While it might be considered that the prime responsibility of company directors and managers is to grow the company, and thereby also grow the returns to owners and investors, this is actually a simplistic way to consider their actions.
Obviously they have a duty to protect the interests and investment of those owners, but there are many ways in which this can be achieved. Indeed, ensuring the continued existence of the company is very often seen as far more important than maximising returns.
This is particularly true in the current climate, when sustainability is on everyone’s lips. The real responsibilities of managers and directors extend well beyond financial prudence and satisfying legal responsibilities, and enters into ethics and moral responsibility. This is an uncertain area which is growing in significance and, increasingly, companies are held responsible for the effects of their actions.
Corporate responsibility takes many forms. At its broadest it is known as corporate social responsibility or corporate responsibility, which can be summarised as the three pillars of the triple bottom line: financial responsibility, environmental responsibility and social responsibility.
An alternative way to think of this is as responsibility to all stakeholders, and we must remember that these stakeholders encompass a wide number of groups including owners and investors, employees, suppliers and customers.
Also included are local communities, society at large, the environment (through its representative pressure groups) and the future—where people will hold us responsible for the effects of the actions we are currently taking.
All of these stakeholders are defined by having an interest in the performance of the company and all have a degree of influence over the company.
For example, customers are increasingly interested not just in the products provided but how they have been made—effects on the environment, actions within the supply chain and particularly any exploitation in developing countries—and are often prepared to take action in the form of protests or boycotts if they are not happy.
So, companies are increasingly held responsible not only for their own actions, but also for the actions of others within the supply chain. And with the increasing focus upon sustainability around the world, impact on the environment is increasing in importance not just in locally but also internationally.
It is important to remember that individuals are part of several stakeholder groupings: thus a supplier may also be a customer, a member of the local community, a member of society at large and also an investor.
It is therefore not possible to pay attention to one set of stakeholders and ignore others, because they are overlapping. All of this is increasing in significance and makes the management of a company more complex.
Corporate governance is very often considered to be the way a company looks after its investors and manages its AGM, among other things.
In reality it is a lot more complex than this and involves the way in which the company manages its relations with all of its stakeholders.
Much communication from companies is intended for stakeholders other than just investors. Examples include publicity statements and announcements, sustainability reports, advertising and so on.
These are important of course, but it is equally important to listen to what these stakeholders want to say to the company, whether it be complementary, critical or merely suggestive.
A lot can be learned from such a dialogue, and the evidence shows that companies which listen to complaints and criticism, and respond in a positive manner, actually flourish better than those that act defensively.
Stakeholders do not expect perfection from a company, any more than they do of individuals, but they do expect honesty and an attempt to remedy problems and mistakes.
Accountability is therefore a very important aspect of governance—a clear line of responsibility and appropriate actions being taken as necessary. A good governance system will establish these lines of accountability.
One aspect of corporate behaviour which has attracted a good deal of attention over recent years is the matter of corruption. This is of equal concern as the concern expressed in society at large and in the political environment.
Often such seeming corruption can be a matter of perceptions rather than actually existing, but we must remember that dishonesty and corruption do exist in many organisations.
A good system of governance, with clear levels of responsibility and commensurate accountability, will not prevent corruption but will certainly limit both its prevalence and its impact. Of equal importance in a good system of governance is the matter of transparency.
Transparency as a principle means that the reporting of external, as well as internal, impacts of the actions of the organisation can be ascertained from that organisation’s reporting, and pertinent facts are not disguised within that reporting.
Thus, all the effects of the actions of the organisation, including external impacts, should be apparent to all from using the information provided by the organisation’s reporting mechanisms.
Transparency is of particular importance to external users of such information, because these users lack the background details and knowledge available to internal users of such information.
Transparency, therefore, can be seen to follow from accountability. Equally, it can be seen to be a part of the process of recognition of responsibility on the part of the organisation for the external effects of its actions, and equally part of the recognition of the power of external stakeholders.
A good system of governance will be written and will be known to all. It will be reviewed regularly to ensure that no amendments and updating are necessary.
Once this system has been established and is running well there is a tendency for it to be considered complete and in no need of any attention. This is when problems often arise, as shortcuts are taken and actions or decisions not fully explained or effects considered, so it is important that a good system of governance has not only an effective written code but also is reviewed regularly, with its operation being monitored.
While it is generally accepted that governance is concerned with the way that an organisation manages its relations with its stakeholders, and with shareholders being a dominant stakeholder, the actual relationships are not simple.
Indeed many companies consider either their employees or their customers to be the most important stakeholder.
In some respects governance can be considered to take the form of reporting to those stakeholders, but in other respects their actual operation is significantly affected and changed by the demands of some of those stakeholders.
Additionally the stakeholders who are considered to be dominant and most powerful can change dramatically over time.
It is clear that the issues surrounding responsibility and governance are intertwined to a significant degree, and each cannot be adequately addressed without recognition of the other.
It is equally clear that all stakeholders need to be considered and that effects can be complex and not always predictable. And of course it is never possible to satisfy all of the people all of the time. The life of a manager is more complex than often thought, and is probably becoming more complex as more factors need to be considered.
Nevertheless it is true that a company which has a strong system of governance and recognises all aspects of responsibility to all stakeholders is well run, and successful and attractive to all stakeholders.
David Crowther is professor of corporate social responsibility at De Montfort University. His book, “Redefining Corporate Social Responsibility”, co-authored with Shahla Seifi, is due out in September.