Corporate social initiatives need key stakeholders' support to be effective

Author: Toru Yoshikawa, Professor, Lee Kong Chian School of Business, Singapore Management University, Singapore

Changing corporate governance practices to address stakeholders' interests

With rising awareness of businesses' social responsibilities, and the rising capital market pressures, e.g., from ESG investors, major firms around the world have started to incorporate sustainability initiatives in their corporate governance practices to tackle major social and environmental problems.

In our review article "Global shift towards stakeholder-oriented corporate governance? Evidence from the scholarly literature and future research opportunities" published in Multinational Business Review, we explored how the implementation of stakeholder-oriented corporate governance practices have led to radical changes in corporations' purpose to position themselves as responsible stewards for a viable future for all. For example, some firms have established a Corporate Social Responsibility (CSR) or sustainability board committee specifically designed to address social and environmental issues. We have also begun to see an increasing number of firms partially linking CEO compensation to sustainability goals.

It is becoming increasingly difficult for corporate executives and board directors to focus solely on their shareholders' interests, at the expense of other stakeholders. Even though the primary purpose of a firm is to pursue greater profits, any firm that does not meet the stakeholders' expectations can be penalised as they will fail to earn social legitimacy.

Social fairness and gender diversity

With extensive research experience on corporate governance and boards, my personal interest lies in the diversity of the board and implications on its performance. While climate change is receiving a lot of attention these days, social equality and fairness including gender diversity on companies' boards is also a key issue. Some European countries implemented board gender quotas to increase the number of women on corporate boards.

European firms are now leading in terms of board gender diversity. However, the adoption of such policy requires the support of relevant stakeholders including the business community, civil society, and government. Indeed, without supportive macro factors, mandated greater gender diversity may merely lead to a symbolic presence of women at these boards and not create a conducive environment in which women can thrive.

Interaction of macro factors and firm initiatives

Despite these initiatives in modifying their corporate governance practices, we can still find many firms that are doing far less and being more passive than others leading the trends. This passivity may derive from where those firms are located.

Local consumers' awareness of how corporate activities and how their own consumption behaviour can impact, e.g., climate change and sustainability, may not be very high in some regions and countries. Similarly, gender inequality, e.g., in career, compensation, and education, is usually deeply embedded in society due to norms and culture, so male corporate executives may feel powerless to change the situation or not feel urgency to act. This suggests that macro environments in which local firms are embedded matter and changes need to come both at macro and firm levels.

Required action

While business firms have an important role to play given their substantial resources, other actors such as government, civil society and local community need to help develop a conducive environment in which corporate executives are not only pressured to respond but also motivated to act.  

However, at the same time, enlightened corporate executives can also raise awareness and the sense of urgency for them to start making changes in their perceptions, behaviour, and priorities. This is a two-way interaction. Every such effort may expand the circle of actors who act together.

---