This is an analysis of the relationship between corporate governance and social responsibility within organizations. This calls for the analysis of previous articles that have been written to show how the two principles are related with regard to the running of an organization and its outlook in the eye of external stakeholders and observers. The issues that are analyzed and discussed, among others, include the responsibilities that an organization has towards external stakeholders, the overall social responsibilities bestowed upon an organization, and the reasons behind the increase in focus towards social responsibility in the running of the organization. The results of the analysis reveal that social responsibility and corporate governance go hand in hand in the present operation of companies and organizations. Corporate governance aims at making the organization look credible and relevant. Therefore, it relies on various aspects of social responsibility to ensure that these goals are achieved.
Corporate Governance and Social Responsibility
Corporate governance can be defined as the systems, procedures, rules, and general formats that are used in the day-to-day running of organizations. Corporate governance is in charge of giving the frameworks that are adhered to in order to ensure that an organization runs smoothly both internally and externally. It is also in charge of ensuring that the organization pays its dues in relation to outside stakeholders, authority bodies, financiers, suppliers, customers, and the community. It also puts in place systems that ensure that an organization is able to attain its goals by handling all aspects of management, internal control, and action plans that are deemed necessary. Social responsibility is the state in which an organization conducts its activities while considering its relationships with the outside people and the society, rather than just concentrating on profit-making. In the present day, social responsibility has been proven as necessary for the continuity of organizations. It is also being adapted as a method of gauging the performance of the said organization. This paper seeks to investigate the relationship that exists between corporate governance and social responsibility and whether the latter has any direct effects on the former with regard to organizations.
Khan, A et al (2012) are of the opinion that these two concepts are inseparable in relation to the effective running of organizations. A research carried out by the team of authors revealed that organizations require social responsibility attributes in order to uphold legitimacy to the external stakeholders. They, therefore, conclude that adaptation and implementation of social responsibility should be heavily considered by companies or countries that share the same regulatory structures and objectives.
In his article that analyzes the connection between corporate governance and social responsibility, Sacconi (2012) states that social responsibility is a model of governance. This is because the latter is fundamental in maintaining the relationship between an organization and its stakeholders, who are the main components required for the sustenance of an organization. He says that social contracts that involve the two parties are responsible for non-partial mediation and reasoning that may be carried out by the organization’s stakeholders in relation to claims that are put across by stakeholders.
Jamali et al (2008) carried out their own analysis by using evidence and statistics of a developing country. This was done by carrying out interviews with the managers of eight corporations that exist in Lebanon. Their findings indicated that there is increasing interdependence between corporate governance and social responsibility and that although in the past companies have greatly concentrated on corporate governance, they are starting to shift some of the attention to social responsibility (Taha, 2013). This is because they have realized that social responsibility has a direct impact on the performance of corporations, which is the main goal that is set by corporate governance.
Aguilera, (2006) also analyzes the relationship between the two in relation to the success of a business. She makes an observation that social responsibility has made it to the top of the list regarding the issues that are usually discussed about companies, especially those that seem to be big in terms of profit-making. Stakeholders always determine the kind of company they would like to be involved with based on the company’s performance. This, in the past, was measured through profit-making. However, in the present times, things have changed and now social responsibility plays a big part when the performance of an organization is being determined.
Buchholtz (2208) analyzes the relationship between the two concepts. He begins this by first analyzing the effect that corporate governance has on value creation for stakeholders. The article also looks at how corporate governance acts towards the needs and concerns of the stakeholders, and whether it fails or succeeds in handling these interests.
To effectively carry out this analysis, a section of books and articles written on similar analysis will be used. Several books have been written in the not so far past about the coexistence between these two concepts and whether they work for the benefit of the company, not only in relation to profit-making but also in the general credibility and reliability of these corporations, especially in the eyes of current and potential stakeholders. During the article analysis, the focus will be given to those that were written about real-life situations. This means that they will have drawn their data and conclusions from analyzing companies in relation to how their corporate governance has or has not been affected, directly or indirectly, through their participation in social responsibility-related activities. This analysis will also focus on the specific activities, if any, that are likely to boost the chances of an organization or company to their target and current markets. These articles will be drawn from both web and print-based avenues. Those that specifically handle corporate governance and social responsibility as a topic will be given priority. Therefore, for ease of access to these documents whether through the library database or online, the keywords of the search shall be ‘corporate governance and social responsibility.’
All the articles analyzed for the purpose of this research concur with the fact that social responsibility plays a part in corporate governance.
All the articles reviewed are of the opinion that companies that take part in social responsibility activities have a greater advantage in the market than those who solely concentrate on profit-making. According to Standberg (2005), the reforms that have recently taken place in several organizations regarding corporate governance have had to incorporate social and environmental responsibilities. This is because social responsibility has proven to have direct financial effects on companies. The article is largely based on a debate that was carried out among Canadian corporations regarding the connection between the two (Solloman, 2007). It was discovered that during the definition of what should be truly regarded as good governance, many companies over the world have had to factor in social responsibility.
Despite this massive agreement, some of the authors were quick to note that social responsibility is not necessarily a guarantee for profit-making and higher rankings, rather the general method in which an organization is run. Therefore, it is important for a company to have proper management systems in place in order to profit from participation in social responsibility.
The rising need to consider social responsibility in governance has been brought about by the changing trends in the world that have been caused by such phenomena as globalization, climate change, and the increasing cases of corporate scandals that are likely to taint the image of a company. Social responsibility can be portrayed in several ways by a corporation (Buysse & Verbeke, 2008). One of these methods is portrayed through proof of accountability. A corporation should be able to clearly explain the goings-on it, especially when its finances have direct effects on the shareholders. A company that is not able to be accountable in such cases quickly loses the trust of its stakeholders and of the public (maretno, 2011). This will in turn have direct negative effects on the profitability of such a corporation because it may lead to withdrawal by stakeholders and other entities that may be the backbone of the company (Crane, 2014). A company should also be able to show corporate responsibility in the way that it manages risks and crises that are likely to occur. Therefore, social responsibility plays a big role in the way a company is viewed.
Beltratti (2005) defines corporate governance as mechanisms that are put in place mainly to protect outsiders while ensuring that the firm continues to work effectively. In her research paper, she identifies that corporate social responsibility assists in the identification of which practices can be classified as ethical, and which ones may need revision (Gjolbert, 2009). Therefore, both these concepts are necessary for determining the market value of a particular firm. She asserts that basing the operations of a company purely on profit-making is what is ailing most companies in the current times. It is important for them to also consider human rights and ways in which they can participate in the preservation of the environment.
From all the articles analyzed, it is evident that social responsibility is necessary for effective corporate governance. Some of the scholars have even asserted that the line between these two concepts is so thin that they are almost referring to the same thing. This is because social responsibility seems to be the one that provides guidance for corporate governance. Corporate governance is only seen to be successful when social responsibility is applied in all its decision-making processes. This, therefore, calls for corporations and other bodies that may be operating for profit-making purposes to recognize the need to incorporate social responsibility in all their undertakings. People have nowadays begun to care less about the profit that is made by a company or the quality of service that the company offers, and are now leaning towards any benefits that the company may be bringing to the table that does not include profit-making.
Corporations should then ensure that the needs of the external stakeholders and company shareholders are put at the forefront instead of profit-making endeavors. This is because these external forces directly affect the profitability or the ability of the company to sustain itself in the market.
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