavy rules based favour. In contrast CSR tends to
be more value-based and externally focussed.22

In conclusion it may be said that in respect of companys governance, control and management,
the corporate governance issues are broad in nature whether mandatory and softer. CSR is one of
the aspects of this governance framework which is voluntary and softer in nature. The mandatory
governance issues are enforced by the litigation or
compliance with the legal provisions. Softer social issues are enforced by stakeholders pressure,
boycotts, compliance with the self-regulatory codes of conduct.

22
Danette Winberge and Phillip H. Randolph, Corporate Social Responsibility: What every In-House Council
Should Know (1st ed. 2004) 72.