Corporate Social Responsibility

LECTURE 6:
Corporate Social Responsibility
MGT 610

Corporate Social Responsibility

Chapter 2
Evolution of Company and
CSR

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

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
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observe the actions of the agent

Corporate Social Responsibility

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 reports7 )

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

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

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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