Pramana Research Journal ISSN NO: 2249-2976

Integration of Corporate Social Responsibility (CSR) and Corporate

Governance: A Conceptual Framework
Dr. Preeti Sharma* and Mr. Kamal Batta
Assistant Professor
Chandigarh University
preeti.sharma4888@gmail.com,kamal.usb@cumail.in

Abstract

Objective: The present paper presents a conceptual framework for the integration of Corporate Social
Responsibility and Corporate Governance to create a more comprehensive approach i.e. Environmental,
Social and Corporate Governance (ESG).
Method and statistical analysis: Secondary data is used to understand the linkage between
environmental, social and corporate Governance
Findings: Companies as a part of society are responsible for its actions and play an important role in a
process of sustainable development. Increasing concerns of the stakeholders of the companies towards the
company’s affairs and actions make the companies to think and rebuilt their strategies. Corporate Social
Responsibility and Corporate Governance are linked to get a clearer picture of the operations of corporate
social responsibility with in the corporate regulations.
Application/Improvements: More and more research on ESG in developing economies is emerging.
It is required to understand the emergence of the concept of ESG. Examination of the two important terms
CSR and CG and their integration into ESG could propagate flawed understanding of the concepts.

Keywords: conceptual framework; corporate social responsibility; corporate governance;

environmental, social and corporate governance (ESG)

Introduction

In recent times, there has been an increase in corporate sustainability reporting, to address the increasing
concerns of the stakeholders. It has become a common phenomenon for listed companies, to report on the
various ESG issues. Stakeholders are interested in the transparency of its corporations regarding its
material ESG issues along with the other financial issues (Siew, Balatbat and Carmichael, 2013). The
global impetus around responsible investing which includes ESG investing has made the corporations
aware of the impact of these non monetary issues on their success. Due to this, various companies are
exploiting the risks and opportunities related to the ESG issues to their advantage and this in turn has
become a matter of concern for the investors. Concerns regarding emissions, depletion of natural
resources, water scarcity, issues due to strikes and disputes of employees illustrate environmental and
social issues. However various corporate frauds and scams such as Enron, WorldCom illustrate the need of
governance in corporations. These ESG issues are being incorporated in the mainstream investment by the
institutional and retail investors.

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Increasing concern and awareness of institutional and retail investors towards ESG Investing is a reflection
of its growing acceptance. This trend is irreversible and for good reasons (Jeroen Bos, 2014). The
increasing trend of investment in sustainable and responsible funds has been documented for the last three
years. A report by Global Sustainable Investment Review, 2016 shows the region-wise growth of Socially
Responsible Investment (SRI) assets for the period 2014-16. A remarkable growth can be observed from
Table 1.1 over the period 2014-16 in all the regions. The total growth is 25.2% and compound annual
growth rate is 11.9%, indicating the growth in the SRI fund market.

Table 1.1: Growth of SRI Assets by Region 2014-2016

Region 2014 2016 Growth over Compound

period annual growth
rate
Europe $ 10,775 $ 12,040 11.7% 5.7%
United States $ 6,572 $ 8,723 32.7% 15.2%
Canada $ 729 $ 1,086 49.0% 22.0%
Australia/New Zealand $ 148 $ 516 247.5% 86.4%
Asia ex Japan $ 45 $ 52 15.7% 7.6%
Japan $ 7 $ 474 6689.6% 724.0%
Total $ 18, 276 $ 22,890 25.2% 11.9%
Source: Global Sustainable Investment Review, 2016

This growth in SRI assets show the investor’s incorporation of material ESG issues into their investment
consideration.

Corporations aware about this change are hence focusing on their non financial information and doing
their best to communicate this, along with the financial information, to its investors and other stakeholders
(Breuer and Nau, 2014). In fact the market interest is also growing in the non financial information (Eccles
and Serafeim, 2011). Thus the non financial information with regard to environment, social and
governance is becoming important to communicate by corporations to its stakeholders.

The materiality of information in financial reporting can be well described by the regulatory bodies whose
guidance generally exists within a set of clearly defined standards and principles (Eccles and Rogers,
2012). However over the last decade, the materiality of non financial information has risen to the fore. The
ESG performance of any company eventually impacts its performance due to which investors and portfolio
managers are considering them in their decision making process. The materiality of ESG factors and issues
into investment decision making is well described in the Figure 1.1.

Sharma & Dangwal (2015) describes that the materiality of ESG factors can be demonstrated from the
recent events related to ESG issues and its relationship with financial performance. ESG factors can be
used to select better managed companies that can mitigate risks and which avoid exploiting the
opportunities stemming from the key environmental and social issues (Briand, Urwin and Chia, 2011). The
materiality of ESG factors may depend on the nature, size and location of a company. It is also possible
that one factor which is material for one company or sector may not be material for another. Recent events
related to environment such as release of leak of cyanide at Aurul, Gold Mining Co. in 2000, oil spill at

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British Petroleum in 2010, radioactive material at Tokyo Electric Power Co. in 2011 etc., similarly events
related to social issues such as child slave labour at Nestle in 2012, wage dispute at Lonmin plc in 2012
and various corporate scams such as Olympus, Satyam, Lehman Brothers, WorldCom etc have impacted
investments in their own way.

Figure 1.1: Materiality of ESG Factors into Investment Decision Making

Source: Sharma & Dangwal (2015)

However we find a vast literature indicating positive correlation between ESG disclosure and financial
performance of companies. Generally materiality of non financial information (ESG factors) arises in two
ways: Recent events related to ESG and Relationship between ESG disclosures and financial performance.
The main purpose of this paper is to present a conceptual framework for the integration of corporate social
responsibility and corporate governance.

Review of Literature

Corporate Social Responsibility (CSR)

Archie B. Carroll in his study “A-Three Dimensional Conceptual Model of Corporate Performance” in the
year 1979 described the broader concept of CSR by formulating a conceptual model on social
performance. According to him, social responsibilities can be categorised into four groups: Economic
Responsibilties, Legal Responsibities, Ethical Responsibities and Discretionary Responsibilties. The
economic responsibility of business firms includes the production of goods and services and sell them at
profit. The business firms has obligation towards the rules and regulations and should perform its activites
with in the legal framework shows the legal responsibility. The ethical responsibilty covers the duties
which are beyond the rules and regulations of the society and the voluntary deeds of business firms to
benefit the society called discretionary responsibility. The study concludes that management must address

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the social issues like environemental, consumerism and discrimiantion into its consideration. But Carroll’s
four domains of CSR and pyramids of CSRhave amended bySchwartza and Carroll (2003) with an
alternative approach to CSR “Three-Domain Model of CSR”. The proposed model eliminates the separate
philanthropic category and sub-sumes it within the economic and/or ethical spheres. It was proposed by the
researchers that the new model portrays the relationships between the three central CSR domains:
economic, legal, and ethical. Corporate CSR reporting is the way to convey information about the CSR
activities and practices of companies to its stakeholders and other interested parties (Yin and Zhang, 2012).
Branco and Rodrigues (2008) suggested that companies with higher visibility exhibit greater concern to
improve corporate image through social responsibility disclosures both on the Internet and in annual
reports. Even the material information related to CSR practices and strategies of corporations may affect
the investors’ and asset managers’ recommendations.

Corporate Governance (CG)

Numerous studies examined the level of corporate governance practices of corporations and its
significance in the investment and corporate world. In his conceptual and exploratory study,Mayer (1997)
examined the role of governance systems in disciplining management and restructuring poorly performing
companies, finance and investment, commitment and trust and found that the main differences in financial
systems may concern the formulation, implementation, and adaptation of corporate strategy rather than
incentives, disciplining, finance, and investment. Shleifer and Vishny (1997) explored corporate
governance practices and assessed the role of legal protection of investors and ownership concentration in
corporate governance system across the world and found the legal protection of investors and
concentration of ownership as complementary approaches to governance.SimilarlyHillman and Dalziel
(2003) argued that board capital affects both monitoring and the provision of resources and a board’s
incentives moderate the relationship between board capital and provision of resources. The researchers
categorised the functions of corporate directors into two parts: Agency Theory and the Monitoring
Function. The primary function of boards according to the agency theory is to monitor the actions of
agents (managers) to protect the interests of principals (owners). On the other hand, monitoring function
relates with number of specific activities such as monitoring CEO, monitoring strategy implementation,
planning succession and evaluating and rewarding the CEO/top managers of the firm.

A good governed company has fairer financial results over the poor governed company. That’s why
corporate governance practices of corporations considered as an important element of communication for
its stakeholders. For instance the study of Farber (2005) indicates that fraud firms have poor governance
relative to a control sample in the year prior to fraud detection and also found that analyst following and
institutional holding do not increase in fraud firms. Similarly Bhat, Hope and Kang (2006) used a sample
of non-US firms cross-listed in the USA as American Depositary Receipts (ADR) from the period 1992 to
2002 and found that governance transparency is positively associated with analyst forecast accuracy after
controlling for financial transparency.

There have been approaches which explained the CSR and CG in a specified manner. However the studies
which provide conceptual integration of CSR and CG are very few. The present paper presents a
conceptual framework for the integration of Corporate Social Responsibility and Corporate Governance to
create a more comprehensive approach i.e. Environmental, Social and Corporate Governance (ESG).
Corporate Social Responsibility and Corporate Governance are linked to get a clearer picture of the

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Pramana Research Journal ISSN NO: 2249-2976

operations of corporate social responsibility in corporate regulations. A good research is available on the
individual study of these concepts, however many studies also found a strong interlink between the CSR
and CG (Jamali, Safieddine and Rabbath (2008), Kolk and Pinkse (2009)). Therefore the next sections
define the concepts of CSR and CG and their convergence into ESG.

Corporate Social Responsibility (CSR) andCorporate Governance (CG) – The Relevant

Concepts of Framework

Corporate Social Responsibility (CSR)

CSR is an obligation of corporations for their actions in the society where they exist and the impact of their
actions whether in a positive or negative way. They are responsible for their deeds in the environment and
society. The traditional concept of CSR as a philanthropic activity has changed into the modern concept of
CSR which is more comprehensive and extensive. It was Archie B. Carroll who contributed the broader
concept of CSR in 1979 by suggesting four kinds of social responsibilities which constitute total CSR:
economic; legal; ethical and philanthropic. He formed a pyramid of CSR according to the four
responsibilities which is shown in Figure 1.2. CSR is defined as the actions which are beyond the interest
of companies but for social interest such as human resource management programs, recycling, abating
pollution, supporting local businesses etc. (McWilliams and Seigal, 2001). It is defined as the
responsibilities of corporations towards societies for their actions (Narwal and Singh, 2013). Through
CSR activities companies having negative reputation can change their bad image (Saleh, Zulkifli and
Muhamad, 2011).

Thus, CSR consist two important factors: Environmental factors and Social factors.

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Figure 1.2: The Pyramid of Corporate Social Responsibility (CSR)

Source: Carroll (1991)

It is the responsibility of the corporations towards its stakeholders and the environment in which they exist
to protect them and provide sustainable business in favor of shareholders, employees, customers,
community, government and environment. Modern concept of CSR is much broader than the traditional
one which was solely based on charity and social welfare.

United Nations Industrial Development Organisation (UNIDO) defined CSR,“asa management concept
whereby companies integrate social and environmental concerns in their business operations and
interactions with their stakeholders.”

Triple Bottom Line or Triple Performance Line further illustrates the concept of CSR. This concept
focuses on the three core dimensions of CSR: Economic; Environmental and Social. It says that a company
should measure its performance in relation to its stakeholders including local communities and
governments not just those stakeholders with whom it has direct and transactional relationships such as
employees, suppliers and customers (Agnieszka Zak, 2015). Environmental issues include emission,
wastes, water discharge, resource reduction etc. and social issues include employee retention, strike issues,
health and safety issues, human rights impacts, impact of operations on community, product safety and
responsibility etc.

Corporate Governance (CG)

One of the most important characteristics of a company is the separation of ownership from the
management, putting the responsibility of business and its operations on its board of directors. A
framework and guidelines has been stipulated for corporations to report and disclose the performance and
affairs of company to their owners. Corporate governance is a system or a set of rules and regulations,
through which the owners of the company oversee the internal affairs of the company, manage the
directions and control over the company stimulating more transparency and disclosures. Corporate
governance is defined by Cadbury Committee of U.K. as “the system by which companies are directed and
controlled.”According to Confederation of Indian Industry (CII) Desirable Corporate Governance Code
(1998), “corporate governance deals with laws, procedures, practices and implicit rules that determine a
company’s ability to take informed managerial decisions vis-à-vis its claimants – in particular, its
shareholders, creditors, customers, the State and employees. There is a global consensus about the
objective of ‘good’ corporate governance: maximizing long-term shareholder value.”

The concept of corporate governance is based on several important theories such as Agency theory;
Stewardship theory; Stakeholder theory; and Stakeholder-Agency theory (Kumar, 2012). The Agency
Theory is based on the concept of separation of ownership and control. Under this theory, the company’s
owners who are the shareholders set its objectives and appoint managers as their agents to pursue their
objectives. Managers (agents) run the company on behalf of the owners (principal) (Kumar, 2012). The
Stewardship Theory of corporate governance is based on the assumption that managers act in a
trustworthy manner and put in their efforts honestly on behalf of the owners for the company. They work
efficiently to attain higher level of profit for the company. The Stakeholder Theory is a much broader
concept than the others which is based on ‘social contract’ theory wherein the organisations are

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accountable to its stakeholders such as investors, employees, suppliers, customers, community,

government, etc. (Kumar, 2012). In order to achieve the long term benefits, organisations must be
concerned about all their stakeholders. The Stakeholder-Agency Theory is an integrated model in which
the business looks after the concerns of its shareholders (investors) along with its stakeholders (investors,
employees, suppliers, customers, community, government, etc.).

In modern economies, a prominent feature of a large corporation is the separation of capital providers
(owners) and resource managers (management) (Cheung and Chan, 2004). Thus, it is necessary to monitor
and control the behaviour of the management for the purpose of transparency and disclosure. Corporate
governance is a framework within which a company has to follow the given rules and regulations and be
accountable to its stakeholders. The issues related to governance are issues related to board diversity,
remuneration, related party transactions, different committees such as audit committee, stakeholders
committee, nomination and remuneration committee, board meetings and attendance etc.

Integration of CSR and CG

The integration of the two concepts CSR and CG has changed the world of corporate reporting. Both
practices of corporations impact its financial performance and are relevant from the managerial
perspective, as well. Nowadays corporate governance is not merely about the rules and regulations for
corporations to protect the interest of its investors, but it encapsulates a much broader concept. It also
includes transparency, disclosures, accountability and ethics (Breuer and Nau, 2014). There are other
stakeholders besides shareholders who have a vested interest in the business’s actions and hence
accountability should be extended to them too. Thus, CSR and CG are both influenced by stakeholder
theory (Money and Schepers, 2007). The companies having good environmental, social and governance
performance influence shareholders value. They can manage risks; anticipate regulatory actions, or access
new markets and at the same time they also contribute to sustainable development of the societies in which
they operate (Standberg, 2005). New governance has been adapted with transparency, accountability,
ethical norms along with including CSR into business practices by corporations (Gill, 2008). In fact
mainstream investors and asset managers are taking these CG and CSR factors into consideration while
taking investment decisions. Hence the measurement of the ESG performance of corporations is as
relevant as their financial performance.

“The growing number of codes of conduct, best practices, and guidelines initiated by businesses,
regulators and administrative agencies serve as a primary source of business regulation. At this juncture,
New Governance finds its strongest expression in the field of corporate conduct as it encompasses two of
the most important socio-legal patterns that enable the convergence of corporate governance and CSR:
self-regulation and meta-regulation” (Gill, 2008).

Thus, the term new governance which can also be called as environment, social and corporate governance
includes legal and regulatory framework of business along with sustainable and social business.

Concept of Environment, Social and Governance (ESG)

A number of non monetary factors contributing to the performance and value of a company are mostly
excluded from the financial statements of the company (Stubbs and Rogers, 2013). These factors are
related to the environmental, social and governance issues such as climate change, water scarcity, social

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issues, strikes, child labour, community issues, board diversity, disclosures, transparency and equity. There
is no universal definition for ESG factors and issues. ESG factors or issues are the three central factors or
issues i.e. environment, social and governance which are created by company’s actions and influence
stakeholders’ decision making.

“Environmental, social and governmental (ESG) factors are indicators used to analyse a (investee)
company’s prospects based on measures of its performance on environmental, social, ethical and
corporate governance criteria (OECD, 2017).”

According to the Principles for Responsible Investment (2016), Environmental issues are the issues
relating to the quality and functioning of the natural environment and natural systems such as biodiversity
loss; greenhouse gas (GHG) emissions, climate change, renewable energy, energy efficiency, air, water or
resource depletion or pollution, waste management, stratospheric ozone depletion, changes in land use,
ocean acidification and changes to the nitrogen and phosphorus cycles, whereas Social Issues relate to the
rights, well-being and interests of the people and communities. These include: human rights, labour
standards in the supply chain, child, slave and bonded labour, workplace health and safety, freedom of
association and freedom of expression, human capital management and employee relations; diversity;
relations with local communities, activities in conflict zones, health and access to medicine, HIV/AIDS,
consumer protection; and controversial weapons and Governance Issues are the issues relating to the
governance of companies and other investee entities such as board structure, size, diversity, skills and
independence, executive pay, shareholder rights, stakeholder interaction, disclosure of information,
business ethics, bribery and corruption, internal controls and risk management, and, in general, issues
dealing with the relationship between a company’s management, its board, its shareholders and its other
stakeholders. Thus, ESG is the term which is the integration of two important concepts: Corporate Social
Responsibility (CSR) and Corporate Governance (CG).

Conclusion and Future Scope of the Study

The corporate reporting of environmental, social and corporate governance factors has increased over the
last few years (Peiro, Segarra, Mondejar and Vargas (2013). There are so many reasons to report on the
material ESG issues by the corporations such as stakeholders’ concern, government regulations and
policies, international and national standards for sustainability etc. In fact, investment managers now prefer
the disclosure of ESG indicators which indicates the long term performance of the. They integrated these
indicators into their investment decision making (Kocmanova, Karpisek and Klimkova, 2012). Therefore
the relevance of disclosing ESG factors in corporate reporting has increased among the corporate sector.
More and more research on ESG in developing economies is emerging. It is required to understand the
emergence of the concept of ESG. Examination of the two important terms CSR and CG and their
integration into ESG could propagate flawed understanding of the concepts. The suggestions of future
research include:

1. ESG reporting of organisations in developing economies. This research would examine the
reporting of material ESG factors by organisations. The legislation framework in favour of the
disclosure of key ESG factors in developing economies make corporations and other
organisations to report on these non-monetary factors. Examination of these reporting practices
may contribute the stakeholders of the organisaiton and also provide in depth knowledge of the
applicability of these reporting practices in economies.

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2. Relevance of ESG factors in investment decision making. Another research area is the materiality
of ESG factors in investment decision making. By presenting the materiality of these factors,
further studies may contribute in investment sector. As the investors and asset managers are
integrating the ESG factors into their investment decision making. But every organisational sector
has its own factor list and it may happen that one factor which is relevant for one sector may be
irrelevant to another.

3. Perception of stakeholders towards ESG investing. The researchers may examine the perception of
stakeholders towards ESG investing and reporting. To examine whether the stakeholders are aware
about the relevant ESG factors or not. It is totally based on the marketing perspective.
Stakeholders may include employees, customers, investors etc. This study may contribute the
corporate sector for emphasizing the material ESG factors which are considered and preferred by
stakeholders.

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