1.8.1 Corporate governance - the decision-making process

The term corporate governance is usually used to assess the quality of the management control of listed companies. CSR is a concept that is not limited to listed companies, as many small and medium-sized enterprises are also engaging with CSR. Chapter 2, which was written in 2004-2005, offers a comparison between corporate governance and CSR. With regard to each concept - corporate governance and CSR - the discussion addresses the history, the relevant treaties and international guidelines, the objectives, the instruments, the initiators, the interested parties, the key-notions, the legal embedding and enforcement. Clearly, there are three premises which are common to both corporate governance and CSR: transparency, accountability and the participation of stakeholders in the decision-making process. Nonetheless, it is argued that traditionally the subject matters of corporate governance and CSR are divergent.

It is contended that corporate governance focuses first and foremost on the division of power within a company, i.e. between the bodies that comprise a company: the board of directors, the supervisory board and the shareholders meeting. For example, transparency primarily concerns the decision-making process with an aim to avoiding potential conflicts of interest. As regards accountability, the emphasis is put on creating a model in which management's strategic decisions can be effectively supervised by the supervisory board and the shareholders meeting. The premise of the participation of stakeholders stresses that shareholders can influence important decisions. Furthermore, employees constitute a recognised stakeholder group. In corporate governance, a Code of Ethics' commonly contains provisions regulating potential conflict of interest situations. By contrast, notions such as the conservation of biodiversity, respecting human rights and ' cradle-to-cradle'1 were generally not associated with good corporate governance but with CSR. Good corporate governance was mainly expected to produce a continuous increase in shareholder value.

CSR is aimed at an increase of value in three dimensions: People, Planet and Profit.2Paramount would be not to compromise any of these dimensions to the benefit of one of the others. The fusion of interests is the ultimate goal. Like corporate governance, CSR promotes transparency, accountability and participation. However, the transparency aimed at by CSR concerns different topics than the aforementioned corporate governance themes. For example, CSR transparency relates to the standards of conduct which a company employs regarding labour and safety conditions and whether the company applies a gender and diversity neutral personnel policy (People). Whether it takes precautionary measures to avoid environmental damage and in which way it improves an efficient use of raw materials, water and energy (Planet). Corruption is also a subject in connection with which CSR stimulates corporate transparency: the initiative ' publish what you pay' to local governments3 is assumed to reduce corruption because locals then have the means to trace sums paid to their governments. Transparency on the P of Profit concerns the manner in which the profit is obtained and how it is distributed among the stake-holders.4 Accountability in CSR concerns the question whether a company that has adopted a CSR code of conduct takes the blame for anything that goes wrong, i.e. any conduct not in line with this code. Does the company offer redress to victims? Does it try to solve problems, either through mediation or damage payments? Does the company repair environmental damage? The premise of the participation of stakeholders typically includes a broader group than just shareholders and employees. Also other people affected by the business activities are considered stakeholders as understood from a CSR perspective. Interesting examples have been developed in the mining industry in Australia.5

The three key concepts - transparency, accountability and participation -are delineated in chapter 3, which was written in 2010. It reveals, that over the last five years, corporate governance has repositioned itself; i.e. a shift is noticeable from defining the rules of the game' to a more holistic perspective including CSR values. For example, in the Netherlands, the revised corporate governance code, the Frijns Code of 2008, explicitly states that the directors' duties include defining a CSR policy and considering the material CSR aspects in relation to the business, and that the board has to report hereon to the general meeting.6 Directing a business is meant to create ' long term shareholder value' as the Preface of the Frijns Code records, thereby balancing the interests of different stakeholder groups within and outside the company. In the United Kingdom, section 172 of the Company Act was introduced in 2006. It also refers to CSR-concerns in its corporate governance provisions: it requires boards to employ a broader and long-term perspective in their management.7 When exercising this duty, the director is required to take into consideration a non-exhaustive list of factors including the long term consequences of the decisions as well as the interests of the employees; the relationships with suppliers and customers; and the impact of the decision on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company. It can be seen that among other things, this duty introduces wider corporate social responsibility into a director's decision making process.

In view of furthering CSR, corporate governance is a relevant legal framework. As governing a company concerns the corporate strategy and means, embedding CSR therein definitively puts CSR in a better position. The institutionalisation of CSR in the Dutch corporate governance code is an interesting development.