Introduction
Corporate governance in strategic management entails a framework of rules and regulations with which the management uses to enhance accountability and transparency in dealing with the company’s stakeholder relationships. Stakeholders of the company include shareholders, suppliers, employees, management, the community, and the government. Each stakeholder has its own set of rights and expectations from the day-to-day activities of the business. By observing the needs and interests of each stakeholder, one engages in Corporate Social Responsibility where not only the interests of the firm are at hand but also the societal, economic, and environmental interests.
What is CSR?
Corporate social Responsibility is a strategic management concept of corporate governance where entities (corporate, public or private) integrate environmental and social aspects in their business concerns in dealing with different stakeholders. It is a means by which a business entity achieves equilibrium or a balance in economic, social, and environmental spheres of operation. Through corporate social responsibility, businesses are able to manage the expectations of both the shareholders/owners of the business and the stakeholders
Corporate governance
Corporate governance consists of three main components for proper functioning and delivery of results. The framework must have clear implicit and explicit contracts that govern distribution of rewards, duties, responsibility, and rights between a business entity and the company as the first component. The second component is that it should have effective procedures of dispute resolution among the stakeholders that arise from a conflict of interests. The framework should base the dispute resolution mechanism on the duties, roles, and the rights that each stakeholder holds in the business. Lastly, the framework should bear the precise and clear procedures of running the company. These procedures serve in controlling, supervising and communication in Oder to keep the right measure of checks and balances.
Corporate governance may either assume the stockholder form of management, which is a traditional form of governance of the Stakeholder from of management, which is the new form of strategic management or governance. The traditional/stockholder form of management maintains that (1) the shareholders retain control of the firm, (2) The fiduciary duty of the directors is to serve the shareholder interests and (3) The main objective of the business is to maximize the owner's equity or wealth. While this form of management served well in eliminating the principle - agent problem where the management served the shareholder interest alone, the style is limited in its scope and for a firm operates and interacts with many stakeholders, a conflict of interest is likely to arise among the different stakeholders if the firm does not uphold their expectations.
Adoption of the stakeholder management practice in strategic management led the concept of corporate social responsibility in management. This is where; firms recognize the need to be sensitive to the effects of the firm’s decision-making and actions beyond the shareholder interests. A business entity operates in an environment with many stakeholders that have different interests. Corporate social responsibility aims at incorporating all the stakeholders in the running of the business. It aims at taking care of the interests of each participant in equal measure.
Principal-Agent Problem
Even though the stakeholder form of management achieves equilibrium in the economic, social, and environmental objectives of the firm, it presents two major problems. One is that it places the directors or the management of the business in a principle- agent problem. A principle agent problem arises when there is disconnect or misunderstanding between the goals, targets and objectives of the principal and those of the agent whom the principal appoints and authorizes to represent him. In stakeholder form of management, principal-agent problem arises when the directors (agent) who are employed by the shareholders (principal) to maximize shareholder wealth (principal’s main objective) find themselves in a dilemma on whose interests to pursue in that they have to pursue all the stakeholder interests and not the shareholder’s alone.
An agent- principle problem may also occur when the agent’s interests override the principal’s or the other stakeholder’s interests. A typical example is in the recent Hong Kong’s employee strike at Kwai Chung Container Terminal in a pay dispute. Hong Kong International Terminals (H.I.T), declined to pay them by stating that they were not party to the employment contract. However, the employers insisted on getting their dues on grounds that H.I.T director was also the director of the sarcoma labour firm that H.I.T contracted to provide the labour on its behalf. In this case, conflict of interest is evident between H.I.T and its director. If the director had an interest in the contract, he should have clearly stated his interest to the board of directors.
Many firms in the recent past in Hong Kong have adopted the Corporate social responsibility strategy in management examples include the Cathy pacific which has evolved from the traditional Asian governance to incorporate corporate social responsibility. It has been reporting on the corporate social responsibility since 1997 as a form of accountability and transparency measure to the various parties with interests in the firm. Another example of a Hong Kong firm that incorporated CSR in the recent past is the Link REITs firm, which has adopted the global reporting initiative. It engages in the social, environmental, and economic initiatives as part of a commitment to upholding its stakeholder’s interests. The following are the main advantages and disadvantages of corporate social responsibility.
Advantages of CSR
Social license
Businesses operate, interact, benefit, and thrive in a social environment rather than a vacuum. It is therefore imperative that for a business to survive it must receive a charter of existence from the society. Without the societal consent and support, the business is bound to fail before it even starts. It is imperative that business should therefore gather some social goodwill in Oder to survive in any social environment. By participating in CSR, businesses give back to the society what it benefits from them in the form of supply of labour, raw materials, and market. A business that engages in CSR is likely able to gain social approval and license to operate than the one that does not.
Triple Bottom line benefits
Through participation in a CSR program, firms gain a triple benefit. First, it benefits by participating in the sustainable conservation of the environment from which it operates. A healthy environment means a steady supply of resources production resources, reduced future cost of negative environmental impact and sustainability of the environment for mutual benefit to the business and community. The second benefit is gaining a dynamic definition of profits, by including the social impact of business activities in the cost of production; businesses are able to perceive a realistic view of profits rather the traditional profits that disregard the social cost aspect. The third benefit that a firm gains by participating in CSR is conducive environment with mutually beneficial relationship with all stakeholders. A firm is likely to gain by practicing fair labour laws, good supply practices, and fair returns on investment through receiving full support from all the stakeholders.
Brand Differentiation
In a highly competitive business environment, firms that practice CSR gain a competitive edge over those that do not in the eyes of the stakeholder (supplier, customers, employees, and Equity owners). CSR differentiates the products of a firm as well as its image from other businesses. Profits are likely to increase faster through the adoption of the CSR strategy. Firms that tend to observe CSR; requirements tend to experience less scrutiny and more goodwill from both the public and the government.
Disadvantages
Nature of business
According to Friedman, Businesses exist to maximize owner’s equity. This means that the nature of the business entity is to create wealth for the shareholders. It exists to serve the shareholder interests and not the societal interest. By observing CSR, businesses face a conflict of interests by putting other interests ahead of the main interest fro which it was created.
Burden To the society
Some business individuals argue that the cost of participating in CSR passes on to the consumer in the long run through higher product prices. Therefore, the net befit the society receives from the business social responsibility is zero. This creates an extra burden to the society that has to bear the cost of production in the first place as well as this new cost of CSR.
Globalization and market expansion
Some businesses are of the view that engaging in CSR costs their firms millions of money in profits. This is because labour laws, environmental restrictions, and economic sanctions limit the extent to which businesses are able to make profits. Different CSR requirements in different countries restrict expansion of business internally and globally. This therefore hinders achievement of globalization and the benefits that come with it.
Unique Situation of Family Owned Companies in Hong Kong
Hong Kong is in a unique situation in that by formerly depending on Britain, its regulatory system is similar to the English law while the actual practices of corporate governance bear both UK and Asian influence. Successful family entrepreneurial ventures have come up in the recent past. The majority of the listed companies in Hong Kong stock exchange is family owned businesses. The overall effect is that corporate governance structure in Hong Kong is a shareholder-centric.This differs from the british system which adopts institutionalized investment
Why Hong kong Should adopt UK Model
Unlike in modern governance structures where institutionalized investment is predominant, the family owned/ investment structure in Hong Kong exhibits some weaknesses in its model. Due to these weaknesses, Hong Kong needs to adopt the British System of coporate governance in oder to remedy the loopholes and avert future flight of investment orpotunities to other destinations. The following are some of the reasons that support this change in governance.
First, the majority shareholder families in Hong Kong influence the major investment decisions and day to day running of business in company governance. The effect of this model of governance is that the minority shareholders have a limited voice in the running of the business.This limits the level of direct foreign investments as well as local investments because investors fear not being able to have a voice on how firms will invest their funds.
Secondly,by adopting the Uk model of governance, the Hong kong compony governance will be able to institute non-executive directors who will act as a balance and check on the executive management. They will be able to protect minority shareholder intrest and promote minority-shareholder activism culture in governance.
Thirdly, the current shareholder centric model does not observe timely and accurate disclosure of information. Under this model, the annual and interim reports produced by componies do not meet the minimum relgulatory requirements on disclosure. The componies provide minimum and limited information such that makes it difficult for outsiders, and foreighn investors to access governance necessary for investment. s
The 1997 financial crisis exposed this weakness therefore prompting the Asian firms to recognize the need of adopting modern governance structure and engaging in CSR where it is important to observe the needs of all stakeholders. The current situation in Hong Kong is that firms still maintain the shareholder centric governance despite having superior U.K. corporate governace rules as their regulatory structure.
In conclusion, Hong Kong stands out in a unique position than other asian countries in that it has good foundations in their regulatory U.K model. The only thing they have to do is to adopt the system and be able to achieve good coporate governance structure. This will boost their investor confindence rating internationally and be able to attract direct foreghn investment as well as superior institutions.
Works Cited
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Hopkins, Michael. Corporate Social Responsibility and International Development: Is Business the Solution? UK: Routledge, 2008.
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