FACULTY OF COMMERCE

GRADUATE SCHOOL OF BUSINESS

Corporate Governance and Ethics (GMBA 5264)

Individual Assignment

by

Rejoice R. Njanji

Lecturer: Dr E. Mugamu
QUESTION 1 (A): CASE STUDY ON BOARDROOM DELIBERATIONS
Goergen (2012) defines corporate governance as the structure through which companies are
directed and managed. It involves balancing the interests of a company’s many stakeholders such
as shareholders, senior management executives, customers, suppliers, financiers, the government
and the community. Good corporate governance requires effective and clearly detailed processes
for ensuring accountability, transparency, documented policies and procedures and sound
decision-making. The board in the case study managed to make a correct and sound decision
considering the advantages and disadvantages that were there if the board had proceeded with this
investment. The first director wanted the board to go ahead with the investment, arguing that it
was economically beneficial despite the fact that it would make the company fail to meet its
investments hurdle rates.

According to Zingales (2008) good corporate governance ensures stakeholders know the
company’s mission, values, short and long term strategic goals and the role they must play in
helping the company accomplish them. This principle of accountability is key as stakeholders
should be aware of what is expected of them and should be cognizant of what the repercussions
are if these expectations are not met. Good corporate governance is designed to drive company
profitability and higher returns through sound decision-making. Hence, there was no point of going
ahead with the investment if the company would fail to meet its investment hurdle rates.

The second director pointed out that it was not appropriate for the board to promote economic
growth at the expense of the company as they also did not even know if the investment made
economic sense. The director also observed the principle of accountability where the board of
directors would not be held responsible for plunging the company into a pit of expenses in the
name of promoting economic growth. Good corporate governance does not only enhance the
profitability but also increases firm performance. The board should be satisfied that the company’s
financial statements accurately present its financial condition and results of operations, that other
disclosures about the company’s performance convey meaningful information about past results
as well as future plans, and that the company’s internal controls and procedures have been designed
to detect and deter fraudulent activity (Tricker, 2009). However, the issue of promoting economic
growth should not be totally ruled out as corporate governance framework should be developed
with a view to its impact on overall economic performance, market integrity and the incentives it
creates for market participants and the promotion of transparent and efficient markets.

Governance must balance the needs of several groups, including shareholders, board members,
customers and the various communities within a company. In this case, the position of the
government as a shareholder was not known, whether it was comfortable with the diversification
of the company’s activities into these products and markets or not. Yet, the board should be
responsible for ensuring that an appropriate dialogue takes place among the organization, its
shareholders (the government in this case) and other key stakeholders as stipulated by the principle
of relations with shareholders. The board should respect the interests of its shareholders and other
key stakeholders within the context of its fundamental purpose (Goergen, 2012).

The board and management should engage with long-term shareholders on issues and concerns
that are of widespread interest to them and that affect the company’s long-term value creation.
Therefore, it was of paramount importance not to go ahead with the investment. Organizations
should respect the rights of the shareholders and help shareholders to exercise those rights. They
can help them by openly and effectively communicating information and by encouraging
shareholders to participate in general meetings such as the altering of associations but in this case
one board member vehemently denied that and said it’s only the board that should make decisions
and not shareholders.

Moreover, this investment’s products and markets were described by one board member as a
representation of risky investments with a potential impact on the national customers. It is a key
principle to also consider the interests of these customers as they are part of the company’s
constituencies of doing business and this contributes in a direct and meaningful way to building
long-term value creation. Boards are required to maintain a sound risk management and internal
control systems and have to confirm in their annual report that they have carried out a robust
assessment of the principal risks facing the company, including those that would threaten its
business model, future performance and liquidity. The board had no idea of how the investment
shortfall would be made up if they proceeded with the investment and at the same time they did
not know if the shareholder would accept a lower return on equity.

Going ahead with this investment would mean risking the accountability of the board for failing
to meet its performance target yet board members should act on a fully informed basis, in good
faith, with due diligence and care, and in the best interest of the company and the shareholders.
The board should fulfil certain key functions, including: reviewing and guiding corporate strategy,
major plans of action, risk policy, annual budgets and business plans; setting performance
objectives; monitoring implementation and corporate performance; and overseeing major capital
expenditures, acquisitions and divestitures.

QUESTION 1 (B) If you were the board in the case study, would you have come to different
decision? Give reasons.

On one hand, there were various reasons that would entice to settle on an alternate choice, which
was proceeding to make this venture. This would be the idea of this speculation preferring
monetary development and the way that the articles of affiliation permitted this sort of venture. Be
that as it may, then again, proceeding with this speculation would mean being uninformed to a
portion of the key standards of corporate administration. Along these lines, l would have not
thought of an alternate choice had l been on the board. Neglecting to get together the organization's
obstacle rates would mean disappointment as a board and a deterrent of the organization's targets.

The board's inability to know the situation of one of its investors which was the administration
would likewise endanger proceeding with this speculation. The board and the executives ought to
draw in with long haul investors on issues and worries that are of broad enthusiasm to them and
that influence the organization's long haul value creation. Investors that draw in with the board and
the executives in a way that may influence corporate dynamic or systems are urged to reveal fitting
distinguishing data and to accept some responsibility for the long-term interests of the organization
and its investors overall. The board didn't know of how the deficit would be met had they felt free
to make the investment.

Corporate responsibility is a key standard where the board should introduce a fair and reasonable
appraisal of the organization's position and prospects. The board is likewise answerable for
deciding the nature and degree of the huge dangers it is willing to take and this was never clarified
in that meeting making it trivial to proceed with the speculation. The board is given authority to
follow up for the benefit of the organization and ought to acknowledge full duty meaning the board
would be considered responsible in the event that they continued with the investment and the
organization neglected to accomplish its objectives. The executives would have neglected to
release their guardian obligations. There was no straightforwardness with this agenda which is
plainly shown by how the board didn't know of the situation of the legislature. Straightforwardness
implies transparency, an eagerness by the organization to give clear data to investors and partners.

QUESTION 2: ‘TO BE OF VALUE, CORPORATE SOCIAL RESPONSIBILITY

ACTIVITIES AND MANAGEMENT MUST CONFORM TO THE UNIQUE CULTURES
AND HISTORIES OF THE VARIOUS LOCALITIES IN WHICH A COMPANY
OPERATES’. USING AN EXAMPLE OF ANY MNC OF YOUR CHOICE DISCUSS THIS
STATEMENT. [15]

Nestle is the focus for this discussion because it is a leader in both CSR and the food and beverage
industry. Industry leaders are notable because they set an example. Among the top 100 Food and
Beverage corporations in the world, Nestle ranked first in sales revenue. Around the world, this
was approximately $102,098 million USD in 2012 (Nestle in Switzerland, 2013). It boasted 5.9%
organic growth in 2012 (Nestle 2012 in 3 minutes, 2013). Topping the sales charts, Nestle also
ranks first in CSR activity among food and beverage companies according to data from Oxfam
International. Nestle is a diversified multinational food and beverage corporation that showcases
how the principles of CSR strategy translate to action.

Founded in 1866, Nestle remains headquartered in Switzerland. It operates in 194 countries,

employing 339,000 people around the world (Nestle in Switzerland, 2013). Nestle’s slogan is
“Good Food, Good Life.” Specifically in China, Nestle entered the Chinese market by “providing
consumers good quality food at an affordable price” (Allen, 2010: 19). It has incredibly impressive
brand recognition in all over the world. Among consumers, its brand is “an icon of good nutrition,
purity, quality, and product safety” (Allen, 2010: 19). It has brands in almost every food and
beverage category, including baby foods, bottled water, chocolate and confectionery, coffee,
frozen culinary foods, dairy, drinks, nutrition supplements, ice cream, pet care, and sports nutrition
snacks (Our Brands, 2013). Its target customer is the average consumer, rather than a niche buyer.
Instead of framing its goods as luxury products. Nestle’s trademark is to help consumers meet
“health and nutrition needs” (Allen, 2010: 19). In this way, its consumer base is widespread.
Competitors to Nestle are other global and national food and beverage corporations. For example,
competitors include PepsiCo, Inc., Kraft Foods, Tyson Foods, and Unilever (Oakman, 2012).
However, Nestle lacks a multidimensional competitor. Other firms are competitors for Nestle’s
individual product categories, rather than the company overall. Those corporations fail to match
Nestle’s range of products. Therefore, market share among these companies measures different
categories, rather than overall as a firm.

Historically, some of Nestle’s business operations endured widespread condemnation. One

particularly memorable outcry concerned infant formula marketing. In 1974, War on Want, an
anti-poverty activist group, accused Nestle of neglecting the best interests of the people. The food
industry began marketing baby formula to third world countries. Saleswomen, dressed up in nurse
uniforms, gave mothers free samples and discounts to convince them to switch from breast milk
to baby formula. However, families in these developing countries were not able to properly use
them. Forty years ago in poor, developing African, Asian, and Latin American cities, the switch
to infant formula was fatal because of improper preparation and hygiene. Incorrect preparation
distorted nutritional properties. This led to infections and malnutrition, which further perpetuated
poverty and health issues. Mike Mueller, writing for this nonprofit, dramatically labeled infant
formula as “the baby killer” (Muller, 1974). The issue was Nestle’s deceptive marketing tactics.
Nestle responded to this bad press by committing itself to ethical expectations and restrictions set
by the World Health Organizational International Code of Marketing of Breast-milk Substitutes.
This example shows how Nestle takes advantage of CSR strategy to demonstrate improvement
from the past.

Nestle first mentioned CSR in an official corporate document in 2006. In 2008, it published the
first “Creating Shared Value” report and has maintained this evaluation annually since. Nestle’s
published literature explains that the “Creating Shared Value” program is to create value for its
shareholders by doing business in ways that specifically help address global and local issues in the
areas of nutrition, water, and rural development (What is Creating Shared Value? 2013). In the
realm of nutrition, Nestle aims to provide healthy and affordable products. Regarding water efforts,
it prioritizes the protection of scarce water resources and more efficient water usage. Finally, it
supports rural farmer development to achieve continued access to quality inputs and strengthen
customer base (Creating Shared Value Explained, 2013). Nestle is driven to uphold these three
objectives because of its concern for sustainable production processes and compliance to laws,
regulations, and its own mission statement. These intentions comprise Nestle’s broad CSR
strategy.
Nestle abides by voluntary guidelines and regulatory requirements, including those from the UN
Global Compact, UN Water Mandate, UN Millennium Development Goals, Universal Declaration
of Human Rights, International Labor Organization conventions, and OECD Guidelines for
multinational enterprises (Global Principles, 2013). In addition to abiding by voluntary guidelines,
Nestle exemplifies the core consideration of CSR strategies by connecting CSR activity with core
business and competencies.

Another aspect of the content of CSR strategy is the need to balance local and global issues.
“Creating Shared Value” is Nestle’s global, company-wide CSR strategy and program. For
example, the global “Healthy Kids Program” to educate children about nutrition was translated to
instruct children. Nestle also has four research and development centers working towards more
nutritious, fortified food products. In China, coffee agriculture and milk production are potential
areas for rural development. In 1992, Nestle China set up an Agriculture Technical Assistance
Service to educate Chinese farmers on coffee cultivation. The methods it taught reduced water
consumption by more than 80%. Having taught Chinese farmers the best practices in coffee
cultivation, Nestle created a supply of coffee beans. Thus, Nestle is able to purchase directly from
local farmers (Coffee Agricultural Assistance Programme, 2012). Nestle performed the same type
of training for China’s dairy farmers in Shuangcheng. The techniques farmers learn about
breeding, animal health, and manure storage are best practices for the environment, high- quality
milk, and profitable careers for dairy farmers (Nestle in China Creating Shared Value, 2012).
Through this dairy program, Nestle has produced benefits across several areas of concern.
Mutually beneficial results are the mark of a quality CSR program. The tradeoff between a local
versus a global CSR strategy is responsiveness and genuine intentions for stricter standards. Nestle
addresses this tradeoff by maintaining a global strategy that is additionally augmented with
programs tailored to local subsidiaries.

The four pillars of “The Nestle Supplier Code” are human rights, safety and health, environmental
sustainability, and business integrity. These expectations apply further to the supplier’s subsidiary
or affiliate entities, as well as all others with whom they do business including all employees,
upstream suppliers, and other third parties (The Nestle Supplier Code, 2013: 1). There is also an
anonymous hotline to report violations to the supplier code. In defining the scope of standards,
Nestle protects itself from any loopholes and gaps in the supply chain that could be used to pass
blame. Nestle also has responsible sourcing guidelines for fish and seafood, dairy, meat, poultry,
and eggs. Furthermore, Nestle aims to audit 10,000 suppliers by 2015. In past performance
reviews, 89.5% of suppliers were in compliance with the Nestle Supplier Code (Highlights and
Challenges, 2013). By establishing this code of conduct with all entities associated with their
operations, Nestle aims for its products to be untainted by any unethical behavior, from its
beginnings to consumer delivery. Nestle made the first step in distributing their values of corporate
responsibility throughout their supply chain. However, they have only addressed the beginning
links. It could strengthen this initiative by having similar standards for distributors and commercial
stores. This way, all steps involved with Nestle’s products, from growing ingredients to delivering
the product to the consumer’s hand, are completed responsibly.

Theories of CSR promote that partnerships and engagement of senior leadership are important
factors for meaningful implementation of CSR strategies. Partnerships are efficient because they
pool resources between different entities working towards the same goal. The sponsorship of CSR
by senior leadership is important to ensure CSR is given adequate priority as a business strategy.
Nestle’s report of Creating Shared Value shows that its plans have accounted for these
considerations. It explains that the social and environmental problems of the world are “too
complex to be tackled by one organization alone” (Partnerships and Industry Alliances, 2013).
Therefore, strategic partnerships are a way to maximize project impact. In choosing partnerships,
Nestle explains that they must be mutually beneficial and accomplish shared goals (Partnerships
and Industry Alliances, 2013). As the UN Global Compact report discussed, more corporations
realize that a better world is a better business environment. The end goal of improving social and
environmental conditions is a shared aim. Therefore, firms can align through partnerships to better
achieve these ends.

Nestle is very transparent in its CSR efforts and accomplishments. This transparency and reporting
is crucial to reap the internal benefits of a strong CSR program. There is an abundance of
information easily accessible on Nestle’s official corporate website. The language is easy to
understand and is very positive. Nestle has both long, comprehensive annual reports and short,
impactful summary blurbs. By making its CSR strategy and performance public, Nestle secures
the public relations benefits that CSR efforts achieve. Furthermore, it clearly establishes the
industry standard, challenging competitors to keep up.
A corporate social responsibility strategy has a cost. Nestle spends over $5.8 million USD in
environmental sustainability projects and activities (Nestle in Switzerland, 2013). However, these
programs generate enough revenue to outweigh their cost, confirmed through quantitative
measures. Nestle tracks a comprehensive series of strategic key performance indicators (KPIs), as
part of its commitment to more evidence-based reporting (Key Performance Indicators, 2013).
Quantitative performance metrics are crucial to ensuring the sustainability of a firm’s CSR strategy
and programs. A tracking program announces the progress and results that CSR programs achieve.
In this way, people at the firm, from executive leadership to growers, stay motivated in promoting
and expanding CSR efforts.

Using Ewing and Windisch’s framework for CSR classification (procedural, tokenistic,
developing, developed, and established) Nestle’s CSR activity is at the highest established level.
It leads other competitors in CSR activity by setting high expectations through the institutional
isomorphism model as the normative factor (Ewing and Windisch, 2007). This is when
competition causes mirroring and adoption of practices throughout the whole industry. Possibly,
Nestle’s CSR achievements will stimulate comparable actions by other food and beverage
corporations. Therefore, competition may create a form of collective governance. In trying to
outperform each other, corporations continually raise their expectations for CSR activity.

Multinational corporations are developing extensive and ingenious CSR strategies for a variety of
reasons. The internal value of CSR strategy is economic gains, through greater sales or increased
market share. Simultaneously, the external impact is improvement in social or environmental
issues. Profits and social benefits priority is critical for enterprises to be sustainable

Every company is different, and every CSR strategy is different. Other firms can look to Nestle as
an example when setting their CSR strategy. In terms of executing their strategies, however, these
firms may be at a disadvantage due to less abundant resources. Furthermore, significant CSR
strategies and implementation cannot correct all wrongs committed in the past. Nonetheless, CSR
strategies are opportunities to set a new direction and to improve a pre-existing public image. In
pursuing this competitive advantage, firms are actually making a valuable contribution to society’s
issues. As corporate social responsibility becomes the universal norm among firms, there will be
more actors innovating and pursuing good for the interests of the whole planet.
REFERENCES

Brei, V., & Böhm, S. (2011). Corporate social responsibility as cultural meaning management: A
critique of the marketing of 'ethical' bottled water. Business Ethics: A European Review, 20(3),
233-252.

Buhr, H., & Grafström, M. (2004). CSR edited in the business press – package solutions with
problems included. Paper presented at the EGOS Colloquium, Ljubljana, 1-3 July.

“Coffee Agricultural Assistance Program.” Nestle. 2012, Web. 20 Jan. 2014. v

Ewing, Michael, and Lydia Windisch. "Corporate Social Responsibility in China." Anznac
Conference, University of Otago, New Zealand. 2007.

Goergen, Marc. (2012) International Corporate Governance, Prentice Hall.

Luigi, Zingales. (2008) Corporate governance, The New Palgrave Dictionary of Economics,2nd
Edition.

Sahlin-Andersson, K. (2006). Corporate Social Responsibility: a trend and a movement, but for
what and of what. Corporate Governance, 6(5), 595-608.

Tricker, Adrian. (2009) Essentials for Board Directors: An A-Z Guide, Bloomberg Press, New
York.

Turker, D. (2009). Measuring Corporate Social Responsibility: A Scale Development Study.

Journal of Business Ethics, 85(4), 411-427.

Wapner, P., & Matthew, R. A. (2009). The humanity of global environmental ethics. Journal of
Environment & Development, 18(2), 203-222.