In 1999, Malaysia’s High Level Finance Committee Report on Corporate Governance defined corporate governance in the following terms:
Corporate governance is the process and structure used to direct and manage the business and affairs of the company, towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interest of other stakeholders.
The last limb â€˜taking into account the interest of other stakeholders’ establishes the link between corporate governance and CR. CR creates a corporate conscience by which a company steers its objectives and sets its priorities.
The two key features of CR are firstly, a wider stakeholder focus which includes capital market participants, consumers, government, employees, society at large, NGO’s etc. The second is the focus on sustainable business operations. Economic considerations are therefore accompanied by ethical, environmental, human capital and social aspirations.
CR is about maintaining an enterprise’s “licence to operate”. This concept whereby the society in which a business operates frames their view on how the activities and the offerings of the business affect them. Their subsequent appraisal of the impact will then determine their reaction to the business in terms of “allowing” the business to operate in the manner that they have been and hence the concept of “licence to operate”. CR is also about the contribution of businesses towards sustainable development.
The SC views CR as a natural progression of its ongoing work in relation to the development of a strong framework for good corporate governance, under which companies look beyond shareholder value and take into account the wider interests of other stakeholders, such as employees creditors and the society at large. In addition, the SC is keen to see more Malaysian companies incorporate CR into their corporate governance agenda, not only to develop better corporate citizens but also to enhance the recognition and profile of domestic companies in the eyes of international and domestic institutional investors. Furthermore, the push towards better CR is consistent with the overall national agenda, particularly in relation to achieving Vision 2020, meeting the objective of the National Integrity Plan and generating greater economic and capital market growth.
Companies which have embraced CR have found real and significant competitive advantages in the form of improved financial performance, enhanced brand image and reputation, an increased ability to attract and retain quality workforce, more effective risk management, reduced long-term cost and attractiveness to increasingly sophisticated institutional investors. CR efforts also allow companies to distinguish themselves from competitors and add value to their brand. Better brand value proposition translates into better client and customer satisfaction especially when consumers, employees and investors are becoming more discerning.
There is also widespread agreement that shareholder action and institutional investors will have a significant impact on the future of CR. More and more investors are focusing on Socially Responsible Investing (SRI). The prevailing belief is that, capital markets will be central to establishing the incentives that drive corporations towards being socially responsible in the future. Socially and environmentally responsible policies provide investors with a good indication of sound internal and external management.