Corporate Governance Corporate and Social Responsibility Disclosure

To what extent corporate governance and CSR are converging in international business not only depends on views on corporate governance, but also on how CSR is framed within an MNE. As mentioned in the introduction, CSR is an elusive concept that, just as corporate governance, has been defined in many different ways. Nevertheless, there is some agreement that it involves attention on a voluntary basis to the ethical, social and environmental implications of business (Carroll, 1999; Whetten et al., 2002). One important dimension for how CSR is framed concerns its scope: is it perceived as an external or internal issue? Deakin and Hobbs (2007) argue that CSR is often thought of by managers of listed firms as a way of dealing with external issues, for example the ethical consequences of outsourcing production activities, fair trade, and global environmental problems. However, these authors also indicate that CSR is sometimes interpreted differently as well, focusing on internal issues instead. They give the example of the European Commission, which argued in a Green Paper that besides an external dimension, CSR has an internal dimension, which involves employees’ working conditions such as work force diversity and equal pay for women (EC, 2003). The distinction between internal and external aspects of CSR touches upon one of the main debates in corporate governance: if firms have a responsibility to a wider group of constituents, how far should this responsibility go and what kind of (social and environmental) activities will they become involved in?

It was with these questions in mind that the stakeholder approach was first introduced (Freeman and Reed, 1983). This approach explains why business has responsibilities that go beyond the maximization of profits to include the interests of non-stock holding agents. Indeed, if a company would focus solely on such narrow objectives, the expectations of other stakeholders would be neglected, and in turn their support could be compromised in the long term. Freeman’s (1984, p. 46) definition of stakeholders as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” is most widely accepted (Mitchell et.al., 1997).

Advocates of the stakeholder perspective consider as a starting point that “all persons or groups with legitimate interests participating in an enterprise do so to obtain benefits and that there is no prima facie priority of one set of interests and benefits over another” (Mitchell et al., 1997, p. 68). From such a perspective, a company emerges as a nexus of implicit and explicit contracts between various actors with interests that are not always congruent (Hill and Jones, 1992). The stakeholder approach emphasizes that actors have different motivations to engage in relationships with a firm and expect different benefits from their collaboration. This means that dealing with stakeholders poses complexities for business in view of conflicting interests (cf. Daily et al., 2003). Researchers in finance and governance also criticise the concept (Jensen, 2001; Sternberg, 1997), inter alia because it is “a convenient portmanteau expression into which many different items can be packed” (Charkham, 2005, p. 20). Another important argument has been that the stakeholder approach makes managers unaccountable for their actions because it does not contain clues on how to balance competing interests and thus gives managers the opportunity to pursue their own causes (Bradley et al., 1999; Jensen, 2001).

In prioritizing competing stakeholder interests, it has been argued that firms take into account to what extent the organization depends on a stakeholder for resources (Jawahar and McLaughlin, 2001). This instrumental view on CSR suggests that firms’ primary reason to be responsive to stakeholders is a maximization of long-term market value (Donaldson and Preston, 1995; Jensen, 2001). Such instrumental motives are closely connected to the way corporate governance has broadened in recent years. As discussed above, a corporate governance view suggests that the main reason for firms to deal with stakeholders is that neglecting them could mean a loss of control on the strategic direction and performance (Luo, 2005a). We therefore expect that firms driven by instrumental motives to practice CSR will predominantly be concerned with shareholders and inside stakeholders such as managers and employees, and, as a consequence, frame CSR with a focus on internal aspects. This is supported by the literature which has found that corporate governance has a considerable impact on internal CSR issues such as employee conditions (Deakin et al., 2002) and ethical aspects related to remuneration, managerial and employee behaviour (Bonn and Fisher, 2005; Kimber and Lipton 2005; Rossouw 2005; Ryan, 2005; Wieland, 2005).

In contrast, motives to deal with outside stakeholders may be seen as not as closely, or not only, connected to instrumental motives, but relying also, and perhaps more, on sustaining moral legitimacy vis-à-vis outsider groups (Suchman, 1995). When CSR is mainly a response to outside stakeholders such as local communities and NGOs, it is more likely to be perceived as dealing with external environmental and community issues (Deakin and Hobbs, 2007). On the basis of this, it can be argued that external framing of CSR shares considerably less commonalities with corporate governance. This would imply that framing CSR focusing on external issues puts much less emphasis on the competitive nature of CSR. Only in a small minority of cases implications for a firm’s strategic direction and performance may be involved – an example that is currently mentioned in this regard is climate change, but this is still in its infancy (cf. Cogan, 2006). On the whole, we thus expect that corporate governance is more likely to be integrated in MNEs’ CSR policies when CSR is framed with a strong focus on internal aspects such as employee conditions and ethical behavior of managers and employees.

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