CSR and Corporate Governance: Two Sides of the Same Coin

In previous articles, we discussed how effective corporate governance is essential for a well functioning economy and how the practice of good corporate governance is the lubricant that greases the machine of the corporate world. We had also discussed how the practice of corporate social responsibility or CSR is a step in the direction of effective corporate governance.

The point here is that companies that practice good corporate governance are also those that are socially and environmentally responsible.

Being a good corporate citizen means that companies have to be internally well governed and externally responsible.

In other words, CSR and corporate governance are two sides of the same coin. The implication here is that unless corporates practice good governance they are unlikely to have a social conscience and hence the first step towards CSR is through practicing the art of effective corporate governance.

The role of the board of directors and the management is especially critical since they are the final arbiters of the actions of the companies. The buck stops with them and hence they have to ensure that the companies that they represent are run effectively and at the same time take into account the social and the environmental concerns.

It is not without basis that companies like Dow Chemicals and Pfizer are routinely accused of malfeasance and unethical behavior since they have outstanding liabilities as a result of their past actions.

On the other hand, companies like Unilever and Infosys are often held up as examples of the way in which effective corporate governance can be practiced. The choice for other companies is clear: either they set their own house in order and comply with social and environmental norms or they run the risk of a sullied image among the investors and the consumers at large.

The next aspect is that the employees and the stakeholders including the shareholders have an important function to perform as far as the twin objectives of good corporate governance and the practice of CSR are concerned.

Since effective corporate governance means that internal democracy and external responsibility go hand in hand, all the stakeholders have a duty towards the company to persuade the management to follow ethical and social norms of doing business. This is a manifestation of what has been called shareholder activism and stakeholder involvement which means that the entire stakeholder and the shareholders can exercise power over the actions of the board and the management to steer them towards the practice of good corporate governance and CSR.

Finally, the pressure groups and the consumers at large can vote with their wallets and their unrelenting focus on the actions of the corporates to bring about effective corporate governance.

As the cliche goes, charity begins at home and hence corporates need to ensure that their internal governance models are robust before they embark on CSR.

In conclusion, there is a mass awakening of sorts that is happening with society at large waking up to the need for corporates to be ethical and socially responsible and conscious. Hence, no corporate can afford to ignore the telltale signs of consumer and stakeholder focus on these aspects.

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