Corporate Governance and Corporate Social Responsibility Synergies and Interrelationships

• Author: Myriam Rabbath,Dima Jamali,Asem M. Safieddine
• DOI: http://doi.org/10.1111/j.1467-8683.2008.00702.x
• Date: 01 September 2008
• Published date: 01 September 2008

Corporate Governance and Corporate Social

Responsibility Synergies and Interrelationships

Dima Jamali*, Asem M. Saf‌ieddine and Myriam Rabbath

ABSTRACT

Manuscript Type: Empirical

Research Questions/Issue: This paper seeks to explore the interrelationships between corporate governance (CG) and

corporate social responsibility (CSR): f‌irst, theoretically, by reviewing the literature and surveying various postulations on

offer; second, empirically, by investigating the conception and interpretation of this relationship in the context of a sample

of f‌irms operating in Lebanon. Accordingly, the paper seeks to highlight the increasing cross-connects or interfaces between

CG and CSR, capitalizing on fresh insights from a developing country perspective.

Research Findings/Results: A qualitative interpretive research methodology was adopted, drawing on in-depth interviews

with the top managers of eight corporations operating in Lebanon, with the f‌indings suggesting that the majority of

managers conceive of CG as a necessary pillar for sustainable CSR. These f‌indings are signif‌icant and interesting, implying

that recent preoccupation with CG in developing countries is starting to be counterbalanced by some interest/attention to

CSR, with growing appreciation of their interdependencies and the need to move beyond CG conformance toward

voluntary CSR performance.

Theoretical Implications: This study makes two important contributions. First, it suggests that there is a salient two-way

relationship and increasing overlap between CG and CSR. While much previous literature has researched CG and CSR

independently, this paper makes the case for considering them jointly and systematically. Second, the paper outlines a

number of theoretical propositions that can serve as the basis for future research on the topic, particularly in developing

countries, given that the data and theoretical propositions are both derived from and tailored to developing country

contexts.

Practical Implications: This study can potentially alert managers to the increasing overlap between the CG and CSR

agendas and the need to exert diligent systematic efforts on both fronts.CG and CSR share more in common than previously

assumed, and this needs to be accounted for by practitioners. The research can also alert policy makers in developing

countries to the need to increase the vigilance and capacity of the regulatory and judicial systems in the context of CG

reform and to increase institutional pressures, particularly of the coercive and normative variety to enhance CSR adoption.

Keywords: Institutional Theory, Corporate Social Responsibility, Business Outcomes, National Outcomes

INTRODUCTION

Corporations have traditionally been conceived as self-

centered, prof‌it-maximizing entities constituting the

central tenets of capitalism and free market philosophies

(Hg, 2007). Until recently, the connections between capital-

ism, economic growth, and self-interested corporation have

largely gone unquestioned in policy circles (Hg, 2007).

However, recent and monumental corporate scandals and

failures have redirected attention to issues of good gover-

nance, ethics, trust, and accountability, heightening the

debate on topics of corporate governance (CG) and the ethics

of economic conduct (Marsiglia and Falautano, 2005).

Accordingly, at no time in history have the role and power

of the corporation been accorded more popular attention

and concern, with the pure prof‌it maximization axiom

increasingly called into question.

While shareholder value maximization is still a major goal

for corporations worldwide, the rise in social activism and

the emergence of new expectationshave indeed caused other

aspects of corporate performance to be examined alongside

f‌inancial results.As f‌irms grow in size and inf‌luence, they are

*Address for correspondence: University of Southampton – School of Management,

Highf‌ield Southampton SO17 1BJ, UK. Tel: +44 (0) 23 8059 8961; Fax: +44 (0) 23 8059

3844; E-mail: D.Jamali@soton.ac.uk

CG AND CSR SYNERGIES AND INTERRELATIONSHIPS 443

Volume 16 Number 5 September 2008

© 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd

doi:10.1111/j.1467-8683.2008.00702.x

no longer expected to be mere contributors to the global

economy, but rather to reconcile and skillfully balance mul-

tiple bottom lines and manage the interests of multiplestake-

holders (Jamali, 2006). There is some recent evidence to

suggest that organizations are generally more inclined today

to broaden the basis of their performance evaluation from

a short-term f‌inancial focus to include long-term social,

environmental, and economic impacts and value added

(Hardjono and van Marrewijk, 2001).

This is where the concepts of CG and corporate social

responsibility (CSR) enter the picture. Under the umbrella of

CG, companies are encouraged to promote ethics, fairness,

transparency, and accountability in all their dealings. They

are expected to continue generating prof‌its while maintain-

ing the highest standards of governance internally. A f‌irm’s

decisions should also be aligned with the interests of differ-

ent players within and outside the company (Freeman,

1984). Hence, businesses have to also keep their activities

attuned to society’s ethical, legal, and communal aspira-

tions. This falls in the realm of CSR, which has attracted

increasing attention in recent years in relation to how com-

panies approach their interactions with their various stake-

holders – from providing quality products and services, to

undertaking charitable activities.

Much of the previous literature has researched and dis-

cussed CG and CSR independently, as being unrelated

accountability models, whose guidelines, reporting stan-

dards, and oversight mechanisms have evolved separately

(Bhimani and Soonawalla, 2005). However, we feel that CG

and CSR are strongly and intricately connected, and that

previous literature has fallen short in capturing the nature

and essence of this relationship.As Bhimani and Soonawalla

(2005) put it, CG and CSR are two sides of the same coin.

This paper will explore this relationship in depth; f‌irst, theo-

retically, by reviewing the literature and highlighting how

this CG–CSR relationship has been posited. Through a quali-

tative study in the Lebanese context, this paper will also

investigate managerial interpretation and practical applica-

tion of CG and CSR, their understanding of the natureof this

relationship, as well as their efforts at pragmatic integration

of each of these two paradigms in their daily operations.

LITERATURE REVIEW

Corporate Governance Literature

This paper will focus on an important – and in no way

simplistic – def‌inition of CG as “the system by which com-

panies are directed and controlled” (Cadbury, 2000: 8). The

control aspect of CG encompassesthe notions of compliance,

accountability, and transparency (MacMillan, Money,

Downing and Hillenbrad, 2004), and how managers exert

their functions through compliance with the existing laws

and regulations and codes of conduct (Cadbury, 2000). The

importance of CG lies in its quest at crafting/continuously

ref‌ining the laws,regulations, and contracts that govern com-

panies’ operations, and ensuring that shareholder rights are

safeguarded, stakeholder and manager interests are recon-

ciled, and that a transparent environment is maintained

wherein each party is able to assume its responsibilities and

contribute to the corporation’s growth and value creation

(Page, 2005). Governance thus sets the tone for the organiza-

tion, def‌ining how power is exerted and how decisions are

reached.

A narrow view of CG portrays it as an enforced system

of laws and of f‌inancial accounting, where socio-

environmental considerations are accorded a low priority

(Saravanamuthu, 2004). There is, however, a broader CG

conception, emphasizing every business’ responsibilities

toward the different stakeholders that provide it with the

necessary resources for its survival, competitiveness, and

success (MacMillan et al., 2004). As such, managers are pri-

marily accountable toward stockholders whose wealth and

fortunes are at stake. But they are also responsible toward

employees, suppliers, customers, and communities whose

investments in the company are equally signif‌icant in other

important respects. Thus, within this broader conception,

the interests of all stakeholders are accorded due regard and

consideration and posited as constraints on managerial

action and shareholder rights (Kendall, 1999; Page, 2005).

Other focal elements or ingredients of good governance

include corporate leadership and strategy setting. These

aspects involve def‌ining roles and responsibilities, orienting

management toward a long-term vision of corporate perfor-

mance, setting proper resource allocation plans, contri-

buting know-how, expertise, and external information,

performing various watchdog functions, and leading the

f‌irm’s stakeholders in the desired direction (MacMillan et al.,

2004; Cadbury, 2000; Page, 2005). The leadership and control

aspects of CG are thus not mutually exclusive; rather, they

go hand in hand, and they both def‌ine the extent of power

accorded to various stakeholders, including executives,

managers, employees, and, to a lesser extent, external con-

stituencies and actors (MacMillan et al., 2004). Leaders in

this respect should exercise their f‌lair in taking their compa-

nies forward, while according due regard to their responsi-

bilities to shareholders and stakeholders (Mallin, 2005).

Corporate Governance is also intimately concerned with

honesty and transparency, which are increasinglyexpected of

the public both in corporate dealings and disclosure (Page,

2005). Investor conf‌idence and market eff‌iciency depend on

the disclosure of accurate information about corporate per-

formance. To be of value in global capital markets, disclosed

information should be clear, consistent, and comparable

(OECD, 1999). Moreover, transparency and disclosure of

information between managers and employees are essential

to earn employee trust and commitment.These factors ensure

an accurate and timelyreporting of activities, thus providing

the necessary underpinning that would facilitate the applica-

tion of sound governance mechanisms (Cadbury, 2000).

While the above focuses primarily on internal governance

mechanisms and principles, a holistic view of CG needs to

also account of external governance mechanisms, including

the takeover market and the legal system (Denis and

McConnell, 2003). Admitting that the legal system is a uni-

versally importantCG mechanism, providing for the protec-

tion of investor rights and enforcement of rules (La Porta,

Lopez de Silanes, Shleifer and Vishny, 1998), the market for

corporate control becomes salient when there is enough

incentive for outside parties to seek control of the f‌irm or, in

other words, when internal control mechanisms fail to a

large degree (Denis and McConnell, 2003). Given the

444 CORPORATE GOVERNANCE

Volume 16 Number 5 September 2008 © 2008 TheAuthors

Journal compilation © 2008 BlackwellPublishing Ltd