Corporate Social Responsibility
LECTURE 6:
Corporate Social Responsibility
MGT 610
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Corporate Social Responsibility
Chapter 2
Evolution of Company and CSR
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Corporate Social Responsibility
After Studying this chapter, you will be able to:
• Understand the concept of corporation
• Trace a brief history of corporations
• Understand how modern corporations come in to
existence
• Provide a brief outline of corporate governance
• Analyze the importance of CSR in governance
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Corporate Social Responsibility
Theories of Corporate Governance
• Agency theory
• Stewardship theory
• Shareholders Vs stakeholders theory
• Transaction cost theory
• Sociological theory
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Corporate Social Responsibility
Theories of Corporate Governance (contd)
• Agency theory
• The economic relationship that arises
between two individuals
• Principal
• Agent
• Three conditions to operate relationship
• The agent has the freedom to choose
between various course of actions
• Actions of agent influence their own
growth as well as the principals
• Difficult for the principal to observe the
actions of the agent as information is not
enough
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Corporate Social Responsibility
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Corporate Social Responsibility
Theories of Corporate Governance (contd)
• Agency theory
• The supplier of finance need return on their
investment
• Principal needs assurance that agent does not
steal the investment
• Principal needs to control the agent
• Control is dispersed and less effective
• Problems with agency theory
• Utility maximizer (agent will not act in the best
interest of the principal
• Unequal sharing of information
• Element of risk (judge performance based on
annual reports )
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Corporate Social Responsibility
Theories of Corporate Governance (contd)
• Agency theory
• Agency loss
• How to reduce it
• Focuses on quantitative and not qualitative
aspect
• To overcome the problems mentioned above:
• Transparent accounting practices and
disclosure
• Non executive independent directors
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Corporate Social Responsibility
Stewardship Theory
• Built on premise that directors will fulfill their duties towards the
shareholders
• Assumes that human are good and directors are trustworthy
• Directors are stewards whose motives are aligned with the
objectives of the principles
• Directors take in to account the stake holders but after the
shareholders
• Strengths
• Trust is high and stewards are motivated
• New ideas and growth
• More liberal and believes in empowerment
• Weaknesses
• Causal relationship between governance and performance
cannot be assessed using this theory
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Corporate Social Responsibility
Transaction Theory
• Assumes that managers seek self interest
• Managers operate under bounded rationality
• Selfishly driven to undertake transaction that
benefits them personally
• Make transaction without study as the money
invested is not their own
• Strengths / weaknesses
• Quantification is easy
• Shareholders are residual receivers , concern
about safety of investment
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Corporate Social Responsibility
The sociological theory
• Composition of the board, transparency of the
financial reporting, disclosure and auditing are
considered central to realizing the socio economic
objectives
• Strengths / weaknesses
• Based on fair distribution of wealth in society
• The challenge is that the board should not
have absolute powers
• Government control, interference may
increase leading to constraints and red
tape
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Corporate Social Responsibility
Importance of CSR in corporate governance
• Stakeholders theory is integral to corporate governance in
addition to shareholders value
• General acceptance that government cannot mange all
needs of society and companies have to involve themselves
for the welfare of stakeholders
• Corporations have the following responsibility
• Economic
• Legal
• Ethical
• Honor trust
• Be culture sensitive to provide the right services
• Discretionary
• Undertake voluntary activities and expenses,
keeping the greater good of society in mind
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