Abstract:
In this paper in order to analyze the governance factor we will study the types of leadership traits that the CEO of a company adopts for its smooth functioning. We further look into the social and ethical governance factors with the help of various case studies and finish the paper with a comparative analysis of corporate social practices inside and outside India.
INDEX
Page Contents
1. Introduction
A total of more than 9,500 companies have participated and 3,000 non-business participants have incorporated their commitment to the UN Global Compact policy[1], granting to base their business activities upon a set of values pertaining to socially responsible conduct. The corporate social responsibility (hereafter referred to as “CSR”) practice is not solely driven by the ideology based on social change in the society, but also by the return in business that the business reaps from its CSR engagement program. T
he sudden rise of CSR has become popular at every level since the stakeholders usually agree with an organisation involved positively in these social and environmental actions. CSR has been defined by various authors. The World Business Council for Sustainable Development defines CSR as, “the continuing commitment by business to behave ethically and also to contribute to development economically and at the same time improving the quality of life of employees, their families and society at large”.[2] If we closely monitor the definition, then it broadly covers three important aspects of CSR, i.e., ethical factor, social factor and governance factor.
2. CSR, Governance & Leadership
Corporate Governance has been an aspect of CSR which has gained enormous traction for organizations in recent years. Corporate governance is a set of norms in the form that are either laid down codes or guidelines which broadly explains the principles that the organizations would follow consisting ethical and moral standards of the organization. Thus, an organization with good corporate governance would also have principles on transparency and information disclosure. Good Corporate Governance not only enables the organization to achieve its goals but also help in reducing loss and manages risks.[3] Furthermore, good corporate governance helps an organization to build a healthy relationship between the management, board of directors and the stakeholders of organization.[4] As a matter of fact, in any organization, firm, company, group or a team, leaders are responsible for crafting the vision via performing efficient strategic planning and empowering the workforce to facilitate growth. Effective leadership is perceived as the reason behind change and leaders are individuals who will find ways to creatively address challenges while sustaining high performance.[5] The Responsible Leadership theory puts into perspective the scope of leadership from the traditional leader-subordinate relationship to the leader-stakeholder relationship and argues that it is important for a leader to build and cultivate ethical and cordial relations towards different stakeholders in the present age since all the stakeholders are interconnected in the society. Different leadership styles are linked to the effective organizational measures including employee satisfaction and financial performance[6] and for this paper it becomes imperative for us to understand the effectiveness of a particular leadership style with respect to the CSR agenda.
A healthy relationship would not only benefit any organization’s revenue but would help in entire work culture of the organization and would further bolster the reputation. Though some direct benefits of good governance in an organization would include efficient process within organizations, reduced costs in operations and smoother functioning of organization but would also have some broader benefits. These broader benefits of good corporate governance would help in improving the culture of the organization from the top to bottom level of the organization.
For the purposes of this paper, we analyze the following leadership styles and their effectiveness with regards to a company’s CSR agenda: –
1. Transformational Leadership – “involves an exceptional form of influence that moves followers to accomplish more than what is usually expected of them. It is a process that often incorporates charismatic and visionary leadership”.[7] The end result of the transformational leader is that the presence of mutual stimulation and elevation between the leader and the followers. Therefore, the followers may transform to leaders and leaders may transform to moral agents.
2. Transactional Leadership – “refers to the bulk of leadership models, which focus on the exchanges that occur between leaders and their followers”.[8] The transactional leadership works on the system of incentives method. This basically means that the transactional leader secures the commitment of the members of the management and develops a system where the leader rewards the employees on each level where they create and market the idea of sustainability practice.
3. Visionary Leadership – comprises of a connection among the leader and either one or more followers on the basis of the leader’s behavior, this breeds positive reactions from the followers. Leaders of some companies are often encouraged to be visionary in their CSR responsibilities. However, it is essential to be more coherent than visionary. The main criteria is consistent morality, saying that the leader’s morality is an essential part in their effective advertising of the CSR activities in the organization.
4. Participative Leadership – involves inviting the employees to share their input in the decision-making process of the institution. Leadership with this trait involves consulting with their subordinates and gaining their ideas and inputs and integrating their suggestions in the upcoming plans of the institution. For any instance, to talk CSR without considering the beliefs and value of employees who are actually involved in the corporate action is a logical fallacy which flops to bring legitimacy to their ethical and work-related prospective.
To analyse the relevance of the leadership styles to the CSR agenda, the strategic leadership approach is being adopted while the individualised leadership style i.e., the leader-follower relationship is being excluded since individual consideration of a leader is not theoretically interrelated to a company’s planned decision making, most specifically the designing and execution of the organizational CSR agenda. Therefore, for a better understanding of the relevance of Leadership style to the CSR Agenda, a comparative approach between the Transformational Leadership style & the Transactional Leadership style is being made. In the transformational style, the leader expresses a goal for the future which can be disclosed with the followers, this intellectually rouses the followers, and brings attention to individual discrepancies among the employees. On the contrary, a transactional leader motivates employees mainly via contingent-reward exchanges. Transactional leaders bring more results while working on the already present system; the transactional leaders set goals, expresses their clear agreements in regard to expectations and rewards. They also provide valuable feedback to maintain everyone on task and thereby they are more successful in transcending the status quo.
It is alluded by many researchers that a transformational leader having a wider vision of the company, would accelerate institutional learning and encourage organizational CSR habits which fulfills the demands of both the primary and secondary stakeholders since the transformational leaders are mindful of the complex interconnections within stakeholder of the company and they perceive the company in its more interdependent form rather than an isolated one. Contrastingly, subscribing to the narrow, stakeholder focused vision of the organization, considering organizational CSR as a diversion against the primary aim of stakeholder value maximization. However, few researchers acknowledge that a transactional leader has a style which predominantly is based on input-output mindset to the extent of organizational CSR & he seeks to optimize the effect on the society via the CSR commitments at any given level. The leaders based on their traits in correspondence to the CSR goals, set CSR based objectives and contribute valuable feedback to help the members on the path across execution of these organizational CSR work. It is also asserted that transformational leadership trait can be superior at ‘proficiency exploration’. (For instance, developing an entirely new set of skills and information.), transactional leadership is superior when it comes to ‘competence exploitation’. It can further be argued that transactional leadership boosts, while transformational leadership trait subsides, the link that is between the outcomes of the organization and the institutional CSR practices. On analysis, it can thus be concluded that transactional leadership traits in business deriving factors have a positive impact from institutional CSR practices and it brings us to the conclusion that in some cases, transactional leadership is more effective as compared to transformational leadership.
3. CSR & Social factors
Social factors are an important part under the CSR since these factors have a broad definition extending from the internal working of the organization to external impact of the organization. It focusses on how responsible an organization should be towards the society and all the social obligations attached to the society. All the business organizations use resources that are in one way or the other for the benefit of the society. As these resources are used by the organizations, it is expected that all the activities that are carried out would in return benefit the society and not only exploit the resources. These can be resources used for manufacturing, for instance natural resources or other resources such as electricity. While other resources that society offer to these organizations are in terms of manpower, i.e., the human resource for working of the organization. The society plays a very important role in building and working of an organization; hence it is expected by the organization to pay back to society by fulfilling the ambit of social welfare for the upliftment of the society. It also covers the environmental factors within its ambit as environmental harm ultimately affects the society in terms of health effects. Market forces also play an important role in making a business understand the social obligations. Market forces explains about the paying capacity of the customers and the actual need of the customers. It also explains the choice and preferences of customers. These are the social obligations that an organization has to be aware of and if it is not aware of these obligations, then such social obligations can result in the decline of business revenues.[9] Though these social factor do not directly affect the society, but these are information related to society which the organization must be aware of to fulfill the needs of the society and also to have an upper hand in this era of cutthroat competition amongst the business organizations.
There have been a good set of examples where the Indian organizations which include ‘Tata’, having multiple schemes for upliftment of society such as medical schemes, school education for their employees and their families. Reliance has also a subsidiary called Reliance Foundation which is involved in activities for upliftment of the society. These include activities such as free education for socially and economically backward children. These not only help the society in uplifting but also help the organization to build its image in the society which increases the goodwill of the organization and further helps the organization to improve its revenues since the customers also connect with such activities and help such organizations in boosting their business and revenues.
4. CSR & Ethical factors
Ethical norms such as loyalty, honesty, fair conduct etc. by an organization plays an important role since these factors help the employees of the organization to engage with ‘proper conduct’ of the organization in key areas of operations of an organization.[10] To ensure proper ethical norms, organization should focus on creating a systematic infrastructure which should be evolving based on constant communication and the process should include components such as, appointment of an ethical spokesman, reviewing ethical aspects of an organization yearly, providing employees with training, etc.[11] Well-formulated ethical norms by an organization does not merely reduces the expenses incurred, but also leads profits for an organization.[12] This happens due to reliable & trustworthy employees and a base of loyal customers which would lead to less corruption on an organizational level. On the other hand, avoiding ethical standards can be very dangerous for an organization as it can not only affect its business and revenues but can also affect the goodwill and the trust of customers towards an organization. A better understanding of this can be done by analyzing the case study of Coca-Cola India.
In 2003, an Indian NGO, Centre for Science and Environment (CSE) published a report that the sample of Coca-Cola and Pepsi co. beverages contained ‘pesticides’ more than the level prescribed as per the European Standards. Through this report, CSE asked the government to implement legally enforceable laws on corresponding standards in order to match the European Standards. This report led to an immediate decline in revenues of Coca-Cola India. Within 2-3 weeks of these allegations on Coca-Cola, the sale of Coca-Cola drinks reduced by 40 percent.[13] Coca-Cola focused on arguing on the testing standards of CSE and kept losing its credibility and goodwill amongst the customers. It did not think of retaining its customers and rather protected its product. This led to a disastrous dip in the sale of Coca-Cola soft drinks and impacted the customer base. If the company would have applied its ethical norms appropriately, then they would have focused more on retaining their customers by understanding their issues and their concerns and would have worked on getting back their customers. In such case, the company could have provided their recipe, though it would have hampered their exclusivity but would have helped retain its customers and its goodwill. Furthermore, there could have been other possible ways to connect with their customers by taking their feedback and explaining the product and how is it not harmful to consume their product. Although, such steps were never taken. This case study sets an example that The ethical factors affect the company and thus harmonizing the ethical factors would help in the smooth functioning of any organization.
5. CSR practice in India & outside India
In 2014, India became the first country to legally mandate CSR activity under section 135 of the Companies Act, 2013. However, this provision is not applicable to every company, since section 135 provides a threshold stating every company with either – net worth of Rs. 500 crores or turnover of Rs. 1000 crores or owns property (before tax) of amount Rs. 5 crores is mandated to perform CSR activities. Section 135 also aims at forming a dedicated system within a company which aims at performing CSR. It states a company must have a CSR committee with at least 3 directors including 1 independent director. However, if a company is without an independent director, it must have at least 2 directors since section 149 of the act states, it isn’t mandatary to have an independent director. Thus, 2 directors within a company without an independent director is deemed acceptable. The purpose of the CSR committee formed would be to formulate a CSR policy which should be aligned with Schedule VII of the act. Schedule VII is an exhaustive list of the CSR activities that a company can perform. The CSR committee after formulating a CSR policy, sanctions it from the board of directors and puts it up on the company’s website.[14] The act makes it clear that the amount to be spent is a minimum of 2% of the Adjusted Net-Profit of the last 3 consecutive years.[15] Lastly, the purpose of the company is to monitor the execution of the CSR policy. Thereafter, the CSR activities performed by the company thereafter must be put in its annual report.[16] Recent amendment to the act has put harsh punishments when it comes to non-compliance to the CSR activities that are to be performed by the company.[17] The Act also provides for provisions in cases where unspent CSR money is left with the company, In such cases, the unspent CSR funds which actively are not being used towards an on-going CSR project in that case the money is to be transferred to the PM CARES fund or the PM national relief fund.[18] However, in case where the remaining CSR funds are pertaining to an on-going project, in that case the money is to be transferred to an ESCROW account which is to be name as ‘Unspent CSR account’, and this needs to be deposited within 30 days at the end of the financial year. Once an ESCROW account is made the amount has to be spent within the next 3 financial years and if the certain amount is still leftover, then it must be transferred to PM CARES fund or the PM national relief fund within 30 days from the date when those 3 financial years end.
Outside India, only 4 countries namely France, Denmark, South Africa and China have compulsory disclosure requirements on the amount spent on CSR operations. In 2006, the corresponding provision in China contained ‘laws and administrative regulations’ to conform with the social and moral ethics. The companies are therefore subject to government and public supervision to undertake CSR activities.[19] Since 2008, France started a special policy on CSR by naming a ‘Special Representative’ whose key function is to actively engage in issues pertaining to CSR. [20] In 2009, Denmark had 87% businesses complying with the legal CSR requirement. However, with the Finance Act, 2012 in Denmark, it established a mediation and compliance body specifically for CSR to improve this number. [21] The South African companies act of 1973 does not make it obligatory for a company to engage in the CSR activities however, King II and King III have explicitly stated the relevance of CSR and acknowledged all shareholders to adopt CSR activities.[22] In 2015, the regulatory requirements have made it mandatory for the companies in South Africa to disclose their CSR activities and provide assurance therein. Only a few countries have mandated CSR performance for companies in their region. Social welfare and environment within a country is drastically improved by multinational companies due to their CSR activities in that region. Therefore, more countries should thrive to mandate CSR activities in their territory.
6. Conclusion
It is a given fact that CSR Agenda is critical to a company’s stakeholder obligations and to have a sustained growth, however, most of the companies fail to elevate the socially responsible business practices and fully utilize the benefits that a company can reap in lieu of their CSR activities. Post the comparative analysis of both the leadership styles, it is evident that leadership styles play a quintessential role in shaping the CSR agenda of a company. Moreover, these three factors namely Ethical, Social and Governance factors (can also be categorized as ESG factors) are the most important factors in view of the company being a good corporate citizen. These three factors along with the comprehensive study of the leadership traits broadly cover all the factors of Corporate Social Responsibility. Ethical factors ensure on ethical standards of the organization while social factors make the organization responsible towards the society at large. Lastly, Governance factors makes the company responsible towards the most important part of the company, i.e., the stakeholders. These factors are also inter-dependent and inter-connected with each other and lack in anyone of the factors can hamper the image for the organization. In this competitive market, the companies must be dynamic and keep on changing and evolving according to demands of the market. An important part of this change would be these inter-dependent ESG factors which will make the brand reputation for the company and moreover, help in long-term profitable business for the company.
Notes:
[1] What’s the Commitment? | UN Global Compact, Unglobalcompact.org, https://www.unglobalcompact.org/participation/join/commitment (last visited Nov 23, 2021).
[2] World Business Council for Sustainable Development 2000, s. 67
[3] “Why is Corporate Governance Important”, by Lakshna Rathod. (2018)
[4] Ibid.
[5] Amagoh, F, Leadership development and leadership effectiveness, Management Decision (2009),Pg 989-999.
[6] Lowe, K.B., K.G. Kroeck, and N. Sivasubramaniam, Effectiveness correlates of transformational and transactional leadership: a meta-analytic review of the MLD literature, Leadership Quarterly (1996), Pg 385-425.
[7] Northouse. P,Leadership: Theory and Practice, Los Angeles 5th Ed Sage. (2010)
[8] Ibid.
[9] Factors Responsible for the Realization of Social Responsibility | Business Management, by smriti Chand, https://www.yourarticlelibrary.com/management/factors-responsible-for-the-realization-of-social-responsibility-business-management/25814 (last visited Nov 23, 2021).
[10] Ewa Mazur-Wierzbicka, University of Szczecin, Anna Horodecka, Warsaw School of Economicshttps://www.researchgate.net/publication/280736576_Ethical_aspects_of_corporate_social_responsibility/link/55c47c9608aeb97567404df1/download (last visited Nov 23, 2021).
[11] Sroka, 2012c, p. 38.
[12] Garsparski et al, 2002, p. 27; Żemigła 2007, p. 96
[13] Coca cola case study summary commerce essay, https://www.ukessays.com/essays/commerce/coca-cola-crisis-case-study-commerce-essay.php (last visited Nov 23, 2021).
[14] Section 135(4), companies act, 2013
[15] Section 198, companies act, 2013
[16] Section 135(2), companies act, 2013
[17] Section 135(7), companies act, 2013
[18] Section 135(5), companies act, 2013
[19] Lin, Li-Wen. “Mandatory Corporate Social Responsibility? Legislative Innovation And Judicial Application In China”. Oxford Law Faculty, 2019, https://www.law.ox.ac.uk/business-law-blog/blog/2019/05/mandatory-corporate-social-responsibility-legislative-innovation-and. Accessed 4 Dec 2021.
[20] “France’s Commitment To Corporate Social Responsibility (CSR)”. France Diplomacy – Ministry For Europe And Foreign Affairs, 2018, https://www.diplomatie.gouv.fr/en/french-foreign-policy/economic-diplomacy-foreign-trade/a-european-and-international/corporate-social-responsibility/. Accessed 4 Dec 2021.
[21] Csrgov.Dk, 2011, http://csrgov.dk/file/319199/corporate_social_responsibility_and_reporting_in_denmark_november_2011.pdf.pdf. Accessed 4 Dec 2021.
[22] Flores-Araoz, Micaela. “CSR In South Africa – Business In South Africa”. Business In South Africa, https://www.businessinsa.com/mvo/. Accessed 4 Dec 2021.
