CORPORATE GOVERNANCE

& CORPORATE SOCIAL

RESPONSIBILITY

Prof.Dr.Dr.Dr.H.C. Constantin BratianuFaculty of Business Administration

Academy of Economic Studies

Bucharest, Romania

Shareholders

Board of

Directors

CEO

Corporate

Governance

Sructure

Executives

Board of

Directors

Internal and

External Auditors

Legislation

Regulation & Control System

CORPORATE GOVERNANCE

• Corporate governance is concerned with the structures

and systems of control by which managers are held

accountable to those who have a legitimate stake in an

organization.

• Governance has become an increasingly important issue

for organization for 3 main reasons:

- The separation of ownership and management control.

- Corporate failures and scandals (i.e. Enron - 2001,

Lehman Brothers and the Royal Bank of Scotland – 2008).

- Increased accountability to wider stakeholders interests.

Beneficiaries

Investment

Funds

Board of

Directors

Executive

Directors

Senior

Executives

Managers

Actions and

Reporting

GOVERNANCE CHAIN

• The relationship in such a governance chain can be

understood in terms of the principal – agent model.

• Principals pay agents to act on their behalf, just as

homeowners employ estate agents to sell their

house.

• Principal – agent theory assumes that agents will not

work diligently for principals unless incentives are

carefully and appropriately aligned.

WEAKNESSES OF THE GOVERNANCE CHAIN

1. There is a lack of clarity on who the end beneficiaries

are. That means a lack of clarity to whom they are

responsible for their decisions.

2. Unequal division of power between the different

components of the chain.

3. There is an unequal access to the information

concerning the company.

4. Potentially, the agents in the chain may pursue their

own self-interests up to higher levels than accepted.

5. These agents may set up targets and may use

measures convenient to their self-interests.

BOARD OF DIRECTORS (I)

• There are differences concerning the structure of

Board of Directors between companies in USA and UK,

and Germany and Japan. Also, there are differences

between state owned and private or public owned

companies.

• Typically, Board of Directors consist of both executive

and non-executive directors. The balance between

them depends on the country and type of organization.

• There is a potential danger that non-executive directors

are chosen based on personal relationship with the

executive directors, thus not having a real impact on

the strategic decisions.

BOARD OF DIRECTORS (II)

• The governing body of an organization is typically a

board of directors.

• The primary statutory responsibility of a board is to

ensure that an organization fulfils the wishes and

purposes of the formally recognized primary

stakeholders.

• Since boards have ultimate responsibility for the

success or failure of a company, they must be

concerned with strategy.

• Generally, we may distinguish between two types of

governance structures: the shareholder model and the

stakeholder model.

THE SHAREHOLDER MODEL OF

GOVERNANCE (USA & UK)

• The main idea is that shareholders have legitimate

primacy in relation to the wealth generated by the

corporation rather than, for example, the rights of

other stakeholders such as employees, union

representatives or banks.

• At least, in principle, the trading of shares provides a

regulatory mechanism for maximizing shareholder

value. Dissatisfied shareholders may sell their shares,

the result being a drop in share price and down fall of

the economic performance of the company.

THE SHAREHOLDER MODEL OF

GOVERNANCE (USA & UK)

• Advantages:

- Higher rate of return for investors

- Reduced risks for investors

- Encourages entrepreneurship

- Independence for management

• Disadvantages:

- Difficult to monitor management for investors

- The risk of short-termism

- The risk of top management greed

THE STAKEHOLDER MODEL OF

GOVERNANCE (Japan, Germany & Italy)

• The main idea is that wealth is created, captured and

distributed by a variety of stakeholders. This may

include shareholders but could include family

holdings, other investors such as banks, as well as

employees or their union representatives.

• In practice, in these countries, one or two large

groups of investors or block holders often come to

dominate ownership. For instance, in Germany

nearly ¾ of all listed companies have a majority

owner.

THE STAKEHOLDER MODEL OF

GOVERNANCE (Japan, Germany & Italy)

• Advantages:

- Closer monitoring of management by investors

- Longer-term decision horizons

- Stakeholders avoid high-risk decisions

• Disadvantages:

- Potential interference between stakeholders and

management, which means reduced independence for

managers

- Slower decision making

- Reduced financing opportunities for growth

CORPORATE SOCIAL RESPONSIBILITY

• Corporate Social Responsibility (CSR) is the

commitment by organizations to behave ethically and

contribute to economic development while improving

the quality of life of the workforce and their families as

well as the local community and society at large.

• CSR is not only good from ethical point of view, but

because doing good for people and environment means

finally a good impact on business.

• There is a triple bottom line of any business:

- Economic: profit

- Social: care for people

- Environmental: sustainability

CSR STANCES (I)

• Laissez-faire

- Managers consider that the purpose of business is to

make profit, regardless the social and environmental

condition.

- It is the Government responsibility to create

legislation for environmental protection and companies

should respect it. That would be enough. If legislation is

badly conceived or non-existent, then business will

destroy the environment.

- In Romania, due to such a bad legislation a lot of our

forested area has been destroyed completely, with

many negative consequences (e.g. floods, climate

change, increasing pollution).

CSR STANCES (II)

• Enlightened self-interest

- Managers recognize that caring about society and

environment contributes to the good image of the

company, which it will have a good effect on business in

long run.

- Also, it helps in recruiting good people and in retaining

them for longer periods of time.

- That implies also developing good relationships with

other categories of stakeholders.

- However, this stance is more reactive than pro-active.

CSR STANCE (III)

• Forum for stakeholder interaction

- Managers are aware of the triple bottom line:

economic, social and environmental.

- Thus, they combine and integrate interests of different

stakeholders. Profit is considered as being necessary

for business development but not as a purpose of

making shareholders richer.

- For instance, companies may invest in education and

culture, with a long term results for them. In France

companies spend a certain percentage of their profit for

training and education. In Germany companies must

support arts and cultural developments. Better

educated people can have a better contribution to the

business development.

CSR STANCE (IV)

• Shapers of society

- Managers consider financial issues as being

secondary to the issue of changing the world.

- Managers consider that solving social and

environmental problems is much more important than

to become rich by maximizing profit.

- There is a new field of business called social

entrepreneurship that tries to find solutions for people,

and not for making money.

- Examples: Mohammad Yunus and Grameen Bank, Roy

Bunker and Barefoot College, many foundations in USA

dedicated to social and educational projects.

Roy Bunker and the

Barefoot College, India

Mohammad Yunus

and the Grameen

Bank, Bangladesh

THREE VIEWS ON THE PURPOSE OF

BUSINESS

• Milton friedman – Profit maximization

In a free enterprise, private property system, a corporate executive

is an employee of the owner of the business. His responsibility is to

make as much money as possible, while conforming with the basic

rules of society.

• Charles Handy – Stakeholders view

The purpose of business is not to make profit. It is to make a profit

so that the business can do something more or better. We need to

eat to survive, but eating is not the purpose of our live.

• Richard Branson – Doing good

Just making money, in order simply to give it away, is out of date.

Doing good can help improve your prospects, your profits and your

business; and it can change the world.