Archive for the ‘Corporate Social Responsibility’ Category

Putting Integrity into Finance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday March 26, 2014 at 9:04 am
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Editor’s Note: The following post comes to us from Werner Erhard and Michael Jensen, Professor of Business Administration at Harvard Business School.

The seemingly never ending scandals in the world of finance with their damaging effects on value and human welfare (that continue unabated in spite of all the various efforts to curtail the behavior that results in those scandals) argues strongly for an addition to the current paradigm of financial economics. In our paper, Putting Integrity Into Finance: A Purely Positive Approach, which was recently made publicly available on SSRN, we summarize our new theory of integrity that reveals integrity as a purely positive phenomenon with no normative aspects whatsoever. Adding integrity as a positive phenomenon to the paradigm of financial economics provides actionable access (rather than mere explanation with no access) to the source of the behavior that has resulted in those damaging effects on value and human welfare, thereby significantly reducing that behavior. More generally, we argue that this addition to the paradigm of financial economics will create significant increases in economic efficiency, productivity, and aggregate human welfare.

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The Foundations of Corporate Social Responsibility

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 19, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Hao Liang and Luc Renneboog, both of the Department of Finance at Tilburg University.

A fundamental issue in business and economics is the sustainability—and not merely the growth—of economic development, which crucially hinges on the socially responsible operational and investment behavior of modern corporations (Porter, 1991). There is a widespread recognition, as well as growing empirical evidence, that corporate social responsibility (CSR) can substantially contribute to social progress and stakeholder wealth, including the wealth of shareholders (e.g., Dimson, Karakas, and Li, 2012; Deng, Kang, and Low, 2013). In our paper, The Foundations of Corporate Social Responsibility, which was recently made publicly available on SSRN, we examine the forces that fundamentally steer companies to behave as good citizens in society.

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The Role of Social Enterprise and Hybrid Organizations

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday February 3, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Ofer Eldar of Yale Law School.

In my paper, The Role of Social Enterprise and Hybrid Organizations, which was recently made available on SSRN, I advance a theory of hybrid organizations that combine profit-seeking and social missions.

Recent years have brought remarkable growth in hybrid organizations, including firms that pursue corporate social responsibility (“CSR”) policies, socially responsible investment firms, and environmentally-friendly firms. In addition, much attention has focused on a broad but vaguely defined group of hybrid organizations which are commonly referred to as “social enterprises”; these include microfinance institutions, businesses that sell fair trade products, work integration firms, and companies that sell affordable products in developing countries (e.g., eyeglasses and bed-nets). Despite popular enthusiasm for hybrid organizations, legal reforms to facilitate their formation and growth—including, in particular, special enabling statutes for hybrid firms (e.g., the Low-Profit LLC and the Benefit Corporation)—have largely been ineffective. This failure stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. Rather, legal and economic scholars tend to treat different forms of hybrids, especially social enterprises and firms implementing CSR policies, as essentially the same form of enterprise, i.e., firms with a mixed profit and social mission.

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Communications Challenges at the New Frontiers of Corporate Governance Activism

Editor’s Note: Charles Nathan is partner and head of the Corporate Governance Practice at RLM Finsbury. This post is based on an RLM Finsbury commentary by Mr. Nathan.

The principal corporate governance campaigns of the past decade have reached a plateau in terms of both investor commitment and implementation. These governance issues (such as majority voting, de-classifying staggered boards, eliminating super-majority votes and executive compensation excesses) are not by any means going away. Indeed, there are concerted investor-led efforts to push favored corporate governance “best practices” down the corporate chain to mid-cap and small-cap companies. However, the activist community has clearly won the policy battles surrounding these governance principles, and their “sizzle” is dissipating.

Policy stasis does not become corporate governance activism, as its very name implies. Corporate governance activists will develop new “green fields” to plow; otherwise they risk becoming irrelevant. The question is not whether corporate governance activists will move on but rather where they will go.

While there are a number of possible new foci, two stand out in particular:

…continue reading: Communications Challenges at the New Frontiers of Corporate Governance Activism

Politics and Corporate Social Responsibility

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 30, 2013 at 9:00 am
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Editor’s Note: The following post comes to us from Alberta Di Giuli of the Department of Finance at ESCP Europe and Leonard Kostovetsky of the Finance Area at the University of Rochester.

In our paper, Are Red or Blue Companies More Likely to Go Green? Politics and Corporate Social Responsibility, forthcoming in the Journal of Financial Economics, we test the hypothesis that Democratic-leaning firms (i.e., firms with a higher proportion of Democratic stakeholders) are associated with more socially responsible policies than Republican-leaning firms. Our results can be illustrated by a comparison of Starbucks and Wendy’s, two large and well-known food and drink retailers. Starbucks started as a coffee beans store in 1971 and began to grow as a popular coffeehouse chain in the late 1980s after entrepreneur Howard Schultz bought it. Schultz, who is the current CEO and Chairman of Starbucks, is a well-known Democrat who donated $130,500 to Democratic federal candidates and only $1,000 to Republicans over his lifetime. In addition, Starbucks was founded and is currently headquartered in Seattle, Washington, a bastion of progressivism and the Democratic Party.

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The Corporate Social Responsibility Report and Effective Stakeholder Engagement

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday December 28, 2013 at 9:00 am
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Editor’s Note: The following post comes to us from Bill Libit, partner concentrating in corporate and securities and municipal finance at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Libit and Todd Freier.

Companies today are being called upon by their shareholders and other stakeholders to not only boost the bottom line, but also to help address some of the country’s most challenging problems, including those concerning economic development and the environment. While opinions differ on how responsibility should be allocated across the public and private sectors, corporate stakeholders (which typically include shareholders, employees, customers, suppliers, communities, governments and regulators) are demanding that companies recognize a broader scope of responsibility in addressing those problems. As a result, companies are increasingly working with stakeholders to understand their views and concerns on various environmental, social, corporate governance and economic issues (such issues often referred to as corporate social responsibility (“CSR”) issues) and to incorporate and address those views and concerns in the company’s strategic decision-making processes.

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Florida SBA 2013 Corporate Governance Annual Summary

Editor’s Note: Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on an excerpt from the SBA’s 2013 Corporate Governance Report by Mr. McCauley, Jacob Williams and Lucy Reams. Mr. Williams and Ms. Reams are Corporate Governance Manager and Senior Corporate Governance Analyst, respectively, at the SBA.

The Florida State Board of Administration (the “SBA”) takes steps on behalf of its participants, beneficiaries, retirees, and other clients to strengthen shareowner rights and promote leading corporate governance practices among its equity investments in both U.S. and international capital markets. The SBA adopts and reports clearly stated, understandable, and consistent policies to guide its approach to key issues. These policies are disclosed to all clients and beneficiaries.

The SBA supports the adoption of internationally recognized governance practices for well-managed corporations including independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, and implement well designed incentive plans with disclosures that clearly explain board decisions surrounding executive compensation.

…continue reading: Florida SBA 2013 Corporate Governance Annual Summary

ISS Updates Proxy Voting Policies, Requests Peer Group Changes

Editor’s Note: Holly J. Gregory is a corporate partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal alert; the complete publication, including appendicies, is available here.

On November 21, 2013, Institutional Shareholder Services Inc. (ISS) released updates to its proxy voting policies for the 2014 proxy season, effective for meetings held on or after February 1, 2014. [1] In addition, ISS has requested that companies notify it by December 9, 2013 of any changes to a company’s self-selected peer companies for purposes of benchmarking CEO compensation for the 2013 fiscal year.

This post provides guidance to US companies on how to address ISS policy changes and also highlights recent developments regarding potential regulation or self-regulation of proxy advisory firms.

The amendments to ISS proxy voting policies for the 2014 proxy season relate to:

…continue reading: ISS Updates Proxy Voting Policies, Requests Peer Group Changes

The Effect of Audit Committee Expertise on Monitoring Financial Reporting

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday December 5, 2013 at 9:10 am
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Editor’s Note: The following post comes to us from Udi Hoitash, Ganesh Krishnamoorthy, and Arnold Wright, all of the Accounting Group at Northeastern University, and Jeffrey Cohen, Professor of Accounting at Boston College.

In our paper, The Effect of Audit Committee Industry Expertise on Monitoring the Financial Reporting Process, forthcoming in The Accounting Review, we examine the impact of audit committee (AC) industry expertise on the AC’s effectiveness in monitoring the financial reporting process. Despite the increased responsibilities, authority, independence, and financial expertise requirements placed on ACs by the Sarbanes-Oxley Act (SOX), ACs may, nonetheless, lack sufficient industry expertise to understand and thus properly monitor complex industry specific accounting issues. For instance, expertise in the retail industry may assist ACs to ensure that companies take an adequate write-down of inventory when their products face potential obsolescence. Similarly, revenue recognition, a prominent area of accounting manipulation (Beasley et al. 2000, 2010), entails an evaluation and understanding of the earnings process, which is tied to a company’s business processes that are often industry specific.

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Accuracy in Proxy Monitoring

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday September 16, 2013 at 9:22 am
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Editor’s Note: The following post comes to us from Heidi Welsh, Executive Director at the Sustainable Investments Institute (Si2), and is based on a Si2 report. This post relates to reports by Proxy Monitor, the most recent of which was discussed on the Forum here.

Shareholder activists are meeting now to consider what proposals they will file for the 2014 proxy season and the results are largely in from the 2013 proxy season, with analysis coming from all the different proponent groups, the proxy advisory firms and others interested in what happened this year. Si2’s own report in August showed that the upward climb of investor support for social and environmental policy proposals continued this year, with average support hitting a record level of 21.3 percent and requests for more board and workplace diversity, sustainability reporting and corporate political activity disclosure got the highest levels of support. (More information on these overall findings and overall trends, illustrated with charts, appears here.)

One group that reports on proxy season findings is Proxy Monitor, a project of the Manhattan Institute’s Center for Legal Studies. It focuses on resolutions that go to votes at the 250 largest U.S. firms, reporting on the vote results and presenting analysis of the trends on its website. The group’s analyses of proxy season results trends have some significant blind spots that are not always apparent to the novice proxy analyst, but its reports nonetheless are widely quoted in the press. As such, they deserve some scrutiny, which this post offers. Si2 took a look at all the shareholder resolutions filed since 2010 and compared the results to the Proxy Monitor database to see precisely how PM reaches its conclusions.

…continue reading: Accuracy in Proxy Monitoring

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