MAA250

Topic 10

Corporate Governance and

Corporate Social
Responsibility

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 LEARNING OUTCOMES

• Describe and understand agency theory and agency

problem
• Understand the importance of corporate governance
• Understand the obligations placed by law and corporate
governance codes
• Appreciate the growing importance of corporate social
responsibility.

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 AGENCY PROBLEM

• An agency problem arises because the agents of a

corporation do not always share the same commitment
or sense of ownership, as would the principal, and they
may fail to operate with the same level of responsibility
 self-interest or bias may exist
• An ‘agency gap’ can emerge, where there is a difference
of commitment between
 principal; and
 agent

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 I N F O R M AT I O N A S Y M M E T R Y

• Types of information asymmetry:

o Adverse selection
 “ … may occur when the agent (manager) is in
the possession of information that is not known
to the principal (shareholder)”

o Moral hazard
 “ … arises when the principals (the shareholders)
bear the cost of the risk-taking behaviour of the
agents (the managers)”

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 AGENCY THEORY

Assumptions in agency theory

Theoretically, the key elements of the agency problem are:
• separation: between principal and agent
• conflicting interests (selfishness): since principal and agent each have
their own utility functions

• rationality: both principal and agent are rational and rationally further
their own interests (but not always the case. We do not always act in a
rational manner)

• asymmetric information: agents are better informed about their own

abilities, their own activities and what is going on in the firm than are
principals (may lead to the agent ‘taking advantage’ of that
knowledge) .
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 AGENCY THEORY

Uncertainty (risk)
The existence of ‘other factors’—weather, bad luck and unforeseen
changes of any kind—means there is no direct relationship between the
activities of the agent and the outcome / risks cannot always be
predicted, and may be beyond the control of the agent … agent acting on
behalf of the principal, in good faith.
Risk aversion-when faced with two investments with a similar expected
return (but different risks), one will prefer the one with the lower risk
Performance pay involves risk for the agent (either over- or under-pay),
and the risk averse will demand compensation for this. Risk averse
agents will want to work for fixed pay to avoid economic uncertainty.
Agents will place expectations on the principal, in regard to appropriate
compensation / remuneration.

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 EXTENDED AGENCY

• It is not just the managers (agent) and shareholders (principle)

involved.

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 OVERARCHING AGENCY ISSUES

• Excessive remuneration

• Government potentially receiving large donations from big

business and the banks (so government ‘protecting’ big
business and supporting capitalism)

• Moral hazard (‘all care – no responsibility’ mentality)

• Protection of the ‘corporate veil’ for directors / Board

members / CEO / executives

• Reward for risk-taking behaviour

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 OVERARCHING AGENCY ISSUES

• A prevailing preoccupation with profit (profit is king)

• The excessive ‘golden-handshake’ resignation payouts upon

exit of the firm (often when they have underperforming) e.g.
Australia Post- executives ‘rewarded’ for underperformance

• Lack of accountability

• Insufficient penalties (if any) for underperformance

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 C O R P O R AT E G O V E R N A N C E

Corporate Governance

“The structure by which corporations are managed,

directed, and controlled toward the objectives of
fairness, accountability, and transparency. The structure
generally will determine the relationship between the
board of directors, the shareholders or owners of the
firm, and the firm’s executives or management.”

Hartman et al (2020)

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 C O R P O R AT E G O V E R N A N C E

ASX Corporate Governance principles

1) Lay solid foundations for management and oversight

2) Structure the board to be effective and add value
3) Instil a culture of acting lawfully, ethically and responsibly
4) Safeguard integrity of corporate reports
5) Make timely and balanced disclosure
6) Respect the rights of security holders
7) Recognise and manage risk
8) Remunerate fairly and responsibly
Corporate Governance Principles and Recommendations,
4th Edition, ASX Corporate Governance Council 2019

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 C O R P O R AT E G O V E R N A N C E

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 BOARD OF DIRECTORS

Board of Directors

‘ … a group of persons chosen to govern the affairs of a

corporation or other large institution …’

• A board is made up of a mix of both executive and non-

executive directors.

• Powers of management are vested in the Board of Directors,

not the shareholders
• Shareholders can only (at least theoretically) alter the
constitution of the Board

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 BOARD OF DIRECTORS

Role of Board of Directors

Principle In business judgements, a director must:
1 Foundations Adopting clearly defined delegations of authority
Agreeing performance indicators with
management

2 Structure Adopting a strategic plan for the company and

measuring its implementation
Reviewing own processes and effectiveness and
the balance of competence on the board.

3 Ethics Ensuring the company complies with the law and

highest ethical standards
4 Reporting Taking steps to protect the company’s financial
position.
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 BOARD OF DIRECTORS

Role of Board of Directors

Principle Details
4 Reporting Adopting an annual budget and monitoring results
(e.g. review of monthly management accounts)
Determining the accounts present a true and fair
view and satisfactory audit arrangements are in
place
5 Disclosure
6 Security Ensuring effective communication with
holders shareholders and other stakeholders
7 Manage risk Ensuring risk management systems are in place
Ensuring adequate reporting systems and internal
controls are in place

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 BOARD OF DIRECTORS

Role of Board of Directors

Principle Details
8 Remuneration Guidance on appointing and remunerating senior
management
Adopting formal processes for the selection of
new directors

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DIRECTORS’ CODE OF CONDUCT

Part 2 D.1 of Corporations Act

sets out the fiduciary duties of directors, which include:
• To be honest and loyal      
• Take care and exercise diligence.
• To disclose interest
• Not to make improper use of information or position

Beyond Law

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 W H Y I S C O R P O R AT E
G O V E R N A N C E I M P O R TA N T ?

Economic efficiency, productivity and social welfare

  Bad Governance Good Governance

Board’s control Many boards are known to Act in time and replace the
function rubber-stamp proposals put CEO or veto dubious
forward by the executives acquisitions.
(managers) and so fail to take
their control role seriously.
Shareholder Many owners do not take Others actively seek to
activism their ownership seriously and influence the direction of
do not even bother to show companies through dialogue
up at shareholder meetings. or board representation.

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 W H Y I S C O R P O R AT E
G O V E R N A N C E I M P O R TA N T ?

Economic efficiency, productivity and social welfare

  Bad Governance Good Governance

Executive The executives of banks Executives who invest in their

opportunism bailed out of trouble by companies and align their
governments live well future with the shareholders
because they cashed in their experience the same fate.
share options in time.

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 CSR

• Corporate social responsibility (CSR)

“The responsibilities that businesses have to the societies within

which they operate…voluntary actions that companies undertake
to address economic, social, and environmental impacts of their
business operations and the concerns of their principal
stakeholders”
(Hartman et al, 2021)

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 C O R P O R AT E S O C I A L
RESPONSIBILITY

Generally
• Do the right thing...
• Business have resources and wealth and therefore have an
obligation to help society for no gain.
• Moral responsibility to act ethically
• Competing obligations
o maximize shareholder wealth; versus
o harm minimization to others

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 CSR

• The view that the responsibility of the executive is to consider

the welfare of all stakeholders is consistent with Stakeholder
theory

Stakeholder Theory
• rejects the view that the sole important relationship is
between managers and shareholders of a corporation.
• considers the corporation from a broader perspective:
o customers, employees, suppliers, communities,
financiers, government, environment, etc.

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 CSR

Stakeholder Theory
• CSR is an extension of Stakeholder Theory.
• An enterprise taking into account the impacts of its activities
on its stakeholders, and
• balances longer-term societal impacts against short-term
financial gains.
• Stakeholder consideration is central to the establishment of
CSR policy.

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 MOTIVES OF CSR

1. Public Expectation
Pressure
Companies encouraged by social and environmental lobby groups
to improve their attitudes towards stakeholders and to act in a
socially responsible manner.
• public expectation explains some CSR behaviour.
• companies that are not rated highly on CSR criteria are
implicitly pressured to take action to improve their attitudes
and performance.

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 MOTIVES OF CSR

1. Public Expectation
Scrutiny
Propensity for the financial media in general, and CSR rating
agencies in particular, to publicly praise socially responsible
companies.
• Good Reputation Index
e.g. Westpac has a reputation for excellence in CSR.
• RepuTex.
• CSR Hub
http://www.csrhub.com/csrhub/
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 MOTIVES OF CSR

• Industries / sectors / firms under public scrutiny are more

likely to engage in CSR? Why?
• They may include:
o Mining
o Banking
o Fast food
o Gaming (e.g. Tatts)
o Tobacco industry
o Alcohol industry
o Power companies
o Multinationals
o Big name brands (related to slave / child labour and
exploitation e.g. Apple, Adidas, Kmart etc.)
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 MOTIVES OF CSR

2. Avoidance of Undesirable Consequences

• A corporation may engage in CSR activities because it believes
that failure to do would lead to undesirable consequences for
it.
• Business Council of Australia (BCA)
o By taking voluntary action to improve corporate conduct,
corporations may forestall regulatory measures to control
their conduct
• Jeremy Cooper (Deputy Chairman, ASIC)
o Behaving without regard to (CSR) can cause “immense
commercial damage”.
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 MOTIVES OF CSR

3. Adding Value

• A corporation may engage in CSR activities because it will add

value to the organisation and ultimately help its operating and
financial performance.

Competitive Advantage
• In a competitive environment companies are increasingly
considering CSR as a source of competitive advantage

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 MOTIVES OF CSR

3. Adding Value
Reputation (the corporate brand)
• The broader stakeholder group is more favourably disposed
toward companies which distinguish themselves by virtue of
their CSR activities
 customer loyalty
 government influence
 regulatory intrusion

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 MOTIVES OF CSR

3. Adding Value
Global Expansion
• Demonstrating a commitment to CSR is increasingly important
for global expansion.
• more likely to win contracts in developing countries
• basis for demonstrating how the country will benefit from the
expansion.

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 MOTIVES OF CSR

3. Adding Value
Risk Management- by reviewing risk associated with CSR, more
complete risk assessment undertaken.
Lee and Faff (2009)
• firms with higher levels of CSR have lower levels of
idiosyncratic risk (firm specific risk)
• a firm with sound CSR practices may have
o better appreciation of material risk factors
o lower litigation costs; and
o lower risks to future cash flow.

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 MOTIVES OF CSR

3. Adding Value
Attraction and Retention of Talent
• Companies are increasingly aware that social responsibility is
important to the next generation of leaders.
• A strong CSR program supports improving employee
satisfaction, productivity and motivation.
• Brekke, and Nyborg (2005)- a firms’ CSR policies act as a
screening device for firms to attract higher quality employees.

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 MOTIVES OF CSR

3. Adding Value
Better Return on Investment
• Positive CSR activities may improve relations with bankers and
investors, and thus facilitate access to both equity and debt
capital.
• Fortune Magazine has calculated that a 1 point change on
"Americas Most Admired Companies" list positively or
negatively affects a company's market value by an average of
$107m.
• Edmans (2011)- the portfolios of the most admired companies
show cumulative returns of 126% while those of the least
admired show cumulative returns of only 80%
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 MOTIVES OF CSR

4. Public Relations
• Not such ethical motivation
• Used to ‘window dress’ public perception (“greenwash”).
o chooses to highlight the superficial ‘good’ being done, and
then
o Used to deflect negative / irresponsible / reckless / profit
driven ‘other’ activities’ and motives
o Manipulate / downplay any negative public / media
attention / focus
o Artificially deflect away from risky behaviour
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 C O R P O R AT E S O C I A L R E P O R T I N G

• Firm’s CSR activities are reported (usually) annually for reasons

discussed earlier.
• Define: the provision of information about the performance of
an organisation in relation to its interaction with its physical
and social environment (Deegan, 2009).
• Firms have been adopting the following for CSR reporting:
o Global Reporting Initiative (GRI) Sustainability Reporting
Standards
o International Integrated Reporting Council (IIRC) Integrated
Reporting.

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 C O R P O R AT E S O C I A L R E P O R T I N G

• Not mandatory by law but encouraged (such as ASX).

• Broadly include Environment, Social, and Governance (ESG)
factors
• CSR reports include factors such as:
o Interaction with local community
o Support for community projects
o Support for developing countries
o Health and safety record
o Training, employment and education programs
o Environmental performance

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 I N T E G R AT E D R E P O R T I N G < I R >

• International Integrated Reporting Council (IIRC) is a global

coalition of regulators, investors, companies, standard setters,
the accounting profession, academia and NGOs to promote
communication of firm’s value creation.
• combines the analysis of financial (traditional annual financial
report) and non-financial performance (such as GRI
sustainability report) in a single report.
• benefits all stakeholders interested in an organization’s ability
to create value over time, including employees, customers,
suppliers, business partners, local communities, legislators,
regulators and policy-makers.

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 I N T E G R AT E D R E P O R T I N G < I R >

Aims to:
• Improve the quality of information available to providers of
financial capital
• Promote a more cohesive and efficient approach to corporate
reporting that draws on different reporting strands and
communicates the full range of factors that materially affect
the ability of an organization to create value over time
• Enhance accountability and stewardship for the broad base of
capitals (financial, manufactured, intellectual, human, social
and relationship, and natural) and promote understanding of
their interdependencies

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 I N T E G R AT E D R E P O R T I N G < I R >

<IR> framework (principles-based approach) consists of

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 CASE STUDY
C O R P O R AT E C I T I Z E N S

The phrase “corporate social responsibility” (CSR) is used in a

variety of ways.  For some, it is essentially equivalent to business
ethics, particularly when contrast with the traditional free
market view which asserts that there is no responsibility other
than to increase profits.  Others understand CSR to refer to a
narrow view of corporate philanthropy. 

Starting in the British common law tradition and extending into

most contemporary legal frameworks, corporations have long
been granted certain legal rights including, most importantly,
the right to own property and enter into contracts. Within the
United States, this extend to include rights of political speech
and religious liberty.
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 DISCUSSION POINTS

• Given the rights limited liability companies as have legal

citizens, the what duties and responsibilities should
accompany those rights?

• A number of other ethical issues have arisen in the area

of social responsibilty of corporations. These include
issues such as privacy, free speech and freedom of
expression, equal opportunity and consumer autonomy,
particularly in the age of big data, A.I. and social media.
Think about what the future may hold for corporations
as legal citizens.

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