101 5.7.1 Importance of corporate social responsibility in organizations The traditional view has been that corporate social responsibility offers no business benefits, and destroys shareholder value by diverting resources away from commercial activity. Such traditionalists argue that companies should operate solely to make money for shareholders and that it is not a company's role to worry about social responsibilities. Companies pay taxes to government, and it is governments and charities that should be responsible for social matters. This traditional view is losing support amongst all sizes of businesses. The modern view is that a coherent CSR strategy can offer business benefits by enabling a company to: • monitor changing social expectations • manage operational risks • identify new market opportunities • retain key employees. By aligning the company's core values with the values of society, the company can improve its reputation and ensure it has a long-term future. The single-minded pursuit of short-term profitability will paradoxically always end in reduced profits in the longer-term, as customers drift away from the company if they no longer feel any attachment to it. There is considerable evidence that the cost of CSR initiatives should be thought of as an investment in an intangible strategic asset rather than as an expense. Among other importance of CSR are: • It makes good business sense to operate sustainably- Consumers are increasingly aware of the importance of social responsibility, and actively seek products from businesses that operate ethically. • Improved public image. This is crucial, when consumers assess company’s public image in making buying decision. • Efficient Processes – due to the repeatability and consistency of tasks performed. • Increased brand awareness and recognition- News will spread when company committed to ethical practices. More people will therefore hear about company’s brand • Cost savings. Many simple changes in favour of sustainability, such as using less packaging, will help to decrease company’s production costs.
102 • Greater employee engagement. It’s proven that employees enjoy working more for a company that has a good public image than one that doesn’t. • An advantage over competitors. By embracing CSR, company will stand out from competitors in the same industry. 5.7.2 Reporting on Corporate Social Responsibility Non-Financial Disclosures in Malaysia In 2006, Bursa Malaysia introduced a requirement for Main and ACE Market listed issuers to disclose their corporate social responsibility (“CSR”) activities or practices in annual reports. This requirement was perceived to focus more on the social aspects of the business – its people and the community – and had limited impact on value creation. Organisations tended to focus on charitable activities, and not necessarily address sustainability-related concerns connected to their business operations. Globally, many leading organisations have moved beyond CSR. Within a period of 50 years, organisations’ understanding of sustainability has evolved from no knowledge, to the development of new management models which integrate sustainability. In fact, stakeholders are increasingly interested in understanding the approaches of organisations in managing their economic, environment and social risks and opportunities. Corporate Social Responsibilities (CSR) Sustainable Reporting Environmental, Social and Governance (ESG) reporting
103 Increasing impacts from sustainability-related risks (e.g. scarcity of resources, changing social expectations and new legislative requirements in sustainabilityrelated areas) are driving organisations to embed sustainability considerations in response to these risks and their challenges. Starting from the year 2007, Sustainability Report has been introduced (incorporate CSR Report). All Malaysia listed firms need to disclose their sustainability practice in the annual reports of their companies. Bursa Malaysia has introduced a sustainability framework which focusing on four focal areas • Environment • Workplace • Marketplace • Community In the Sustainability Report, the terms economic, environmental and social (EES) is widely used. It can be explained as follows: • Economic An organisation’s impacts on the economic conditions of its stakeholders and on economic systems at local, national, and global levels. It does not focus on the financial condition of the organisation. These may include the organisation's procurement practices, or community investment. • Environmental An organisation's impact on living and non-living natural systems, including land, air, water and ecosystems. These may include the organisation's usage of energy and water, discharge of emissions, or loss of biodiversity, etc. • Social The impacts an organisation has on the social systems within which it operates. These may include the organisation's relationships with communities, employees, consumers, etc. Stakeholders (who may include investors, customers, employees, suppliers, NGOs, local communities, etc.) are now more aware of the impact that businesses have on the economy, environment, and society. This impact may be positive or negative. For example, agricultural activities may create a positive economic or social impact (e.g. providing job opportunities; improving quality of life of local communities) but may also create a negative impact on the environment in the form of local or regional air pollution (e.g. haze generated from open burning). This negative impact may become a reputational risk to the organisation which allowed it to occur and may subsequently affect its ability to obtain funding.
104 Sustainability-related issues, therefore, can significantly affect an organisation’s risk profile, potential liabilities and its value. Hence, there is a need for the business community to respond appropriately. Business leaders have also begun to recognise the benefits of integrating sustainability. Organisations are realising key benefits from integrating sustainability in business including: • Enhancing risk management • Promoting innovation and attracting new customers • Maintaining a licence to operate • Securing capital • Improving productivity and cost optimisation • Enhancing brand value and reputation Environmental, Social and Governance report • The disclosure of Environmental, Social and Governance (ESG) involves nonfinancial disclosures in nature, which related to the issues which is material to the company’s stakeholders and hence provides opportunity for the companies to be transparent in exchanging the information to stakeholders. • Additionally, potential investors have started to utilize ESG reporting as their benchmark in ensuring their investments are in line with their return. • Through ESG reporting, companies are able to provide a deeper overview of their operations, making it easier for stakeholders to have well and full informations about the company at that particular financial year end. • The ESG report is usually used to complement the company’s annual report and financial account where this report benefits the stakeholders in assessing the company’s strategy particularly in environmental, social and governance. • Environmental – issues relating to quality and functioning of the natural environment and natural systems. These include gas emissions, climate change, energy efficiency, air water pollution, waste management.
105 • Social – issues relating to the rights, well-being and interest of people and communities. These include human rights, labour standards, workplace health and safety, employee relations and relations with community. • Governance – Issues relating to the governance of companies and investee entities. These include board composition, business ethics, bribery and corruption, shareholders right, internal control, risk management. • Benefits of ESG Reporting: o Improved transparency and understanding of company’s operations. o Increased trust from stakeholders, investors and customers. o A stronger competitive advantage in market place. o Enhanced brand reputation and public image. o More efficient use of resources and energy. o Detection and prevention of potential risks. o Improved employee engagement. o Better forecasting capabilities for long term planning. o Increased access to capital from investors who prioritize elements in ESG reporting as a factor in making their investment decision.
106 EXERCISES 1. Define corporate governance. 2. Discuss the importance of corporate governance to an organisations 3. Discuss the roles of audit committee 4. List and briefly explain three (3) theories of corporate governance 5. Define corporate social responsibility 6. Discuss the pyramid of corporate social responsibility. 7. Explain theories of Corporate Governance. CASE STUDIES CASE STUDY 1 Super Infrastructure is listed on the Bursa Malaysia Securities Berhad. The company is a medium-sized developer of infrastructure projects with three offices in Kuala Lumpur, Penang and Iskandar Malaysia, Johor, respectively. The founder and Chief Executive Officer (CEO), Ricky Lee, is a high-profile entrepreneur with a penchant for a luxurious lifestyle and risky strategies. A few months ago, Lee had extravagantly spent RM250,000 on gold watches as gifts and installed a marble and gold bathroom in his office. He also bought a whopping RM1 million worth of paintings to adorn the guest area outside his luxurious office. Lee is very dominant personality in the company. He has a strong hold on the company by virtue of holding both the Chairman and CEO posts. Lee views are hardly challenged by other board members. It is not surprising that there is hardly any debate or disagreement during board meetings. Shareholders are very concerned about Lee’s dominance in the board and his pursuit of what they regarded as very risky strategies. They are certainly unhappy with Lee’s lavish lifestyle at the company’s expenses. Lee just brushed this concern aside. He said, “I know how to run the business and they should just trust me to do my job.” Last year’s earnings were down 20%. Lee was unperturbed by the decline in earnings and boasted that he knew how to turn the profits of the company around this year. The board of directors comprises Ricky Lee as Chairman cum CEO, four executive and two non-executive directors, and two independent directors. Three of these directors, excluding the independent directors, are Lee’s close family members. The company has established remuneration, nomination, and audit committees. Lee is the Chairman of both the remuneration and nomination committees. These two committees hardly meet to discuss issues such as the board’s nomination and
107 executive remuneration packages. It is widely known among board members and top executives that Lee regards corporate governance as irrelevant to real business. Supe Intrasturcture recently appointed an external auditor upon recommendation by Lee. This appointment received great attention in the financial press, particularly highlighting the fact that the same audit also provided consultancy services on Lee’s acquisition strategy about 10 years ago. You are required to: 1. Explain the nature of agency problem that exists in Supe Infrastructure. 2. Assess the corporate governance structures within the company, in light of corporate governance best practice. 3. Recommend any improvements you consider necessary for the corporate governance structures of Super Infrastructure. CASE STUDY 2 Giant Trading is the largest retailer in Malaysia, Singapore, and Brunei with RM15billion in sales. The company employs 50,000 employees in four countries and serves about 20 million customers per week. Giant Trading carries an extensive range of products from groceries and household items to home improvement and leisure products. The company has a core of loyal customers who love the fast, friendly services and high-quality products with lower prices. The CEO who is also the grandson of Giant Trading’s founder always ensure the company lives up to its credo of supplying consumers with low-cost quality goods. Business week reported that Giant Trading was one of the most profitable companies in Southeast Asia. Employees receive good training in customer service. Customers are assured of a pleasant hopping experience where Giant Trading’s employees are friendly and ready to assist whenever they need help. However, this good image is tainted with complaints against the way Giant Trading treats its employees. In Indonesia, for example, employees complained that they were forced to work ‘round the clock’ without or with only little overtime pay. The backroom employees receive low pay and few or low benefits, mainly because they are immigrant workers. Employees are often asked to sacrifice their ret and meal breaks, in Malaysia, Giant Trading was accused of hiring illegal immigrants with low pays to do menial jobs. These employment practices are clearly against the law, but Giant Trading got away de to weak enforcement of laws. While customers love Giant Trading, small local sundry shops and merchants complain of unfair competition. Many went out of business because Giant Trading sells similar products, but at lower prices. Giant Trading could afford to offer lower
108 prices due to hefty discounts given by its suppliers for large orders. In addition, in Malaysia, many local suppliers complained that Giant Trading gives priority to foreign products such as those from China and Bangladesh. Some even had to close their business. Giant Trading buys its products from these two countries due to cheaper prices. In Indonesia, Giant Trading has embarked on an aggressive expansion strategy due to great market potential. Giant Trading plans to open 20 stores each in East Java and Northern Sumatra next year. Ten new stores are due to be opened in Sulawesi end of the year. Giant Trading receives severe resistance from local communities in some of the new locations. Their main grouses are traffic congestion, noise and other forms of pollution during and after the construction of the new stores. They do not want Giant Trading’s presence disturbing their daily lives. In Malaysia, Giant Trading gets the same resistance, but at lower scale. The main grievance is the employment of illegal immigrants to construct new stores, which raises security concerns among locals due to a sudden influx of foreign workers in their area. Despite its critics, Giant Trading receives wide support, and many consider the company to be socially responsible in addition to being a provider of thousands of jobs, low prices and high value and service. Giant Trading also undertakes some initiatives to give back to the society. For example, Giant trading awards annual scholarship to secondary school children from poor and underprivileged families in Indonesia and Malaysia. The company is also active in promoting good environmental practices such as recycling and using paper bags. Moreover, it also sponsors educational programmes organized by local environmental groups to educate the public about recycling and other environmental topics. You are required to: 1. Assess Giant Trading’s corporate social responsibility based on economic responsibility, Legal responsibility, and Ethical responsibility. 2. Assess whether Giant Trading has balanced its economic and social responsibilities through its various programmes? 3. Identify the stakeholders in Giant Trading case. 4. Explain what should Giant Trading do with regards to the issues raised by its various stakeholder?
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