Good governance in relation to or corporate social responsibility

Corporate governance is concerned with holding the balance between economic and social goals and
between individual and communal goals. The corporate governance framework is there to encourage
the efficient use of resources and equally to require accountability for the stewardship of those
resources. This article outlines the relationship between corporate governance and corporate social
responsibility (CSR). It begins by examining the role of corporate governance in creating value for
shareholders. It focuses on the actions of the corporation and the board toward its shareholders and
other stakeholders, i.e., how corporate governance serves or fails to serve their interests. It covers the
assumptions that underlie theories of corporate governance and the expected outcomes of various
board structures and compositions. It then examines the state of corporate democracy, the issue of
accountability, and key legislation relative to corporate governance.

Advantage disadvantages of governance

What is Corporate Governance?

Corporate governance is often associated with public companies, but small businesses can also benefit
from this practice. Corporate governance consists of rules that direct the roles and actions of key people
rather than processes. Unlike simple policies and procedures, such as a dress code or expense
reimbursement procedure, corporate governance rules focus on creating better management and fewer
ethical or legal problems.

Examples of corporate governance include setting rules for using business funds for personal use;
serving on a board of directors; hiring family members; conflicts of interest; notifying owners, investors
and partners of key meetings and decisions; and disbursing profits.

Advantage

Improves the Company's Reputation

A corporate governance program can boost your company's reputation. If you publicize your corporate
governance policies and detail how they work, more stakeholders will be willing to work with you. This
can include lenders who see you have strong fiscal policies and internal controls, charities you might
partner with to promote your business, government agencies, employees, the media, vendors and
suppliers. The practice of sharing internal information with key stakeholders is known as transparency,
which allows people to feel more confident you have little or nothing to hide.

Fewer Fines, Penalties, Lawsuits

Corporate governance includes instituting policies that require the company to take specific steps to
stay compliant with local, state and federal rules, regulations and laws. For example, as part of
corporate governance, an executive management team or board of directors might conduct a review of
the company’s hiring practices if it falls under the guidelines of the Equal Opportunity Employment
Commission. You might require that your accounting department undergo an external audit by an
independent auditor every quarter or year.

Decreased Conflicts and Fraud

Corporate governance limits the potential for bad behavior of employees by instituting rules to reduce
potential fraud and conflict of interest. For example, the company might draft a conflict of interest
statement that top executives must sign, requiring them to disclose and avoid potential conflicts, such
as awarding contracts to family members or contracts in which an executive has an ownership interest.
The company might forbid loans to officers and family members or the hiring of family members.
External audits or requiring checks over a certain amount to be approved and signed by two people help
reduce errors and fraud.

Disadvantage

Corporations Governed by Statutes

Corporations are governed by federal and state statutes. One major reason business owners form
corporations is to limit the owners' liability to the amount of their investments. Another reason
founders form corporations is because corporations are permitted to raise capital by selling stock to
investors and have a long legal and case history to support this. With this corporate structure comes
certain requirements.

Fiduciary Duty of Board

Officers and the board of directors have fiduciary duties to act in the best interest of the corporation. If
they breach those duties by not exercising honest and prudent care, they can be held liable. This is why
companies where shareholders elect non-shareholder directors often provide directors and officers, or
D&O, insurance. D&O insurance does not protect against outright fraud, but it does protect against
fallout from bad business decisions.

Increased Costs

Corporations have higher administrative costs because of greater administrative requirements than
those required of LLCs and limited partnerships. Corporate boards must either meet or create
resolutions to enter into financial arrangements or contractual arrangements. Corporations must
maintain corporate documentation, including stock purchases and sales, legal compliance and annual
registration.

Maintenance of Separation

Corporations, shareholders and board directors and officers must follow all the corporate formalities,
including keeping annual meeting minutes for both shareholders’ meeting and board of directors’
meetings, documenting major decisions as board-approved. Even corporations owned and governed by
one shareholder in multiple director roles must adhere to all formalities. Shareholder-owners must sign
all documents as their position, for example, “John Smith, President, ABC Company." Failure to adhere
to these rules could result in a creditor getting a judge to pierce the corporate veil. When a court or
judge “pierces the corporate veil,” the court sets aside the corporate protection and allows the creditors
to go after the personal assets of the shareholders.

Principal Agent Conflict

Conflicts arise when a corporation’s shareholders do not actively participate in the business and instead
hire professional management to run the business. The manager represents the shareholders but often
has different goals and perspectives. The manager acts in his best interest as an employee but not in the
best interest of the shareholders. For example, a manager may make decisions that help him keep his
job and a nice salary but that reduce the amount of profits that go to the shareholders. Shareholders
must structure employment agreements to reduce or eliminate this conflict.

Advantage and disadvantage of corporate social responsibilty

Advantage: Profitability and Value

A CSR policy improves company profitability and value. The introduction of energy efficiencies and
waste recycling cuts operational costs and benefits the environment. CSR also increases company
accountability and its transparency with investment analysts and the media, shareholders and local
communities. This in turn enhances its reputation among investors such as mutual funds that integrate
CSR into their stock selection. The result is a virtuous circle where the company's stock value increases
and its access to investment capital is eased.

Advantage: Better Customer Relations

A majority of consumers – 77 percent according to a survey by branding company Landor Associates

cited by the University of Pennsylvania's Wharton School – think that companies should be socially
responsible. Consumers are drawn to those companies that have a reputation of being a good corporate
citizen. Research at Tilburg University in the Netherlands showed that consumers are prepared to pay a
10 percent higher price for products they deem to be socially responsible.
Disadvantage: CSR Costs Money to Implement

The main disadvantage of CSR is that its costs fall disproportionally on small businesses. Major
corporations can afford to allocate a budget to CSR reporting, but this is not always open to smaller
businesses with between 10 and 200 employees. A small business can use social media to communicate
its CSR policy to customers and the local community. But it takes time to monitor exchanges and could
involve hiring extra personnel that the business may not be able to afford.

Disadvantage: Conflicts with the Profit Motive

Even for larger companies, the cost of CSR can be an obstacle. Some critics believe that corporate social
responsibility can be an exercise in futility. A company's management has a fiduciary duty to its
shareholders, and CSR directly opposes this, since the responsibility of executives to shareholders is to
maximize profits. A manager who forsakes profits in favor of some benefits to society may expect to lose
his job and be replaced by someone for whom profits are a priority. This view led Nobel-Prize winning
economist Milton Friedman to write a classic article with the title: "The Social Responsibility Of Business
Is to Increase Its Profits."

Disadvantage: Consumers are Wise to Greenwashing

Greenwashing is term used to describe corporate practices that appear to be environmentally

responsible without actually representing a change in how a company conducts its business. For
example, a product may be labelled as "All Natural", even though it is being manufactured just as it
always has. Some dry cleaning services label their operations as "Organic" which sounds similar to
"organic food" but really carries no specific meaning. Some customers may react positively to these
types of claims, but others are wary of corporate greenwashing.