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BWFM 5013 CORPORATE FINANCE

CORPORATE FINANCE

CONCEPT PAPER
STAKEHOLDERS INFLUENCE AND CONFLICT
BETWEEN SHAREHOLDERS TOWARDS FIRMS
CSR
Submitted to:
Prof.Madya.Dr Zahiruddin Ghazali

Prepared by:
RAJENDIRAPERASAD MUNIAM (820309)

Date of Submission: 8TH April 2017


Table of Contents

1 : Introduction 2-3
2 : Problem Statement 4-5
3 : Research Question 6
4 : Methodology Overview 6
5 : Stakeholders influence factors 7-8
6 : Shareholder conflict factors 9
5 : Literature Review 10-11
5 : Recommendation 12
5 : Conclusion 12
6: Reference 12-15

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STAKEHOLDERS INFLUENCE AND CONFLICT BETWEEN
SHAREHOLDERS TOWARDS FIRMS CSR

Introduction

Companies which are tied to shareholders and stakeholders find themselves


lack of ability to shape their own ability and manage events. Values, strategy
and public pressure were found as the main drivers in corporate social
responsibilities. Besides that, social expectation, increasing affluence and
globalization also were the contributing factors towards CSR.

The concept of CSR begins from the needs of ethical and fair treatments
among their customers and basically all business need to respect the
honesty. Even though was not legally required, but due to it was the right
thing to do. It is the link between the company and the community. On
todays phenomena the use of CSR influence the way business adopt more
consideration and responsibility. Due to the rapid economic development,
Malaysia were also not being excluded in the process with social,
environment, pollution and other things which incorporate with social need
awareness (Shim, D. S. 2006).

Being ranked among four largest economics in Southeast Asia with the
increase of total market capital from 116.9 to 410.5 billion US dollars in
between the year 2000 and 2010 (US Census Bureau, 2011), the tremendous
growth came not without its cost, such as deforestation, carbon emission,
pollution and others factors as well (Ang, J. B. 2008). Therefore,
implementation of social and environment related activates under CSR under
voluntary basis were needed to overcame such issues.

To motivate such voluntary basis activities in private sectors, Malaysia


introduce CSRR regulation that acquire the firms to disclose their CSR
activities in annual reports with effective from 2007 (Bursa Malaysia, 2007).
Despite the lack details found in the guideline or standards in the regulation,

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this give the firms an opportunity to came report CSR information in their
own way by leaving the stakeholders at disadvantage. The stakeholders can
utilize their power to pressure the firm in a way that necessary information
can be disclose in CSSR as they are in good position in control critical
resources to the firms (Roberts, R. W. 1992).

There is no exact frame work done to specify how corporate social


responsibility of a company shall be conducted. Not only on the effect on the
stakeholders, another key relationship between the CSR expenditure would
be on the firm value. When considering expenditure is low, it definitely has
positive contribution towards firm such as productivity, reputation and so on.
The interest to increase CSR expenditure to higher level can maximize firm
value. The benefit will be on the high CSR rating, when the rating getting
high, the reputation of firm got higher as well. But not to forget, when
outsiders such as the stakeholder are getting huge benefit from it,
shareholders might not approve high in CSR expenditure if it reduces the firm
value. Therefore, CSR not only can be a conflict between the shareholders,
the stakeholders also can influence the CSR of any firm undertakings.

The capital structure of any firm also considered as influence factor of


conducting CSR. The limitation occurs in high type of investment if the firm
have high interest payment similar as suggested by Jensen (2001) and
Chappel (2005). The high debt level may also make the shareholders to be
active in monitoring it which can help to mitigate the conflict (Gray. 1995).
The companies with the social responsible were expected to deliver above-
average financial return, as per the company ability to deal with their
environment and social issues which will give credit in measuring of
management quality. Even though its hard to get detached social from
economic and environment performances, there still will be social variables
which some will be closely correlated. The performance carries many
variables, both on financial and non-financial. The financial variable ware
found objective whereas non-financial variables are subjected to the nature.

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The study of objective variable is found to be easier where else the study of
subjective variable is not so accurate. Thats why many of the studies found
to concentrate on the financial performance on the impact caused by both
shareholders and stakeholders.

Problem Statement

The Corporate Social Responsibility (CSR) term is been highly used in


academic with both practice and research started in early 1950s (Carroll &
Shabana, 2010). Hundreds of article can be found while entering the term in
search engine. The concept derives, develop and applicable initially in
western world (Maignan & Ralston, 2002) due to the economic, politic and
the cultural content. However, the practice of CSR is now widely used
throughout the world as a policy which sustain the stability on human and
environment. The actual practice of CSR can differ in firm (Blowfield &
Frynas, 2005).

Only few is known regarding the practice of CSR in the non-western world (Li
et al. 2010). Currently its been in a doubt on the relation between theory
and reality and wheater the theory has represented the reality worldwide.
More research shall be conducted in developing countries in order to test the
application and use of the concept to those countries (Belal & Momin, 2009).
Some studies were done to identify the influence of the specific country in
context with CSR and identified cultural factors, social, political, business
system, shareholders influence and environment impact (Williams, 2001)

CSR can be something different to different people in different time, place


and situation (Campbell 2007). In China the research towards CSR reveal that

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the companies there were aware and active in CSR, but most sees that as a
burden and distracting from making profits (Qingfen, 2006). Some studies
have shown significant result and shows a clear difference between
interpretation and practice of CSR in different countries which involve both
stakeholders and shareholders contribution towards CSR practice. Malaysia
firms shows more social responsibilities due to keep the annual report brief
and shows what the company is doing (Teoh & Thong, 1984).

In able to survive in industries, firms are always trying to create competitive


advantages among themselves. The factors that contribute to the
competitive advantage will be the stakeholders and the shareholders.
Stakeholders are the key factor for success and were the most affected
group that results in CSR. The stakeholders vary from the external and
internal were the firm performance may change. Without their engagement,
skills, talents, loyalty and knowledge the firm could not achieve its objective.
According to the stakeholders theory, the top management make decision in
order to meet the stakeholders demand and thats why the stakeholder is
one of crutial part in making decision (Roberts, 1992). The firms are
accountable to the various stakeholders on the business activity that can
affect them but yet it is still seen that the stakeholders as secondary, non-
essential to the CSR agenda.

The shareholders have the responsibility to ensure the firm is well run and
well managed. The main concept of having shareholders for a company is to
make the firm accountable for their action. As representative on the board of
directors, they are responsible and act as custodian for the shareholders
interest. The main objective of the shareholders of any firm will be profit
maximization and the shareholders have the effect on CSR by multiple ways.
They can decrease the amount of money spend on CSR as their aim will be
on maximize their financial benefits rather than maximize their social welfare
responsibility (Jensen & Meckling, 1976). Even though CSR indirectly
contribute to their financial benefits, the tendency of shareholders to invest

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in direct investment were more to be practical. Therefore, the shareholders
pressuring firm to invest in economic activities found more than CSR
activities. Under this circumstances, the conflict between the shareholder
occur for the firm CSR.

This study aimed to examine the influence of the different stakeholders in


determining the level of CSR and also on the decision making process by the
shareholders by looking at their capital structure. Based on this following
were the objective of the study:

1. How CSR affected by the influence by stakeholders.


2. How shareholders conflict influences the decision making process in
the firm towards CSR.

Research Question and Sub-questions

The following research question and sub-questions have been formulated to


gain insight into the influence and conflict involving of CSR:

How is Corporate Social Responsibility creating conflict between the


shareholders and how does stakeholders influence on CSR.

Sub-questions:

1) What is CSR according to the corporate point of view?

2) How committed to CSR are the firms?

Methodology Overview

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This discussion paper proposes a mixed methods approach to identifying and
categorizing towards firm CSR. I will rely on existing data reported by
cooperatives such as annual reports previous case study and sources from
studies conducted by both academic and practicer. I will also use findings
from any existing studies, and compare findings across studies.

Stakeholders influence factors

Influence by Stakeholders

Malaysia possess a unique type of corporate ownership structure among


others, normally they are characterized by concentrated ownership, cross
holding or pyramidal (Claessens & Djankov, 2000). Many firm have their
share held by large shareholders, controlled by government or family basis.
The CSR practice in Malaysia mainly been influence by western style
practice. Factors such as lower public interest and accountability lead to less
concern given to social and environmental issue. The power held by the
shareholders limits the desire of stakeholders to conduct what is right for
them towards CSR. There is less reliance of the owners family on the public

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disclosure which resulted lower demand on public disclosure in the family
own firm including CSRR.

With the compulsory regulation done by Bursa Malaysia (known as Kuala


Lumpur Stock Exchange) with the effective from 2007, more level of CSSR is
expected done by firm regardless type of the ownership. This will make sure
any firm will try to compliance to the mandatory CSR regulation. However,
from the finding from previous literature that investigated the level of CSR
shows mix result. Improved reporting will promote good level of CSSR (Criado
et, al. 2008).

Based on all the above matters related, its obvious that the greater level of
CSR in shareholder power influence the firm decision and at the same time
limits the stakeholder position to take action.

Creditor Power
Firms dependent on debt can be shown by leverage. Normally in high
leverage of firms, the creditors may put pressure towards firm to act
according to them to preserve their interest. Creditors have high concern on
firms activities when activity can generate negative impact on both
environment or society, they will face risk in associated with them. Examples
are penalties, litigation, fines and so on. This will turn away the creditor
interest. The call for greater integrity from the firm and information on the

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latest status can protect against firms opportunistic behavior (Huang &
Kuang, 2010).

Firm will disclose their CSR related information due to creditors expectation
and demand (Robert, 1992). The firm need to make sure to convenience the
creditors on the business responsibility undertaken by the firm regardless
their CSR regulation. Therefore, high leverage firm normally will disclose
their level of compete towards CSR.

Government Power

CSR may be used by firm as a strategy which designed to able satisfy on the
government demands (Robert, 1992). There are two type variable which are
the firm size and industry. The regulation was imposed towards larger firms
generally. Since larger companies tendency to impact on the society due to
their business activities, they came out with more CSRR then smaller firms
(Branco & Rodrigues, 2008). With greater excess with their resource, they
can invest in CSR and give better picture to the stakeholders scrutiny
especially on their regulators (Chapple & Moon, 2005). With the
implementation of the CSR disclosure by BSKL in 2017, at the same time
government with their agencies able to control and monitor the activities of
the firm and influence them by the regulation which they have to comply.

Shareholders Conflict factors

Insiders

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There are two type of shareholders which consist of insiders which
associated with the firm and the shareholders which are not affiliated with
the firm. For insiders, if their firm CSR reduces the value then if should be
matter. Difference from deviation of value maximization could reduce as the
management ownership rise up. Another issue that could came will be, with
more control comes more entrenchment which will lead in the management
chooses to be in nonvalue-maximization activities. With larger stakes by the
insiders it may also reduce the CSR implementation and give more priority
towards them.

Board of Directors

The independent directors help more in aligning the managers objective and
with the other shareholders expectations. It is very crucial to understand
that the CSR conflict is not between the management and the shareholders,
it is into bringing close association affiliated and non-affiliated shareholders.
Since the reputation of a firm may be affected by the firms CSR rating,
therefore the directors both from inside and outside shall be seen as
affiliated shareholders. If all the board member tends to have ownership,
there will be correlation between CSR and board composition. The conflict of
misunderstand between the directors will result in conflict on the path
towards their firm CSR.

Institutions

The incentives of monitoring corporate decision making is usual by


institutional shareholders. The objective of the institution shareholders is
different from the unit holders. This institution shareholders official manage
and have their own personal agendas such as campaigning for public office.
Under this issue, the institution may find that the pro CSR agenda clashes
with their private objective and eventually reduce the firms value. Even for
them, they give higher priority for those which benefit them the most.

Literature Review.

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So far on the research conducted by the scholars in CSR generalized their
study on broad view and not on a specific organization or firm. Therefore,
CSR can be used to reduce the corporate function towards carrying for
community as well. Investment are done by the corporate organization for
getting back talents as well as financial returns. In Malaysia, generally mega
corporates companies such as Petronas, Proton, DRB Hicom, SP Setia and
many more doing their CSR to gain more support and at the same time along
with the new regulation done. Corporate social responsibility defines as a
generic concept where it refers the firm more concern and be in two-way
involvement with social, economic and public trust with the influence of
environment effect (Aguilera et, al. 2006). Barnea et al 2010 argues that the
word corporate social responsibility(CSR) were commonly used to describe
good practice and improvement citizenship. The strategic CSR is a point
where balanced of benefits and maximization of business and development
term were caused. To be able consistently contribute towards CSR, both
internal and external (shareholders and stakeholders), must have a common
goal to achieve in giving successful CSR practice and overcame their
differences (Jia & Zang, 2012).

The implementation of the new regulation in 2007, had open a wide aspect
and expectation to be performed by firm in contributing their CSR (Sharma,
2013). Stakeholders have broad explanation therefore anyone can play their
role. Due to that, the influence of the stakeholders can be variable. This issue
therefore considers each stakeholder may have different conflict views
among themselves (Aguinis & Glavas, 2012). For example, the initial
campaign done by the Greenpeace on the claim on deforestation and killing
orang utans, assuming most consumers from West doesnt come and see
what is going on here, they tend to buy into this campaign. The firm which
purchase and consume the oil palm had the fear of losing the market share
were they forced to find alternative and the palm oil owners and
suppliers(shareholders) not excluding their dependents (the stakeholders)

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lose out in the process. The stakeholders and not forgetting the role of
shareholders if anything may handicap them from achieving their true
potential (Jensen, 2001).

CSR both consist the voluntary and mandatory reports made by each firm
regardless issues important to wide range of stakeholders (Gray et, al. 1995).
CSR is used by many firms to manage the internal and external stakeholders
relationship which will impact those firms (Ullmann, 1985). The stakeholders
have the power to influence the firms decision because of their control in
resources required by the firm. The three main component which influence
the stakeholders are shareholders, government and creditors. However,
there are no association shown between the shareholders power which can
be used to measure concentrated power disclosed in firms worldwide, but
both the government and creditors have those influence (Robert, 1992). In
Malaysia (Elijido, 2009) did observe that the firms are more likely have the
tendency the government concerns while other stakeholders may influence
on the environmental reporting. The evidence from literature supports the
view of particular shareholders which refers to important in survival and
effective than others in CDR demanding subjected to their power in
influencing CSR. Investigation in the influence of the external pressure in
Canadian firm shows the firms are more response to the demand of their
financial shareholders, government and environmentalists (Neu et, al. 1998).
Firms should take into their consideration on both social and environmental
to maximize profits. The compulsory CSR requirement have an effect on the
firm disclosure (Lee & Hutchison, 2005). In several studies conducted in UK,
Spain and Norway its found that, although the number of reports on the
quantity and quality of CSR increases, but the lack of reports still found
presence of such regulation (Criado et, al. 2008).

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Recommendation

The socio-economic market context may need to be considered adjusted to


suit for both shareholder and stakeholder. The continues growth and also
stability were needed for both of the shareholders and stakeholders to
contribute towards CSR. Both are equally important as they influence and
their conflicts can be overcame. If the adaptation of Share Value theory
adopted as the basis of both shareholder and stakeholder policy towards
their contribution on CSR, it helps on the social and environment problem as
well as increase the firms wellbeing (Porter & Kremer, 2002). In choosing the
social and environment cause therefore, both shareholders and stakeholders
should provide their opportunity for shared value between the firm and
society.

Conclusion

As the nation is going towards develop country status, it is very important


that we adopt a more pragmatic and practical approach basis for CSR. To do
so, engaging CSR can increase their competitive advantage while at the
same time could address social and environmental causes. It is therefore
important for the stakeholders and shareholders to aligning the funds to
more successful decision about CSR. Among other reason attitude of
investing fund is more severe towards CSR. Since the goal of the

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shareholders and stakeholders were not consistent, it is necessary for them
to work side by side for efficient decision making. The conflicts and influence
of them shall be align to achieve better goods and successful towards CSR of
their firms.

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