Corporate Governance. Corporate Social Responsibility as a Business Strategy for Corporations

Having corporate mission, value statements, codes of conduct and corporate social responsibility policies became a must have in today’s corporate world. Companies throughout the world praise themselves for being corporate responsible. However, in the light of so many examples of corporate misconduct such as the Enron, WorldCom, British Petroleum and the Bernie Madoff out there, little has advanced in the legal field that actually requires corporations to not only have those codes of conduct and corporate social responsibility agendas but also to legally accountable for them. This paper argues that a corporation should act as a social responsible entity not only praising shareholders but also all stakeholders.

Corporations should have as a principal role being social responsible when doing their business. Even believing that is already a clear statement it seems a continuing and long process to make this clear for so many corporations.

In reliance with the responsible approach of Professor David Millon,[1] this paper will discuss more about the importance of nearing a long run term business instead a short-term for corporations, adding the inevitable profit focus with the sustainability approach of CSR.

I. Rational given for Corporate Responsibility from Delaware law

Considering the importance of Delaware for being the state of incorporation for nearly two-thirds of U.S. publicly traded companies, Delaware is America’s incorporation giant, with 945,000 active entities,[2] is possible to imagine the influence of this jurisprudence. However there is no enacted statute around the corporate social responsibility subject.[3]

Looking for answers and decisions around Delaware Court is possible to find spread decisions without much care to support a platform of uniform and reliable decisions for Corporate Social Responsibility. What is clear is the availability of choice for whatever path the companies want to choose.

It was already stated by the Delaware Chancery Court that directors are obligated “to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders”[4]. But the Delaware Supreme Court also has declined to endorse shareholder primacy even that never stated plainly that management’s fiduciary responsibilities imply a general duty to only maximize profits to shareholders without regard to nonshareholders considerations and social responsibilities.[5]

Even though trying to show that Delaware law do not disposes a restrict rule imposing shareholders results as the prime goal, the majority of the market works in different path. Bonus and salaries for manager levels encourages maintenance of the high level of current share prices, corporate lawyers advise boards on their responsibilities typically taking shareholders primacy granted[6] and the business press insists on the same idea.[7]

According to Professor Millon management’s duties are owed to the “corporation and its stockholders”,[8] rather than to the shareholders alone. It is necessary look forward to management’s duties and to involve all stakeholders in the corporation responsibilities.

The Delaware Court will require maximization of shareholder value only if management voluntarily chooses to abandon its own long-run business strategy by undertaking a transaction that will result either in change of corporate control or break-up of the corporate entity. As it was decided in Paramount[9] Case Law the board of directors violated their fiduciary duty to shareholders for not fully considering the QVC offer to maximize theirs’ profits.

Today’s shareholders typically adopt a short-term perspective that manifests itself in a strong preference for immediate results measured in terms of current share price.[10]

For Delaware law throughout decided cases, the management body of the company is allowed, and sometimes encouraged, to take the best interest decisions for the enterprise, as being looking for the a long-run administration model or not.

For example, in Paramount Communications v. Time Incorporated[11] the maintenance of the “Time culture” was the primacy value for happening the merger between Time and Warner. Paramount not recognizing any value different from maximizing the shareholder value sued Time under Revlon Duties. The Court of Chancery posed a pivotal question: “Under what circumstances must a board of directors abandon an in-place plan of corporate development in order to provide its shareholders with an immediate control premium?”[12] Is the corporation’s future only in the hands of its shareholders?

Delaware Law imposes on the board of directors the duty to manage the business and affairs on the corporation (8 Del. C. § 141 (a)). This broad mandate includes a conferred authority to set a corporate course of action, including time frame, designed to enhance corporate profitability. Thus the question of “long-term” versus “short-term” values is relevant because directors, generally, are obligated to chart a course for a corporation. As decided by Revlon the board of directors has no duty to maximize shareholder value only under short-term strategy. [13]

Also in Unocal case,[14] the business judgment rule mitigate against court engaging in the process of attempting to appraise and evaluate the relative merits of a long-term versus a short-term investment goal for shareholders. But directors are not obligated to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is no basis to sustain the corporate strategy. [15]

Even though Delaware law has not also committed to the shareholder primacy of interest in the corporation the question still vague and in the hands of the management’s corporation to understand and choose for a strategy that involves the corporate social responsibility.

II. CSR and the Long-Run Business Strategy

 A corporation is itself a distinct person[16] with its own rights, obligations and responsibilities. With this concept in mind is possible to understand the importance of the external relationships that will determine its long-term survival.

Just for exemplify how different views are possible to find for the personality of companies, the renowned Milton Friedman has exactly the opposite opinion: “only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense.”[17] However for this analyzes will be considered that even “artificial responsibilities” still a business implicated in serious important attitudes.

The main challenge is balancing potentially conflicting interests implicated by particular business decision, between the interest for maximization profits and the interests of nonshareholders, the so-called stakeholders – workers, suppliers, and costumers, as well investor, and even environment. [18]

Shareholders generally are looking for maximal return on their investments, employees want rewarding work, satisfactory working conditions and good wages, creditors expect that will be paid according to the terms of their contract,[19] communities want the environment to be protected, customer want lower prices and supplies a fair price.

The role of management will require weigh these interests and deploying company’s resources to the best interest of all its stakeholders. By doing so a corporation can be called social responsible. The turning point is the company considering using all best efforts to maintain interest of all stakeholders. None is asking for a company abandons the major goal of profitability, no. The opposite.

Searching for profits and applying all possible efforts to maintain the balance should be the major interest. What is not fair is just abandon the corporate social responsibility alleging that is in opposite interest of the company, that it is exactly what is wrong, because both ideas ate interrelated.

The sustainability approach to corporate social responsibility is based on the idea that the corporate entity should remain economically viable over the long-run. The corporation must generate profits because survival requires it, but survival most emphatically does not require short-term profit maximization. In fact, a short-term time horizon may impede the corporation’s long-run sustainability because it can result in policies that sacrifice future earnings for current net income. [20]

The difficult part to the corporate social responsibility defendant is to show that an approach to nonshareholder’s interests is not with a cost that comes at the expense of profit and therefore shareholder value. Again, it is the opposite. The sustainability perspective sees attention to nonshareholders as essential to the viability and success of the company and thus to the maximization of the shareholders value on the long term. [21]

For example, multinational corporations doing business in developing countries to maintain investments with in community level is practically a mandatory rule. Investments in infrastructure, development projects, technological innovation, education and health-care are far most important than increase wages for the employers. A health work environment is proven to boots employee’s productivity, investments in more efficient infrastructure will reduce lead times and costs, these are initiatives that are not only social responsible but also have a direct link with both bottom line results and long term survival for the corporation. The challenging portion of those initiatives is that on one hand some or potentially most of the results will not appear in the short term, and on the other hand the costs associated with implementing them will be clearly present on the company’s quarterly results, reducing its earnings.

The advantages for a long-run strategy are many but they are only achieved if companies and shareholders are willing to spend money on projects that will earn returns in the future. For example benefits as the potential to generate net gains in the form of enhanced productivity, greater skills and knowledge, commitment, increased consumer demand, political and social stability and the long-run viability.[22]

As repeated here the idea that sustainability for corporate social responsibility insists on corporate profitability over the long-run. That will benefit nonshareholders but are designed to generate profits to the corporation and its shareholders.

A strategic corporate social responsibility should be understood as promoting the corporation’s financial interest. This approach avoids objections to the effect that management is “spending someone else’s money”[23] when it uses corporate funds to improve the well-being of nonshareholder. For this reason, corporate social responsibility must have significantly broader appeal than the philanthropic model has had. [24]

According to Millon, “Corporate social responsibility cannot be expected to engage in social issues unless it has a potential to improve the long-run bottom line. For example, a corporation may decline to address environmental impacts or labor-force problems, even though doing so could serve the corporation’s business interests, if in management’s view the long-run benefits to the corporation do not justify the short-terms costs. “[25] And that advance together in the ideal that Milton Friedman insists to incentive that corporations should only consider profitability but do not ignore the existence of the problem or maybe the reasonable future investment for the issue.

Of course it is known that corporate social responsibility seen only with the cost-benefit lens are not likely to go as far as some would advocate. The moral and ethical cases may therefore continue to provide justification for business policies but they cannot, and it is not the objective of this paper, to defend without an economic reason.[26] It is already recognizable that corporations should give profits and it is necessary to advance in the responsibilities when it is already happening that.

So if it is necessary to consider the expenditures designed to benefit the nonshareholders as reported expenses that reduce the net income in the period in which they are paid, it should be demonstrated as an investment, considering their value is not expressed on balance sheet. [27] It is an investment that the company is doing for the long-run journey so cannot be viewed as a loss.

Mr. Friedman, the defendant of a freedom investment environment for companies says  "There is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."[28] And exactly with the idea of long-run perspective without “fraud and deception” the company will be already, in certain way, seeking for sustainability permitting the social responsibility works automatically.

The connection between sustainability and corporate social responsibility is simply the realization that the corporation’s long-run prosperity depends on the well being of its various stakeholders, including workers, suppliers and customers.[29]

Mr. Millon best explains that sustainability in corporate social responsibility looks beyond the current quarter or year and in the long-run best interest for the shareholders. The whole point is to generate net gains in the future from expenditures incurred in the present, benefits to nonshareholders come not at the expense of shareholders but rather are deployed for their ultimate advantage.[30]

As this thought is part of studies the business investors start to put the ideas in practice.  An important British group, led by Dominic Barton, global managing director of McKinsey & Company, and Lynn Forester de Rothschild, whose husband is Sir Evelyn de Rothschild, who runs E. L. Rothschild, a holding company, started to encourage investors to think over a longer term too. “Companies should … focus more on long-term goals…” The group called Henry Jackson Initiative for Inclusive Capitalism suggests companies should stop reporting earnings quarterly, to encourage investors to think over the longer term. [31]

The group said companies should reward investors who hold their shares longer by paying, for example, a higher dividend or a bonus. And it said companies should change the way they pay senior executives and reward them more based on long-term goals. “Compensation decisions taken in relation to short-term criteria have not reflected the long-term interests of the companies concerned,” the group said in its report.[32]

For that, failure to attend to such consideration may threaten the corporation’s long-run competitiveness and long-run sustainability requires economic success over time. Strategic investments beneficial to nonshareholders are thus designed ultimately to enhance profits for the company.  [33]

However, since shareholders are a more organized and active group when compared with the other stakeholders, shareholders present a more active voice to company’s management and usually get their claim for short terms results addressed. The challenge will be to get the other stakeholders sufficiently organized as groups that can have a similar level of influence on management. Achieving that would mean that management will not only have a fiduciary responsibility to shareholders but also to the other groups.

Conclusion

As a result, is necessary a starting point to a more formalized long-run journey strategy for companies. Where shareholders can maintain their profitability during the years and also the structure and people that surround the corporation will be achieved for the benefices of the company. Once that has take place the next step would be to evolve to a formalized legal structure, where management will have proper and reasonable duty to all stakeholders. In other words corporations will help and be indirectly responsible for constructing a better environment for everyone that surround them.