The Governance of Risk 9781781907818, 9781781907801

Citation preview

THE GOVERNANCE OF RISK

DEVELOPMENTS IN CORPORATE GOVERNANCE AND RESPONSIBILITY Series Editors: Gu¨ler Aras and David Crowther Recent Volumes: Volume 4:

Education and Corporate Social Responsibility: International Perspectives

Volume 3:

Business Strategy and Sustainability

Volume 2:

Governance in the Business Environment

Volume 1:

NGOs and Social Responsibility

DEVELOPMENTS IN CORPORATE GOVERNANCE AND RESPONSIBILITY VOLUME 5

THE GOVERNANCE OF RISK EDITED BY

DAVID CROWTHER De Montfort University, Leicester, UK

GU¨LER ARAS Yıldız Technical University, Istanbul, Turkey

SRRNet Social Responsibility Research Network www.socialresponsibility.biz

United Kingdom – North America – Japan India – Malaysia – China

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2013 Copyright r 2013 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78190-780-1 ISSN: 2043-0523 (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF CONTRIBUTORS

vii

INTRODUCTION

ix

SUSTAINABLE PRACTICE: THE REAL TRIPLE BOTTOM LINE Gu¨ler Aras and David Crowther

1

IS CSR IN CRISIS? Marı´a del Mar Miras Rodrı´guez

19

UNDERSTANDING STAKEHOLDER ACTIVISM, MANAGING TRANSPARENCY RISK Millicent Danker

33

CORPORATE RISKS AND RESPONSIBILITIES IN LOW CARBON ECONOMY Wang Hong

73

GOVERNANCE AND SOCIALLY RESPONSIBLE ENERGY CONSUMPTION Shahla Seifi

95

GOVERNANCE IN CAPITAL MARKET INSTITUTIONS Gu¨ler Aras and Banu Yobas-

111

THE ELEMENT OF RISK IN RELATION TO IMPORTING FROM LESSER DEVELOPED COUNTRIES USING PREFERENTIAL TARIFFS Rachel English

143

v

vi

CONTENTS

GOVERNANCE, RISK AND STAKEHOLDER ENGAGEMENT: WHAT LESSONS CAN BE LEARNT FROM MINING? Veronica Broomes THE TERRITORIAL SOCIAL RESPONSIBILITY IN THE CITY OF VOLTA REDONDA, BRAZIL: THE CASE OF CSN Maria Alice Nunes Costa, Carolina Doria Romeo Losicer, Jessica Guerra Ina´cio de Oliveira and Bruno Silva Faria

157

181

DECIPHERING THE DIVERSE NATURE OF CORPORATE GOVERNANCE IN THE INDIAN PUBLIC SECTOR: A STUDY OF PUBLIC SECTOR BHARAT HEAVY ELECTRICALS LIMITED (BHEL) COMPANY Roopinder Oberoi

203

ABOUT THE CONTRIBUTORS

235

INDEX

237

LIST OF CONTRIBUTORS Gu¨ler Aras

Faculty of Economics and Administrative Sciences, Yıldız Technical University, Turkey

Veronica Broomes

Executive Solutions Training Ltd, London, UK

Maria Alice Nunes Costa

University Federal Fluminense, Brazil

David Crowther

De Montfort University, UK

Millicent Danker

Perception Management International, UK and Malaysia

Rachel English

De Montfort University, Leicester, UK

Bruno Silva Faria

University Federal Fluminense, Brazil

Carolina Doria Romeo Losicer

University Federal Fluminense, Brazil

Marı´a del Mar Miras Rodrı´guez

University of Seville, Spain

Roopinder Oberoi

University of Delhi, Delhi, India

Jessica Guerra Ina´cio de Oliveira

University Federal Fluminense, Brazil

Wang Hong

School of Economics, Shanghai University, Shanghai, China

Shahla Seifi

Universiti Putra Malaysia, Selangor, Malaysia

Banu Yobas-

Management Engineering Department, Istanbul Technical University (ITU), Istanbul, Turkey

vii

INTRODUCTION The relationship between economic or social or political activity and risk is widely recognised at a societal level, a market level and a business level, and equally widely discussed. The relationship between governance and risk at all of these levels is equally widely recognised but much less widely discussed. But the consequences of poor governance in this arena have been exposed to all in the recent financial and economic crisis as financial institutions and even countries have collapsed or come close to collapsing. The relationship between governance and risk is particularly important in the global environment in which we operate and needs to be more fully discussed and theorised. This book is designed to address important aspects of this topic and set it within the context of the global business and societal environment. It is clearly accepted that good governance is fundamental to the successfully continuing operating of any organisation; hence much attention has been paid to the procedures of such governance. Often, however, what is actually meant by the governance of an organisation is merely assumed without being made explicit; often it is assumed to be concerned with how the organisation conducts its annual meeting, deals with auditors, etc. Increasingly this has been extended into a more general concern with the management of investor relationships. In reality of course it affects all of the operations of a business and its relations with all of its stakeholders – a much more wide-ranging concern than is sometimes appreciated. It is being recognised everywhere that good governance is important for corporate performance. Indeed firms are being expected to make statements about their governance as part of their annual reporting and every corporate website makes a statement about the company’s governance procedures. It is easy to claim that this is because of a reaction to all the corporate scandals which we have witnessed in the last decade, starting with the collapse of Enron. Corporate governance is therefore currently an important concept the world over. It has gained tremendous importance in recent years. Two of the main reasons for this upsurge in interest are the economic liberalisation and deregulation of industry and business brought about through globalisation ix

x

INTRODUCTION

and the demand for new corporate ethos and stricter compliance with the law of the land. One more factor that has been responsible for the sudden exposure of the corporate sector to a new concern for corporate governance is that times have changed and there is a demand for greater accountability of companies to their shareholders and customers (Bushman & Smith, 2001). A significant part of the reason for this is due to the developments brought about through globalisation. The phenomenon known as globalisation is a multidimensional process involving economic, politic, social and cultural change. However, the most important discussion about globalisation is related to the economic effect it has upon countries and the corporations operating within and across these countries. But this is not really the reason why governance has become so important. The reason is that investors are recognising that good governance leads to better financial performance. The relationship is direct and the evidence is overwhelming. The evidence is so great that it is clear that investors are increasingly willing to pay a premium to invest in a company with good procedures for its governance. This is because they recognise that this will lead to expected improvements in sustainable performance which will, over time, be reflected in future dividend streams. In other words it is more profitable for an investor to invest in a well-governed company and the benefits accrue both in the short term and in the long term. A principal reason why investors think this is that they understand that there is a close relationship between governance and risk and that good governance includes the identification and management of risk. As the economic environment becomes more global, this relationship comes more to the fore. There has been much written about globalisation – either positive or negative – and the effects which it is having. One consequence of globalisation though is manifesting itself in the structure and organization of corporations. This is concerned with the harmonisation procedures and structures which will manifest themselves through the emergence of global norms for corporate governance. One factor which is significantly affected by such governance is that of risk assessment and management. Good governance reduces and facilitates the management of risk. This is the focus of this book. There are many types of risk and many approaches to dealing with risk as the various contributions in this volume show. Indeed the types of risk which are identified as being of concern continue to expand as more issues become of concern. It is equally clear that the definition of corporate governance has extended considerably beyond investor relations and

Introduction

xi

encompasses relations with all stakeholders – including the environment. This is essential for the longer term survival of a firm and is therefore a key component of sustainability. There is evidence that some firms understand this but they are in a minority. So it is possible to say that good corporate governance will address this but that not all firms recognise this. It is equally possible to state that a firm which has a more complete understanding of the relationship between social responsibility, sustainability and corporate governance will address these issues more completely. By implication a more complete understanding of the inter-relationships will lead to better corporate governance, and therefore to better economic performance. Another tentative conclusion which can be arrived at is concerned with the extent of disclosure manifest through the reporting of such things as corporate governance and corporate social responsibility, and is more in the nature of a prognosis. Crowther (2000) traces an archaeology of corporate reporting which shows, over time, the amount of information provided – first to shareholders, then to potential investors (Gilmore & Willmott, 1992), then to other stakeholders – has gradually increased throughout the last century, as firms recognised the benefit in providing increased disclosure. Similarly the amount of disclosure regarding all activities has been increasing rapidly over the last decade, as firms have recognised the commercial benefits of increased transparency. Therefore it is reasonable to argue – as we are doing – that the amount of information regarding the relationship between governance and social responsibility will also increase, not just as firms gain a clearer understanding of that relationship but also as they understand the benefits of greater disclosure in this respect. Thus we consider that this will become more apparent over time. The most important point to note, however, is the relationship between corporate governance and the level of risk to which a firm is exposed. Good governance reduces the exposure of a firm to a whole variety of risks. This is clearly recognised by investors and potential investors and so the cost of capital is lower if a firm has good procedures for its governance. In this volume various authors have sought to address the relationship between governance and risk and their relationship to business practice, whether it is at a global level or a societal level or at a business unit level, whether in the commercial sector or in the public sector. And the debate contained in this volume flows through all of these levels within the varied contributions. And the debate addresses such central issues as transparency, environmental problems, sustainability and corporate social responsibility as well as governance itself, because these concepts are inextricably interrelated. The approaches taken by the various authors reflect the divergence

xii

INTRODUCTION

of opinions in the field, whereas the fact that the authors come from many difference countries shows the unification of concern for the topic as one which is of global interest and global relevance. These contributions combine together to make a distinctive contribution to the discourse. This book is a part of the series on Developments in Corporate Governance and Responsibility which is published in association with the Social Responsibility Research Network. Each book in the series focuses upon one of the factors that influence societal or business behaviour and thereby contribute towards social responsibility. This particular volume focuses upon the increasingly important topic of governance and risk. The purpose of the book, therefore, is to explore this issue and its significance around the world. In doing so it inevitably also considers the relationship between these and corporate performance and corporate social responsibility. This is also something we consider at our conferences. Indeed this book was prepared for our 12th conference in Rio de Janeiro, Brazil where all delegates have received a copy. The conference extends the discourse just as this book does. David Crowther Gu¨ler Aras Editors

REFERENCES Bushman, R. M., & Smith, A. J. (2001). Financial accounting information and corporate governance. Journal of Accounting and Economics, 32, 237–333. Crowther, D. (2000). Corporate reporting, stakeholders and the Internet: Mapping the new corporate landscape. Urban Studies, 37(10), 1837–1848. Gilmore, C. G., & Willmott, H. (1992). Company law and financial reporting: A sociological history of the UK experience. In M. Bromwich & A. Hopwood (Eds.), Accounting and the law (pp. 159–191). Hemel Hempstead: Prentice Hall.

SUSTAINABLE PRACTICE: THE REAL TRIPLE BOTTOM LINE Gu¨ler Aras and David Crowther ABSTRACT One of the children of Brundtland has been the concept of the triple bottom line – economic, environmental and social – as a means of planning for and measuring performance. This approach has largely been unquestioningly accepted. Despite this the agenda for socially responsible behaviour has evolved and developed. Now the concern is for the whole supply chain, which transcends the organisational boundary and throws a question over any idea of the triple bottom line. Corporate concern increasingly focuses upon two key issues, which are also of paramount importance to individuals: environmental degradation, particularly climate change, and human rights protection. In addition a lot of concern has been expressed as a result of revelations stemming from the economic and financial crisis, which have exposed significant failures in governance at corporate level and in markets and governments. Environmental degradation, human rights protection and governance operate at many levels from global to corporate. In many ways they parallel the idea of the triple bottom line but are not organisationally bounded. They represent issues of greater concern than merely corporate issues; they have an impact on the global and societal matters also. They are also totally connected to sustainable

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 1–18 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005004

1

2

GU¨LER ARAS AND DAVID CROWTHER

behaviour. In this chapter we therefore argue that this is the real triple bottom line, and discuss the implications. Keywords: Sustainability; triple bottom line; human rights; governance; environment; stewardship

INTRODUCTION In recent times there has been a considerable shift in the perception of corporate social responsibility (CSR). It seems to have become generally accepted by businesses and their managers, by governments and their agencies, and by the general public that there is considerable benefit in engaging in CSR. Consequently every organisation is increasingly going to have its CSR policy translated into activity. Despite the fact that many people remain cynical about the genuineness of such corporate activity, the evidence continues to mount that corporations are actually engaging in such socially responsible activity, not least because they recognise the benefits which accrue. It seems therefore that the battle is won and everyone accepts the need for CSR activity – all that remains for discussion is how exactly to engage in such activity and how to report upon that activity. Even this has been largely addressed through such vehicles as Global Reporting Initiative (GRI) and the forthcoming ISO26000. Nevertheless the need for social responsibility is by no means universally accepted but evidence shows that a number of large corporations are successfully engaging in ethical and socially responsible behaviour – and this number is increasing with time. Additionally, there is no evidence that corporations that engage in socially responsible behaviour perform, in terms of profitability and creation of shareholder value, any worse than any other corporations. Indeed there is a growing body of evidence1 that shows that socially responsible behaviour leads to increased economic performance – at least in the long term – and consequentially greater welfare and wealth for all involved. All of this means that a wide variety of activities have been classed as representing CSR, ranging from altruism to triple bottom line reporting, and different approaches have been adopted in different countries, in different industries and even in different but similar corporations. And recently the agenda has shifted from a concern for CSR to a concern for sustainability, and many activities have been re-designated accordingly (Aras & Crowther, 2009a). This chapter re-examines this understanding of sustainability and

Sustainable Practice: The Real Triple Bottom Line

3

in the process argues for a new and completely different triple bottom line. In doing so we must start, like everyone else, with Brundtland and its legacy.

THE BRUNDTLAND REPORT AND AFTER ... Sustainability is both ubiquitous and a controversial topic because it means different things to different people. Nevertheless there is a growing awareness that has led to a lot of discussion about whether it can be delivered by multinational companies in the relatively straightforward manner they promise (Schmidheiny, 1992; World Commission on Environment and Development (WCED), 1987). The Brundtland Report (WCED, 1987) must be considered the starting point because there is general acceptance of its contents and the definition of sustainability in it is pertinent and widely accepted. Equally, the Brundtland Report is part of a policy landscape being explicitly debated by the nation states and their agencies, big businesses and supra-national bodies such as the United Nations through the vehicles of the WBCSD (World Business Council for Sustainable Development) and ICC (International Chamber of Commerce) (see for example, Beder, 1997; Gray & Bebbington, 2001). The effect of actions taken in the present upon the options available in the future has directly led to glib assumptions that sustainable development is both desirable and possible and that corporations can demonstrate sustainability merely by continuing to exist in the future (Aras & Crowther, 2008a). It is therefore important to remember the Brundtland Commission’s (WCED, 1987, p. 1) definition of sustainable development, which is most widely accepted and is used as the standard definition of sustainable development: y development that meets the needs of the present without compromising the ability of future generation to meet their own needs.

This report makes institutional and legal recommendations for change in order to confront common global problems. More and more, there is a growing consensus that firms and governments in partnership should accept moral responsibility for social welfare and for promoting individuals’ interest in economic transactions (Amba-Rao, 1993). Significantly the Brundtland report had made an assumption – which has been accepted ever since – that sustainable development was both possible and desirable; and the debate since then has centred on how to achieve this. Thus, ever since the Brundtland Report was produced by the World Commission on Environment and Development in 1987, there has been a continual debate concerning sustainable development (Chambers, 1994;

4

GU¨LER ARAS AND DAVID CROWTHER

Pretty, 1995). Similarly, emphasis has been placed on such things as collaboration, partnerships and stakeholder involvement (Brown, Tompkins & Adger, 2002; Ladkin & Bertramini, 2002). However, it has been generally accepted that development is desirable and that sustainable development is possible – with a concomitant focus on how to achieve this. Quite what is meant by such sustainable development has however been much less clear and a starting point for any evaluation must be to consider quite what is meant by these terms. There is a considerable degree of confusion surrounding the concept of sustainability: for the purist sustainability implies nothing more than stasis – the ability to continue in an unchanged manner – which is often taken to imply development in a sustainable manner (Hart & Milstein, 2003; Marsden, 2000) and for many the terms sustainability and sustainable development are synonymous. For us we take the definition as being concerned with stasis (Aras & Crowther, 2008b); at the corporate level if development is possible without jeopardising that stasis then this is a bonus rather than a constituent part of that sustainability. Moreover, sustainable development is often misinterpreted as focusing solely on environmental issues. In reality, it is a much broader concept as sustainable development policies encompass three general policy areas: economic, environmental and social. In support of this, several United Nations texts, most recently the 2005 World Summit Outcome Document, refer to the ‘interdependent and mutually reinforcing pillars’ of sustainable development as economic development, social development and environmental protection.

BRUNDTLAND AND SUSTAINABILITY Although it is over 20 years old, the Brundtland report should be considered the starting point as its definitions have been universally accepted. According to this report sustainability is concerned with the effect of actions taken in the present upon the options available in the future. And of course it is concerned with the fact that if resources are utilised in the present then they are no longer available for use in the future. It has also led to an acceptance of what must be described as the myths of sustainability (Aras & Crowther, 2008c):  Sustainability is synonymous with sustainable development.  A sustainable company will exist merely by recognising environmental and social issues and by incorporating them into its strategic planning.

Sustainable Practice: The Real Triple Bottom Line

5

Both are based upon an unquestioning acceptance of market economics predicated in the need for growth and upon the false premise of Brundtland, to which we will return later. An almost unquestioned assumption is that growth remains possible (Elliott, 2005) and therefore sustainability and sustainable development are synonymous. Indeed the economic perspective of post-Cartesian ontologies predominates and growth is considered to be not just possible but also desirable (see for example Spangenberg, 2004). Therefore it is possible for Daly (1992) to argue that the economics of development is all that needs to be addressed and this can be dealt by the clear separation of the three basic economic goals of efficient allocation, equitable distribution and sustainable scale. Hart (1997) goes further and regards the concept of sustainable development merely as a business opportunity, arguing that once a company identifies its environmental strategy then opportunities for new products and services become apparent. Concomitantly all corporations are becoming concerned about their own sustainability and what the term really means. Such sustainability means more than just environmental sustainability. As far as corporate sustainability is concerned, the confusion is exacerbated by the fact that the term ‘sustainable’ has been used in the management literature over the last 30 years (see for example Reed & DeFillippi, 1990) to merely imply continuity. Thus Zwetsloot (2003) is able to conflate CSR with the techniques of continuous improvement and innovation to imply that sustainability is thereby ensured. Consequently the trajectory of all of these effects is increasingly being focused upon the same issue. One of the most used words relating to corporate activity at present is the word ‘sustainability’. Indeed it can be argued that it has been so heavily overused, and with so many different meanings applied to it, that it is effectively meaningless. It is therefore time to re-examine the legacy of Brundtland and to redefine what is meant by sustainable activity. Thus we argue that sustainable development has assumed such significance in the lexicon of corporate behaviour that it is in effect a strategic imperative, despite there being little understanding of the term and its implications (see Aras & Crowther, 2008b). It is part of our argument that the current fashionably ubiquitous use of the term has obfuscated any consideration of a real understanding of sustainability. This is unfortunate as we consider that sustainability must be an integral part of the strategic development of a company, but that a complete understanding of sustainability is necessary before sustainable development can be countenanced. Sustainability is of course fundamental to a business and its continuing existence. It is equally fundamental to the continuing existence not just of

GU¨LER ARAS AND DAVID CROWTHER

6

current economic activity but also of the planet itself – at least in a way which we currently understand. It is a complex process, as we have discussed. Moreover, it is a process which must recognise not just the decision being made in the operational activity of the organisation but also the distributional decisions which are made. Only then can an organisation be considered sustainable. Others have assumed that a sustainable company will exist merely by recognising environmental and social issues and incorporating them into its strategic planning. According to van Marrewijk and Werre (2003) there is no specific definition of corporate sustainability and each organisation needs to devise its own definition to suit its purpose and objectives, although they seem to assume that corporate sustainability and CSR are synonymous and are based upon voluntary activity which includes environmental and social concerns.

THE DESCENDANTS OF BRUNDTLAND There have been various descendants of Brundtland, including the concept of the triple bottom line (Aras & Crowther, 2008d). This, in turn, has led to an assumption that addressing the economic, social and environmental aspects is all that is necessary not just to ensure sustainability but also to enable sustainable development. Indeed the implicit assumption is one of business as usual – add some information about environmental performance and social performance to conventional financial reporting (the economic performance) and that equates to triple bottom line reporting. And all corporations imply that they have recognised the problems, addressed the issues and thereby ensured sustainable development. This implication is generally accepted without questioning – certainly without any rigorous questioning. Let us start with an investigation of the triple bottom line – the three aspects of performance (Fig. 1). We argue for rejection of the triple bottom line as it is insufficiently refined for practical use. Our argument is that the problem of sustainability Sustainability Economic Performance

Fig. 1.

Environmental Performance

Social Performance

The Triple Bottom Line.

Sustainable Practice: The Real Triple Bottom Line

7

is not even understood, let alone addressed. Furthermore it is our argument that the conceptions associated with the triple bottom line and also with the notion of sustainable development are not just incorrect but also positively misleading (see for example Aras & Crowther, 2008a) through an obfuscation of the key issues. It is therefore time to re-examine the legacy of Brundtland and to redefine what is meant by sustainable activity. In order to do this we reject sustainability and sustainable development – the accepted terms – preferring instead the term ‘durability’ to emphasise on the change in focus. We suggest an alternative model: the real triple bottom line. It will be apparent of course that in order to achieve sustainable development2 it is first necessary to achieve sustainability, and there are a number of elements to do this. What is important for sustainability is not just addressing each of these elements individually but also paying attention to maintaining the balance between them. It is the maintenance of this balance which is the most challenging – but also the most essential – aspect of managing sustainability. There are a number of elements which must be addressed, but these can be grouped together into four major elements, which map exactly onto the model for evaluating sustainability outlined earlier. These four major elements of sustainability (Aras & Crowther, 2009b) are:  Maintaining economic activity, which is the central raison d’etre of corporate activity and the principal reason for organising corporate activity. This, of course, maps onto the finance aspect.  Conserving the environment, which is essential for maintaining the options available to future generations. This maps onto the environmental impact aspect.  Ensuring social justice, which includes activities like eliminating poverty, ensuring human rights, promoting universal education and facilitating world peace. This maps onto the societal influence aspect.  Developing spiritual and cultural values, which is where corporate and societal values align in the individual and where all of the other elements are promoted or negated; sadly at present they are mostly negated. It is our argument that sustainability can be predicated by addressing all of these aspects .This cannot be done simply through the implementation of contracts, or through the firm comprising a nexus of treaties (Williamson, 1975). Of crucial importance are not just these negotiated contracts, but also the psychological contract which is an essential part of the social contract, as well as provides a basis for operation of the negotiated contract. And of course this only operates in an environment of trust, which can neither be

8

GU¨LER ARAS AND DAVID CROWTHER

mentioned in the contract nor be ignored. Trust enables transactions to be negotiated (Fukuyama, 1996). It also enables contract to be implemented in ways which are flexible enough to enable the organisation to react to changing circumstances. More significantly it facilitates power inequalities being removed from the negotiation and thereby overcomes some of the deficiencies of the Utilitarian philosophical underpinning of the market system. There has been a trend to claim rationality by negotiating trust out of any contract, and it is our argument that this trend merely leads to the elimination of sustainability.

ACCOUNTING AND STEWARDSHIP Sustainability implies good organisational performance and one view of good corporate performance is that of stewardship. Thus just as the management of an organisation is concerned with the stewardship of the financial resources of the organisation so too would management of the organisation be concerned with the stewardship of environmental resources. The difference however is that environmental resources are mostly located externally to the organisation. Stewardship in this context therefore is concerned with the resources of society as well as the resources of the organisation. As far as stewardship of external environmental resources is concerned, the central tenet of such stewardship is that of ensuring sustainability. Sustainability is focused on the future and is concerned with ensuring that the choices of resource utilisation in the future are not constrained by decisions taken in the present. This necessarily implies such concepts as generating and utilising renewable resources, minimising pollution and using new techniques of manufacture and distribution. It also implies the acceptance of any costs involved in the present as an investment for the future. Not only does such sustainable activity affect society in the future, but it also affects the organisation itself. Thus, good environmental performance by an organisation in the present is in reality an investment for the future of the organisation. This is achieved by ensuring supplies and production techniques that will enable the organisation to operate in the future in a similar way as it operates in the present, and to undertake value creation activities in the future. Financial management also however is concerned with the management of the organisation’s resources in the present so that

Sustainable Practice: The Real Triple Bottom Line

9

management will be possible in a value creation way in the future. Thus the internal management of the firm, from a financial perspective, and its external environmental management have common concern for management in the future. Good performance in the financial dimension leads to good future performance in the environmental dimension and vice versa. Thus there is no dichotomy (Crowther, 2002) between environmental performance and financial performance and the two concepts conflate into one concern. This concern is of course the management of the future as far as the firm is concerned.3 The role of social and environmental accounting and reporting, and the role of financial accounting and reporting therefore can be seen to be coincidental. Thus the work required needs to be concerned not with arguments about resource distribution but rather with the development of measures which truly reflect the effect of activities of the organisation upon its environment. These techniques of measurement, and consequently of reporting, are a necessary precursor to the concern related to management of an organisation in the future – and hence with sustainability. Similarly the creation of value within the firm is followed by the distribution of value to the stakeholders of that firm, whether these stakeholders are shareholders or others. Value however must be taken in its widest definition to include more than economic value as it is possible that economic value can be created at the expense of other constituent components of welfare such as spiritual or emotional welfare.4 This creation of value by the firm adds to the welfare of society at large, although this welfare is targeted at particular members of society rather than treating all as equals. This has led to arguments by Tinker (1988), Herremans, Akathaparn, and McInnes (1992) and Gray (1992), amongst others, concerning the distribution of value created and whether value is created for one set of stakeholders at the expense of others. Nevertheless if, when summed, value is created, then this adds to welfare for society at large, however distributed. Similarly good environmental performance leads to increased welfare for society at large, although this will tend to be expressed in emotional and community terms rather than being capable of being expressed in quantitative terms. This will be expressed in a feeling of wellbeing, which will of course lead to increased motivation. Such increased motivation will inevitably lead to increased productivity, some of which will benefit the organisations. It will also develop a desire to maintain a pleasant environment, which will in turn lead to a further enhanced environment, a further increase in welfare and the reduction of destructive aspects of societal engagement by individuals.

10

GU¨LER ARAS AND DAVID CROWTHER

SUSTAINABILITY ISSUES There are a number of issues which are of current concern to businesses and to people (Crowther & Seifi, 2011). Broadly speaking they can be considered to be issues concerning the environment, human rights protection and governance.

Environmental Issues The changes in weather around the world is apparent to most people, especially extreme weather conditions such as excessive rain or snow, droughts, heat waves and hurricanes which have been affecting many parts of the world. For example, most of us remember Hurricane Katrina which devastated New Orleans and the volcanic eruption of Eyjafjallajo¨kull which disrupted air traffic across Europe. This volcanic eruption was a result of global warming that led to the melting of glacier around it. Global warming and climate change, its most noticeable effect, is a subject of discussion all over the world, and it is generally, although by no means universally, accepted that global warming is taking place and therefore that climate change will continue to happen. Opinions are divided on whether the climate change which has taken place can be reversed or not. Some think that it cannot be reversed. Thus according to Lovelock (2006) climate change is inevitable along with its consequences upon the environment and therefore upon human life and economic activity. Although there are many factors which are contributing to the global warming, it is clear that commercial and economic activities play a significant part. Many people talk about ‘greenhouse gases’, with carbon dioxide being the main one, as a direct consequence of economic activity. Consequently many people see the reduction in the emission of such gases as being fundamental to any attempt to combat climate change. This of course requires a change in behaviour – of people and of organisations. Such a perceived need for change is one of the factors which has caused the current concern with sustainability. Another factor occupying the minds of people in general is ecological footprint – the physical area of the earth required for each person. Ecological footprint analysis compares human demand from nature with the biosphere’s ability to regenerate resources and provide services. It does this by assessing the biologically productive land and marine area required to produce the resources a population consumes and absorb the corresponding

Sustainable Practice: The Real Triple Bottom Line

11

waste, using prevailing technology. This approach can also be applied to an activity such as the manufacturing of a product or driving of a car. A possibly more fashionable term at the moment however is carbon footprinting.5 For an individual the definition of carbon footprint is the total amount of carbon dioxide attributable to the actions of that individual (mainly through their energy use) over a period of one year. This definition underlies the personal carbon calculators that are widely used. The term owes its origins to the idea that a footprint is what has been left behind as a result of the individual’s activities. Carbon footprints can either consider only direct emissions (typically from energy used in the home and in transport, including travel by cars, aeroplanes, rail and other transport), or can also include indirect emissions (including carbon dioxide emissions as a result of goods and services consumed). It is commonly understood that the carbon dioxide emissions (and the emissions of other greenhouse gases) are almost exclusively associated with the conversion of energy carriers such as wood burning, natural gas, coal and oil. The carbon content released during the energy conversion process reaches the atmosphere and is deemed to be responsible for global warming, and therefore climate change.6 Nevertheless general concern has been expressed worldwide and this has led to the Kyoto Protocol.7 The Kyoto Protocol defines legally binding targets and timetables for cutting the greenhouse-gas emissions of industrialised countries that ratified the protocol.8 Although scientific opinion has more or less reached a consensus that global warming is taking place and climate change is happening, there are still a considerable number of sceptics and people who deny that it is happening.9 There are others who argue that the human contribution to global warming is negligible: they argue therefore that it is useless or even harmful to concentrate on individual contributions. In many parts of the world water is becoming a serious problem. Irrigation has led to serious problems in various parts of the world such as California, while in Uzbekistan it has led to the shrinking of the Aral Sea to a fraction of its previous size. And many rivers, in all parts of the world, have so much water extracted from them that they no longer reach the sea. At the same time millions of people do not have access to safe drinking water. And countries are entering into disputes with each other for access to water that they share between them. Access to water is forecasted to become a major source of conflict in the 21st century. Another issue concerning water is the question of virtual water and the Royal College of Engineering (UK) have documented (2010) that countries such as the United Kingdom are

12

GU¨LER ARAS AND DAVID CROWTHER

using water from developing countries, where it is in short supply, by embedding it in the products purchased from such countries. It is fairly obvious that the resources of the planet are finite and this is a limiting factor to growth and development. The depletion of the resources of the planet is one of the factors which has helped to create the current interest in sustainability. The extractive industries are of particular concern because they are the cause of short supply of raw materials such as aluminium. In the United Kingdom the mineral resources such as tin and lead were fully extracted long ago and the thriving industries based around them are long gone. As other resources – such as coal – are extracted in total the companies based upon them would disappear, along with the jobs in those industries. This is an obvious source of concern for people. An extinguishing supply of oil is of particular concern, because many economic activities are only possible because of energy created by the use of oil. Many would argue that the wars in the Middle East,10 particularly the problems in Iraq and Iran, are caused by oil shortages, actual or impending, rather than by any political issues. Most people are aware of Hubbert’s Peak11 and have engaged in the debate regarding whether this peak has been reached (Bower, 2009; Deffeyes, 2004). Certainly it has in parts of the world such as the United States and the North Sea but it is less certain if it has been reached for the world as a whole. Nevertheless the whole crux of sustainability – and sustainable development – is based upon the need for energy and there are insufficient alternative sources of energy to compensate for the elimination of oil as a source of fuel. Consequently resource depletion, real or imagined, and particularly energy resources, is one of the most significant causes of the current interest in sustainability.

Human Right Issues Another issue which has become prominent is the concern with the supply chain of a business; in other words with what is happening in the companies with which a company does business, for example their suppliers and the suppliers of their suppliers. In particular people are concerned with the exploitation of people in developing countries, especially the question of child labour and issues such as sweatshops. It is no longer acceptable for a company to say that the conditions under which their suppliers operate is outside of their control, and so they are not responsible. Customers have said that this is not acceptable and have called companies to account. Recently a number of high profile retail companies

Sustainable Practice: The Real Triple Bottom Line

13

have held their hands up to acknowledge problems and taken public steps to change this. Interestingly the popularity of companies increases after they admit that problems exist and take steps to correct these problems. In doing this they are thereby showing that honesty is the best practice and also that customers are reasonable. The evidence suggests that individual customers are understanding and that they do not expect perfection but they do expect honesty and transparency. Moreover they also expect companies to make efforts to change their behaviour and to solve their CSR problems. Companies themselves have also changed. No longer are they concerned with greenwashing – the pretence of socially responsible behaviour through artful reporting. Now companies are taking CSR much more seriously not just because they understand that it is a key to business success and can give them a strategic advantage, but also because people in those organisations care about social responsibility. So it would be reasonable to claim that the growing importance of CSR and sustainability is being driven by individuals who care – but those individuals are not just customers, they are also employees, managers, owners and investors of a company. So companies are partly reacting to external pressures and partly leading the development of responsible behaviour and reporting.

A Crisis of Governance The 2008 financial and economic crisis has shown that there are failures in governance and problems with the market system. In the main these have been depicted as representative of systemic failures of the market system and the lax application of systems of governance and regulation. Thus many people are arguing for improved systems to combat this. Naturally many people have discussed these failures and the consequent problems, and will continue to do so in the future. It is not the first such crisis and the market economy has been proceeding on a course of boom and bust for the last 20 years which is not dissimilar to that of the 1960s and 1970s which the neo-conservatives claimed to have stopped. The main differences are that recent cycles are driven by the financial markets and the era of globalisation means that no country is immune from the effects felt in other countries. When we are thinking about alternatives, we should consider governance. All systems of governance are concerned primarily with managing the governing of associations and therefore with political authority, institutions,

14

GU¨LER ARAS AND DAVID CROWTHER

and, ultimately, control. Governance in this particular sense denotes formal political institutions that aim to coordinate and control interdependent social relations and have the ability to enforce decisions. However, in a globalised world, the concept of governance is being used to describe the regulation of interdependent relations in the absence of an overarching political authority, such as in the international system. Thus global governance can be considered as the management of global processes in the absence of a global government. There are some international bodies which seek to address these issues and prominent among these are the United Nations and the World Trade Organisation. Each of these has met with mixed success in instituting some form of governance in international relations, but they are part of a recognition of the problem and an attempt to address worldwide problems that go beyond the capacity of individual states to solve. Global governance is not of course the same thing as world government: indeed it can be argued that such a system would not actually be necessary if there was such a thing as a world government. However, currently the various state governments have a legitimate monopoly on the use of force – on the power of enforcement. Global governance therefore refers to the political interaction that is required to solve problems that affect more than one state or region when there is no power of enforcing compliance. Improved global problem-solving ability may not require the establishment of more powerful formal global institutions, but it would involve the creation of a consensus on norms and practices to be applied. Steps are of course under way to establish these norms and one example that is currently being established is the creation and improvement of global accountability mechanisms. In this respect, for example, the United Nations Global Compact12 – described as the world’s largest voluntary corporate responsibility initiative – brings together companies, national and international agencies, trades unions and other labour organisations and various organs of civil society in order to support universal environmental protection, human rights and social principles. Participation is entirely voluntary, and there is no enforcement of the principles by an outside regulatory body. Companies adhere to these practices both because they make economic sense, and because their stakeholders, including their shareholders (most individuals and institutional investors) are concerned with these issues and this provides a mechanism whereby they can monitor the compliance of companies easily. Mechanisms such as the Global Compact can improve the ability of individuals and local communities to hold companies accountable.

15

Sustainable Practice: The Real Triple Bottom Line

Sustainability Human Rights Performance

Fig. 2.

Environmental Performance

Governance

The Real Triple Bottom Line.

CONCLUSIONS It is our argument in this chapter that the triple bottom line is a facile concept which has been used to imply that sustainability and sustainable development are simple targets to achieve. We have argued elsewhere (see for example Aras & Crowther, 2008a, 2009b) that the Brundtland definition of sustainable development is misleading. In this paper we have tried to show that the concerns which are pre-conditions of sustainability are much different from the implications of the triple bottom line – to such an extent that they represent a new triple bottom line (Fig. 2). Our argument essentially is that it is not possible to consider sustainability without a consideration of these three factors the environment, human rights and governance which, together, represent an approach based in the Social Contract approach and represent the distribution aspect of durability identified previously (see Aras & Crowther, 2009b). They provide a mechanism for focusing on corporate strategic decision making.

NOTES 1. See Crowther (2002) for detailed evidence. 2. Many authors continue to assume both the possibility and desirability of achieving sustainable development. For us, however, the achievement of sustainability is both a necessary precondition and sufficient in itself. 3. Financial reporting is of course premised upon the continuing of the company – the going concern principle. 4. See for example Mishan (1967), Ormerod (1994) and Crowther, Davies and Cooper (1998). This can be equated to the concept of utility from the discourse of classical liberalism. 5. This conveniently obfuscates the problem. Carbon dioxide is not the only greenhouse gas and is not the most problematic but focusing on it means that carbon monoxide from the motor vehicle industry and methane from the dairy industry can be ignored. These industries are also a cause of significant other environmental problems.

16

GU¨LER ARAS AND DAVID CROWTHER

6. This is of course overly simplistic, if not completely wrong. Thus people (and animals) produce carbon dioxide when breathing, cows (and other ruminants) produce methane and the process by which vegetation produces, captures and subsequently releases carbon dioxide is complex and not fully understood (see Lomborg, 2001). 7. This was agreed in 1997 and came into effect in 2005. 8. In late 2007 Australia ratified the protocol, leaving only one large developed country which has not done so. This country is however the United States, probably the largest producer of such greenhouse gases. 9. The European consensus is by no means worldwide in this respect. 10. And most probably any other parts of the world also – it would be instructive to correlate the presence of oil with conflicts. 11. In 1956 M. King Hubbert developed a model of oil production which showed that when the mid-point of oil reserves is reached then future production would slow down and less would be available. Although originally developed for US oil production it has been shown to be equally valid globally. This mid-point is known as Hubbert’s Peak and has arrived or soon will arrive; at that point oil supplies start to get less with obvious implications on an environment in which demand continues to increase. 12. See http://www.unglobalcompact.org

REFERENCES Amba-Rao, S. C. (1993). Multinational corporate social responsibility, ethics, interactions and third world governments: An agenda for the 1990s. Journal of Business Ethics, 12, 553–572. Aras, G., & Crowther, D. (2008a). Corporate sustainability reporting: A study in disingenuity? Journal of Business Ethics, 87(Suppl. 1), 279–288. Aras, G., & Crowther, D. (2008b). Governance and sustainability: An investigation into the relationship between corporate governance and corporate sustainability. Management Decision, 46(3), 433–448. Aras, G., & Crowther, D. (2008c). The social obligation of corporations. Journal of Knowledge Globalisation, 1(1), 43–59. Aras, G., & Crowther, D. (2008d). Evaluating sustainability: A need for standards. International Journal of Social and Environmental Accounting, 2(1), 19–35. Aras, G., & Crowther, D. (2009a). The durable corporation in a time of financial and economic crisis. Economics and Management, 14, 211–217. Aras, G., & Crowther, D. (2009b). The durable corporation: Strategies for sustainable development. Farnham: Gower. Beder, S. (1997). Global spin: The corporate assault on environmentalism. London: Green Books. Bower, T. (2009). The Squeeze. London: Harper Press. Brown, K., Tompkins, E. L., & Adger, W. N. (2002). Making waves: Integrating coastal conservation and development. London: Earthscan. Chambers, R. (1994). The origins and practice of participatory rural appraisal. World Development, 22(7), 953–969.

Sustainable Practice: The Real Triple Bottom Line

17

Crowther, D. (2002). A social critique of corporate reporting. Aldershot: Ashgate. Crowther, D., Davies, M., & Cooper, S. (1998). Evaluating corporate performance: A critique of economic value added. Journal of Applied Accounting Research, 4(3), 2–34. Crowther, D., & Seifi, S. (2011). The future of corporate social responsibility. In M. A. N. Costa, M. J. Santos, F. M. Seabra & F. Jorge (Eds.), Responsabilidade Social - Uma Visa˜o IberoAmericana. Lisbon: Almedina. Daly, H. E. (1992). Allocation, distribution, and scale: Towards an economics that is efficient, just, and sustainable. Ecological Economics, 6(3), 185–193. Deffeyes, K. S. (2004). Hubbert’s peak: The impending world oil shortage. American Journal of Physics, 72(1), 126–127. Elliott, S. R. (2005). Sustainability: An economic perspective. Resources Conservations and Recycling, 44, 263–277. Fukuyama, F. (1996). Trust: The social virtues and the creation of prosperity. New York, NY: The Free Press. Gray, R. (1992). Accounting and environmentalism: An exploration of the challenge of gently accounting for accountability, transparency and sustainability. Accounting, Organizations & Society, 17(5), 399–425. Gray, R., & Bebbington, J. (2001). Accounting for the environment. London: Sage. Hart, S. L. (1997). Beyond greening: Strategies for a sustainable world. Harvard Business Review, 75(1), 66–76. Hart, S. L., & Milstein, M. B. (2003). Creating sustainable value. Academy of Management Executive, 17(2), 56–67. Herremans, I. M., Akathaparn, P., & McInnes, M. (1992). An investigation of corporate social responsibility, reputation and economic performance. Accounting, Organizations & Society, 18(7/8), 587–604. Ladkin, A., & Bertramini, A. M. (2002). Collaborative tourism planning: A case study of Cusco, Peru. Current Issues in Tourism, 5(2), 71–93. Lomborg, B. (2001). The skeptical environmentalist. Cambridge: Cambridge University Press. Lovelock, J. (2006). The revenge of Gaia. Harmondsworth: Penguin. van Marrewijk, M., & Werre, M. (2003). Multiple levels of corporate sustainability. Journal of Business Ethics, 44(2/3), 107–119. Marsden, C. (2000). The new corporate citizenship of big business: Part of the solution to sustainability. Business & Society Review, 105(1), 9–25. Mishan, E. J. (1967). The costs of economic growth. Harmondsworth: Pelican. Ormerod, P. (1994). The death of economics. London: Faber and Faber. Pretty, J. N. (1995). Participatory learning for sustainable agriculture. World Development, 23(8), 1247–1263. Reed, R., & DeFillippi, R. J. (1990). Causal ambiguity, barriers to imitation, and sustainable competitive advantage. Academy of Management Review, 15(1), 88–102. Royal College of Engineering. (2010). Global water security – An engineering approach. London: Royal College of Engineering. Schmidheiny, S. (1992). Changing course. New York, NY: MIT Press. Spangenberg, J. H. (2004). Reconciling sustainability and growth: Criteria, indicators, policies. Sustainable Development, 12, 74–86. Tinker, T. (1988). Panglossian accounting theories: The science of apologising in style. Accounting, Organizations & Society, 13(2), 165–189. UN. (2005). 2005 World summit outcome A/60/355. New York: UN.

18

GU¨LER ARAS AND DAVID CROWTHER

Williamson, O. E. (1975). Markets and hierarchies: Analysis and anti-trust implications. New York, NY: The Free Press. World Commission on Environment and Development (WCED). (1987). Our common future (The Brundtland Report). Oxford: Oxford University Press. Zwetsloot, G. I. J. M. (2003). From management systems to corporate social responsibility. Journal of Business Ethics, 44(2/3), 201–207.

IS CSR IN CRISIS? Marı´ a del Mar Miras Rodrı´ guez ABSTRACT Due to the economic crisis, organizations are changing their behaviours to be able to survive in that uncertain environment. In most of the cases, these changes could mean rethink about the CSR issues, so the aim of this chapter is to study the evolution in the Social and Environmental Scores of the Spanish companies before and during the financial crisis in order to analyse empirically the effect of the crisis on them. Keywords: Social responsibility; environmental responsibility; crisis; financial performance

INTRODUCTION If organizations had taken the CSR approach seriously, we would not have likely been involved in the current economic crisis (Fernandez, 2009) or at least not to this magnitude. The crisis is now a reality and many companies have suffered huge consequences such as the closing down of several firms, incurring losses and a large reduction in the profits. Therefore, many companies have been forced to redefine their business and implement austerity plans as to survive in the current uncertain environment. In this The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 19–32 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005005

19

20

MARI´A DEL MAR MIRAS RODRI´GUEZ

context, both academicians and practitioners ask about how Corporate Social Responsibility (hereinafter CSR) will be influenced by these extraordinary circumstances. So now, when the social needs are greater than ever (Karaibrahimoglu, 2010), it is more necessary to emphasize the relevance of CSR actions carried out by the organizations for the societal well-being. Hence, society asks companies to be more involved in supporting social and environmental causes (Grigore, 2011). These circumstances help firms to better understand the real motivations or interests of conducting CSR policies. If companies implement CSR policies only for legitimacy or direct benefits (short-term vision), they would be drastically affected by the crisis. However, if organizations really engage with these issues and integrate CSR into their business strategy, they could take advantage of the crisis as an opportunity instead of threat. Therefore, the present crisis may not directly mean the disappearance of CSR actions, although the amount could be reduced due to main causes. The CSR purpose has been questioned by some researchers, among whom stands Friedman (1970) who argued that the main objective of each firm should be to satisfy the shareholders’ expectations. Nevertheless, Freeman (1984) along with a large number of authors maintained that the organizations should be focused on the expectations of not only shareholders but also stakeholders. Despite the fact that the concept of CSR has been debated upon since it was defined by Carroll (1979), it is undoubtedly an essential component of business nowadays. In addition, the relationship between CSR and Financial Performance has received substantial attention in the literature (Allouche & Laroche, 2005; Margolis & Walsh, 2003; Orlitzky, Schmidt, & Rynes, 2003; Wu, 2006), even though there is a lack of agreement about this causality. Likewise, we could identify many different theoretical approaches that try to explain it. Therefore, considering the potential influence of the Financial Performance on the CSR actions carried out, we set out two hypotheses. On one hand, the Slack Resources Hypothesis proposed that the extent to which organizations will be socially responsible is dependent on the available financial resources. On the other, the Managerial Opportunism Hypothesis states that the aims pursued by managers may well be different from those of owners and other stakeholders. This fact is related to the term ‘orientation’. The managers’ objectives usually are oriented towards shortterm and immediate profitability, while the owners’ objectives are more aimed at long-term profitability.

Is CSR in Crisis?

21

Despite the relevance of this issue, few researchers have addressed the problem worldwide (Charitoudi, Giannarakis, & Lazarides, 2011; Giannarakis & Theotokos, 2011), and others have analysed the situation in specific countries (Arevalo & Aravind, 2010; Njoroge, 2009; Schiopoiu Burlea, Radu, Craciun, Ionascu, & Lolescu, 2010). In addition, taking into account that Spain is one of the most affected countries by the economic downturn, economic intervention by the EU has been discussed. There is an urgent need to have a better understanding of the influence of the crisis on the CSR behaviour of the companies, trying to extend the results obtained by Escobar and Miras (2013) with respect to the Spanish Savings Banks. With the aim of studying what has happened in Spain, we make an exhaustive study of the evolution in the social and environmental scores of the companies included in the IBEX-35 before and during the crisis (2006–2010) in order to analyse empirically the effect of the crisis on the social and environmental responsibilities of the listed firms. The layout of the study in this chapter is as follows. Firstly, there is a description of the CSR concept followed by key debates on CSR. Next, we discuss CSR, Financial Performance and Economic Crisis. Then, we look more closely at the method and the sample formation. Next, we report and discuss the results. Finally, we present the conclusions as well as the limitations of the research and the guidelines for future research.

CORPORATE SOCIAL RESPONSIBILITY It is undeniable that the evolution of CSR has suffered in importance and significance over the last decades (Carroll & Shabana, 2010; Schultz & Wehmeier, 2010). It has changed from an irrelevant or fashionable idea to one of the most widely accepted concepts in the business world (Argandon˜a, 2007; Lee, 2008). Although the idea that firms have some responsibilities towards society beyond making profits has been around for centuries (Carroll & Shabana, 2010), it was not until the end of the last century when CSR became a reality in business world and also one of the determining factors in the decisionmaking process (Nieto & Fernandez, 2004; Garriga & Mele´, 2004). This is why most of the international organizations have established guidelines (i.e. Global Reporting Initiative – GRI) and recommendations about how to be a socially and environmentally responsible company. CSR is also an

22

MARI´A DEL MAR MIRAS RODRI´GUEZ

important reason for a high increment in the number of voluntary social disclosures by the companies as well as the creation of Sustainability Stock Indexes – Dow Jones Sustainability Index, KLD Domini, FTSE4Good, between others (Miras, Escobar, & Carrasco, 2011). Nevertheless, there are still numerous debates around CSR. One of the most relevant debate is on the lack of consensus about the concept (Aras & Crowther, 2009; Carroll, 1979; Dahlsrud, 2008; McWilliams, Siegel, & Wright, 2006). Likewise, a varying terminology has been developed such as Corporate Citizenship, Business Ethics, Corporate Accountability, Corporate Philantropy, Corporate Responsibility, Corporate Social Performance, Corporate Sustainability, Philantropy, Stakeholder Management, Sustainability and Triple Bottom Line, even though they are competing, complementary and overlapping concepts (Barlett & Devin, 2011). In addition, other discussions about altruism (Husted & De Jesus, 2006; Maignan & Ferrell, 2004; Margolis & Walsh, 2003) and voluntariness (Carroll, 1991; Williamson, Lynch-Wood, & Ramsay, 2006) of the CSR practices can be found in the literature. Within these debates, it is also important to emphasize the controversy about the relationship between Financial Performance and CSR because despite being a recurrent topic in the literature, the results are certainly not conclusive (Allouche & Laroche, 2005; Orlitzky et al., 2003; Wu, 2006). In addition, still no mathematical formula has been derived to explain the causal relationship (Preston & O’Bannon, 1997) and the issue about the direction of that causality (Salzmann, Ionescu-Somers, & Steger, 2005). In this regard, this chapter focuses on the effects of Financial Performance on the CSR. Since the current economic crisis is affecting the financial outcomes of the companies seriously, it is necessary to describe the different approaches that try to explain this relation. On one hand, Waddock and Graves (1997) proposed in the Slack Resources Hypothesis that companies will be more or less socially responsible depending on the availability of financial resources to them. Achieving a better performance will allow making great investments in social projects. Consequently CSR will only be viable in companies with solid and sustainable financial results. Some authors, such as Izquierdo (2004), have emphasized that CSR is a luxury that can only be borne by buoyant companies. According to this approach, the present financial situation would trigger a large-scale diminution in CSR activities or policies. In contrast, the Managerial Opportunism Hypothesis reported by Williamson (1967, 1985) states that the aims of managers may be different

23

Is CSR in Crisis?

from those of the shareholders and other stakeholders. This is because managers are oriented towards short-term and immediate profitability, while owners aim at long-term profitability. In accordance with this hypothesis, we could find two different implications to our research question. On one hand, the high cost of CSR initiatives could be the reason for a drastic reduction in these activities, with the reduction being even higher than that suggested by the previous approach. Managers worried by the financial situation prefer to decrease all the cost because their main concern is the survival of the company and not shortterm benefits. However, managers pressurized by shareholders could choose continuing with CSR policies because they understand that it could be a good way to manage the economic crisis and they could be more concerned about long-term repercusions.

CSR AND ECONOMIC CRISIS The financial and economic crisis affecting the industrialized countries in recent years has been singular, given its intensity and complexity and the difficulties faced in overcoming it; therefore, the importance of CSR has been called into question. However, the present financial situation provides a perfect opportunity to test the real commitment of the companies with the CSR approach (Escobar & Miras, 2013). According to Fernandez (2009), the crisis could be perceived as a threat or an opportunity. On one hand, she argued that CSR approach could be a threat to firms’ survival mainly due to the high cost of implementation. So it is entirely understandable that carrying out a CSR strategy in periods of uncertainty is not expected. On the contrary, she asserted that CSR is one of the ways to manage the situation and helps companies overcome the consequences of the crisis as long-term benefits are widely recognized. There are some arguments that support that CSR could be a threat in times of crisis. Therefore, with the crisis at its height, companies behave in a more conservative and defensive way (Cheney, 1990), leading away from a socially responsible behaviour in order to be able to satisfy the shareholders’ expectations (Giannarakis & Theotokos, 2011). Since the current economic crisis rose, the priorities of the business have changed, with liquidity management becoming one of the most important aspects. Moreover, all actions are carried out in accordance with the financial difficulties (Yelkikalan & Ko¨se, 2012). Due to the uncertain business environment, companies are encouraged to reduce their expenses

24

MARI´A DEL MAR MIRAS RODRI´GUEZ

(Karaibrahimoglu, 2010), which leads to revocation of their cost-generating social responsibilities (Orlitzky et al., 2003). According to Njoroge (2009) the immediate consequences are the delay in and cancellation of many CSR initiatives. However, Wilson (2008) took an opposite stance. Nervertheless, it’s true that the number of social needs have increased during these rough times, so the CSR actions are more necessary than ever (Karaibrahimoglu, 2010). In this way, companies should change or redefine their business objectives in relation to social expectations (Porter & Kramer, 2002), with this being a perfect way of differentiating from others (Giannarakis & Theotokos, 2011). In accordance with Arevalo and Aravind’s (2010) results, the level of impact of the financial crisis on a company depends mainly on both the degree of CSR integration in the company (the organizations with a high integration stage are those that suffer more in the crisis) and the kind of CSR strategy (proactive or reactive) that it carries out because companies who have a proactive approach are more used to coping with new circumstances. Despite the importance of this issue and the large number of explications found in the literature, there is little empirical evidence about what is happening in fact. While Karaibrahimoglu (2010) analysed whether in the context of the companies listed in Fortune 500 there was a change in the number of CSR projects in 2008 (the year when the crisis was at its peak), Giannarakis and Theotokas (2011) investigated the influence of the crisis on the CSR performance in some companies included in the GRI report list since 2007 until 2010. On the other hand, Cheritoudi et al. (2011) evaluated the CSR behaviour of companies during 2007 until 2009. Likewise, Njorage (2009) examined how the multinational firms in Kenya were affected by the economic downturn whereas Arevalo andAravind (2010) studied the impact on the USA companies. Indeed, the general conclusion we can draw from the articles analysed is that the firms had improved their CSR scores in spite of the consequences of the economic downturn. Nevertheless, there seems to be a significant drop in the level of CSR activities during the last period studied (2009–2010).

ECONOMIC CRISIS IN SPAIN The Spanish situation is studied here because the present economic crisis had a deeper and longer impact on Spain compared to both other countries and previous instances. The results and the evidence from the articles discussed in the previous section cannot be extrapolated here.

Is CSR in Crisis?

25

In the following paragraphs, we discuss some of the main reasons why we are so interested in studying the consequences of the financial crisis on CSR in Spain, and why it could be different from other countries, taking the Foretica report into account. One of the reasons why the Spanish economy has been severely affected by the present situation is lack of balance generated during the boom phase. These imbalances have made Spanish economy particularly vulnerable to changes in the macroeconomic and financial conditions, so the consequences of the global international crisis are worse in Spain than in other European countries. Due to the marked expansion experienced by the Spanish economy in the period before recession (with an annual GDP growth above 4%), Spain now stands out for its sharp decline in employment (with an unemployment rate of around 25%), for the difficulties the recovery faces and for the higher risks from the possible fall. The adjustment phase has been affected by certain idiosyncratic features of the Spanish economy and by certain institutional characteristics that affect the adjustment mechanisms. Moreover, according to the report by Foretica (2011), the crisis has had a direct impact on business activities in Spain. The report reveals that at least 65% of Spanish firms maintained or increased their investment in CSR in 2010, although it is also shown that one in three companies stopped performing CSR as a direct consequence of the crisis. It is also noted that the behaviour of big companies and that of the smaller ones differ considerably, the latter being those that have absorbed most of the reductions in CSR. In accordance with the authors, these results are quite good to the CSR in Spain because in spite of the fact that 2.3 million jobs were destroyed and 1,30,000 businesses closed down in Spain between 2008 and 2010, most of the organisations continued to carry out the CSR initiatives. Despite the difficult situation CSR has not lost its strength in the Spanish economy. So consequently, we conclude from the report that the behaviour of the CSR policies in Spain has been affected by the crisis in a different way from other countries. Although there is a lack of empirical evidence, Escobar and Miras (2013) tried to determine the impact of the economic crisis on the level of social commitment of the Spanish Savings Banks. This study focused on one specific industry in Spain, and they found a significant decline in absolute numbers – as a logical consequence of an important decrease in the financial results – although they identified a substantial growth in the percentage of money that this kind of organizations spent on CSR issues. Notwithstanding, these results are not necessarily extensive to all the Spanish companies

26

MARI´A DEL MAR MIRAS RODRI´GUEZ

because the study focused on a specific industry – the Savings Banks – and its particular characteristics. So taking into consideration that Spain is one of the countries that has been severly affected by the current financial situation, there is a possibility that the effect of the crisis on CSR in Spain could be different from other countries, and it is impossible to extend the results of the Escobar and Miras’ (2013) article to all Spanish companies, we are going to test what has happened with CSR in Spain during 2006–2010.

METHOD AND SAMPLE The current investigation involves analysing whether the social and environmental behaviour of the Spanish companies have been influenced by the present financial crisis. In order to achieve our aim, we are going to study the evolution of the social and environmental scores from 2006 to 2010, deepening the comparison between the year 2006 (before the crisis started) and the year 2010 (when the crisis was wreaking havoc). The companies under study are the ones listed in the IBEX-35 Spanish Stock Index. This is because most of the industries are represented in this index. So, the sample was initially composed of Spanish firms included in the IBEX-35, although seven of them had to be excluded due to lack of data availability. The final sample had 28 companies whose data were provided by the DataStream Professional database. The variables used in the study are mainly the Social and Environmental Performance Scores. Based on the description given, the Social Score measures a company’s capacity to generate trust and loyalty within its workforce, customers and society by using best management practices, while the Environmental Score measures a company’s impact on living and non-living natural systems, including the air, land and water, as well as the complete ecosystem. Also, we have included several measures of the Financial Performance such as ROA and ROE as they have been used in the literature.

RESULTS As mentioned previously, the aim of the chapter is to analyze empirically the influence of the crisis on the social and environmental responsibilities of the

27

Is CSR in Crisis?

most representative firms in Spain. The results are divided into two parts as follows: firstly, we examine the evolution of the four variables studied using the mean values in order to be able to get a general idea of the increase or decrease in the scores when the crisis began; and secondly, we delve into more detail about the real evolution of each variable (Social Score, Environmental Score, ROA and ROE) to be able to draw some interesting conclusions. In general, we could report that the Social and Environmental Scores are growing year on year in spite of the economic downturn. The evolution of all the variables considered from 2006 to 2010 is shown in Figs. 1 and 2. A positive tendency of the CSR Scores could be easily identified while the financial ratios showed a negative evolution. From these figures, we could get some ideas. Firstly, there is a continuous growth in both scores, although there is a decline in scores since 2009. It is also evident from Fig. 1 that the behaviour of Environmental Score is steadier than that of the Social Score. On the contrary the ROA and ROE ratios have suffered a big drop, although it is softer in the last two periods studied. This decline seems to have affected the ROE ratio more than the ROA. In Tables 1 and 2, we are able to draw more precise conclusions due to the presentation of the mean values and the percentage changes for every year and variables considered. So in this regard, it is especially remarkable that

Fig. 1.

Evolution of the Social and Environmental Scores.

MARI´A DEL MAR MIRAS RODRI´GUEZ

28

Fig. 2.

Evolution of the ROA and ROE Indicators.

Table 1. Mean values of Each Variable.

Social Score Environmental Score ROA ROE

2006

2007

2008

2009

2010

79.16 75.06 7.56 26.56

88.01 79.30 7.60 25.36

91.11 83.02 6.68 19.59

92.00 84.24 4.67 17.32

92.29 86.59 4.93 17.21

Table 2. Percentage Changes in the Variables.

Social Score Environmental Score ROA ROE

2006–2007

2007–2008

2008–2009

2009–2010

11.19% 5.64% 0.49% 4.52%

3.52% 4.69% 12.50% 22.73%

0.97% 1.47% 30.10% 11.59%

0.31% 2.79% 5.55% 0.66%

the Scores in 2008 and 2009 improve although the largest decline in the financial ratios is produced in these years. It’s so important because it is likely that the CSR behaviours of the companies are not interrupted or delayed by the financial crisis.

Is CSR in Crisis?

29

According to several authors the consequences of a decrease in the financial performance may not be reflected on the CSR investments in the same year; they usually talk about the temporary delays. If we want to take this argument into consideration and examine it in accordance with the results of Table 2, the evidence suggests that the CSR Scores – Social and Environmental – of the most representative companies in Spain are not affected by the crisis, because no score has decreased during the period considered.

DISCUSSION AND CONCLUSIONS The results are surprising because no other empirical work has recorded CSR increases during 2010, although they confirm the evidence shown by Foretica’s report. This has reinforced the idea that Spanish big companies continued to take into consideration the CSR approach during the crisis, trying to behave in a socially and environmentally responsible way. The social and environmental scores did not decrease but rather increased slightly, although these growth rates are quite irrelevant compared to previous years. Another important finding is that both mean scores are close to the maximum level, and therefore the scope for improvement of firms each year is further reduced and achieving significant improvements in the scores becomes more complicated. After a detailed analysis of the findings and attempts to connect them with the theoretical framework, we could say that the results show that the Managerial Opportunism Hypothesis is the one which serves to explain the behaviour of the CSR in Spain during the crisis. Thus, in the light of the results, we can conclude that listed Spanish firms have adopted a long-term approach to manage the CSR, under the pressure of their shareholders. So they are trying to continue with their CSR policies, although in most of the cases it involves making significant changes in their CSR strategy to adapt it for the new circumstances. In this regard, it should be noted that the increase in Social and Environmental Scores do not necessarily mean that the costs of CSR in companies have increased considerably. The concept of CSR is often mistaken with philanthropy, which is not always true, because philanthropy is one of the ways in which CSR can be articulated, but not the only one. Indeed, the cost of philanthropy is often much higher than that in other CSR activities, making it usually difficult for companies to evaluate the potential financial benefit of them.

30

MARI´A DEL MAR MIRAS RODRI´GUEZ

The chapter’s limitations are that it is only a descriptive analysis about the Social and Environmental Scores as well as the financial indicators (ROA and ROE). Only the companies listed in the IBEX-35 Index have been analyzed, so the conclusions cannot be extrapolated to all the Spanish companies, and lesser to the small and medium companies because they are completely different from the studied firms.

REFERENCES Allouche, J., & Laroche, P. (2005). A meta-analytical investigation of the relationship between corporate social and financial performance. Revue de Gestion des Resources Humaine, 57, 18–41. Aras, G., & Crowther, D. (2009). Corporate sustainability reporting: A study in disingenuity? Journal of Business Ethics, 87(Suppl. 1), 279–288. Arevalo, J. A., & Aravind, D. (2010). The impact of the crisis on corporate responsibility: The case of UN global compact participants in the USA. Corporate Governance, 10(4), 406–420. Argandon˜a, B. (2007). La Responsabilidad Social de la Empresa a la luz de la E´tica. IESE Research Papers D/708, IESE Business School. Barnett, J. L., & Devin, B. (2011). Management, communication and corporate social responsibility. In Ø. Ihlen, J. L. Bartlett & S. May (Eds.), The handbook of communication and corporate social responsibility. Oxford, UK: Wiley-Blackwell. Carroll, A. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, July–August, pp. 39–48. Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. The Academy of Management Review, 4(4), 497–505. Carroll, A. B., & Shabana, K. M. (2010). The business case for corporate social responsibility: A review of concepts, research and practice. International Journal of Management Reviews, 12(1), 85–105. Charitoudi, G, Giannarakis, G., & Lazarides, T. G. (2011). Corporate social responsibility performance in periods of financial crisis. European Journal of Scientific Research, 63(3), 447–455. Cheney, G., & McMillan, J. J. (1990). Organizational rhetoric and the practice of criticism. Journal of Applied Communication Research, 18(2), 93–114. Dahlsrud, A. (2008). How corporate social responsibility is defined: An analysis of 37 definitions. Corporate Social Responsibility and Environmental Management, 15(1), 1–13. Escobar, B., & Miras, M. M. (2013). Spanish savings banks’ social commitment: Just pretty words? Social Responsibility Journal, 9(4) (Forthcoming). Fernandez, B. (2009). Crisis and corporate social responsibility: Threat or opportunity? International Journal of Economic Sciences and Applied Research, 2(1), 36–50. Foretica. (2011). Evolucio´n de la Responsabilidad Social de las empresas en Espan˜a. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman.

Is CSR in Crisis?

31

Garriga, E., & Mele´, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53(1), 51–71. Giannarakis, G., & Theotokas, I. (2011). The effect of financial crisis in corporate social responsibility performance. International Journal of Marketing Studies, 3(1), 2–10. Grigore, F. G. (2011). Corporate social responsibility and marketing. In D. Crowther & G. Aras (Eds.), Governance in the business environment – developments in corporate governance and responsibility (Vol. 2, pp. 41–58). Bingley, UK: Emerald Group Publishing Limited. Husted, B. W., & De Jesu´s Salazar, J. (2006). Taking friedman seriously: Maximizing profits and social performance. Journal of Management Studies, 43(1), 75–91. Izquierdo, J. A. M. (2004). Responsabilidad social corporativa y competitividad: una visio´n desde la empresa. Revista valenciana de economı´a y hacienda, 12, 9–50. Karaibrahimoglu, Y. Z. (2010). Corporate social responsibility in times of financial crisis. African Journal of Business Management, 4(4), 382–389. Lee, M. D. P. (2008). A review of the theories of corporate social responsibility: Its evolutionary path and the road ahead. International Journal of Management Reviews, 10(1), 53–73. Maignan, I., & Ferrell, O. C. (2004). Corporate social responsibility and marketing: An integrative framework. Journal of the Academy of Marketing Science, 32(1), 3–19. Margolis, J. D., & Walsh, J. P. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48(2), 268–305. McWilliams, A., Siegel, D. S., & Wright, P. M. (2006). Corporate social responsibility: Strategic implications. Journal of Management Studies, 43(1), 1–18. Miras, M. M., Escobar, B., Carrasco, A. (2011, March). Responsabilidad social corporativa y rendimiento financiero: Un meta-ana´lisis. Presented at VIII Workshop on Empirical Research in Financial Accounting, Seville, Spain. Nieto, M., & Ferna´ndez, R. (2004). Responsabilidad social corporativa: la u´ltima innovacio´n en management. Universia Business Review, 1, 28–39. Njoroge, J. (2009). Effects of the global financial crisis on corporate social responsibility in multinational companies in Kenya. Covalence Intern Analyst Papers. Retrieved from www.covalence.ch/docs/Kenya-Crisis.pdf. Accessed on December 30, 2009. Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24(3), 403–441. Porter, M. E., & Kramer, M. R. (2002, December). The competitive advantage of corporate philanthropy. Harvard Business Review, December, pp. 57–68. Preston, L. E., & O’Bannon, D. P. (1997). The corporate social-financial performance relationship: A typology and analysis. Business and Society, 36, 419–429. Salzmann, O., Ionescu-Somers, A., & Steger, U. (2005). The business case for corporate sustainability: literature review and research options. European Management Journal, 23, 27–36. Schiopoiu Burlea, A., Radu, C., Craciun, L., Ionascu, C., & Lolescu, R. (2010). The relationship between financial crisis, corruption and corporate social responsibility in Romania. Management & Marketing, 8(1), 65–72. Schultz, F., & Wehmeier, S. (2010). Institutionalization of corporate social responsibility within corporate communications: Combining institutional, sensemaking and communication perspectives. Corporate Communications: An International Journal, 15(1), 9–29. Waddock, S. A., & Graves, S. B. (1997). Corporate social performance-financial performance link. Strategic Management Journal, 18(4), 303–319.

32

MARI´A DEL MAR MIRAS RODRI´GUEZ

Williamson, D., Lynch-Wood, G., & Ramsay, J. (2006). Drivers of environmental behaviour in manufacturing SMEs and the implications for CSR. Journal of Business Ethics, 67(3), 317–330. Williamson, O. E. (1967). The economics of discretionary behavior: Managerial objectives in a theory of the firm. Chicago: Markham. Williamson, O. E. (1985). The economic institutions of capitalism. New York, NY: Free Press. Wilson, A. (2008, October 15). Deepening financial crisis should not derail corporate social responsibility. Retrieved from http://www.kyivpost.com/content/business/deepeningfinancial-crisis-should-not-derail-corpo-30379.html. Accessed on September 2012. Wu, M.-L. (2006). Corporate social performance, corporate financial performance and firm size. Journal of American Academy of Business, Cambridge, 8(1), 163–171. Yelkikalan, N., & Ko¨se, C. (2012). The effects of the financial crisis on corporate social responsibility. International Journal of Business and Social Science, 3(3), 292–300.

UNDERSTANDING STAKEHOLDER ACTIVISM, MANAGING TRANSPARENCY RISK Millicent Danker ABSTRACT The lexicon of corporate governance has ‘transparency’ as a key imperative. Yet transparency as a management principle begs explanation. It also raises several questions: transparent to whom, how and why? Who decides? Is full transparency desirable? What are its merits and benefits? What are the risks of increased transparency? The answers may lie somewhere between the shareholder and stakeholder views of the modern corporation, with the former defending shareholder-owner primacy and firm profit-maximisation, and the latter offering a valuesbased approach towards balancing the needs and expectations of all stakeholders. While corporate governance broadly addresses the needs of shareholders and investors, driven by the position that companies need to be better governed for stockholder value, the ‘stakeholder’ view of the corporation has gained ground over the past 20 or so years whereby the modern corporation is accountable not only to its owners, but also society. The transparency debate has emerged in parallel, and with it, issues of privacy and/or secrecy on one hand and the notion of ‘sunlight’ on the

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 33–72 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005006

33

34

MILLICENT DANKER

other. Transparency’s role has been variously described as the promotion of corporate disclosure and protection of the rights of minority shareholders in the information environment (Bushman & Smith, 2003); the promotion of corporate accountability and advancement of the rights of stakeholders (Clarke, 2004; Donaldson & Preston, 1995; Hess, 2007; Mallin, 2002); a tool to limit information asymmetries (Boatright, 2008; Florini, 2007a, 2007b; Hood, 2006; Lev, 1992); a means to create a level playing field through ethics and fairness (Boatright, 2008; Oliver, 2004); the promotion of market efficiency (Bessire, 2005; Heflin, Subramanyam, & Zhang, 2003); and the prevention of abuse through stakeholder activism (Bandsuch, Pate, & Thies, 2008; Roche, 2005). Aspirations aside, there is lack of consensus as to transparency’s dimensions, drivers and dilemmas in corporate behaviour. Indeed, its perceived value to stakeholders and corporations alike remains questionable. In this chapter, the author discusses the governance of corporate transparency and argues that clarity and Board policy are needed to manage transparency activism and its resultant risks. Keywords: Accountability; communication; corporate governance; corporate transparency; ethics; information; stakeholders; stakeholder theory; ethics; transparency

CORPORATE GOVERNANCE: STOCKHOLDER VERSUS STAKEHOLDER PERSPECTIVES From various definitions of corporate governance one senses either a broad or a narrow accountability in the relationship between the governors and the governed. The origins of corporate governance are found in the seminal work by Berle and Means (1932), which addresses the divergence of interest between ownership and control due to separation of powers in the evolution of the modern corporation. Given the rise of concentration of ownership in the hands of a few, Berle and Means argue that stock ownership has dispersed, resulting in the notion of ‘nominal’ or ‘passive’ ownership; as a result, the interests of passive owners have given way to the broader needs of society. In this respect, Berle and Means, by suggesting the ‘balancing (of) a variety of claims by various groups in the community’ (ibid., p. 312) by corporations, are the precursors of scholarly thought in modern corporate governance and stakeholder accountability.

Understanding Stakeholder Activism, Managing Transparency Risk

35

Since 1992, governance issues have attracted keen attention due partly to systemic business failures and ethical lapses. Cadbury’s leadership through the Report on the Financial Aspects of Corporate Governance brought these issues international recognition and provided the impetus for global reform of institutional systems and laws (Roche, 2005), as well as scholarly interest in the field, now multi-disciplinary (Keasey, Thompson, & Wright, 2005). In recent years, corporate governance theorising has been largely polarised between shareholding and stakeholding paradigms (Clarke, 2004; Letza, Sun, & Kirkbride, 2004; Mallin, 2007), with traditional theorists addressing the principal notion that companies need to be better governed to deliver shareholder value (Friedman, 1962; Jensen & Meckling, 1976; Ross, 1973), and other, more recent theorists defending the ‘stakeholder’ view of the corporation, suggesting that stakeholders are vital to business continuity (Cadbury, 2002; Freeman, 1984; Goodpaster, 1991; Phillips, 2003; Solomon & Solomon, 2004; Tricker, 2000). While some find ‘stakeholding’ has intellectual appeal (Clarke, 2004), others believe the ‘myopic’ and ‘narrow’ finance-perspective of shareholder-value maximisation has largely been responsible for business failures (Keasey et al., 2005, p. 3). Stakeholder theory gained momentum in the past 20 years as a reaction to traditional ‘shareholder’ theorists whose view of the firm has a ‘finance and market myopia’ (Blair, 1995, in Clarke, 2004, p. 174). It defends accountability to a broad range of stakeholders beyond the shareholder. Colley et al. (2003) notes: ‘All organizations have multiple stakeholders whose needs must be considered to achieve sustainable success’ (ibid., p. 216). Phillips (2003) forwards a normative approach to stakeholder theory, describing it as ‘a theory of organizational management and ethics’ (ibid., p. 15). While the stakeholder notion appears to have gained favour, it is ‘deceptively simple’, having not been fully explained as theory and lacking in conceptual rigour (Clarke, 2004, p. 194). Describing the ‘stakeholder corporation’ as a business philosophy rather than theory, Clarke (2004) recognises the internationalisation of capital markets with the result that there is a degree now of both convergence and divergence of governance systems between ‘stakeholder capitalism’ (Europe), ‘stockholder capitalism’ (US/UK) and ‘collective capitalism’ (Japan) (ibid., p. 190). The view that one model of corporate governance will not fit all is gaining currency (Davies & Schlitzer, 2008). In defence of shareholder theory, it is argued that while stakeholders are important, their interests ought to be considered in the context of demand for shareholder value as shareholders who are effectively the recipients of residual free cash flows would always ensure that the resources of the firm are used to maximum effect (Monks & Minow, 2004). Debating on the

36

MILLICENT DANKER

proposition that only the ultimate or beneficial owner would maximise profit for the firm and thereby act as proxy for the public interest, Clarke (2004) doubts if in an era of active participation by consumers, employees and others there could be any validity to the claim that only shareholders are capable of effective monitoring (ibid., p. 193). Clarke (2004) notes the counter argument to the stakeholder view which cites the lack of homogeneity when representing the needs of the stakeholder, lack of clarity in terms of their expectations and the difficulty of measurement and verification (ibid., p. 194). Bradburn (2001) challenges shareholder theorists by disagreeing that a company ought to be solely responsible to a group of anonymous shareholders, for example pension fund managers or institutional investors, whose relationship with the firm is impermanent, and thereby their right to hold companies accountable is questionable. He contends that to make stakeholder responsibility a practical reality, a stakeholder board of directors should be emplaced ‘to manage the affairs of the business in concert with the interests of the stakeholders’ (ibid., pp. 90–91). Shareholder theorists draw strength from traditional economic theory and theories of the firm which suggest that firms exist to produce goods and services for their customers, which go to maximise profit for their owners, and hence take a strong position against any social obligations. Within American industry, the notion of the stockholder gained prominence, with Friedman (1962) advocating that the business of business is business, and the corporation should therefore serve the interests of its stockholders. He famously said: Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is? Can they decide how great a burden they are justified in placing on themselves or their stockholders to serve that social interest? (ibid., p. 134)

Definitions of corporate governance are polarised at opposing ends of the stakeholder versus shareholder axis (Solomon & Solomon, 2004). While the 1992 Cadbury Committee on the Financial Aspects of Corporate Governance defines it as ‘the system by which companies are directed and controlled’ (Cadbury, 2002, p. 12), subsequent definitions take stakeholder interests into consideration. Colley et al. (2005) suggest that a typical model of corporate governance includes systems to ensure that the organisation’s

Understanding Stakeholder Activism, Managing Transparency Risk

37

obligations to its major stakeholders – customers, employees, creditors, suppliers and distributors, the community and owners – are met with integrity and in compliance with applicable laws and regulations. While shareholder theorists advocate shareholder value (hence the focus on fiduciary duties of boards), others (Cadbury, 2002; Colley et al., 2005; Ghoshal, 2005; Goodpaster, 1991; Solomon & Solomon, 2004) support the stakeholder-accountability view of corporate governance, summed up as ‘the process by which corporations are made responsive to the rights and wishes of stakeholders’ (Cadbury, 2002, p. 1). Turnbull (1997) notes ambiguity in the meaning of governance and calls for greater rigour in its study, while acknowledging the existence of stakeholders whom he describes as ‘strategic’ because they determine the ability of the firm to exist. Tricker’s (2000) summary position is useful for its relational approach which has been taken up by others after him: ‘In fact, though often called stakeholder theory, such notions are better seen as a matter of corporate governance philosophy, being concerned with values and beliefs about appropriate relationships between the individual, the enterprise and the state’ (ibid., pp. 289–296). Solomon and Solomon (2004) put definitions of corporate governance on a spectrum, noting: One approach toward corporate governance adopts a narrow view, where corporate governance is restricted to the relationship between a company and its shareholders. This is the traditional finance paradigm, expressed in ‘agency theory’. At the other end of the spectrum, corporate governance may be seen as a web of relationships, not only between a company and its owners (shareholders) but also between a company and a broad range of other ‘stakeholders’: employees, customers, suppliers, bondholders, to name but a few. (ibid., p. 12)

Who then are the stakeholders? Bradburn (2001) holds the view that there are two types: those who are vital to the survival of the organisation, and any group who can affect or be affected by the organisation but who do not have direct control (ibid., p. 86). Mallin (2007) posits that stakeholders refer to any individual or group upon which the activities of the company have an impact, while arguing that ‘shareholders’ rights are enshrined in law whereas those of the wider group of stakeholders are not’ (ibid., p. 49). No discussion of stakeholder theory would be complete, however, without attributing a view to Freeman who first proposed it, saying: ‘I do not seek the demise of the modern corporationyrather, I seek its transformation’ (Freeman, 1994, p. 125). He defines stakeholders as Groups and individuals who benefit from or are harmed by, and whose rights are violated or respected by, corporate actions. The concept of stakeholders is a generalization of the notion of stockholders y Just as stockholders have a right to

38

MILLICENT DANKER demand certain actions by management, so do other stakeholders have a right to make claimsy . Stakes require action of a certain sort, and conflicting stakes require methods of resolution. (ibid., p. 129)

The threads of stakeholder theory in the literature do appear to converge in the central philosophy that multiple-stakeholder accountability is necessary for good governance. As Solomon and Solomon (2004) note, ‘broader definitions of corporate governance stress a broader level of accountability to shareholders and other stakeholders’ (ibid., p. 14). Fox (2007) has argued that the concepts of transparency and accountability are closely linked, adding that ‘transparency is supposed to generate accountability’ (ibid., p. 663). Fox further observes: ‘y the twin principles of transparency and accountability have become adopted by an extraordinarily broad array of political and policy actors in a remarkably brief period of time. This broad appeal is testimony to their trans-ideological character’ (ibid.). This continuing debate is believed fundamental to the understanding of stakeholder management as a function of corporate governance as there are consequential implications on corporate reporting, communication and relationships. The literature suggests that stakeholders have legitimate relational, dialogic, communication and information needs and the ethical response of management to these demands is vital to ensure the delivery of corporate governance (Argenti, Howell, & Beck, 2005; Bandsuch et al., 2008). It may be assumed that where companies accept a narrower accountability to shareholders and owners, their communication responsibilities would be materially different than if they were expected to serve the interests of all stakeholders. Content, channels and tools of communication would be broader and more stakeholder-specific in the latter case.

TRANSPARENCY: DIMENSIONS AND DILEMMAS Rhetoric is plentiful around the transparency debate, as noted in the policy, theoretical, empirical and practitioner literature of the past two decades, particularly where governance reform is addressed (Hood, 2006; Rodan, 2004). This has tended to cloud the intellectual discourse. Unlike corporate governance, where several grand theories have been isolated (Clarke, 2004; Mallin, 2007; Solomon & Solomon, 2004), corporate transparency has not yet found its theoretical home and straddles various scholarly traditions, whether philosophy, law, government, politics, public policy, ethics, information sciences, social science, accounting, finance or

Understanding Stakeholder Activism, Managing Transparency Risk

39

business. Scholarly and practitioner interest in transparency has assumed importance only recently, rendering the term a ‘pervasive cliche´ of modern governance’ (Hood, 2006, p. 3). It has been described as both pervasive yet ambivalent (Grossman, Luque, & Muniesa, 2006); a force (Tapscott & Ticoll, 2003); an imperative (Oliver, 2004); a phenomenon and revolution (Florini, 2007a, 2007b), with an ‘exalted ring of eternal truth about it (Bennis et al., 2008, p. 7). Transparency’s role has been variously discussed as the promotion of corporate disclosure and protection of the rights of minority shareholders in the information environment (Bushman & Smith, 2003); the promotion of corporate accountability and advancement of the rights of stakeholders (Clarke, 2004; Donaldson & Preston, 1995; Hess, 2007; Mallin, 2002); a tool to limit information asymmetries (Boatright, 2008; Florini, 2007a, 2007b; Hood, 2006; Lev, 1992); a means to create a level playing field through ethics and fairness (Boatright, 2008; Oliver, 2004); the promotion of market efficiency (Bessire, 2005; Heflin et al., 2003); and the prevention of abuse through stakeholder activism (Bandsuch et al., 2008; Roche, 2005). The word is believed to have originated from Jeremy Bentham’s early 19th century ‘transparent management’ principle, as it applied to the government of the day. He argued for openness as opposed to secrecy by suggesting that the more strictly people are watched, the better they behave (Gallhofer & Haslam, 1993). This was linked to the notion of ‘publicity’ or bringing actions to light, to prevent abuse; publicity was needed to enable citizens to control and monitor the acts of their representatives through a ‘watchdog’ process. Gallhofer and Haslam (ibid.) argue that the principle of publicity is central to Bentham’s understanding of the accountability process. Bentham describes publicity as ‘the most effectual means of applying the force of moral motives y by bringing to light, and thus exposing to the censure of the law and of public opinion, every instance of contravention’ (Bentham, 1797, pp. 51–52, in Gallhofer & Haslam, 1993, p. 322). Benthamite wisdom may arguably be applied towards theories of modern corporate governance and accountability as he pursued a moral quest for surveillance to make things more visible to citizens. This predates the ‘Sunshine Act’ of the United States of 1976 which prized the doctrine of openness in governmental dealings; this was also a fundamental principle of the EU’s various transparency directives of 2004 (Hood, 2006), aimed at harmonising transparency requirements among issuers. The UK followed with its Disclosure and Transparency Regulations (DTR) of 2007. The notion of ‘sunlight’ has been discussed by Bennis et al. (2008) and Florini

40

MILLICENT DANKER

(2007a, 2007b) in terms of electronic technology which renders everything visible and makes transparency inevitable. Elsewhere, corporate governance codes refer to transparency and accountability as a basic principle (Mallin, 2007) and expect that companies will deal transparently with shareholders and responsibly with stakeholders (Institute of Directors, 2005, p. xii), with the OECD Principles of Corporate Governance 2004 adopting it as an international standard (ibid., p. xviii). In Asia and other emerging markets, ‘transparency’ is used in connection with global corruption surveys and the Corruption Perceptions Index conducted by Transparency International, the Global Coalition against Corruption, to benchmark government transparency levels. It has been argued that transparency in the corporate environment cannot but be linked with political and government transparency and corruption, and has to do with democracy, the state of political economy, human rights, the freedom of speech and the freedom of information or FOI (Birkinshaw, 2006; Fung, Graham, & Weil, 2007; Rodan, 2004; Wu, 2009), being in fact, a key principle of democratic government (Florini, 2007a, 2007b). It has also been argued that transparency levels among Asian countries and companies have fallen short (Clarke, 2004; Goh, 2008; Roche, 2005; Rodan, 2004). The debate on transparency becomes complex when perceived as a matter of human right and given the demands for freedom of information. Birkinshaw (2006) observes that access to government-held information is applauded as a remedy ‘for the deficiencies and operations of government where government claims to be democratic but where it falls short of rhetoric’ (ibid., p. 48), noting that themes of openness pervade common law in England, and ‘numerous judgments display a constitutional preoccupation with openness, or, as we would say today, transparency (ibid., p. 52). A tension has also been observed between the public’s right to know and the right to privacy. This view challenges information property rights. Behrman (1981) questions the right to know versus the duty to disclose: Who has the right to know? What do they have the right to know? When do they have the right to know it? Mere desire to know does not constitute a right to know. Nor does the possession of information imply a duty to disclose it. (ibid., p. 97)

Besides these dilemmas, the literature surfaces other ethical and practical issues of transparency governance with scholars questioning its value and arguing that transparency has its limits, is not always desirable and may not always be effective (Bennis et al., 2008; Fung et al., 2007; Heald, 2006). Indeed, privacy, security and efficiency are argued to be transparency’s competing values. While more than 80 countries now have some form of

Understanding Stakeholder Activism, Managing Transparency Risk

41

FOI law or regime (Piotrowski, 2010), Birkinshaw (2006, pp. 191–193) presents a list of arguments against openness which includes the cost of meeting FOI requests which may deflect resources from more important governmental functions, threats to security and innocent third parties and what he describes as unjustified invasion of personal privacy or commercial confidentiality. The difficulty, he argues, is finding the correct balance between the public’s right to know and the individual’s and corporation’s desire to keep their information out of the public domain. Piotrowski (2010, p. 36) concurs: ‘Having strong freedom of information laws without successful implementation does little to promote transparency.’ A corporate perspective is held by Calland (2007): y when balancing privacy and proprietary ownership with duties to disclose, we do not apply the same approach as we would with a human being. Corporations are not human beings. They have legitimate interests that deserve to be protected, including a responsibility to withhold information in some cases. (ibid., p. 220)

Palmer (2005) argues that there is a strategic role for secrecy, or ‘enclosure’ of information as opposed to ‘disclosure’, which is ‘to further communicator interests’ (ibid., p. 165). Nevertheless, the right-to-information themes are carried in the institutional definitions of transparency such as that adopted by the international organisation Transparency International which interprets the term as ‘a principle’, calling on civil servants, managers and trustees to act ‘visibly’ in making information available to stakeholders (www.transparency.org). The notions of ‘open’ government information, rights of citizens to public information, the power of information, legislated transparency and the challenges to secrecy as a tool to combat corruption and check abuses of public and corporate power have been well documented (Florini, 2007a, 2007b; Fox, 2007; Fung et al., 2007; Hood & Heald, 2006; Prat, 2006; Piotrowski, 2010; Rodan, 2004). Government transparency or transparency at the policy and legislated levels is believed to be important in understanding the debate on corporate transparency, as the regulatory environment will ultimately create a climate of transparency within which companies act; without such a climate, transparency will fail (Fung et al., 2007). In recent years, while ‘policymakers were honing transparency – a widely shared but amorphous value – into a refined instrument of governance’, success has been limited since transparency policies are subject to politics, are dependent on intense lobbying, represent compromises because of conflict of interest, and tend towards failure because information content often remains incomprehensible (ibid., pp. xi, xii; also O’Neill, 2006). Wu (2009) notes:

42

MILLICENT DANKER

‘Government plays an important role in shaping the operating environment to which corporate accounting practices respond, and the degree of transparency in government actions shapes the degree of economic, financial, and political risks perceived by the corporate sector’ (ibid., p. 75). In recent years, international organisations such as the International Monetary Fund (IMF) have responded to demands for improved transparency. It has been argued that the IMF’s handling of the Asian financial crisis in 1998 was flawed by secrecy which led to errors of judgement (Roberts, 2010), and that today the Fund is disclosing more information than it did a decade ago. Nevertheless, it has been ‘candid about the limits of reform’ (ibid., p. 59). According to Roberts, the disclosure policies of other inter-governmental organisations such as the World Bank and the World Trade Organisation (WTO) have developed cautiously, ‘but the ethos of diplomatic confidentiality continues to be respected and remains a significant barrier to greater transparency’ and ‘where disclosure obligations are recognised by member states, they are typically tied to a narrow program of reform aimed at promoting trade and financial liberalization’ (ibid., p. 66) In discussing if markets need transparency, Rodan (2004) sees a push for institutional reform in some countries because of an ‘unprecedented emphasis on transparency’, but does not believe transparency reform has progressed beyond political rhetoric (ibid., p. 23). He concludes that these governments remain ‘extremely nervous about broader conceptions of transparency’, and further notes: ‘Ideas about the rights of citizens to information, the importance of a free press to more transparent and accountable systems and attempts to subject state institutions to greater public scrutiny are resisted with vigour’ (ibid., p. 42). Florini (2007a) sums up ‘the battle for transparency’ as being fought over issues of secrecy and privacy versus right to know, quality of public disclosure and imperfections of information, and concludes: But the debate over transparency and access to information is more than a power struggle. It is also a war of ideas about what transparency is good for and when secrecy may better serve the public interest. This is no trivial or arcane debate. The arguments for and against transparency reflect fundamental issues about the nature of democracy, good governance, economic efficiency, and social justice y . (ibid., p. 1)

The transparency debate has to take stock of ‘disclosure theory’ where issues of private disclosures, fair or full disclosure, the role of disclosure in a capital market, voluntary or discretionary disclosure, forecast disclosure versus earnings disclosure, and, more recently, period-driven disclosure rather than event-driven disclosure have dominated the accounting and

Understanding Stakeholder Activism, Managing Transparency Risk

43

finance literature in the past 20 or so years (Barnea, 2008; Grossman, 1981; Healy & Palepu, 2000; Heflin et al., 2003; Lang & Lundholm, 1996; Lev, 1992; Verrecchia, 1983). A review of the empirical disclosure literature surfaces issues related to disclosure policy and analyst behaviour (Lang & Lundholm, 1996), information gaps as a result of disclosure (Lev, 1992), the impact of good versus bad news disclosure (Shalev, 2009), disclosure cost versus disclosure value (Barnea, 2008; Verrecchia, 1990) and the correlation between voluntary disclosure and share price movements (Barnea, 2008). Voluntary disclosure has been defined as ‘disclosure, primarily outside the financial statements, that are not explicitly required by GAAP or an SEC rule’ and particularly recommended for business today by the Financial Accounting Standards Board which also prescribes that such disclosure should cover not only good news (Financial Accounting Standards Board (FASB), 2001) but also bad news. It may also be qualitative or quantitative, prospective or retrospective in nature (Lev, 1992). Corporate disclosure has been perceived to be an important vehicle for management to communicate firm- and industry-specific information to the market (Healy & Pelepu, 2000). In exploring disclosure theory, Shalev (2009) has expanded on the ‘good-news model’ of disclosure discussed extensively by Lev and Penman (1990), concluding that on balance, managers tend to reveal good news and to provide comprehensive information to positively affect stock prices, and withhold information when it comes to bad news. Corporate disclosure has a bearing on corporate transparency, which as a variant of transparency, also defies consensual definition, being at an early stage of modern inquiry. In recent multi-disciplinary scholarship, the terms are sometimes used interchangeably, but there is evidence that both, though related, are different. The literature widely suggests that despite the intense global interest in aspects of corporate transparency, it is not limited to disclosure of financial matters alone but takes a much more inclusive and broader stakeholder-driven approach. The term ‘disclosure’ belongs to the financial and accounting disciplines, while the term ‘transparency’ is rather more diverse in terms of its traditions, with links to the humanities, and may be said to have a ‘softer’ approach. It has been argued that corporate transparency is broader than corporate disclosure which suggests a box-ticking approach to compliance; the latter spells out the fiduciary obligations of the firm towards its principals or shareholders, and is highly regulated, while corporate transparency extends the scope of corporate reporting to social reporting beyond financial reporting (Gallhofer & Haslam, 1993; Goodpaster, 1991; Hess, 2007; Low & Cowton, 2004).

44

MILLICENT DANKER

Yet Solomon and Solomon (2004) argue that corporate disclosure is not mere financial accounting information; the former refers to a ‘whole array of different forms of information produced by companies’ from the annual report to profit and loss statements, mandatory items as well as voluntary corporate communications, including management forecasts, analysts’ presentations, the AGM, press releases, information placed on corporate websites and other corporate reports, while the latter is merely one aspect of corporate disclosure, that is quantitative data concerning the financial position of the firm (ibid., pp. 120–121). It is observed that companies are now obliged by their respective regulators to produce financial information at periodic intervals and to ensure such information is made available to all shareholders at the same time, to limit insider trading and address information deficiencies and gaps. Corporate transparency suggests the inclusion [emphasis added] of corporate disclosure in the shift from regulation to governance, which some refer to as a collaborative approach or the new governance model (Hess, 2007); nevertheless, being self-regulated, corporate transparency is often subject to a number of challenges and what is largely understood in the literature to be related to ethical dilemmas. Cheah and Ow-Yong (2004) note: ‘Transparency and disclosure are key pillars of a sound corporate governance framework because they provide market participants with the information necessary to evaluate whether their interests are being looked after’ (ibid., p. 217). Elliott and Schroth (2002) believe timeliness and detail are of the essence if companies are ‘interested in closing the information gap with those who invest in themy . Off-balance-sheet details as well as accurate on-balance-sheet information are a minimum’ (ibid., p. 139). The literature reveals a shift in corporate disclosure behaviour in recent years with advances made by companies to undertake voluntary disclosure following Regulation Fair Disclosure enacted in 2000 which regulated US issuers disclosing material non-public information to make such information publicly available simultaneously, to prevent private and selective disclosure, thereby moving towards greater transparency on the principle of equal access to information. In the literature of corporate governance, values of openness, truth, trust, trustworthiness, accountability and responsibility are at the core of corporate transparency in modern usage (Cadbury, 2002; Bandsuch et al., 2008; Bennis et al., 2008; Henriques, 2007; Keeble, 2005; Mallin, 2007; Oliver, 2004; O’Neill, 2006). In trying to deconstruct the notion of transparency, Heald (2006) has concluded that ‘openness’ is the closest to it (ibid., p. 25), a view corroborated by Birkinshaw (2006) who considers that openness and transparency are close in meaning and convey something wider than information access. Some scholars have perceived a continuing

Understanding Stakeholder Activism, Managing Transparency Risk

45

struggle towards openness in transparency reform (Florini, 2007a, 2007b; Fung et al., 2007). Indeed, the very act of being transparent has been interpreted to mean to communicate openly (Cadbury, 2002), to communicate honestly and with candor (Bennis et al., 2008), without ambiguity and ‘opacity, obfuscation and fraud’ (Oliver, 2004, p. 31). Transparency is also often described using the metaphor of light as in ‘allowing others to see the truth, without trying to hide or shade the meaning, or altering the facts to put things in a better light’ (Oliver, 2004, p. 3). How companies can actively begin the task of being transparent while managing risk is a key challenge. Cadbury (2002) believed it right and sensible for chairmen and chief executives to be ‘as open as they prudently can be about the affairs of their companies’, contending that openness also builds goodwill towards the company which can be drawn on in times of difficulty y the more information which is openly available about a company, the less chance there is that anyone would gain a financial advantage through privileged knowledge. (ibid., p. 137)

Rushton (2008a, 2008b) sees the need for board chairmen ‘to create a climate of transparency in the board’ (ibid., p. 31), believing transparency to be a key requirement for directors, while Carver and Oliver (2002) argue for boards to create value through policy, noting that ‘written policies are a tool for conveying the board’s decisions to all in a consistent and enduring manner’ (ibid., p. 11). This is a view held also by Demb and Neubauer (1990) who believe boards have a role to identify and prioritise standards and values against which their companies can be judged. There is endless debate about what transparency is not, and secrecy or opacity are often cited as transparency’s antonyms, as is the misreporting or hiding of information. Opacity is addressed by the OECD which sets international governance benchmarks, and which says of the Asian financial crisis: ‘The absence of effective discipline on corporate managers, coupled with complicated and opaque relationships between corporations, their owners and their finance providers, severely affected investor confidence in the region’s corporate sectors’ (as cited in Bhattacharyay, 2004, p. 2). Opacity continues to characterise many American organisations (Bennis et al., 2008, p. 2); it is defined as being transparency’s opposite, ‘the state of being hard to understand, not clear or lucid’ (Oliver, 2004, p. 13). Regulatory institutions took their cue from these developments and reinforced corporate laws, regulations and guidelines. The Sarbanes-Oxley Act of 2002 (SOX), described as the most dramatic change to US securities laws in a half century, made it more difficult for dishonest acts to be hidden by focusing on real-time disclosures; indeed, SOX contains rules requiring

46

MILLICENT DANKER

companies to disclose to the public ‘on a rapid and current basis’ and in ‘plain English’ important changes in their financial status or operations, with the objective of protecting investors (Colley et al., 2005, p. 84). It has been noted that the original name of the bill had the word ‘transparency’ in it, but this was later dropped; unfortunately, the term was never defined in the final legislation (Kulzick, 2004, p. 43). The UK’s FSA Handbook of June 2009 has likewise clear guidelines to issuers in regard to disclosure of inside information and communication with third parties and makes the distinction between unpublished information and insider information (http://fsahandbook.info/FSA/print/ handbook/DTR), which are now known as the Disclosure and Transparency Rules (DTR). These are based on the EU’s Transparency Directive which came into effect in the United Kingdom on 20 January, 2007. Even though the terms ‘corporate transparency’ and ‘corporate accountability’ often appear together in the corporate governance literature, they are not well correlated in the theoretical literature, though they are perceived to be key pillars of such governance in the practitioner literature. The UK Institute of Directors has noted ‘four underlying principles’ of an effective corporate governance system: transparency, accountability, fairness and responsibility (IOD, 2005, p. xvi). Many argue that transparency is a complex notion, is obscure and defies definition (Florini, 2007a, 2007b; Hood, 2006; Prat, 2006) while being difficult to legitimate, measure and achieve (Bessire, 2005; Fung et al., 2007). Prat (2006) attempts to draw on agency theory, that is the principal-agent relationship, to explain transparency as corresponding to the ability of the principal to observe [emphasis mine] the agent perform his duty (ibid., p. 91), with others implying a principal-agency struggle in relation to corporate transparency (Gallhofer & Haslam, 1993). Transparency, as linked to stakeholder demands for greater information and greater accountability (Fox, 2007), is one of the key objectives underpinning the proposals for UK Company Law Reform (Cadbury, 2002, p. 200). Fox notes the new emphasis on timely access to high quality information, adding, It is not only shareholders who have a legitimate interest in the activities of companies, but also, for example, employees, trading partners, and the wider community. The proposals, therefore, aim to meet the needs of these other constituencies for corporate accountability. (ibid., p. 202)

There is mounting interest in the literature between ‘old’ and ‘new’ models of governance which casts further light on transparency; in the latter, it is about a proactive and active stance in response to stakeholder pressures for

Understanding Stakeholder Activism, Managing Transparency Risk

47

information, whether from whistleblowers, the media or environmental pressure groups, rather than the state of being reactive and passive, without concern for outcomes (Heald, 2006; Hess, 2007; Oliver, 2004). Goodpaster (1991) defended the need for a much more inclusive approach towards stakeholders, to whom the firm has ethical ‘multi-fiduciary responsibilities’, a view held by others (Donaldson & Preston, 1995; Freeman, 1984; Phillips, 2003) who suggest that stakeholders now have a legitimate claim to information about an organisation’s actions and intents. It is widely posited that stakeholders are at the centre of the demand for new levels of transparency (Bandsuch et al., 2008; Bradburn, 2001; Colley et al., 2003; Oliver, 2004; Palmer, 2005). Hess (2007) argues for a new governance model which promotes stakeholder accountability through improved voluntary social reporting systems. Clarke (2004) sums up the debate by proposing that it is time ‘for the principal-agent problematic to be reinforced with the environment-trustee problematic in both theory and practice’ (ibid., p. 24), adding that all corporate governance systems will need to operate ‘via transparency and accountability, generating more value with minimum impact’ (ibid., p. 25). He recognises the need for a new model of corporate governance within an environmental context, which focuses on transparency and accountability ‘in a multi-stakeholder world’ (ibid.). Hood links the term to theories of international governance, national and local government: ‘What is called ‘‘transparency’’ in other fields tends to go under the title of ‘‘disclosure’’ in the (English) language of accounting though the word transparency entered the lexicon of corporate governance late in the twentieth century’ (2006, p. 15). Tapscott and Ticoll (2003), arguing for greater ‘active transparency’ by firms, have noted that SOX represents ‘the greatest leap in corporate transparency since Franklin Delano Roosevelt’s securities laws of 1932’ (ibid., p. 3). Solomon and Solomon (2004) contend that companies have to be proactive in removing barriers to information flow, while Cadbury (2002) proposes that the new objective is ‘to move beyond reporting on a historic and quantitative basis, in order to include qualitative as well as financial information, and intangible and well as tangible assets’ (ibid., p. 202). Lodge (2002) presents a number of transparency dimensions in relation to EU practice: ‘Transparency and openness are words which are frequently coupled together in EU parlance y they are portrayed as synonymous, or as two sides of the same coin’ (ibid., pp. 95–96), while Mayo (2008) comments on the EU Transparency Directives 2007: ‘The overall effect is rather like a goldfish bowl in which the activities of regulated companies seem visible from all angles’ (ibid., p. 142).

48

MILLICENT DANKER

The stakeholder literature represents an assortment of theoretical underpinnings which have not come together to explain fully the dynamics between corporate governance, corporate transparency and stakeholder accountability, although the notion of stakeholder fairness and organisational ethics has emerged (Phillips, 2003). Reservations have been expressed about transparency being just a technical matter of financial communication when it has a moral imperative (Henriques, 2007, pp. 4–5). Bandsuch et al. (2008) argue for a corporate governance model based on principle-centred leadership, transparency, ethical culture and stakeholder voice as its four components (ibid., p. 100). That transparency has gained currency in recent years especially in the literature of corporate governance is clear. What remains still unclear is whether transparency means the same thing as disclosure. While the latter is perceived to be an ‘accounting vision of transparency’ (Hood, 2006, p. 20), Oliver believes transparency to be about ‘active disclosure (2004, p. 3), and Gallhofer and Haslam (1993) argue that transparency suggests ‘a disclosure to the public at large, a broader audience than the shareholder group’ (ibid., p. 324). They also note that Bentham was clearly a non-traditionalist advocate of open management, stakeholder accountability and disclosure beyond the financial realm. While he argued for publicity to secure people’s confidence in public decision-making, he abhorred secrecy which he believed created suspicions of misconduct (Setala & Gronlund, 2006). The question should also be asked, ‘is transparency the same as communication?’ While the literature does not provide sufficient empirical evidence of association, some scholars do recognise that greater communication leads to transparency (Argenti et al., 2005; O’Neill, 2006; Palmer, 2005). A related question is whether Bentham’s ‘publicity’ is the same as ‘transparency’. Setala & Gronlund (2006) argue that publicity suggests observation and scrutiny on the part of the citizenry, while transparency is a feature of the political system and increases [emphasis added] the chances of publicity. The authors conclude that ‘publicity’ is closely related to, but is not synonymous with, transparency, adding that ‘transparency increases the chances of publicity because it refers to the comprehensibility of the decision-making processes, and public access to documents and information which decision-making is based upon’ (ibid., pp. 149–150). While definitions abound, transparency is perceived through various lenses. Transparency International defines the term broadly as A principle that allows those affected by administrative decisions, business transactions or charitable work to know not only the basic facts and figures, but also the mechanisms

Understanding Stakeholder Activism, Managing Transparency Risk

49

and processes. It is the duty of civil servants, managers and trustees to act visibly, predictably and understandably. (www.transparency.org)

Other definitions tend to perceive corporate transparency in the light of how different it is from corporate disclosure, implying that it is more than the former (OECD, 2003). Oliver (2004) makes the distinction between the ‘old’ and ‘new’ standards of transparency with the former being the act of being open and forthright, ‘should anyone happen to ask’, and the latter being the proactivity needed in calling attention to deeds, both intentional and unintentional (ibid., p. 4). Oliver argues that transparency as a value proposition demands active [emphasis added] disclosure, including the expectation of timeliness and relevance of essential information, and adds the dimension of communication: Transparent communication with stakeholders involves focusing on more than just the traditional numbers, such as financial data, customer statistics, and operational metrics. It requires venturing into accurate and understandable discussions of the stakeholder value drivers, the things that mean the difference between success and failure for the organization. Frequent communication to stakeholders is essential. (ibid.)

Recent literature tends to take a more critical and realistic view of corporate transparency, and though some suggest it is desirable (Florini, 2007a, 2007b; Jensen, 2002; Oliver, 2004; Tapscott & Ticoll, 2003), others point to its limitations, risks, dilemmas and tensions (Fung et al., 2007; Heald, 2006; Hood, 2006; Piotrowski, 2010).

PERSPECTIVES ON CORPORATE TRANSPARENCY If transparency defies definition, the notion of corporate transparency is no less clear. The empirical work of Bushman, Piotroski, and Smith (2004) offers a starting point. Claiming to have developed a framework for measuring corporate transparency at the country level, they define it as the ‘availability of firm-specific information to those outside publicly-traded firms’ (ibid., p. 207), thereby providing a limited view of transparency as the act of providing information which may be assumed to be data, or information of the ‘hard’ kind, as defined by Petersen (2004) to be quantitative, easy to store and to transmit impersonally, and comparable. The quality of information, the language of such information and the ethical principles which affect the nature of information dissemination are not taken into account. Bushman, Piotroski, and Smith (ibid.) isolate two separate factors – financial transparency which ‘captures the intensity and timeliness of

50

MILLICENT DANKER

financial disclosures, and their interpretation and dissemination by analysts and the media and governance transparency which ‘captures the intensity of governance disclosures used by outside investors to hold officers and directors accountable’. Their study explores whether these factors are compatible with the countries’ legal, judicial and political regimes. Recognising the multi-faceted nature of corporate transparency, they conclude that it is the ‘joint output of a multi-faceted system whose components collectively produce, gather, validate, and disseminate information to market participants outside the firm’ (ibid., p. 208), viewing corporate transparency as ‘the output from a system of interrelated information systems’ (ibid., p. 210). While the Bushman, Piotroski, and Smith study facilitates understanding of transparency at a firm-specific level, its view of corporate transparency is located primarily in the finance and accounting paradigm. For example, it tracks the average number of 90 accounting and non-accounting items disclosed by a company in its annual report. Besides financial and governance disclosures, however, they recognise that corporate transparency also has to do with ‘private information acquisition’ and relationships, suggesting that the relationships between ‘public information disclosure and the private information processing and gathering activities of investors have long been recognized as important determinants of information allocations in an economy’ (ibid., p. 213). The literature also contains references to different types of transparency: personal transparency or honesty whose use is often conflated; political transparency (Rodan, 2004); financial transparency and corporate transparency (Bushman et al., 2004); institutional transparency (Millar et al., 2005); governance transparency (Bushman et al., 2004); event and process transparency (Heald, 2006) and retrospective versus real-time transparency (Heald, 2006). Issues and dilemmas surface, relating to full or partial or optimal transparency, or nominal versus effective transparency, and the benefits and risks attached to these are well argued (Heald, 2003, 2006). The tensions, ethical dilemmas and challenges for policy, governments and companies aspiring to be transparent are well documented in the literature. Although Oliver (2004) suggests that ‘if corporate leaders embrace the spirit of transparency as a matter of principle and routine action, they’ll give stakeholders the information they really want’ (ibid., p. 32), the practical realities of managing and delivering transparency are a challenge to modern business. Various transparency scholars in recent years have questioned the limited benefits and true value of transparency (Fung et al., 2007; Heald, 2006; O’Neill, 2006). Some of the issues have ethical and

Understanding Stakeholder Activism, Managing Transparency Risk

51

moralistic undertones while others are philosophical, and yet others, mainly practical in nature. If transparency is a continuum, with full transparency at one end of the spectrum and secrecy on the other, where does optimal transparency lie – and who decides? Is optimal transparency the same as ‘full’ transparency? What level of transparency ensures that shareholder value is not destroyed, seeing as full and active disclosure may put companies at risk? Besides the notion of secrecy, what about the need for confidentiality? Do companies when aspiring to be transparent take cognizance of the need to maintain and respect confidentiality in matters affecting shareholder interests? Who within the company has responsibility for transparency and who decides when or why a company should be transparent? What is the role of the Board in the governance of transparency? Do corporate boards take transparency decisions or do they leave it to specific managers to do so? What are the risks associated with individuals making decisions on the quality and quantity of information dissemination to stakeholders? What are the guidelines or ethical codes that direct the production and release of material information from modern corporations? O’Neill (2006) argues convincingly for a meaningful approach to transparency, the act of which alone, based on dissemination and mere transmission of information, does not render any organisation transparent: ‘indeed, it is often all too plain that the real aim of certain practices of disclosure is not to communicate’ (ibid., p. 88), a view shared by Fox (2007) who uses the term ‘opaque’ or ‘fuzzy’ transparency to describe such situations. Petersen (2004) who points out the merits and demerits of ‘hard (quantifiable process-driven) information and ‘soft’ information (information collected in person) notes that information which drives stock prices is usually ‘in text form, not numbers’ (p. 17). Transparency is said to be ‘strategic’ when it goes against normative values; at other times it is deemed ‘operational’ when the need for confidentiality and secrecy are essential to maximising shareholder value and protect the interests of the corporation (Lodge, 2002). In such cases, who decides? Who gains and who loses from acts of transparency? What about the tensions between real-time versus retrospective transparency (Heald, 2006), full disclosure versus selective disclosure, ‘soft’ information versus ‘hard’ information which demands ‘informational transparency’ (Petersen, 2004) versus ‘insider’ information, and use of formal or informal channels and private or public channels (Al-Hawamdeh & Snaith, 2005)? What of the issues around equal access and information asymmetry where different stakeholders, internal and external, are privy to different levels of

52

MILLICENT DANKER

information which gives some an advantage over others (Healy & Palepu, 2000; Setala & Gronlund, 2006)? How do companies deal with the challenges of comprehensiveness and comprehensibility and transparency of their information? An even bigger question – why, despite corporate governance reform and the push for greater transparency, do corporate failures continue? Some of these issues have been addressed by Al-Hawamdeh and Snaith (2005) in their paper questioning the legality of private briefings of market participants by the management of listed companies in the United Kingdom, resulting in information gaps, a matter which has already been addressed in the United States, as well as by Gallhofer and Haslam (1993) who imply a disclosure struggle exists between opposing interests, that is agent and principal, and Setala and Gronlund (2006) who discuss equal access to information as a result of the ‘procedural equality of citizens’ (ibid., p. 150). For sure, compliance alone will not be enough to navigate these ethical or integrity dilemmas (Kennedy-Glans & Schulz, 2005). In respect to disclosure ethics, Behrman (1981) singled out understandable information, timeliness, relevance, completeness and appropriateness as some characteristics of truthfulness while rejecting ‘deception and double speak’ (ibid., pp. 98–100). Former US Securities and Exchange Commission (SEC) chief Harvey Pitt had argued that the route to better corporate disclosure lay in simplified, shortened reporting that led to greater clarity (Oliver, 2004, p. 32). Reporting clarity aside, SOX has enhanced the quality and timeliness of company information, including the need for ‘real-time’ disclosure of such information (Lander, 2004, p. 3), and along with related SEC rules, prescribe the need for disclosure committees with responsibility for materiality of information and determining disclosure obligations on a timely basis. Real-time versus retrospective transparency is discussed by Heald (2006) and addressed in the UK DTR. Equal access to information and an avoidance of privileged access to information are other best-practice governance requirements (Cadbury, 2002). Reinforcing the importance of this, it is argued that management and boards have a role to play in communicating the performance of their firm and governance to outside investors (Argenti et al., 2005; Carver & Oliver, 2002; Elliott & Schroth, 2002), a role which Cheah and Ow-Yong (2004) describe as having ‘never been more critical than today’ (ibid., p. 200). Elliott and Schroth (2002) further note: Boards must consider innovative ways to relate to their shareholders. Shareholder meetings, interactive shareholder websites, special communications from the board, and

Understanding Stakeholder Activism, Managing Transparency Risk

53

other ideas should be reexamined y . How boards communicate, learn, and interact will begin to define the boards of the future. (ibid., pp. 158–160)

Argenti et al. (2005) recognise ‘the dearth of both academic and practitioner emphasis on the strategic nature of communications’, concluding that this, coupled with recent legal and regulatory responses in the United States to corporate scandals including Regulation Fair Disclosure 2000 and SOX 2002, ‘has created a strategic communication imperative’ for companies (ibid., p. 83). They have found in a recent survey of 50 companies in the United States supported by the National Investor Relations Institute’s Centre for Strategic Communication that new regulations have driven companies there to revisit communications strategies and practices. SOX, in requiring that CEOs and CFOs certify their companies’ financial results, has changed the way companies communicate y (this) and the move toward transparency has pressured companies to make their footnotes to financial statements more understandable and complete and to make the management discussion and analysis section of annual reports more comprehensible and accessible. (ibid., p. 86)

There is a school of thought that sees the instruments of social reporting and environmental reporting as fulfilling the requirements for corporate transparency (Anderson, Herring, & Pawlicki, 2005; Henriques, 2007; Hess, 2007). Henriques notes the principal official means of transparency by companies is reporting, voluntary as well as involuntary (2007, p. 5). Anderson et al. (2005) propose for a voluntary global disclosure framework that will help present non-financial reporting to a larger population, which they say has a key role in not only making business reporting more transparent but also giving stakeholders better information for better decision-making. They argue that Enhanced Business Reporting or EBR, a consortium which includes The Business Roundtable, The Confederation of Business Industry, Nasdaq, The National Investor Relations Institute and XBRL International as members, will improve information quality, integrity and transparency, and propose a voluntary, global disclosure framework for the presentation of non-financial components of business reports, a reporting model that they suggest should not only focus on historical information but also provide a broader view of a company’s current and future performance. While agreeing that transparency can be partly achieved by environmental and sustainability reporting, Henriques (2007) believes transparency and reporting are not the same thing. He notes that the vast majority of company reporting has historically been, and continues to be, financially driven (ibid., p. 69), and argues that stakeholder reporting has enjoyed

54

MILLICENT DANKER

‘rather more patchy success’, is ‘piecemeal and fragmentary at best’ (ibid., p. 88), with the result that it has lost credibility with stakeholders (ibid., p. 70). Anderson et al. (2005) cite the case of two drug companies, Company A which reported higher earnings every quarter for the past two years, and Company B which has invested a greater share of its revenue in research and development and is expecting FDA approval to market a new drug. They ask if one had to base a decision solely on a financial statement one would lose the opportunity to make an informed assessment of a company which would prove more valuable to investors and other stakeholders in the long term. They claim research shows that financial statements are not a primary decision-making tool, but rather the focus of data has shifted from financial, historical and ‘lagging information’ to a new model incorporating financial and non-financial data. They propose that this model of shared understanding allows stakeholders to take a long-term view of a company’s performance and future opportunities, rather than focus from one quarter to the next. Sutton (2002) points to holes in the financial-reporting standards and practices, claiming financial reporting is once again at a crossroads; he also argues for financial reporting to provide useful and reliable information that both promotes informed investment decisions and greater confidence in the system. Arguing that Enron and Worldcom were examples of financial reporting gone wrong, he makes a strong case for the auditing profession to have a role consistent with high public expectations and discusses how insiders have more information in public capital markets about the current condition and future prospects of the firm than does the investing public (‘information asymmetry’) which has led to problems of market inefficiency and what some scholars have labelled as a ‘moral hazard’ (ibid., pp. 321–322). The next steps may include a review of financial disclosure and financial reporting. Verrecchia (2001) calls for a comprehensive theory of disclosure, which has implications for transparency, in order to explain better the symbiotic relationship between corporate transparency and corporate disclosure in corporate governance. It is now believed that companies can markedly improve their business reporting by voluntarily disclosing more available information about which the investment community and shareholders have a keen interest. Barnea (2008) notes the emergence of a ‘new disclosure profile’ where firms provide voluntary earnings disclosure between mandatory earnings announcements (ibid., p. 2). Outside the accounting literature, O’Neill (2006) observes that transparency ‘mandates disclosure’ and disclosure does not necessarily bring about

Understanding Stakeholder Activism, Managing Transparency Risk

55

transparency (ibid., p. 81); she argues that disclosure and dissemination may leave audiences believing they have been informed but unaware that any real or successful communication has been achieved (ibid., p. 89). Elliot and Jacobson (1994) in their study of disclosure costs and benefits observe: ‘some parties might benefit from any disclosure, though it is also true that some disclosure is immaterial in cost and in effect’ (ibid., p. 80). Arguing that transparency is a necessary condition for CSR, Dubbink et al. (2008) posit that corporate financial disclosure is a ‘complex, differentiated, highlevel information system’ whereas CSR reporting, read as non-financial information streams, is nowhere as sophisticated, which presents policy challenges (ibid., p. 401). Mallin (2002) draws attention to the relationship between corporate governance, transparency and financial disclosure, noting that ‘transparency and disclosure are key attributes of any model of good corporate governance’ (ibid., p. 254); she also argues that the accounting and nonaccounting disciplines need to come together to define how disclosure environments potentially alter a firm’s or a country’s image and reputation as a regime committed to openness and transparency. She further observes that surveys of investor opinion do highlight the importance of transparency and disclosure in the corporate governance system of a country. Certainly, disclosure theories cannot be divorced from theories of transparency, whether at the firm or country level. At a practitioner level, research has noted other transparency-disclosure dilemmas. Mallin (2007) opines that several high-profile corporate collapses have arisen ‘despite the fact that the annual report and accounts seemed fine’ (ibid., p. 1), a view shared by Neuhausen (2009) who asks what can be done to ensure meaningful disclosures in the future, blaming today’s ‘piecemeal approach to disclosure requirements’ as being a drawback (ibid., p. 68). It is further suggested that transparency is about more channels of open two-way communications, a point argued persuasively by O’Neill (2006) who has recognised the role of communication ethics behind transparency debates: ‘Disclosure and dissemination may leave ‘‘audiences’’ unaware that there has been any communication, unable to understand what was communicated, unable to see whether or how it was relevant to them, or (at worse) misinformed or disinformed’ (ibid., p. 89). Various codes of corporate governance (the UK Combined Code, for example) recommend increased communication and relationships between companies and shareholders. Anandarajah (2001) notes that besides formal methods of communication (such as shareholders’ meetings, annual reports and other explanatory circulars to shareholders), ‘additional channels need

56

MILLICENT DANKER

to be developed more widely if the communication process is to be made more effective’ (ibid., p. 226). However, an increase in quantitative disclosures may not necessarily increase transparency as has been argued by Greenspan (2003), O’Neill (2006) and Baumann and Nier (2004). Greenspan opines that public disclosure and transparency may be interchangeable in the minds of some, but they are not, as transparency remains a higher goal: Transparency implies that information allows an understanding of a firm’s exposures and risks without distortion. The goal of improved transparency thus represents a higher bar than the goal of improved disclosures. Transparency challenges market participants not only to provide information but also to place that information in a context that makes it meaningful. Transparency challenges market participants to present information in ways that accurately reflect risks. Much disclosure currently falls short of these more demanding goals. (Greenspan, 2003, p. 7)

Pitt argues that the route to better corporate disclosure lies in simplified, shortened reporting for greater clarity (as cited in Oliver, 2004, p. 32). As for corporate disclosure, Cadbury (2002) observes it to be a means of enhancing accountability. There are also arguments for ‘voluntary disclosure’ (Gregory, 2004, in Monks and Minow, 2004) which call for greater transparency since it is not mandated disclosure. In their study of corporate, financial and governance transparency, Bushman et al. (2004) allude to an important dimension of corporate transparency which is information dissemination. Yet the authors believe that the lack of a well-developed communication infrastructure ‘may impede the flow of information reported by firms, limiting the availability of the information to economic agents’ (ibid., p. 214). The existence of communication gaps has also been investigated by Ho and Wong (2001); in a study of the perceptions of CFOs and financial analysts in Hong Kong, they found that neither group believed enhancing disclosure requirements alone would suffice to close the gap but instead suggested improvements in disclosure strategy, communication quality, communication media and relationship building.

ETHICAL CONSIDERATIONS The corporate governance literature often includes references to such values as trust, truthfulness, transparency, openness, candor, honesty, accuracy, integrity, responsibility, fairness, accountability, all of which may arguably fall within the ambit of ‘ethical behaviour’. The word ‘ethics’ is derived

Understanding Stakeholder Activism, Managing Transparency Risk

57

from the Greek word ‘ethikos’ which relates to character and whose roots can be traced to Aristotle’s ‘The Nicomachean Ethics’. Ethical behaviour is behaviour ‘that is in accordance with a virtuous character’ (Vardy & Grosch, 1994, p. 4). Other early classical philosophers include Socrates and Plato who laid the foundations for ethical inquiry and theory. While ethics – theoretical and applied – has been investigated in relation to a variety of disciplines including medicine, law and the sciences, it has begun to capture the imagination of social scientists including business scholars, only in the past two decades. Business ethics has now become a specialised subject at university, with themes directed towards ‘real-world issues in, and about, business’ (Shaw, 2009, p. 566). The resurgence of interest in business ethics has come about largely in reaction to corporate misdeeds. Corporate governance has come to imply good in both the moral and non-moral sense: In its moral sense good corporate governance has come to be seen as promoting an ethical climate that is both morally appropriate in itself, and consequentially appropriate in that ethical behaviour in business is reflected in desirable commercial outcomes. Here the links are with due diligence, directors’ duties, and the general tightening of corporate responsibility. (Francis, 2000, p. 10)

Shaw (2009) discusses a key theme of business ethics, that is that business ethics (which has been suggested is an ‘oxymoron’) is impossible, ‘because capitalism itself tends to produce greedy, over-reaching, and unethical business behaviour’ and posits that far from being impossible, ‘business requires and indeed presupposes ethics and that for those who share Marx’s hope for a better society, nothing could be more relevant than engaging the debate over corporate social responsibility’ (ibid., p. 565). Sternberg (2000) disagrees with the notion of business being unethical and proposes a conceptual framework to guide ethical business decisions rather than support stakeholder and CSR theories; she notes that ‘the choice facing business is not whether to confront ethical concerns, but how [emphasis added]’ (ibid., p. 18). The ethical discourse around corporate social responsibility perceives a company’s response to society as being one way of becoming more ethical, and of veering away from the pure pursuit of profit, although this may be argued as being a limited and narrow view of business ethics. Fox (2007) opines that the ‘transparency banner has been held high by the environmental movement for decades’ but this is no longer about ‘obligatory reporting’ as more investors are now holding management to account in the wake of Enron (p. 664). The debate has been polarised over

58

MILLICENT DANKER

Milton Friedman’s contention that the only obligation of a corporation is to make as much money as possible for shareholders (see Friedman, 1962). Cosans (2009) argues that the popular reading of Friedman’s notion is wrong in suggesting that managers only concentrate obsessively on profits and marginalise ethics (ibid., p. 391). He posits that Friedman had raised a very high bar for business responsibility and ethics (ibid., p. 392), noting that Friedman had clearly asserted that profit seeking must be done while conforming to the basic rules of society (ibid., p. 393). Shaw (2009) observes the need to counteract immoral business behaviour by prescribing a greater sense of ethical responsibility among corporations (ibid., p. 566), but he does also agree that the ‘debate over corporate social responsibility is not the whole of business ethics, which is also concerned with the moral dimension of the individual choices that employees, managers, and firms make, day in, day out’ (ibid., p. 570). It has been further observed that the moral discourse for corporate governance implied by the differing notions of stakeholder theory and agency theory is vastly different with the former based on the notion of duty and responsibility, and the latter on self-interest (Solomon & Solomon, 2004, p. 28). Continuing tension is observed between business and ethics. Elliott and Schroth (2002) maintain that ‘corporate lies, legal misrepresentations, and complex global fraud schemes are in our destiny unless countries move faster to establish governance and regulatory standards that translate across global business boundaries’ (ibid., p. 6); the authors claim that truth-telling, getting the facts right, ‘and verifying the accuracy of important details are difficult tasks and major responsibilities’ for companies caught in a ‘fog of corporate complexity’ (ibid., pp. 108–109). In criticising the corporation for its propensity to wield undue power, and to govern society, Bakan (2004) has noted that despite SOX which came into law to redress some of the ‘more blatant problems of corporate governance and accounting’, the US government’s response to corporate scandals ‘has been sluggish and timid at best’ (ibid., p. 8). He argues that more than government, the market is in a position to regulate corporate behaviour (ibid., p. 143). Both Cosans (2009) and Shaw (2009) agree there are tensions between business pursuing profits and staying ethical. The task ahead for business is to tease out the responsibilities and obligations of business managers in various particular circumstances as they endeavour to fulfil their fiduciary duty to run a successful business and turn a profit for their shareholders, on the one hand, and their obligations to various other constituencies – employees, other firms, consumers, and society in general – on the other. (Shaw, 2009, p. 574)

Understanding Stakeholder Activism, Managing Transparency Risk

59

This brings the subject of stakeholder theory into focus once again, which has engrossed the corporate responsibility and business ethics literature since Freeman (Stieb, 2009). Business ethicists such as Donaldson and Werhane (2008) and Shaw (2009) have contributed to the discourse in recent years, adding to the work done by others (Berhman, 1981; Donaldson, 1989; Goodpaster, 1991; Kuhn, 1992; Sternberg, 1994, 2000). The ethical debate has implications for stakeholder theory (Bandsuch et al., 2008; Freeman, 2004; Phillips, 2003), with scholars arguing that the limitations of the shareholder paradigm or agency theory have compromised the ethical governance of companies (Clarke, 2004). Phillips (2003) argues for a theory of organisational ethics including stakeholder fairness as a key principle of a stakeholder-dominant theory of good governance. Boatright (2008) attempts to balance the debate by throwing his weight behind stakeholder theory, while defending the interests of the stockholders who, he says, take the financial risks and therefore have to receive profits. Ethics scholars do suggest that business ethics cannot be taught, but must find its moral roots in early philosophical thought (Henriques, 2007; Sternberg, 2000) or in ethical leadership (Bandsuch et al., 2008; Bennis et al., 2008; Mendonca & Kanungo, 2007). Ethics has come to symbolise the normative response in the corporate governance literature. ‘Accountability’ is one such response, a term that has been discussed extensively in the literature by many including Cadbury (2002) but whose meaning and implications have not been fully explained. Tricker (2000) in his definition takes both shareholder and stakeholder positions by declaring that the directors of a company are primarily accountable to their shareholders, but recognising that stakeholder theory demands public companies to be accountable to all [emphasis added] interest groups. Drucker (as cited in Goodpaster, 1991) identified the need for management to consider accountability more seriously: ‘So we must think through what management should be accountable for, and how and through whom its accountability can be discharged. The stockholders’ interest, both short and long-term, is one of the areas. But it is only one’ (ibid., p. 103). Monks and Minow (2004) argue for a well-understood standard and a language of accountability: As in the political domain, in the corporate domain accountability should be based on a comprehensible standard that is widely understood. It can be argued that employees, customers, suppliers, and the residents of host communities should share with owners the entitlement to hold corporations accountable. Yet, to date, no one has developed a language of accountability that would be equally acceptable to all of these

60

MILLICENT DANKER constituencies; indeed, no one has succeeded in conceiving of acceptable quantifiable standards. (ibid., p. 30)

Ethical acts are based on moral principles that are universal; they incorporate fundamental values such as truth, goodness, beauty, courage and justice (Mendonca & Kanungo, 2007, p. 11). Trust demands principlecentred or ethical leadership (Bandsuch et al., 2008; Mendonca & Kanungo, 2007); organisational ethics and transparency (Oliver, 2004; Phillips, 2003); meaningful and mutually rewarding stakeholder relationships and two-way communication (Botan, 1997; O’Neill, 2006). Trust, argues Clarke (2004), is a good place to start in ‘the search for new paradigms of corporate governance’ (ibid., p. 21), and notes that there are two parts to it: trust on the part of the ‘truster’, and trustworthiness on the part of the ‘trustee’ (ibid., p. 22). Indeed, trust relationships between a firm and its stakeholders, and business ethics, are said to be the main principles of stakeholding or stakeholder management (Letza et al., 2004, p. 243; see also Wheeler & Sillanpaa, 1997). Truth calls for personal integrity and corporate integrity which KennedyGlans and Schulz (2005) define as having the characteristics of probity and honesty, but ‘while honesty and probity are embodied in integrity, integrity goes beyond honesty to incorporate a wholeness that defines corporate character’ (ibid., p. 7). Corporate integrity is ‘the alignment between a corporation’s explicit intention to define its values and its role in society, and its manifestation of this organizational intention in the commitments and actions of corporate personnel’ (ibid., p. 1). Elliot and Schroth (2002) call for truth-telling and getting the facts right: Creating a culture with the right orientation requires leadership from the top and work by the entire company. You do not turn it on and off. Your business culture is either based on candor and honesty or it is not. (ibid., p. 111)

The practitioner literature also suggests that rules, regulations, laws, concepts, structures, processes, best practices and technology cannot ensure transparency and accountability, but only individuals of integrity (PricewaterhouseCoopers (PwC), 2004). Arguing that transparency is a key factor contributing to financial market efficiency and integrity, Witherell (2003) calls for integrity of the financial and non-financial reporting systems to be better defined, with better board oversight and improved enforcement (ibid., p. 4). Tricker (2009) makes several references to the integrity of directors in his discussion of corporate governance principles, policies and practices, while Shaw (2009) holds the view that business needs ethics as the

Understanding Stakeholder Activism, Managing Transparency Risk

61

business system could not survive without widespread acceptance of shared norms (ibid., p. 567). Ethical questions are also addressed in the debate over corporate social responsibility, particularly in context of firm responsibilities beyond economic self-interest, and beyond maximising return to shareholders and owners. The business ethics literature suggests that management should reconsider values (Freeman, 2004), or introduce an ethical framework (Henriques, 2007), with Cadbury (2002) himself calling on boards to draw up codes of ethics to guide employees (ibid., p. 38). It is further suggested that managements need to articulate and embed their values, to establish formal operating principles or ethical protocols to guide effective communications in a spirit of transparency: Transparency with owners and with society is impeded when the board does not make its values explicit and available or allows the management of information or performance to be hiddeny . The company will act lawfully, honouring transparency and declared ethical standards regardless of any negative impact on shareholder value. (Carver & Oliver, 2002, p. 147)

Discussions on transparency in the context of governance tend to have ethical underpinnings with a ‘holier-than-thou’ morality (Hood, 2006, p. 4), which is not surprising as ethics found definition in Christianity and the early teachings of St Augustine, Thomas Aquinas and others. But Blackburn (2003) has argued that an ethical climate is different from a moralistic one, and ethics can exist whether people are religious or not. He attempts to understand the motivation and reason behind why people are moved to take certain ethical positions, and discusses seven threats to ethics which include the death of God; egoism; evolutionary theory; determinism and futility; unreasonable demands (from ourselves and one another); and false consciousness, finally suggesting that ethical positions will be taken because human beings are essentially ethical: Human beings are ethical animals. I do not mean that we naturally behave particularly well, nor that we are endlessly telling each other what to do. But we grade and evaluate, and compare and admire, and claim and justify. We do not just ‘prefer’ this or that, in isolation. We prefer that our preferences are shared; we turn them into demands on each other. (ibid., p. 4)

Poor ethics behind acts of transparency can create situations of unfair advantage because they can benefit outsiders and insiders by providing them access to information (Boatright, 2008; Oliver, 2004; O’Neill, 2006). Boatright (2008) argues that finance ethics is needed ‘to prohibit against fraud and manipulation’ (p. 6) and avoid Enron-type issues which were a

62

MILLICENT DANKER

result of ‘ethical lapses’ (p. 3); he believes ethics can play a vital role in ‘first, by guiding the formation of laws and regulations, and second, by guiding conduct in areas not governed by laws and regulations’ (ibid., p. 6). Ethical breaches from the literature include concealment of information, deception, integrity of financial products, unethical behaviour and leadership derived from the culture of an organisation, breaches in fiduciary duties of fiduciaries and agents, conflict of interests, lack of market fairness or efficiency, inequalities in information and in bargaining power, inefficient pricing, insider trading and information asymmetries. Boatright (2008) further suggests that candor is the opposite of concealing important information, withholding it or remaining silent about it, adding, In a market, everyone has an obligation of honesty or truth-telling. It is wrong to say something false or to make a material misrepresentationy . A fiduciary y has a duty of candor, that is, a more extensive obligation to disclose information that the beneficiary would consider relevant to the relationship. (ibid., p. 40)

The accounting, finance and practitioner literature has addressed the factors behind corporate failures and ethical lapses, and the risks associated with derivatives and other financial instruments (see Greenspan, 2003). Many view Enron and the related collapses as having their raison d’etre in ethical lapses. Clarke (2004) surmises that Enron was a classic example of the limitations of agency theory, arguing that ‘the relentless emphasis on the importance of shareholder value in recent times has created the conditions for the disconnection of corporations such as Enron from their essential moral underpinnings’ (ibid., p. 19), a view shared by Werhane (2004) who says Enron happened because of the inability to take ethics seriously in economic transactions, and ‘the separation of ethics from compliance’ (ibid., p. 39). The importance of business ethics and morality must continually be held up to ensure better governance (Behrman, 1981; Colley et al., 2003; Kuhn, 1992; Shaw, 2009; Sternberg, 2000). In respect to ethics, Behrman (1981) has singled out understandable information, timeliness, relevance, completeness and appropriateness as some characteristics of truthfulness while rejecting ‘deception and double speak’ (ibid., pp. 98–100). Any discussion on ethics cannot ignore ‘discourse ethics’, a term attributed to Habermas who takes a moral point of view within the framework of communication when he describes it as preferring to view ‘shared understanding about the generalizability of interests as the result of an intersubjectively mounted public discourse’ and distinct from monological conversations (Habermas, 1992, p. 203). Sternberg (2000) argues in favour of

Understanding Stakeholder Activism, Managing Transparency Risk

63

her ‘Ethical Decision Model’ which is a basis for resolving ethical business questions whenever and wherever they arise with references to conflicts of interest, financial reporting, fiduciary responsibility and corporate governance. These and other ethical issues will continue to intrigue corporate governance scholars.

DISCUSSION Corporate governance codes around the world – and there are more than 60 (Carver & Oliver, 2002) – have tended to focus on shareholder-value considerations of board duties and fiduciary control and compliance issues, and only recently have they begun to broaden accountability beyond the shareholder. But corporate transparency is not limited to disclosure of financial matters alone (Goodpaster, 1991; Low & Cowton, 2004). Corporate governance codes have begun to prescribe the need for investor relations and shareholder dialogue and information-sharing between board and management (see IOD, 2005). But even where communication is recognised as best-practice, the focus tends to be on the needs of the investing public for information while the needs of the wider community within which companies operate tend to be ignored. How companies can actively begin the task of increasing transparency to multiple stakeholders is a key challenge, within the limitations outlined, where some call for selective policies (Cadbury, 2002) and a form of ‘targeted transparency’ (Fung et al., 2007), while others point to a balancing act or a trade-off between the value of ‘sunlight’ and danger of ‘over-exposure’ (Heald, 2003). Efforts have been made to develop appropriate guidelines and agree standards to ensure a high level of non-financial reporting, such as the UK’s Operating and Financial Review (OFR), but this was aborted in 2005, causing some confusion among companies in respect to what is sometimes referred to in the literature as ‘forward-looking statements’ (Henriques, 2007, p. 73) as compared to ‘historical reporting’. Nevertheless, other broadly similar international environmental and social reporting requirements have emerged, including the UK’s Department for Trade and Industry (DTI) Consultation on Narrative Reporting, which includes the requirement for a Business Review attached to an annual report. In the United Kingdom, some 85% of the FTSE 100 produced some form of nonfinancial report in 2005, with more than 2,000 such reports having been published (Henriques, 2007, pp. 77–78). Noting that these various guidelines have also come about as a result of increasing pressure from stakeholder

64

MILLICENT DANKER

communities such as NGOs, he makes a case for ‘non-financial auditing’ to ensure greater credibility and validation of such reporting which he says is ‘at a stage that financial auditing was 150 years ago’ (ibid., p. 80). It has been argued that the notions of financial transparency and a ‘shareholder-driven model’ based on agency theory of corporate governance have compromised business ethics and led to corporate failures (Clarke, 2004; Millar et al., 2005). A shift away from conventional models, from regulation to self-regulation, and now to governance (Hess, 2008) may lead to more collaborative models of transparency (Fung et al., 2007; Hess, 2008), as well as bring about greater corporate accountability through transparency. If stakeholder accountability and transparency are essential ingredients for a sound system of corporate governance (Hess, 2008; Mallin, 2002; Solomon & Solomon, 2004; Tapscott & Ticoll, 2003), goes hand in hand with it (Anderson et al., 2005), or is even its twin (Khoo, 2005), greater understanding of its practical applications, tensions and limitations as well as board oversight are required to prevent ethical lapses as well as to ensure transparency’s demands are met by the modern corporation, while mitigating enterprise risk.

REFERENCES Al-Hawamdeh, A., & Snaith, I. (2005). Is ‘private briefing’ illegal in the United Kingdom? Corporate Governance: An International Review, 13(4), 489–504. Anandarajah, K. (2001). Corporate governance: A practical approach. Singapore: Butterworths Asia. Anderson, A., Herring, P., & Pawlicki, A. (2005). EBR: The next step: Enhanced business reporting will improve information quality, integrity and transparency. Journal of Accountancy, 199(6), 71–74. Argenti, P. A., Howell, R., & Beck, K. (2005). The strategic communication imperative. MIT Sloan Management Review, 46(3), 83–89. Bakan, J. (2004). The corporation: The pathological pursuit of profit and power. London: Constable. Barnea, J. (2008). From event-driven to period-driven voluntary earnings disclosure. DBA thesis, Henley Management College, Brunel University. Baumann, U., & Nier, E. (2004, September). Disclosure, volatility, and transparency: An empirical investigation into the value of bank disclosure. FRBNY Economic Policy Review, 10, 31–45. Behrman, J. N. (1981). Discourses on ethics and business. Cambridge, MA: Oelgeschlager, Gunn & Hain, Inc. Bennis, W., et al. (2008). Transparency: How leaders create a culture of candour. San Francisco, CA: Jossey-Bass. Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York, NY: Macmillan.

Understanding Stakeholder Activism, Managing Transparency Risk

65

Bhattacharyay, B. N. (2004). Strengthening corporate governance in developing countries in Asia: Prospects and problems. In S. Bala & M. Nair (Eds.), Corporate governance: An international perspective (pp. 1–12). Kuala Lumpur: Malaysian Institute of Corporate Governance. Birkinshaw, P. (2006). Transparency as a human right. In C. Hood & D. Heald (Eds.), Transparency: The key to better governance. Oxford: Oxford University Press. Blackburn, S. (2003). Ethics: A very short introduction. Oxford: Oxford University Press. Blair, M. M. (1995). Ownership and control: Rethinking corporate governance for the twentyfirst century. In T. Clarke (Ed.), Theories of corporate governance: The philosophical foundations of corporate governance (pp. 174–188). Oxford: Routledge. Botan, C. (1997, April). Ethics in strategic communication campaigns: The case for a new approach to public relations. The Journal of Business Communication, 34(2), 188–202. Bradburn, R. (2001). Understanding business ethics. London: Continuum. Bushman, R. M., Piotroski, J. D., & Smith, A. J. (2004). What determines corporate transparency?’ Journal of Accounting Research, 42(2), 207–252. Cadbury, A. (2002). Corporate governance and chairmanship: A personal view. Oxford: Oxford University Press. Calland, R. (2007). Prizing open the profit-making world. In A. Florini (Ed.), The right to know: Transparency for an open world (pp. 214–242). New York, NY: Columbia University Press. Carver, J., & Oliver, C. (2002). Corporate boards that create value. San Francisco, CA: JosseyBass. Cheah, K. G., & Ow-Yong, K. (2004). Financial disclosure in Malaysia: A case study of commercial banks’ corporate reporting. In S. Bala & M. Nair (Eds.), Corporate governance: An international perspective (pp. 198–229). Kuala Lumpur: Malaysian Institute of Corporate Governance. Colley, J. L., Jr., et al. (2003). Corporate governance. New York, NY: McGraw-Hill. Colley, J. L., Jr., et al. (2005). What is corporate governance? New York, NY: McGraw-Hill. Cosans, C. (2009). Does Milton Friedman support a vigorous business ethics? Journal of Business Ethics, 87, 391–399. Davies, M., & Schlitzer, B. (2008). The impracticality of an international ‘one size fits all’ corporate governance code of best practice. Managerial Auditing Journal, 23(6), 532–544. Demb, A., & Neubauer, F. F. (1990). How can the board add value? European Management Journal, 8(2), 156–160. Donaldson, J. (1989). Key issues in business ethics. London: Academic Press Ltd. Donaldson, T., & Werhane, P. (Eds.). (2008). Ethical issues in business: A philosophical approach (8th ed.). New Jersey, NJ: Prentice Hall. Dubbink, W., et al. (2008). CSR, transparency and the role of intermediate organisations. Journal of Business Ethics, 82, 391–406. Elliott, L. A., & Schroth, R. J. (2002). How companies lie. London: Nicholas Brealey. Elliott, R. K., & Jacobson, P. D. (1994). Costs and benefits of business information disclosure. Accounting Horizons, 8(4), 80–96. Financial Accounting Standards Board (FASB). (2001). News release. Retrieved from http:// www.fasb.org/news/nr012901.shtml Fox, J. A. (2007). The uncertain relationship between transparency and accountability. Development in Practice, 17(4–5), 663–671.

66

MILLICENT DANKER

Francis, R. (2000). Ethics and corporate governance: An Australian handbook. Sydney: University of New South Wales Press. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman Press. Freeman, R. E. (1994). A stakeholder theory of the modern corporation: Ethical theory and business. In M. B. E. Clarkson (Ed.), The corporation and its stakeholders: Classic and contemporary readings (pp. 66–76). Toronto: University of Toronto Press. Freeman, R. E. (2004). The stakeholder approach revisited. Zeitschrift fur Wirtschafts-und Unternehmensethik, 5(3), 228–241. Friedman, M. (1962). Capitalism and freedom. Chicago: The University of Chicago Press. Fung, A., Graham, M., & Weil, D. (2007). Full disclosure: The perils and promise of transparency. Cambridge: Cambridge University Press. Gallhofer, S., & Haslam, J. (1993). Approaching corporate accountability: Fragments from the past. Accounting & Business Research, 23(91A), 320–330. Ghoshal, S. (2005). Bad management theories are destroying good management practices. Academy of Management Learning & Education, 4(1), 75–91. Goh, K. S. (2008). Corporate governance practices of Malaysian Chinese family owned business. DBA thesis. Southern Cross University, Australia. Goodpaster, K. E. (1991). Business ethics and stakeholder analysis. Business Ethics Quarterly 1(1), 53–73. In M. B. E. Clarkson (Ed.) (1998). The corporation and its stakeholders: Classic and contemporary readings. Toronto: University of Toronto Press. Greenspan, A. (2003, May 8). Remarks. Delivered via satellite at the 39th Conference on Bank Structure and Competition, Federal Reserve Bank of Chicago. Retrieved from http:// www.federalreserve.gov/boarddocs/speeches/2003/20030508/default.htm Gregory, H. (2004). Overview of corporate governance guidelines and codes of best practice in developing and emerging markets. In R. A. G. Monks & N. Minow (Eds.), Corporate governance (3rd ed., pp. 530–538). Oxford: Blackwell. Grossman, E., Luque, E., Muniesa, F. (2006). Economies through transparency. CSI Working Paper Series No. 3. Retrieved from http://www.halshs.archives-ouvertes.fr/docs/00/09/ 08/22/PDF/WP_CSI_003.pdf Grossman, S. J. (1981). The informational role of warranties and private disclosures. Journal of Law and Economics, 24(3), 461–483. Habermas, J. (1992). Moral consciousness and communicative action. Boston, MA: MIT Press. Heald, D. (2003). Fiscal transparency: Concepts, measurement and UK practice. Public Administration, 81(4), 723–759. Heald, D. (2006). Varieties of transparency. In C. Hood & D. Heald (Eds.), Transparency: The key to better governance? (pp. 25–43). Oxford: Oxford University Press. Healy, P. M., & Palepu, K. G. (2000). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1–3), 405–440. Henriques, A. (2007). Corporate truth: The limits to transparency. London: Earthscan. Ho, S. S. M., & Wong, K. S. (2001). A study of corporate disclosure practice and effectiveness in Hong Kong. Journal of International Financial Management and Accounting, 12(1), 75–102. Hood, C., & Heald, D. (Eds.). (2006). Transparency: The key to better governance? Oxford: Oxford University Press. Institute of Directors. (2005). The handbook of international corporate governance: A definitive guide. London: IOD.

Understanding Stakeholder Activism, Managing Transparency Risk

67

Jensen, H. (2002). Optimal degrees of transparency in monetary policymaking. The Scandinavian Journal of Economics, 104(3), 399–422. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. Keasey, K., Thompson, S., & Wright, M. (Eds.). (2005). Corporate governance: Accountability, enterprise and international comparisons. Chichester: John Wiley & Sons Ltd. Kennedy-Glans, D., & Schulz, B. (2005). Corporate integrity: A toolkit for managing beyond compliance. Ontario: John Wiley & Sons Canada Ltd. Khoo, B. T. (2005). Transparency and authoritarian rule in Southeast Asia: Singapore and Malaysia. Journal of Contemporary Asia, 35(2), 266. Kuhn, J. W. (1992). Ethics in business: What managers practice that economists ignore. Business Ethics Quarterly, 2(3), 305–315. Kulzick, R. S. (2004, Winter). Sarbanes-Oxley: Effects on financial transparency. SAM Advanced Management Journal, 69(1), 43–49. Lander, G. P. (2004). What is Sarbanes-Oxley? New York, NY: McGraw-Hill. Lang, M. H., & Lundholm, R. J. (1996). Corporate disclosure policy and analyst behaviour. The Accounting Review, 71(4), 467–492. Letza, S., Sun, X., & Kirkbride, J. (2004). Shareholding versus stakeholding: A critical review of corporate governance. Corporate Governance: An International Review, 12(3), 242–262. Lev, B., & Penman, S. H. (1990). Voluntary forecast disclosure, nondisclosure, and stock prices. Journal of Accounting Research, 28(1), 49–76. Lodge, J. (2002). Transparency and EU governance: Balancing openness with security (2003). Journal of Contemporary European Studies, 11(1), 95–117. Low, C., & Cowton, C. (2004). Beyond stakeholder engagement: The challenges of stakeholder participation in corporate governance. International Journal of Business Governance and Ethics, 1(1), 45–55. Mallin, C. A. (2007). Corporate governance (2nd ed.). Oxford: Oxford University Press. Mayo, C. (2008). Directors’ duties. In K. Rushton (Ed.), The business case for corporate governance (pp. 119–145). Cambridge: Cambridge University Press. Mendonca, M., & Kanungo, R. N. (2007). Ethical leadership. Maidenhead: Open University Press. Millar, C. J. M., et al. (2005). Corporate governance and institutional transparency in emerging markets. Journal of Business Ethics, 59, 163–174. Monks, R. A. G., & Minow, N. (2004). Corporate governance (3rd ed.). Oxford: Blackwell. Neuhausen, B. (2009). Achieving greater transparency. Directorship, 35(3), 68–69. O’Neill, O. (2006). Transparency and the ethics of communication. In C. Hood & D. Heald (Eds.), Transparency: The key to better governance? (pp. 75–90). Oxford: Oxford University Press. OECD. (2003). White paper on corporate governance in Asia. Paris: OECD Publications. Palmer, J. (2005). Secrecy, communications strategy and democratic values. In R. Keeble (Ed.), Communication ethics today (pp. 156–176). Leicester: Troubadour Publishing Ltd. Petersen, M. A. (2004). Information: Hard and soft. Working Paper. Kellogg School of Management, NorthwesternUniversity, USA. Retrieved from http://www.kellogg. northwestern.edu/faculty/petersen/htm/papers/softhard.pdf Phillips, R. (2003). Stakeholder theory & organizational ethics. San Francisco, CA: BerrettKoehler Publishers, Inc.

68

MILLICENT DANKER

Piotrowski, S. J. (Ed.). (2010). Transparency and secrecy. Plymouth, UK: Lexington Books. Prat, A. (2006). The more closely we are watched, the better we behave. In C. Hood & D. Heald (Eds.), Transparency: The key to better governance? (pp. 91–103). Oxford: Oxford University Press. PricewaterhouseCoopers (PwC). (2004). The future of corporate reporting. Retrieved from www.pwc.com/extweb/service.nsf/docid Ramesh, M., & Fritzen, S. (Eds.). (2009). Transforming Asian governance: Rethinking assumptions, challenging practices. Oxford: Routledge. Roberts, A. (2010). A partial revolution: The diplomatic ethos and transparency in intergovernmental organizations. In S. J. Piotrowski (Ed.), Transparency and secrecy. Plymouth, UK: Lexington Books. Rodan, G. (2004). Transparency and authoritarian rule in Southeast Asia: Singapore and Malaysia. London: Routledge-Curzon. Ross, S. (1973). The economic theory of agency: The principal’s problems. American Economic Review, 63, 134–139. Rushton, K. (2008a). The role of the chairman. In K. Rushton (Ed.), The business case for corporate governance (pp. 29–49). Cambridge: Cambridge University Press. Rushton, K. (Ed.). (2008b). The business case for corporate governance. Cambridge: Cambridge University Press. Setala, M., & Gronlund, K. (2006). Parliamentary websites: Theoretical and comparative perspectives. Information Polity, 11, 149–162. Shalev, R. (2009). The information content of business combination disclosure level. The Accounting Review, 84(1), 239–270. Shaw, W. H. (2009). Marxism, business ethics, and corporate social responsibility. Journal of Business Ethics, 84, 565–576. Solomon, J., & Solomon, A. (2004). Corporate governance & accountability. Chichester: John Wiley & Sons Ltd. Sternberg, E. (1994). Just business: Business ethics in action. London: Warner Books. Sternberg, E. (2000). Just business: Business ethics in action (2nd ed.). Oxford: Oxford University Press. Stieb, J. A. (2009). Assessing freeman’s stakeholder theory. Journal of Business Ethics, 87, 401–414. Sutton, M. H. (2002). Financial reporting at a crossroads. Accounting Horizons, 16(4), 319–328. Tapscott, D., & Ticoll, D. (2003). The naked corporation: How the age of transparency will revolutionise business. New York, NY: Free Press. Tricker, B. (2000). Editorial: Corporate governance – the subject whose time has come. Corporate Governance: An International Review, 8(4), 289–296. Tricker, B. (2009). Corporate governance: Principles, policies and practices. Oxford: Oxford University Press. Turnbull, S. (1997). Corporate governance: Its scope, concerns and theories. Corporate Governance: An International Review, 5(4), 180–206. Vardy, P., & Grosch, P. (1994). The puzzle of ethics. London: Fount. Verrecchia, R. E. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179–194. Verrecchia, R. E. (1990). Information quality and discretionary disclosure. Journal of Accounting and Economics, 12(4), 365–380.

Understanding Stakeholder Activism, Managing Transparency Risk

69

Verrecchia, R. E. (2001). Essays on disclosure. Journal of Accounting and Economics, 32(1), 97–180. Werhane, P. H. (2004). Why do good people do bad things. In R. A. Peterson & O. C. Ferrell (Eds.), Business ethics: New challenges for business schools and corporate leaders (pp. 38–55). New York, NY: ME Sharpe Inc. Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation. London: Pitman. Witherell, B. (2003). The roles of market discipline and transparency in corporate governance policy. Paper presented at Banque de France International Monetary Seminar, 16 May. Wu, X. (2009). Public sector transparency & corporate accounting practices in Asia. In M. Ramesh & S. Fritzen (Eds.), Transforming Asian governance: Rethinking assumptions, challenging practices (pp. 74–95). Oxford: Routledge.

FURTHER READING Andriof, J., & Waddock, S. (2002). Unfolding stakeholder engagement. In J. Andriof, et al. (Eds.), Unfolding stakeholder thinking: Theory, responsibility and engagement (pp. 19–42). Sheffield: Greenleaf Publishing. Barnea, J. (2007). What drives firms’ voluntary earnings disclosure?’ Working Paper Series. Henley Management College, Brunel University. Bandsuch, M., Pate, L., & Thies, J. (2008). Rebuilding stakeholder trust in business: An examination of principle-centred leadership and organisational transparency in corporate governance. Business and Society Review, 113(1), 99–127. Bentham, J. (2007). An introduction to the principles of morals and legislation. First published 1780. New York, NY: Dover Publications, Inc. Bessire, D. (2005). Transparency: A two-way mirror? International Journal of Social Economics, 32(5), 424–439. Boatright, J. R. (2008). Ethics in finance (2nd ed.). Oxford: Blackwell Publishing. Bratianu, C., Jianu, I., & Vasilache, S. (2011). Integrators for organizational intellectual capital. International Journal of Learning and Intellectual Capital, 8(11), 5–17. Bradley, F. H. (1962). Ethical studies (2nd ed.). London: Oxford University Press. Bushman, R. M., & Smith, A. J. (2001). Financial accounting information and corporate governance. Journal of Accounting and Economics, 32(1), 237–333. Bushman, R. M., & Smith, A. J. (2003, April). Transparency, financial accounting information, and corporate governance. FRBNY Economic Policy Review, 9, 65–87. Buzby, S. L. (1974). The nature of adequate disclosure. Journal of Accountancy, 137(4), 38–47. Cahn, S. M., & Markie, P. (2002). Ethics, history, theory, and contemporary issue (2nd ed.). Oxford: Oxford University Press. Claessens, S., & Fan, J. P. H. (2002). Corporate governance in Asia: A survey. International Review of Finance, 3(2), 71–103. Clarke, T. (2000). Haemorrhaging tigers: The power of international financial markets and the weaknesses of Asian modes of corporate governance. Corporate Governance: An International Review, 8(2), 101–116. Clarke, T. (Ed.). (2004). Theories of corporate governance: The philosophical foundations of corporate governance. New York, NY: Routledge. Clarke, T. (Ed.). (2005). Corporate governance: Critical perspectives on business and management, vol. IV, Asian corporate governance. New York, NY: Routledge.

70

MILLICENT DANKER

Clarkson, M. B. E. (Ed.). (1998). The corporation and its stakeholders: Classic and contemporary readings. Toronto: University of Toronto Press. Clinch, G., & Verrecchia, R. E. (1997). Competitive disadvantage and discretionary disclosure in industries. Australian Journal of Management, 22(2), 125–137. Department of Trade & Industry, UK. (2004). The operating and financial review: Practical guidance for directors. London: DTI. Retrieved from www.dti.gov.uk\ Diamond, D. W. (1985). Optimal release of information by firms. Journal of Finance, 40(4), 1071–1094. Diamond, D. W., & Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. The Journal of Finance, 46(4), 1325–1359. Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: concepts, evidence, and implications. The Academy of Management Review, 20(1), 65–91. Dye, R. A. (1985). Disclosure of nonproprietary information. Journal of Accounting Research, 23(1), 123–145. Dye, R. A. (1986). Proprietary and nonproprietary disclosures. The Journal of Business, 59(2), 331–367. Dye, R. A. (1990). Mandatory versus voluntary disclosures: The cases of financial and real externalities. The Accounting Review, 65(1), 1–24. Financial Reporting Council, UK (FRC). (2003). The combined code on corporate governance. London: FRC. Florini, A. (Ed.). (2007a). The right to know: Transparency for an open world. New York, NY: Columbia University Press. Florini, A. (2007b). Whither transparency? In A. Florini (Ed.), The right to know: Transparency for an open world (pp. 337–348). New York, NY: Columbia University Press. Freeman, R. E. (2006, August). The Wal-Mart effect and business, ethics, and society. Academy of Management Perspectives, 38–40. Freeman, R. E., & McVea, J. (2005). A stakeholder approach to strategic management. In M. A. Hitt, R. E. Freeman & J. S. Harrison (Eds.), The Blackwell handbook of strategic management (pp. 189–207). Oxford: Blackwell Publishing. Freeman, R. E., Wicks, A. C., & Parmar, B. (2004, May-June). Stakeholder theory and ‘the corporate objective revisited’. Organization Science, 15(3), 364–369. Friedman, A. L., & Miles, S. (2004). Stakeholder theory and communication practice. Journal of Communication Management, 9(1), 95–97. Friedman, A. L., & Miles, S. (2006). Stakeholders: Theory and practice. New York, NY: Oxford University Press. Gallego-A´lvarez, I., Garcı´ a-Sa´nchez, I. M., & Rodrı´ guez-Dominguez, L. (2010). The influence of gender diversity on corporate performance. Revista de Contabilidad-Spanish Accounting Review, 13(1), 53–88. Gelb, D. S. (2000). Managerial ownership and accounting disclosures: An empirical study. Review of Quantitative Finance and Accounting, 15(2), 169–185. Gelb, D. S., & Siegel, P. (2000). Intangible assets and corporate signaling. Review of Quantitative Finance & Accounting, 15(4), 307–323. Gibbins, M., et al. (1990). The management of corporate financial disclosure: Opportunism, ritualism, policies, and processes. Journal of Accounting Research, 28(1), 121–143. Global Reporting Initiative (GRI). (2002). Sustainability reporting guidelines. Boston: GRI. Habermas, J. (1984). The theory of communicative action, vol. I: Reason and the rationalization of society. Boston, MA: Beacon Press.

Understanding Stakeholder Activism, Managing Transparency Risk

71

Heflin, F., Subramanyam, K. R., and Zhang, Y. (2003, January). Regulation FD and the financial information environment: Easy evidence. Accounting Review. Retrieved from http://www/ssrn.com/abstract=345420 Hess, D. (2007). Social reporting and new governance regulation: The prospects of achieving corporate accountability through transparency. Business Ethics Quarterly, 17(3), 453–476. Hilb, M. (2005). New corporate governance: Successful board management tools (2nd ed.). Berlin: Springer. Hood, C. (2006). Transparency in historical perspective. In C. Hood & D. Heald (Eds.), Transparency: The key to better governance? (pp. 3–23). Oxford: Oxford University Press. Hood, C. (2007). What happens when transparency meets blame-avoidance? Public Management Review, 9(2), 192–210. Institute of Directors. (2006). Standards for the board (4th ed.). London: IOD. Irani, A. J. (2004). The effect of regulation fair disclosure on the relevance of conference calls to financial analysts. Review of Quantitative Finance & Accounting, 22(1), 15–28. Kashima, Y., & Kashima, E. S. (2003). Individualism, GNP, and pronoun drop: Is individualism determined by climate and economic affluence, or does language use play a role? Journal of Cross-Cultural Psychology, 34, 125–134. Kolk, A., & Pinkse, J. (2010). The integration of corporate governance in corporate social responsibility disclosures. Corporate Social Responsibility and Environmental Management, 17(1), 15–26. Letza, S., & Sun, X. (2004). Philosophical and paradoxical issues in corporate governance. International Journal of Business Governance and Ethics, 1(1), 27–44. Lev, B. (1992, Summer). Information disclosure strategy. California Management Review, 34(4), 9–32. Luo, Y. (2001). Determinants of local responsiveness: Perspectives from foreign subsidiaries in an emerging market. Journal of Management, 27(4), 451–477. Mallin, C. A. (2002, October). Editorial: The relationship between corporate governance, transparency and financial disclosure. Corporate Governance: An International Review, 10(4), 253–255. Mallin, C. A. (2008). Institutional shareholders: Their role in the shaping of corporate governance. International Journal of Corporate Governance, 1(1), 97–105. Milgrom, P. R. (1981). Good news and bad news: Representation theorems and applications. The Bell Journal of Economics, 12(2), 380–391. Miller, G. S. (2004). Discussion of what determines corporate transparency? Journal of Accounting Research, 42(2), 253–268. Minkes, A. L., Small, M. W., & Chatterjee, S. R. (1999). Leadership and business ethics: Does it matter? Implications for management. Journal of Business Ethics., 20(4), 327–335. OECD (2008, October). Recommendation of the council on enhancing integrity in public procurement. Retrieved from http://www.ppiprocurementconsulting.com/news_resources/ 2/index.html Oliver, R. W. (2004). What is transparency? New York, NY: McGraw-Hill. On, K. T. (2002). Ethical issues in the evolution of corporate governance in China. Journal of Business Ethics, 37(3), 303–320. Peters, S., Miller, M., & Kusyk, S. (2011). How relevant is corporate governance and corporate social responsibility in emerging markets? Corporate Governance, 11(4), 429–445.

72

MILLICENT DANKER

Phillips, R. (1997). Stakeholder theory & a principle of fairness. Business Ethics Quarterly, 7(1), 51–66. Post, J. E., Preston, L. E., & Sachs, S. (2002). Redefining the corporation: Stakeholder management & organizational wealth. Stanford: Stanford University Press. Ramkumar, V., & Petkova, E. (2007). Environmental governance. In A. Florini (Ed.), The right to know: Transparency for an open world (pp. 279–307). New York, NY: Columbia University Press. Roche, J. (2005). Corporate governance in Asia. London: Routledge. Rodan, G. (2002). Do markets need transparency? The pivotal cases of Singapore and Malaysia. New Political Economy, 7(1), 23–47. Shaw, N. E., Burgess, T. F., de Mattos, c., & STEC, L. Z. (2005). Supply chain agility: The influence of industry culture on asset capabilities within capital intensive industries. International Journal of Production Research, 43(16), 3497–3516. Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–783. Simon, C. (2006). Corporate information transparency: The synthesis of internal and external information streams. Journal of Management Development, 25(10), 1029–1031. Skinner, D. J. (1994). Why firms voluntarily disclose bad news. Journal of Accounting Research, 32(1), 38–60. Solomon, J. (2007). Corporate governance & accountability (2nd ed.). Chichester: John Wiley & Sons Ltd. Spencer, J., & Gomez, C. (2011). MNEs and corruption: The impact of national institutions and subsidiary strategy. Strategic Management Journal, 32(3), 280–300. Wieland, J. (2001). The ethics of governance. Business Ethics Quarterly, 11(1), 73–87. Williamson, O. E. (1996). The mechanisms of governance. New York, NY: Oxford University Press. Zimmerli, W. C., Klaus, R., & Markus, H. (Eds.). (2007). Corporate ethics and corporate governance. Berlin Heidelberg: Springer-Verlag.

CORPORATE RISKS AND RESPONSIBILITIES IN LOW CARBON ECONOMY Wang Hong ABSTRACT The chapter explores the corporate risks and opportunities in low carbon economy in order to provide references for business to tackle the global warming issue. It first discusses severe consequence of climate change and points out that the low carbon economy is to mitigate climate change. Then different perspectives of low carbon economy and similar connotations are introduced. It is found that companies are driven to practise environmental responsibility by various risks. In particular, these risks come from international policies, investors, national regulations, customers, peers, sub-sectors, and supply chains. Finally, the opportunities and benefits of low carbon responsibility are illustrated. The research shows that if the enterprises actively take low carbon responsibility, they will get the opportunities to develop corporate capabilities, benefits of early movement and advantages of brand effect. Keywords: Greenhouse gases; corporate; responsibility; risk; low carbon economy

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 73–93 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005007

73

74

WANG HONG

CLIMATE CHANGE AND LOW CARBON ECONOMY The greenhouse gases in the atmosphere are changing the earth’s climate at an unprecedented rate in history. The year 2005 was the warmest on record, and the ten warmest years have all occurred since 1980. Ice in the Arctic, the Antarctic and Greenland is melting, and virtually all of the world’s glaciers are shrinking. And the shrinking polar ice caps aren’t the only apparent consequence: storms, droughts and other weather-related disasters  for example, epidemics, whose spread are correlated with temperature and moisture rates  are growing more severe and more frequent. Most climate models predict a three-to-eight-degree rise in global average temperatures if atmospheric concentrations of greenhouse gases reach twice preindustrial levels, something that will happen by 2050 if current trends continue. All of those models show some risk (between 5% and 15%) that the temperature will rise significantly more than that. Furthermore, there is a risk of unknown magnitude that positive feedback mechanisms in the climate system  for instance, the release of methane from melting permafrost in northern Canada, which could contribute to global warming and further melting of the permafrost  will create sudden, nonlinear acceleration in warming (Lash & Wellington, 2007, p. 128). If current emission trends continue or even if emission reduction commitments currently made by nations are successfully achieved, several studies indicate that temperatures will exceed 21C average global warming by 2100 (Anderson & Bows, 2008; Hansen et al., 2006; Meinshausen et al., 2009; Parry, Lowe, & Hanson, 2008; Rogelj et al., 2009). This level of warming is considered by many scientists and over 100 nations (IPCC, 2007a), including the G8 nations (G8, 2009), to represent ‘dangerous interference with the climate system’ as outlined in the United Nations Framework Convention on Climate Change. In order to halt the accumulation of greenhouse gases in the earth’s atmosphere, global emissions would have to stop growing at all in this decade and be reduced by an astonishing 60% from today’s levels by 2050. And the target of low carbon economy is to mitigate climate change.

VIEWS ON LOW CARBON ECONOMY Ideas of a low carbon economy primarily emerged in British energy white paper in 2003, ‘Our energy’s future: creating low-carbon economy’. It says

Corporate Risks and Responsibilities in Low Carbon Economy

75

low-carbon economy is through the less of natural resource consuming and less of the environmental pollution, to get more economic output, low-carbon economy is an approach and chance to create a higher standard of living and better quality of life, and also creates opportunities for the development, application and output of advanced technology, at the same time, it also can create new business opportunities and more employment opportunities.

Subsequently, Johnston (2005) studied the technology feasibility of carbon dioxide emission in the greatly decreasing British houses number and reported that it was possible to use the current technology and reduce emissions to 80% below 1990 levels by the middle of this century. Treffers (2005) discussed the possibility of 80% GHG emission on the 1990 basis in Germany in 2050. They thought robust economic growth and GHG emission reduction could be achieved by adopting related policy measures. Kawase (2006) reviewed long-term stable climate status, and classified the emission change into three factors: carbon dioxide intensity, energy efficiency and economic activities. They pointed out that the changing speed of the general energy intensity, the decreasing speed of carbon dioxide intensity must be two to three times faster than that in the previous 40 years. Shimada (2007) constructed a method to describe the suburban long-term low carbon development and applied it to the Shiga area of Japan. The report ‘Profit: Low carbon economy growth’ was made by Climate Group; it introduced the concept of low carbon economy, reviewed the market development and analysed the benefit of low carbon economy. It indicated that low carbon economy could bring higher investment reward rate, greatly increase the production, decrease production liability, improve product quality and working environment and encourage staff morale. It had excellent potential in the employment creation and its growth speed would be faster than other economic patterns. Professor Pinkse and Kolk (2009) explained the most relevant regulatory developments across the world, focused on the voluntary initiatives taken by companies, discussed the factors that have influenced corporate activities on climate change and examined compensatory approaches, particularly carbon trading, and companies’ activities in the face of a range of emerging carbon markets with different characteristics. They analysed how corporate climate change activities built on a company’s existing capabilities in other areas of its operations may help create new sources of competitive advantage and thus benefit the company’s profitability, growth and survival. Chinese scholar Zhuang (2005) thought the essence of low carbon economy was energy efficiency and clean energy structure; the core was the energy technology innovation and system innovation; the target was to

76

WANG HONG

mitigate climate change and promote human sustainable development. In other words, an energy revolution should be promoted by technology innovation and policy measures to set up an economic development pattern with less greenhouse emission to mitigate the climate change (Jin, 2005, April; Low carbon economy project group, 2010). Fu (2008) stated the development orientation, pattern and method of low carbon economy from macro-, meso- and micro-levels. It meant that the low carbon development direction, energy saving and emission reduction pattern and carbon neutral method should be adopted. They proposed some measures for developing low carbon economy in China: priorities to save energy and improve energy efficiency; make low carbon fossil fuels and develop renewable energy; set up carbon fund and encourage researching and developing low carbon technologies; establish national carbon trade mechanism (Yan & Ding, 2005). The report ‘Toward a Low Carbon Development: China and the World  Suggestions of Chinese Economists’ systematically analysed the effectiveness of various emission reduction mechanisms such as ‘carbon tax’ and ‘carbon trade’ under different conditions on the basis of ‘Emissions per capita consumption of historical accumulation’ to calculate emission reduction responsibility of each country (Fan, 2010). It suggested the strategies and measures that China, as a developing country, should adopt in this aspect. Also it pointed out the deficiencies in the current international emission reduction cooperation and put forward ‘Inter-country Joint Mitigation Plan’ as the third channel of international cooperation emission reduction. It would induce the necessary transfer of fund and technology from developed countries and improve more achievement of emission reduction among developed and developing countries with the aim to prevent climate change collectively (Wang & Yang, 2004, 2005). Feng (2010) used the theories and methods of history to make clear how the EU energy strategy moved from pure supply safety to energy safety, economic safety and ecological safety and how these three targets’ interaction grew into low carbon economy. From this historical evolution process, the interaction relationship between EU energy strategy and Europe unity was discussed in an inclusive and systematic manner. To sum up, since the concept of low carbon economy was proposed by the United Kingdom, individual understanding and explanations have been provided by international scholars in the aspects of low carbon economy concept, achievement possibilities and market values, etc. Although they are different in the perspectives and concepts, one connotation is similar: the economic and social clean and sustainable development can be realised by technology innovation and system innovation to minimise the green gas emission without influencing the economic and social development.

Corporate Risks and Responsibilities in Low Carbon Economy

77

RISKS OF ENTERPRISES IN LOW CARBON ECONOMY Various risks from international policy, investor, national regulatory, customer, peers, sub-sector and supply chain lead to the complex low carbon economy context of enterprises.

International Policy Risk International policy on climate change started with the adoption of the United Nations Framework Convention on Climate Change (UNFCCC) at the United Nations Conference on Environment and Development in Rio de Janeiro in 1992. This agreement marked the beginning of a long process of international policy developments on climate change, as shown in Table 1. Global climate change have become a widely salient issue appealing to voters all over the world since the inception of the 1997 Kyoto Protocol (Bonardi & Keim, 2005), especially during 2005–2007. In the post-Kyoto period, especially in 1999, 2000, 2001 and 2005, the international policy context experienced failures and refusals due to different characteristics in different countries. Obviously, the United Kingdom is the leading country to set up its report and scheme in response to climate change. However, it is difficult to keep track of the exact details of climate policy on an international level, and on a national level as well. Even though many countries have ratified the Kyoto Protocol, it is still not evident in most cases how national governments intend to meet their targets (Pinkse & Kolk, 2009, p. 31). Since the government, the important stakeholder of companies, cannot tackle the issue effectively, there is ample room or opportunity, and also necessity for companies to go beyond the policy and voluntarily take actions to influence the current measures of climate change at the national and international levels.

Investors Risk International government regulators aren’t the only ones monitoring individual companies for inadequate climate-related practices. Evidence suggests that investors expect and receive competitive returns from social investments (Business Week, 1998). Buchholtz and Carroll (2008, p. 74) assert that there are investors in the real world who take the social

Kyoto Protocol Conference of Parties 3 (COP 3)

COP 4 in Buenos Aires

COP 5 in Bonn

EU renewable energy proposal

COP 6 in The Hague

IPCC 3rd Assessment Report

1998

1999

2000

2000

2001

Framework Convention on Climate Change EU carbon tax proposal

Policy Event Adopted at the United Nations Conference on Environment and Development (Rio de Janeiro); expression at 1990 levels by the year 2000; no mandatory emission curbs. The European Commission proposed in 1992 a carbon tax that would raise prices of fossil and nuclear energy by 50%. The proposal was conditional on the introduction of a similar tax by the United States and Japan. In 1995 a carbon tax was proposed without this condition. Both proposals failed because several EU countries refused to accept the tax. Agreement on reduction targets for greenhouse gases compared to 1990 levels, to be reached in 2008–2012. Differentiated targets per country/region, for example Australia +8%; Canada 6%; Japan 6%; Russia 0%; US 7%; EU 8%. EU overall target translated into specific ones for member countries, for example Germany 21%, France 0%, Italy 6.5%, Spain +15%, UK 12.5%. First Conference of Parties after Kyoto. Confirmation of the Kyoto agreement and adoption of a ‘Plan of Action’ to implement the Protocol. A ‘process meeting’ which showed different views. Discussion points were targets for developing countries (China and India refused to accept targets) and the EU–US disagreement on restrictions on the use of the flexible mechanisms. Agreement to conclude final negotiations on global greenhouse gas emissions by November 2000. Proposal of the European Commission to set ‘indicative’ national targets for renewable energy production with the aim to double energy consumption from renewables to 12% by 2010. Failure to achieve agreement between the United States and the European Union. Main issues concerned rules for emissions trading and the Clean Development Mechanism. The issue on which the negotiations ultimately failed was the use of forests and farmlands as carbon sinks, which was favoured by the United States, but contested by the European Union. Third report by the Intergovernmental Panel on Climate Change (IPCC), released in January. It contained expectations that the consequences of climate change will be greater than expressed in earlier assessment.

Elaboration

Overview of Policy Developments on Climate Change.

1997

1992 and 1995

1992

Year

Table 1.

78 WANG HONG

US rejection of Kyoto Protocol

Launch of US alternative ‘sciencebased’ climate plan

Bonn Agreement on Kyoto implementation

EU emissions trading scheme proposal

COP 7 in Marrakech

EU Kyoto Ratification Launch of UK emissions trading scheme

COP 8 in New Delhi

McCain–Lieberman plan

Oppositions of US states to federal government climate policy

2001

2001

2001

2001

2001

2002 2002

2002

2003

2003

In March 2001 the Bush administration declared that it would not implement the Kyoto Protocol and intended to withdraw the US signature. Some ‘softening’ of the US stance in June, shown in the proposal of an alternative ‘science-based’ response to climate change. Main elements were increased research expenditure on energy efficiency improvements and voluntary measures for industry. Agreement by the EU, Japan, Canada, Australia, Russia, and a number of developing countries on the rules for the reduction of GHG emissions as laid down in the Kyoto Protocol. Concessions of the EU included allowing emissions trading and the limited use of forests and agricultural land as carbon sinks, which enabled Japan to meet its targets. Proposed by the European Commission to set up an emissions trading scheme to come into effect from 2005 onwards. 2001 Bonn Agreement turned into a legal text. Further concessions won by Russia and Japan on the use of carbon sinks and the ability to sell surplus emissions credits. EU agreement to ratify the Kyoto Protocol by the end of May 2002. The UK government opened a national emissions trading scheme in April. Under the scheme, companies received a limited amount of emissions allowances that served as a ‘cap’ on their carbon emissions, which they are allowed to trade. The eight Conference of Parties put the position and vulnerability of developing countries central. India criticised calls for emissions targets for developing countries and stressed the growing tension between the developed and developing world on climate change. Senators McCain Lieberman proposed a bipartisan plan to introduce industry-wide caps on GHG emissions and to set up emissions trading scheme. The bill failed to pass US Congress by 12 votes, which was commonly viewed as a positive sign. Twelve US states file a lawsuit against the Environmental Protection Agency for denying responsibility for GHG emissions (reflecting their opposition to the US federal policy). US Northeast states also develop (regional and perhaps later EU-linked) ‘cap-and-trade’ plans.

Corporate Risks and Responsibilities in Low Carbon Economy 79

Chicago Climate Exchange (CCX)

Regional Greenhouse Gas Initiative (RGGI)

COP 10 in Buenos Aires

Start of EU ETS Kyoto Protocol entered into force

New South Wales Greenhouse Plan

Kyoto Protocol Achievement Plan

COP 11 in Montreal

US State of the Union

Asia-Pacific Partnership on Clean Development and Climate

California Global Warming Solutions ACT

2003

2004

2005 2005

2005

2005

2005

2006

2006

2006

Policy Event

2003

Year

Elaboration Start of this voluntary trading scheme (which is legally binding for member organisations to meet reduction targets of 6% by 2010 compared to average 1998–2001 greenhouse gas emissions). Initiative in the United States by Northeast and Mid-Atlantic states to discuss a regional cap-and-trade programme that will initially cover CO2 emissions from power plants but can be extended later. Disagreement about future of Kyoto Protocol after 2012 (to come up with new negotiation rules/targets by 2008); weak compromise found for a 2005 seminar to exchange information. On 1 January 2005, the EU emissions trading scheme started. On 16 February 2005, the Kyoto Protocol entered into force with the official ratification by Russia. In 2004, President Putin had announced that Russia intended to ratify (as a ‘quid pro quo’ for EU’s acceptance of Russian WTO admission). Australian state plan to reduce greenhouse gas emission to 2000 levels by 2025, and realise 60% reduction by 2050. Adopted by Japanese government; implies dissemination of technology, emissions reporting and voluntary use of Kyoto Mechanisms. First meeting of the parties to the Kyoto Protocol (COP/MOP-1); Marrakech Accords were adopted and a four-track path was initiated to discuss future action on climate policy beyond 2012. US President Bush called for an end to the US addiction to oil and proposed to step up development of clean technologies, for example ethanol. Brings together Australia, China, India, Japan, South Korea and the United States in what has been labelled as an ‘alternative to Kyoto’ attempt that focuses on voluntary, non-binding steps relying on clean technology. Mandates a cap of California’s greenhouse gas emission at 1990 levels by 2020.

Table 1. (Continued )

80 WANG HONG

Stern Review

COP 12 Nairobi

Launch of EU climate change targets

IPCC 4th Assessment Report

California Climate Exchange (CaCX)

Western Climate Initiative

US mayors’ climate protection agreement

Canadian Regulatory Framework for Air Emissions

2006

2006

2007

2007

2007

2007

2007

2007

Sir Nicholas Stern, a former World Bank economist, published a report on the economic impact of climate change. It argued that not addressing climate change will lead to costs running from 5% to about 20% of global GDP, while preventing would cost about 2% of global GDP each year. (The Stern report suggested extreme weather might reduce global gross domestic product by up to 1%, and that in a worst-case scenario global per capita consumption could fall 20%.) Lack of progress on post-Kyoto climate policy due to refusal of the United States and developing countries to commit to binding targets. More attention to adaptation to climate change because COP was held in sub-Saharan Africa. EU launched new targets to prevent warming of more than 21C before 2020 including 20% reduction in GHGs (20% if other industrialised countries come aboard); 20% of energy use from renewable sources; 10% of transport fuel consumption by biofuels. Fourth report by the Intergovernmental Panel on Climate Change (IPCC), released in Kyoto Protocol Achievement Plan February. It reaffirmed findings that global temperatures are rising and that this development is very likely to have been induced by human-caused GHG emissions. Launched by the Chicago Climate Exchange to developing trading instruments related to the California Global Warming Solutions Act. Initiated by Western states in the United States and two Canadian provinces to realise a regional, economy-wide reduction target of 15% below 2005 levels by 2020, using market based systems such as a cap-and-trade programme. Builds on two earlier initiatives: the West Coast Governors’ Global Warming Initiative (2003) and the Southwest Climate Change Initiative (2006). Signed by 600 mayors in all 50 US states and Puerto Rico. Involves a commitment to cut greenhouse gas emissions by 7% in 2010 compared to 1990 (which is the US Kyoto target). Initiative was started in 2005 by the mayor of Seattle. Successor to earlier plan launched by the previous government in 2005. The 2007 plan aims to realise a 20% reduction greenhouse gas emissions by 2030 compared to 2006.

Corporate Risks and Responsibilities in Low Carbon Economy 81

Australia Climate Exchange (ACX) Australia and New Zealand intended joint emissions trading

Sydney APEC declaration on climate change

Midwestern Greenhouse Gas Reduction Accord

Australia ratifies Kyoto Protocol

COP 13 Bali

2007 2007

2007

2007

2007

2007

Source: Adapted from Pinkse and Kolk (2009).

Policy Event

Year

Elaboration Launched Australia’s first emissions trading platform. Announcement by Australia and New Zealand to join forces in the development of carbon-trading systems that would be compatible. Follows on earlier statement by Australia that it intends to move towards a domestic, nationwide emissions trading system per 2012. Adopted by 21 Pacific Rim countries (including Australia, the United States, Canada, Russia, China, Japan); includes an aspirational goal of a reduction in energy intensity of at least 25% by 2030 compared to 2005, and support for a post-2012 international climate agreement. Initiative by the Midwestern US states Minnesota, Wisconsin, Illinois, Iowa, Michigan and Kansas, as well as the Canadian Province of Manitoba to set a cap on GHG emissions and develop an emissions trading scheme by 2010. Indiana, Ohio and South Dakota are also part of the Accord, but merely as observers to participate in the formation of the regional cap-and-trade system. Early December the new Prime Minister Kevin Rudd ratified the Kyoto Protocol, making the United States the only non-ratifying industrialised country. Establishment of ‘Bali Action Plan’; an agreement to start negotiating a post-2012 internal framework for climate change policy as a follow-up to the Kyoto Protocol.

Table 1. (Continued )

82 WANG HONG

Corporate Risks and Responsibilities in Low Carbon Economy

83

performance issue quite seriously. According to Lash and Wellington (2007, p. 129), big investors are beginning to demand more disclosure from companies. For example, the Carbon Disclosure Project, a coalition of institutional investors representing more than $31 trillion in assets, annually requests information from large multinational companies about their climate-risk positioning. Its most recent report, released in 2006, showed a marked increase not only in the awareness of climate change on the part of the respondents but also in the best practices being developed to manage exposure to climate change. Similarly, investor coalitions are filing shareholder resolutions requesting more climate risk disclosure from companies. More than two dozen climaterelated resolutions were filled with companies in the 2004–2005 period, triple the number in 2000–2001. US companies faced increased pressure from institutional investors who called for disclosure requirements on climate risks (Monks, Miller, & Cook, 2004). Meg Voorhes, director of the Investor Responsibility Research Center, says that climate change has emerged in the last three years as the most widespread concern. Some of the nation’s largest investors are among those filing resolutions, including pension fund managers representing public employees in Connecticut, New York state, Maine and New York City (Barnaby, 2004). After the Exxon Valdez oil spill, several environmental, labour and social investor groups formed an organisation called CERES and developed a preamble and a set of 10 policy statements called the ‘Valdez Principle’. These principles have been advanced as models for business to express and practice environmental sensitivity. For example, the fourth principle declares that we will conserve energy and improve energy efficiency of our internal operations and of the goods and services we sell; we will make every effort to use environmentally safe and sustainable energy sources. The last principle promises that we will conduct an annual self-evaluation of our progress in implementing these principles; we will support the timely creation of generally accepted environmental audit procedures; we will annually complete the report, which will be made available to the public. Companies that have endorsed the principles include American Airlines, Bank of America, Coca-Cola, General Motors, Polaroid Corporation and Sunoco (http://www.ceres.org).

National Regulatory Risk In November 2009, the UK’s Climate Change Act became the first piece of domestic legislation anywhere in the world to create binding targets for

84

WANG HONG

lowering emissions of greenhouse gases. It also created the Committee on Climate Change, an independent institution reporting to Parliament to monitor and advise the progress. The government has also launched a lowcarbon growth strategy and a consultation on heat and energy savings (Altman, 2009, p. 77). This will limit these companies who do not concern the amount of output achieved from each unit of energy consumed, or the energy productivity. In the United States, which even withdrew from the Kyoto Protocol, various regional, state and local government policies increasingly affect companies. Seven north eastern states have adopted an agreement to cap carbon emissions from utilities and establish a carbon trading scheme. California has enacted regulations requiring that from 2008 to 2016, greenhouse gas emissions from new cars be reduced by 30% and has passed a legislation to reduce total emission to 1990 levels by 2020. A 2007 executive order also requires a reduction in the carbon content in motor fuels. Twenty states require utilities to obtain a percentage of the power they sell from renewable sources, and more than 218 US cities have adopted programmes to reduce emissions. And companies that generate significant carbon emissions will face the threat of lawsuits similar to those common in the tobacco, pharmaceutical and asbestos industries. For instance, in an unprecedented case spearheaded by the former New York attorney general Eliot Spitzer and currently being considered by the US Second Circuit Court of Appeals, eight states and New York City have sued five of America’s largest power companies, demanding that they cut carbon emissions. In a federal district court case in Mississippi, plaintiffs are suing oil and coal companies for greenhouse gas emissions, arguing that they contributed to the severity of Hurricane Katrina. The claims in that case include unjust enrichment, civil conspiracy (against the American Petroleum Institute), public and private nuisance, trespass, negligence, and fraudulent misrepresentation. Companies that don’t adequately address the issue of climate change also can create personal liabilities for directors and officers who become vulnerable to shareholder-related litigation (Lash & Wellington, 2007, p. 135).

Customer Risk Today’s consumers are better informed and more in control where corporate environmental responsibility is concerned. And customers can do more for

Corporate Risks and Responsibilities in Low Carbon Economy

85

the environment without damaging their wallets. A company in Lincolnshire, UK has come up with free-range respectful eggs which are produced on farms powered by carbon-neutral, renewable energy source such as wind turbines and solar panels. These methods are said to reduce the amounts of damaging carbon dioxide released into the atmosphere and help to prevent the acceleration of global warming and climate change (Food and Drink Technology, 2007). It is no doubt that these low carbon eggs laid by happy hens will help environment and health conscious consumers to make a better choice. According to Dickinson, head of research at logistics giant DHL, twothirds of DHL’s major customers already have concrete reduction targets and expect DHL to contribute to the achievement of those goals (Facilities management Energy, 2008, p. 16). A new Deutsche Post DHL (DP-DHL) study shows that 84% of consumers in China, India, Malaysia and Singapore will accept a higher price for green products compared to only 50% in Western industrialised nations. And the sense of urgency regarding climate change is also strongest in Asia, particularly in India and China, where 70% of consumers rate it as one of the world’s most serious problems (Air Cargo World, 2010, p. 2). Companies also face judgement in the court of public opinion, where they can be found guilty of selling or using products, processes or practices that have a negative impact on the climate. The potential for consumer or shareholder backlash is particularly high in environmentally sensitive markets or in competitive sectors where brand loyalty is an important attribute of corporate value. In a recent study analysing the impact of climate change on brand value, The Carbon Trust, an independent consultancy funded by the UK government, found that in some sectors the value of a company’s brand could indeed be at risk because of negative perceptions related to climate change (Lash & Wellington, 2007, p. 136).

Peers Risk The following list (see Table 2) showed that many chemical firms published partial details about their carbon emissions activities (Scott & Westervelt, 2008, p. 23). However, some companies participated but produced no public result and some of them declined to do so. ‘Those multinational chemical firms with the best environmental performance and environmental reporting in their sector increasingly are rewarding with a higher share price’, says Kees Cools, professor of corporate finance

86

WANG HONG

Table 2.

Chemical Firms Leading on Emission Reporta.

Company

M.T. Equivalent of CO2 Emissions

Air Liquide Air Products Akzo Nobel Altanna Ashland AstraZeneca BASF Bayer Chevron Dow Chemical DSM DuPont Eni ExxonMobil Lanxess Mitsui Chemical Monsanto Rhodia Shell Syngenta Total

15,299,000 11,000,000 5,200,000 118,514 730,000 524,000 24,986,816 8,000,000 61,834,134 37,700,000 9,900,000 12,100,000 63,050,000 158,800,000 Participated but results not public Participated but results not English 1,901,000 Participated but results not public 98,000,000 748,319 57,800,000

a

Carbon dioxide (CO2) equivalent emissions for companies in 2006. Figures relate to direct CO2 emissions as well as indirect emissions such as those derived from consuming electricity. They exclude CO2 emissions relating to raw materials. The following companies declined to participate in Carbon Disclosure Project (CDP) Emission survey: Archer Midland Daniels; Agrium; Asahi Chemical; Formosa; Evonik (declined to participate from 2005); Mitsubishi Chemical; Sumitomo Chemical; Shin Etsu; Reliance Industries. Source: Adapted from Carbon Disclosure Project (London) and CW research.

at the University of Croningen (Netherlands). ‘Equity analysts increasingly are recognising the implementation of sustainable practices as a determinant of shareholder value’, Kees says. ‘In particular, companies that lag behind with their CSR and GHG emissions get punished in the stock market’, he says (Cools, 2007, p. 28).

Sub-Sector and Supply Chain Risk There is general consensus that tourism, as a global economic sector interconnected with many other sectors such as aviation, accommodation and

87

Corporate Risks and Responsibilities in Low Carbon Economy

Table 3. Distribution of Emissions from Tourism by Sub-Sector. Sub-Sectors

Air transport Car transport Other transport Accommodation Activities Total Total world Tourism contribution

2005

2035

CO2(Mt)

%

CO2(Mt)

%

515 420 45 274 48 1,307 16,400 5%

40% 32% 3% 21% 4% 100%

1631 456 37 739 195 3,059

53% 15% 1% 24% 6% 100%

Source: Adapted from UNWTO-UNEP-WMO (2008).

retail, is an important contributor to climate change and should make a contribution to global efforts to reduce GHG emissions and address climate change. The study commissioned by United Nations World Tourism Organisation (UNWTO), United Nations Environment Programme (UNEP) and the World Meteorological Organisation (WMO) (UNWTOUNEP-WMO, 2008) estimated global tourism-related emissions of CO2 at roughly 5% of total global emissions in 2005 (with an estimated range of 3.9% to 6.0%). Most of these emissions are generated by the transport of tourists and, in particular, air travel (as Table 3 shows). Apart from two sub-sectors, the emissions from three sub-sectors of air transport, accommodation and activities are expected to increase substantially in 2035. The total emission from tourism in 2035 will be over two times in 2005. If tourism remains on a business-as-usual pathway, it will become a key source of GHG emissions in a world seeking to decarbonise all other sectors of the economy (Scott, Peeters, & Go¨ssling, 2010, p. 394). A company that has outsourced many non-core activities depends for many of its critical resources on outsiders and the supply-chain risk will also be demanded for energy efficiency because of higher energy prices (Pinkse & Kolk, 2009, p. 146). The vulnerability of suppliers could also lead to higher component and energy costs as suppliers pass along increasing carbon-related costs to their customers. Auto manufacturing, for instance, relies heavily on suppliers of steel, aluminium, glass, rubber and plastics, all of whom are likely to be seriously affected by emissions regulations or  as in the case of aluminium manufacturing, a big consumer of energy  by regulation on their supplier’s supplies (Lash & Wellington, 2007, p. 133).

88

WANG HONG

OPPORTUNITIES AND BENEFITS OF LOW CARBON RESPONSIBILITY Developing low carbon economy is not only the approach to accomplish Corporate Environmental Responsibility, more significantly, it brings increasing corporate opportunities as well, if corporate actively take the environmental responsibility. The following three perspectives can be elaborated. .

Opportunities to Develop Corporate Capabilities To what extent companies are able to take advantages from climate change depends on their flexibility in developing new capabilities which mainly refers to organisational learning and approaches for continuous improvement and innovation (Sharma & Vredenburg, 1998; Hart, 1995). On the one hand, a company has to be informed how the core business activities are affected and which strategic adjustments are required to manage these impacts optimally. Therefore the availability and type of internal climate expertise is very crucial (Kolk & Levy, 2004). On the other hand, as many companies are still short of climate expertise, they choose to access climate-specific knowledge from outside and learn from external partners. There are many examples of Multinational Corporations (MNCs) which have ties with universities and research institutes: Suncor funds a Clean Energy Laboratory of the University of British Colombia; Exxon Mobil invests in the Global Climate and Energy Project of Stanford University; and Chevron is co-funding the Massachusetts Institute of Technology Joint Program on the Science and Policy for Global Climate Change. Moreover, Rio Tinto participates in research efforts of the US-based Electric Power Research Institute; while BP, together with Ford, has a partnership with Princeton University, called the Carbon Mitigation Initiative, which aims at ‘resolving the fundamental scientific, environmental and technological issues that are likely to influence public acceptance of any proposed solution’ (Pinkse & Kolk, 2009, p. 144). It is when companies are able to continuously prevent emissions that they can achieve additional reductions. Innovation is an important underlying driver to the capabilities of not only successive progress on emission reduction but also production efficiency. As Wang and Wang (2008, p. 421) explains, in responding to climate change, technology innovation can

Corporate Risks and Responsibilities in Low Carbon Economy

89

improve energy efficiency or increase low carbon energy supply through process innovation. It will reduce the cost of emission reduction measure and its adverse influence in the economic system. For example, a technology for converting coal into energy (IGCC, or Integrated Gasification Combined Cycle), while currently more expensive than traditional methods used in pulverised-coal plants, can lower aggregate carbon emissions through better efficiency and possibly carbon dioxide capture and storage. In continuous technology improvement, IGCC would reduce the significant costs that coal-fired plants would face under stricter emission standards.

Benefits of Early Movement Global warming is a problem characterised by uncertainties. And in a world where even TV weather forecasters can’t accurately predict rain or sun, business leaders might be forgiven for tending to more immediate problems and leaving climate-change efforts to the next generation. But the uncertainty is no excuse for inaction even with any other risks. Most scientists agree that we will face serious consequences if we fail to address the problem (Packard & Reinhardt, 2007, p. 29). According to The Pew Center’s Business Environmental Leadership Council (BELC), which was created at the Center’s inception under the belief that business engagement is critical for developing efficient, effective solutions to the climate problem, companies take early action on climate strategies and policy will gain sustained competitive advantage over their peers (www.pewclimate.org/companies_leading_the_way_belc). Usually the first-mover advantage is based on deployment of a new, climate-friendly technology. Du Pont is one of the early movers on climate change. It prides itself on having achieved cost savings through an emission reduction programme. This chemical company claims that even though the costs to achieve emission reductions exceeded US$50 million, cost savings amounted to more than US$3 billion between 1990 and the end of 2005 (Pinkse & Kolk, 2009, p. 72). The pioneering corporations that have made reinvestments in natural capital are starting to see some interesting paybacks. The independent power producer AES, for example, has long pursued a policy of planting trees to offset the carbon emissions of its power plants. That ethical stance, once thought quixotic, now looks like a smart investment because a dozen brokers are now starting to create markets in carbon reduction. Similarly,

90

WANG HONG

certification by the Forest Stewardship Council of certain sustainably grown and harvested products has given Collins Pine the extra profit margins that enabled its US manufacturing operations to survive brutal competition. However, most companies still do not realise that a vibrant ecological web underpins their survival and their business success. It is not just a public benefit to enrich natural capital  it is vital to every company’s longevity (Lovins, Lovins, & Hawken, 2007, p. 89). Low carbon economy closely links enterprise environmental responsibility. The earlier action taken by enterprises, the more competitive they will be. In other words, based on the resource-based perspective, corporation should comply with the government regulations, make innovations on clean energy and achieve the competitiveness of high energy efficiency.

Advantages of Brand Effect It is well known that a company can benefit from its brand. Corporations can raise customer loyalty and governmental support by good brand image. Currently, it is easier for low-carbon-economy corporations to establish good public image compared to those with high releasing and dissipation. So they can extend further market and capture market share so as to establish a stable base for corporate benefit and growth (McKinsey & Company, 2008, April). Regarding direct effects of low carbon economy on brand marketing, in addition to possible carbon tax discussed again and again by officials, the changes in global consumption values should be considered by all brand managers. With low carbon economy tendency, some consumption values usually proclaimed in traditional brand marketing, such as showing off luxury and style, are likely to be embarrassing and put under the public magnifier of reducing energy use and releasing, becoming the market poisonous drugs. This is because the public has realised consumption can’t be so casual to just satisfy individuals. Unreasonable and excessive consumption will leave too many troubles for offspring. Therefore, ‘responsible consumption’ will increasingly become global popular consumption styles, which will influence all products, from luxury to fast moving consumer goods, without any exception. For example, the strong consciousness of reducing dissipation is increasingly valued in the United Kingdom. An investigation result at the end of 2008 shows over twothird British people prefer to purchase the products whose companies actively participate in reducing energy use and dissipation. The first thing British oil company BP did after stepping out of the Global Climate Coalition in 1997 was to establish a target to reduce internal emissions by

Corporate Risks and Responsibilities in Low Carbon Economy

91

10% by 2010 (other steps were setting up partnerships with Environmental Defense and the Pew Center for Global Climate Change) (Levy & Kolk, 2002). The company emphasised that their target was tougher than those of most industrialised countries under the Kyoto Protocol. The BP case on climate change has become one of the most widely cited best practices in corporate climate change initiatives, and thereby the leadership on the issue has greatly improved corporate reputation. In recent years, American Hollywood film stars greatly pursue gas – electricity mixed cars, which represent ‘low-carbon luxury’ and will replace ‘low-key luxury’ step by step. Gradually a new value of top consumption will come into being (Jin, Jing, & Jianting, 2010, pp. 236–237). Global warming is becoming a core engine for low carbon economy and green business development. Going green is not just a fashion statement (Hagen, 2007, p. 2). Smart companies know that action is coming and they are moving to get ahead of the game (Coffman, 2007, p. 1). They have learned to reduce their role in global warming and get ahead of regulators and gain a competitive edge (Charle, 2007, p. 1). Consequent responsible brand image enables them in a better position to prosper. If we stay on our present path, we face an unacceptable choice: either we sacrifice global economic growth to secure the health of our planet or we sacrifice the health of our planet to continue with fossil-fuelled growth. — Condoleezza Rice, US Secretary of State, at a meeting with the highest GHG emissions (Haryey, 2007a, p. 1)

Low carbon economy is the inevitable choice to tackle global warming and achieve sustainability development. In this chapter, we first discussed severe consequences of climate change and pointed out that the target of low carbon economy is to mitigate climate change. Then we introduced different perspectives of low carbon economy and similar connotation as well. The risks of low carbon economy drive companies to practise environmental responsibility. The pressures come from international policy, investor, national regulation, customers, peers, sub-sectors and supply chains. When the low carbon responsibility is taken, companies will have the opportunities to develop corporate capabilities, benefits of early movement and advantages of brand effect. This is the developing trend expected in a low carbon economy.

REFERENCES Air Cargo World. (2010). Logistics at center of low carbon economy. Air Cargo World, 100(11), 4–6. Retrieved from http://web.ebscohost.com/ehost Altman, W. (2009). Carbon consultant. Engineering and Technology, June 6–June 19, 76–79.

92

WANG HONG

Anderson, K., & Bows, A. (2008). Reframing the climate change challenge in light of post – 2000 emission trends. Philosophical Transactions A, 366(1882), 3863. Barnaby J. F. (2004). Funds want oil companies to report on climate. New York Times, February 27, p. C3. Bonardi, J. P., & Keim, G. D. (2005). Corporate political strategies for widely salient issues. Academy of Management Review, 30(3), 555–576. Buchholtz, A. K., & Carroll, A. B. (2008). Business and society. Canada: Cengage Learning. Business Week. (1998, February 16). Good works and great profits, p. 8. Charle, S. (2007, November 29). Strategy and business: When addressing climate change is good business, p. 1. Coffman, J. (2007, November 29). Leading global business strategies map US global warming solutions, p. 1. Cools, K. (2007, January 31). Chemical week, p. 28. Facilities management Energy. (2008, June). Green tips for a low carbon world, p. 16. Retrieved from www.worksmanagement.co.uk Fan, G. (Ed.). (2010). Toward a low-carbon development: China and the world—research group of Chinese economists 50 forum. Beijing: China Economic Publishing House. Feng, J. (2010). EU energy strategy: Towards a low-carbon economy. Beijing: Shishi Press. Food and Drink Technology. (2007, October). Happy hens lay low carbon eggs. Fu, Y., Ma, Y., Liu, Y., & Niu, W. (2008). Development patterns of low carbon economy, China population. Resources and Environment, 18(3), 14–19. G8. (2009). Declaration of the leaders of the major economies forum on energy and climate. Retrieved from www.g8italia2009.it/static/G8Allegato/MEFDeclarationl.pdf. Accessed on December 22, 2009. Hagen, K. (2007, December 21). How global warming affects your business strategy, p. 2. Hansen, J., Sato, M., Ruedy, R., Kharecha, P., Lacis, A., Miller, R., et al. (2006). Dangerous human made interference with climate: A GISS model study. Atmospheric Chemistry and Physics, 7, 2287–2312. Hart, S. L. (1995). A natural-resource-based view of the firm. Academy of Management Review, 20(4), 986–1014. Harvey, F. (2007a). Winds of change beginning to blow, Financial Times, 12 October. IPCC. (2007a). Climate change 2007: Synthesis report. Cambridge, UK: Cambridge University Press. Jin, B. (2005, April). China’s industrial development under the binding of resources and environment. China Industrial Economy, No. 4. Jin, L., Jing, M., & Jianting, L. (2010). The influence of low carbon economy. Asian Social Science, 6, 11. Johnston, D., Lowe, R., & Bell, M. (2005). An exploration of the technical feasibility of achieving CO2 emission reduction excess of 60% within the UK housing stock by the year 2050. Energy Policy, 33, 1643–1659. Kawase, R., Matsuoka, Y., & Fujino, J. (2006). Decomposition analysis of CO2 emission in long-term climate stabilization scenarios. Energy Policy, 34, 2113–2122. Kolk, A., & Leby, D. (2004). Multinationals and global climate change: Issue for the automotive and oil industries. In S. M. Laundan (Ed.), Multinations, environment and global competition (Vol. 9, pp. 171–193). Amsterdam: Elsevier. Lash, J., & Wellington, F. (2007). Competitive advantage on a warming plant. Harvard business review on green business strategy. US: Harvard Business School Publishing Corporation. Levy, D. L., & Kolk, A. (2002). Strategic responses to global climate change: conflicting pressures on multinationals in the oil industry. Business and Politics, 4(3), 275–300.

Corporate Risks and Responsibilities in Low Carbon Economy

93

Lovins, A. B., Lovins, L. H., & Hawken, P. (2007). A road map for natural capitalism. Harvard business review on green business strategy. Harvard: Harvard Business School Publishing Corporation. Low carbon economy project group. (2010). Low carbon wars—China leads the low carbon world. Beijing: Chemical industry press. McKinsey & Company. (2008, April). Business strategies for climate change, p. 1. Meinshausen, M., Meinshausen, N., Hare, W., Raper, S. C. B., Frieler, K., Knutti, R., et al. (2009). Greenhouse-gas emission targets for limiting global warming to 21C. Nature, 458(7242), 1158–1162. Monks, R., Miller, A., & Cook, J. (2004). Shareholder activism on environmental issues: a study of proposals at large US corporations (2000–2003). Natural Resources Forum, 28, 317–330. Packard, K. O., & Reinhardt, F. L. (2007). What every executive needs to know about global warming. Harvard business review on green business strategy. Harvard: Harvard Business School Publishing Corporation. Parry, M., Lowe, J., Hanson, C. (2008). The consequences of delayed action on climate change. Retrieved from http://www3.imperial.ac.uk/pls/portallive/docs/1/53345696.PDF. Accessed on January 21, 2009. Pinkse, J., & Kolk, A. (2009). International business and global climate change. UK: Routledge. Rogelj, J., Hare, B., Nabel, J., Macey, K., Schaeffer, M., Markmann, K., et al. (2009). Halfway to Copenhagen, no way to 21C. Nature Reports Climate Change, 3(0907), 81–83. Scott, A., Westervelt, R. (2008). Corporate social responsibility, Chemical Week, June 23, pp. 21–23. Scott, D., Peeters, P., & Go¨ssling, S. (2010, April). Can tourism deliver its ‘‘aspirational’’ greenhouse gas emission reduction targets? Journal of Sustainable Tourism, 18(3), 393–408. Sharma, S., & Vredenburg, H. (1998). Proactive corporate environmental strategy and the development of competitively valuable organizational capabilities. Strategic Management Journal, 19, 729–753. Shimada, K., Tanaka, Y., Gomi, K., & Matsuoka, Y. (2007). Developing a long-term local society design methodology towards low-carbon economy: An application to shiga prefecture in Japan. Energy Policy, 35, 4688–4703. Su, J. (2007). Profit: Low carbon economy growth. World Environment, 4, 32–34. Treffers, T., Faaij, A. P. C., Sparkman, J., & Seegregts, A. (2005). Exploring the possibilities for setting up sustainable energy systems for the long term: Two visions for the Dutch energy system in 2050. Energy Policy, 33, 1723–1743. UNWTO-UNEP-WMO. (2008). Climate change and tourism: Responding to global challenges. Madrid: UNWTO. Wang, C., & Wang, K. (2008). Technology innovation improves low carbon economy development. Introduction to low carbon economy (p. 421). Beijing: Chinese Environment and Science Press. Wang, J., & Yang, L. (2004). The energy efficiency is only 3% in our country. Chinese Industrial and Commercial Times, September, 17. Wang, Y., & Yang, D. (2005, January 27). Coal supply condition still serious this year. Economic Reference. Yan, W., & Ding, X. (2005). Reviewing 2004 world mineral resource condition, China Gold Newspaper. January, 19. Zhuang, G. (2005). The way and potential analysis of developing low-carbon economy. Studies in International Technology and Economy, 8(3), 79–87.

GOVERNANCE AND SOCIALLY RESPONSIBLE ENERGY CONSUMPTION Shahla Seifi ABSTRACT In the ever increasing worldwide attention to the concept of sustainable development, industrial engineering as productivity champion has not received major attention. This is unfortunate as one can see it as the toolkit to attain sustainable development because industrial engineering is concerned with productivity as the measure for production and service efficiency. Without this it would be difficult to quantify the quality aspects of sustainable development and evaluate the integrated systems of man, money, materials, energy, knowledge, information and equipment, all instances of the three pillars. Energy efficiency is one route towards minimising environmental impact, achieving sustainability and therefore making possible sustainable development. This chapter analyses industrial engineering tools to assess how sustainable our current energy consumption is. For this analysis refrigerators are taken as the sample. This is due to general usage of refrigerators by all people everywhere and due to its major role in worldwide energy consumption. Energy labels are nowadays a common

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 95–110 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005008

95

96

SHAHLA SEIFI

feature of refrigerators put into the market for sale, although this trend is diverse in different parts of the world which signals non-harmonized comprehension of sustainable development in the world. These are explored at a theoretical level to show that industrial engineering tools contribute to sustainability. The implications of using game theory to address these issues are substantial although not previously used. Keywords: ISO 26000; sustainability; energy consumption; risk management; Brundtland

INTRODUCTION The concept of sustainable development has assumed prominence in the economic world and it is increasingly being based upon a process of interactive, integrative and learnt decision-making by firms through the process of understanding possibilities for common technological futures. In the range of issues that now comprise the soft-technology basket there are the physical environmental issues, social contracts that are mutually suitable to factors of production, and sustainable future of firms that are friendly to physical and human ecology (Coombs, 1990; Goodland, Daly, El-Serafy, & von Drost, 1992; Hawley, 1986; Martinez-Alier, 1987). Sustainable development therefore has been extracted from out of the ethical decision-making of corporations and is made to link up with the common interests of ecology and the grassroots for poverty alleviation and gaining human capabilities (Daly, 1992; Ekins, 1992; Walker & Unterhalter, 2010). Korten (1995) refers to such an emergent age of business decision-making as an ecological revolution. The business world we currently inhabit calls for different kinds of strategies in production, organizational decision-making, and delivery of its social image to the consumer. These dimensions are quite different from those we have learnt and practised in a conventional neoclassical world.1 According to Jackson (1987), Myrdal calls upon this kind of challenge to neoclassicism by wondering why the psychologists and philosophers have left the economists alone and undisturbed in their futile exercise of neoclassicism. So we must turn to other disciplines to seek possible answers; industrial engineering as the productivity champion has received

Governance and Socially Responsible Energy Consumption

97

major attention in other arenas but has not yet engaged with the problems of sustainable development. In this chapter, we seek to do so. One can see it as the toolkit to attain sustainable development because industrial engineering is concerned with productivity as the measure for production and service efficiency. Without this it would be difficult to quantify the quality aspects of sustainable development, for example those related to environment. And without this there would be difficulty evaluating the integrated systems of man, money, materials, energy, knowledge, information and equipment, which are all instances of the three pillars. Energy efficiency is one route towards minimising environmental impact which we are investigating.

SUSTAINABILITY AND INDUSTRIAL ENGINEERING Industrial engineering (IE) is concerned with the design of processes which will benefit companies and therefore ultimately consumers. This means that they have to be sustainable. Sustainability is a concept which concerns all businesses more than anything else. Sustainability requires R&D and technological development – which is what industrial engineering is concerned with. So, IE has to be focused upon sustainability to remain relevant. Sustainability is based on the three pillars of Brundtland – economic, social and environmental. So, IE has to be concerned with these. Mainly these three things are also what CSR is all about. So sustainability and CSR are very largely synonymous. In other words – CSR is equivalent to sustainability and sustainability has to be the central focus of IE. Designing anything without considering sustainability is a waste of time. The current discourse of sustainable development concentrates upon a concern for not limiting the choices available to future generations. This is plainly unrealistic as mankind has been unable to achieve this since humans changed from hunter gatherer to farmer and cut down the forests around the world. In the present it is not just unrealistic but attracting attention away from the real issues. Resources are important of course but attention needs to be directed towards the real scarce resources which need to be used efficiently. And those scarce resources are not financial resources as conventional finance theory would have us believe – they are environmental. Sustainability or its synonym, sustainable development,2 has so far been referred to in different terms such as durability (Aras & Crowther, 2009), triple bottom line, corporate integrity, etc. The most widely used definition of sustainable development is the one from the 1987 Report of the United Nations World Commission on Environment and Development

98

SHAHLA SEIFI

(the Brundtland Commission): meeting the needs of the present without compromising the ability of future generations to meet their own needs. Sustainability implies the acceptance of any cost involved in the present as an investment for the future (Aras & Crowther, 2008). Sustainable development is concerned with the effect which action taken in the present has upon the options available in the future (Crowther & Martinez, 2004). A sustainable society is the society which provides for its needs without impairing the needs of the future generations. Therefore, sustainability implies that society must use no more of a resource than can be regenerated (Crowther & Martinez, 2004). Considering our current consumption, the way we live is not sustainable at all. Hence, sustainability is a matter of international concern which requires the emergence of international standards. This requirement is exacerbated by the recent movement towards globalization. Indeed globalization requires a worldwide integration; therefore, countries should adopt international standards and avoid standards as barriers to trade. With the increasing globalization of markets, international standards (as opposed to regional or national standards) have become critical to the trading process, ensuring a level playing field for exports, and ensuring imports meet internationally recognized levels of performance and safety. International standards and their use in technical regulations on products, production methods and services play a vital role in sustainable development and trade facilitation– through the promotion of safety, quality and compatibility. The benefits derived are significant. Standardization contributes not only to international trade but also to the basic infrastructure that underpins society, including health and environment, while promoting sustainability and good regulatory practice. (ISO central secretariat, 2006)

The idea of globalization encourages countries to adopt harmonized rules; otherwise, they will be trapped in diverse and sometimes conflicting rules which would result in unequal trade market. International standardization is an ideal opportunity for the countries to raise their voices on the matters which otherwise may become barriers to their trades with the world. So, countries should necessarily participate actively in the process of international standards drafting. This is indeed of vital importance for the developing countries that could make sure that their national conditions are observed. So, they would willingly meet the international standards formulated through a fair consensus approach. Besides, use of international standards is beneficial in avoiding unnecessary costs to provide national standards which may result in other barriers to trade. Spending time and money on already established international standards at national level is just as reinventing the wheel. Therefore, the worldwide trend is to adopt

Governance and Socially Responsible Energy Consumption

99

international standards in order to realize the aim of ‘one standard, one test and one conformity assessment procedure accepted everywhere’. However, it is worth mentioning that ‘development is not a one-size-fits-all process. Each country must progress, as ultimately only it can best tell what its ambitions and needs are. However, in a globalization world, sustainable development cannot be achieved in isolation’ (Sudarwo, 2008). Sustainable development is a concept closely related to social responsibility in that the latter is denoted by WBCSD as the third pillar of sustainable development, the other two pillars being economic growth and ecological balance. Meanwhile, sustainability is referred to as one of the three principles of social responsibility, the other two being accountability and transparency (Crowther, 2002). On the other hand, social responsibility is defined in ISO 26000 (2010) as the responsibility of an organisation for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour that contributes to sustainable development, including health and the welfare of society. So here we see that the main focus and final aim of social responsibility is to attain sustainable development. The organisation contributes to sustainable development through social responsibility in its defined borderlines whereas there is no such borderline defined for sustainable development; therefore, it is more comprehensive and belonging to all, not just the organisations.

PILLARS OF SUSTAINABLE DEVELOPMENT The three pillars of sustainable development are defined as economic growth, ecologic balance and social responsibility. Unlike the sequence mentioned by WBCSD, one can assume that these pillars consist in a circle, all with equal value to create sustainability. Consider the energy consumption status throughout the world. We waste a good portion of our consumed energy through inefficient methods. This way we ignore the requirements of our children (social irresponsibility). The pollution due to fossil fuel consumption leads to global warming, the consequence of which threatens environment (ecological imbalance). It demands for investments in purging environment (economic pressure). In this example, social irresponsibility leads to ecological imbalance which in turn leads to economic pressure. As a result, we may choose to save more fossil fuel for the sake of our children (social responsibility). It results in saving money wasted to remove pollution (economic growth). For such a

100

SHAHLA SEIFI

Ecological balance

Economic growth Sustainable development

Social responsibility

Fig. 1.

The Interdependence of Sustainable Development and its Pillars.

purpose, we may switch to a kind of renewable energy such as solar (ecological balance). In another instance, the government may decide to remove subsidies to fuel in order to make consumers account for externalities. Then people would buy fuel by its virtual price (economic pressure). Such a pressure would necessitate for designing energy efficient devices to minimize the amount of energy consumed, or people may decide to avoid buying that sort of fuel and substitute a sort of renewable energy for that. The result would be a cleaner atmosphere (ecological balance) and more concern for the future generation (social responsibility). Fig. 1 shows that no sequence could be considered for these three pillars. Instead they are interdependent. A shortage in one would result in loss in another.

ENERGY CONSUMPTION The world energy consumption in residential sector doesn’t seem even and countries use energy according to factors such as their income levels, natural resources, climate and available energy infrastructure. Therefore, due to a higher income level, typical households in OECD nations generally use more energy than those in non-OECD nations. This is partly because higher income levels allow OECD households to have larger homes and purchase more energy-using equipment. Larger homes generally require more energy

Governance and Socially Responsible Energy Consumption

101

to provide heating, air conditioning and lighting, and they tend to include more energy-using appliances, such as televisions and laundry equipment. Smaller structures usually require less energy, because they contain less space to be heated or cooled, produce less heat transfer with the outdoor environment and typically have fewer occupants. A comparison of the United States and China as an example proves this claim. The average residence in China currently has an estimated 300 square feet of living space or less per person, than in the United States, where the average residence has an estimated 680 square feet of living space per person (World Energy and Economic Outlook, 2008). The US GDP per capita and its estimated residential energy use per capita in 2007 were $43,076 and 37.2 million Btu respectively, whereas the same data for China amounted to only $5,162 and 4.0 million Btu, which means only about one-eighth and one-ninth the US level respectively (US Department of Energy). It is apparent however that as a country develops the amount of energy rises in correlation with its per capita income, and so too does its use of ever more sophisticated consumer durables, demanding a corresponding increase in energy availability. Over the last decade, the price of crude oil has varied between $16 per barrel and $150, although currently around $100. It is expected however that the price will continue to follow a rising trend as demand continues to increase at a faster rate than supply. This has implications for both energy availability and usage and for sustainable development which need to be considered. An increasingly important factor which influences purchasing decisions is that of environmental protection, particularly associated with climate change. This is particularly important as far as the purchase of consumer durables is concerned because of the energy which they consume; energy efficiency is one route towards minimising environmental impact. Minimising such impact is one factor towards achieving sustainability and therefore making possible sustainable development. The central argument of this chapter is that the desire to make sustainable purchasing decisions necessitates better information to make decisions according to this criterion. This in turns requires manufacturers to provide better information through their labelling. This research extends our knowledge of the components of sustainability and requirements for sustainable development, particularly as far as consumer purchasing decisions are concerned. It also has potentially important implications for manufacturers and shows for them too an important route towards achieving sustainable development for themselves and for the global economy.

102

SHAHLA SEIFI

RISK REDUCING An important component of sustainability is that of risk management. This too provides an intersection with operational requirements as minimising exposure to risk both makes a company more socially responsible and more sustainable but also reduces cost in the longer term (Crowther & Seifi, 2010). Often however the methodologies for the evaluation of risk are deficient in their effectiveness of evaluating – particularly of environmental risk. So we will demonstrate how some IE techniques can be used to address the problem. It is accepted that design, and specifically energy labelling, influences the consumer purchasing decision (Seifi & Crowther, 2010; Seifi, Zulkifli, & Crowther, 2010). This is an important area for manufacturers to be concerned with as it has crucial effects upon the design of products. Consumer durables are an important area to investigate this relationship as they represent significant purchases within the household budget. Moreover, they represent purchases which are typically made after investigation and the consequences of the decision are manifest over a number of years of the typical life of the product. Consumer durables therefore represent an important area of study. But consumer durables are diverse in nature; thus generalisations can be made across the range but the investigation needs to be based upon the specific. This study therefore is based upon refrigerators. This particular durable has been chosen for several reasons. Firstly, it is a product which all individual consumers make use of, as well as many commercial organisations. Secondly, it is not a high technology product and not subject to rapid technological changes in the same manner as televisions or computers. Thirdly, the market is mature as almost all consumers are already in possession of a refrigerator. Purchases, therefore, are almost entirely replacements and are based upon need rather than the dictates of fashion. In other words, the product tends to get replaced when it gets old and inefficient, rather than because of change in fashion or a desire for something new. Thus, the product has a long life cycle. The life cycle is also an important determinant of choosing refrigerators; the long life cycle means that running costs are a significant determinant of choice and not just the initial purchasing cost. Refrigerators, therefore, represent an exemplar which is ideal to study the phenomenon under investigation and have been chosen as such. Owing to developments in household industries in recent decades, an average house has approximately 10 electrical appliances, among which and after illuminating devices, refrigerating appliances are the most important.

Governance and Socially Responsible Energy Consumption

103

This appliance plays a major part in the welfare and health of a family. Factors such as the population growth, buying power of the families, relative price reduction, by-instalment purchases, are expected to increase the market of this appliance. The conventional and relatively straightforward manufacturing process of household refrigerating appliances together with a reliable demand market has led to the emergence of so many manufactures around the world. The energy consumption behaviour of a household refrigerating appliance depends on several factors such as the climatic condition of the area in which the appliance is used or the ambient temperature, the type of the appliance namely freezer, refrigerator, refrigerator-freezer, Frost-free or not, the frequency of opening and closing the door, the volumes of different compartment, etc. Different climate classes contain different atmospheric conditions and the manufacturer accomplishes design and manufacturing according to the specific conditions of each. So it is needed to apply proper material and equipment which would lead to proper performance based on the climatic class concerned. Also, it is vitally important that the customer would knowledgably purchase a refrigerating appliance suitable for his/her own area of living. Unfortunately, so far this important factor has not yet received enough attention and customers usually purchase an appliance without taking climatic classes into consideration. They may buy an appliance not suitable for their place of residence. This way the appliance would soon lose its efficient performance and consume considerably more energy. As an instance, an appliance designed according to climatic class N, would have an approximate compressor run 20% more when used in tropical areas. A refrigerator is basically a heat exchanger, cooling the air within it at the expense of the ambient air temperature. The objective for sustainability is to make this heat exchange as efficient as possible by making the refrigerator energy efficient. Over time this is happening as Fig. 2 indicates. This supports findings by Parker and Stedman (1992). It was calculated that the fit of a multiple regression model to daily use data from a refrigerator is affected by door opening and explained by the following model: kWh ¼ 5:05 þ 0:084 ðKitchen Temp:Þ þ 0:0092 ðDoor OpeningsÞ

(1Þ

where kWh ¼ daily refrigerator kWh; Kitchen Temp ¼ 1F; Door Openings ¼ the number of refrigerator door openings per day R-squared ¼ 0.85.

104

SHAHLA SEIFI 800 700 600 500 400 300 200 100 0 1960

1970

1980

1990

2000

2010

2020

Series 1

Fig. 2.

Increasing Refrigerator Efficiency and Reducing Cost.

APPLYING IE TECHNIQUES TO UNDERSTAND THE ISSUES In this chapter, we are primarily concerned with the effects of energy labelling on refrigerator purchasing. The techniques of IE can be helpful to our understanding and will help to show that better energy labelling will lead to different decision making; therefore, we now explore how this can be done. Firstly, we start by considering the use of Bayes Theorem. In the eighteenth century, the Reverend Thomas Bayes (1702–1761) became interested in mathematical applications of probability theory, and in particular in the way in which probabilities changed depending upon the acquisition of additional information. He developed what became known as the Bayes theorem of conditional probability which states that Probabilities can change when additional information is acquired from subsequent events. Probability is therefore of consequential value in decision making.

Bayes theorem of conditional probability can be expressed algebraically as PrðAjBÞ ¼

PrðABÞ PrðBÞ

(2)

Governance and Socially Responsible Energy Consumption

105

In the case of refrigerators we can consider that 80% of people would like to buy an energy efficient refrigerator because it has lower operating costs. But half of these people will only do so if they understand the information being provided on the label. So Bayes theorem can be used to show that the probability of buying an energy efficient appliance will change if additional information is provided through labelling. This can then be compared with the cost of providing this information. This additional information will facilitate decision making for the manufacturer. Bayes theorem can therefore be seen to be of value in management decision making (Crowther, 1996) through its use in quantification of the value of additional information and a consideration of how this additional information changes the decision which might be made by managers. Equally the use of this theorem focuses attention upon the salient features of decision making through its quantification of the risks associated with any course of action in comparison with the gains which might ensue, thereby making a comparative analysis if the effects of alternative courses of action more rigorous through quantification. Use of the theorem can also actually help identify the choices which are available through this rigorous quantification. It is, therefore, a valuable part of IE. There are, however, problems with the use of this technique in practice which revolve around the ability to quantify the effects of alternative courses of action and to assign probabilities to their likelihood of occurrence. The value of the quantification is obviously only as good as the value of the evaluation of the costs of the alternatives and the probabilities assigned to them. If these are not particularly accurate then the analysis based upon them will not be accurate and this quantification will not form a satisfactory basis for decision making. Currently, research is being undertaken to arrive at a more accurate assessment of the relevant probabilities. One of the problems with this kind of analysis is that, unless these decisions are made on a regular basis and some experience is therefore built up, the evaluations are necessarily subjective and the decisions made based upon them therefore questionable. The main use of this technique therefore is in introducing a certain degree of rigour into the decision-making process through a forced identification of choices available and consequences of making each individual choice. This in itself is likely to improve the quality of managerial decision making without an accurate quantification. One further problem with Bayes theorem is that it assumes that the decision in question can be made in isolation and will not affect, nor be affected by, any other decision which might be made within the organisation. In practice this is rarely the case and any individual decision is inter-related with other decisions.

106

SHAHLA SEIFI

RISK ANALYSIS Obviously there is an element of risk attached to any operational decision, and this risk arises because we are attempting to predict outcomes in the future of decision made now (Crowther, 2004). Various techniques exist which can help a manager to understand the nature of risk associated with any decision and to quantify the effects of that risk. One such technique is Risk Analysis which is based on clearly distinguishing risk from uncertainty and then treating risk probabilistically in order to make the best decisions. In all cases of strategy development, the selection of an appropriate strategy depends upon a realistic assessment of the risk and a quantification of possible effects through analysis. Therefore, we study risk analysis. When a range of possible outcomes for an event exist, then obviously the sum of the probabilities for all of the possible outcomes must equal 1 – as one of the outcomes must occur. The assignment of probabilities to each of the outcomes, however, enables us to construct a probability distribution showing the range of possible outcomes and their respective probabilities. Such a distribution may well be important to the analysis because merely selecting the most likely outcome may well not reflect the level of risk involved. For example, in the two projects shown below the best estimate of profitability for each of the projects is identical, but it can be seen from the probability distributions (Fig. 3) that the risk associated with them is quite different, with one of the projects having a risk of incurring a loss (project B). Without the probability distributions therefore a firm would be indifferent as to which project was chosen, but with an understanding of the distribution of risk it can be seen that project A is the preferable project, providing always that expected returns for the two projects are similar. Risk

probability

profitability best estimate

Fig. 3.

Differing Probability Profiles.

Governance and Socially Responsible Energy Consumption

107

analysis can be used to quantify the expected values of the return from each project but assessing the relative relationship between risk and rewards inevitably relies upon managerial judgement and a person’s attitude to risk. Risk analysis as a technique is based upon probability theory (Crowther, 2004) and upon the ability to construct probability distributions. It is a technique which is designed to enable individual risks associated with a project to be combined and summed to find the overall risk for the project. It is based upon assigning a probability distribution for each risk factor, rather than merely assigning a best estimate. These probability distributions are then combined using Monte Carlo Simulation techniques to arrive at an overall assessment of risk (Crowther, 1996). This kind of analysis can lead to very different assessment of risk for particular decision than would be our assessment if we based our quantification solely upon mean values from our understanding of the probability of particular outcomes. In complex problems with a range of possible outcomes and a variety of factors to be included, this technique, therefore, can help in our understanding of the risks involved and hence can affect our decision making in such cases. It is therefore an important tool for IE which can be used in the analysis of the problem concerning energy labelling discussed in this chapter. For example, current understandings concerning energy efficiency and future demand enable probability distributions to be calculated regarding the effects of producing increasingly energy efficient refrigerators, the effects of improving labelling and the costs of doing so (and hence selling price). Risk analysis techniques enable these to be quantified to make the best decisions regarding future production.

GAMES THEORY Risk analysis can be a useful tool, but when it comes to making strategic decisions the most useful tool is Games Theory. This is particularly helpful when deciding about refrigerator labelling because just as in making many engineering and management decision it is important to recognise that the decision is not made in isolation and that the effects of the decision cannot be realistically quantified as if that decision is made in isolation. This is particularly true when the external environment is affected by the decision, such as when a firm is considering the launch of a new product, a change to its prices or the conduct of an advertising campaign. In such circumstances it is not sufficient to consider how the decision might affect the firm itself or how it might be received by its customers. It is also necessary to recognise

108

SHAHLA SEIFI

that the firm’s competitors will be affected by the decision and may very well decide to respond to the actions of the firm. In such a situation the firm and its decision makers can be regarded as either in competition with another firm and its decision makers or in conflict and the generic term to describe this kind of situation is that of a game and Games Theory can help to model this kind of situation (Crowther, 2004) and therefore improve the decisions which are made. In games, the participants are competitors and the success of one is usually at the expense of the other, such as when one firm gains market share through the use of an advertising campaign at the expense of the other firms in the industry – or through its labelling strategy. For the purposes of Games Theory in such a situation the number of players can very often be simplified to two players – the firm and the competition, with all competitors being regarded as a single player. It is possible to model the actions and reactions of all competitors separately through Games Theory but this makes the mathematics very complicated, often without significantly changing the analysis. Games Theory provides a method of formulating a business situation in terms of strategies – the strategy of the decision maker and the strategy of his/her opponent – and in terms of outcomes. Each player in the game selects and executes those strategies which (s)he believes will result in ‘‘winning the game’’, that is will result in the most favourable outcome to the problem situation. In determining this strategy for winning each player makes use of both deductive and inductive logic and attempts quantification of the outcomes. This will form a valuable route to examining the problems identified in this chapter.

CONCLUSIONS This chapter considered the issues concerned with sustainability and energy consumption and then showed how it is possible to use industrial engineering tools like risk analysis to assess how sustainable our current energy consumption is and what can be changed through the use of these techniques. For this purpose, refrigerators are taken as the sample for analysis. This is due to general usage of refrigerators by all people everywhere and due to its major part in worldwide energy consumption. Energy labels are nowadays a common feature of refrigerators put into the market for sale, although this trend is diverse in different parts of the world. This is part of an on-going research project and the current stage is concerned with the collection of data which will enable mathematical

Governance and Socially Responsible Energy Consumption

109

calculations to be incorporated into the industrial engineering problems which have been identified.

NOTES 1. This is the modern world based upon economic growth and rational behavior. 2. These are often treated as synonyms although they are in fact different.

REFERENCES Aras, G., & Crowther, D. (2008). Corporate sustainability reporting: A study in disingenuity? Journal of Business Ethics, 87(Supp. 1), 279–288. Aras, G., & Crowther, D. (2009). The durable corporation: Strategies for sustainable development. Aldershot: Gower. Coombs, H. C. (1990). The return of scarcity, strategies for an economic future. Cambridge, England: Cambridge University Press. Crowther, D. (1996). Management accounting for business. Cheltenham: Stanley Thornes. Crowther, D. (2002). A social critique of corporate reporting. Aldershot: Ashgate. Crowther, D. (2004). Managing finance – a socially responsible approach. London: Elsevier. Crowther, D., & Martinez, E. O. (2004). Corporate social responsibility: History and principles (102–107). Social responsibility world. Penang: Ansted University Press. Crowther, D., & Seifi, S. (2010). Corporate governance and risk management. Copenhagen: Ventus. Daly, H. (1992). From empty-world to full-world economics: Recognizing an historical turning point in economic development. In R. Goodland, H. Daly, S. El-Serafy & B. von Drost (Eds.), Environmentally sustainable economic development: Building on Brundtland (pp. 29–41). Malta: Center for Development Studies. Ekins, P. (1992). A new world order, grassroots movements for global change. London, England: Routledge. Goodland, R., Daly, H., El-Serafy, S., & von Drost, B. (Eds.). (1992). Environmentally sustainable economic development: Building on Brundtland. Malta: Center for Development Studies. Hawley, A. H. (1986). Human ecology. Chicago, IL: The University of Chicago Press. Jackson, W. A. (1987). Gunnar Myrdal and America’s conscience: Social engineering and racial liberalism. London: University of North Carolina Press. Korten, D. C. (1995). The ecological revolution (pp. 261–276). When corporations rule the world London, England: Earthscan. Martinez-Alier, J. (1987). Methodological individualism and inter-generational allocation. Ecological economics, energy, environment and society. Oxford, England: Basil Blackwell. Parker, D., Stedman, T. (1992). Measured electricity savings of refrigerator replacement: Case study and analysis. ACEEE 1992 summer study on energy efficiency in buildings, proceedings – commercial performance: Analysis and measurement panel 3, American Council for an Energy-Efficient Economy.

110

SHAHLA SEIFI

Seifi, S., Crowther, D. (2010). Supporting sustainable consumption of consumer durables. In G. Aras, D. Crowther & K. Krkac (Eds.), Proceedings of 9th Conference on CSR (pp. 777–787). Zagreb. Seifi, S., Zulkifli, N., Crowther, D. (2010). Promoting sustainable consumption: The case of refrigerators. Discussion Papers in Social Responsibility No 1001. Social Responsibility Research Network, UK. Sudarwo, I. (2008, September). Meeting the expectations of developing countries. ISO Focus. Retrieved from www.iso.org US Department of Energy, US Energy Information Administration, state energy information, detailed and overviews. Retrieved from http://www.eia.doe.gov/state. Accessed on February 20, 2011. Walker, M., & Unterhalter, E. (2010). The capability approach: Its potential for work in education. In M. Walker & E. Unterhalter (Eds.), Amartya Sen’s capability approach and social justice in education. London, UK: Palgrave Macmillan. World Energy and Economic Outlook. (2008). International Energy Outlook 2008, Report # DOE/ EIA-0484, June 2008. Retrieved from http://www.xof1.com/energyConsumption.php

GOVERNANCE IN CAPITAL MARKET INSTITUTIONS Gu¨ler Aras and Banu YobasABSTRACT The governance of capital market institutions did not receive much interest compared to their banking sector counterparts, partly due to their different ownership structures. Recent trends; increased competition, technological advances, structural changes, globalization, all had their share of impact on governance systems of capital markets institutions particularly on exchanges. Corporate governance of non-financial firms and capital markets institutions differ in several ways. Firstly the role of risk management differs since they may impose systemic risks to the financial system. Secondly well-implemented governance structures and processes are required but are not sufficient in capital markets since there are several conflicts of interests to be addressed. Therefore whether and how effectively they function is what matters. Thirdly the governance structures of such institutions exhibit different effectiveness on their decisions. The governance of FIs in capital markets is discussed in terms of board structure and management, risk governance, supervisors, shareholders, executive compensation, role of regulators, authorities and values and culture. The role of stock exchanges in corporate governance are discussed separately in terms of implementing corporate governance codes, The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 111–142 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005009

111

112

GU¨LER ARAS AND BANU YOBAS-

demutualisation and its impact on regulations, transparency and accountability issues and the effects of M&As among exchanges. Market needs strong analytical tools and reliable benchmarks to assess governance risk. The corporate control and the regulation of the institutions by the exchanges when the corporations (regulated) are the competitors of the exchanges (regulators) or owned by the stockholders of the exchanges must be addressed. The risk of regulatory arbitrage, calls for the need of harmonisation among regulators. Better regulation of FIs and greater global coordination among regulators are seen as the most two important issues to prevent another crisis. Keywords: Corporate governance; capital markets; stock exchanges; market power

INTRODUCTION The most recent financial crisis, from a corporate governance perspective, is the crisis of competence; the management and board of directors of the financial institutions (FIs) share a significant part of the responsibility. The depth, breadth, speed and impact of the crisis were beyond anticipation of many FI management teams and boards of directors, inevitably imposing enormous costs on society. In the aftermath of the crisis, many debates and studies have been carried out on the shortcomings of the corporate governance as a concept and the governance practices of the FIs. Corporate Governance concept covers such a wide area that there is not a single definition covering all these aspects. Instead there are multiple definitions, each one reflecting a different aspect of the concept. The difficulty in defining the concept thoroughly is mostly due to the fact that it covers several economic phenomenon; hence, there are various definitions each focusing on and reflecting a certain concern in the field. Almost every study on corporate governance starts with one or more definitions of the concept, because providing a definition also helps define the scope of the concept to be discussed. According to Brickley and Zimmerman (2010), claiming that a general agreement exists on the definition of ‘corporate governance’ is a myth. Despite having so many different existing definitions, the lack of agreement upon a single definition of this concept reminds the story of ‘Blind Men and the Elephant’.1 The story warns the reader that preconceived notions and perceptions can lead to misinterpretation. It is our belief that it is equally wise to keep this warning in mind when dealing with corporate governance issues and particularly when interpreting them.

Governance in Capital Market Institutions

113

As Aras and Crowther (2008) stated, ‘Corporate governance is a complex issue which cannot be related to merely the Anglo-Saxon approach to business; indeed it cannot be understood without taking geographical, cultural and historical factors into account in order to understand the similarities, differences and concerns relating to people of different parts of the world.’ Our focus in this chapter will be the corporate governance of institutions in capital markets including the market infrastructure institutions.2 The structure of this chapter is as follows: first section provides selected definitions of corporate governance, each one with a different perspective and highlighting a feature of the governance concept. The definitions are given with respect to the timeline so as to show the evolution of the concept in time. Hopefully this broad view, though by no means exhaustive, will help the reader understand the requirements and key points in governance of FIs better. Thereinafter the governance of FIs will be discussed with emphasis on the differences specific to the capital markets. The important role of stock exchanges on corporate governance deserves to be studied in a section on its own; so, the third section is devoted to the role of stock exchanges on corporate governance. In the last section, how governance of stock exchanges was affected by recent trends (e.g. demutualisation and M&As among exchanges) and increased competitive environment will be investigated in terms of regulation and conflict of interests created by all these factors. Before proceeding, several important topics closely related to corporate governance that this chapter does not deal with shall be mentioned together with some of the references on these topics. Given the wide scope of the concept, there are several surveys on corporate governance, of which some are Becht et al. (2003), Claessens and Fan (2002), Denis and McConnell (2003) and Holmstrom and Kaplan (2001). For a recent study on corporate governance history, refer to ‘The History of Corporate Governance’ by Cheffins (2011). The study conducted is not a general one and focused on debates about managerial accountability, board structure and shareholder rights. It is limited to tracing developments occurring between the mid-1970s and the end of the 1990s. The evolution of corporate control research is examined by Netter, Poulsen, and Stegemoller (2009), as a part of the study, 10 most highly cited ‘corporate control’ and ‘corporate governance’ papers in ISI’s Web of Science citation database from 1981 to October of 2008 are also given. For corporate governance and reporting, see Armstrong, Guay, and Weber (2010). For general review articles, see Becht et al. (2003), Denis (2001), Shleifer and Vishny (1997) and Zingales (1998, 2000). Papers focusing on specific aspects of governance include Adams and Mehran (2003) and Macey and O’Hara (2003) on banks and bank holding

114

GU¨LER ARAS AND BANU YOBAS-

companies; Claessens and Fan (2002) on Asian corporate governance; Denis and McConnell (2003) and Gillan and Starks (2003) on international issues; Black (1998), Gillan and Starks (1998) and Karpoff (1998) on shareholder activism and John and Senbet (1998) on boards. For country-specific issues, refer to Doidge, Andrew Karolyi, and Stulz (2007). They developed a model to investigate the influence of country characteristics, such as legal protections for minority investors and the level of economic and financial development on firms’ costs and benefits in implementing measures to improve their own governance and transparency. In another study, Thirty Group (2012) examined governance arrangements at 36 of the world’s largest FIs, and found a wide diversity of approaches, driven by differences in culture, law, institution-specific circumstances and the people involved. Just like with the definition of corporate governance, a governance framework that suits all organisations does not, yet, exist either. How broadly shall the framework for corporate governance be defined? Gillian (2006) developed a corporate governance framework and provided a broad overview of recent developments in corporate governance in terms of the role of antitakeover measures, board structure, capital market governance, compensation and incentives, debt and agency costs, director and officer labor markets, fraud, lawsuits, ownership structure, and regulation. According to a recent study by Claessens and Yurtoglu (2012), ‘Under a narrow definition, the focus would be only on the rules in capital markets governing equity investments in publicly listed firms. This would include listing requirements, insider dealing arrangements, disclosure and accounting rules and protections of minority shareholder rights.’ For a detailed study on frameworks, refer to Aras and Crowther (2008), where they not only examined and evaluated existing frameworks but also outlined the cultural context of systems of governance.

SEVERAL ASPECTS OF CORPORATE GOVERNANCE A selection of corporate governance definitions3 will be given in this section, because none of the existing definitions gained a real overall consensus. Even the field the concept falls into is debatable. Shleifer and Vishny (1997) consider corporate governance being in the field of finance whereas Mathiesen (2002) views corporate governance as a field of economics.4 Yet, definitions differ significantly even among countries. The significant differences of corporate governance systems in different countries are due

Governance in Capital Market Institutions

115

to the fact that countries differ from each other in terms of culture, legal systems and historical developments. Consequently, these differences are reflected in the definitions. In order to provide an understanding of the broad scope of the governance concept, the selection of the definitions given in this section is based on different perspectives and evolution of corporate governance. Together with the definitions a review in terms of FIs’ governance issues will also be provided. Some commentators take too narrow a view, and say it (corporate governance) is the fancy term for the way in which directors and auditors handle their responsibilities towards shareholders. Others use the expression as if it were synonymous with shareholder democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and consequently blurred at the edges y corporate governance as a subject, as an objective, or as a regime to be followed for the good of shareholders, employees, customers, bankers and indeed for the reputation and standing of our nation and its economy. (Maw, Lord Lane of Horsell, & Craig-Cooper, 1994, p. 1)

Almost 20 years later it is still possible to call corporate governance as ill-defined, particularly when we talk about the corporate governance of FIs. The 2008 crisis showed that the bad governance of FIs had tremendous impacts not only on the local economies but also globally. The governance of FIs should be handled with great care and on its own. The reasons are twofold: firstly, these institutions differ from the standard corporate governance. For some common issues, the solutions or remedies working for corporate governance of a non-financial corporation unfortunately doesn’t work for the governance of FIs. Secondly, the scope of the governance of FIs spreads to a much wider area compared to the scope of governance in other sectors. For instance, the demutualisation created a potential conflict of interest in balancing an exchange’s obligation against public interest with its commercial interests. In other sectors the remedy for such a problem is applying the separation of functions rules. This remedy didn’t work for exchanges in some situations and in order to overcome the problem new governance arrangements were made. In situations when neither of the remedies helped solve the conflicts of interest, exchanges had to discontinue a wide range of their regulatory responsibilities. These issues will be discussed in detail in the following sections. On the other hand, the interpretation of the definitions may differ significantly whether the corporation is in the financial sector or not, for instance; Governance systems, broadly defined, set the ground rules that determine who has the control rights under what circumstances, who receives what share of the wealth created, and who bears what associated risks. Blair (1995, p. 273)

116

GU¨LER ARAS AND BANU YOBAS-

According to the definition, governance systems set the rules, and in doing so, identify both the party bearing the risk and the associated risks. In non financial sectors it is relatively straight forward to identify, because the risk bearers are most of the time limited to the parties working with that corporation and the risk hardly spans to the entire sector or market the corporation takes part in. On the other hand, an FI has a much wider impact area. First of all FIs may pose systemic risks to the financial system and indirectly to the entire economy. Moreover the financial sector institutions bear more complex risks5 compared to other sectors, making it more difficult to identify what ‘the associated risks’ are. According to our knowledge, Pound (1995, p. 90) was the first to bring out the relation between governance and power: ‘(C)orporate governance is not, at its core, about power, it is about finding ways to ensure that decisions are made effectively.’ Recently this relation has been highlighted by others as well. It seems that the relation between power and governance is much stronger in financial sector, particularly in the securities markets. We will come to this later. Shleifer and Vishny (1997, p. 737) define the concept with respect to investors: ‘Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.’ Exchanges, as a part of their business, already play a significant role to assure that investors of the companies listed on an exchange get a return on their investment. Now that the exchanges are demutualised and most of them are already listed on themselves, they also have to care for those who invested in the exchange’s own shares. Unlike other sectors, in capital markets, there are situations when protecting the first will put the second’s interests in jeopardy, causing conflict of interests, which will be discussed in the following section. World Bank emphasises holding a balance between individual and communal goals in its definition as 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. The aim is to align as nearly as possible the interests of individuals, corporations and society. (Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, World Bank, 2000)

OECD (1999) glossary shares a definition given by European Central Bank: ‘Corporate Governance is procedures and processes according to which an organisation is directed and controlled. The corporate governance

Governance in Capital Market Institutions

117

structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.’ (European Central Bank, 2004). However, defining the rules and procedures for decision making in an FI can be extensively complicated. Setting the rules doesn’t assure improving decision making. In the 2008 crisis, boards of directors failed to grasp the risks their institutions had taken. It is clear that their decision-making processes were adequate neither to measure the risks taken nor to respond to major shocks. The governance definition shall also include a mechanism to measure how well the decision-making processes are performing. One of the most often cited definitions of Corporate Governance is the one given in Cadbury Report: ‘Corporate governance is the system by which companies are directed and controlled. The boards of directors are responsible for the governance of their companies. The shareholder’s role in governance is to appoint the directors and the auditors to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting’ (Cadbury report, European Corporate Governance Institute). A definition with respect to protection of investors is given by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000): ‘Corporate governance is, to a large extent, a set of mechanisms through which outside investors protect themselves against expropriation by the insiders’ (We refer to both managers and controlling shareholders as ‘‘the insiders’’). Governance arrangements encompass the relationships between management and owners and other interested parties, including users and authorities representing the public interest. The key components of governance include the ownership structure, the composition of the board, the reporting lines between management and board, and the processes that make management accountable for its performance. IOSCO (CPSS– IOSCO Technical Committee 2001 Recommendation 13)

Contrary to the definition of Pound, The Mondo Vision Exchange Forum report entitled ‘Future of Financial Exchanges’ (2009) defined governance, in terms of power: ‘(G)overnance is about who has it (the power), how they get it, why they get it and how and why they use it.’ According to the Forum, from the ownership point of view, power exists at board committee

118

GU¨LER ARAS AND BANU YOBAS-

appointments, voting rights, regulation and management. These are examples of formal structures of power. In a competitive market, customers can choose the market they want to trade in and can move from one to another as they see appropriate. They do so by means of the power they possess. Similarly, suppliers and others have power, all depending on the types of relationship they have with the marketplace. The market also has its power. Macey (2008) associates power and decision making in his definition as: ‘Corporate governance is a broad descriptive term rather than a normative term. Corporate governance describes all of the devices, institutions, and mechanisms by which corporations are governed. Anything and everything that influences the way that a corporation is actually run falls within this definition of corporate governance. Every device, institution, or mechanism that exercises power over decision-making within a corporation is part of the system of corporate governance for that firm.’ Another aspect of power and governance is given by the Thirty Group (2012): ‘(I)n a modern economy, business leadership represents a large concentration of power. The social externalities associated with the business of significant FIs give that power a major additional dimension and underscore the critical importance of good corporate governance of such entities.’ One of the broadest definitions is given by Brickley and Zimmerman (2010): ‘(C)orporate governance is the system of laws, regulations, institutions, markets, contracts, and corporate policies and procedures (such as the internal control system, policy manuals, and budgets) that direct and influence the actions of the top-level decision makers in the corporation (shareholders, boards, and executives). Of particular importance in this system are: (1) the allocation of top-level decision making rights among the three groups and the comprehensive set of mechanisms that (2) measure their performance and (3) provide performance-based rewards and penalties.’ We refer to these elements as the firm’s ‘Top-Level Organizational Architecture’ (Brickley & Zimmerman, 2010). The actions of top-level decision makers are a primary determinant of firm value. This definition focuses on these important decision makers, the specific decisions each is allowed to make and the comprehensive set of incentives they face in making these decisions. Considering all these definitions, the key points of interest in corporate governance include issues of transparency and accountability, the legal and regulatory environment, robust decision-making processes, appropriate risk management measures, information flows and the responsibility of senior management and the board of directors. In the next section, governance of capital market institutions is discussed.

Governance in Capital Market Institutions

119

GOVERNANCE OF CAPITAL MARKETS INSTITUTIONS In times of crisis due to globalisation, the impact of the improper governance of FIs can be extensive. Until recently, ‘the governance of financial institutions’ usually meant the institutions in the banking sector. The governance of capital market institutions did not receive equal interest neither from academics nor from the business. Back in 2002, The OECD Council Meeting at Ministerial Level noted that the integrity of corporations, FIs and markets is essential to maintain confidence and economic activity, and to protect the interests of stakeholders (OECD, 2004). Even though everyone agreed with this statement, we all witnessed how this integrity was sacrificed and how financial crisis eroded the confidence in the global finance sector significantly. In order to remind the key issues regarding the governance of stock exchanges,6 this section starts with brief background information. Exchanges were not the subject of corporate governance studies until the recent crisis partly because their ownership structure was different and partly because they were subject to very strict regulations compared with the other sectors. The recent trends in securities markets had impacts on governance systems of the market participants: in order to resist destructive effects of increased competition, markets changed their governance systems. Demutualisation changed the traditionally member-owned governance structure of exchanges. Traditionally, exchanges were member owned and were responsible for the regulation of both the markets they operated in and their members. In the last few decades, with the demutualisation wave, exchanges, in most cases, have been transformed into for-profit shareholderowned enterprises. According to Olivier Lefebre, a member of the NYSE Euronext managing committee, the following factors increased competition among exchanges; trading moved away from the exchange floor to computers, remote membership became pervasive, members were now in a position of choosing the exchange to trade in, besides many members trade in several exchanges or platforms concurrently. The transformation of a mutually owned exchange to a for-profit enterprise raised a number of concerns. The commercial nature of the exchange became more evident: maximising profits became an explicit objective. The interests of the owners of the exchange may now diverge from those of the principal customers of its trading services. As a result, today, the governance of capital market institutions is attracting more attention and is being watched more closely by the market participants all over the world.

120

GU¨LER ARAS AND BANU YOBAS-

Before the global financial crises broke out, IOSCO published a report entitled ‘Regulatory Issues Arising From Exchange Evolution’ (2006) considering any additional issues pertinent to exchange regulation that have followed or accompanied demutualisation. Whether or not demutualised, all exchanges were operating in a more competitive environment. Due to this increased competitiveness, the ways in which for-profit exchanges seek to enhance shareholder value, created additional issues to be addressed. From securities regulatory authorities perspective, these changes in exchange ownership and business objectives have been raising significant issues concerning the regulatory role of exchanges and issues relating more broadly to the regulation of exchanges. We will return to these issues in detail in the following sections. In May 2007, a forum was organised to discuss the future of exchanges. Chief executives from many of the world’s most important financial exchanges came together with senior executives from a wide array of global banking, trading, investing firms, index providers, regulators, system suppliers and key academics to discuss the rapidly changing business and technological environment in which exchanges function. The attendants were those who ran exchanges, who were clients of exchanges and who invested in and supplied goods and services to exchanges. These experts explored the effect of shrinking margins as more instruments became exchange traded rather than OTC and the conflicts that created. They shared what exchanges were doing then to respond to the challenges wrought by competition, globalisation and rapid technological advances.7 The attendants of the forum looked into the future and discussed the multi-asset, multi-currency and multi-region trading that holds out the promise of future success. After the event, a report entitled ‘The Future of the Financial Exchanges’ (Skeete, 2009) was published to provide an overview of the latest technological, regulatory and market developments in the exchange industry and the common problems exchanges face; explaining how these problems were being addressed. The report also presented the consensus view from leading exchange professionals about how to move forward. Regarding the future, the sustainability of the monopolistic environment of security markets was questioned. The challenges introduced by fragmentation, consolidation, collaboration and competition were discussed. The importance of innovation and product development in securities market was emphasised. Several events are responsible for the progressive increased public interest in corporate governance of FIs; to name a few increased competition, globalisation of financial systems, technological advances, reduced margins, demutualisation. However, the most impulsive action came with the latest global financial crisis. The management and boards of directors of the

Governance in Capital Market Institutions

121

FIs together have been widely cited being responsible for, due to the incompetency and failure, to assess the risk. We are talking about the governance of financial institutions y into the future, and we are dealing with a situation in which the American people and peoples around the world have lost confidence in major financial institutions. — ‘Governance of Financial Institutions’ a colloquium participant

The recent financial crisis, in a way, has highlighted some of the shortcomings in the current corporate governance system, consequently attracting the attention of both academics and other organisations8 in search of the causes of global crisis and how to avoid another one. This effort resulted in increasing the number of studies carried out about corporate governance of FIs. Highly functional governance systems take significant time and sustained effort to establish; therefore, despite the growing attention, the literature on corporate governance and the valuation effect of corporate governance in financial firms is still very limited. A recent OECD report (2010) concludes that the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements (Kirkpatrick, 2009). In order to prevent another crisis, better regulation of FIs and greater global coordination among regulators are seen as the two most important issues among governments around the world. Now we turn to the studies conducted after the crisis that are focused on the governance of FIs. A colloquium entitled ‘Governance of Financial Institutions’9 was organised in an effort to create a platform to discuss the issues behind the crisis and examine the approaches, policies and strategies in order to improve the governance of FIs. Michelle Edkins, Managing Director at Governance for Owners, considers good governance of a market as a sign of quality of investment (Skeete, 2009, p. 26). In 2009–2010, a project named ‘The Role of the Stock Exchanges in Corporate Governance’ was endorsed by the Programme of Work and Budget (PWB) within OECD. The Steering Group was appointed in order to create a better understanding of how stock exchanges may encourage better governance of listed companies. In this context, 10 of the world’s largest stock exchanges with diverse regulatory and ownership models were selected.10 In the outcome report, the main aspects of stock exchanges’ role on corporate governance and the issues regarding the changes in the role of exchanges were published. The report first discussed how stock exchanges can help enhance the corporate governance of their listed companies, then investigated how the corporate governance of listed companies are affected

122

GU¨LER ARAS AND BANU YOBAS-

from the changing ownership of, and competition among, stock exchanges. A self-regulatory organisation (SRO) versus an organisation acting on behalf of regulators were examined in terms of listing, maintenance and disclosure requirements of the exchanges considering the ‘markets for corporate control’ risk which is broadly defined as the mechanisms by which ownership and control of companies is transferred from one group of investors and managers to another. In order to identify the issues most relevant to good corporate governance within the EU, the Commission conducted interviews with a sample of listed companies from different member states and different economic sectors, with different levels of capitalisation and different shareholding structures. Meetings were also held with corporate governance experts and with representatives of the investor community and of civil society. Some relevant issues had already emerged in the context of the Green Paper on Corporate Governance in Financial Institutions and remuneration policies11 adopted in June 2010. In late spring of 2011, another project12 on the governance of major FIs was launched by the G30. Forty-one of the world’s largest, most complex FIs – banks, insurance companies and securities firms – were contacted by G30. Of them, 36 contributed to this project by sharing their perspectives and experiences to identify the essence of effective governance and what it takes to build and nurture governance systems that work. Discussions were held with board leaders, CEOs and selected senior management leaders. Based on these detailed discussions, a report entitled ‘Toward Effective Governance of Financial Institutions’ is published about the composition and functioning of FI boards and the roles of regulators, supervisors and shareholders. As can be seen the governance of capital market institutions have been discussed in several events and platforms since 2002, but events held are significantly intensified after the global crises. The next section will be focusing on the current issues concerning the corporate governance of financial institutions in capital markets.

CURRENT ISSUES REGARDING GOVERNANCE IN CAPITAL MARKETS Global financial crisis has raised several questions with respect to the corporate governance of FIs. Firstly, public policy makers around the world

Governance in Capital Market Institutions

123

have started to question the appropriateness of the current corporate governance applied to FIs. More specifically, how stock exchanges contribute to the good corporate governance is to be answered. It is relatively easier to describe what good governance is. In the Principles of Corporate Governance, the OECD acknowledges that: ‘Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.’ In case of FIs, pursuing interests of the institutions and their shareholders are not sufficient to talk about good governance. The scope is much wider, in some situations embracing the whole market’s interest.13 Effective monitoring alone will not be sufficient to ensure good governance either. It shall be accompanied by comparing the results to globally accepted benchmarks, so that the monitoring will indicate any shifts from good governance criterions and help the institutions direct to the right track. Good corporate governance is y reliant y upon the (existence) introduction and maintenance of mechanisms to promote behaviour and performance on the part of the manager, which is in the interests of the organisation’s stakeholders. (Ashburner, 1997, p. 280) In fact, the subject of corporate governance is of enormous practical importance. Even in advanced market economies, there is a great deal of disagreement on how good or bad the existing governance mechanisms are. (Shleifer & Vishny, 1997, p. 737)

Today, almost 15 years after these definitions were made, there is no agreement yet, and current governance mechanisms are still being discussed. There is clearly a need for better methods to assess the governance of FIs. As George Dallas (Dallas, 2004) stated, ‘Good governance should be rewarded, and bad governance should be punished. To do this in practical terms, the market needs strong analytical tools and reliable benchmarks to assess governance risk.’ This, in turn, leads us to another aspect of governance to question which behaviours and approaches shall be cultivated for better and efficient governance systems. The governance system is composed of four participants: boards of directors, management, supervisors and (to some degree) long-term shareholders. What each of these four participants shall be doing differently to make FI governance function more effectively is another question to be answered. Well-implemented governance structures and processes are required but they are not sufficient. The question is not what the definitions of these processes or structures are, but whether and how effectively they function. Moreover, the governance of market infrastructure institutions

124

GU¨LER ARAS AND BANU YOBAS-

differ from the standard corporate governance issues in several ways. In order to answer all those questions we first need to understand and explain why these institutions are to be handled separately and how the governance structure of these institutions affect the markets due to the dynamics of the financial industry. So in the following part we try to explain these differences. The financial sector institutions bear more complex risks compared to other sectors for two main reasons. Firstly, these institutions are more closely connected to each other compared to other industries. Actually, they are not only connected to each other but also to various markets they operate in. Secondly, the products in financial sector are far more complex than products produced by other sectors. The monitoring of risk and audit are significantly different functions for FIs, because financial services operate in volatile financial markets, using operationally complex systems and having commodity-type products with narrow margins. On the other hand, FIs do have their particularities, such as higher opaqueness, heavy regulation and intervention by the government (Levine, 2004), which also require a distinct analysis of corporate governance issues. Aebi, Sabato, and Schmid (2011) point to the role of risk management as one of the important differences between the governance structure of financial and non-financial firms. FIs are special in terms of risk management, because of the particular challenges faced in ensuring effective risk management and the systemic risks they may pose to the financial system. We all witnessed how regulators missed the potential systemic impact of entire classes of financial products, such as subprime mortgages, and in general failed to spot the large systemic risks that had been growing during the previous two decades (G30, 2012, p. 12). Boards of directors failed to grasp the risks their institutions had taken on. They did not understand their vulnerability to major shocks, or they failed to act with appropriate prudence. Management, whose decisions and actions determine the organisation’s risk status, clearly failed to understand and control risks. In order to answer whether the governance structure of market infrastructure institutions plays a significant role, we need to look at the ways these institutions differ from the standard corporate governance issues. One difference from the standard is the increasing impact of politics on financial markets (Skeete, 2009, p. 17). According to Ruben Lee, chairman of Oxford Finance Group, the reasons are threefold: firstly, when the competition threatens the existing interests, in some cases political jurisdictions may be preferred to countervailing in a competitive environment. The second reason is due to the power created by consolidations of the markets, for example the New York Stock Exchange is not an ordinary market anymore, now it is

Governance in Capital Market Institutions

125

a political institution, indeed. The third one is about the internationalisation going on in the markets, causing conflicts of interest between nations. Now let’s return back to the question of whether the governance structure of infrastructure institutions matter. According to the market players, the outcomes of the decisions made by those institutions are much more important than the governance structure they choose. However, governance has significant influence on the decisions made, directly or indirectly in several ways. The governance structures of such institutions exhibit different effectiveness on their decisions, which is a concern for the market players. The relation between the regulatory outcomes and governance structures is another concern. Demutualisation of such institutions may introduce governance problems14 due to the conflicts of interest, one of the key issues for corporate governance known as the agency problem (Aras, 2008). The standard corporate governance systems provide solutions for agency problem, but unfortunately they don’t work for FIs. Even though the problem is the same, the solutions working for the conventional governance don’t work for FIs, introducing another difference between the governance of FI and standard corporate governance. Another factor affecting the governance of FIs is the increased and destructive competition in capital markets. Apparently, there are many competing parties in the markets due to the technological advances; trading systems and automation both compete with the exchanges by providing alternatives to the customers, smart order routing systems compete with the network structure of the exchanges, dealers compete with the exchanges by means of internalisation whereas exchanges enable transactions without middlemen by disintermediation. Nevertheless, the huge economies of scale created by mergers and the market share of the newly created exchanges may prevent a real competition. Then the real concern becomes whether a competition environment or monopoly is dominating the market. The key concept explaining the relation between competition and governance structures is the market power. Market power is the ability of a firm to alter the market price of a good or service. Many countries try to prevent the formation of market power by means of legislation, because companies which have the opportunity to exploit market power do so and as a result, industries or markets of such companies become unilateral and anticompetitive. Exchanges and financial markets are no exceptions in this respect. For a company to accrue market power, market share (even a 100% of market share) is not sufficient, the potential competition is what counts. On the contrary, competition alone is not sufficient to end a market power if there exists one. CCPs and CSDs are not exempt from the effects of market

126

GU¨LER ARAS AND BANU YOBAS-

power exchanges accrued. The good news is that there is no danger for those institutions gaining market power particularly because, by definition, they are institutions established for users and the type of their governance prevents them being monopoles against public interest. However, the bad news is that the user governance structure of these institutions may also introduce, yet other governance problems arising as a set of contradictions. For example, in terms of board structure, fulfilling confidentiality requirements and accessing outside expertise at the same time is an issue for FI. Another issue is about equal representation at the board which includes regulators request for ‘independent’ directors, to which we will be returning shortly. The governance issues of FI of capital markets will be discussed under the following headings:       

Board structure and management Risk governance Supervisors Shareholders Executive compensation Role of regulators, authorities Values and culture

Board of directors of an FI controls three critical factors: the choice of business model (strategy), the assessment of risk taking and the assurance that the qualified human resources (including CEO) are in place to implement the agreed strategy. The board structure of FIs and its accountability covers issues related to the selection process of directors including the qualifications needed, the optimal size of the board and the role of management and of shareholders in the selection process. What shall the board of directors be doing differently for better governance? According to the Thirty Group, FI boards shall have a long-term view on both strategy and performance issues.‘Long-term’ is a time frame of 5–20 years. Sir David Walker15 recommends 30–60 days per year to be dedicated by a diligent, non-executive director of an FI. This recommendation is recognised by many executives.16 Having smaller boards that require greater time commitment from their members is a far better approach than having larger boards that require only modest time commitment. Similarly, the board shall focus on sustainable success ensuring all stakeholder interests are appropriately presented and considered. Board independence is also critical. A challenging board will add value to the decision-making process. The board’s own effectiveness shall be assessed regularly. While the board is

Governance in Capital Market Institutions

127

responsible for direction setting, oversight and control, it is the management’s responsibility to run the business. Both parties shall respect the distinction. Governance cannot be effective without major continuing input from management in identifying the big issues and presenting them for discussion with the board. Risk governance is more important in financial services sector than other sectors, because it directly affects the stability and profitability of not only the enterprise but sometimes the whole market. FIs without an ability to properly understand, measure, manage, price and mitigate risk are destined to underperform or fail. The ways FIs utilise to manage their risk exposures and how this could be improved regarding the roles of the Chief Risk Officer (CRO), the CEO and the board of directors are important issues. Boards of FIs shall have both an audit committee and a risk committee. Even though the two can be combined, a separate risk committee is more beneficial. For a detailed discussion of the roles of the Chief Risk Officer (CRO), the CE, and the board of directors in managing the firm s risks, refer to (Dallara, Hills, & Mortimer (2009). It is agreed that before the crisis too many institutions maximised risks. Institutions took on higher risks, because their margins, hence income, significantly reduced. Making more money became their first priority. This, in turn, broke their business models due to the loss of focus. Those accountable for key risk policies in FIs, on the board and within management, have to be sufficiently empowered to interrupt the actions on the firm’s risk taking. But, on the other hand, in such a competitive environment they also play a critical role in enabling the firm to conduct well-measured, profitable, risk-taking activities that support the firm’s long-term sustainable success. The right balance between risk aversion and innovation shall be ensured by the board, the risk committee and management. Supervisors have legally defined responsibilities relating to risk control, fraud control and conformance to laws, regulations and standards of conduct. Supervisors shall be willing to make an effort to understand strategies and risk appetite of the FI. In doing so the profile and culture of the FI shall be considered and the governance effectiveness shall be evaluated. This is a requirement of their job, otherwise they may not make the key judgments their mandate requires. Moreover supervisors have a unique perspective on emerging systemic, macro prudential risks and can compare and contrast one FI with others. In the meantime, maintaining their independence is of crucial importance. Long-term shareholders can and should contribute meaningfully to effective FI governance. The role of long-term shareholders is a subject

128

GU¨LER ARAS AND BANU YOBAS-

thoroughly investigated by responsible investment, which is beyond the scope of this chapter. It is widely acknowledged that the compensation policies are responsible for the financial crisis or its severity. Mr Volcker, Chairman, President’s Economic Recovery Advisory Board, informed that although the profit generated in financial sector is 40% of the all corporate profits in the United States, it is hard to say that financial industry contribute to the growth of the economy, to its innovation, to its productivity and to its sustainability in equal ratio. In terms of regulating the executive compensation, The Federal Reserve mandated 28 Large Complex Banking Organisations (LCBOs) to develop compensation standards that will protect the ‘safeness and soundness’ of the institutions. As for regulators, although the objective is the same, the methods of approaches they use are different in different markets, sometimes creating significant concerns for the market participants. The Remuneration Code of the United Kingdom is more rule-based as compared to the principles-based approach of the United States. Regardless of the methods, the boards of FIs are expected to exercise more control over compensation policies. To summarise, there is an urgent need to create a competent board structure, competent risk management policies and competent compensation policies to guide and shape the governance of FIs. Regarding the role of regulators, authorities and investors in shaping corporate governance in FIs, there are two complaints: firstly, there is ‘no regulatory consensus’ as to what makes boards work or risk governance effective among the regulators. Secondly, unlike audit committees who have a charter, risk committees of boards have no charter at all. The close connections among the FIs require that there is a better ‘Global Governance’ in place for multinational FIs. In addition, several regulatory shortcomings exist. Firstly, the inability of regulators to keep up with changes in technology, which permitted all sorts of new instruments, new transactions, all executable within nanoseconds. Governments have no equivalent ability to understand the challenges of the technological advances used extensively by the market players, either. Secondly, there is a fundamental lack of transparency. Thirdly, nobody has a clear understanding of who has the ability or the responsibility to deal with any of the things concerning the new markets and the new products; moreover, governments generally lacked official tools required to monitor and regulate them (Dallara et al., 2009). According to Thirty Group, values and culture lies at the core of corporate governance of FIs. The structures and processes for effective governance are to be supported by value and culture. At the end of the day,

Governance in Capital Market Institutions

129

behaviours of people throughout the organisation and the ultimate effectiveness of its governance arrangements depend on the values and culture of the FIs. In this respect, honesty, integrity, proper motivations, independence of thought, respect for the ideas of others, openness/ transparency, the courage to speak out and act and trust shall be embedded in the culture (G30, 2012). The next section is about the role of stock exchanges in corporate governance. The subject will be discussed in terms of implementing corporate governance codes, demutualisation and its impact on regulatory role of the exchanges, transparency and accountability issues in an environment of increased competition and the effects of M&As on governance.

THE ROLE OF STOCK EXCHANGES IN CORPORATE GOVERNANCE Stock exchanges used to contribute directly to the corporate governance in two ways. Firstly, by issuing the listing and disclosure standards and monitoring the compliance of the listed companies. Secondly, by providing corporate governance recommendations.17 Their role is getting more important due to the structural and technological changes in the capital markets. ‘Stock exchanges are uniquely positioned at the intersection between investors, companies and regulators. As such, they can play a key role in promoting responsible investment and sustainable development,’ said James Zhan, Director of UNCTAD’s Division on Investment and Enterprise.18

As stated by James Zhan, exchanges can help improve governance practices in the market through their regulatory role. Exchanges’ regulatory functions were more or less limited to issuing rules and exercising an existing legal framework on behalf of the securities regulators, mainly giving support to the supervisory, regulatory and enforcement agencies. In general, exchanges considered these complementary functions as a ‘reputational capital’. What would exchanges gain in return for their effort and what is their motivation behind giving this support? Aras and Crowther (2009, p. 73) clearly stated the importance of the reputation for the corporations and the benefits it provides which is equally, if not more, applicable to FIs. In today’s markets, organisations focus on intangible factors in order to compete and differentiate their services/products in an environment which is characterised by rapid changes. The reputation of the corporation is often the most important factor in gaining

130

GU¨LER ARAS AND BANU YOBAS-

a competitive advantage as well as building financial and social success. Corporations are realising that possessing a well-known name can help them secure a good position in the marketplace. There are many benefits claimed for being perceived as having a good corporate reputation. One of the main ones is concerned with the fact that it improves shareholder value; a strong corporate reputation inspires confidence in investors, which in turn leads to a higher stock price for a company. It brings increased customer loyalty to the products of the company because a positive customer perception of a company extends to its products. Equally a strong corporate reputation is an influential factor for forming partnerships and strategic alliances as the partner company has the potential to improve its own reputation by association. Similarly a company with a solid reputation is more influential on legislative and regulatory governmental decision-making. Employee morale and commitment are higher at corporations with a good corporate reputation. At a time of a crisis a good corporate reputation can shield the company from criticism and even blame, and can help it communicate its own point of view more easily to audiences that are willing to listen to its point of view.

Today, investors can choose the exchange they trade in, and most of them trade in multiple exchanges or platforms concurrently, and therefore arguments, explained by Aras and Crowther, are even more important for exchanges to gain a competitive advantage. Exchanges’ second direct contribution to the corporate governance is by means of corporate governance codes and recommendations. The OECD report entitled, ‘The Role of Stock Exchanges in Corporate Governance’ provided some insight of how stock exchanges differentiated the corporate governance codes developed and recommendations proposed.19 Exchanges differentiated not only by the topical coverage of the codes or the specificity of the underlying recommendations but also in monitoring the compliance of the required codes. The listing requirements defined by exchanges themselves were the most generally accepted way of imposing sanctions to enforce compliance. Nevertheless, listing standards and disclosure requirements are all under the discretion of the stock exchanges, and thus may be compromised when faced with intensive competition or against the possibility of revenue loss. A recent example of this concern is Nasdaq’s participation to the Sustainable Stock Exchanges commitment and Mr Frucher’s explanation regarding this participation. ‘NASDAQ OMX is happy to be a founding signatory of the Sustainable Stock Exchanges commitment and will work together with the other founding signatories – BM&FBovespa, ISE, JSE and EGX – through the World Federation of Exchanges to encourage all exchanges to sign up to the new SSE commitment,’ said Sandy Frucher, Vice-Chairman of NASDAQ OMX.20

Governance in Capital Market Institutions

131

Mr Frucher also noted that the move is not expected to have any immediate impact on companies listed on the US exchange, emphasizing that they had no intention of making such disclosure a condition of listing in a globally competitive market. He drew attention to the fact that making disclosure a condition of listing by an exchange solo, will not be effective, on the contrary it would be even counterproductive. ‘If we took a position, perhaps someone at this conference would stand up and call it heroic, but all kinds of companies that did not want to have that as part of a mandatory reporting requirement would list on our competitors [so] it would not be particularly effective.’

CONCERNS INTRODUCED BY THE RECENT TRENDS Recent trends (competition, globalisation and technological advances) changed the securities market landscape significantly. Even the definition of a financial exchange has been influenced; location used to be a distinctive mark for exchanges, today a fixed location doesn’t have such a meaning anymore. As a response, the business models and governance structures of the infrastructure institutions, particularly exchanges, underwent changes. Governance of exchanges (and in general FIs) affects a great part of the market they operate in. Additionally most of the time, their effects are not limited to the market they operate in and their influence reach far beyond local markets. Therefore all kinds of changes taking place in such institutions are watched closely by the market participants. The demutualisation of the exchanges created a debate21 on their regulatory role, because of the possibility that their for-profit activities and regulatory responsibilities could create a conflict of interest. Another potential conflict of interest may arise in balancing an exchange’s obligation against public interest with its commercial interests. As a remedy, either the separation of functions rules applied or new governance arrangements were made. In situations when neither of them helped solve the conflicts of interest, exchanges had to discontinue a wide range of their regulatory responsibilities. Another concern has been the increased competition among exchanges, thus creating a risk of a regulatory ‘race to the bottom’ since exchanges themselves became listed companies. Coupling with the absence of minimum standards, increased competition among exchanges raised concerns particularly in the area of enhancing corporate governance of already listed companies. Still another concern is about the exchange’s potential misuse of regulatory powers with the object of profit. According to some, the more stringent the regulations and their enforcement are, it is

132

GU¨LER ARAS AND BANU YOBAS-

more likely that the exchange loses its competitive power. De-listing is the most powerful enforcement tool of an exchange, but if not based on reputational and financial dissuasiveness, de-listing erodes the exchange’s regulatory power. Breaches of legislation or fraud are two main risks for the markets’ credibility. The issues related to these two risks are handled with great care and adamantly. Nevertheless, there are other issues that create significant risks even though they are not related to breaches or fraud directly. Instead, they are related to the well-functioning of the markets for corporate control. The implementation of market abuse rules is one of them. Stock exchanges may not stand as determined as they do for fraud or breach to take punitive measures for market abuse rules in some situations. An example is the dispute between Deutsche Bo¨rse AG and Porsche AG concerning the disclosure requirements. Deutsche Bo¨rse decided not to apply the de-listing rules for Porsche, even though it didn’t comply with for more than seven years.22 The rationale behind their reluctance of taking the necessary steps depends on their profit versus ‘reputational capital’ balance, for many abusive strategies lead to increasing trading volumes, hence profit. (Pritchard, 2003; Pirrong, 1995). On the other hand, the SIX Swiss Exchange Sanction Commission showed its determination by applying the sanctions in a case regarding ad hoc publicity23 recently. Recently the SIX Swiss Exchange Sanction Commission has fined Sonova Holding Ltd. CHF 2 million for breach of the rules on ad hoc publicity. Sonova Holding Ltd. disclosed a profit warning on 16 March 2011. However, the Sanction Commission has established that the company was too late with its disclosure of this profit warning and the profit warning should have been issued by 4 March 2011 at the latest, i.e. 12 days earlier. This late disclosure was found to have violated the rules on ad hoc publicity. (10 July, 2012)

Another issue of concern is corporate control, particularly the regulation of the institutions by the exchanges when the corporations (regulated) are the competitors of the exchanges (regulators) or owned by the stockholders of the exchanges. The pressure created by the increased competition affected exchanges negatively in terms of enforcement of regulations according to SEC (2004). There is a risk that exchanges organised as Self-Regulated Organisations (SROs) fail to enforce their own regulations according to DeMarzo, Michaek, and Kathleen (2001). Exchanges that are structured as SRO failing to fulfil their self-regulatory obligations created a public debate on the efficacy of the SRO system in general. The implementation of governance codes is not always straightforward. Due to the alliances and M&As among exchanges, the operations of

Governance in Capital Market Institutions

133

exchanges now span across several national borders. Different issuer regulations are in place in each jurisdiction, sometimes creating multiple regulatory frameworks. Furthermore, today issuers possess the power to choose the exchange to be listed on. The lack of harmonisation together with these two issues creates the risk of regulatory arbitrage. Moreover dual listing at exchanges with a mutual recognition agreement has become a way of exploiting regulatory arbitrage. The compliance with the domestic governance standards are seen sufficient to be listed on the second exchange on the assumption of equivalency, even though the former may have a lax governance regime compared to the latter. Nonetheless, exchanges play an important role in setting standards for foreign issuers entering the market either by dual listing or foreign listing. Dual listing when handled properly may produce governance benefits. According to the OECD report (2009), mutual recognition agreements are evaluated thoroughly in the first place, to lower or limit the risk of regulatory arbitrage. Stock exchanges play an active role by leading particularly already listed companies to higher governance standards24; the same may apply to the cross-listed companies on foreign exchanges. Brazil’s BM&FBovespa and the Johannesburg, Istanbul and Egyptian stock exchanges, encourage companies listing with them to disclose more about their environmental and social performance. Nasdaq OMX has joined them recently.25 The announcement came amid high-profile discussions among governments on the role of the private sector – including finance – in building a green economy and the importance of corporate sustainability reporting, on the eve of the United Nations Conference on Sustainable Development (Rio+20), taking place between 20–22 June 2012. These leading exchanges, with over 4,600 listed companies in developed and emerging markets, have voluntarily committed to work with investors, companies and regulators to promote long-term sustainable investment and improved environmental, social and corporate governance disclosure and performance among companies listed on their exchange.26 With these new commitments, the SSE initiative is moving into a new phase with a more robust programme of activities and support for greater engagement of stock exchanges with companies and investors. Committed exchanges provided key insights behind their support for the SSE initiative. ‘We believe that stock exchanges have to play a vital role in encouraging the companies to apply ESG practices to create a responsible investment environment where investors could reward sustainability sensitive companies. Therefore, we strongly support the SSE initiative and invite other exchanges to be part of it,’ said Ibrahim Turhan, Chairman and CEO of the Istanbul Stock Exchange.

134

GU¨LER ARAS AND BANU YOBAS-

Governance of FIs is expected to address the major issues raised by M&As among exchanges. M&As of stock exchanges in different countries and continents created cross jurisdictional organisations, raising issues concerning the risk of regulatory spill over from legal or regulatory points of view. Self-regulated exchange groups operating in multiple jurisdictions are closely watched by regulators, other stock exchanges and market participants. In order to protect the regulatory authority of national exchanges and regulators, some countries restricted the ownership and acquisition of stock exchanges. Some others have introduced legislation to prevent the M&As from changing the governance regime of the national exchange. Even so from corporate governance perspective there are still unanswered questions on the governance requirements of foreign issuers on such consolidated exchanges, because right now the listing and disclosure standards can only be imposed on a national basis. For the moment, the governance requirements for a Chinese company listing on Euronext is less clear than a French, Belgian or Portuguese company, whereas some exchanges, for example OMX Nordic Exchanges, have extended their governance requirements to foreign companies. In the near future foreign issuers who wish to be listed in such exchanges shall be prepared to be subject to a governance code different than their domestic regime. Effects of alternative trading systems on corporate governance of stock exchanges created two main concerns; one is the deterioration in transparency due to the fragmentation which may result in risks being less transparent and adversely affecting the price discovery mechanism. The second is about the ATSs being exempt of the regulatory and other corporate governance functions and the associated costs whereas exchanges are not. Stock exchanges are not happy to be regulated strictly and have to dedicate resources to regulation and enforcement especially in an era of decreasing revenues whereas ATSs enjoy the free-ride. The emergence of competitors namely ATSs, ECNs and dark pools clearly had an impact on both the trading and business models of exchanges, but their impact on the corporate governance is not a priori clear. By definition off-exchange trading on these platforms is less transparent and regulated less rigorously. They caused market fragmentation hence affecting the corporate control and price discovery adversely. On the other hand, these trading platforms are not entitled to list, so exchanges are the sole authority to ensure the compliance of the listed companies with the listing and disclosure rules, and therefore their role in corporate governance is intact (for the moment). From ATS’s point of view they can enforce sanctions not on issuers but on market participants27 since the transactions

Governance in Capital Market Institutions

135

on ATSs are based on private law contracts rather than stock exchange regulations. It is no wonder that as the number of ATSs approved to become an exchange increases, the rules of the game will be revised. A possible alternative is a more direct regulation to be put in place for the listed companies by the regulators reducing the self-regulatory role of exchanges. Another alternative is that ATSs are subject to more stringent regulations and share the financial burden of the exchanges regulatory function. The impact of fragmentation on the price discovery may be positive or negative depending28 on the landscape of the securities market, national regulatory framework, specific features of a security and the trading platform used. Dark pools meet the anonymity needs of institutional investors by providing a less transparent platform. The fragmentation together with the anonymity hinders an important function of exchanges: monitoring the trades. Consequently, market and participants may all face a higher risk of insider trading.

CONCLUSION AND DISCUSSION As the recent global financial crisis showed, the good governance of FIs is of paramount importance because of the vast impact of these institutions on corporations, markets, economy and society as a whole. Weak and ineffective governance of FIs played an important role in contributing to the failure of financial sector decision making and leading to systemic consequences. Corporate governance of FIs is also crucial to securing greater financial stability. As stated by Aras and Crowther (2011, p. 90), the financial and economic crisis has shown that there are failures in governance and problems with the market system. In the main these have been depicted as representative of systemic failures of the market system and the lax application of systems of governance and regulation. Globally, many financial services firms have drawn lessons from the recent financial crisis. Even though governance reforms are implemented, it is still not possible to conclude that governance in leading FIs has been fully addressed. Governance is an on-going process, and shall not be considered as a fixed set of guidelines and procedures. Besides, the regional or national solutions are not sufficient to safeguard the customers, shareholders of the FIs and society at large, given the global impact area of the FIs. In order to prevent another crisis, better regulation of FIs and greater global coordination among regulators are seen as the most two important issues among governments around the World.

136

GU¨LER ARAS AND BANU YOBAS-

The changing landscape of financial markets is introducing various new risks exchanges might have to bear. The demutualisation of exchanges raised concerns for the implementation of their regulatory responsibilities, because their for-profit activities and regulatory role created potential conflict of interest. The pressure created by the increased competition affected exchanges negatively in terms of enforcement of regulations since their obligation to public interest with their commercial interests (since exchanges themselves became listed companies) was another potential conflict of interest. Market needs strong analytical tools and reliable benchmarks to assess governance risk. Another problematic area is the corporate control and the regulation of the institutions by the exchanges when the corporations (regulated) are the competitors of the exchanges (regulators) or owned by the stockholders of the exchanges. Stock exchanges may not stand as determined as they do for fraud or breach to take punitive measures for market abuse rules in some situations, particularly when many abusive strategies lead to increasing trading volumes, hence profit for exchanges. M&As among exchanges enable a single exchange operate in several countries each with a different issuer regulation, thus creating risk of regulatory arbitrage. Moreover the close connections among the FIs require that there is a better ‘Global Governance’ in place for multinational FIs. This, in turn, clearly indicates an urgent need for harmonisation among regulators. For instance, there is ‘no regulatory consensus’ as to what makes boards work or risk governance effective among the regulators. Regulators better be constructive players rather than trying to catch up with the new trends.29 The alternative trading systems on the other hand increase the competition among exchanges creating concerns for deterioration of transparency due to the fragmentation. Besides, these competitors namely ECNs, ATSs and dark pools are not subject to the same strict regulation and enforcement whereas exchanges are. Today, business is forcing the regulators to move ahead. Regulators’ contribution to the debates and discussions will help them understand the concerns of the market. They are required to monitor changes and technological advances, taking notice of their possible consequences on competition and regulation. Furthermore, governments urgently need to invest in official tools required to monitor and regulate the new markets and products. ‘Corporate governance can be considered as an environment of trust, ethics, moral values and confidence – as a synergic effort of all the constituents of society – that is the stakeholders, including government; the general public etc.; professional/service providers – and the corporate sector’(Aras & Crowther, 2008). This necessitates the structures and processes for effective

Governance in Capital Market Institutions

137

governance to be supported by value and culture. In this respect, honesty, integrity, proper motivations, independence of thought, respect for the ideas of others, openness/transparency, the courage to speak out and act and trust shall be embedded in the culture to serve as common denominators (G30, 2012). The risk governance of FIs is getting more challenging every day, because it directly affects the stability and profitability of not only the enterprise but sometimes the whole market. The essence of FI governance is understanding risk. If a risk is too complicated to understand, it is too complicated to accept. Effectively balancing risk, return and resilience takes judgment, so we all must be prepared that the highly functional governance systems will not be established soon. All the parties involved should be prepared to devote significant time and sustained effort.

NOTES 1. ‘Blind Men and the Elephant’ is a story that originated in India. Six blind men were asked to determine what an elephant looked like by feeling different parts of the elephant’s body. The blind man who feels a leg says the elephant is like a pillar; the one who feels the tail says the elephant is like a rope; the one who feels the trunk says the elephant is like a tree branch; the one who feels the ear says the elephant is like a hand fan; the one who feels the belly says the elephant is like a wall; and the one who feels the tusk says the elephant is like a solid pipe. A king explains to them: ‘All of you are right. The reason every one of you is telling it differently is because each one of you touched a different part of the elephant. So, actually the elephant has all the features you mentioned.’ 2. The settlement systems including a central counterparty (CCP) clearinghouse or central securities depository (CSD), together with exchanges, constitute market infrastructure institutions. 3. For a more comprehensive listing, please refer to John Davies’ study Models of Governance – A Viable Systems Perspective. There he outlined 22 views of governance (John Davies, 2002). 4. ‘‘Corporate governance is a field in economics that investigates how to secure/ motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return’’, www.encycogov.com, Mathiesen (2002). 5. Risk of insider trading, risk of regulatory arbitrage, fraud, risk of regulatory ‘race to the bottom’, etc. 6. Exchange is used for both stock exchanges and derivatives. 7. Among foreseen technological advances, latency-related issues attracted the most attention.

138

GU¨LER ARAS AND BANU YOBAS-

8. Including but not limited to OECD, Mondo Vision, Thirty Group, The International Organization of Securities Commissions (IOSCO), The International Council of Securities Associations (ICSA). 9. Colloquium was conceived by Roderick M. Hills, Partner, Hills Stern & Morley and former Chairman of the SEC, and cosponsored by the Institute of International Finance (IIF), the Hills Program on Governance at the Center for Strategic and International Studies and The American Assembly of Columbia University in 2009. 10. Namely, Australian Stock Exchange (ASX), Nasdaq, NYSE, LSE, Nasdaq OMX Nordic Exchanges, Tokyo Stock Exchange, Toronto Stock Exchange, Six Swiss Exchange, Warshaw Stock Exchange. 11. EU (2010) and (EU, 2011), see also Feedback Statement – Summary of responses to the Commission Green Paper on Corporate Governance in Financial Institutions, accessible at http://ec.europa.eu/internal_market/consultations/docs/ 2010/governance/feedback_statement_en.pdf 12. The project was led by a Steering Committee chaired by Roger W. Ferguson, Jr., with John G. Heimann, William R. Rhodes and Sir David Walker as its vicechairmen. They were supported by 11 other G30 members, who participated in an informal working group. 13. For instance, in case of regulatory arbitrage or regulatory ‘race to the bottom’ situations. 14. For a review of the regulatory issues that could arise following the demutualisation of exchanges and their conversion into for-profit entities, refer to IOSCO (2001). 15. Independent review of corporate governance of UK banking industry by Sir David Walker published on 26 November 2009. Information about the review can be found on the independent review page for the Walker Review of Corporate Governance of UK Banking Industry (Walker Report, 2009). 16. By attendees of the colloquium summoned during the Sustainable Stock Exchanges (SSE) 2012 Global Dialogues at the Corporate Sustainability Forum in Rio de Janeiro (20–22 June 2012). 17. The Survey of Corporate Governance in OECD Countries (2004) identified and discussed corporate governance codes and recommendations in a number of OECD countries. 18. Colloquium is summoned during the Sustainable Stock Exchanges (SSE) 2012 Global Dialogues at the Corporate Sustainability Forum in Rio de Janeiro (20–22 June 2012). 19. For detailed information and examples of the differences in corporate governance codes and recommendations, please refer to the OECD report the Survey of Corporate Governance in OECD Countries (2004). 20. On the eve of the United Nations Conference on Sustainable Development (Rio+20), taking place between 20–22 June, 2012 http://www.gcnindia.org/news. php?news_id=8 21. In 2006, IOSCO published a consultation report emphasising the risks demutualised exchanges might come across. 22. For detailed information, refer to http://www.economist.com/node/3387781 23. According to the provisions on ad hoc publicity, an issuer must inform the market of any potentially price-sensitive facts as soon as it itself becomes aware of the main points of such information. http://www.mondovisione.com/media-and-

Governance in Capital Market Institutions

139

resources/news/six-swiss-exchange-fines-sonova-holding-ltd?disablemobileredirect= true 24. The most widely known example is the establishment of Novo Mercado by Brazilian Stock Exchange. 25. Financial Times announced on June 18, 2012 8:57 pm ‘Nasdaq joins environmental disclosure push’ By Pilita Clark in Rio de Janeiro. http://www.ft.com/intl/ cms/s/0/bd8a251a-b96d-11e1-a470-00144feabdc0.html#axzz21jR87i2r 26. Source: http://www.gcnindia.org/news.php?news_id=8 27. Depending on the owners and operators of the ATSs, because it has no incentive to prohibit its owner/operator from participating a trade. 28. Refer to the OECD report ‘‘The role of stock exchanges in corporate governance’’ (2009) for a detailed discussion on the United States and Europe. 29. The role of the regulators in transatlantic M&As is a good example for this trying to catch up situation. They kind of stood at the door and said ‘No!’. The most recent example is the European Union regulators vetoing the merger of Deutsche Boerse AG (DB1) and NYSE Euronext, which would create the world’s biggest exchange. This merger prohibition was the commission’s fourth since 2004. The reason being that the merger would hurt competition. http://www.reuters.com/ article/2011/02/11/us-exchanges-idUSTRE71A77Q20110211

REFERENCES Adams, R., & Mehran, H. (2003). Is corporate governance different for bank holding companies? FRBNY Economic Policy Review, 9(1), 123–142. Aebi, V., Sabato, G., & Schmid, M. (2011). Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance, 6(12). Aras, G. (2008). Corporate governance and the agency problem in financial markets. In D. Crowther & N. Capaldi (Eds.), Ashgate research companion to corporate social responsibility. Aldershot: Ashgate. Aras, G., & Crowther, D. (2008). Exploring frameworks of corporate governance. In G. Aras & D. Crowther (Eds.), Culture and corporate governance (pp. 3–16). Leicester: SRRNet. Aras, G., & Crowther, D. (2009). The durable corporation: Strategies for sustainable development. Aldershot: Gower. Aras, G., & Crowther, D. (2011, December). Governance and social responsibility international perspectives. Palgrave Macmillan. Available at http://www.palgrave.com/products/ title.aspx?pid=391261 Armstrong, C. S., Guay, W. R., & Weber, J. P. (2010). The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics, 50(2–3), 179–234. ISSN 0165-4101, 10.1016/j.jacceco.2010.10.001. Retrieved from http://www.sciencedirect.com/science/article/pii/S0165410110000418 Ashburner, I. (1997, September). Corporate governance economic and financial issues. In K. Keasey, S. Thompson & M. Wright (Eds.), Corporate governance in the public sector: The case of the NHS. Oxford University Press. Becht, M., Bolton, P., & Roell, A. (2003). Corporate governance and contro. In G. M. Constantinides, M. Harris & R. M. Stulz (Eds.). Handbook of the economics of finance (Vol. 1, Part 1, 1st edn., pp. 1–109). North Holland: Elsevier. Available at http://Econ Papers.repec.org/RePEc:eee:finhes:1

140

GU¨LER ARAS AND BANU YOBAS-

Black, B. S. (1998). Shareholder activism and corporate governance in the United States. In P. Newman (Ed.), The new Palgrave dictionary of economics and the law. Blair, M. M. (1995). Ownership and control: Rethinking corporate governance for the twenty-first century. Washington, DC: Brookings Institute. Brickley, J. A., & Zimmerman, J. L. (2010). Corporate governance myths: Comments on Armstrong, Guay, and Weber. Journal of Accounting and Economics, 50(2–3), 235–245. Cheffins, B. R. (2011). The history of corporate governance oxford handbook of corporate governance. Oxford: Oxford University Press. Forthcoming; University of Cambridge Faculty of Law Research Paper No. 54/2011; ECGI–Law Working Paper No. 184/2012. Claessens, S., & Fan, J. P. H. (2002). Corporate governance in Asia: A survey. International Review of Finance, 3, 71–103. Claessens, S. B., & Yurtoglu, B. (2012). Corporate governance in emerging markets: A survey. Emerging Markets Review. Retrieved from http://www.sciencedirect.com/science/ article/pii/S1566014112000131. Accessed on 13 March 2012, ISSN 1566-0141, doi: 10. 1016/j.ememar.2012.03.002 Dallara, C., Hills, R. M., & Mortimer, D. (2009). Governance of financial institutions, Institute of International Finance (IIF), the Hills Program on Governance at the Center for Strategic and International Studies, and the American Assembly of Columbia University. Dallas, G. (2004). Governance and risk, an analytical handbook for investors, managers, directors and stakeholders (1st ed.). New York: McGraw-Hill. Davies, J. (2002). Models of governance – a viable systems perspective. Australasian Journal of Information Systems, 9(2). DeMarzo, P., Fishman, M. J., & Hagerty, K. M. (2001). Contracting and enforcement with a self-regulatory organisation. Working Paper. Denis, D. (2001). Twenty-five years of corporate governance research y and counting. Review of Financial Economics, 10, 191–212. Denis, D. K., & McConnell, J. J. (2003). International corporate governance. Journal of Financial and Quantitative Analysis, 38, 1–36. Doidge, C., Andrew Karolyi, G., & Stulz, R. M. (2007). Why do countries matter so much for corporate governance? Journal of Financial Economics, 86(1), 1–39. EU. (2010). Green Paper, corporate governance in financial institutions: Lessons to be drawn from the current financial crisis, best practices, commission staff working document, accompanying document to the green paper corporate governance in financial institutions and remuneration policies, Brussels, 2.6.2010, SEC(2010) 669. EU. (2011). Green Paper. The EU corporate governance framework. Retrieved from http://ec. europa.eu/internal_market/company/docs/modern/com2011-164_en.pdf European Central Bank. (2004). Annual report: 2004, ECB, Frankfurt, Glossary. Retrieved from http://www.ecb.europa.eu/pub/pdf/annrep/ar2004en.pdf G30 Working Group. (2012). Toward effective governance of financial institutions. Retrieved from http://www.group30.org/rpt_64.shtml. Accessed on September 16, 2012. Gillan, S. L. (2006). Recent developments in corporate governance: An overview. Journal of Corporate Finance, 12(3), 381–402. Gillan, S. L., & Starks, L. T. (1998). A survey of shareholder activism: Motivation and empirical evidence. Contemporary Finance Digest, 2(3), 10–34.

Governance in Capital Market Institutions

141

Gillan, S. L., & Starks, L. T. (2003). Corporate governance, corporate ownership, and therole of institutional investors: A global perspective. Journal of Applied Finance, 13(2), 4–22. Holmstrom, B., & Kaplan, S. N. (2001). Corporate governance and merger activity in the United States: Making sense of the 1980s and 1990s. The Journal of Economic Perspectives, 15, 121–144. IOSCO. (2001, June). Issues paper on exchange demutualization. IOSCO. (2006, November). Regulatory issues arising from exchange evolution. John, K., & Senbet, L. W. (1998). Corporate governance and board effectiveness. Journal of Banking and Finance, 22(4), 371–403. Karpoff, J. (1998). The impact of shareholder activism on target companies: A survey of empirical findings. Working Paper. University of Washington. Kirkpatrick, G. (2009). The corporate governance lesson from the financial crisis. OECD Financial Market Trends Report. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58, 3–27. Levine, R. (2004). The corporate governance of banks: A concise discussion of concepts and evidence. World Bank Policy Research Working Paper No. 3404. Macey, J. R. (2008). Corporate governance. Oxford, NY: Princeton University Press, p. 2. http://www.amazon.com/Corporate-Governance-Promises-Kept-Broken/dp/06911480 23#reader_0691148023 Macey, J. R., & O’Hara, M. (2003). The corporate governance of banks. FRBNY Economic Policy Review, 9(1), 91–107. Mathiesen, H. (2002). Managerial ownership and financial performance. Ph.D. series 18. Copenhagen Business School, Denmark, p. 311. ISSN 0906-6934, ISBN 87-593-8166-3. Maw, N., Lord Lane of Horsell, & Craig-Cooper, M. (1994). In A. Alsbury (Ed.), Maw on corporate governance (p. 1). Oxford, NJ: Dartmouth Publishing. Netter, J., Poulsen, A., & Stegemoller, M. (2009). The rise of corporate governance in corporate control research. Journal of Corporate Finance, 15(1), 1–9. OECD. (1999). OECD principles of corporate governance, OECD Publications Service, France. Retrieved from http://www.ausncp.gov.au/content/docs/19990101_corporate_governance. pdf. Accessed on 17 May, 2004. OECD. (2004). Corporate governance: A survey of OECD countries, OECD Publications Service. Retrieved from http://www.oecd.org/daf/corporateaffairs/corporategovernance principles/21755678.pdf. Accessed on September 12, 2012. OECD. (2009). The role of stock exchanges in corporate governance, OECD Publications Service. Retrieved from www.oecd.org/dataoecd/3/36/43169104.pdf. Accessed on September 12, 2012. OECD. (2010, February 24). Corporate governance and the financial crisis. Retrieved from http://www.oecd.org/corporate/corporateaffairs/corporategovernanceprinciples/44679170. pdf. Accessed on September 14, 2012. Pirrong, C. (1995). The self-regulation of commodity exchanges: The case of market manipulation. The Journal of Law and Economics, 38. Pound, J. (1995, March-April). The promise of the governed corporation. Harvard Business Review, 89–98. Pritchard, A. C. (2003). Self-regulation and securities markets.Working Paper No. 02-008. John M. Olin Center for Law and Economics, University of Michigan.

142

GU¨LER ARAS AND BANU YOBAS-

Securities and Exchange Commission (SEC). (2004). Concept release concerning self regulation. Retrieved from http://www.sec.gov/rules/concept/34-50700.htm Shleifer, A., & Vishny, R (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–783. Skeete, H. (2009). The future of the financial exchanges, mondo vision. Boston, MA: Elsevier. Retrieved from http://www.sciencedirect.com.divit.library.itu.edu.tr/science/article/pii/ B9780123744210000013 Walker Report. (2009). A review of corporate governance in UK banks and other financial industry entities, chair D Walker. London: HM Treasury. Retrieved from http://www. hm-treasury.gov.uk/d/walker_review_consultation_160709.pdf. Accessed on September 12, 2012. World Bank. (2000). Global corporate governance forum. Retrieved from http://www.gcgf.org/ wps/wcm/connect/4297970048a7e4ef9f87df6060ad5911/GCGF_Annual_Review.pdf? MOD¼AJPERES&CACHEID¼4297970048a7e4ef9f87df6060ad5911 Zingales, L. (1998). Corporate governance. The new Palgrave dictionary of economics and the law. Zingales, L. (2000). In search of new foundations. Journal of Finance, 55, 1623–1653.

THE ELEMENT OF RISK IN RELATION TO IMPORTING FROM LESSER DEVELOPED COUNTRIES USING PREFERENTIAL TARIFFS Rachel English ABSTRACT Many studies have been carried on the effect of trade preferences, in particular from the viewpoint of lesser developed countries. There has been little focus on the importer, who has to consider their business strategy and the risk of non-compliance of legislation before obtaining preferences. One of the main issues is compliance with the country of origin rule by an importer wishing to access preferential tariffs. The chapter provides an insight into the issues facing importers and considers whether the preferences are being used to their full potential. It raises the question: Are importers choosing not to use the reduction of import tariffs in relation to preference due to its complexity? This study was carried out to highlight importers’ issues by interviewing senior management of eight European companies in relation to their approach to generalised system of preference (GSP). The results provide an

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 143–155 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005010

143

144

RACHEL ENGLISH

interesting evaluation of the importers’ many dilemmas when choosing to use trade preferences. Keywords: Country of origin rules; European Union; generalised system of preference; importers; lesser developed countries

INTRODUCTION The object of this chapter is to highlight the many risks that companies of developed countries find themselves accepting when importing from Lesser Developed Countries (LDCs), in relation to import tariffs. Trade, in general, has become more global, and sourcing of goods on a world-wide scale is becoming the norm, as manufacturers and retailers are looking to reduce costs. There are many risks involved when importing from abroad and many companies are able to successfully govern their way through the difficulties to gain the advantages of global trade. However, there is an unseen cost of importation in relation to import duty which has a direct impact on the cost of goods coming into the developed countries. The more astute importers are aware of advantages of applying for preferential tariffs from LDCs, and these preferences can provide a reduction on the import tariff at the point of entry; the most used scheme within the EU is the Generalised System of Preferences (GSP). Other schemes used to reduce the impact of importation duty, for example Inward Processing Relief (IPR) and Outward Processing Relief (OPR) are used within Europe; these allow the importer to get a refund of the importation tariff once goods have completed a certain level of processing and have been moved either outside the EU or re-imported back into the EU. The chapter will investigate some of the risks the importer has to overcome to be able to use these schemes, in particular GSP. The main purpose of having trade preferences is to encourage trade between developed countries and LDCs by reducing import duty from LDCs, as the duty amounts can be significant and it is the importers responsibility (in the main) to pay the duty at the point the goods enter the developed country. The EU designed GSP to be available while the economy of the LDC is growing, to enable the LDC to gain access to a more global market. The GSP were first implemented by the EU in 1971 and incorporates to almost all developing countries. However, there are some that would argue that other trade agreements, for example, free trade

Element of Risk in Importing from LDCs Using Preferential Tariffs

145

agreements are more effective and allow goods to be imported at zero tariffs (Stevens & Kennan, 2005). The chapter will examine viewpoints from European companies who trade with LDCs. Eight companies were interviewed at a senior level to establish the level of use of preferences, in particular GSP. Semi-structured interviews were used and there were some interesting observations made by the interviewees with regards to the risk of applying for and the application of GSP.

THE RISKS OF GENERALISED SYSTEM OF PREFERENCE There are many risks associated with employing GSP to help reduce costs. The chapter will look at some of these risks which were highlighted within interviews taken with senior management of a research sample of eight European companies who import from Non-EU companies. The main issues covered in this chapter when trading with LDCs and using preferences are provided below.

CANCELLATION OF GENERALISED SYSTEM OF PREFERENCE The EU GSP scheme has a safeguard that allows the preference to be suspended if imports ‘cause or threaten to cause serious difficulties to a Community producer’ (Hoekman & Ozden, 2006, p. xvii). Therefore, GSP can be cancelled or moved if felt appropriate by the EU GSP committee. Ozden and Reinhardt (2005) highlighted the issue of GSP being outside the binding GATT legal system and therefore can be unilaterally modified or cancelled at anytime. GSP+, which identifies developing countries’ individual needs, can also be cancelled. An example of this is an LDC has started to be able to trade on the global market without the assistance of GSP. The GSP is withdrawn either in its entirety or over a period of time (graduation of withdrawal). There is risk that importers may invest in their suppliers and provide factories and training to ensure the quality of goods of the required standard. The EU committee may decide to no longer allow GSP on the product being made and the importer then looses this cost advantage. This has happened recently with China. As the country has

146

RACHEL ENGLISH

grown and become more able to compete on a global market, the GSP was removed over a short period of time, that is, duty on some products before withdrawal would have reduced duty from 4% to 0% upon entry. Under graduation the duty is reduced from 4% to 1.5% for a period of time and will not be reduced at all once graduation is finished and the full duty rate applies (Stevens & Kennan, 2005). The manufacturer can mitigate the risk by reorganising their supplies and provides them with time to seek other suppliers who are either more competitive or who are in a country that still qualifies for GSP. This may appear to be going against the EU directive as to why preference rates are used and the LDC could be worst off by the cancellation of a preference on certain goods as many companies will simply change supplier. Leading on from this there is an issue that an importer may spend a lot of time and energy in setting up links with the supplier to ensure that quality is maintained. This may be done over a number of years. The EU may decide to adjust the allocation of GSP to that country and remove the preference from the importers’ goods. This leaves the importer with higher costs due to the increase import duty. Some importers will cancel their supplier and will try and import from another GSP country to keep costs down. There are a number of costs involved in this procedure, as well as, quality issues. Therefore, the GSP allocation is unpredictable and can be removed with little notice. Smaller companies may not be able to mitigate this risk and be subject to higher costs. Many importers may feel that they unable to control the GSP allocation and therefore it can be conceived as a greater a risk to be able to undertake applying for preference. Others will try and govern this risk by not placing too much reliance on the duty saving and therefore treating the reduction of duty as a bonus.

COMPLIANCE There are various compliance risks placed on the importer as there are a number of regulations that have to be adhered to. Brenton and Manchin (2002) suggested that the emphasis on the manufacturer to ensure that all rules have been complied with when importing preference goods could be an issue. This is underpinned by the following; the rules and regulations formed within the EU are overseen by the various countries customs authorities, for example, in the United Kingdom, H M Revenue and Customs will monitor importation and will inspect importers importation documentation to ensure it is compliant. All importation documentation has to be kept for

Element of Risk in Importing from LDCs Using Preferential Tariffs

147

six years and these can be inspected at any time. If found to be wanting, then the importer will be eligible for fines and prosecution. This could make many smaller companies not wishing to apply for preference as this risk is too great and therefore prefer to pay the full import duty rate, which could cost them dearly. Some importers import via a shipping agent and assume that the shipping agent will ensure that the documentation is complete. However, it is still the importers’ responsibility and H M Revenue and Customs can still call at a business and expect to be able to inspect documentation. When this happens, the importer simply contacts the shipping agent and the shipping agent can forward the documentation to the importer. The importer can provide written confirmation from H M Revenue and Customs that they will accept this, otherwise they can request original documentation. If the shipping agent has found to have made an error on any element of the documentation then it is the importer and not the agent who will be held responsible. So although the importer has tried to mitigate the risk of non-compliance, it is still held with them and not the shipping agent. Brenton and Manchin (2002) suggested that many products imported into the EU from LDCs do not qualify for GSP due to non-conformity with the EC Country of Origin rules. One of the biggest areas of compliance when applying for Preferential Tariffs is the Country of Origin Rule. The EU has stated that the LDC has to supply goods to the EU that have a % of goods being manufactured or changed within the LDC; they cannot buy goods from outside the LDC and then just ship them out again. It is the importers’ responsibility to, as far as possible, ensure that their supplier is provided goods that comply with the Country of Origin Rule. The importer has to obtain a written declaration from the supplier that they are supplying goods to the EU that comply with the Country of Origin Rule. Many academics argue and in some cases provide evidence that full import tariffs are being paid by importers as they are unable to comply with the Country of Origin rule set by the EU (Augier, Gasiorek, & Tong, 2005; Brenton & Manchin, 2002; Candau, Fontagne, & Jean, 2004). Bhagwati, Greenaway, and Panagariya (1998) further argue that there are so many different free trade agreements available within the EU that there are many different rules of origin that can be applied. For example, for one item there can be a large number of tariffs applicable to the same item. This adds to the complexity for companies to try and adhere to the Country of Origin Rule. Some importers try to mitigate the risk of non-conformity by having a close working relationship with their shipping agents. However, as highlighted earlier the responsibility will still fall on the importer to ensure full compliance.

148

RACHEL ENGLISH

These are some of the many risks that importers face when importing goods into the EU from Non-EU countries using preferential tariffs. How to govern those risks can be a difficult task as the importer is relying on others outside their jurisdiction to ensure that they are compliant, that is, are their suppliers able to claim for the preference as their goods qualify under the Country of Origin rules?

A SURVEY OF IMPORTERS WITH REGARDS TO RISK OF IMPORTING USING PREFERENTIAL TARIFFS Initial research was undertaken to try and establish if the various risks previously highlighted are considered when using preferential tariffs. A study group of eight companies with a turnover ranging from d12 million to d10 billion were interviewed; all of which are able to import goods from outside the EU and eligible to use preferential tariffs. Senior-level management took part in semi-structured interviews and the findings of which are as follows.

USE OF SHIPPING AGENTS Along with the risk of compliance, there is a risk that shipping agents are not the most effective with regards to the administration in relation to the required regulation. As per Fig. 1, three of the eight preference receiving

25% 37%

38% Shipping

Fig. 1.

Admin

Other

Use of Shipping Agents.

Element of Risk in Importing from LDCs Using Preferential Tariffs

149

companies use shipping agents to import and export goods. When questioned further, the importers stated that they were reliant on the agents to able to provide the correct documentation. There is an expectation by the importer that the shipping agents will claim duty back retrospectively if documentation is not available at the time of importation, thus reclaiming all possible preference relief. These companies have the risk that if the documentation is not correctly in place, then the importer will be liable. There is the strong possibility that the shipping agent will not claim duty retrospectively, and the importer will not necessary have knowledge that this is not being carried out. The importer can try and reduce this risk by having a close working relationship with the shipping agent. However, this takes time and therefore will provide an added indirect cost to the business. Three companies that are shown in Fig. 1 completed this administration in-house. This has the advantage of the importer having control of the documentation and can ensure that any respective claims are made. It allows the importer to ensure that all regularity requirements to be fulfilled are done so efficiently. However, it can be a costly measure.

COUNTRY OF ORIGIN Another risk highlighted was the non-compliance of the Country of Origin rule. Fig. 2 shows that half of the companies interviewed did not have any issues. However, quarter of the interviewees rely on the in-house purchasing department to obtain the correct documentation that is supplied 13%

12% 50%

25%

No Issues Purchasing Dept Supported Suppliers Issues with Suppliers

Fig. 2.

Compliance of Country of Origin Rule.

150

RACHEL ENGLISH

by the suppliers in order that the Country of Origin rules are met. One of the interviewees went as far as supporting their suppliers in obtaining the Country of Origin on their products and therefore had no issue with this. Another did have a number of issues with suppliers not seeing the importance of providing a GSP certificate for every shipment. There are many difficulties to be overcome when applying for Country of Origin as the Country of Origin has to be registered for each component used within manufacture and the supplier has to provide documentation, that is purchase invoices and process notes to their authorities. If there is a slight processing variation, for example a different colour is produced, then new documentation is required and Country of Origin has to be reapplied for. Country of Origin certification can be inspected by the LDC authorities at any time. If non-compliance is established, then the preference can be withdrawn. This provides a risk to the importer as their goods will become more expensive due to any breaches. One of the interviewees has remedied this by having a close working relationship with their supplier and to understand the EU and LDCs’ requirements with regards to Country of Origin. They help the supplier to be able to comply with the Country of Origin rules and when the importer has to declare to the UK customs that their supplier is compliant, they are able to do so with confidence.

CHANGE OF PREFERENCE ALLOCATION The decision made by the EU to take away GSP status on certain commodity codes could affect the way company’s trade, half of the interviewees in Fig. 3 did not have an issue, and these were randomly spread throughout the sample. A further quarter shown in Fig. 3 stated that when preference was being removed from China they had been affected as there was little notice with regards to the implementation of graduation and after one year the preference came off in its entirety and there was a short period of time for the importers to resource parts from cheaper countries. The importer had to absorb the increase of cost of supply until a new supply could be found. The risk of increased costs is highlighted further as the remaining 25% had experienced higher costs directly from the complete removal of GSP without graduation and therefore had a direct impact on profitability. However, one of the importers experienced GSP+ status removed from a country of supply. They had spent time and money in building a good relationship with their suppliers and have taken the risk strategy that from an ethical angle it would not be correct to no longer trade with the

Element of Risk in Importing from LDCs Using Preferential Tariffs

151

25%

50%

25%

No Issue

Had An Effect

Impact On Costs

Fig. 3.

Removal of GSP Status.

suppliers. To enable this to happen, the extra costs are incorporated within the overall costing strategy; however, there is a risk that their end customer will not be prepared to pay the extra costs and therefore could leave the importer with an overall loss. Another way to off-set the risk is by not depending on the reduction of duty. Therefore, if the preference is removed then the impact on cash flow will be minimal. The importer should always investigate other countries of supply of the goods and if an item of good is taken out of GSP, then another supplier in another GSP country could be found.

IS THE GENERALISED SYSTEM OF PREFERENCE CONSIDERED AS PART OF BUSINESS STRATEGY? The research has highlighted the fact that GSP can be changed without consultation to businesses and be removed within a short period of time. The financial risk of withdrawal can be high, so the interviewee’s were asked how they incorporate the reduction of duty within their business strategy. As per Fig. 4, the majority interviewed suggested that they prefer to treat the preference as a bonus rather than incorporate the benefits within their business strategy, therefore mitigating any loss from changes of preference. Thirteen per cent found it not applicable. However, 25% do incorporate the benefits of the preference as part of their costing models. This is interesting as they are forming dependence on the preference always being there even

152

RACHEL ENGLISH

25%

62% 13%

Treated As A Bonus

Not Applicable

Incorporated In Costing Models

Fig. 4.

Incorporation of GSP within Business Strategy.

though the preference can move away from goods in a short period of time and the importers could be at financial risk.

SUMMARY AND CONCLUSION Importers face many challenges when trying to trade with LDCs and apply for a trade preference. Although trade preferences can provide a reduction of import duty they can also require a lot of time and there is a risk of noncompliance. Link that with the risk of the GSP being removed, importers may decide to manage the risk by not applying for the preference in the first instance. Brenton and Manchin (2002) and Candau et al. (2004) provided arguments and evidence that the Country of Origin rules set by the EU have resulted in tariffs being paid on a large proportion of tariff-free GSP imports.

WITHDRAWAL OF GENERALISED SYSTEM OF PREFERENCE One of the risks highlighted at the introduction was the fact that GSP can be withdrawn with little warning. Indeed when you look at Fig. 3, 50% of

Element of Risk in Importing from LDCs Using Preferential Tariffs

153

interviewees had an issue with a change of allocation. The EU reviews the GSP scheme and revises it on a ten year cycle (McQueen, 2007). The uncertainty as to the time period an importer may be able to access GSP provides another risk which has to be managed within the business. Fig. 4 clearly shows that the majority interviewed do not consider preference within the main part of their business strategy but treat the preference as a bonus and therefore govern the risk.

COMPLIANCE The responsibility of the importer to ensure compliance with the preference rules is a risk that Brenton and Manchin (2002) highlighted. Importers are aware that completing the administration of a shipment should not delay the importation of goods. Fig. 2 shows 25% of the interviewees do have an issue with complying with the Country of Origin rule and this is within the parameters of Brenton and Machin’s argument. However, smaller companies mitigate this risk by relying on shipping agents to ensure that the correct procedures have been used and preference is utilised where available, see Fig. 1. This can have its own issues as companies have experienced that the shipping agents tend not to be up to speed on custom regulations and preferences are lost due to the incorrect documentation being provided or the preference has not be reclaimed retrospectively.

COUNTRY OF ORIGIN The findings as per Fig. 2 show that although 50% stated that they have no issues in relation to the Country of Origin rules, there were still 25% who either supported or had issues with their supplier in relation to this. The academic argument that GSP agreements are not being fully utilised due to compliance and the complexity of complying with the Country of Origin rule therefore does have some gravitas. There is a level of risk in relation to the cost aspect of loss of reduction of import duty by not being able to meet the strict originating requirement (Augier et al., 2005). Brenton and Manchin (2002) and Candau et al. (2004) have argued and provided evidence a large proportion of tariff-free GSP imports have resulted in full duty being paid due to Country of Origin rules set by the EU. They suggest that due to non-conformity with the Country of Origin rules will have an impact on the level of trade and importations made. While interviewing

154

RACHEL ENGLISH

it became clear that there is generally a broader approach by importers when applying for GSP. The governance of risk by the importers in relation to non-conformity is in many forms: gaining knowledge, training staff, supporting their suppliers by providing training and forming a good dialogue.

CONCLUSION Importers therefore have to cover a large amount of risk themselves when deciding whether or not to apply for preferential tariffs and many could feel that it is too complex and the risk of being fined for non-compliance to great. Let’s not forget the risk of the preference being removed from the goods being imported altogether, as this could have a big impact on cost and the level of investment required to implement the preference and to maintain it would be lost. Candau et al. (2004) concluded that exporters do not find using GSP agreements profitable due to having to comply with administrative requirements, when the preference itself is a small cost saving. The findings highlights that the administrative requirements is an issue to both the exporters and the importers of preference goods. The EU allows the trade preferences to provide an incentive for EU importers to trade with LDCs. While many importers are able to do this, there are many risks involved within the process of application. Throughout the interviews undertaken, there has been a suggestion that many smaller companies are not taking advantage of the preferences as they simply are not aware that they are available. Therefore, preferences are time consuming and costly to administer, for the importer and the smaller companies are not able to provide the resources to gain from the preference, there is an argument as to whether the EU policy of preferential trade is actually being effective or should the EU provide aid instead to the LDCs?

REFERENCES Augier, P., Gasiorek, M., & Lai-Tong, C. (2005, July 25). The impact of rules of origin on trade flows. Economic Policy, 20(43), 567–624. Bhagwati, J., Greenaway, D., & Panagariya, A. (1998, July). Trading preferentially: Theory and policy. Economic Journal, 108(448), 1128–1148 (21p Diagram, 3 graphs). Brenton, P., & Manchin, M. (2002, March). Making EU trade agreements work: The role of rules of origin. CEPS Working Document No. 183. Centre for European Policy Studies, Brussels.

Element of Risk in Importing from LDCs Using Preferential Tariffs

155

Candau, F., Fontagne, L., & Jean, S. (2004, 17–19 June). The utilisation rate of preferences in the EU. 7th Global Economic Analysis Conference CEPII Working paper. Washington, DC. Hoekman, B., & Ozden, C. (Eds.). (2006). Trade preferences and differential treatment of developing countries (critical perspectives on the global trading system and the WTO) (Vol. 11). Cheltenham: Edward Elgar Publishing Limited. McQueen, M. (2007, July–August). Are EU non-reciprocal trade preferences passe´? Intereconomics, 4, 205–218. Ozden, C., & Reinhardt, E. (2005). Political economy, the perversity of preferences: GSP and developing country trade policies, 1976–2000. In B. Hoekman & C. Ozden (Eds.), Trade preferences and differential treatment of developing countries, critical perspectives on the global trading system and the WTO (Vol. 11). Cheltenham: Edward Elgar Publishing Limited. Stevens, Dr., C., & Kennan, J. (2005, February). GSP reform: A longer-term strategy (with special reference to the ACP). Sussex: Institute of Development Studies.

GOVERNANCE, RISK AND STAKEHOLDER ENGAGEMENT: WHAT LESSONS CAN BE LEARNT FROM MINING? Veronica Broomes ABSTRACT Considerations about governance at the level of local or national often focus on how engaged citizens are in protecting democracy, the influence of civil society on policy making and whether or not attaining specific developmental objectives can be justified if the rights of citizens are trampled on in the process. Corporate governance as well as the way national and local governments practise governance can have direct impact on communities located in areas near to extractive industries and even further afield. However, although risk analyses are considered in feasibility studies, including the conduct of environmental impact assessments of mining investments, what has attracted less attention are the consequences of poor governance in managing/mitigating risks when communities which traditionally are ‘resource guardians’ are not consulted during stakeholder discussions as part of investment negotiations. Academic literature and popular media are replete with examples of the high price paid by some communities, including loss of lives and livelihoods,

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 157–180 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005011

157

158

VERONICA BROOMES

when investors and governments ignore opportunities for meaningful engagement with stakeholders. And, although recommendations have been made on how to improve meaningful stakeholder engagement, the various discussions/articles have not revealed consensus on how best to create meaningful stakeholder engagement in regions rich in natural resources sometimes described as suffering from ‘resource curse’. In considering ways in which meaningful stakeholder engagement could convert the resource curse into ‘resource blessings’, the question may well be asked, what are the indicators of meaningful stakeholder engagement and how can this be strengthened through greater transparency in governance? Drawing on a case study of diamond mining in Botswana and the mining of platinum in South Africa, this chapter provides an overview of approaches to risk assessment by companies and governments and examines key indicators of governance which impact on the lives and livelihoods of communities directly affecting by mining operations. In addition, the author highlights how risks associated with poor governance can derail attainment of development objectives as well as opportunities that act as catalysts in transforming communities and meeting national development objectives. Keywords: Governance; stakeholders; Triple Wins CSR; risk

INTRODUCTION In developed countries, and increasingly in developing ones, some transnational companies (TNs) and global businesses are promoting greater and more meaningful engagement with local communities (Carroll & Shabana, 2010; Kytle & Ruggie, 2005; SAB Miller, 2010). These companies go beyond a ‘business-as-usual’ approach of maximum shareholder return, indicative of the single bottom line focus. Instead, they have a Triple Bottom Line approach which address economic, social as well as environmental influences and impacts (Elkington, 1999). Among the terms used to describe the showcasing of business activity beyond single bottom line focus of profits, and in the past this included profits at any cost, are: Corporate Social Responsibility (CSR), Business Social Responsibility (BSR) and Inclusive Business (IB), the latter term promoted by CEO-led organisation, World Business Council for Sustainable Development (WBCSD, 2006), In the main, the initiatives are voluntary in nature and have shifted from reflecting

Governance, Risk and Stakeholder Engagement

159

primarily the views of Boards or Chief Executives, increasingly the initiatives are consistent with guidelines and/or principles set by the Global Reporting Initiative (GRI, 2010), United Nations Global Compact (UNGC, 2009) and more recently those outlined in the ISO 26000 guidelines on Social Responsibility as approved by the International Standard Organisation (ISO, 2010). In the main, knowledge of and actions to implement CSR in developing countries and emerging economies are at the level of philanthropy/corporate giving to communities or ensuring fair labour conditions for employees and human rights practices are observed. In countries where companies act beyond mere philanthropic or employee volunteering CSR, a common characteristic is likely to be in infrastructure industries, for example mining, or the companies are signatories to or subscribe to the principles enshrined in the work of United Nations Organisations such as the Global Fund on AIDS and the Global Compact. Because of the gap between philanthropic CSR and/or Community Engagement strategies in developing country subsidiaries of global operations and inclusive CSR embedded with a strong business case for competitiveness, there are opportunities for policy makers to engage more meaningfully with stakeholders to achieve local and national development objectives. Through transparency in governance and meaningful stakeholder engagement, governments can create relevant policies and incentives which promote and reward innovation beyond standard business practice. Such policies and incentives can be linked to innovative actions with specific national development goals and objectives and/or targets to achieve specific Millennium Development Goals (MDGs). Therein is the potential for voluntary actions from businesses which take account of social and/or environmental issues over and above those mandated by existing legislation in the respective country. It is the building on this voluntary action CSR platform that can create Triple Wins – for businesses, governments and communities. Creating Triple Win CSR can lead to higher returns on investments for shareholders. In addition, through appropriate investment frameworks, governments can offer additional incentives to businesses that will have exceptional positive impacts on economic development. Although retained as a volunteering initiative of many developing countries, there have been calls for greater governmental involvement in providing CSR guidelines, especially in developing countries. (Baird, 2008; Hamann, 2003; Ward, 2004; Ward, Fox, Wilson, & Zarsky, 2008). Consideration of social and environmental issues in addition to economic/financial ones is the catalyst that will accelerate the creation of higher quality and even larger number of enterprise/job opportunities and improve the livelihoods and quality of life of local communities.

160

VERONICA BROOMES

Ultimately, it is stronger and more transparent partnerships between government and the private sector that will benefit communities (Business Partners for Development, 2002). This will prevent communities from continuing to be mere observers of changes to local infrastructure yet at the same time providing a backdrop for the creation of Triple Wins for CSR or IB strategies and simultaneously foster a climate in which businesses can declare high returns on investments designed to capture the attention of key decision makers and at the same time demonstrate the impact beyond traditional areas of learning. In addition, governments can trumpet how they have created new jobs and revitalised communities and for communities to feel they are at the heart of development in their local areas instead of being at the periphery. This chapter draws on an overview of platinum mining in South Africa and a case study of diamond mining in Botswana which explored the link between Corporate Social Investment (CSI) and MDGs and how policy makers and inward investors can use the link to leverage the CSR and/or IB strategies of transnational businesses for the creation of Triple Wins – for governments, businesses and communities (Fig. 1). Although Botswana was

CONCEPTUAL FRAMEWORK FOR TRIPLE WIN CSR

INVESTORS

GOVERNMENT

TRIPLE WIN PARTNERSHIPS

COMMUNITIES

Fig. 1. Conceptual Framework to Create Triple Wins for Improved Governance and Reduced Risks through Public Private Community Partnerships (PPCPs).

Governance, Risk and Stakeholder Engagement

161

the focus of the case study, the findings are applicable in other developing countries as well as across industries/sectors. A shift to more effective governance through meaningful stakeholder engagement can help developing countries to combine government incentives with leveraging of CSR/ Community Engagement policies and strategies of global businesses. Benefits resulting from strengthened governance and meaningful stakeholder engagement include improvements in the social and physical infrastructure which impact on the lives of citizens and creation of additional livelihoods, building local capacity and skills, stimulating innovation in science and technology, supporting entrepreneurship, reversing rural urban migration, reducing pressure for services in urban areas, ensuring environmental sustainability; and in general, reducing poverty and contributing to national development. Further, multinational companies can use CSR initiatives as part of their risk management (Kytle & Ruggie, 2005).

PLATINUM MINING IN SOUTH AFRICA In South Africa, mining contributes approximately 18% to the Gross Domestic Product (8.6% direct and 10% indirect) and employs more than one million directly and indirectly (Anon, undated; Chamber of Mines of South Africa, 2012; National Treasury, 2012). One of the main sources of platinum is the Bushveld Igneous Complex (BIC) which extends for 400 kilometres in the Northern Province and contains the world’s largest known deposits of platinum group metals (PGMs). South Africa’s platinum mines made global news in 2012 following thousands of workers going on strike and subsequent deaths of miners. The violent clashes between South African police and striking miners at the Anglo American Platinum mine in summer 2012, the death of 34 miners, the sacking of thousands, who were rehired subsequently. It seems that over the past decade or so, since Hamann’s study of six mining companies in the Rustenburg area (Hamann, 2003). In the ensuing year, not much has changed. Not only has traditional CSR not addressed adverse impacts on the social fabric of business, which includes working conditions for miners as well as those living near mining operations, but poor industrial relations resulted in workers taking strike action which led to violent clashes and loss of lives among miners. The deaths of the miners and related strikes were fuelled by demands for improved conditions of work and employment for miners working at Anglo American Platinum mines. Studies of platinum miners revealed that they were prone to developing platinum salt sensitivity, associated with asthma, rhinitis and urticaria, and

162

VERONICA BROOMES

dermatitis; however, there seems to be a paucity of literature on specific occupational health effects of platinum mining. In general, however, much more data and information are available about health conditions associated with gold and diamond mining. While the deaths of South African miners were a consequence of clashes with South African Police had been the norm in South Africa during apartheid, not post-apartheid, mining is a high-risk occupation in South Africa for more than 100 years. For example, measures are in place for autopsies on miners which require analysis of their internal organs so as to determine eligibility of next of kin for compensation in instances where evidence shows that miners die from occupationally related conditions such as asbestosis and silicosis (Chamber of Mines of South Africa, 2012). The right of miners’ families to have autopsies of their deceased relatives who were miners is enshrined with passing of the Act on Occupational Diseases in Mines and Works (Republic of South Africa, 1973). Anecdotal evidence suggests that many families do not request such autopsies because of a reluctance to have the organs of their loved ones consigned to the labs of South Africa’s National Institute for Occupational Health (Booyens, 2012). Although a measurable proportion of migrants continue to form part of the miners working in South Africa’s platinum mines, local leaders have since grown in confident when it comes to negotiating with mining companies the employment of local residents in mines close to mining operations. However, there seems to be less engagement with local communities in agreeing terms and conditions of mining activities.

Key Indicators of Governance and Impact on Stakeholder Engagement In considering governance at the level of local or national government, concerns raised often focus on what constitutes good governance, the extent of citizens/civil society’s involvement in protecting democracy and whether or not the contribution made by companies to the economy and development of a country’s infrastructure justifies the fact that in the exploitation of natural resources may result in the trampling of citizens’ rights. In this regard, questions have been raised by various interests about the role of China in Africa. For example, an article by the US Council on Foreign Relations (Brautigam, 2010) argued that the lessons learnt by China on how to combine state intervention with economic incentives to attract private investment to move hundreds of millions out of poverty has been

Governance, Risk and Stakeholder Engagement

163

applied in China’s strategy of providing loans to cash strapped countries as well as rapidly growing economies in Africa. Further, many studies consider single focus CSR issues such as labour conditions, human rights, community/stakeholder engagement including relocation of residents, accountability, good governance, philanthropy, volunteering by employees, ethical procurement and investment, including fair trade (Adams, Grost, & Webber, 2004, pp. 17–25; GRI, 2010; Zadek, 2007). These studies, however, have not explored opportunities for policy changes to promote innovation by business while contributing simultaneously reducing poverty.

Engaging Local People in Mining Communities and Fostering Goodwill for Resource Use South Africa’s 1996 constitution as well as the 1998 white paper on Local Government, includes communities as part of stakeholders who should be consulted as part of the approach by local government to develop a more community-oriented and strategic response to policy objectives. In reality, however, local government lacks resources (human and financial) to engage meaningfully with stakeholders. Development of Integrated Development Plans (IDPs) in South Africa and subsequently IDPs are designed to accelerate service delivery, promote greater involvement of communities in policy making and make local government more accountable to citizens (Education Training Initiative, undated; Gueli, Liebenberg, & van Huyssteen, 2007a, 2007b; Rogerson, 2011). IDPs can be applied to cover key areas such as consultation, strategic planning and implementation (Table 1).

Stakeholders in Platinum Mining Sector in South Africa South Africa has up to 80% of the world’s supply of platinum with ore found in areas such as Merensky Reef and BIC. The former stretches from southern Zimbabwe through to the Rustenburg and Pretoria regions and is host to companies such as Rustenburg Platinum Mines and Bafokeng Rasimone Platinum Mines (Anon, undated; Chamber of Mines of South Africa, undated; MMSD, 2002, May; MMSD, 2002b). Anglo American Platinum is the world’s largest platinum producer.

164

VERONICA BROOMES

Table 1. Characteristics of South Africa’s Integrated Development Plans Model Based on Principles-Based Approach to Stakeholder Engagement. Phases of IDP Process

Descriptiona

Analysis/consultation

The aim is to foster engagement with stakeholders to analyse existing services to communities. This is done through consultation with stakeholders in face-to-face engagements, online and offline surveys and opinion polls. Representatives include local residents, government representatives, NGOs, civil society, and external sector specialists to: analyse problems affecting service delivery; prioritise issues; develop a common strategic framework; formulate and integrate project proposals; and assess, align and approve IDP plans. Ensure that local knowledge combined with technical experts to improve service delivery. This means service delivery delays are overcome through consensus building, addressing both the underlying causes and symptoms of service delivery and maximising resources to ensure that from the start of an initiative IDPs are integrated in the public decision-making process. Based on gaps identified in services not yet available to communities, this enables capturing details about activities that will contribute to improving service delivery. IDP as a way of improving service delivery (better and faster service) through ensuring project proposals submitted for funding are not only technically sound project proposals but those designed to create direct links with the country’s planning budget.

Strategic planning

Project formulation

Monitoring and implementation

a

Source: Gueli et al. (2007b).

The International Finance Cooperation (IFC) and indices on ease of doing business in South Africa ranks South Africa at 39 out of a possible 185 using a group of 10 indicators including (IFC, 2012). Not unsurprisingly, the focus is on the investor and compliance with relevant legislations, not on communities in or near to the site(s) where investments are made. Indeed, just one indicator suggests that views from local communities are considered, the indicator being the one addressing the issuance and/or compliance with construction permits in South Africa. Hamann (2003) observed that although South Africa’s 1996 constitution as well as the 1998 white paper on Local Government, includes communities as part of stakeholders who should be consulted as part of the approach by local government to develop a more community-oriented and strategic response to policy objectives. In reality, however, local government

Governance, Risk and Stakeholder Engagement

165

lacks resources (human and financial) to engage meaningfully with stakeholders. Further, development of IDPs in South Africa may have had the aim of creating and implementing strategies to accelerate service delivery, promote greater involvement of communities in policy making as well as make local government more accountable to citizens (Anon, 2010; Gueli et al., 2007a).

DIAMOND MINING IN BOTSWANA Since the 1980s, Botswana’s average growth rate has been 7.8% (te Velde & Cali, 2007) and the country has the highest per capita growth in the world. In 2007, Botswana had a current trade surplus of over US$ 2300 million, single-digit inflation of 7.1% and a GDP growth rate of 6.0. However, just under half of Botswana’s population is economically active and the mining sector only accounts for about 3% of Botswana’s formal employment. Agriculture, in contrast, contributes only about 2% to GDP although it accounts for approximately 75% of employment (BEDIA, 2008). Nonetheless, diamond mining transformed Botswana from an agricultural-based economy to one in which mining accounts for 40.7% of GDP and 41.4% of all economic activity (Government of Botswana, 2008a). Diamonds account for 80% of all exports and 50% of government revenue. With establishment of the Kimberley process in 2000 and the Certification Scheme in 2002, Botswana has since been issuing certificates for all diamonds mined to signal that diamonds were not produced with either the use of forced labour or as a result of violence (Kimberley Process, 2008). Foreign Direct Investment in Botswana’s Mining Industry The largest recipient of Foreign Direct Investment is the mining sector (BEDIA, 2008) and FDI has grown in areas beyond the diamond industry to include other areas of mining as well as energy-based investments. The Government of Botswana retains equity stake and board representation in the mining industry; however, the industry operates on a privately owned free-market basis. Because the state has full rights to all minerals in Botswana, irrespective of ownership of the land where found, citizens of Botswana have a common stake in and can enjoy shared benefits of mineral revenues.

166

VERONICA BROOMES

Following the 2008/2009 global financial crisis, Botswana’s economy was one of the strongest among middle income countires, however, its economy remains highly reliant on diamond mining and it is vulnerable, therefore, to external shocks and uncertainties affecting economies globally (Africa Economic Outlook, undated).

The Practice of CSR in the Mining Industry in Botswana A review of four mining companies in Botswana revealed that of the two companies with active CSR initiatives, it was only the diamond mining company Debswana which had embedded CSR into its core business activities (Broomes, 2009). Through embedding CSR initiatives in the business of Debswana, the government is assisted in realising goals for national economic development, improved livelihoods and poverty reduction. A comprehensive approach has been taken by Debswana in developing and decentralising its strategy on CSI. Investors in Botswana’s diamond mining industry have demonstrated preparedness to go beyond ‘business as usual’, that is mere job creation and provision of inward foreign direct investment. They consider related areas which if not addressed could threaten their investment. Possibly, because of majority government interest, there has been a formal strategy for investing in local communities and national economic investment. Therefore, although aspects of traditional philanthropy are supported by the mining companies, the approach to Corporate Responsibility contains multi-thematic approaches that will contribute to capacity building in the areas of technology adaptation.

Opportunities for Policy Change to Support Corporate Innovation and Poverty Reduction Poverty and unemployment have been subjects of considerable policy attention and resource commitment in Botswana since the early 1980s and the government’s approach to poverty reduction has always encompassed three complementary elements, namely: (i) Aggressive investment in human capital formation, (ii) Infrastructure development and (iii) Employment creation. Vision 2016 policy (Government of Botswana, 2008b) identifies key areas where improvements are needed to take the country towards prosperity by

Governance, Risk and Stakeholder Engagement

167

2016, the 50th anniversary of the country’s independence. In addition to poverty and unemployment, critical weaknesses in Botswana’s development cited in UNDP’s Human Development Report (2005) are: (i) excessive dependence on the state, (ii) slow pace of citizen economic empowerment, (iii) technology gap, (iv) slow pace of diversification, outside of diamond mining, and (v) inequalities in the population and between geographic locations. In the area of technology, there is a huge opportunity for corporate innovation to strengthen Botswana’s Science and Technology capability, as the country will struggle to meet its Vision 2016 goals to reduce the technology gap (UNDP, 2005). Similar to the observations about Botswana, policy makers in developing countries and investment negotiators can use as a point of reference/starting point the following points in leveraging inward investment initiatives to create Triple Wins – for governments, businesses and communities: 1. Job creation in rural communities or those with poor infrastructure (reducing unemployment in communities/towns) 2. Development of new areas/upgrading of existing ones/geographic regions 3. Promote innovation and use of new and appropriate technologies 4. Increase employment of women and/or youth 5. Performance based – agreed benchmarks, for example 20% renewable energy, 40% local suppliers, 50% local management 6. Increasing household income, sustaining livelihoods, reducing poverty 7. Expand options to promote appropriate technology, implement sound renewable energy systems, create profitable and efficiently managed local businesses 8. Contribute to increasing development of enterprise/industry.

Learning from Botswana – Potential Policy Changes to Reduce Risk and Foster Stakeholder Engagement in Support of Corporate Innovation The diamond mining company Debswana embedded actions and initiatives to mitigate and plans to mitigate any adverse impacts from their operations as well as strengthening the development of social and economic infrastructure for communities in which they operated, improving well-being of communities. In return, Debswana created a positive image as a Good Corporate Citizen which makes the company more attractive to potential employees (especially highly skilled ones) and foster motivated current

168

VERONICA BROOMES

employees. Profitable and high performing transnational businesses providing greater value and higher social and environmental impacts and strengthen the business case on how embedding CSR can contribute to higher profitability and sustainability, ultimately for the benefit of all stakeholders in business, government and communities. Health care is an outstanding example of how the private sector has led in an area traditionally the responsibility of government. Establishment of the Global Fund for Aids was established primarily because of actions by investors, especially in Sub-Saharan Africa, to providing health care for employees and, in some cases, extended the service to include families of employees and the wider community (The Global Fund, 2010). Underpinning the action of businesses was a strong business case for businesses increasing the likelihood of having a capable workforce to service their business. In the mining sector in Botswana, this led to the provision of antiretroviral treatments long before the Government of Botswana began providing such care for HIV infected persons. With high levels of unemployment and few opportunities for entrepreneurship, jobs at any cost/price is an attractive option for governments and communities and there is a risk that in pursuing inward investments, those negotiating on behalf of governments or their investment agencies can provide incentives to encourage innovative job creation, stronger supply chains with small businesses that foster entrepreneurship and simultaneously create opportunities to build local capacity in managerial skills management of resources and in the process promote sustainable livelihoods. In this context, CSR leads investors to more complex assessments of potential investments and allow for greater consideration of customers’ perspectives through initiatives that enhance competitiveness and allow for increased awareness that traditional business models of profits at any cost is no longer widely a viable options.

Increasing Awareness and Strengthening Pro-CSR Initiatives in Developing Countries Creating awareness and increasing understanding of CSR are essential pre-requisites to the development of appropriate innovative and strong investment frameworks to attract FDI. It is essential that such awareness and knowledge to reside in negotiating teams and policy makers in ministries such as Finance, Economic Development, Trade and Commerce and dedicated investment agencies.

Governance, Risk and Stakeholder Engagement

169

The promotion of Public Private Partnerships (PPPs) can be applied to other sectors, not just mining. PPPs are used for large infrastructure projects (Smith, 2008, Yong, 2010), in the main, however, PPPs seem not to be linked directly with particular community interests. It seems timely, therefore, to make a paradigm shift from PPP to PPCP (Public Private Community Partnerships). Such change can lead Ito the realisation of even greater opportunities for policy changes to support corporate innovation for poverty reduction and promotion of sustainable livelihoods in developing countries. Countries need ways of engaging in negotiations which maximise benefits from foreign direct investments. While intense advocacy in developed countries have led to the establishment of several ethical and social investment funds, it is unlikely that such ethical funds would be re-directed in larger volumes to developing countries. Opportunities for policy changes supportive of corporate innovation include:  Promote strategic planning and innovation in technology adaptation and efficient systems through investment frameworks and negotiations that will result in greater social and environmental impacts.  Review lessons learnt from approaches taken by other countries to increase social impacts of inward investors, for example CSR project guides as introduced in Mauritius and mandatory reporting as in the case of Denmark.  Apply principle-based standards such as UN Global Compact and Organisation for Economic Cooperation and Development guidelines for multinational enterprise when reviewing the CSR credentials of transnational businesses.  Formulate suitable incentives to deal with investors already demonstrating exceptional corporate citizenship in applying CSR to non-core business areas and, under different guises, for example financial institutions partnering with local councils/municipalities to maintain parks and street furnishings in cities and towns –beautification/aesthetics or funding successful entrepreneur programmes and green investment initiatives. In addition, a paradigm shift is needed for governments in the pursuit of PPPs between governments and businesses to partnerships acknowledging the importance of meaningful stakeholder consultation through PPCPs. The development of PPCPs can be the much needed catalyst to shift from a business as usual approach to one in which communities are no longer mere observers of change in their communities and left to the whims those

170

VERONICA BROOMES

representing public organisations and private investors. Further, this is an urgent requirement for meaningful interlinking of key stakeholder interests and communities (often the guardians of resources used by businesses) in agreeing inward investment negotiations. Governments that leverage the CSR strategies of inward investors can enhance business competitiveness of their countries. This can be done through the creation of investment incentives for transnational businesses to support and/or build capacity in local supply chains which in turn will promote enterprise, expand job creation and in the process improve livelihoods in specific geographic regions or communities. Indeed, incentives from local and national governments that recognise and reward companies for ‘Beyond Best Practice’ behaviour can form part of investment negotiations. There is, however, a delicate balance between inward investors contributing through CSR initiatives to support and/or build capacity in local supply chains which in turn will promote way of abdicating responsibility to provide basic facilities to citizens. On the other hand, communities should not be left to the whims of private investors with ill-defined and restricted CSR strategies and/or action plans for enhanced engagement with communities. Consorted action by investment agencies officials and senior policy makers can be used as a vehicle to raise awareness among existing and potential inward investors of additional incentives available for investments which enhance benefits to developing countries beyond the creation of low-skilled jobs. Such efforts can yield huge dividends as investors are more likely to see the benefits for their shareholders from additional incentives to their investment. Further, greater collaboration should be promoted among policy makers in Ministries of Finance, Trade and Economic Development as well as officials in investment agencies. This will enable a range of investment needs to be matched with specific development objectives of priority sectors such as energy, communications, transport, special interest groups such as women and young people and/or geographic areas (communities with high levels of unemployment). The challenge for transnational businesses with an inclusive or Triple Bottom Line approach to business is how to maintain an innovative approach in the face of contracting markets, higher commodity prices for raw materials and intense competition in the absence of supportive government policies and incentives. This places developing country governments with the dilemma of having to decide if incentives should be offered to attract much-needed Foreign Direct Investment or indeed if

Governance, Risk and Stakeholder Engagement

171

governments should create an investment package in which the focus is on attracting companies that create low skilled jobs where earnings would be eligible for payment of income tax and the companies would pay relevant Value-Added or Consumption taxes, as applicable. Such taxes can then be channelled by relevant local and national government departments to improve social infrastructure (e.g. health, education, transport), with the potential to benefit a more diverse section of the population, including those who are most vulnerable and impoverished.

Indicators of Meaningful Stakeholder Engagement and Transparency in Governance Meaningful stakeholder engagement supportive of communities that are traditional stewards of areas rich with mineral deposits such as platinum and diamond can create profound positive impact through transforming the lives of people in local communities and their livelihoods, both mining and non-mining. In linking meaningful stakeholder engagement with national development objectives such as those encompassed by the MDGs and Vision 2016 in the case of Botswana and the Black Economic Empowerment Programme (BEEP) in South Africa would allow for inward investments to yield higher returns not only financially but through additional positive social and environmental impacts. Ways in which governments, businesses and communities can work in partnership to support inward investment as well as contributing to achieving national development objectives include those designed to increase the level of inward investment and improve social capital and environmental infrastructure. Measures that could be analysed and promoted include:  A government policy of offering longer tax holidays for investments in green technology and/or use of non-fossil fuel energy sources, such as solar energy, hydro power and biomass. There could be a phased implementation of the system of longer tax holidays, for example a sliding scale of three to ten years can be used as a guide on providing incentives to encourage the increase in use of renewable energy sources.  Providing immediate write-off of up to 100% capital expenditure in the first 12 months of investment. Botswana’s mining sector has demonstrated already that immediate and full write-offs can be applied outside of mining. Investments supportive of investing in retooling to

172

VERONICA BROOMES

increase use of non-fossil fuel energy and promoting greater efficiency in science and technology.  Maintaining a policy of extended tax holidays, that is more than five years, can be applied on a sliding scale. This can be based on indicators such as the quantity and level of jobs created, whether jobs are available only on a seasonal or temporary basis or longer-term or permanent jobs are available to people in local communities, extent to which procurement involves local suppliers and the volume of business they trade with large mining companies. A combination of these incentives linked with specific national development objectives, for example increasing household income and reducing unemployment among young people and women can be used during negotiations as a way of encouraging investors to locate their operations in rural or remote areas, which traditionally have high levels of unemployment and low-income households. For example, mining companies planning to raise the percentage of the businesses’ procurement from local suppliers will contribute to greater financial inflows (directly and indirectly) to communities. At the same time, the company would be building local capacity as well as fostering the creation of an entrepreneurial mindset in the community as well as capacity building to improve skills among various communities of people. Outside the mining sector, one of the case studies cited often of how business, governments and communities can work in partnership for the benefit of all stakeholders is the way in which the South African brewery SAB Miller used sorghum for beer production in their local subsidiary in Uganda (SAB Miller, 2010). Because of the company’s decision to use locally sourced raw materials for brewing instead of imported hops and malt, the company benefited from the fiscal incentive offered by the Government of Uganda for use of local raw materials, local sorghum farmers had a ready market for their crop and an opportunity to improve their livelihood and the Government of Uganda facilitated the creation of jobs within the brewery as well as development of small farm businesses. The potential to reduce risks to communities from high unemployment, low household income and marginalisation of local people in communities near mining area would be much enhanced through development of people with strong ethos for entrepreneurship not only along the supply chain in mining but also outside of the mining sector. Further, either singly or any combination of the above incentives can strengthen local supply chains and in the process of creating thousands, if not hundreds of thousands of jobs,

Governance, Risk and Stakeholder Engagement

173

reduce risks to communities at risk of high unemployment and underemployment. Improved approaches to governance through promoting meaningful stakeholder engagement can lead to the creation of skilled jobs in mining areas as well as even more employment from growth of well managed and dynamic small and medium-size business. For some stakeholders in local communities, increases in household income can result in more children, especially girls, staying longer in schools and the end of secondary education will be associated with higher levels of employment among young people.

Learning from the Experience of Botswana – Policy Changes to Foster Corporate Innovation Transnational businesses that mitigate adverse impacts from their operations as well as foster development have a social and economic infrastructure for communities in which they operate can have a competitive edge because the well-being of vulnerable communities. In periods of high unemployment and few opportunities for entrepreneurs, jobs at any cost/price is an attractive option for governments and communities. This is not necessarily the only option, as governments can seek to provide incentives that will encourage corporate innovation in job creation and entrepreneurship development. But, does it have to be so? In developing countries, governance and risks associated with investments can be considered with a broad lens through greater consideration being given to resource guardians even as they examine initiatives for highly competitive investment frameworks. One driven not only by profits but by an increasing awareness that traditional business models of profits at any cost are not longer widely acceptable. While this may be true for multinationals in developed countries, it is not always the same for developing countries. Vision 2016 policy (Government of Botswana, 2008b) identifies key areas that need to be improved to take the country forward towards prosperity. For Botswana, 2016 is a significant year as it marks the 50th anniversary of independence. In addition to poverty and unemployment, critical weaknesses in Botswana’s development cited in UNDP’s Human Development Report (2005) are: (i) excessive dependence on the state, (ii) slow pace of citizen economic empowerment, (iii) technology gap, (iv) slow pace of diversification, outside of diamond mining, and (v) inequalities in the population based on gender, age and geographic location. In science and

174

VERONICA BROOMES

technology, including green technology, there are numerous opportunities for corporate innovation in the mining sector and energy to strengthen Botswana’s Science and Technology capability. Unless and until this is done, UNDP predicts that Botswana will struggle to meet its Vision 2016 goals to reduce the technology gap (UNDP, 2005). And, there is no further evidence since that UNDP Human Development report that with less than two years to 2015, Botswana would have closed its technology gap. In Botswana, policy changes reflective of incentives such as those listed below could form the basis of business innovation that is embedded in core business activities and will impact directly on communities/citizens: 1. Job creation in rural communities or those with poor infrastructure (reducing unemployment in communities/towns) 2. Development of new areas/upgrading of existing ones/geographic regions 3. Promote innovation and use of new and appropriate technologies 4. Increase employment of women and/or youth 5. Performance based – agreed benchmarks, for example 20% renewable energy, 40% local suppliers, 50% local management 6. Increasing household income, sustaining livelihoods, reducing poverty 7. Increasing renewable energy options in country 8. Contribute to increasing development of enterprise/industry

Promoting Better Governance through Improving Stakeholder Engagement IB approaches and CSR strategies can be used by investors as well as representatives of investment agencies to expand opportunities for the development of appropriate innovative and strong investment frameworks to attract Foreign Direct Investment as well as reduce investment risk and improve governance. Traditionally, PPPs are used most frequently for large infrastructure projects (Yong, 2010; Smith, 2008), but not across a broad range of sectors nor are there direct linkages with specific community interests and/or national development objectives. It seems timely, therefore, to consider how a paradigm shift can be made, from PPP to PPCP. This is one way of realising even greater opportunities for policy changes to support corporate innovation for poverty reduction and promotion of sustainable livelihoods in developing countries. Increasingly, however, there is a preference for less government involvement and greater multi-layered collaboration (Ruggie, 2002).

Governance, Risk and Stakeholder Engagement

175

Ways of creating opportunities for policy changes supportive of corporate innovation include:  Fostering strategic and innovative approaches when revising investment frameworks and negotiations, especially in the face of recent turmoil in global financial markets. Agreed incentives should be defined clearly in contracts.  Reviewing lessons learn from approaches taken by some countries to make social demands of incoming businesses, as in the case of Mauritius, and requirements for reporting, as made mandatory in Denmark.  Applying Principle based standards such as UN Global Compact and Organisation for Economic Cooperation and Development guidelines for multinational enterprise when reviewing the CSR credentials of transnational businesses.  Formulating suitable strategies to deal with investors already demonstrating exceptional corporate citizenship in applying CSR to non-core business areas and, under a different guise, for example financial institutions partnering with local councils/municipalities to maintain parks and street furnishings in cities and towns – beautification/aesthetics. Making a paradigm shift from PPPs between governments and businesses to promote PPCPs can improve governance and foster community engagement as resource guardians and those living in poverty can realise greater benefits from resources in their local communities or country, instead of being held to ransom by public and private partners. This creates opportunities for the interest of key stakeholder and communities to be taken into account in development and business initiatives. Governments able to leverage the CSR strategies of TNs can contribute to enhancing the business competitiveness of their country. In addition, they could formulate investment incentives that will be attract TNs who develop/ strengthen local supply chains and create sustainable livelihoods. Where companies do not have designated or clearly defined CSR/ Community Engagement strategies, initiatives to increase awareness of the potential for further incentives can be provided by official investment agencies. There is need, however, for policy makers in Ministries of Finance to collaborate directly with officials in investment agencies in developing appropriate incentives according to sectors. In this way, the broad range of investment needs can be matched with priority sectors (e.g. energy, communications), interest groups/women, youth) and/or geographic areas (communities with high levels of unemployment).

176

VERONICA BROOMES

CONCLUSION Through embedding CSR initiatives in the business of Debswana, the government is assisted in realising goals for national economic development, improved livelihoods and poverty reduction. A comprehensive approach has been taken by Debswana in developing and decentralising its strategy on CSI. Investors in Botswana’s diamond mining industry have demonstrated preparedness to go beyond ‘business as usual’, that is mere job creation and provision of inward foreign direct investment. They consider related areas which if not addressed could threaten their investment. Creating Triple Wins – for governments, businesses and communities – in developing countries through combining government incentives and leveraging CSR and/or Community Engagement policies and strategies of transnational businesses could result in improved lives of citizens and creation of additional livelihoods. Further, such strategies will build local capacity and skills, stimulate innovation in science and technology, support entrepreneurship, reverse rural urban migration, reduce pressure for services in urban areas and ensure environmental sustainability. In general, reducing poverty and catalysing the attainment of national development objectives, including targets set under the MDGs. Proponents of business operating independently of government may argue that the business of government is to create the enabling fiscal policies to attract investment and businesses should be left to focus on business, not communities. It should be recognised, however, that business that take this approach risk being portrayed as corporate pariahs instead of responsible corporate citizens. Further, although in South Africa, use of IDPs has resulted in their adaptation as a way of accelerating service delivery, IDPs in themselves will not foster greater involvement of communities in policy making and make local government more accountable to citizens. The latter becomes even more challenging when local government lack both resources and capacity to addressing the plethora of issues that could threatened the livelihoods and adversely affect citizens’ lives. Another area in which there is need for specific action and a paradigm shift is in the way investments are negotiated. Urgently required is a shift from primarily PPPs to partnerships in which communities – however defined – are recognised and treated as part having a stake in the success and development of mining operation. What’s needed are more PPCPs, as these types of partnerships once developed can become the vehicle through which policy changes with greater potential to stimulate and support corporate innovation can be used both as to stimulate inward investments as well as

Governance, Risk and Stakeholder Engagement

177

achieving major national development objectives that will improve infrastructure, raise profitability, reduce risks of disruptions to operations and enhance sustainable livelihoods. The growing awareness among people living in poverty, especially in resource-rich areas, that it is not enough for governments to be acting on their behalf but they should have a say in shaping their own future should lead investors, including those in mining, to realise that the business as usual approach of speaking with central government representatives is not enough to guarantee the cooperation of communities during their mining operations. Instead, there is awareness of the important and pivotal role of meaningful stakeholder engagement for governing and managing successful mining operation, and in this context it is useful to be reminded of the often overlooked fact that employees are stakeholders whose views should be canvassed. Against a backdrop of vulnerable economies, limited physical infrastructure and threatened coastlines, especially developing countries threatened with more frequent natural disasters and burgeoning unemployment especially among young people, global businesses are reluctant to innovate. What they choose instead is to demand even further concessions and relief from developing country governments to protect their investments. Indeed, investors may opt for a path of CSR based on philanthropy rather than inclusive and embedded CSR reflective of a Triple Bottom Line approach to business. The latter not the former approach to CSR is likely to create Triple Wins – for governments, businesses and communities.

REFERENCES Adams, C., Grost, G., & Webber, W. (2004). Triple bottom line: A review of the literature. In A. Hendriques & J. Richardson (Eds.), The triple bottom line: Does it all add up? (pp. 17–25). London: Earthscan. Anon. (2010). Examining the business case for proactive community engagement during mineral exploration: A research report. Presentation to the graduate school of business, University of Cape Town, in partial fulfilment of the requirements for the degree of Master of Business Administration. Retrieved from http://gsbblogs.uct.ac.za/gsbresearchforum/ files/2011/12/MBA-Research-report-Student-B.pdf Anon. (undated). Platinum mining in South Africa. Mining IQ. Retrieved from http:// www.projectsiq.co.za/platinum-mining-in-south-africa.htm. Accessed in October 2012. Baird, B. (2008). Community engagement: Guidelines for mining and mineral exploration in Victoria. In K. John (Ed.). Victoria, Australia: Department of Primary Industries, Minerals and Petroleum branch. Retrieved from http://www.dpi.vic.gov.au/__data/ assets/pdf_file/0003/19578/CE_Guide_Exp_and_Min.pdf

178

VERONICA BROOMES

BEDIA. (2008). Mining in Botswana. Retrieved from http://www.bedia.bw/. Accessed in June 2008. Booyens, Y. (2012). South Africa losing investment opportunities. Botswana. (undated). African Economic Outlook. Retrieved from http://www.africaneconomicoutlook.org/en/countries/southern-africa/botswana/. Accessed on 18 February 2013. Brautigam, D. (2010, January). Africa’s eastern promise: What the West can learn from Chinese investment in Africa. Council on foreign relations. Retrieved from http://www. foreignaffairs.com/author/deborah-brautigam Broomes, V. (2009). ‘Triple wins’ from foreign direct investment. Potential for Commonwealth countries to maximise economic and community benefits from inward investment negotiations: Case studies of Belize and Botswana. London, England. r The Commonwealth Policy Studies Unit and Commonwealth Secretariat. ISBN: 978-0-9551095-5-3. Business Partners for Development. (2002). Putting partnering to work: Tri-sector partnership results and recommendations (1998–2001). London: Business Partners for Development. Retrieved from http://www.oecd.org/unitedkingdom/2082379.pdf Carroll, A. B., & Shabana, K. M. (2010). The business case for corporate social responsibility: A review of concepts, research and practice. International Journal of Management Reviews, 12(1), 85–105. Chamber of Mines of South Africa. (undated). Platinum group metals in South Africa. Retrieved from http://www.bullion.org.za/content/?pid=86&pagename=Platinum Chamber of Mines of South Africa. (2012). Facts about South Africa mining – putting South Africa first, 8 pp. Retrieval from http://www.bullion.org.za/documents/Chamber% 20of%20Mines%20fact%20sheet%20web.pdf Education Training Initiative. (undated). Integrated development planning for local government. Retrieved from http://www.etu.org.za/toolbox/docs/localgov/webidp.html%23 process. Elkington, J. (1999). Cannibals with forks: The triple bottom line of 21st century business. Oxford: Capstone Publishing Ltd. ISBN: 1-84112-084-7. Government of Botswana. (2008a). Botswana budget speech (2008). Retrieved from http:// www.gov.bw/docs/BudgetSpeech2008.zip Government of Botswana. (2008b, June). Vision 2016 strategy document. Retrieved from http://www.vision2016.co.bw GRI. (2010). G3 sustainability reporting guidelines (effective 2006). Boston, MA: Global Reporting Initiative. Retrieved from http://www.globalreporting.org/ReportingFramework/ G3Guidelines/#1 Gueli, R., Liebenberg, S., & van Huyssteen, E. (2007a). Integrated development planning in South Africa: Lessons for international peacebuilding? African Journal on Conflict Resolution, 7(1), 89–112. Gueli, R., Liebenberg, S., & van Huyssteen, E. (2007b). Integrated development planning in South Africa: Lessons for international peacebuilding? Retrieved from http://www. gsdrc.org/go/display&type=Document&id=3550 Hamann, R. (2003). Corporate social responsibility and its implications for governance: The case of mining in South Africa. Paper submitted to the Oikos PhD summer academy, St Gallen, Switzerland, 28 July–1 August 2003. IFC. (2012). Ease of doing business in South Africa. Retrieved from http://www.doingbusiness. org/rankings

Governance, Risk and Stakeholder Engagement

179

ISO. (2010). International guidance standard on social responsibility. Retrieved from http://isotc. iso.org/livelink/livelink/fetch/2000/2122/830949/3934883/3935096/home.html. Accessed on February 14, 2010. Kimberley Process. (2008). Botswana 2004 review visit summary visit. Retrieved from http:// www.kimberleyprocess.com. Accessed in June 2008. Kytle, B., & Ruggie, J. G. (2005). Corporate social responsibility as risk management: A model for multinationals. Corporate social responsibility initiative, Working Paper No. 10. Cambridge, MA: John F. Kennedy School of Government, Harvard University. MMSD. (2002, May). Mining, minerals, and sustainable development. Breaking new ground: The report of the mining, minerals, and sustainable development project. London: Earthscan. MMSD. (2002b). Mining, minerals, and sustainable development: Southern Africa. Mining, minerals and sustainable development in southern Africa. The report of the regional MMSD process. Johannesburg: MMSD Southern Africa. National Treasury. (2012). Budget review 2012. National treasury republic of South Africa. Retrieved from http://www.treasury.gov.za/documents/national%20budget/2012/review/ FullReview.pdf Republic of South Africa. (1973). Occupational diseases in mines and works act (Act No. 78 of 1973). Pretoria, South Africa: Government Printer. Rogerson, C. M. (2011, July 18). Mining enterprise and partnerships for socio-economic development. African Journal of Business Management, 5(14), 5405–5417. Retrieved from http://www.academicjournals.org/AJBM Ruggie, J. G. (2002). The theory and practice of learning networks: Corporate social responsibility and the global compact. Journal of Corporate Citizenship, 5, 27–36. SAB Miller. (2010). Farming better futures (p. 8). Retrieved from http://www.sabmiller.com/ files/pdf/SABMiller_Farming_Better_Futures.pdf Smith, R. (2008). Government – Private Sector Partnerships as a Catalyst for Economic Growth and Development. Paper presented at CSR and Commonwealth countries conference, CPSU, 16 July 2008. Retrieved from http://www.cpsu.org.uk/index.php? id¼67. Accessed on 12 February 2010. teVelde, D. W., & Cali, M. (2007). Assessment of Botswana’s service sector: A study for the BTPP/BIDPA. London: Overseas Development Institute. The Global Fund. (2010). Global fund to fight AIDS, tuberculosis and malaria. Retrieved from http://www.theglobalfund.org/. Accessed on February 12, 2010. UNDP. (2005). Human development report 2005. Retrieved from http://hdr.undp.org/docs/ reports/national/BOT_Botswana/Botswana_2005_en.pdf. Accessed in June 2008. United Nations Global Compact. (2009). Overview of the UN global compact. Retrieved from http://www.unglobalcompact.org/. Accessed in February 2009. Ward, H., Fox, T., Wilson, E., & Zarsky, L. (2008, March). CSR and developing countries: What scope for government action? London: International Institute for Environment and Development (pp. 1–13). Retrieved from http://www.iied.org/pubs/display.php?o= G02247&n=8&l=16&k=csr Ward, H. (2004). Public sector roles in strengthening corporate social responsibility: Taking stock. London and World Bank, Washington, DC: International Institute for Environment and Development. pp. (1–36). Retrieved from http://www.iied.org/pubs/display.php?o= 16014IIED&n=5&l=16&k=csr

180

VERONICA BROOMES

WBCSD. (2006). From challenge to opportunity: The role of business in tomorrow’s society. Retrieved from http://www.wbcsd.org/pages/edocument/edocumentdetails.aspx?id= 75&nosearchcontextkey=true Yong, H. K. (Ed.). (2010). Public-private partnerships policy and practice: A reference guide. London: The commonwealth secretariat. ISBN: 978-1-84929-020-3. Zadek, S. (2007). The civil corporation. London: Earthscan.

THE TERRITORIAL SOCIAL RESPONSIBILITY IN THE CITY OF VOLTA REDONDA, BRAZIL: THE CASE OF CSN Maria Alice Nunes Costa, Carolina Doria Romeo Losicer, Jessica Guerra Ina´cio de Oliveira and Bruno Silva Faria ABSTRACT This chapter is a case study of Companhia Sideru´rgica Nacional (CSN, National Steel Company, Volta Redonda, Rio de Janeiro, Brazil), in order to compare two models of social responsibility adopted by the same company in two different historical periods: when it was state-owned company (since forties) and then when it was privatized in the 1990s. The results are preliminary for this case study, in that the research is ongoing. However, we can anticipate a main conclusion, that CSN has no social responsibility with its main stakeholders: the community of city Volta Redonda, where industrial activities are carried out. This research is relevant for future research in the comparative perspective, in poor or

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 181–202 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005012

181

182

MARIA ALICE NUNES COSTA ET AL.

developing countries such as Brazil. We add that this study has led us to build the concept of territorial social responsibility, in order to broaden and move beyond the debate focused on social responsibility in the corporate world and move towards a transnational reflection of what is liability to the planet. Keywords: Social responsibility; territory; International Law; liability

INTRODUCTION This chapter aims to present some preliminary results of research in progress, developed by the Laboratory of Public Policy, Governance and Regional Development (Laborato´rio de Polı´ ticas Pu´blicas, Governac- a˜o e Desenvolvimento Regional/LADER) at University Federal Fluminense (Rio de Janeiro, Brazil), entitled ‘The Social Responsibility of the Territorial CSN: Before (State) and After (Privatized)’, started in 2011. We will present a brief historical background of the industrial city of Volta Redonda, portraying it in four phases: the first phase, in the 1940s, is with the implementation of the Companhia Sideru´rgica Nacional (National Steel Company/CSN) in the territory later called Volta Redonda (steel industry first large state in Brazil). CSN was the result of the economic policy of industrial expansion and import substitution in the country. The second phase was when the territory of Volta Redonda established itself as an industrial city with an urban and social structure built and maintained by the omnipresence of CSN. In the third phase, we observed that with the military dictatorship in Brazil in the 1960s and subsequently, with the oil crisis, there was a transfer of CSN’s social responsibility to the local government of the city of Volta Redonda, in respect of their social and urban infrastructure. The fourth phase in the 1990s is marked by the democratization process in Brazil, State Reform and, consequently, the privatization of CSN. As a compensatory action, its ancient and extensive political and administrative responsibility within the territory of Volta Redonda observed the arrival on the scene of strategic management known as corporate social responsibility. Through the development of social projects, CSN creates its ‘social arm’ (the CSN Foundation) in order to create social activities for the community of Volta Redonda, in particular in the areas of education, culture and sport. The results of this comparative study between two models of social responsibility implemented by the same company (CSN) in two different

Territorial Social Responsibility in the City of Volta Redonda

183

historical moments prompted us to establish a relationship between the city and the logic of profit maximization. We are trying to build a new concept that moves, epistemologically, the central axis of the development of a territory by the economic subordination of an industry or company, for another perspective on the central axis is the territory, place and space and pulse resulting from all human actions and interventions, and that, therefore, absorb all the positive and negative externalities, and which then return to human beings and social institutions produced by themselves. Trying to bring the territory at the centre of our discussions, we intend to show that companies in particular industries produce harmful effects to the territory and the human beings who comprise it. These effects return to the territory in all its dimensions, medium or long term as a ‘boomerang’. What is at stake today is the redefinition of these economic and public choices, so they are indeed more rational in order to enable us to understand, effectively universally, what is economic growth in favour of social development and human our planet. As a friend told me recently: ‘‘With consumption patterns, income distribution and environmental degradation that mankind has been adopting, we can say we’re all travelling by plane, and very few in first class, plus some in the executive and the majority in economy, but when the plane goes down, we all die the same way’’.

THE TRAJECTORY OF SOCIAL RESPONSIBILITY OF CSN IN VOLTA REDONDA The National Steel Company (CSN) when it was State Property The city of Volta Redonda is ‘umbilically’ linked to the National Steel Company (CSN) in various spheres: from their material resources, the subjective and symbolic resources they have created. We have the financial capital invested in the construction of the national steel plant in the territory of Volta Redonda and the development of networks of sociability within and around the industrial space. Therefore, the city of Volta Redonda is a territory profoundly marked by the historical background, political and social construction of CSN. The initiative of building CSN was planned in the scenario of World War II, by the government of President Getu´lio Vargas (1930–1945), which was based on the model of Nazi-fascist governments of some European countries such as Portugal, Spain, Italy and Germany. Across the context of the War,

184

MARIA ALICE NUNES COSTA ET AL.

Brazil has been fit to develop its industrial sector through the economic policy of import substitution, based on the development-nationalist principle. However Brazil, being ideologically close to the totalitarian politics of the countries of the axis, could still enter into economic agreements with the United States to finance its industrialization base, in particular steel and mining. Consequently, with the loan of 20 million dollars, granted by the U.S. government to finance the CSN, Brazil stood alongside the allied countries. With this loan, the CSN was founded in 1941 and undertook to create a master plan to build in the area of its property, a domestic steel mill, as well as the urbanization of the territory. Neighbourhoods were built for different officials and for other highly qualified workers. This urban planning and care provided for subdivisions, hierarchical road structure, wide open spaces with parks and gardens, creating centralized urban facilities, and a green belt of environmental preservation. For comparison of the impact of CSN in that territory, we saw that in 1940, the area, which belonged to CSN, had a population of less than 3,000 inhabitants, devoted mostly to agriculture. With the start of its operations and official opening of the CSN in 1946, it was noted that in 1950, the population reached a total population of 33,110 inhabitants, forming the following scenario: a working class with a reasonable benefit from the purchasing power and low cost housing, as well as a range of health and education that attracted merchants and service providers, streamlining the side of the steel sector, the tertiary economic sector in the territory of Volta Redonda (Fontes & Lamara˜o, 2006). As Volta Redonda was between the axes of the cities in the Southeast, which is industrially the most developed region in Brazil (Sao Paulo and Rio de Janeiro), CSN decided to offer a number of benefits in order to attract a better skilled workforce for this territory, which was still being built. Thus CSN could, while being a state-owned company, provide higher quality housing than the average Brazilian worker housing at the time, including such things as sewage, piped water, electricity, forestation, while offering low-cost rental homes and proximity to the workplace workers, as well as construction of hospitals, schools, clubs, and other urban services. Until 1954, the territory of Volta Redonda was only one district municipality belonging to the adjacent town of Barra Mansa. This city has not distributed equitably benefits to their districts, and this fact has generated discontent to the people of Volta Redonda, in that CSN attenuated the serious social and environmental problems generated by its

Territorial Social Responsibility in the City of Volta Redonda

185

rapid growth. As the taxes were not intended for Volta Redonda, the population was organized into a social movement, which enabled Volta Redonda become an emancipated city; now it can thus allocate the taxes generated by the CSN (Fontes & Lamara˜o, 2006). For CSN this resolution was favourable, as it reduced its social responsibilities in relation to the maintenance of the living conditions of workers and their direct investments in the infrastructure in Volta Redonda, which were transferred to the government of the new municipality of Volta Redonda. However, we found that these taxes which were raised for Volta Redonda were intended indirectly to the CSN itself, a typical Brazilian development model: the government funds intended to support works to improve the movement and disposal of industrial production faster. Thus, it blocked the allocation of public funds for investment in the welfare of the population of the territory of Volta Redonda. In the second half of the fifties, a new government was elected (the Juscelino Kubistchek Government, 1956/1961). This government had a bold programme for the strong economic and industrial growth in Brazil, known as ‘50 years in five’. This Plan goals deepened the debt and inflation in Brazil, due to the borrowing of foreign capital for growth, in particular, the automobile industrial park. Consequently, investment in construction of highways overlapped investment in railways in Brazil, which until today is discouraged. This industrial ‘boom’ impacted the city of Volta Redonda, and its surroundings (the Middle Paraı´ ba of Sul Fluminense) that now have the economic characteristic of metal-mechanical industry (mechanical metallurgy), with supply chains that make up this industrial sector: steel and metallurgy, manufacture of motor vehicles, manufacture of metal artefacts and oil and gas, cement, food and energy. Thus, the city of Volta Redonda absorbed the negative impacts and damage characteristics of an industrial city in a poor country: territorial expansion and uncontrolled demographic and unemployment of workers attracted by industrial expansion. In the mid-1960s, with the implementation of Brazil’s military dictatorship (1964–1985), we observed another social irresponsibility of CSN with the city of Volta Redonda. Most of the urban heritage of the state company (such as houses, hospitals, schools) was sold or transferred to local government in Volta Redonda, as CSN did not need to ensure the attraction or establishment of workers in the territory of Volta Redonda. Moreover, the water which belonged to the CSN Plant Reservoir started to be purchased by local government.

186

MARIA ALICE NUNES COSTA ET AL.

The sale of the houses greatly impacted the lives of workers who had no resources to buy these properties. This fact has shaken the credibility of the workers in respect of CSN, as it broke with a social pact established and consolidated in the social work: the stability in employment linked to housing guaranteed until retirement. However, as we were under a dictatorial government, workers and their union had lost their bargaining power or any demonstration against the government decision, due to strong political repressions of this period. In the 1970s, Brazil was impacted with the international situation of the Oil Crisis, and therefore was driven into the process of democratization of the country, to the extent that the state as central actor in economic development has been shaken, and its political power weakened in the face of increasing social demands. With the economic crisis of the 1980s, the state was pressured by international constraints, to rephrase. Thus, the model of State Reform began with the fiscal adjustment and privatization of state enterprises, including the CSN.

The Social Responsibility of the CSN Privatized The privatization of CSN was part of the National Privatization Program (Act 8031 of 4 December 1990, Brazil), the Collor government (1990–1992) who was the first president elected directly by the Brazilian population, in the process of democratization of the country. This programme had fundamental objectives, such as to reorder the state’s strategic position in the economy (by transferring to private activities things previously undertaken by the public sector), in order to contribute to the reduction of public debt through the economic restructuring of the public sector, to contribute for economic redevelopment in the private sector through lending and to enable public administration to concentrate its efforts on activities in which only the state’s presence was essential. In summary, privatization has brought in its wake the neoliberal belief that the government would focus its efforts on activities in which their presence was essential: health, education and public safety. However, the privatization in Brazil took place in the midst of significant events of rejection of society, involving parliamentarians and leftist militants. There was an additional concern that communities located in areas of influence of companies would be privatized because there was fear about the disruption of social investments made by these state companies. It was known that local governments didn’t have structure to absorb all the

Territorial Social Responsibility in the City of Volta Redonda

187

negative social and environmental impacts generated by these companies/ industries. The privatization of the state withdrew the responsibility or accountability in the modernization of large industries, but on the other hand, the local government was unable to respond satisfactorily to the people, for the negative externalities caused by these industries. In short, the new Brazilian democratic state was in the classic dilemma of a capitalist state in crisis (Offe, 1984): promote and maintain the accumulation of capital or respond to the interests of workers and citizens for their collective welfare. Facing this dilemma, private companies are driven and constrained by multilateral agencies and civil society movements to develop and deal with a new model of social responsibility. Thus, we observe in the 1990s the international expansion of strategic management called corporate social responsibility. CSN, as a large company, did not flee this strategy. The CSN Foundation was created in 1993 in order to perform its social responsibility initiatives to the community, the environment of their economic activities. The CSN Foundation operates through projects focused on health, education, culture and sport. We quote below some social projects developed by the CSN in Volta Redonda (Table 1). When comparing the social and environmental impacts of CSN industry, we note that these social projects fall short of social response that the industry gives to the territory of Volta Redonda and its surroundings, as well as the needs produced by these impacts, particularly on the issue environment. Therefore, we can say that, in fact, the CSN has not demonstrated social responsibility, in the fullness of its term, with the territory built by it.

THE IMPACT OF STEEL INDUSTRY IN A TERRITORY: THE CASE OF CSN First of all, we define what we understand about the concept of territory. There are multiple interpretations which often mix with other concepts such as space and place. Despite these multiple interpretations, which are of paramount importance, we don’t intend here further development on each of these concepts. Instead we concentrate on the broad concept of territory and understand as a result of collective action in a particular human and

188

MARIA ALICE NUNES COSTA ET AL.

Table 1. Field

Social Responsibility of the Foundation CSN, 2011. Project

Objective

Health

1) Projeto Rindo a` Toa (Project Laughing Easily)

1) In partnership with local government, acts of dental prevention, distributing toothbrushes, dental floss, shirt and educational materials on oral health.

Education

1) Um Caminha˜o para Jorge Amado (A Truck Jorge Amado); 2) Projeto Hotel-Escola Bela Vista (Project Bela Vista Hotel School; 3) Escola Te´cnica Pandia´ Calo´geras (Technical School Pandia Calo´geras/ ETPC);

1) Through an itinerant truck, aims to spread the great names of Brazilian literature, such as Jorge Amado, for young people; 2) Training of young people in the hotel business through the Bela Vista Hotel which belongs to CSN in Volta Redonda; 3) Provides scholarships at the Technical School, which belongs to the CSN Foundation in the areas of electromechanical, metalworking, electronics, telecommunications, IT and administration.

Culture

1) Orquestra Sinfoˆnica Jovem(Youth Symphony Orchestra); 2) Oficinas Comunita´rias (Community Workshops); 3) Projeto Galeria de Arte (Design Art Gallery); 4) Projeto Fonoteca (Phonotheque Project);

1) Provide training and professionalization of music for young people living in social risk, moreover, intended to form the first orchestra instruments mounted on steel (Steel Orchestra); 2) Provide for children, youth and adults free courses in theater, music, visual arts, etc.; 3) Professionalize young talents to the visual arts; 4) Create an archive on the history of the phonograph radio Volta Redonda;

Sport

1) Projeto Esportivo Social (Social Sports Project);

1) To promote the sports of volleyball and badminton to young people.

Social assistance

1) Projeto Garoto Cidada˜o (Project Citizen Boy)

1) Provide care, after school, children and youth at social risk, such as supplementary feeding, learning support, clothes, dental and psychological.

Territorial Social Responsibility in the City of Volta Redonda

189

institutional space, which takes place in a dynamic, pluralistic environment and of different formats through different interests, contradictory and conflicting, including also the existence of solidarity and social responsibility, to some extent. So here the concept of territory is seen as a result of human production in space, as it develops and structures from the actions undertaken by all social actors in the space/place and the effects they generate on other external agents therein. As Raffestin (1992) states, when social actors appropriate the space, the same is territorialized. Thus, the territory is filled with the realization of subjectivity, symbolism and culture of social agents. For Santos (1994), the territory won from the symbolism of its use, which he called ‘used territory’, is understood as a mediation between the world and society, bound by all forms of networks, processes and social dimensions multiple complexities. In short, the Territory can be understood as a consequence of human action and intervention in space and place pulsing of everyday life, lived through their shared culture and social institutions, and changing. In this sense, talk about this territory implies an inflection about the relations of power. According to Souza (1995, p. 97), the territory is defined ‘as a force field of power relations spatially defined and developed on an area’. Therefore, the territory is affected by the relationship of control and ownership of space by instruments of political action and economic. Currently, the social question has become territorial and concentrated in sectors dominated by the fragility of groups of hegemonic power and therefore the strongest, that territory. In the case of Volta Redonda, this economic power is concentrated in the hands of the steel industry CSN. We present in Table 2 some trends that occur so predominantly, as a kind of Weberian ideal-type of social actors involved in the territory. It is noteworthy that Volta Redonda is not a typical industrial city.1 In proportional terms, and an economic industrial city, Volta Redonda can be regarded as a single industry centre or defined by the concept of companytown,2 to the extent that there is only one industry in Volta Redonda, CSN, and therefore one that has great influence and economic domination and political place at the same time has immense symbolic power over the population, until the present day. The CSN management was able to generate its own geographies and induce their growth conditions for attracting factors of production it needed. This fact is further entrenched in the ways and the veins of Volta Redonda. The change in this scenario is a dilemma, which is ongoing. So we are left with the question: what is the social responsibility of the steel industry CSN in Volta Redonda?

190

MARIA ALICE NUNES COSTA ET AL.

Table 2.

Perspectives on the Territory of Intervention.

Social Actors

Space

Individuals, civil society, citizens and employees

Public space

Capitalist state and governments

Legal space

Companies and industries

Space of production

Action and intervention Cultural identification in everyday life, community ties and solidarity, citizenship, desire for social emancipation and prosperous future, conflicts between different interest groups. Legitimacy, legal regulation and social planning; power redistribution of capital; compulsory solidarity in relation to public welfare. Economic domination, political and symbolic (loyalty); social regulation (power); search for credibility and reputation, trade-offs between profit maximization, market share and improved compliance.

Currently after seven decades the territory of Volta Redonda has social and environmental consequences arising from the operation of the plant CSN, such as indiscriminate occupation of land with high agricultural quality, landscape aggression, contamination and pollution of air, water, soil, visual and sound, generation of acid rain and the emergence of slums and neighbourhoods lacking basic urban and social services, thus contributing to social exclusion and segregation. For the purpose of summarizing, we present Table 3 with some of the impacts caused by the CSN in Volta Redonda. Some of the damages are still under trial by the judicial power. In some, CSN prefers paying the fines instead of preventing the problems. It is noteworthy that a steel industry is among those with the greatest potential for environmental degradation. In the face of this scenario CSN behaves as any large company, and its management has in the managerial strategy of Corporate Governance. Despite the credibility of information, CSN makes reports with the aim of publishing their readiness for dialogue with its stakeholders and the achievement of good administrative practice.3 However, despite all the damage in that territory, in those 70 years of existence, we can observe some weaknesses in their practice from its latest Sustainability Report (2010), with regard to the answers that are being given to Volta Redonda and the community.

Territorial Social Responsibility in the City of Volta Redonda

191

Table 3. Negative Impacts of CSN in the Territory of Volta Redonda. Social and Environmental The privatization of CSN produced a large surplus labour (unemployment). Air pollution and visual: the plant is located in the city centre. Increasing temperature in the centre city, where industry is located, caused by high temperature ovens at the plant. Dump 540,000 tons of hazardous waste landfill near the city of Volta Redonda, performed in the 1970s and 1980s. Waste only discovered in 2010 by the prosecutor. Leakage of oily material and material chemical and benzene reaches the Rio Paraı´ ba do Sul. Emission of dust (iron powder) caused by the slag, which creates serious respiratory problems. Large carbon dioxide emissions in the city, generated by the plant and the great movement of vehicles. Issue of waste (lead and cadmium) in the soil that causes toxicity to agriculture. Strong odour, smoke release (gas sulfrı´ dico sulfide and nitrogen). Areas/spaces of CSN which are degraded. Occupation of the soil so disorganized. Excessive use of energy by CSN, especially water. Generation of high occupational risks and health of workers.

CSN reports that they expanded their businesses, creating other subsidiary companies in mining, cement, logistics, infrastructure in Brazil, United States and Portugal. Its turnover in 2010 was 15 million reais/R$ (approximately EUR 8 million), a gross profit of nearly 7 million reais/R$ (approximately EUR 4 million) and an annual investment in expansion projects and maintenance nearly 4 billion reais/R$ (approximately EUR 2 billion). The Report says that the CSN has an annual production capacity of 6 million tons of crude steel, and is highly liquid, with 10 million reais/R$ (approximately EUR 7 million) in cash, with 42,000 shareholders. As its corporate governance, this Report (2010) registers some data, such as:    

Improving the dialogue with investors; It has a Code of Ethics since 2010; Conduct internal and external auditing; Implementation of corporate risk management, in order to ensure conformance to requirements of the Sarbanes-Oxley (USA): market risk, supply of raw materials, competition, currency risks, compliance with environmental legislation in Brazil; mitigate civil claims, labour and environmental sign contracts with different types of insurance policies; and engage with financial institutions large and respectable credit quality.

192

MARIA ALICE NUNES COSTA ET AL.

As for its proposal for social responsibility, the Report notes that in 2010, the company’s social investments were 15 million reais/R$ (about EUR 7 million) in the areas of education, culture and sport. It was reported that the CSN Foundation, which represents its social responsibility activities, carried out an extensive local diagnosis, aiming to capture the aspirations of the community. According to that report, the research found that community was the main demand in relation to professional development of young people. Therefore, we conclude that the vision of the company’s impact on the territory of Volta Redonda and its social responsibility is limited to the provision of professional education in order to create manpower for economic activities, in addition to offering specific activities in the area of culture and sport. In short, the implementation of the CSN in Volta Redonda is an example of the Brazilian Developmentalist Capitalism, installed after the war, portraying a Fordist model of a country of late capitalism. Despite this model, which relied on the concentration of income and exports, we can understand that the industrialization process in Brazil was linked to the ideology of progress, subordinating the territory, the city and its urban issues, predatory economic growth and neglecting the development social and human as a synonym for collective well-being and expansion of individual capabilities, as proposed by Sen and Kliksberg (2010). Therefore, we observed that both models of social responsibility adopted by the CSN (state-owned and privatized) are far from being considered with a broad perspective of sustainability. Aras and Crowther (2009) extend in a complex way the concept of sustainability through the concept of durability. According to the authors, and respect for nature and importance of the value and business sustainability, durability and the use of resources should be based on two fundamental pillars for the future management of the company, and corporations on the planet: equity and efficiency.

FINAL CONSIDERATIONS: BEYOND ‘GOOD CORPORATE GOVERNANCE’ – THE TERRITORIAL SOCIAL RESPONSIBILITY This chapter aimed to portray a part of the reality of the city of Volta Redonda in the state of Rio de Janeiro, Brazil, as a result of the action and effect of the National Steel Company (CSN). We are dealing with a reality of a semi-peripheral country4 and a city with approximately 300,000

Territorial Social Responsibility in the City of Volta Redonda

193

inhabitants, founded in 1954 by national and international economic interests and therefore violated the social and urban planning decision making of economic agents. The civil society in Volta Redonda was established for adjustments and interests of the CSN as state-owned, and even after being privatized recent political force that can produce the necessary changes towards a city with an effective wellness for its citizens. On the other hand, the government has no local autonomy from CSN, nor is it strong enough to organize social and political society, for it to become autonomous from the power of the CSN. The dynamics of the territory of Volta Redonda is still concentrated in the hands of the CSN. The industrial logic permeates the lives of people in a way daily, through the air and the culture that everyone breathes. Volta Redonda’s excessively ‘industrial’ world, which prevailed in the 1960s, concrete continues today both concretely and symbolically. The city carries all the negative externalities of a steel-industry company town. However, CSN, as a large and important company in Brazil, does not seem to respond to its impacts on the territory of Volta Redonda. Its response falls below the real needs of the city. Preliminary results of this research on the relationship between social responsibility and life of the CSN in the territory/city of Volta Redonda have driven in the construction of a new epistemological concept: territorial social responsibility. Ashley (2010) has cited this concept in order to seek a reorientation, a transition and a repositioning of the concept of corporate social responsibility and organizational by proposing a concept of social responsibility involving governance and multilevel multiactors in a territorial context, directed to sustainable development. The author argues that the case studies are possibly good choices for the application of the concept of social responsibility of stakeholders. For her, the comparison between case studies in different territorial levels could show the degree of impact and applicability of a model with an inter-institutional framework directed to the development of social responsibility of all stakeholders involved with the organizations. The author discusses that social responsibility is not just a matter of business leaders and companies, but also a political agenda and interactive to be defined between state, civil society, market and, crucially, between educational institutions and research (Ashley, 2010). Thus, we observed that in the context of discussions on corporate governance and corporate social responsibility there is the importance of stakeholder theory. This theory has been enriched and improved over the

194

MARIA ALICE NUNES COSTA ET AL.

years and today, the definition is the hegemonic idea that management of companies should be based on the interests of all stakeholders (employees, managers, suppliers, customers, environment, government, local community) involved with the company, and not only focused on the interests of shareholders/owners. This definition of the normative theory of stakeholders (Carrol, 1991; Donaldson & Preston, 1995; Evan & Freeman, 1993, among others) should be the understanding that all stakeholders can benefit or harm businesses, because the stakeholders have power to affect them in some measure. Therefore, it is necessary for companies to have answers (CSR) for the rights and claims of all stakeholders that affect businesses. Based on this concept, we present the following question: If the interests of various stakeholders can be incompatible, such as balancing the power of different stakeholders and resolve trade-offs among competing interests? Evan and Freeman (1988), faced with this question, embarked on the path of the Kantian philosophy and democratic approach, saying that all stakeholders should be treated equally. However, we know that in practice the decision-making in a company does not respond equitably to all stakeholders, in that decisions are made within a weighting system-embedded subjectivity, and ultimately focused on the profit maximization. Furthermore, D’Anselmi (2011) questions the approach of this theory, considers the importance of ‘stakeholders unknown’ and ignored by companies. The studies that develop the theory of stakeholders, although when not to ignore cultural differences, political and economic conditions of each company and country, is a fundamental premise the discussion: what is the best corporate governance model to be adopted? Therefore, even with the empowerment of multiple stakeholders for future decision making, concern for its stakeholders (even the unknowns) remains centred in the arena instrumental and cognitive economic power of business operations. The critical reflections occur and are laudable, but the company is seen as the centre of a constellation of interests of individuals, groups and their supply chain. Therefore, the cognitive perspective and heuristic continues viewing the corporate world and the capital as key agents of our lives, thus neglecting the territory and the people who occupy it, including businessmen and capitalists, as if they might have had another planet to live. That is, an efficient business is one that should engage, listen and respond to all different stakeholders, and will also prevent damage to the company. But anything is possible. Thus, we emphasize the position of Ashley (2010) when she says that social responsibility can’t be centred only in the corporate world. According

Territorial Social Responsibility in the City of Volta Redonda

195

to the author, it is necessary to mobilize all stakeholders in social responsibility. Considering that the territory is the space of collective action involves the participation and social responsibility of all economic and social actors, that is, all social institutions, the living forces that set in motion: companies, individuals, workers and labourers, unions, religious bodies, social movements, associations, NGOs, etc. However, we intend here not only broaden the composition of stakeholders and social responsibility. What we propose is a shift in the epistemological point of view towards the social responsibility. A concept that can overcome any size of ethical or restricted relationship between capital and labour owns the business world. Thus, we are trying to look at CSR from another perspective. A perspective that provides an offset from the epistemological point of view of the term corporate social responsibility is to a concept that can go beyond the CSR on a voluntary basis to the point of a mandatory responsibility (liability) which reaches the international level, from a vision of territorial social responsibility. For this purpose, it is necessary that instead of looking at the corporate world, companies and organizations through a hyper-centred vision, instrumental and strategic to profit maximization, we propose a vision of ontological responsibility of the urban being. In our opinion, the urban being and not the company is what should be centred and highlighted in the territory teleological perspective in its multiple and complex facets of the local, national, transnational, supranational and global environment. And looking at this in another way, there is nothing contradictory to profit. Profit is not a sin! The problem is the way we think about getting the profit. A wrong way of thinking can lead to failure in the long term. And that failure is causing a chain reaction. In this sense, the territorial social responsibility is not just the responsibility of the sum of individuals and institutions. We are talking about a social responsibility of the territory towards itself. This territory is seen as containing the dialectical dynamics of all the institutions produced through reflection, social action and human intervention. Thus, it urges a regulatory system stemming from a strong and preserved International Law, to enforce social responsibility with the territory, at all scales of our planet. The current global economic crisis has shown us that there were and there are numerous and large weaknesses in international multilateral organizations, which intensely tried, especially from the 1990s, only to aware, constrain and encourage companies, using voluntary guidelines in companies of all sizes, ownerships and sectors to take better practices and

196

MARIA ALICE NUNES COSTA ET AL.

responsible and sustainable conduct towards the community, workers and the environment. ISO 26000 is an example. Thus, we can refer to Adam Smith saying, that is not from the benevolence of the butcher, the brewer or the baker that we expect to get our dinner, but the attention it gives each in their own interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages. Therefore, it is advantageous for each of us that this territory is well maintained and well looked after, because that is where we live and survive. Here, there is no contradiction between the common good and private property. Territorial social responsibility is therefore the responsibility of the reciprocal interactions of the members of that territory, be it local or global. As Etchegoyen (1993) said, the growing demand for insurance against the risk of conviction is the result of a decisive symptom that marks the acceptance of civil law and morality, ‘when responsibility is moral, it is impossible to hold it’ (p. 46). Were further accidents (work and movement) that gave the arguments for the thesis of risk. With the insurance system, the concern is now with the compensation of victims. In this sense, social responsibility has lost all moral dimension of law, that is, ‘the winner is he who has the better lawyer’. The deviation of the legal dimension of corporate social responsibility has highlighted the extent of the insurance dimension of the phenomenon in our society that made us forget the notion of rational social responsibility, because ‘the insurance clears the error and risk in the dimensions of repair’ (ibid., p. 45). According to Ricoeur (1994), currently there is a demoralization of the roots of allocation, which amounts to cancel the obligation, in its sense of social embarrassment, to the internalized social embarrassment. In our opinion, with the expansion of the term CSR in the 1980s and 1990s, there has been a demoralization in the principles that originated the endorsement of CSR, even leading to a CSR withdrawal. Companies and industries, especially in poor countries, using CSR as a reformulation of the legal responsibility, where the idea of the mistake has been replaced by risk and danger, so that the penalization of liability does not involve the accountability and guilt. Therefore, organizations are facing a liability without errors, in which the victim does not try to demand repair, demanding compensation instead. And it seems that is enough. As we look at the company as a central player, we are sure of the immense power that companies have in the territory. And this is quite clear when we look at the impacts and negative externalities they produce socially and environmentally in the territories.

Territorial Social Responsibility in the City of Volta Redonda

197

Thus, we must focus on the responsibility to those who are really more important and central to all economic, social, cultural and environmental interventions: not the company, but the territory and the people who set it in motion, that is, the urban beings. When we centralize the activities of the social responsibility to companies, we are in a dilemma of ethical and political strategy all along: to raise awareness and convince economic agents to act in solidarity and responsibility towards society and the environment. These international bodies such as ISO 26000 only request a voluntary commitment and commendable enterprises. In this sense, we are always dealing with basic principles of morality, we believe that we can’t have legitimate expectations of companies exceeding their liability. However, we find a political problem in this epistemological trajectory. We know that in this way, we enter a dangerous arena with respect to sovereignty and state supremacy. This question brings with it the existence of laws that have been working with varying degrees of demand, resulting in different costs, created by a market of high-cost certifications for semiperipheral and poor countries thus impairing their competitiveness. Therefore, the dilemma regarding the concept of territorial social responsibility is in the dimension of territorial sovereignty and the limitations of International Law. Thus, political power is needed to expand this social responsibility, given the intensification of globalization processes, as well as changes in the structure of international relations and state sovereignty. The territorial social responsibility is the result of rational verification, even limited in that the crisis affects everyone to some extent and at some point. The creation of ‘Ethical Commandments’ has not been effectively exercised for businesses world. It is now that the social and intellectual leaders seek alternative responses to global responsibility, under the cloak of social responsibility territorial critical extranational, based on the idea that social and human development must be constructed in a pragmatic dimension of human dignity and social justice. Appealing for good governance, ethics and social responsibility of economic agents is a good start. Their system of values, interests and hegemonic and dominant logic failed. So now we depend on the action and the reinvention of values from a constellation of networks of social players on the planet, mobilized by a broad view of urban development project and social cohesion. As stated by Amartya Sen, social injustice and the distribution of benefits in the global economy depend, among other things, on global institutional

198

MARIA ALICE NUNES COSTA ET AL.

arrangements appropriate to the development and equitable global opportunities: There is an urgent need to reform the institutional arrangements – in addition to the national – in order to overcome both the errors of omission as the action that tend to give to the poor in various parts of the world such limited opportunities. (2010, p. 32, translated by the authors)

Therefore, we need a new agenda towards a supranational and transnational pact that will legalize and ensure the sustainability and durability of our territory, so it produces the well-being. We know that in this way, we enter a dangerous arena with respect to sovereignty and state supremacy. This question brings with it the existence of laws that has been working with varying degrees of demand, resulting in different costs, creating a market for high-cost certifications for semi-peripheral countries and, thus impairing their competitiveness. As Henderson (2001) attempts at standardization of norms and standards of conduct, particularly on an international scale, neglecting the specificities of each country may penalize the trade and investment flows, and thus hinder the development of poor countries. Attempts to enforce standards ‘socially responsible’ may limit competition and harm the economy as a whole. This does not mean that businesses in poor or developing countries do not need or can’t have social responsibility in corporate governance. What we are trying to point out that work is a new look, more extended on the impact and the role that companies have in the territory. And this intervention is the responsibility of global and multinational companies. Therefore, the classical concept of sovereignty which includes the unitary state in its unique way, making the whole territory as a unified, independent with its own jurisdiction, should be questioned by a double sphere: a framework for subnational and supranational another through a transnational character of policy networks. We must question the sovereignty of the state as a supreme power which believes it is not derived from other territories or originates only in itself. Given the multiple processes of globalization and domination, the growing importance of other political actors such as cities, non-governmental organizations and transnational counter-hegemonic movements emerges. Therefore, we must resort to a new transnational territorial order. Thus, corporate social responsibility needs to be moved to the parameter of transnational territoriality, in which what is at stake is the relationship of

Territorial Social Responsibility in the City of Volta Redonda

199

power between the strongest states (North) and the weakest (South). As both are exposed to the same increased economic, technological and socioenvironmental risks, a transnational territorial social responsibility is necessary, resulting from the struggle of those who have the perception that these risks, although they are not equally redistributed, affect the entire planet, all states and nations and, therefore, all territories. Although the state has not lost its capacity for action and intervention, as political representative and agent of social solidarity compulsory, the state has lost part of its national economic sovereignty against the context of globalization, such as global flows of capital, commerce, of management, of information, the complex network of organized crime, environmental issues and citizen insecurity (Castells, 2001, p. 150). And this is clearer in poor countries, who are hostages of the location of multinational companies and industries in its territory. Therefore, we observed a restricted range and pulverized mainly the state and semi-peripheral countries of the world system, allied to its corporate and institutional weaknesses. Therefore, we need a new agenda towards a supranational and transnational social pact that could ensure the sustainability and durability of our territory, so that in a way it can produce the well-being of humans and urban areas. In short, the current political and economic scenario depicts the effect of huge inequalities in economic power between the parties of a territory and the ability that this inequality gives to the stronger party to impose, without discussion, the conditions that are more favourable. Any intervention has chain effects. The effects may be tiny or enduring and we often cannot have any idea of the magnitude of these effects. This is the complexity of our time. We are held responsible not only for the consequences of our actions, but also of actions from others under our care, and sometimes our responsibility can go even far beyond. The problem is how to determine the correlation between the quota sharepart of shared responsibility and the consequences of the quota-share. These dimensions of social responsibility rarely coincide, as the more negative consequences tend to reach low-priority populations and social groups with less responsibility in the design of actions that caused it. Therefore, we believe that we must deepen the concept of territorial social responsibility, since all co-responsibility is everyone’s responsibility, regarding the sustainable and durable future of this planet, not voluntarily, but under an international legal basis.

200

MARIA ALICE NUNES COSTA ET AL.

NOTES 1. On the concept of the industrial city see Branda˜o, Carlos, 2006. The breadth of the term industrial city presents itself as the place of division of labour, trade, the centrality of the organized community, the ‘‘polis’’ and ‘‘civitas’’ opposed to the field, a space that surrounds it. Is the market town to the industrial city. This, beyond the scope of collective life, becomes the territory of industrial production, the centre of the whole society and economy, track their field and to guide the ‘general conditions of production and consumption’. Your space becomes, himself, industrial product governed by exchange value rather than by use, by the logic of private rather than the collective good. Here, the spaces depoliticizes the field social, cultural and political. 2. Company-town defines itself as a classic model in which cities or regions are controlled by one company, with dual perspective, that is, on the one hand, meet with a reasonable degree of assurance, the needs of the workforce, by setting this by providing housing and, on the other hand, to extend the company’s domain to the private sphere of employees through various mechanisms to impose discipline (Graciolli, 2007 apud LIMA, Raphael, 2007). 3. The only CSN Annual Report Supplied on the company website is the year 2010. 4. The countries that belong to the semi-peripheral system are regions of the world through development, which act as a centre to the periphery and a periphery to the centre. We also emphasize that the central regions and peripherals spaces can coexist in very close and, even within the same space and/or territory. The concept of semiperiphery is based on the Theory of World-System of Immanuel Wallerstein, the American sociologist, began in the 1970s.

REFERENCES Aras, G., & Crowther, D. (2009). The durable corporation–strategies for sustainable development. UK: Gower. Ashley, P. A. (2010). Interactions between states and markets in a global context of change: Contribution for building a research agenda on stakeholders’ social responsibility. Working Paper No. 506. Institute of Social Studies, Erasmus University Rotterdam, The Netherlands. Branda˜o, C. (2006). As cidades da Cidade. Universidade Federal de Minas Gerais, Instituto de Estudos Avanc- ados Transdisciplinares. Carrol, A. B. (July/August, 1991). The pyramid of corporate social responsibility: Towards the moral management of organizational stakeholders. Business Horizons. Castells, M. (2001). Para o Estado-rede: globalizac- a˜o econoˆmica e instituic- o˜es polı´ ticas na era da informac- a˜o’’. In P. Pereira, Wilheim, & Sola, L. (Orgs.) Sociedade e estado em transformac- a˜o. Brası´ lia: ENAP e Sa˜o Paulo: Editora UNESP e Imprensa Oficial de Sa˜o Paulo. D’Anselmi, P. (2011). Values and stakeholders innan era of responsibility. Cut-throat competition? UK: Palgrave Macmillan.

Territorial Social Responsibility in the City of Volta Redonda

201

Donaldson, T. & Preston, L. E. (1995). The stakeholder theory of the corporation: concepts, evidence and implications. Academy of Management Review, 20. Etchegoyen, A. (1993). A era dos responsa´veis. Portugal: Difel. Evan, W. M., & Freeman, R. E. (1988). A stakeholder theory of modern corporation: Kantiancapitalism. In T. L. Beauchamp & N. E. Bowie (Eds.), Ethical theory and business. Englewood Cliffs, NJ: Prentice-Hall. Evan, W. M., & Freeman, R. E. (1993). A stakeholder theory of modern corporation: Kantian capitalism. In T. L. Beauchamp & N. E. Bowie (Eds.), Ethical theory and business. Englewood Cliffs, NJ: Prentice-Hall. Fontes, Aˆ. M. M. & Lamara˜o, S. T. de N. (2006). Volta Redonda: histo´ria de uma cidade ou de uma usina? Revista Rio de Janeiro, n. 18–19, jan.-dez. Graciolli, E. J. (2007). Privatizac- a˜o da CSN: Da luta de classes a` parceria. Sa˜o Paulo: Expressa˜o Popular. Henderson, D. (2001). Misguide virtue: False notions of corporate social responsibility. London: The Institute of Economic Affair. Lima, R. J. C. (2007). Polı´ tica e Movimentos Sociais no Sul Fluminense: a construc- a˜o do MEP de Volta Redonda. Anais do II Semina´rio Nacional Movimentos Sociais, Participac- a˜o e Democracia. UFSC, Floriano´polis, Brasil, Nu´cleo de Pesquisa em Movimentos Sociais – NPMS, ISSN 1982–4602. Offe, C. (1984). Problemas estruturais do estado capitalista, R. de Janeiro (Ed.), Tempo Brasileiro. Raffestin, C. (1992). Por uma geografia do poder. Sa˜o Paulo: A´tica. Ricoeur, P. (1994). Le Juste. Paris: Ed. Esprit. Santos, M. (1994). Territo´rio, Globalizac- a˜o e Fragmentac- a˜o. Sa˜o Paulo: Hucitec. Souza, M. L. O. (1995). territo´rio: sobre espac- o e poder, autonomia e desenvolvimento. In I. Castro, et al. (org.) Geografia:conceitos e temas. Rio de Janeiro: Bertrand Brasil.

FURTHER READING Abramovay, R. (2000). O capital social dos territo´rios: Repensando o desenvolvimento territorial. Economia Aplicada, 4(2). Alves, M. P. (2001). Lazer opera´rio e alienac- a˜o (Volta Redonda - 1951 a 1956). Vassouras, RJ Dissertac- a˜o de Mestrado. Universidade Severino Sombra. Andrade, A. (2010a). Teor de zinco, ca´dmio e chumbo em plantas de arroz em solos incubados com resı´ duo sideru´rgico. Revista Brasileira de Engenharia Agrı´cola e Ambiental . Andrade, M. (2010b). Por tra´s do discurso socialmente responsa´vel da siderurgia mineira, UFMG. Minas Gerais. Cardoso, A. (2010). Uma Utopia Brasileira: Vargas e a Construc- a˜o do Estado de Bem-Estar numa Sociedade Estruturalmente Desigual, UERJ. Rio de Janeiro. Carvalho, J. (2011). Mudanc- as clima´ticas e aquecimento global: Implicac- o˜es na gesta˜o estrate´gica de empresas do setor sideru´rgico de Minas Gerais. FGV–Cadernos EBAPE . Companhia Sideru´rgica Nacional (CSN). (2010). Relato´rio Anual. CSN, Rio de Janeiro. Costa, A. C. da. (1978). Volta Redonda ontem e hoje. Volta Redonda, Lux. Costa, M. A. (2006). Mudanc- as empresariais no Brasil Contemporaˆneo: O investimento social privado na sau´de e´ uma nova forma de solidariedade? Tese de Doutorado- UFRJ, Rio de Janeiro.

202

MARIA ALICE NUNES COSTA ET AL.

Costa, M. A. (2011). Teias e tramas da responsabilidade social: o investimento social empresarial na sau´de. Rio de Janeiro: Editora Apicuri. Fernandes, M. (2001). Volta Redonda: Imagina´rios, Memo´rias E Identidades. Dissertac- a˜o de mestrado defendida na Escola de Comunicac- a˜o (ECO) da UFRJ em. Ferreira, D. (2005). Queiroz Gomes PRIVATIZAC - A˜O DA CSN: Resisteˆncia e Adaptac- a˜o do Sindicato dos Metalu´rgicos sob a Perspectiva de Dependeˆncia de Recursos Dissertac- a˜o de Mestrado, Instituto COPPEAD de Administrac- a˜o-UFRJ, Rio de Janeiro. Graciolli, E. J. (2007). Privatizac- a˜o da CSN: Da luta de classes a` parceria. Sa˜o Paulo: Expressa˜o Popular. International Organization for Standardization/ISO 26000. (2008). Guidance on social responsibility. Klein, C. H. (1986). Variac- a˜o da pressa˜o arterial em trabalhadores de uma sideru´rgica. Escola Nacional de Saude Publica, FIOCRUZ. Rio de janeiro. Lima, S. (2008, March). Capital transnacional, company town e a produc- a˜o do espac- o urbano. Caminhos de Geografia Uberlaˆndia, 9(25). Lyra, M. G. (2009). O Papel dos Stakeholders na Sustentabilidade da Empresa: Contribuic- o˜es para Construc- a˜o de um Modelo de Ana´lise, ANPAD. Curitiba. Medeiros, S. A. de. (2004). A cidade que educa: a construc- a˜o das identidades sociais dos trabalhadores da cidade-empresa de Volta Redonda (1940–1973). Nitero´i, RJ. Dissertaca˜o de Mestrado, Universidade Federal Fluminense–UFF. Morel, R. L. de M. A. (1989). ferro e fogo. Construc- a˜o e crise da ‘‘famı´ lia sideru´rgica’’: o caso de Volta Redonda (1941–1968). Sa˜o Paulo, SP. Tese de Doutoramento, Universidade de Sa˜o Paulo–USP. Peiter, P. (1998). Poluic- a˜o do ar e condic- o˜es de vida: uma ana´lise geogra´fica de riscos a` sau´de em Volta Redonda, Rio de Janeiro, Brasil. Caderno de Sau´de Pu´blica. Pereira, S. E. M. (2007). Sindicalismo e privatizac- a˜o: o caso da Companhia Sideru´rgica Nacional. Rio de Janeiro, RJ. Tese de Doutoramento, Universidade Federal do Rio de Janeiro–UFRJ. Schmidtz, D., & Goodin, R. (1998). Social welfare and individual response: For and Against. Cambridge University Press. Sen, A., & Kliksberg, B. (2010). As pessoas em primeiro lugar- A E´tica do Desenvolvimento e os problemas do mundo globalizado. Sa˜o Paulo: Companhia das Letras. Tobar, C. (1998). Poluic- a˜o do ar e condic- o˜es de vida: uma ana´lise geogra´fica de riscos a` sau´de em Volta Redonda, Rio de Janeiro. Veiga, S. M. & Fonseca, I. (1990). Volta Redonda, entre o ac- o e as armas. Petro´polis, Vozes. Velasco Jr., L. (1997). A Economia Polı´ tica das Polı´ ticas Pu´blicas: as privatizac- o˜es e a Reforma do Estado. Textos para Discussa˜o. Brasil: BNDES. Veras, M. (2000). Trocando olhares: uma introduc- a˜o a` construc- a˜o sociolo´gica da cidade. SP.

DECIPHERING THE DIVERSE NATURE OF CORPORATE GOVERNANCE IN THE INDIAN PUBLIC SECTOR: A STUDY OF PUBLIC SECTOR BHARAT HEAVY ELECTRICALS LIMITED (BHEL) COMPANY Roopinder Oberoi ABSTRACT The study of Bharat Heavy Electricals Limited (BHEL)1 was undertaken to understand the quality of corporate governance in public sector and to gain insight into the major infirmities in internal and external conditions that impinge on the quality of corporate governance in the public enterprises. In India, to bring in more transparency and accountability in the functioning of Central Public Sector Enterprises (CPSEs), the government of India in June 2007 introduced the Guidelines on Corporate Governance. These Guidelines were originally of voluntary nature. The government has acknowledged the need for continuing the adoption of

The Governance of Risk Developments in Corporate Governance and Responsibility, Volume 5, 203–233 Copyright r 2013 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-0523/doi:10.1108/S2043-0523(2013)0000005013

203

204

ROOPINDER OBEROI

good Corporate Governance Guidelines for ensuring robust public sector with high level of transparency and decided to make these Guidelines mandatory and applicable to all CPSEs. Thereby, government in March 2010 asked all the 246 CPSEs to mandatorily follow corporate governance norms and business ethics, a step to ensure more transparency in their functioning. Keywords: Public Sector Governance; Central Public Sector Enterprises; voluntary guidelines; agency problem; incentives; discipline The study provides an assessment of corporate governance in Public Sector Units (PSUs) or State-Owned Enterprises (SOEs) in India. In fact, it is believed that government as the principal shareholder and promoter in Public Sector Enterprises (PSEs) should be setting the benchmark for corporate governance standards and practices but the study indicated towards deep fault lines in governing public sector. The study was conducted in June 2011 and it involved 30 respondents which included managers from finance, planning and development and vigilance departments of BHEL. The study is significant as it was conducted just after a year of these guidelines being made mandatory. It seeks to identify and gain consensus on the pillars of good corporate governance without being caught in potential controversies or operational barriers. The underlying assumption is that corporate governance modalities are indispensable to resilient public companies and some serious effort is being made in this direction by the concerned ministries and corporate enterprises. The study also aims to recognise significant gaps that become observable between policy guidelines and complicated terrain of manifold relationships at ground level. This study is focussed on managers of PSUs, with a view to assess how they perceive the complex milieu. A little is known about the manager’s perspective on corporate governance standards in ‘Navratna’ company2 in statistically reliable manner. The study is motivated by the belief that true change can occur when a critical mass of top and middle managers internalise the change and push it through. Such transformation would of course, assume that managers have the space to ‘steer’ the change.

PUBLIC SECTOR GOVERNANCE Corporate governance is a system of structuring, operating and controlling a company with a view to achieve long-term strategic goals to satisfy all

Diverse Nature of Corporate Governance in the Indian Public Sector

205

stakeholders. Its aim, if defined restrictively, is to make sure there is compliance with the legal and regulatory requirements, besides meeting local and community needs. It encompasses the policies and procedures adopted by the company to achieve its objectives. Therefore, a framework of effective accountability to the stakeholders is the essence of corporate governance. Until the economic liberalisation, public sectors were considered as ‘temples of modern India’. They operated in capital intensive industries with long gestation period and were often involved with production of strategic goods/services. The social obligation of supplying goods/services at subsidised prices and protecting employees took precedence over making profits. The debate on corporate governance for the public sector is contemporary. Much of what governments do in delivering public services involves running business. In India, various forms of businesses managed by SOEs have assets that run into billions, and they are not inconsequential by any standard. Taxpayers, as the ultimate owner of these businesses, have the right to expect them to perform well. This mandates having good corporate governance systems in place.3 Critical of the Weberian form of governance for public sector, several new models have emerged where governmental restructuring draws heavily from the lexicon of ‘governance’. The distinct characteristic of this model is its ‘corporate orientation’ and the ‘pro-consumer’ perspective. Citizens are clients and not just right bearing individuals. There is, therefore, radical altering of contour in public sector management. The remarkable shift from the administration of public sector to management and then a further push to good corporate governance has become acceptable for the provision of public goods/services. Public sectors enterprises are legitimised by a twofold delimitation: in contrast to core public administration, they are expected to be more efficient, effective, and innovative as they benefit from greater autonomy. In contrast to privately owned enterprises, they are expected to allow for greater political control and influence, so that they can fulfil tasks that are politically sensitive. This has direct consequences for the governance of public sector: requirements from both public governance and corporate governance have to be met. In simpler terms, this leads to a situation of a ‘politics-vs.-market dilemma’ for the governance of public sector. In this ambivalent situation, boards of public sector play a major role in balancing the inherently conflicting interests of political control vs. market success. It also operates at the interface between different rationalities. Primarily, these are the rationality of politics and the rationality of the market (Schedler, 2003).

206

ROOPINDER OBEROI

Whitfield (2003) pointed out: governments do more than simply provide utility services. If private sector businesses bear upon the community and the economy, then many public sector activities have a more direct and instantaneous sway. Health, education, social welfare and the justice systems all rebound directly to the society’s benefit. Governments seek to achieve a complicated array of political, social and economic objectives through a variety of public sectors (Whitfield, 2003). These multiplicity of objectives brings with it perplexity about the respective roles, powers, responsibilities and accountabilities of the ministers, the boards and the chief executive officers. Therefore, corporate governance in the public sector is much more multifaceted as it raises noteworthy questions about government monopoly, ownership concentration, regulatory capture, redistribution and the wide scope of public sector activities among others, which needs to be considered for evolving a suitable corporate governance framework and practice. A difference of emphasis forms the crux of the antagonistic relationship that has evolved between business and government over the years. The problem has been termed as a ‘clash of ethical systems’. The two antithetical ethical systems are the ‘individualistic ethics of business’ and the ‘collective ethics of government’.4 The clash of these two ethical systems partially explains the existing nature of business–government relationship. Corporate governance, in this sense, has assumed a symbiotic relationship with capital market development and dispersed private ownership. More fundamentally, corporate governance difficulties in public sector derive from the fact that the accountability for the performance of PSUs involves a complex chain of agents (management, board, ownership entities, ministries, the government), without clearly and easily identifiable, or remote, principals. To structure this complex web of accountabilities in order to ensure efficient decisions and good corporate governance is a challenge. Most vital checks on underperformance are absent in public sector. Unlike a widely held corporation in the private sector, public sector cannot have its board changed via a takeover or proxy contest, and they do not go bankrupt. The absence of potential takeovers and proxy contests reduces the incentives of board members to maximise the value of the company, and the lack of bankruptcy can introduce a ‘soft budget’ constraint, which reduces pressure on PSUs to be cost effective (Baygan-Robinett, 2004; Estrin, 1998). These significant differences are presented in Fig. 1. But despites these differences (represented in Fig. 1) there are some ‘core’ corporate governance principles applicable to both. There is convergence of principles that include: accountability; transparency; integrity; leadership

Diverse Nature of Corporate Governance in the Indian Public Sector

Fig. 1.

207

Public and Private Sector Governance.

‘setting the tone’ for the organisation; a focus on performance as well as conformance; and recognition of stakeholder rights. Good corporate governance means the public sector cannot ignore the interest of consumers/citizens just as the private enterprise cannot ignore the interests of minority shareholders, suppliers, creditors and workers.

HIGHLIGHTS OF THE STUDY AT BHEL India has remarkable complex dual ownership form with a number of bodies overseeing PSUs. The matrix of agencies incorporate Department of Public Enterprises, Central Vigilance Commissioner provides guidelines on conduct, disciplinary cases, investigations, etc. Departmental enterprises are subject to a special additional audit by the Comptroller and Auditor General. The Central Bureau of Investigation, an autonomous police organisation of the government, assumes jurisdiction over the employees and board members. The Planning Commission has a role in planning, appraising and approving project. The Public Enterprise Selection Board recommends and selects board members. Finally, it is respective ministries that exercise ownership rights and set policy objectives (sometimes together

208

ROOPINDER OBEROI

with the legislature). The ministries make the final choice for certain board members and the chief executive – through which they exert substantial influence – and can also issue directives to and veto major decisions of boards. Ministerial responsibility concerns both the nature of the relationship with the participants in a particular policy area and achieving policy objectives (Standing Committee on Public Enterprises, 2004). The State plays a dual role of market regulator and owner of PSUs with commercial operations, particularly in the newly deregulated and partially privatised network industries. Whenever this is the case, the State is a major market player and an arbitrator. Full administrative separation of responsibilities for ownership and market regulation is therefore a fundamental prerequisite for creating a level playing field for PSUs and private companies and for avoiding distortion of competition (Isaksson, 2005). This whole package forms the starting point for the structuring of governance. If governance is ‘steering’ the corporation, then, corporate governance is about accomplishing the tasks without sacrificing the core values of transparency, responsibility, fairness, and accountability. Fig. 2 depicts the milieu of governance in public sector (Ministry of Finance, 2000). The main assumption behind public enterprises in the international context is that they are closely held by the government and its agencies; that they are inaccessible to investors as they would not be publicly traded; that they enjoy monopolistic markets. Distinct governance challenge emanates from undue hands-on and politically motivated ownership interference as well as from totally passive or distant ownership by the State. To structure this complex web of accountabilities in order to ensure efficient decisions and good corporate governance is itself an issue.

Fig. 2.

Corporate Governance in the Public Sector.

Diverse Nature of Corporate Governance in the Indian Public Sector

209

In India, to bring in more transparency and accountability in the functioning of CPSEs,5 the government of India in June 2007 introduced, for an experimental period of one year, the Guidelines on Corporate Governance for CPSEs. These Guidelines were of voluntary nature. Since the issue of these guidelines, the CPSEs have had the opportunity to implement them for the whole of the financial year 2008–2009. These Guidelines have been modified based on the experience gained during the experimental period of one year. The government has acknowledged the need for continuing the adoption of good Corporate Governance Guidelines for ensuring robust public sector with high level of transparency and decided to make these Guidelines mandatory and applicable to all CPSEs. The government in March 2010 asked all the 246 CPSEs to mandatorily follow corporate governance norms and business ethics, a step to ensure more transparency in their functioning. The decision to make these norms binding on the CPSEs, both listed in the stock market and unlisted, was taken by the Union Cabinet.6 The study of BHEL, a CPSE, was undertaken to understand the quality of corporate governance in public sector. This study aimed to appreciate the major infirmities in internal and external conditions that impinge on the quality of corporate governance in the public enterprises. It provides an initial assessment of corporate governance in PSUs and assesses the ingrained perception among the employees despite the initiatives being undertaken to reform governance in public sector.7 The study is significant as it was conducted just few months after these guidelines were made mandatory. Following questions were raised and the analyses of the responses given in BHEL unit are highlighted here: (a) Objectives of PSUs The objectives of PSUs should be explicit. Clearer accounting for policy objectives facilitates the comparison/benchmarking of PSUs vis-a-vis other enterprises. To ensure efficient use of State assets, maximising enterprise value should be considered as a primary commercial objective. The complexity in defining the appropriate corporate governance for a PSU stems from the intrinsic ambiguity in the company’s primary mission. The attempt to advance commercial and social objectives is not always easily reconcilable. Thus, management cannot be fairly held accountable for failure to achieve objectives, when such failure is undermined by the concurrent policy objectives mandated by the State as a majority shareholder.

210

ROOPINDER OBEROI

The government should develop and issue an ownership policy that defines the overall objectives of State ownership, the State’s role in the corporate governance of PSUs, and how it will implement its ownership policy. It is often suggested that PSUs should face competitive conditions regarding access to finance. Their relations with State-owned banks, Stateowned financial institutions and other State-owned companies should be based on purely commercial grounds. The government should develop and issue an ownership policy that defines candidly the overall objectives of State ownership, the State’s role in the corporate governance, and how it will implement its ownership policy. It is often the multiple and contradictory objectives of State ownership that lead to either a very passive conduct of ownership functions or conversely results in the State’s excessive intervention in matters or decisions which should be left to the company and its governance organs. In order for the State to clearly position itself as an owner, it should clarify and prioritise its objectives. The objectives may include avoiding market distortion and the pursuit of profitability, expressed in the form of specific targets, such as rate-of-return and dividend policy. Setting objectives may include trade-offs, for example between shareholder value, public service and even job security. The State should therefore go further than defining its main objectives as an owner; it should also indicate its priorities and clarify how inherent trade-offs shall be handled. In doing so, the State should avoid interfering in operational matters, and thereby respect the independence of the board.8 Direction in terms of broader political objectives should also be channelled through the co-ordinating or ownership entity and enunciated as enterprise objectives rather than imposed directly through board participation. Regardless of the existing performance monitoring system, a basic objectives can be identified to know how the enterprise is dealing with trade-offs between objectives that could be conflicting. PSUs should report on how they fulfilled their objectives by disclosing key performance indicators. A clear, consistent and explicit ownership policy will provide PSUs, the market and the general public with predictability and a clear understanding of the State’s objectives as an owner as well as of its longterm commitments (Fig. 3). The result of the survey conducted at BHEL indicates clarity regarding the objective of the company among the employees. Eighty-seven per cent of the respondents placed financial performance at top as they were convinced about prioritising profitability. They felt that return to capital and accurate measures of cash flow is a useful indicator of commercial performance.

211

Diverse Nature of Corporate Governance in the Indian Public Sector

90 80 70 60 50 % 40 30 20 10 0

87

53

47

47 33

40

33 27

20

13 0

0 Financial performance

Maximizing shareholder value Very

Fig. 3.

Quite

Providing employment

Socio-economic benefits

A little

Objective of Public Sector Units.

Public sector companies have been of late given a clear signal that in future their investment plans must be financed either by internal resource generation or by resources raised from the capital markets – both alternatives being bound to encourage and reward efficiency and commercial orientation. A number of public sector units have resorted to the capital markets to raise resources to finance their investment plans and this trend is certain to accelerate in future.9 Providing employment and aligning commercial and social objectives is delicate area where the opinions showed that company has successful aligned the two. This alignment comes naturally in PSUs as the central philosophy behind PSUs remains social and strategic besides commercial. However, overwhelming outlook was that PSUs have ‘multiplicity of objectives which they sometimes struggle to synergise’ and respondents admitted that opaque targets do hamper well-meaning management. Clear objectives with ‘metrics’ that facilitate decision making by PSU board and management could help clarify trade-offs and make it easier to hold managers accountable for performance. This could include requirements in terms of minimum standards or targets, or explicit ‘shadow values’ or ‘shadow costs’ that place the social gain/loss caused by PSUs decisions onto the balance sheet, allowing for a focus on bottom line. The predominant view is State should go further than defining its main objectives as an owner; it should indicate its priorities and clarify how inherent trade-offs shall be handled. In doing so, the State should avoid interfering in operational matters, and thereby respect the independence of

212

ROOPINDER OBEROI

the board. Clear accounting for policy objectives will facilitate the comparison/benchmarking of PSUs against each other and private sector firms. (b) Power of board in PSUs Two questions were posed regarding the level of independence of board and loci of power centre in PSUs. A key difference between private sector and public boards is the relationship between the board and its controlling shareholder and the relative authority of the two. The Board of Directors of PSU normally comprise: Full time functional directors or executive directors; Nominees of the Administrative Ministry; ‘Non-official part time directors’ (independent directors). The chief executives and functional directors are recruited, selected/promoted by the Public Enterprises Selection Board (PESB).10 The appointments of board members have to be cleared by the Appointments Committee of the cabinet comprising of ministers. The nominees of the Administrative Ministry are up to a maximum of two and are selected by the concerned minister. All appointments (except government nominee) are subject to due diligence and clearance by the Central Vigilance Commissioner.11 As underlined in the OECD Principles, ‘in order to exercise its duties of monitoring managerial performance, preventing conflicts of interest and balancing competing demands on the corporation, it is essential that the board is able to exercise objective judgement’. In the nomination and election of board members, the ownership entity should focus on the need for boards to exercise their responsibilities in a professional and independent manner. It is important that individual board members when they carry out their duties do not act as representatives for different constituencies. PSU boards tend to be too large, lack business perspective and independent judgment. They are not be entrusted with the full range of board responsibilities and can be overruled by senior management and by the ownership entities themselves. Their function is also duplicated by specific State regulatory bodies in some areas. Empowering and improving the quality of boards is a fundamental step in improving the corporate governance of PSUs.12 For enhancing board independence, the OECD Principles of Corporate Governance considers that it may be regarded as a good practice that the Chair person is separated from the CEO in single board structures. Separation of the Chair from the CEO helps in ‘achieving an appropriate

213

Diverse Nature of Corporate Governance in the Indian Public Sector

balance of power, increasing accountability and improving the board’s capacity for decision making independent of management’.13 However, it is well accepted that boards in PSUs face peculiar impasse. At best, they may act as a kind of Parliament that represents the interests of employees, ministries and in some cases, non-State shareholders, leaving control of the company to management and government (Fig. 4). The respondents at BHEL expressed candidly and emphatically that Board of PSUs till date lack adequate autonomy despite reform measures being undertaken to instil professionalisation. The study indicates 63% of the respondents agree that there is lack of independence in PSU boards. Regarding the power residing with concerned government ministry, over 70% affirmed the Statement. The power of PSU board to take policy decisions is more of theoretical than genuine. Legal, financial and investment decisions are restricted. Decisions on employment and employees are also severely constrained. Accordingly, the government has a greater say in deciding the strategy of PSUs than its board. The overwhelming view is that the boards of PSUs should be assigned a clear mandate and ultimate responsibility for the company’s performance. The board should, in principle, have the same responsibilities and liabilities as stipulated in company law. The responsibilities of PSU boards should be articulated in relevant legislation, regulations, the government ownership policy and the company charters. There should not be any difference

80 70

73 63

60 50 % 40 27

30

20

20

10

10 0 agree

disagree

not sure

The boards of PSUs have little independence The real power in PSUs lies with concerned ministry

Fig. 4. Power of Boards in PSUs.

7

214

ROOPINDER OBEROI

between the liabilities of different board members, whether they are nominated by the State or any other shareholders or stakeholders. Training is required for board members to discharge their responsibilities and liabilities.14 The Guidelines on corporate governance (2010) States that the company concerned shall undertake training programme for its new Board members (Functional, Government, Nominee and Independent) in the business model of the company including risk profile of the business of company, responsibility of respective directors and the manner in which such responsibilities are to be discharged. They shall also be imparted training on Corporate Governance, model code of business ethics and conduct applicable for the respective directors (Guidelines on corporate governance for central public sector enterprises, 2010). It was expressed that there has been consistent demand for adherence to principles formulated to disentangle boards from excessive control of ministries. The unswerving demand for reforms include that the part time non-official directors should at least constitute one-third of the board. But the responsibility for filling vacancies has been vested with the Administrative Ministries, the Department of Public Enterprises (DPE) and the PESB with the board having modest role in board appointments, renewal or succession planning. The compensation for full-time functional directors and the Executive Chairman are as per the guidelines issued by the DPE while the non-official part time directors are allowed a sitting fee per meeting, which is a nominal amount, and invariably less as compared to compensation in BoDs of private sector. It is particularly essential to clarify the personal and State liability when State officials are on PSU boards. The State officials need to disclose any personal ownership they have in the PSU and follow the relevant insider trading regulation. Guidelines or code of ethics for members of the ownership entity and other State officials serving as PSU board members have been developed by the coordinating or ownership entity. The Guidelines indicates how confidential information passed on to the State from these board members should be handled. Direction in terms of broader political objectives should be channelled through the co-ordinating/ ownership entity and enunciated as enterprise objectives rather than imposed directly through board participation. PSU boards should not respond to policy signals until they are authorised by the Parliament or approved by specific procedures (Isaksson, 2005). A truly effective board with sufficient independence and competent directors can effectively act as cushion and insulate the PSUs from the vagaries of ministry officials and political functionaries (Reddy, 2002).

215

Diverse Nature of Corporate Governance in the Indian Public Sector

(c) The PSU as ‘State’. Some observers have argued that entities with major government ownership being treated as ‘State’ constitutes a major drag on the performance of PSUs. The ownership rights of the government are exercised along with other controls by a complex system primarily arising from the view that ‘PSUs are indeed government’ and that the ‘boards are needed principally for compliance purposes’. Article 12 of the Indian constitution provides the foundation for this control.15 The SOEs are also subject to writs petitions of the Supreme Court under Article 32 and High Court under Article 226 of the constitution. Though the public and the employees hold some stock, their part and voice appear subordinated due to the additional gearstick that the government exercises as an owner. PSUs’ accountability to the legislature needs to be clearly defined, which should not be diluted by virtue of the intermediary reporting relationship. The co-ordinating or ownership entity should be held accountable to representative bodies such as the Parliament and have clearly defined relationships with relevant public bodies, including the State supreme audit institutions (Fig. 5).16 The survey reveals that overwhelming 73% of the respondents agree that there is possibility for further freeing from State control along with commercial orientation. They believe that PSU’s special status weighs down on the quick resolution of labour disputes in the company vis-a-vis private sector where labour laws allow for speedy action against the defaulters and

80

73 60

60 % 40

23

27 13

20

3

0 agree

disagree

not sure

Courts ruled PSUs to be ‘State’; there is scope for commercial orientation within this constraint The status of State constrains PSUs in the settlement of labour related disputes

Fig. 5.

The PSU as ‘State’.

216

ROOPINDER OBEROI

non-performers. Labour unions tend to be more inflexible in public sectors. 60% agreed that this is a hindrance and is amply curtailing for speedy settlement of labour/management disagreement. Another concern expressed is regarding the boards not having the full complement of directors and several positions of Executive Chairman remaining unfilled for long duration or under additional/temporary charge. The ministry representatives on the Board also exercise de facto veto powers. Capital expenditure beyond a limit, long-term purchase agreements, joint ventures and technology agreements need a clearance by the ministry outside the board. All these controls admittedly hamper the competitiveness of the PSUs. The view is that often long-term interests of the enterprise are sacrificed in favour of vested or short-term interests of entrenched politicians. The influence of government over management is subtle and non transparent: it is generally expected that ‘wishes/orders’ are complied with uncritically. Such meddling occur in spite of explicit restrictions found in the PSU’s articles of association, issuances by the DPE, central government guidelines, the procedures for scrutinising investment funding, choice of projects, wage policy and all other regulations which are common to the public sectors. (d) Department of Public Enterprise (DPE) and PSU The command and control approach which once had legitimacy is no longer appropriate as there are complexities in ownership and differentiated competition in the market place. The DPE was set up with laudable objectives, which appeared imminent and strategic then. Most of these objectives in changed scenario appear incongruous. This is predominantly because of the need for firm-specific approaches as against unitary/monolithic designs and due to the proven ineptitude of departmental governance. Thus, the DPE need to revisit its role. It is recommended that DPE re-crafts its mission to that of a competitive consultancy organisation offering value-added services to PSUs. Administrative reforms connected with economic adjustments call for, among others, restructuring and ‘institutionalising’/corporatising of some services. Countries such as Australia and United Kingdom have done this successfully years ago. Majority confirmed to the view that involvement of DPE in staff capacity does cause needless hold-ups. Nearly 70% agreed to this observation while

217

Diverse Nature of Corporate Governance in the Indian Public Sector

13% of the respondents were uncertain of the ‘extent of difficulty’ caused during the clearance of a project from DPE (Fig. 6) Regarding DPE’s role as an advisor to company, 67% accepted there was little justification for DPE’s advisory role since boards have external directors to provide expertise. Ten per cent were unsure and twenty-three per cent disagreed. Widely held belief was that there is little justification for continuation of conventional role of DPE in times of evolving diversities and complexities in the nature of ownership, differentiated competition and other related concerns. To an additional question of bargaining power of CEO vis-a-vis DPE, some agreed with the opinion that cash rich PSUs or ‘Navratna’ in Indian parlance have extra leverage/bargaining power compared to cash constrained PSUs. There was an acknowledgement that profitability criterion and tough CEOs can alter the equation between the DPE and PSU. Another recommendation often discussed is that if the ownership function is not centralised, a minimum requirement is to intermittingly establish a strong co-ordinating entity among the different administrative departments involved.17 This will help to ensure that each PSU has a clear mandate and receives a coherent message in terms of strategic guidance or reporting requirements. The co-ordinating entity would harmonise and co-ordinate the actions and policies undertaken by different ownership departments in various ministries. The co-ordinating entity should also be in charge of establishing an overall ownership policy, developing specific guidelines and unifying practices among the various ministries.

70

67

70 60 50 %

40 23

30

17

20

13

10

10 0 Agree

Disagree

Not sure

The involvement of DPE results in delay in decision making There is little justification for DPE involvement in advisory capacity

Fig. 6.

Department of Public Enterprise (DPE) and PSU.

218

ROOPINDER OBEROI

(e) The auditor and the PSU PSUs, notably in areas of audit and accounts are over-governed due to the oversight roles played by the CAG and the Central Vigilance Committee (CVC). All listed PSUs are required to follow the Securities and Exchange Board of India’s (SEBI) requirement of corporate governance18 such as the constitution of Audit Committee with a majority of independent auditors and at least one auditor with accounting knowledge;19 disclosure of financial performance/results of the listed companies; and to present in the Annual Report a separate section on corporate governance with details on compliance, non-compliance (with reasons) of the mandatory requirements along with compliance certificate from the auditors. Section 292A of the Companies Act 1956 requires every public limited company having paid up capital of not less than Rs. five crores to constitute an Audit Committee at the Board level. The Audit Committee should have a minimum of three directors and twothirds of the total number of members of Audit Committee shall be directors other than managing or whole-time directors. The terms of reference of the Audit Committee include all matters related to financial reporting and the audit thereof including efficacy of the internal control system.20 Various government authorities carry out the review and audit of the performance and accounts of the PSUs. These include the Parliamentary Standing Committee, Internal Audit, the Controller and Auditor General (CAG) of India, the Chief Vigilance Commission besides the DPE and administrative ministries.21 Presently, chartered accountant firms are appointed by the PSU boards to carry out audits besides the audit committee and the internal audit wing of the enterprise.22 The perception expressed regarding the role of Statutory Auditors (SA) is that they transparently and accurately appraise and apprise PSU’s performance to government. As shown in Fig. 7, 67% of the respondents approved that Statutory Auditing is an effective way to check the over-adventurous behaviour and is valuable for risk management in PSUs. However, as a result of multiple appraisals, the management tends that ‘avoid’ rather than ‘manage’ risks. To rationalise audit, a framework must be established on an integrated ‘whole-of public sector’ approach on a consistent and comparable basis. It must take a holistic approach to managing strategic, operational, compliance and financial risk. Government must simplify the review procedure and generate uniform standards that must be followed by review

219

Diverse Nature of Corporate Governance in the Indian Public Sector 80 80

67

60 % 40

23

20 10

20

0 0 Agree

Disagree

Not Sure

Statutory Audit (SA) exists to appraise the PSUs performance. Audit queries lead to risk-avoiding behaviour of managers.

Fig. 7.

The Auditor and the PSU.

authorities.23 Listed PSUs should disclose financial and non-financial information according to high quality internationally recognised standards. In particular, the ownership entity should maintain co-operation and continuous dialogue with the State supreme audit institutions responsible for auditing the PSUs. It should support the work of the State audit institution and take appropriate measures in response to audit findings. The 2009 CAG reports hauled up some PSUs for deficiency in financial reporting in audit reports and other disclosures.24 Some of these deficits have raised questions about the quality of audits. The audit committee of PSUs should have explicit powers in monitoring audit quality and ensuring that audit fees are commensurate with the level of audit risk and efforts involved in undertaking the PSU audits. The guidelines on corporate governance recommend that PSUs should consider supplementing in house internal audit functions with external service providers in areas requiring specialist skills.25 The CAG is an important instrument of public accountability, but it is at times unfavourable to the freedom of PSUs. It is advised that the CAG must ensure diligence in management and restructure the manner in which it counsel on the appointment of chartered accountants, issue directions under section 619(3) of the Companies Act, prepare special reports, affirm, or comment upon or supplement the audit report prepared by the Chartered Accountants as provided under section 619(4) of the Companies Act. PSUs have complained about this double check and expressed desire to rationalise multiple review mechanisms. This sentiment is reiterated in the OECD

220

ROOPINDER OBEROI

document as well in the context of multiple domains: ‘y there is a risk that the variety of legal influences may cause unintentional overlaps and even conflicts, which may frustrate the ability to pursue key corporate governance objectives. It is important that policy makers are aware of this risk and take measures to limit it’. (f) The concerned administrative ministry and PSUs One of the major complaints of PSUs has been that the ministers and the officials in the ministry exercise authority frivolously through formal as well as informal communications. The ministry can easily conjure up reasons for all interaction; nevertheless one of the axioms of good governance is ‘well structured interaction and open communication’. It is a fact that several directors and chief executives often appear to be seeking undue interaction with the ministers and secretaries; such inclination is defensible by giving reasons of managing the ‘authoritarian stake-holder’. It is very often suggested that the administrative ministry should contact the PSUs through its representatives on the Board and not otherwise. Furthermore, the interim arrangement can be to list down communication/events along with the subjects of discussion for circulation among members of the Board every three months. This can ensure transparency and curtail irrelevant communication. The relationship of the co-ordinating or ownership entity with other government bodies should be clearly defined. A number of State bodies, Ministries or administrations have different roles vis-a`-vis the same PSUs. In order to increase the public confidence in the way the State manages ownership of PSUs, it is important that these different roles are clarified and explained to the general public (Fig. 8). The study indicates strong agreement on the issue of undue strangling control of concerned ministry over PSUs. Eighty per cent of the respondents feel that administrative ministries wield much power over PSU. This indicates that PSUs desire autonomy so that they take critical decisions and avoid sluggish processes while getting sanctions from concerned ministries and bureaucrats. Red tapism and frivolous approvals does eat into the precious time while bidding for businesses and ceiling the deals. There was strong sense of excessive meddling by ministries regarding the operational decisions, managing labour relations and employment issues in PSUs. However, as an impact of liberalisation; 80% consider that ministries’ involvement has relatively decreased. Delinking PSUs from the control of the Ministry officials and functionaries would create enough space to function effectively and focus on performance rather than mere ‘conformance’.26

221

Diverse Nature of Corporate Governance in the Indian Public Sector 80 80

80 67

60 % 40 20 20

7

20 13

13 0

0 Agree

Disagree

Not sure

Administrative ministries wield much power over PSUs The administrative ministry interferes in administrative and operational decisions, employment rules, and labour relations. The ministry’s involvement in PSUs has become far more functional and restrained after liberalisation.

Fig. 8. The Concerned Administrative Ministry and PSUs.

The co-ordinating or ownership entity should be held clearly accountable for the way it carries out the State ownership function to bodies representing the interests of the general public, such as the Parliament. Its accountability to the legislature should be clearly defined, as well as the accountability of PSUs themselves, which should not be diluted at any cost by virtue of the intermediary reporting relationship. More specifically, the ownership entity should enjoy a certain degree of flexibility vis-a`-vis its responsible ministry in the way it organises itself and takes decisions with regards to procedures and processes. (g) The PSU and Parliament Questions about the working of PSUs are often raised in the Parliament. How are these questions viewed and their merit in keeping the PSUs accountable? The Parliament’s role in the governance of PSUs has received varied reactions while predominantly indicating that call attention motions and question hours in Parliament regarding PSUs have not served much interest of the PSUs. Policy discussions and perspective should feature prominently in this forum, it is the overriding outlook that most questions raised are ‘constituency based’ and ‘interest related’ and therefore fall short to provide prospective directions (Fig. 9). Nearly 67% agreed that good amount of time/resources are devoted to sometimes insignificant parliamentary questions which result in distraction

222

ROOPINDER OBEROI

100 80 %

83

77

67

60 40 17

20

23 7

10

10

10

0 Agree

Disagree

Not Sure

Management devote too much time to questionsraised in Parliament Proper information gathering and retrieval systems expediates the time spent on answering questions Without the pressure of parliamentary questions, many PSUs would drift away from their social goals.

Fig. 9.

The PSU and Parliament.

from core business. Twenty-three per cent of the respondents disagreed and held parliamentary questioning as essential because government as the major shareholder is fully justified in asking questions and the company is answerable to the Parliament. Information Management Discussions and Analysis disclosures focus on improving level of details around operation’s key risks.27 With effective information retrieval systems (MIS) the time spent on furnishing answers to parliamentary question is considerably streamlined with 83% agreeing that information management systems have enhanced the data processing and dissemination. The information technology and transparency criteria makes it mandatory to display information of companies’ performance on web sites or on stock exchange thereby keeping the government and stake holders fully informed. Sizeable numbers of employees do value information sharing as an essential and effective tool to check malpractices. A contrarian view do exist which holds that although truly ‘publicly owned’, many PSUs report provide little to the public. In many developing countries, the public sector is perceived as distant, corrupt and unaccountable, leading to a widespread crisis of legitimacy between citizens and the institutions that represent them. The link between citizen voice, transparency and accountability has been recognised in this context as the core of good governance and improved public sector performance. Not only do

Diverse Nature of Corporate Governance in the Indian Public Sector

223

PSUs rarely have public reporting requirements, they may, in fact, be prevented from doing so, with PSU accounts and other information treated as classified. Normally, PSUs report to the part of the government that oversees it and that may, in practice, be deeply involved in its management. Although necessary, reporting only to a government department directly involved in running the PSU does little to ensure transparency.28 It was interesting to note that 77% felt that PSUs would not drift away from its goals even if the pressure from Parliament was removed. The opinions are definitive regarding the role of Parliament as a goal determiner for the PSUs. Often managers of PSUs use parliamentary checks and accountability as smart approach to skirt dysfunctional political interference. The accountability to Parliament should ensure avoidance of erroneous decisions and helps them keep orientation. PSUs may also be subject to auditing by governmental authorities and oversight by a finance ministry or similar body, however, the focus is generally on expenditures, with little accounting for financial performance, possible liabilities, or the success of the PSUs in meeting its potentially wideranging objectives. Opacity undermines performance monitoring, limits accountability at all levels, and can conceal liabilities that can have an impact on national budgets and even financial stability. This opacity reflects not only limited disclosure at the enterprise level and inadequate auditing of this disclosure, but insufficient reporting on the performance of the State-owned sector as a whole. Parliamentary/Legislative Assembly’s control over public enterprises should be limited to interaction with the body exercising the ownership rights of the government. Currently, government ownership implies the right of the Parliament over even the functional matters of PSUs. Managers in the PSUs find this as an exceptional control that the private sector does not suffer from. (h) Corporate governance and PSUs Various questions were put forth to understand the depth of disclosures, ethical norms, audit skills and dual role of government to gauge the quality of corporate governance in PSUs. While listed PSUs are required to comply with Clause 49 of the SEBI Agreement, it is now mandatory for all PSEs to comply with the corporate governance norms rolled out by the DPE. The general view is that from a regulatory perspective, PSUs are not lagging behind and do have highquality mechanism available to plug in the loop holes of governance.

224

ROOPINDER OBEROI

Corporate governance is an issue of perception/reputation or brand building in private sector. Sometimes, private sector scores in perception management, that is in projecting the corporate governance practices they have voluntarily adopted in their quest for improved transparency and accountability or CSR initiatives. Maharatna, Navratna and Miniratna PSUs should also lead the way in implementing the MCA’s guidelines on corporate governance to set high standards for others to follow. In fact, government as the principal shareholder and promoter in PSUs should be setting the bar on corporate governance standards and practices (Fig. 10). Around 33% are highly satisfied with the extent of disclosures in PSUs. Fifty-seven per cent believed that there was further scope for improvement. The guidelines on corporate governance (2010) recommends that a Statement in summary form of transactions with related parties in the normal and ordinary course of business shall be placed periodically before the Audit Committee. Details of material individual transactions with related parties, which are not in the normal and ordinary course of business, shall be placed before the Audit Committee. Details of material individual transactions with related parties or others, which are not on an arm’s length basis, should be placed before the Audit Committee, together with Management’s justification for the same (Guidelines on corporate governance for central public sector enterprises, 2010). Forty per cent of the respondents felt that audit committees have requisite expertise and knowledge to do high-quality job. Fifty-three per cent felt that auditors needed further skills enhancement. Around 50% expressed their

57

60

50

50 40

53

40 33

33

% 30 17

20

10

10

7

0 High

Little

Not at all

Satisfaction with the level and depth of disclosures in your company. Level of depth and expertise in Audit firms Following of timelines in submission of financial results by listed entities

Fig. 10.

Corporate Governance and PSUs.

Diverse Nature of Corporate Governance in the Indian Public Sector

225

contentment regarding meeting the time lines prescribed under Clause 49 of SEBI while submitting financial Statements. The respondents did articulate the want for better transparency and disclosure of executive performance criteria as an essential requisite. So the responses varied between high and modest satisfaction on various criteria of corporate governance indicating scope for further improvement.29 Co-ordinating or centralised ownership entities should develop aggregate reporting that covers all PSUs and make it a key disclosure tool directed to the general public, the Parliament and the media. This reporting should be developed in a way that allows all readers to obtain a clear view of the overall performance and evolution of the PSUs. In addition, aggregate reporting is also instrumental for the co-ordinating or ownership entities in deepening their understanding of PSUs performance and in clarifying their own policy. To be more transparent there should be mechanisms by which enterprises debate openly about directives or choices that affect shareholder/stakeholder value or the long-term sustainability of the PSUs. Consequently, they should communicate more frequently with investors, stakeholders and the public at large on their policies and their effective implementation. It is advisable that PSUs have their stakeholder reports independently scrutinised in order to strengthen their credibility (Monga, 2007). In the interest of the general public, PSUs should be as transparent as publicly traded corporations. Regardless of their legal status and even if they are not listed, all should report according to best practice accounting and auditing standards.30 The Board Members and Senior Management need to comply with the code of Internal Procedures for prevention of Insider Trading. Senior management shall make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the company (e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives). Many were pleased with the incorporation of disclosure requirements in audit reports. Regulators should send clear signals to defaulters and impose substantial penalties for non-compliance. Details of non-compliance by the company, penalties, strictures imposed on the company by any statutory authority should be part of report by the company (Fig. 11). In its efforts to balance its trusteeship and stewardship responsibilities, the government has granted varying levels of independence to PSUs (from Maharatna to Miniratna). Autonomy involves outlook change on the part of PSU senior executives and directors. More than 30% value the ability of

226

ROOPINDER OBEROI 60 60

57 50

50 40 % 30

33 27

27

20

23 10

13

10 0 High

little

not at all

Does government strike a balance in role between trusteeship and stewardship? How well placed are the ethical norms of the company? How do you rate the corporate governanace guidelines of 2007

Fig. 11.

Corporate Governance and PSUs.

the government to strike a balance between the role of steward and an owner. Fifty-seven per cent of the employees felt government is doing a tight-rope walk to strike equilibrium between trusteeship and stewardship role. Large majority were fairly satisfied with this dual role of government only 10% were pessimistic about the dual role of government. It is in the State’s interest to ensure that, in all enterprises where it has a stake, minority shareholders are treated equitably, since its reputation will influence its capacity of attracting outside funding and the valuation of the company. It should therefore ensure that other shareholders do not perceive the State as an opaque, unpredictable and unfair owner. The State should, on the contrary, establish itself as exemplary and follow best practices regarding the treatment of minority shareholders. The future of the organisation depends on both technical and ethical excellence. Adherence of professionals to a code of ethics is largely a voluntary matter. The employees felt the ethical norms of the company are theoretically well placed but its execution is easier said than done. In fact, 27% were highly contented with the ethical norms in the company. Fifty per cent were little less satisfied with the ‘worth of ethics’ in the functioning of company but twenty-three per cent opined more needs to be done to instil ethics in functioning of corporate enterprises. As the government’s disinvestment strategy gathers momentum, there is a genuine need to improve the levels of transparency and accountability within PSUs. Sixty per cent rated adherence to 2007 corporate governance guidelines high. The company has established a mechanism for employees to

Diverse Nature of Corporate Governance in the Indian Public Sector

227

report to the management concerns about unethical behaviour, actual or suspected fraud, or violation of the company’s general guidelines on conduct or ethics policy (Guidelines on corporate governance for central public sector enterprises, 2010). This mechanism provides for adequate safeguards against victimisation of employees and also makes available for direct access to the Chairman of the Audit Committee in exceptional cases. There has to be a separate section on Corporate Governance in each Annual Report of company, with details of compliance on Corporate Governance. The company need to obtain a certificate from either the auditors or practicing Company Secretary regarding compliance of conditions of Corporate Governance as stipulated in the Guidelines. The respondents view seriously and appreciate the guidelines on corporate governance. The Guidelines stipulate that Chairman’s speech in Annual General Meeting (AGM) should also carry a section on compliance with Corporate Governance guidelines/norms and should form part of the Annual Reports of the concerned CPSE. The grading of CPSEs may be done by DPE on the basis of the compliance with Corporate Governance guidelines/norms. BHEL has yet to develop a Whistle Blower Policy. The guidelines on corporate governance to CPSEs clearly States that the company need to establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud, or violation of the company’s General guidelines on conduct or ethics policy. This mechanism could provide for adequate safeguards against victimisation of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit Committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organisation. Some ‘areas of concern’ in PSUs can be summarised as: Further Clarity in objectives; Strong, Independent and Proactive Board of Directors in PSUs; Appropriate Governance Structures with Role Demarcation; Streamlining of legal forms along with coherent and consistent regulatory framework; More Operational Autonomy; Curtailment of political meddling/Ministerial interference; High level of transparency and disclosures; Integrity of accounts and audit.

THE WAY FORWARD The issues discussed above may provoke a question whether PSUs, in the new paradigm, have given up their ‘public’ orientation in favour of

228

ROOPINDER OBEROI

‘enterprise’. In the early decades after Independence, ‘commanding heights’, ‘temples of modern India’ and ‘model employer’ were the terms/cliche´s that captured the entire vision for the public enterprises. However, public enterprises today need to reposition their thinking to affirm shareholder value and sustainable competitiveness. In current scenario, the fiscal strain on the economy is slowly eroding budget provisioning for the public enterprises. Second, is the public listing and trading in several companies by which the shareholder value in the capital market has became an important parameter of performance. Third, the competition with the private sector and the MNCs in the domestic as well as international markets has forced public enterprises to look closely at their cost structures, product positioning and marketing strategies, thus inducing a commercially competitive spirit (Reddy, 2004). Today PSUs have to be primed to meet the challenges of global competition. They must respond proactively to the market dynamics by making quick decisions and taking bonafide commercial risks. The legal and regulatory framework for SOEs should ensure a level-playing field in markets where PSEs and private sector companies compete in order to avoid market distortions. Governments should strive to simplify and streamline the operational practices and the legal form under which PSUs operate. Areas that require serious revisiting relate to Public Sector Management; Intergovernmental Relationships particularly involving Parliament and Regulatory Agencies; Internal Organisational Management; switch to International Financial Reporting Standards; Market Research and Analysis to scrutinise media reports and press releases; Performance Measurement and delinking procedural aspects of company regulation from substantive law; and effective Risk Management. Bearing in mind the various forms, nature and levels of performance of PSUs, a discerning, steady and flexible approach for executing corporate governance practices is prudent. The conditions ‘on the ground’ in which the PSU operates need to be taken into account in formulating an effective governance framework. ‘One size fits all’ may not be finest way to instil good governance, and in all cases corporate governance must pass the ‘localisation’ test.

NOTES 1. BHEL was founded in 1950s. It has emerged as the largest engineering and manufacturing enterprise of its kind in India. Power equipment major BHEL has

Diverse Nature of Corporate Governance in the Indian Public Sector

229

approached the government for the grant of coveted Maharatna status, which will give the company greater financial autonomy. At present, BHEL is a Navratna company. A company qualifying for the Maharatna status should have an average annual turnover of more than Rs 20,000 crores in the last three years, according to the new guidelines. Once a company gets the Maharatna status, its board would not be required to take the government’s permission for investments up to Rs 5,000 crores in a joint venture project or wholly owned subsidiary. For the Navratna companies, the limit is Rs 1,000 crores. 2. Navratna was the title given originally to nine PSEs identified by the government of India in 1997 as ‘public sector companies that have comparative advantages’, giving them greater autonomy to compete in the global market so as to ‘support [them] in their drive to become global giants’. BHEL is one of the Navratna PSE. 3. In India, there are 240 PSEs outside the financial sector. These enterprises produce 95% of India’s coal, 66% of its refined oil, 83% of its natural gas, 32% of its finished steel, 35% of its aluminium, and 27% of its nitrogenous fertilizer. Indian Railways alone employs 1.6 million people, making it the world’s largest commercial employer. Financial sector SOEs account for 75% of India’s banking assets. 4. A typical SOE is mandated to produce an output of reasonable quality to be sold at an affordable price. It may be required to offer a comprehensive service (e.g. rail, telephony, mail). It has such financial targets as returns on capital, profitability, taxes and dividends paid to the treasury, and other performance indicators. It may very well have additional goals in terms of employment, community development, correcting past social injustices, and providing social services for its workers and their families. Many of these objectives may be explicit; others may be implicit but no less important in practice. Typically, the enterprise is not reimbursed for its various social mandates; there is usually no clear link between any subsidy it may receive and its various objectives. 5. Industrial policy from 1948 to 1991 has seen a sea change with most Central government industrial controls being liquidated. The CPSEs were classified into ‘strategic’ and ‘non-strategic’. Strategic CPSEs were identified in the areas of (a) Arms & Ammunition and the allied items of defence equipments, Defence air-crafts and warships; (b) Atomic Energy (except in the areas related to the operation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries); and (c) Railway transport. All other CPSEs were considered as non-strategic. Further, Industrial licensing by the Central Government has been almost abolished except for a few hazardous and environmentally sensitive industries. The government has made a clear commitment to empowering the CPSEs and their managements. It was recognised that public enterprises could not compete effectively with private entrepreneurs without freedom to function and operate commercially. 6. With a view to bring in more transparency and accountability in the functioning of CPSEs, DPE issued guidelines on Corporate Governance in May 2010, which were made applicable to all CPSEs on a mandatory basis. DPE has developed 30 points parameters on which the compliance on Corporate Governance will be monitored and graded. Based on the Annual Compliance report on Corporate Governance received from CPSEs for the year 2010–2011, CPSEs will be

230

ROOPINDER OBEROI

graded. These new guidelines are some improvement over Clause 49 of SEBI listing agreement. 7. Reform of the public sector is a critical element in structural adjustment programmes all over the world and is also included on India’s reform agenda. However, this is an area where changes are being implemented slowly. 8. Today, both public sector and private sector have become an integral part of the Indian economy. The assumption behind the Industrial Policy Statement of 1991 and later announcements relating to public enterprises outline a new paradigm – public enterprises now appear much less as instruments of dirigisme to promote undefined ‘welfare’ and more as economic agents in pursuit of maximising the residual incomes and shareholder value. In that sense, several of the mechanisms of superintendence over PSUs and legal dispensations could be construed as additional levy on the transaction cost apart from potential contradiction with the accepted principles of corporate governance which support democratic values. 9. Integration of Indian economy with global markets has thrown up new opportunities and challenges. Some of the PSEs with strategic vision are actively exploring new avenues and have increased their activities to go in for mergers, acquisitions, amalgamations, takeovers and for creating new joint ventures. 10. The PESB was set up with the objective of evolving a sound managerial policy for CPSEs and in particular to advise government on appointments of their top management posts. 11. India CSR (5 October 2011) – As per regulations, half of the company’s board should comprise independent directors. Currently, BHEL has 13 directors, including Chairman and Managing Director B. P. Rao. Out of them, five are independent directors. According to a top BHEL official, there is a shortage of two independent directors to achieve compliance with SEBI’s listing norms. ‘Presently, our board has thirteen directors, of which five are independent directors, while Clause 49 of the Equity Listing Agreement stipulates that independent directors should comprise 50 per cent of our board’, it noted. 12. The role played by the government in the PSUs may be even greater than implied by formal controls. Both through the influence of its board nominees and the objectives and directives given to the PSU, the ownership entity may run the company directly, bypassing the board all together. Even when the PSU is wholly owned by the State, this degree of direct control can be problematic. It undermines the common reform objective of reducing political interference and increasing PSU autonomy. It makes board accountability essentially meaningless because there may be little to be accountable for. This direct control may also reduce transparency, as direction of the enterprise bypasses formal mechanisms of control. 13. OECD Guidelines on Corporate Governance of State-Owned Enterprises – ISBN 92-64-00942-6 –OECD (2005). 14. OECD Guidelines on Corporate Governance of State-Owned Enterprises – ISBN 92-64-00942-6 –OECD (2005). 15. Interestingly, Jawaharlal Nehru, who was responsible for making the public sector a pillar of Indian economic strength, presaged the dilemma to be faced by Indian SOEs when he said after independence: ‘The way a government functions is not exactly the way that business houses and enterprises normally function y When one deals with a plant and an enterprise where quick decisions are necessary, this

Diverse Nature of Corporate Governance in the Indian Public Sector

231

may make a difference between success and failure. I have no doubt that normal governmental procedure applied to a public enterprise of this kind will lead to the failure of that enterprise’. But the essence of this message seems to have been lost over the years and was never translated into practice. 16. Some of these come from the State’s right as a shareholder and include participating in the general meeting of the PSU, nominating board members and exercising other powers held by shareholders. Under the right circumstances, the State’s ownership function can be exercised using primarily their rights as a shareholder. For example, State-owned conglomerates in Brazil, such as CVRD and Petrobas, have used normal shareholding meetings, director appointments, and board procedures to exercise effective governance over large numbers of subsidiaries. 17. On the other hand, critics have expressed deep scepticism in having a single, ‘monolithic’ ownership entity, especially for countries with larger and more complex State sectors. Such an entity is seen as a potential bureaucratic monster, wasting resources and acting as a magnate for corruption. There is also concern about how PSUs meet what are perhaps diverse objectives when controlled by a single body focused on financial returns. Advocates of centralisation emphasise that policy can still be set by the relevant parts of the government and that the PSU can maintain good relations with ministries. 18. The SEBI, by its circular dated 21 February 2000, directed Stock Exchanges to amend the Listing Agreement between them (i.e. stock exchange) and entities whose securities were listed and to include a new Clause 49 in such Listing Agreement. This clause was amended in October 2004 and the revised clause has been made effective from 1 January 2006. 19. All members of Audit Committee shall have knowledge of financial matters of Company, and at least one member shall have good knowledge of accounting and related financial management expertise. 20. The statutory requirement of Audit Committee brings into sharp focus the primacy of independent Directors in corporate governance and the critical role of financial reporting in meeting the expectations of stakeholders. 21. At the same time, there is recognition that where public funds are deployed and budget provisions are made, public accountability arises as a natural consequence and warrants continued parliamentary oversight, ministerial responsibility and government auditing. 22. The Audit Committee should meet at least four times in a year and not more than four months shall elapse between two meetings. 23. The Auditors of your Company are appointed by the Comptroller and Auditor General of India. The names of auditors appointed for the year 2010–2011 are printed separately in the Annual Report. The detail of cost auditors appointed for the year 2010–2011 and Cost Audit details are printed separately in the Annual Report. The replies to the points referred to in the Auditors’ Report and to the Comments of the Comptroller and Auditor General of India. 24. Stressing the need for complete restructuring of the government accounts, CAG mentioned, ‘Rs 20,273.52 crore under 28 major heads of accounts was classified under the minor head y this indicates a high degree of opaqueness in the accounts’.

232

ROOPINDER OBEROI

25. The Audit Committee reviews the following information: Management discussion and analysis of financial condition and results of operations; Statement of related party transactions submitted by management; (iii) Management letters/ letters of internal control weaknesses issued by the statutory auditors; (iv) Internal audit reports relating to internal control weaknesses; (v) The appointment and removal of the Chief Internal Auditor shall be placed before the Audit Committee; and (vi) certification/declaration of financial Statements by the Chief Executive/Chief Finance Officer. 26. In a dual or decentralised system where ministries exercise the ownership function; these ministries are responsible for particular PSUs in the same way they are for other government functions. Within each ministry there may be a special unit or fund overseeing PSUs. These units are a normal part of the administration, report to the minister, and are subject to audit and investigation as are other parts of the government. The ministry, in turn, may have reporting requirements to government and the legislature regarding its PSUs. 27. As part of the Directors’ Report or as an addition thereto, a Management Discussion and Analysis Report should form part of the Annual Report. 28. There is a growing interest in interventions aimed at mobilising the public against corruption and strengthening the demand for curbing corruption and promoting better forms of governance. Demand-side approaches cover a wide range of interventions aimed at promoting civic engagement in governance processes. This recognition has opened new opportunities for citizen involvement in recent years, with the proliferation of a wide range of accountability mechanisms aimed at increasing citizen voice and influence over public policies and the use of public resources. Such interventions share the common goal of empowering citizens to play a more active role in decisions that affect them, with the view to reducing the accountability gap between citizens and policy makers and improving the provision of public services. The Right to Information Act 2005 provides for setting out the practical regime of right to information for citizens to secure access to information under the control of public authorities, in order to promote transparency and accountability in the working of every public authority, the constitution of a Central Information Commission and State Information Commissions and for matters connected therewith or incidental thereto. 29. Information in accordance with the provisions of Section 217(1) (e) of the Companies Act, 1956 read with Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1988 regarding conservation of energy, technology absorption and foreign exchange earnings and outgo is given in Annexure of annual report. None of the employees have drawn remuneration in excess of the limits prescribed under section 217(2A) of the Companies Act, 1956 read with Companies (Particulars of employees) Rules, 1975 during the year 2010–2011. 30. As per the requirements of Clause 49 of the Listing Agreement a detailed report on Corporate Governance together with the following is given at Annexure: (i) CEO/CFO Certificate [as per Clause 49(V)] and (ii) Certificate from the Company’s Auditors [as per Clause 49(VII)].

Diverse Nature of Corporate Governance in the Indian Public Sector

233

REFERENCES Baygan-Robinett, G. H. (2004). Estrin, held by the visible hand – the challenge of SOE corporate governance for emerging markets. Washington, DC: World Bank. Estrin, S. (1998). State ownership, corporate governance and privatization. In Corporate governance, State-owned enterprises and privatization. Paris, France: OECD. Available at http://eprints.lse.ac.uk/22562/ Guidelines on corporate governance for central public sector enterprises. (2010). Government of India, Ministry of Heavy Industries and Public Enterprises, Department of Public Enterprises. Available at http://dpe.nic.in/sites/upload_files/dpe/files/gcgcpse10.pdf Isaksson, M. (2005). OECD guidelines on corporate governance of State-owned enterprises: A tool for value creation. State ownership report. Available at http://www.oecd.org/daf/ corporateaffairs/corporategovernanceprinciples/40823806.pdf Ministry of Finance. (2000). Government governance: Corporate governance in the public sector, why and how? The Netherlands: Government Audit Policy Directorate. Monga, R. C. (2007). Corporate governance in India: Lessons from public sector. In E. T. Gonzalez (Ed.) Best practices in Asian corporate governance. Reddy, Y. R. (2004, September 4). Corporate governance: Challenges for public enterprises in India. Address to the conference of CEOs of central public sector enterprises, Ministry of heavy industries & PEs and SCOPE, New Delhi. Reddy, Y. R. K. (2002, May). Corporate governance and empowerment of boards. Kaleido Scope. Available at http://www.academyofcg.org/data/5.%20YRK%20-%20CG%20 SOEs%20in%20India%20KaleidoSCOPE%20April%20%6009.pdf Schedler, K. (2003). Public management developments in the light of two rationalities. Public Management Review, 5(4), 533–550. ISSN 1471–9037, print/ISSN 1471–9045. Available at http://www.tandf.co.uk/journals Standing Committee on Public Enterprises. (2004). Government issues. Retrieved from http:// www.scopeonline.in/issues.htm Whitfield, T. (2003, 24 September). Achieving best practice corporate governance in the public sector. Chartered Secretaries Australia’s Public Sector Governance Forum. Retrieved from http://www.apo-tokyo.org/publications/files/ind-20-bp_acg.pdf

ABOUT THE CONTRIBUTORS Gu¨ler Aras is Professor of Finance and Dean of the Faculty of Economics and Administrative Sciences, Yıldız Technical University, Turkey. Veronica Broomes is a Sustainability & CSR Consultant and Researcher at Executive Solutions Training Ltd in London, UK. Maria Alice Nunes Costa is Professor of Political Science and Coordinator of the Laboratory of Public Policy, Governance and Regional Development (LADER/UFF), University Federal Fluminense, Brazil. David Crowther is Professor of Corporate Social Responsibility, De Montfort University, UK. Millicent Danker is the founder of Stakeholder Relations consultancy Perception Management International & Associate Faculty of Henley Business School, UK. Rachel English lectures and researches at De Montfort University, UK. Bruno Silva Faria an undergraduate student at the University Federal Fluminense, Brazil. Carolina Doria Romeo Losicer is a Masters student at the University Federal Fluminense, Brazil. Marı´ a del Mar Miras Rodrı´ guez is based at the University of Seville, Spain, where she is also undertaking a PhD. Roopinder Oberoi is Post Doctoral Fellow and Assistant Professor at the University of Delhi, India. Jessica Guerra Ina´cio de Oliveira is an undergraduate student at the University Federal Fluminense, Brazil. Wang Hong is Associate Professor at Shanghai University, School of Economics in China.

235

236

ABOUT THE CONTRIBUTORS

Shahla Seifi is managing partner of SeifiCrowther Consulting and currently also undertaking a PhD at Universiti Putra Malaysia. Banu Yobas- has been working for the Central Registry Agency (CRA) of Turkey since 2003. She is also a PhD candidate at Management Engineering Dept., Istanbul Technical University (ITU).

INDEX accountability, 14, 22, 34–35, 37–40, 44, 46–48, 56, 59–60, 63–64, 99, 112, 114, 117, 119, 126, 129, 163, 187, 196, 203, 205–206, 208–209, 213, 215, 219, 221–224, 226, 229–232 Act on Occupational Diseases in Mines and Works (Republic of South Africa, 1973), 162 Adam Smith, 196 administrative ministry, 212, 220–221 agency problem, 111, 125, 204 agency theory, 37, 46, 58–59, 62, 64 alternative trading systems, 134, 136 Anglo American Platinum mine, 161, 163 annual report, 44, 50, 53, 55, 63, 200, 218, 227, 231–232 apartheid, 162 Aral Sea, 11 arbitrage, 112, 133, 136, 138 audit committee, 127–128, 218–219, 224, 227, 231–232 auditing profession, 54 auditor, 207, 218–219, 231–232 Bayes theorem, 104–105 Bharat Heavy Electricals Limited (BHEL), 203–204, 207, 209–210, 213, 227–230 board of directors, 36, 112, 119, 126–127, 212, 227, 232 237

Botswana, 158, 160, 165–168, 171, 173–174, 176 brand image, 90–91 Brazil, 133, 181–182, 184–186, 191–193, 231 Brazil’s military dictatorship, 185 Brundtland, 1, 3–7, 15, 96–98 business ethics, 22, 57–62, 64, 204, 209, 214 Cadbury Report, 117 capital markets, 35, 54, 111–114, 116, 119, 123, 125–126, 129, 211 carbon dioxide, 10–11, 15–16, 75, 85–86, 89, 191 carbon footprint, 11 Chief Risk Officer (CRO), 127 China, 76, 78, 80, 82, 85, 101, 145, 150, 162–163 citizens, 39, 41–42, 52, 157, 161–163, 165, 170, 174, 176, 187, 190, 193, 205, 207, 222, 232 civil law, 196 climate change, 1, 10–11, 73–79, 81–85, 87–89, 91, 101 code of ethics, 191, 214, 226 communities, 14, 59, 64, 157–160, 162–177, 186 Companhia Sideru´rgica Nacional (National Steel Company/ CSN), 182 competition, 90, 108, 111–112, 119–122, 125–126, 129,

238

131–132, 136–137, 139, 170, 191, 198, 208, 216–217, 228 competitive advantage, 75, 89, 130 compliance, 14, 37, 43, 52, 62–63, 129–130, 133, 135, 143, 146–150, 153–154, 164, 190–191, 205, 215, 218, 225, 227, 229–230 consumption patterns, 183 corporate control, 112, 114, 122, 132, 135–136 corporate environmental responsibility, 84, 88 corporate governance, 1, 19, 33–40, 44, 46–48, 52, 54–60, 63–64, 73, 95, 111–119, 121–125, 128–130, 132–135, 137–139, 143, 157, 181, 190–194, 198, 203–215, 217–221, 223–232 corporate social responsibility, 2, 20–21, 57–58, 61, 158, 182, 187, 193, 195–196, 198 Corruption Perceptions Index, 40 country of origin, 143–144, 147–150, 152–153 Country of Origin Rule, 143–144, 147–150, 152–153 crude oil, 101 cultural values, 7 democracy, 40, 42, 115, 157, 162 demutualisation, 113, 115, 119–120, 125, 129, 131, 136, 138 Department of Public Enterprises (DPE), 207, 214, 216–218, 223, 227, 229 developing country, 76, 159, 170, 177 diamond mining, 158, 160, 162, 165–167, 173, 176

INDEX

disclosure theory, 42–43 durability, 7, 15, 97, 192, 198–199 ecological footprint, 10 ecology, 96 economic activity, 6–7, 10, 119, 165 economic power, 189, 194, 199 energy efficiency, 75–76, 79, 83, 87, 89–90, 95, 97, 101, 107 enhanced business reporting, 53 environment, 2–3, 7, 9–10, 15–16, 19, 23, 34, 39–42, 47, 75, 77–78, 85, 87, 97–99, 101, 107, 112–113, 119–121, 125, 127, 129–130, 134, 137, 187, 189, 194–197 environmental reporting, 53, 85 ethical dilemmas, 44, 50 ethics, 22, 34–35, 38–39, 48, 52, 55–62, 64, 137, 191, 197, 204, 206, 209, 214, 226–227 Exxon Valdez, 83 Federal Reserve, 128 financial crisis, 1, 19, 24–26, 28, 42, 45, 111–112, 119, 121, 123, 128, 135–136, 166 financial exchanges, 118, 120 financial institutions, 111–112, 119, 121–123, 138, 169, 175, 191, 210 financial performance, 9, 19–22, 26, 29, 138, 210–211, 218, 223 financial risk, 59, 151–152, 218 financial sector, 116, 124, 128, 135, 229 foreign direct investment, 165–166, 169–170, 174, 176 fraud, 45, 58, 61, 114, 127, 132, 136, 138, 227

Index

game theory, 96 Generalised System of Preferences (GSP), 143–147, 150–154 Getu´lio Vargas, 183 global banking, 120 global economic crisis, 195 Global Fund for Aids, 168 global warming, 10–11, 73–74, 80–81, 85, 89, 91, 99 globalization, 98–99, 111, 197–199 governance, 1–2, 10, 13–15, 19, 33–42, 44–48, 50–52, 54–64, 73, 95, 97, 99, 101, 103, 105, 107, 111–139, 143, 154, 157–163, 165, 167, 169, 171, 173–175, 181–182, 190–194, 197–198, 203–232 governance structure, 111, 117, 119, 124–126, 131, 227 governance system, 35, 46–47, 55, 111, 115–116, 119, 121–122, 124–125, 137, 205 governments, 1–3, 14, 42, 50, 77, 121, 128–129, 133, 136–137, 157–160, 167–173, 175–177, 183, 186, 190, 205–206, 228 greenhouse gases, 10–11, 16, 73–74, 78, 84 H M Revenue and Customs, 146–147 Hubbert’s Peak, 12, 16 India, 78–80, 85, 137, 203–205, 207, 209, 218, 228–231 Indian railways, 229 industrial engineering, 95–97, 108–109 information asymmetry, 51, 54

239

innovation, 5, 75–76, 88–89, 121, 127–128, 159, 161, 163, 166–167, 169, 173–176 Institute of Directors, 40, 46 International Finance Cooperation (IFC), 164 Inward Processing Relief (IPR), 144 ISO 26000, 96, 99, 159, 196–197 Juscelino Kubistchek Government, 1956/1961, 185 Kimberley process, 165 Kyoto Protocol, 11, 77–82, 84, 91 late capitalism, 192 legitimacy, 20, 190, 216, 222 lesser developed countries, 143–144 life cycle, 102 low carbon economy, 73–77, 79, 81, 83, 85, 87–91 Managerial Opportunism Hypothesis, 20, 22, 29 market power, 112, 126 Millennium Development Goals (MDGs), 159–160, 171, 176 Mondo Vision Exchange Forum, 118 Monte Carlo Simulation, 107 moral hazards, 54 morality, 61–62, 196–197 Nasdaq, 53, 131, 133, 138–139 National Institute for Occupational Health, 162 National Privatization Program, 186 New York Stock Exchange, 125 nexus of treaties, 7

240

OECD, 40, 45, 49, 100, 117, 119, 121–123, 130, 133, 138–139, 212, 219, 230 oil crisis, 182, 186 oil shortages, 12 Outward Processing Relief (OPR), 144 ownership, 34, 41, 111, 114, 118–120, 122, 134, 165, 189, 206–208, 210, 212–217, 219–221, 223, 225, 230–232 parliament, 84, 213–215, 221–223, 225, 228 performance measurement, 228 performance monitoring system, 210 platinum mining, 160–163 pollution, 8, 75, 99, 190–191 poverty reduction, 166, 169, 174, 176 preferential tariffs, 143–145, 147–149, 151, 153–154 private ownership, 206 profit maximization, 183, 190, 194–195 public governance, 205 Public Private Community Partnerships (PPCPs), 160, 169, 175–176 Public Private Partnerships (PPPs), 169, 174–176 public sector management, 205, 228 public sector units, 204, 211 public sectors, 205–206, 216 regulation, 13–14, 44, 53, 64, 87, 91, 112–114, 118–121, 124, 132, 134–137, 148, 190, 208, 214, 228

INDEX

regulator, 208 regulatory institutions, 45 Rio de Janeiro, 77–78, 138–139, 181–182, 184, 192 risk, 1, 19, 33, 35, 37, 39, 41, 43, 45, 47, 49, 51, 53, 55, 57, 59, 61, 63–64, 73–74, 77, 83–87, 95–96, 102, 106–108, 111–112, 116, 119, 121–124, 126–128, 132–138, 143, 145–154, 157–159, 161–163, 165, 167–169, 171, 173–176, 181, 188, 191, 196, 203, 214, 218–220, 228 risk analysis, 106–108 risk aversion, 127 risk management, 96, 102, 111, 119, 124, 128, 161, 191, 218, 228 ROA, 26–28, 30 ROE, 26–28, 30 SAB Miller, 158, 172 Sarbanes-Oxley, 45, 191 Sarbanes-Oxley Act of 2002 (SOX), 45, 47, 52–53, 58 Securities and Exchange Board of India (SEBI), 218, 223, 225, 230–231 self-regulatory organization (SRO), 122, 133 shareholder return, 158 shareholder theory, 35 shareholder value, 2, 35, 37, 51, 61–62, 86, 120, 130, 210–211, 228, 230 Slack Resources Hypothesis, 20, 22 social contract, 7, 15, 96 social injustice, 197, 229 social justice, 7, 42, 197

241

Index

social reporting, 43, 47, 53, 63 social responsibility, 2, 13, 19–21, 36, 57–58, 61, 99–100, 158–159, 181–183, 185–189, 191–199 South Africa, 158, 160–165, 171–172, 176 South Africa’s 1996 constitution, 163–164 sovereignty, 197–199 Spain, 21, 24–27, 29, 78, 183 stakeholder accountability, 34, 38, 47–48, 64 stakeholder engagement, 157–159, 161–165, 167, 169, 171, 173–175, 177 stakeholder theory, 34–35, 37–38, 58–59, 193 stakeholders, 9, 14, 20, 23, 33–41, 47, 49–51, 53–54, 60, 63, 117, 119, 123, 137, 158–159, 163–165, 168, 172–173, 177, 181, 190, 193–195, 205, 214, 225, 231 standardization, 98, 198 state ownership, 210, 221 steel industry, 182, 187, 189–190 stewardship, 2, 8, 90, 117, 225–226 stock exchanges, 112–113, 119, 122–123, 129–134, 136, 138–139, 231 supply chain, 1, 12, 73, 77, 86, 91, 168, 170, 172, 175, 185, 194 sustainability, 2–10, 12–13, 15, 22, 53, 91, 95–99, 101–103, 108, 121, 128, 133–134, 138, 161, 168, 176, 190, 192, 198–199, 225 sustainable development, 3–7, 12, 15, 76, 95–101, 129, 133, 139, 158, 193 sweatshops, 12

tax holidays, 171–172 territorial social responsibility, 181–183, 185, 187, 189, 191–193, 195–197, 199 territory, 182–185, 187, 189–200 Thirty Group, 114, 118, 127, 129, 138 transnational companies, 158 transparency, 13, 33–35, 37–57, 59–61, 63–64, 99, 112, 114, 119, 129, 134, 136–137, 158–159, 171, 203–204, 206, 208–209, 220, 222–227, 229–230, 232 Transparency International, 40–41, 48 triple bottom line, 1–3, 5–7, 9, 11, 13, 15, 22, 97, 158, 170, 177 trust, 7–8, 26, 44, 56, 60, 85, 129, 137 truth, 39, 44–45, 58, 60, 62 Uganda, 172 unemployment, 25, 166–168, 170, 172–175, 177, 185, 191 United Kingdom, 11–12, 46, 52, 63, 76–77, 90, 128, 146, 216 United Nations, 3–4, 14, 74, 77–78, 87, 97, 133, 139, 159 United Nations Framework Convention on Climate Change, 74, 77 United Nations Global Compact, 14, 159 United States, 12, 16, 39, 52–53, 78, 80–82, 84, 101, 128, 139, 184, 191 urban planning, 184, 193 Valdez Principle, 83

242

Volta Redonda, 181–185, 187–193, 195, 197, 199 water, 11–12, 26, 184–185, 190–191 Whistle Blower Policy, 227 whistleblowers, 47

INDEX

World Bank, 42, 81, 117 World Commisions on Environment and Development (WCED), 3 World Trade Organisation, 14, 42