Corporate Governance and CSR

Question to Ask the Prof: What is the relationship between corporate governance and corporate social responsibility?

Answer (Professor Zhang): In finance, the goal of a corporation is to maximize its shareholders’ value. However, the corporation is typically run by professional managers who have their self-interest. The goal of managers is to maximize their own benefits. In finance, the so-called corporate governance means shareholders use various mechanisms to align managers’ interest with shareholders’ and to prevent managers from engaging in self-dealing activities. Corporate governance mechanisms include board of directors, equity-based compensation, shareholder activism, etc.  In sum, corporate governance mechanisms are designed to protect the benefits of shareholders.

Corporate social responsibility (CSR) is not necessary consistent with the value-maximization goal of a corporation, although more recent studies show that good-CSR firms have good firm performance. Professor Hull and Rothenberg’s SMJ paper (i.e., Hull and Rothenberg, 2008) is related to this issue. CSR emphasizes the benefits of various stakeholders (not only shareholders).

Taken together, if we argue that CSR means firms should act responsibly to all stakeholders, then good corporate governance means firms should act responsibly to one type of stakeholders, i.e., shareholder. In this sense, we may argue that corporate governance is a dimension of CSR.

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