Corporate governance and corporate social responsibility are actually quite different business concepts. They have become much more closely linked in the early 21st century, however, due to increased focus on balancing business profits with responsible operations. In fact, the definition of corporate governance has evolved over time to include core aspects of CSR.
Corporate Governance Basics
Corporate governance was historically defined as the systems and processes used by a corporation to make certain that operations are optimized to produce the best financial results for shareholders and other company financiers. Today, though, the definition has evolved to cover much a much broader spectrum. Essentially, it describes the expectation that companies balance shareholder interests with other stakeholder needs, including the needs of customers, suppliers, employees, financiers, managers, government and the community. Laws such as the Sarbanes-Oxley Act have put pressure to hold companies accountable for actions affecting their finances, recognizing that errors can affect all of these stakeholder groups.
The inclusion of “community” in the list of stakeholders means that company boards have routinely incorporated social and environmental responsibility into corporate guidelines.
Convergence with Corporate Social Responsibility
There continues to be a debate surrounding to what extent corporations should feel compelled to include other stakeholder interests within the corporate governance system — are all stakeholders created equal? Some companies still hold to long-held beliefs that their primary responsibility as publicly owned companies is to maximize shareholder value. Others believe that by balancing social and environmental responsibility with profits, long-term viability and success will be even greater. These companies tend to be more heavily involved with CSR initiatives than purely profit-driven enterprises.
Corporate Social Responsibility Basics
CSR has evolved largely in the early 21st century from basic standards of business ethics. It has taken simple concepts of honesty and transparency and added other expectations for companies to act in ways that benefit the environment and society. Some examples of CSR in practice include a technology company choosing to use sustainable materials to make its packaging and a bank that allows its workers to volunteer a day a month at a local charity while being paid their usual wages. To provide good financial results while also considering CSR, it is important for companies to balance the interests of customers, communities, business partners and employees with those of shareholders, to meet public requirements for CSR compliance.
Overall Business Results
Actual business results of the common convergence of corporate governance and social responsibility are hard to measure. Company leaders don’t always see tangible profits from responsible behavior, although there are intangible benefits. Therefore, companies should include responsible behavior in their corporate governance to do the right thing and to experience long-term indirect benefits of better community relations, an improved company image to attract investors and customers, more engaged employees and the avoidance of public backlash.