CSR and corporate governance: two sides of the same coin?

Source: Euractiv, 20 February 2004

Representatives of the Commission, business community and academia have been debating differences and points of convergence between the concepts of corporate governance and CSR.

Corporate ethics has entered the limelight in the past few years as a result of a surge in corporate scandals of different genres, involving financial fraud, ecological damage and the exploitation of local communities.
In response to the scandals, the EU has stepped up action to boost the accountability of European companies. The Lisbon European Council in March 2000 made a special appeal to companies’ sense of social responsibility. The Commission launched a Green Paper on Corporate Social Responsibility (CSR) in July 2001, which was followed by a public consultation. A follow-up communication of July 2002 resulted in the establishment of the European Multi-Stakeholder Forum on CSR, which is an ongoing discussion forum between trade unions, employers’ organisations, civil society organisations and business networks on the way forward for CSR. The stakeholder forum is currently holding meetings with a mandate to submit its conclusions to the Commission by mid-2004.

In the field of corporate governance, the Commission launched an Action Plan in May 2003, based on the conclusions issued by a high-level group of company law experts. A number of proposals, in particular two recommendations are expected during the mandate of the current Commission. One recommendation will be on the role of non-executive or supervisory directors and the other will be on directors’ remuneration (see also EurActiv 13 February 2004).

An event organised by the stagiaires of the European Commission addressed the link between CSR and corporate governance, examining differences and similarities between the two from an institutional, corporate and academic angle.


Institutional angle

Dominique BĂ©, head of unit in DG Employment and Social Affairs of the Commission, pointed out that not many academic papers existed on the relationship between CSR and corporate governance. The two concepts are not, in his view, two sides of the same coin, but they have a lot in common. Globalisation and the new media have led to the emergence of new stakeholders that are putting pressure on companies to act responsibly. CSR offers an approach for companies to manage more issues and more stakeholders. Which issues and stakeholders to manage varies, however, depending on the size, geographical location and field of activity of companies. (There are approximately 1.4 million companies in the EU with ten employees or more. 40.000 of these are large enterprises.)

Dominique Thienpont from DG Internal Market explained the Commission’s upcoming policy priorities in the area of corporate governance. Mr Thienpont explained that while the concept of corporate governance has been around for a while, CSR is still an emerging policy area. Its future in the EU will largely depend on the outcome of the stakeholder forum. Corporate governance deals with listed companies, their management and shareholders while the scope of CSR is much broader as it covers all sorts of companies and legal entities. CSR is by definition voluntary. It comprises policies implemented above legal obligations. There is also a philosophical difference, Mr Thienpont added, as corporate governance is concerned with process and mechanism while CSR deals with values and defines objectives and targets.

Corporate angle

Jan Noterdaeme, Senior Director at CSR Europe explained that the main difference between the two concepts is that corporate governance provides a legal framework for managing relationships between a company’s board, management and owners while CSR provides a non-legal framework for managing social and environmental concerns. The two are similar in that they can both have a direct impact on the survival of business.

Servin Setareh, Senior Consultant from Deminor Rating defined corporate governance as a system by which business corporations are directed and controlled. Deminor Rating conducts the annual assessment of corporate governance performance of European blue chip companies. Mr Setareh explained that Deminor’s research has confirmed that companies are increasingly under pressure to act more responsibly. This partly shows in a sharp rise in the publication of corporate ethics codes and a similar development is noticeable for corporate governance mission statements among the companies surveyed by Deminor.

Academic angle

Prof. Philippe de Woot from the UniversitĂ© Catholique de Louvain said that corporate governance refers to law and rules while CSR was concerned with values, ethics and behaviour. It is a short-sighted view to suppose that the purpose of a business firm is to enrich the shareholders, said Mr de Woot. The main objective of companies is to create technological and economic progress. The notions of ethics and integrity often get confused, Mr de Woot explained. Integrity means abiding by the law. Ethics rather means ‘love thy neighbour’. The issue then becomes the definition of who our neighbours are – whether this includes people living in faraway places as well as generations to be born in two or three generations. Mr de Woot observed that business did not know how to deal with NGOs. The speaker thus praised the stakeholder forum for opening the dialogue to society at large. Mr de Woot also suggested that students at business schools should be made aware that the system currently applied is becoming unsustainable and something needs to be done about it.

Prof. Louis-Henri Verbeke from the Vlerick Leuven Gent Management School explained that corporate governance is building an environment to ensure better, more honest, properly transparent and yet efficient corporate decision-making by all involved ensuring the long-term efficiency and responsiveness to the relevant interests. When we put the question "to whom a company should be responsive, what interests should it serve and what balance should it achieve?", we arrive at the domain of CSR. A recent World Economic Forum poll of CEOs has shown that 60 per cent of the market capitalisation of corporations is based on "hard" financial data while 40 per cent is dependent on "reputation", ie broadly satisfying expectations. The speaker observed that CSR is "woolly European stuff". In the US, the debate started earlier and corporate responsiveness is greater due to a less regulated environment. Ultimately, the role of business schools is to train people capable of professional judgement as judgement becomes increasingly more important as one progresses in a business hierarchy.

Next steps:

March 2004 – Commission proposal for a revised Company Law Directive on the Statutory Audit function;
Summer 2004 – report of the Multi Stakeholder Forum on CSR;
later in 2004 – two Commission recommendations on the role of non-executive or supervisory directors and on directors’ remuneration.