Corporate Governance and Social Responsibility

Corporate Governance and Social Responsibility

When used in the same sentence the concepts of corporate fiscal responsibility and social responsibility create an oxymoron. The expectations of corporate management, stockholders, and government oversight do not equate to a social moral expectation or consciousness. To suggest that a corporation has a moral obligation to the community, demonstrates a lack of understanding of capitalism and business. Capitalism demands that businesses compete for consumer loyalty, which is the basis of their profit. The very nature of business is to realize profit by marketing goods and services for a cost that is above the cost of production and operation of any given business. America is a consumer society, and much of the rest of the world is quickly following along that path. If a business fails to produce the goods and services that consumers demand, of a quality of product that consumers expect from the goods or services of business, then consumers take their business elsewhere. Consumers are even prone to sacrificing quality for a savings in price; and that should be with the expectation that the product or service will reflect a short-term utility for the consumer.

If, however, no product or service exists, and the business represents that it does, and accepts the consumers' money for the product or service, then that constitutes fraud. Fraud, by the laws that govern business in America is illegal. This is what we have seen in the collapse of the false foundation of capitalism in recent months. The products and services, or forecasted sales based on historical company trends that consumers believed they were investing in with brokerage firms did not exist except perhaps on paper. People are confusing the responsibility of the corporate world to provide consumers and investors with true and accurate business reporting with moral or social responsibility when in fact it is a legal responsibility to do so. Corporate responsibility rests in reporting and producing, not in responding to social need, although social need is indeed an impetus for creating new businesses and services.

The responsibility of corporate America is to the marketplace. The markets are driven by consumers and investors. To prevent fraud, government regulation and oversight presides over corporate America. The Securities and Exchange Commission (SEC) has the responsibility at the government level for corporate regulation and oversight as empowered by the laws under which they operate. Again, as a government regulatory body, the SEC performs its legal oversight of corporate America without a true social conscience. It is not reflective of a social conscience to ensure that publicly traded corporate entities are practicing sound accounting and business management. It is rather, enforcing the laws that govern the marketplace, and as a result attempts to ensure that fraud is prevented or discovered; hopefully before consumers and investors experience loss.

Referencing corporate accountability and governance, Dan A. Bavly (1999, p. 7) states:

"Just as every social structure has its own accountability system, in the classic market economy a company is held responsible in the marketplace. In the same vein, corporate governance is based on the premise that corporate officers operate best when they are held to account for what they do . . . When management assumes operating responsibility for production, thereby overseeing the money of other (often anonymous) people, it must being measured by yardsticks designed to indicate performance."

Recent events have demonstrated, however, that the system is flawed. As a result, investors and consumers have suffered extraordinary financial losses. This has confused consumers and investors, leading them to conclude that corporate America has a moral responsibility, because millions of consumers have experienced financial losses and setbacks that adversely impact their lives. It is a combination of fraud, a deliberate action to bilk consumers and investors of their money, and bad business management, all of which serves to cause consumers and investors to become distrustful and withdraw and withhold their money from corporate America.

The word greed has been tossed about lately. Corporate greed has sparked discussions and debate, which in turn has lead to discussion of corporate social responsibility, and government regulation and oversight. This essay examines these concepts in an effort to both understand what is meant by these ideas, and to understand how recent events brought the markets down in America, and around the world in lieu of government regulation and oversight.

Corporate Social Responsibility

The responsibility of any publicly traded corporation is to the profit line, and to the shareholders who have invested in the business and who expect to realize a return on their investment. In the past two decades, however, corporate America has been called upon to take a more involved role in the overall welfare of society (Angelidis and Ibrahim, 1993). The pressure brought to bear on corporations by social groups and special interest groups caused the corporations to create codes of ethical standards, which in effect had little to do with the business of the corporation (Angelidis and Ibrahim, 1993). Many businesses have paid a special attention over the past two decades to the social impact of their production and business (Angelidis and Ibrahim, 1993).

These expectations imposed upon Corporate America by the public has, Angelidis and Ibrahim say, left corporate America somewhat perplexed (1993, p. 7). Social conscience has not until recent times been a part of the corporate structure or responsibility. In America, the quid pro quo between society and consumers has always been the product or service produced by corporate America. The corporate social conscience, to the extent that we can tie social conscience and business together, has been largely satisfied by individuals whose fortunes arose from their business acumen pursued individual and private philanthropy.

Corporate social conscience has never been built into economic business models (Angelidis and Ibrahim, 1993). Angelidis and Ibrahim, focusing on corporate social responsibility, developed a model of the corporation today with the element of social responsibility built into it (1993, p. 7). The comprehensive framework for corporate social responsibility is as follows (Angelidis and Ibrahim, 1993):

1. Social segments expect different social agents to fulfill their survival, safety, and growth needs.

2. Social agents can be an individual, a group, a business organization, a not-for-profit organization, or a government.

3.

The type and extent of the needs to be fulfilled and the agent who is expected to satisfy these needs will depend upon:

(a) the social segment's culture and ethics,

(b) the legal environment, and (c) the degree to which these needs are not fulfilled.

4.

Social demand encompasses both demand for a firm's products or services and the fulfillment of other societal needs.

5.

Social supply is influenced by:

(a) the relative importance of the social segment to the firm's operations,

(b) the cost of social response relative to the firm's resources,

(c) the firm's culture,

(d) the values of management, and (e) the rewards a firm expects to receive from the social segment it serves.

6.

Equilibrium is achieved when the corporate social supply satisfies the social demand.

The goal of this model was that it might serve as a basis for practical understanding within society of society's expectations from business (Angelidis and Ibrahim, 1993). It is possible, however, that the model, evidencing social expectations, has instead better informed business as not just to the needs of society, but society's weaknesses too. That society would impose such expectations upon business has essential exposed society's vulnerabilities, and when society, by way of its social expectations, began exacting that consideration from business without a return to business in the traditional business sense of profitability, then it is perhaps then that business began taking advantage of society's weaknesses and vulnerabilities. In exacting these expectations from businesses, and when business responded to them, it created a bond of trust between society and business that business was not originally modeled to support. The response of business was to exploit the trust bond, creating a market environment of avarice; what has come to be known as corporate greed.

Government Oversight and Regulation of Publicly Traded Companies

America had plenty of warning about that which was to come in corporate America. Referencing the fall of Enron, WorldCom, and the ongoing investigations of no less than nineteen other major corporations, Jonas V. Anderson (2008, p. 1081) states that as early as August, 2002, America should have been on notice that corporate America was on the skids. Indeed, Enron fell, and took down millions of investor dollars, jobs, pension plans, private life savings of families and retired individuals. The question is: Why? And, what had the SEC been doing in the moths and years prior to the fall of these major corporations?

The answer is that the SEC was in the middle of the muck, mired down in investigatory regulations and oversight that led it nowhere fast.

The very creation of the SEC, in 1934, demonstrates that corporate America has long lacked a social conscience. The Federal Securities Act of 1933 underscored the need for corporate governance and regulation in the full disclosure of companies held for public offering (Cox, Thomas, and Kiku, 2003).

"When Congress returned in 1934 to complete the federal disclosure tapestry, it created express private causes of action for misleading reports filed with the Securities and Exchange Commission (SEC) as part of the newly enacted continuous disclosure requirements, (3) provided private recoveries for market manipulation, (4) and authorized suits on behalf of reporting companies for short-swing profits garnered by certain insiders (Cox, Thomas, and Kiku, 2003)."

The creation of the SEC as a government body for oversight arose out a recognition by the courts that private action was not enough to protect investors and consumers from the materially misleading representations of corporate America (Cox, Thomas, and Kiku, 2003). Since its creation, however, the numerous laws and regulations that have come to frame the world of corporate governance have exceeded the limits of manageable governance. By the time the SEC has identified a problem, pursued investigation of the corporate representations of public offering, performed forensic accounting, and compared potential corporate malfeasance to the Sarbanes-Oxley Act of 2002 (arising out of the Enron debacle); it can be years before the investigations and examinations of accounting practices are put into a coherent dialogue as to be able to swiftly bring to justice the perpetrators of fraud, much less give investors or potential investors a heads up that they have been swindled. In fact, it is the design of the SEC processes that they not go public with their investigations, because just the whisper of it on the wind could ostensibly bring on a frenzied selling of investments that could be more harmful than the fraud and malfeasance being investigated.

The SEC is not a social welfare agency. It is not the mission of the SEC to establish legal cases for private individuals or groups of individuals pursuing class action law suits (Cox, Thomas, and Kiku, 2003). If we examine the historical role of the SEC in uncovering corporate malfeasance and fraud, it would probably suggest that SEC investigations have led to relatively few cases of corporate leaders being prosecuted and imprisoned, but rather that the SEC has collected large fines from corporations (not distributed to defrauded shareholders), and that certain corporate leaders, CEOs and CFOs, and lesser managers, have been prohibited from sitting on the boards of publicly traded companies, or from ever again being responsible for the leadership of a publicly traded company. Until recently, it is only the most egregious cases of fraud and malfeasance where the SEC has built cases against individuals that have been used to prosecute, rather than remove, corporate leaders. This, of course, does not satisfy the investor groups or individuals who have experienced significant financial losses as a result of corporate avarice.

"More significantly, numerous regulatory provisions of the securities laws create problems that prevent the meaningful pursuit of violations by private plaintiffs. In many cases, the loss suffered by the plaintiff or even a group of plaintiffs may not rise to a sufficient level to attract the interest of the entrepreneurial plaintiffs' attorney. And, the expected gains of the suit may be heavily discounted by both the plaintiff and his attorney, due to problematic elements such as establishing or even pleading key elements of the case. (18) The plaintiff may, not withstanding a clear violation, face causation or standing requirements. (19) Or, the violation may not have been discovered within the applicable limitations period. (20) It can also be the case that the violation is simply of the type for which no private action exists. The net capital requirements of brokers, (21) the requirement of reliable internal controls and records, (22) and compliance with the independence requirements of auditors and audit committee members (23) are examples of such provisions. The absence of a private action may well be because the nature of the regulation is one that focuses not on investor protection as such, but rather on achieving desired efficiency or general confidence in the market. Violation of such a broadly-based social objective is a poor candidate to isolate particular investor harm and, therefore, to equip the investor with a private enforcement remedy, let alone to exclude the SEC from enforcement. If the SEC then is to have an enforcement mission, why not allow its actions to cover those violations where there may also be private harms that arise from the violation. A related factor is the a priori concern that private actions may well be fortuitous, but that SEC actions may be more deliberate in their focus. As we will see in the data assembled in this Article, there is little overlap between private and SEC suits. This finding documents the a priori assumption that reliance solely on private enforcement will in turn depend on serious imperfections in the market for private suits . . . (Cox, Thomas, and Kiku, 2003)."