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Chapter 7

OTHER ISSUES:
SOCIAL RESPONSIBILITY INVESTMENT
CORPORATE SOCIAL RESPONSIBILITY
ETHICS

Learning objectives
To be aware of the origins of socially
responsible investment
To appreciate the role of institutional investors in
socially responsible investment
To Explain corporate social responsibility (CSR)
To emphasize the importance of establishing a
positive relationship between CSR and corporate
social performance.
To define ethics, and explain how organizations
specify standards for ethical behavior.
Mallin: Corporate Governance 4e

Organizational Stakeholders
Owners

Employees

Governments
Customers

Social Activist
Groups

Community
Competitors

Socially Responsible Investment (SRI)


Also known as Corporate social investment (CSI)
Involves considering the ethical, social, and
environmental performance of companies selected
for investment, as well as their financial
performance (EIRIS, 2000)
Ethical investment is another often-used term for
SRI.
SRI originated from philanthropy when the value it
added to the reputation of the organisation was
recognised.
Mallin: Corporate Governance 4e

Socially Responsible Investment (SRI)/


The following definition illustrates the wide array of
terms used to refer to the process of SRI:
Corporate social investing, social responsibility
investing, social aware investing, values-based
investing, mission-based investing.all describe the
same concept. These terms tend to e used
interchangeably within the investment industry to
describe an approach to investing that integrates
personal values and societal concerns into the
investment decision making process.

Mallin: Corporate Governance 4e

Socially Responsible Investment


SRI encompasses projects that are external to the
normal business activities of a company and not
directly for purposes of increasing company profit.
These projects have a strong developmental
approach and utilise company resources to
benefit and uplift communities and are not
primarily driven as marketing initiatives.
SRI as a part of the mainstream investment
strategy, enhances financial returns in the long
term.
Mallin: Corporate Governance 4e

Drivers of SRI and its role in CSR


SRI is one of the most important drivers of CSR.
CSR has been encouraged by lobbyist who have
pressured companies to improve their performance in
the area of environment and human right.
They have also put pressure on shareholders,
especially institutional investors to become more
involved in SEE (social-ethical-environmental)- related
behavior of their investee.
It is not just outside pressure that has led companies
to adopt a more stakeholder-oriented attitude but also
internal pressure.
Mallin: Corporate Governance 4e

Drivers of SRI and its role in CSR


Institutional investor themselves are likely to
drive SRI as they are beginning to recognize the
significant financial impacts in such areas as
liability or reputation that environmental and
social issues can have on investment portfolios.
A number of institutional investors have policies
in place regarding SRI.
The policies may be separate or incorporated as
part of institutional investors corporate
governance policies.
Mallin: Corporate Governance 4e

The Drivers of SRI


External Drivers of SRI
Government
Lobby groups
Increase in interest in CSR
Company reputation
Trade association

Internal Drivers of SRI


Fund members
Pension fund trustees
Fund managers interest in CSR
SRI disclosure requirements

Pressure on institutional investors to practice SRI


Pension funds; Banks; Unit/Investment Trusts; Insurance
Companies

SRI drives companies to practice CSR


Mallin: Corporate Governance 4e

SRI Basic Strategies


1. Engagement
Identify areas for improvement in the ethical, social and
environmental policies of the companies invested in, and
encourage them to make improvement.

2. Preference
Fund managers work to a list of guidelines that trustees
prefer companies invested in to meet.

3. Screening
Trustees ask for investments to be limited to companies
selected (screened) for their ethical behavior.

Mallin: Corporate Governance 4e

Corporate Social Responsibility (CSR)


Previously, the terms CSI (SRI) and CSR were
used interchangeably, but have now been defined
separately.
CSR refers to an organisations total responsibility
towards the business environment in which it
operates.
CSR describes the broader solution to triplebottom-line matters of the 3Ps profit, people and
planet.

Mallin: Corporate Governance 4e

Corporate Social Responsibility


Corporate Social Responsibility (CSR) is the
responsibility a firm has to all of its stakeholders
rather than just the shareholders.
A CSR approach will take into account societal and
environmental concerns.

Mallin: Corporate Governance 4e

Corporate Social Responsibility (CSR)


Corporate Citizenship Concepts
Corporate social responsibility
emphasizes obligation and accountability to
society
Corporate social responsiveness
emphasizes action, activity
Corporate social performance
emphasizes outcomes, results

Mallin: Corporate Governance 4e

Corporate Social Responsibility (CSR)


Business Criticism/ Social Response
CycleFactors in the Societal Environment
Criticism of
Business
Increased concern
A Changed
for the Social
Social Contract
Environment
Business Assumption of Corporate Social
Responsibility
Social Responsiveness, Social Performance,
Corporate Citizenship
A More Satisfied
Society
Fewer Factors
Increased Expectations Leading
Leading
to More Criticism
to Business
2Criticism
7

Pyramid of CSR
Philanthropic Responsibilities
Be a good corporate citizen.
Ethical Responsibilities
Be ethical.
Legal Responsibilities
Obey the law.
Economic Responsibilities
Be profitable.

Key Issues in CSR


Labour rights:
child labour
forced labour
right to organise
safety and health
Environmental conditions
water & air emissions
climate change
Human rights
cooperation with paramilitary forces
complicity in extra-judicial killings
Poverty Alleviation
job creation
public revenues
skills and technology

Common Understanding One: Integration


Corporate Social Responsibility: The Integrated
Approach to Business in the 21st Century
Exchange
Rates

Consumer
Confidence

Interest
Rates

Governance
Regulation/Policy
Economic

Climate
Change
Waste

Corruption

Environment

Social

Biodiversity
Resource
Use

Human
Rights

Communities

Labour/
Workplace

Common Understanding Two: Stakeholders


Common Understanding Two: CSR relates to the idea whereby
a business addresses and balances the needs of stakeholders.
Who/what are stakeholders? Individuals and groups who may
affect or be affected by the actions, decisions, policies,
practices or goals of an enterprise.
Examples:
Shareholders and other investors
Employees
Customers
Governments
Local communities
NGOs
Environment
Mallin: Corporate Governance 4e

The Principles of CSR


Sustainability
Accountability
Transparency

Mallin: Corporate Governance 4e

Sustainable Development
Many definitions describe CSR as the business pursuit of
sustainable development.
Sustainable development: development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs. (1987
Brundtland Report).
Like CSR, sustainable development is also recognised as
having three fundamental pillars: economic development,
social development and environmental protection.

Mallin: Corporate Governance 4e

The Components of Sustainability


Social influence
A measure of the impact that society makes upon the corporation
in terms of social contract and stakeholder influence.

Environmental impact
The effect of the actions of the corporation upon its geophysical
environment.

Organizational culture
The relationship between the corporation and internal
stakeholders

Finance
An adequate return for the level of risk undertaken.
Mallin: Corporate Governance 4e

Accountability
This is concerned with an organization
recognizing that its actions affect the external
environment, and therefore assuming
responsibility for the effects of its actions.
Accountability necessitates the development of
appropriate measures of environmental
performance and the reporting of the actions of
the firms.

Mallin: Corporate Governance 4e

Transparency
Transparency, as a principle, means that the
external impact of the action of the
organization can be ascertained from that
organization reporting and pertinent facts are
not disguised within that reporting.

Mallin: Corporate Governance 4e

CSR and Related Concepts: Corporate


Governance
Many definitions highlight the link between CSR and corporate
governance.
Is CSR a subset of corporate governance or is corporate
governance a subset of CSR?
Both concepts are closely related.

Mallin: Corporate Governance 4e

CSR and Corporate Governance


Related in definition:
1994 Report of the Toronto Stock Exchange Committee on Corporate
Governance in Canada:
Corporate Governance means the process and structure used to
direct and manage the business and affairs of the corporation with the
objective of enhancing shareholder value. The direction and
management of the business should take account the impact on other
stakeholders such as employees, customers, suppliers and
communities.
Principle 4 of The OECD Principles of Corporate Governance (2004)
underscores the need of a corporate governance framework to
encourage active co-operation between corporations and
stakeholders in creating wealth, jobs, and the sustainability of
financially sound enterprises.

Mallin: Corporate Governance 4e

IS CSR a Voluntary Concept?


Some definitions (e.g. European Union) describe CSR
as a voluntary concept.
Given the multitude of initiatives that promote CSR (e.g.
Global Compact, Global Reporting Initiative, OECD
Guidelines) in a voluntary fashion- not surprising CSR is
perceived in this way
However, recent legal developments suggest CSR is no
longer a voluntary concept.
Two major areas of development: Reporting and
Directors Duties
Mallin: Corporate Governance 4e

Benefits of CSR
Benefits of a CSR approach include:
Improved business reputation
Ability to attract customers
Ability to recruit quality employees
Easier to attract ethical investors
Competitive advantage
Improved employee motivation

Mallin: Corporate Governance 4e

Drawbacks of CSR
Drawbacks of adopting a CSR approach include:
Additional costs
It can be argued that the main responsibilities
firms have are to their shareholders
Efficiency may be reduced by acting in a socially
responsible manner

Mallin: Corporate Governance 4e

Main Concepts of CSR


CSR (Carrol, 1979)
Firms have responsibilities to societies including
economic, legal, ethical and discretionary (or
philanthropic).
Social Contract (Donaldson, 1982; Donaldson
and Dunfee, 1999) There is a tacit social
contract between the firm and society; the
contract bestows certain rights in exchange for
certain responsibilities.

Mallin: Corporate Governance 4e

Main Concepts of CSR


Stakeholder Theory (Freeman, 1984) A
stakeholder is any group or individual who
can affect or is affected by the achievement
of an organisations purpose. Argues that it
is in the companys strategic interest to
respect the interests of all its stakeholders.

Mallin: Corporate Governance 4e

ETHICS
What is Ethics
the principles by which people
distinguish what is morally right.

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Criteria for ethical decision


making: (continued)
Rights approach
A means of making decisions based on the belief
that each person has fundamental human rights
that should be respected and protected.

Justice approach
An approach to decision making based on treating
all people fairly and consistently when making
business decisions.

Mallin: Corporate Governance 4e

A company needs to ensure agreement about the relevant


criteria on which to judge the ethics of a business decision so
that people do not base decisions on personal value systems.

Code of Ethics
Corporate Credos
Ethical Policy
Statements

Managing Ethics

Ethics Training

Ethical Structures
Whistleblower
Policies

Whistleblower policies should include


the following key features:
The policy encourages reporting unethical conduct.
Meaningful procedure to deal fairly with reported
violations.
Those who report violations are protected from
retaliation.
Alternative reporting procedures.
Anonymous reporting to an ethics officer/committee.
Feedback to employees on ethics violations.
Top management support and involvement.
Mallin: Corporate Governance 4e

Copyright 2002 by The McGrawHill Companies, Inc. All rights

Eight steps to sound ethical decision


making in business:
1. Gather the facts.

6. Consider your

character and
integrity.
issues.
3. Identify the affected 7. Think creatively
about potential
parties.
actions.
4. Identify the
8. Check your gut
consequences.
feelings.
5. Identify your
obligations.
2. Define the ethical

Should firms be socially responsible?


Do corporations have a responsibility to conduct
their affairs ethically?
Should corporations be judged by the same
standards as individuals?
Should a business be concerned with more than
the pursuit of profits for its shareholders?

Mallin: Corporate Governance 4e

Differing Measures of Ethical Behavior


Code of ethics
An organizations written statement of its values
and rules for ethical behavior

Meeting high ethical standards is especially


challenging for those who work with people
from more than one culture, because ethical
standards can vary from culture to culture.

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CSR in Malaysia
In an effort to instill CSR culture into business, the
Malaysian Government requires all PLCs disclose their
CSR activities in their annual report to the Securities
Commission (SC)68, starting in 2007.
This new requirement affects over 1,000 companies in
Malaysia.
Bursa Malaysia published a reporting framework for PLCs,
which outlines potential CSR initiatives in the categories of
environment, community, marketplace and workplace.
The guidelines are flexible and require minimum
disclosure to understand whether a company undertook
CSR activities or not.
Mallin: Corporate Governance 4e

CSR in Malaysia
The overall goal of the regulatory authority is to raise
the awareness of CSR and encourage PLCs to
integrate the practice of CSR as part of the way they
work and think.
Chapter 9, appendix 9C (Part A, paragraph 29) of the
Listing Requirements, A listed company is required
to provide a description in its annual report of the
corporate social responsibility activities or practices
undertaken by listed company and its subsidiaries or
if there are none, a statement to that effect.

Mallin: Corporate Governance 4e

CSR: Reporting requirements


Type of
companies

Regulatory body

Public listed
companies (PLCs)

Bursa Malaysia and


All PLCs are required to
Securities Commission disclose their CSR
Malaysia
activities according to the
listing requirements
(Appendix 9c, Part A (29)

Government
Linked Companies
(GLCs)

Putrajaya Committee
on GLC High
Performance (PCG)

No reporting requirements

Small and Medium


Enterprise (SMEs)

Companies
Commission Malaysia
(SSM)

No reporting requirements

Mallin: Corporate Governance 4e

Reporting
requirement

Malaysian PLCs CSR Reporting limitations


CSR Element

Limitations

Workplace

Only a few companies had policies such as


flexible hours, childcare, diversity training
Obvious discrimination based on HIV status.

Marketplace

Product/service responsibility were poorly


understood
Less than half of the companies were
conducting initiatives in their supply chain.

Community

Not strategic, mostly philanthropic


Few companies align community investment to
MDGs or Malaysia development goals.

Environment

Almost 25% of companies reported no data

Mallin: Corporate Governance 4e

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