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Corporate Social Responsibility and Governance

Table of Contents

Abstract 2

Corporate Social Responsibility and Governance. 3

Introduction. 3

Overview of Croda International and Centrica. 4

Diversity in the Board Room.. 5

Impact of gender and ethnic diversity on firm performance. 7

Compliance with various governance guidelines. 8

Conclusions and recommendations. 11

List of References. 11

Abstract

 Corporate governance, corporate social responsibility and board diversity have been the subject of discussion by a large number of researchers and writers.  This paper analyses how these variables affect the financial performance of organization with a focus on Croda International and Centrica. To investigate whether gender and ethnic diversity in board rooms is critical for improved financial performance several theories have been analyzed including Agency theory, resource dependency theory, social cohesion theory and human capital theory. It is clear from the paper that organizations which embrace diversity in their boards are likely to report better financial performance.

Corporate Social Responsibility and Governance

Introduction

            A large number of researchers have written on the relationship between corporate governance, corporate social responsibility (CSR) and financial performance.  This paper aims to explore empirically the relationship between corporate governance and corporate social responsibility and the role played by board of directors in attaining these ideals.  The paper analyses different theoretical and empirical perspectives on corporate governance and corporate social responsibility. 

For this study special focus is placed on how these perspectives are applied in Croda International and Centrica. Analysis is done to determine whether the two companies comply with various guidelines on corporate governance recommended by various bodies in the United Kingdom.  Research has shown that companies which implement good corporate governance practices such as having a large number of independent directors ultimately perform better and are likely to undertake corporate social responsibility activities (Yamanaka 2018, p.503).  However, reporting good financial performance does not necessarily mean that a corporate entity will implement corporate social responsibility programs (Singh, Singhania and Sardana 2019, p.55).

Overview of Croda International and Centrica

            One of the companies that is focused on in this paper is Croda International plc (Croda).  Listed on the London Stock Exchange, Croda is a publicly listed company which deals in specialty chemicals. Based in Snaith, England, Croda was founded in 1925 by George w. Crowe and Henry J. Dawe (Croda 2019).  The company’s specialty chemicals include surfactants used as ingredients for lotions and cosmetic creams, dietary supplements and fatty acid amides among others (Croda 2019).  Some of the company’s products are used as inputs by manufacturers of beauty products such as lotions and cosmetic creams among others. The company operates factories in various countries of the world such as Japan, South Korea, the United Kingdom, the United States and the Netherlands among others (Croda 2019).

            The other company that is focused on in this paper is Centrica; a British multinational corporation headquartered in Windsor, Berkshire which deals in energy and related services. The company supplies gas and electricity to customers in the United Kingdom and Ireland as its principal business activity. In addition, the company also deals in providing energy solutions and trading to companies located in various parts of the world (Centrica 2019).   The company is reckoned as the largest supplier of gas in the United Kingdom, England and Wales as well as one of the largest suppliers of electricity in the same market segment. The company also provides plumbing as well as other household services to its customers. Founded in 1997, the company is listed on the London Stock Exchange and is therefore a public company (Centrica 2019).

Diversity in the Board Room

            Diversity in the board room is an issue that continues to draw a lot of attention to many researchers and academicians. Literature on board diversity sources its theoretical underpinnings from management theories since its empirical in nature.  Agency theory, resource dependency theory, social cohesion theory and human capital theory are some of the theories that are relied on to shed light on diversity in the board room (Singh, Singhania and Sardana 2019, p.60). Human capital theory focuses on an individual’s cumulative repository of skills, educational background and the experience an individual possesses in developing cognitive and productive capabilities in life which end up benefiting both the individual and the entity he/she works for. In line with this theory therefore the diversity of a board is supposed to be a key resource as it brings on board diverse and unique human capital (Irene, Azizan, Bhaskaran and Sukumaran 2020, p.26). Social cohesion theory holds that boards that are not diverse tend to create boundaries which places high entry barriers for people who are not in the board. Boards that exclude people from becoming members and only accept members drawn from a certain class, race or religion prevent an entity from benefiting from diverse resources which would be injected by directors from diverse back grounds (Kanojia, Sharma and Jain 2020, p.30).

            The resource dependency theory encourages boards to embrace diversity since directors provide critical resources that are required to create competitive advantage and survive in the long run. The theory holds that directors provide critical information in the form of advice and counsel and access to information channels that link environmental contingencies and the entity. Directors also provide legitimacy to an organization as well as preferential access to resources (Yamanaka 2018, p.510).   The theory holds that these resources cannot be provided by a certain group of directors but rather an organization requires directors who are insiders, community influencers, support specialists and business experts to access these resources. Better economic outcomes can only be attained in an organization which puts in place a diverse board rather than one that only relies on a certain type, class or group of people (Singh, Singhania and Sardana 2019, p.53).  Diverse boards help in better decision making and improves advisory to managers as directors bring on board unique information. Lastly, agency theory has been advanced as a major proponent of the importance of having diverse boards in organizations. The theory holds that self-interest is what underpins decisions that are made by organizational boards all over the world (Yamanaka 2018, p.520).

The theory holds that managers can filter information to shareholders for their benefit given an information asymmetry exists between managers and shareholders.  Being a source of reliable information for shareholders is the principle role of a board of directors which monitors what managers do effectively. Provision of rich and reliable information to shareholders is dependent on the diversity of boards (Yamanaka 2018, p.503).  Rich and reliable information assists shareholders to ensure managers’ behavior is consistent with their interests.  A diverse board of directors forms various subcommittees to monitor management behavior, includes individuals who have managerial experience and also experience in the industry (Yamanaka 2018, p.522).

Impact of Gender and Ethnic Diversity on Firm Performance

            Gender and ethnic diversity in the boardroom has an impact on the performance of an organization. Organizations that have diverse boardrooms perform better than organizations that do not embrace diversity in their boardrooms. Diverse boards are able to provide richer and reliable information to shareholders which ensures the interests of shareholders are aligned with the behavior of management (Kagzi and Guha 2018, p.1030).  Since shareholders’ primary motive is profit maximization, it therefore implies that once management behavior is aligned with shareholders’ interests then decisions which management make will be aimed at maximizing profits. Boards which have women representatives have noted that women bring on board expertise in dealing with public relations, networking, career development and media management which are critical in improving the performance of organizations (Yamanaka 2018, p.503). Studies have shown that organizations which have gender and ethnic representations in their boards are likely to report better financial performance and especially in nations where shareholder protections are upheld (Yamanaka 2018, p.503).

Experience, knowledge and values which each board member bring to the board are some the factors which motivate boards to enhance gender and ethnic inclusion.  Firms operating in countries with greater gender parity, perform better if they add gender and ethnic board members into their boards (Yamanaka 2018, p.503). In countries with greater gender and ethnic parity, firm’s performance is affected by societal gender differences in its board. If gender and ethnic representation is prioritized, organizations tend to perform better financially (Yamanaka 2018, p.503). 

 Croda’s board is made up out of nine members; out of which three are women. On the other hand, Centrica has eight board members out of which four are women. Each board has formed various committees to monitor certain aspects of management behavior and provide rich and reliable information to shareholders (Yamanaka 2018, p.503). Due to gender diversity in the board of Centrica, the company provides funding to various charities which seek to address community concerns. Once of the charities is Bord Gáis Energy which supports people at risk of losing their homes or are already homeless. Croda also supports climate change programs as part of its corporate social responsibility programs (Croda 2019).

Compliance with Various Governance Guidelines

                After analyzing the boards of Croda International and Centrica there is evidence that shows that the two companies have complied with the 2018 UK Code of Corporate Governance, the 2017 Parker Review recommendations and the 2015 Davies Women on Board recommendations relating to board diversity (Klumpes, Ledlie, Fahey, Kakar and Styles 2017, p.140).  The board of Centrica is more diverse than that of Croda as it comprises four women and four men. It is therefore equally represented by both genders. The board of Croda consists of 3 women and 6 men which means that one third of the board is made up of women. Most of the guidelines on corporate governance advocate for transparent, formal and rigorous process of appointing board directors in organizations. The process of appointing directors within the two organizations is transparent, formal and rigorous as it is usually done during annual general meetings of each company (Klumpes et al. 2017, p.150). 

                Appointments are supposed to be made on merit according to the recommendations/ guidelines. The boards of the two companies carry out transparent recruitment of the board members.  Board members are recruited based on merit as each board member possess unique attributes which are different from those of other board members (Yamanaka 2018, p.503).  The two companies report on the number of women they have at in the company, senior management level and in the board during annual financial reporting. Each company has put in place policy guidelines which ensure women are recruited and gender diversity is prioritized at all times (Volonté, and Gantenbein 2016, p.120). Each company advertises non-executive board positions which encourage gender diversity periodically as provided by the policy guidelines in each of the documents.  The code and recommendations requires that the board chair should only serve for nine years from when he was appointed to the board of the company with an allowance of the time being extended to facilitate succession planning (Yamanaka 2018, p.503).

                 Both Croda and Centrica have changed their board chairs within the stipulated duration provided in the recommendations.  The boards are also required to take measures to ensure independence and manager conflict of interest. Both Croda and Centrica report on board independence and conflict of interest issues in their annual reports which demonstrates that they comply with these guidelines (Klumpes et al. 2017, p.150).  The code also requires that board directors to disclose other commitments that they hold outside the company. Members of the boards of directors of Croda and Centrica have disclosed what other responsibilities and directorships they hold apart from being members of the respective boards which complies with the provisions of the 2018UK Code on Corporate governance (Klumpes et al. 2017, p.135).

                The 2018 UK Code on corporate governance requires companies to carry out robust assessment of risks that are emerging in addition to the required principal risks, explain procedures used within the company to identify risks that are deemed to be emerging and measures that the company is putting in place to mitigate the risks (Klumpes et al. 2017, p.145). As at 2019 both Croda and Centrica included sections in their annual reports where they reported on principal risks and also emerging risks which they had identified. They also included measures that each company planned to put in place to mitigate each of the risks identified (Ali, Muhammad, Talles, Hwang, Nguyen and Thai 2020, p.149)

                The codes and recommendations also require organizations to disclose measures that they have taken to enhance and assure that their businesses are sustainable. Both Croda and Centrica have provided sustainability reports which provide details on measures that each company has put in place to enhance sustainability (Poulton, Barnes and Clarke 2017, p.430). Some of these measures include corporate social responsibility programs which each organization implements to improve their relationship with the community. Corporate social responsibility activities are essential as they demonstrate to stakeholders that the organization is playing a role in helping address issues which matter to stakeholders.  For instance, Centrica supports organizations which assist homeless people and people about to lose their homes whereas Croda ensures its products, processes and footprint are environmentally friendly (Poulton, Barnes and Clarke 2017, p.425).

Conclusions and Recommendations

                From the foregoing analysis, board diversity is critical for the continued success of an organization. Gender and ethnic diversity is important because it ensures an organization complies with some of the requirements in the 2018 UK Code on corporate governance, the 2017 Parker Review recommendations and the 2015 Davies Women on Board recommendations relating to board diversity. Board diversity enables and organizations to bring on board diverse skills, diverse resources and networks which are critical for an organization to obtain competitive advantage and enhance long term survival. Board diversity ensures organizations are able to identify and support corporate social responsibility programs which address matters that are of concern to its stakeholders. Board diversity enables organizations to provide rich and reliable information to shareholders which enables them to monitor the performance of management and align management behavior with their interests.