Social Responsibility Writer's Prize 2007 - Tertiary Entry - Third Prize

Laura Hogarth - University of Queensland

'Partnership Alignment' in Socially Responsible Corporations

Early concepts of corporate social responsibility (CSR) in its purest form have attracted criticism from economists, legal theorists and entrepreneurs alike. While social responsibility is happily accepted to be a positive concept in most contexts, traditional approaches to corporate social responsibility are fragmented and disconnected from business strategy (Porter &Kramer Dec 2006), and so frail to harness the opportunities to be gleaned from investment in the community, or competitive integration. Modern modifications to CSR theory, however, have seen some corporations selectively adopt socially responsible practices as part of targeted business strategy for the ultimate benefit of both the shareholders and then community at large.

In the past, a major stumbling block for corporations seeking to become more socially responsible was the balance between social benefits and corporate profits to be gained from any corporate activity. 'Partnership alignment' or 'competitive integration' is a new trend in CSR that conceptualises the relationship between social benefits and corporate profits as symbiotic, rather than competitive. This essay examines these practical adaptations of CSR theory and the potential benefits to be gained from partnerships between corporate and not-for-profit entities in the interests of social responsibility.

To understand the theoretical conflicts of interests and how to overcome them to realise corporate social opportunity, it is first necessary to examine the capitalist underpinnings of our economy and the company director's obligation at law to protect the 'best interests' of the company. Any corporate body seeking to successfully adopt socially responsible practices without sacrificing corporate profits and other benchmarks of success, must operate within these legal and economic frameworks.

A Director's Duties to the Shareholders

The common law fiduciary duty of directors to act in the interests of their company has now been incorporated into the Corporations Act. Section 181(1) prescribes a duty to act both 'in the best interests of the company' and 'for a proper purpose'. This reform has therefore placed an objective restriction on the previously subjective duty of directors to act in the interests of the company (Cilliers 2001, p.12).

The current shareholder-centred ideology of corporate law (see Hansmann & Karaakman 2002) assets that a director's duty to act in the best interests of the company requires a director to govern solely for the benefit of shareholders (and in limited circumstances, creditors), and not for any collateral purpose (Cilliers 2001, p.12). This position reflects the well-established view of the corporate management body as an 'agent' acting for the beneficial owners or shareholders (see the Corporations and Markets Advisory Committee (CAMAC) Discussion Paper, November 2005, p.3).

The generally accepted common law test, equating the best interests of the company with the best interests of the shareholders (Ford 2005, p341), is often mistaken as an obligation to maximise shareholder wealth. The reality at law is that a directors' fiduciary duty does not extend to a general obligation to engage in profit maximising activities' at the expense of other stakeholder interests (Standen 2006, p.13).

A key distinction to make at this time is that between truly uncompensable costs and other socially desirable outcomes that will benefit the company indirectly. Australian law already provides a significant degree of flexibility which allows for consideration of the interest of non-shareholder stakeholders as part of the broader consideration of what is in the best interests of the corporation as a whole (Standen 2006, p.13). However, demonstrating the 'best interests' of the corporation still requires some commercial justification (Corporate Research Group submission to the APJCCFS, 11 October 2005). A prolific body of CSR theory and commentary relies on a direct or indirect commercial incentive as the fundamental justification for any corporate action serving non-shareholder interests.

However, where a company is incorporated with a specific purpose and policy, surely actions in the 'best interests of the company' are actions in pursuit of that purpose and in accordance with that policy. This approach is presented as a natural evolution of law forced by growing social pressures on corporate bodies (Redmond 2005/06, p.23), as they grow ever larger and more powerful, both economically and politically. These social pressures are part of the 'invisible hand' that directs free-market economy.

The Capitalist Foundations of Corporate Law Practice


"Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stakeholders as possible." (Friedman, 1962, p.133)
'[F]irms should not generally give without expecting something in return'. (ASA spokesperson quoted by ABC News Online, 7 January 2005)

While we may be reluctant to recognise greed as the fundamental underpinning of a free society, the above reasoning is a sound and defendable when the full global impact is considered. Few theorists championing purely non-commercial justifications for socially responsible corporate practices have been given much credence in the academic sphere, as any claim of a need to 'trust' (Redmond 2005/06) corporations in an 'unstable public sector framework' (Kell 2005/06) flies in the face of well established free-market capitalist theory and practice.

Under purist free-market capitalist theory, if consumers, shareholders and other stakeholders demand certain standards, an economic imperative to meet these standards will occur without regulatory interference. If consumers won't buy products from sweatshops, sales revenue will depend on good human resources practices. If potential shareholders won't invest in corporations that are perceived to be environmentally destructive, capital rising will depend on a good environmental impact management policy. Similarly, corporations that benefit from consumer approval and a positive social reputation can justify potentially profit sacrificing philanthropy on the basis that they will benefit from an improved social reputation or goodwill (Standen 2006, p.16).

This finding reaffirms the assertion that the consideration of stakeholders other than shareholders in directorial decision-making is not mutually exclusive of the optimisation of shareholder wealth (Standen 2006, p.13). The key distinction, therefore, is between a duty to current shareholders seeking to maximise share prices for short term trading and a duty to the company as a sustainable enterprise over the long term (Horrigan 2006, p.20).

Corporate Sustainability Theory

'[M]aximising shareholder value requires multi-dimensional attention and responses to corporate opportunities and risks from a variety of politico-regulatory, socio-economic and environmental sources in the surrounding business climate. Shareholder and stakeholder interests are therefore relational and interdependent.'
(Horrigan 2006, p.20)

The above quote summarises, in effect, why socially responsible practices benefit businesses in the long term, even operating in a capitalist economy that demands value maximisation. It is difficult to envisage a scenario where a corporation operating in an environmental, economic and social sphere can absolutely isolate its interests from those of other stakeholders in that sphere. It is for good reason that the 'good corporate citizenship' advocated by the Commonwealth Business Council (see Mohan Kaul, Director-General of the Commonwealth Business Council, 2001, quoted in Horrigan 2002, p.515) is now recognised as 'good business practice' in any industry.

In their haste to improve community goodwill and capture the benefits of socially responsible practices, many corporations have implemented 'green initiatives' (Grayson & Hodges 2007) or made donations to unrelated charitable groups without a clear cut plan as to how the corporation will have benefited as a result. Without any control over how donated funds are spent, or any concrete ideas of the opportunities arising from community investment, it may be impossible to measure the value of the CSR initiatives, and therefore how much money a corporation can justify spending on them. This is where the advantages of partnership alignment become apparent.

'Partnership Alignment'

The primary form of partnership alignment is that of corporate partnerships with non-government organisations (NGOs) and charitable organisations. NGOs are the most trusted sector in most markets, and thus the ability to forge trusted relationships with NGOs can be instrumental in building or repairing the corporate image and consumer goodwill (Grayson & Hodges Apr 2007). Similarly, an ongoing relationship with a charitable or community-based organisation not only signifies a greater dedication to responsible practices that a lump sum donation, but also allows a corporation to direct how the money may be invested to the benefit of all parties.

The greatest advantages of such a partnership are evident where a company is expanding into previously underserved markets (Grayson & Hodges Apr 2007), where a partnered NGO or not for profit organisation can open communication channels, share market data crucial to business projections, and provide credibility and respectability in support of applications for government approvals.

The following example illustrates how socially responsible practices, implemented with a strong business stratagem, can create corporate social opportunities. In the case of Nile Breweries, cleverly targeted investment in a local economy produced both a new product and access to a new market (Grayson & Hodges Nov 2006).

In the 1900s, Nile Breweries imported raw materials into Uganda at great expense, as local farming techniques and undeveloped infrastructure could not provide the quantity or quality of materials required. In an inspired move, Nile Breweries and SAB Miller started a programme offering technical assistance and finance to small-scale agricultural producers in Uganda. Within a few years of the launch of the project, Nile Breweries and SAB Miller had created a stable supply base of more than 3,500 Ugandan local farmers, whose livelihoods had previously been insecure.

The follow-on effects of the new industry created greater spending power in some communities and thus a new market was born. The new lower cost product was ready and waiting to take on that market, now commanding a twenty percent market share in Uganda. This is a shining example of how corporations can harness the full potential of CSR practices by developing business models that align corporate strategy with the community's development needs.

Conclusion

In Australia, our development needs are different, but the principals remain the same. Well planned and aligned partnerships can facilitate CSR initiatives to fulfil both a social need and a corporate need. Whether it is a scholarship program to develop a pool of future potential employees in a newly emerging sector, or an environmental restoration program to boost local real estate prices, the social and corporate aims of any CSR initiative are two sides of the same coin.

Endless opportunities await discovery.

Bibliography

Articles

  • Bostock, T 2004-2005, 'Is Beerworth's proposal really so modest?' Company Director, December/January.

  • Brugmann, J, & Prahalad, C K, 'Co-creating Business's New Social Compact', Harvard Business Review, Feb 2007, p.80.

  • Cilliers, J 2001, "Director's duties in corporate groups - Dose the green light for the enterprise approach signal the end of the road for Walker v Wimbourne?', 13 Australian Journal of Corporate Law, p.1.

  • Grayson, D & Hodges, A, Apr 2007, 'Corporate social opportunities: Brand reputation - Consumers applaud ethical performance', Ethical Corporation, (http://www.ethicalcorp.com/content.asp?contentID=5011).
  • Grayson, D & Hodges, A, Nov 2006, 'Corporate social opportunities - Sustainable opportunities - A high-flying new brand', Ethical Corporation, (http://www.ethicalcorp.com/content.asp?contentID=4658).

  • Hansmann, H &Kraakman, R, 'The End of History for Corporate Law' (2002) 89 Geo Law Journal, p.439.

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  • Redmond L 2005/06, 'The challenge of CSR', Reform, Issue 87, pp.22-26.

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Texts

  • Ford, H, Austin, R, & Ramsay, l 2005, Ford's Principals of Corporations Law, 12th edn, LexisNexis Butterworths, Chatswood.
  • Friedman, M 1962, Capitalism and Freedom, University of Chicago Press, Chicago.

Legislation

  • ASX Corporate Governance Council Explanatory Paper and Consultation paper, 2 November 2006, 'Review of the Principals of Good Corporate Governance and Best Practice Recommendations'.
  • Corporate Research group submission to the Australian Parliamentary Joint Committee on Corporations and Financial Services, 11 Oct 2005,
  • Corporate and Markets Advisory Committee (CAMAC) Discussion Paper, Nov 2005
  • Parliamentary Join Committee on Corporations and Financial Services (PJCCFS) Inquiry into Corporate Responsibility, 21 June 2006
  • T.Wilson, 7 February 2005, 'The "Best interests of the Company" and Social Responsibility', paper presented at CLTA conference.

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