Despite ample research on corporate governance (CG) and corporate social responsibility (CSR), there is a lack of consensus on the nature of the relationship between the two concepts, says Professor Tanusree Jain of Trinity Business School, as she sheds light in a two-part feature on the full sweep of this bond.
By CoBS Editor Megha Sureshkar. Related research: Zaman, R., Jain, T., Samara, G., & Jamali, D. (2020). Corporate Governance Meets Corporate Social Responsibility: Mapping the Interface. Business & Society, 0007650320973415.
“The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume.” – Tony Hayward, former BP CEO, on the oil spill disaster that claimed 11 lives and has since spewed 20 to 100 million gallons of toxic oil into the Gulf of Mexico. The tragic event represented a failure of more than just environmental law, with corporate governance(CG) and corporate social responsibility (CSR) attitudes equally to blame.
The deep-water BP oil spill is just one of the many damaging incidents. The new millennium has been wrought with social, environmental and governance related scandals, linked by the common thread of the interplay between corporate governance and responsibility. So, how do the CG and CSR concepts interlink and overlap with each other? This question has spurred the interest of academics, practitioners and legislators alike.
Getting the ball rolling
Professor Jain kicks off the investigation by categorizing the world’s major business systems into 9 clusters. These clusters include liberal market economies (LME), coordinated market economies (CME), highly coordinated economies, European peripheral economies, advanced emerging economies, advanced city economies, Arab oil-based economies, emerging economies, and socialist economies. Understanding the shades of each cluster is essential to paint a picture of the CG-CSR behaviours unique to firms present in different environments.
The whole nine yards
- LMEs (e.g. USA, UK, Australia, Canada, Ireland and New Zealand) and CMEs (e.g. Austria, Belgium, Denmark, Finland, Netherlands, Norway, Sweden and Switzerland) are differentiated on the basis of how firms coordinate with each other and with other actors. With individualism being encouraged, workers and other actors are less organized in LME countries, indicating that firms coordinate their activities through a free market system and hierarchies. In LMEs, corporate governance norms are guided by shareholder value maximization. There is greater reliance on stock markets translating into short-termism, with inter-firm relations being more competitive and at arm’s length.
- CMEs, on the other hand, emphasize collectivism, with strong reliance on non-market forms of coordination between firms and other actors. There is a greater dependence on credit-based financial systems that translates into long-termism and inter-firm relations are collaborative in nature with unionization being accepted. State has a greater role in organizing economic activities in CMEs than in LMEs and there is increased focus on value maximization for multiple stakeholders, influencing how firms perceive both CG and CSR norms and behaviors.
- Highly coordinated economies (e.g. Japan) witness the state’s dominant role in the coordination of economic activities and regulation of markets, as opposed to banks and financial institutions. Also, there exists a high level of paternalistic authority. Insider‐dominated governance structures are prevalent which decide how firms function and conceive responsibilities within society.
- European peripheral economies (e.g. France, Greece, Italy, Portugal, Spain, Czech Republic, Hungary, Poland, Romania and Slovakia) exhibit a strong presence of industrial and craft unions, banking-led financial systems, and hierarchical decision-making at firm and national levels. Family and state ownership are key with moderately strong corporate governance norms in place.
- Advanced emerging economies (e.g. Chile, Turkey, Israel, South Africa, Korea and Taiwan) comprise a geographically diverse group of emerging countries that reflect similar economic development patterns in terms of their reliance on developmental state policies. Common attributes include banking-led financial systems, hierarchical governance at firm and national levels, dominant role of families in firm ownership and control, and well-defined corporate governance norms, which have distinctive consequences on CSR.
- Advanced City Economies (e.g. Hong Kong and Singapore) represent trade dependent hubs that mainly rely on banking-led financial systems with very high levels of inward foreign investment. Hierarchical decision-making exists within firms and so do superior corporate governance norms. A strong role of family ownership is emphasized in Hong Kong, whereas state ownership remains strong in Singapore. While the state is regulatory in Hong Kong, it includes a developmental element in Singapore and is highly effective in character. These specificities shape corporate orientations towards CSR.
- Arab oil-based economies (e.g. Kuwait, Qatar, Saudi Arabia and the United Arab Emirates) primarily rely on oil production and exports, with ongoing efforts at diversifying into other industries. These countries are characterised by absent or weak unions rights, banking-led financial investments and low foreign investment, hierarchical decision-making at firm and national levels, and an emphasis on the role of powerful families and state in the economy. These economies demonstrate poor to average corporate governance norms as well as peculiar CSR practices.
- Emerging economies (e.g. Algeria, Argentina, Bangladesh, Brazil, China, Colombia, Egypt, India, Indonesia, Kazakhstan, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Peru, Philippines, Russia, Thailand, Ukraine and Vietnam) represent the largest cluster with a very wide geographical spread of countries. Their features include relatively low levels of per capita GDP, suppressed union rights, important role of credit and banking-led finance aligned with developmental goals of the state, hierarchical decision-making at firm and national levels, and family and state ownership of firms with poor corporate governance norms.
- Finally, socialist economies (e.g. Cuba and Venezuela) have weak union rights, banking-led financial systems coupled with absent or very low foreign direct investment, hierarchical decision-making at firm and national levels, state ownership and control of firms (with family involvement in Venezuela), very weak corporate governance norms and existence of a state that hinders economic development.
A gradual shift
With the clusters and their unique elements identified, Prof. Jain proceeds to divide the selected articles into three main timeframes: prior to the start of the global financial crisis (GFC); during GFC; and post GFC.
Closer inspection revealed that prior to the GFC, there was a dominance of CG-CSR research in LMEs followed by very limited research in CMEs, emerging economies and European peripheral economies. No studies were conducted in the other clusters. However, this trend gradually shifted in the post GFC period. While LMEs still dominated the research space, growing efforts were made in emerging economies, advanced emerging economies and in European peripheral economies. Unfortunately, there were still very few studies carried out in CMEs, advanced city economies, Arab oil-based economies, and highly coordinated economies, with gross neglect of research in socialist economies.
Within non-LME countries, most of the research has taken place in emerging economies. The increased research interest in CG-CSR within emerging economies, most of which is contextualized in Asia, primarily India and China, can be traced to the implementation of regulations on CG and CSR by national stock exchanges across Asian countries.
Although the European context (which mainly includes CMEs and European peripheral economies) is argued to exhibit stronger institutional pressures for CSR especially from the European Commission, LME firms often have more pronounced and explicit CSR practices. These are well documented and reported, and therefore more researched, as compared to those prevalent in CMEs and European peripheral economies, where CSR tends to be more implicit in nature.
Additionally, the majority of the studies measured CSR holistically, considering commitment and practices that affect firms’ relations to their stakeholders – employees, customers, society, environment etc. Studies focusing on specific aspects of CSR such as environmental performance or corporate philanthropy were limited in number. Interestingly, a larger proportion of the environment-focused studies correspond to the post GFC period – reflecting both an acknowledgement of environmental issues as well as a move that emphasizes specificity in CSR measurements.
Prof. Jain contends that there is an urgent need to re-think the fundamental assumptions and boundary conditions of CG and CSR theories that may have universal appeal in LME and CME business systems, but exhibit limits when applied across other business systems. The domination of specific theories (e.g., agency theory) across a few clusters exposes an underlying etic approach in international business research that assumes that theories are universal and applicable across contexts. This is dangerous she warns because CG and CSR may manifest in different ways or even have different meanings across contexts. Adopting a native lens to understand CG and CSR is necessary and important to account for cultural, historical, and ethnic dimensions affecting the understanding and practice of CG and CSR.
Read part 2 of this research feature on Thursday 7th January.
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