Does Corporate Governance Include an Obligation to Society as a Whole?

There is an increasing level of debate about whether and to what extent corporations have an obligation to protect the interests of society in general — and not just to their shareholders. This is generally described as corporate social responsibility. A good many companies have recognized a need to do more, and they provide periodic reports describing their activities, such as efforts to reduce carbon emissions.

Today, an individual I respect, Richard Anderson, posted a blog that I want to share here. It’s not that I necessarily agree with Richard, but I respect his opinion and want to give it some air. Richard is a recognized force in the corporate governance world and recently completed a study of the causes of the financial crisis for the Organisation for Economic Co-operation and Development (OECD). It is a very UK-centric piece, but the general comments apply equally to the rest of the world.
Some words of explanation to help understand Richard’s comments:
  • FRC is the Financial Reporting Council, the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance.
  • The UK, like most of the world, requires companies to comply with the provisions of the national governance framework or explain, in their filings with the regulator, how and why they do not. The majority believe this is more efficient, if not more effective, than the compliance requirements of the U.S. Sarbanes-Oxley Act of 2002.
  • Sir Charles Hogg is the chair of the FRC.
  • Sir David Walker is the former chairman of Morgan Stanley International and was charged by the UK government earlier this year to lead a review of banks’ corporate governance.

I am interested in your views:

1.      Do you believe there is an obligation for companies to prioritize the interests of society over those of the organization and its shareholders?
2.      Do you believe that the “comply or explain” approach is better or worse than the comply and certify requirements under U.S. law?
3.      Do you agree that “External audit is stretched to a point where the degree of reliance that is placed upon it is out of proportion to the amount of work that actually goes into it”?
4.      Finally, do you agree with Richard’s view? He says, “We need to see a fundamental change in attitudes towards corporate governance. Boards need to be held accountable for the discharge of their corporate governance responsibilities and this requirement should be enshrined in law in all major business jurisdictions. There needs to be a fundamental re-alignment, at least in societally critical businesses (banks, maybe those that form part of the critical national infrastructure, maybe those that have an impact on life and death such as major chemical businesses with plants near densely populated cities) whereby a new concept of ‘assurance’ can help non-executives hold the more risk-engaged directors to account.”

Posted on Jul 1, 2009 by Norman Marks

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  1. Norman,

    I just wanted to provide a couple of thoughts on the initial point as to whether interests of society should receive priority over the internal stakeholders. My view is that this is not the appropriate question to ask. The appropriate question is who are the stakeholders both internal and external, what are their needs and what are the risks for failing to meet their needs/expectations.

    Take as an example the green issue/carbon emissions you articulate above.  Wal Mart as an example is now requiring that each supplier with no exceptions "calculate and disclose the full environmental costs of making their products, then allow Wal Mart to distill the information into a rating system that shoppers will see alongside prices for everything from T-shirts to televisions." So from perspective of the supplier, it needs to recognize Wal Mart as an external stakeholder should it wish to continue to do business with Wal Mart.

    I think that it is critical that all of the stakeholders needs be identified. What is apparent is that in many cases, this is not being  done in the risk assessment and companies bear the consequences of such actions. Further to your point of prioritization, once the stakeholders have been identified and their needs and this is related to the overall objectives of the company, it can then be a bit easier to prioritize the stakeholders and sometimes it will end up being the external ones that take priority and other times it will be the internal stakeholders.

    I hope that this is helpful.

    Arnold Schanfield

     

  1. I came to this blog after hearing you speak at the IIA luncheon in Silicon Valley.

    You had mentioned the issue of societal responsibility during the talk, and I was immediately reminded of the infamous "T J Rodgers attacks nun" story.

    And here's a link: http://oldsite.reason.com/9610/fe.rodgers.shtml

  1. I was interested to see the TJ Rodgers story. I was not familiar with it, and it raises some critical issues that we dismiss at our peril. However, I would differentiate what I have written in the report that Norman has written about in that there are organisations that are of such societal importance that our governments, UK, US, French, Dutch, German and many, many others decided that they could not be allowed to fail. Hance we have collectively poured something like $15 trillion into the financial services sector in order to prop it up. Had we let it go we would have seen a devastating global depression with misery of unimaginable proportions. In such cases then I would suggest that banks need to be conscious of and at times be subservient to our needs as society (and tax payers) rather than solely to shareholders.

    I am not sure how wide I would draw the net for societally important companies, but I rather suspect that T J Rodgers organisation, fine as it obviously is, would not fit that description. This is why the kneejerk rejection of the kind of mechanisms that I am suggesting would be inappropriate.

    Happy to discuss!

    Richard

  1. Hi Thank you for the updates and the  article opens up endless debates in the  areas of corporate governance.

    The question of corporate governance and its  obligation to society is fundumental.

    Really if crporate governance and its yardsticks could be best practiced in public organisations, the effects under economic depression would be minimal, fraud and corruption would be minimal,individual insurance,personal debts, personal investments and morgaging,personal taxes, government spending,personal spedning and foreighn investments would be checked in the interest of society. This would goo a log way in institutionalising corporate governance under depression in a tax regime and budget implications would be a definite area for tangible results. remunerations or retirement benefits would be checked off! but what would be the legal implications when CEO s' employment contract terms have been abbrogated?

    Richard Gudoi MSc.Audit(UK),CIA,CFE

  1. Hi!

     

    Corporate governance truly has an obligation to society in many ways.

    First, it defines the way policies affect the communities and or society. These can be components of stakeholder. Who are these stakeholder? These can be workers, customers, organisations, government parastals,and well-wishers. International institutions like banks are a party to it.

     So when corporate governance is well practiced, its impact is felt in all sectors of the economy. Such effects can be full employment, higher standards of living,household incomes increase, government plans are met, more tax revenue is collected, communication is well done,infrascture is well managed.

    So the idea that corporate governance has a bearing to society ,to me I can say yes it does have an impact. This is because, corporate social responsibility can be felt, organisational outreach is now a mandated to give back to the communities and that is prt of good practices of corporate governance.

     

    Regards,

     

    Richard Gudoi Gid'Agui

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