Corporate Governance and Corporate Social Responsibility: A Brief Survey of Corporate Governance, its Measures and Impact, and Why It Should Be Socially Responsible

Most debate around corporate governance has focused on the impact of Corporate Social Responsibility (CSR) on performance. This chapter focuses on why the owners of corporations should take care of the society’s interests while protecting themselves from expropriation by managers. Corporate governance can be defined as a set of protection mechanisms that capital providers (i.e., owners) put in place in order to get a fair return on their investment. Hence, corporate governance relies heavily on managers’ observance of the duty of loyalty to act in the shareholders’ best interests. However, the empirical evidence (briefly discussed below) suggests that these mechanisms are not always efficient in reducing the agency problem between managers and shareholders, and often exacerbate the problem. A reason for this failure is that the mechanisms have focused on the utility function of shareholders and have neglected the utility function of other stakeholders. The owner of a corporation can prevent the manager from investing in social projects that do not increase her/his wealth, even if this increases the wealth of the manager or the employees or the society. However, under-investment in social projects might undermine market confidence. For example, if the customer is not happy with the quality of the product, he/she may decide not to buy the good, in which case the corporation receives nothing, the employee has no salary and the shareholder has no profit; as a consequence, the firm receives no further funding, which might lead to its collapse. In this chapter, I argue that managers and owners have a duty of loyalty to employees, the society and the environment. In particular, the owner should not prevent the manager from investing in socially responsible projects that have value for employees and the society, even if those projects do not increase the owner’s wealth. In a sense, corporate governance should be socially responsible.