Friday, 23 March 2018

Are Corporations Taking Their Citizenship Roles Seriously

The news regarding how personal data from Facebook was abused by Cambridge Analytica is just another example of how much our lives are affected by the conducts of corporations. Not only corporations like Facebook profited from the data provided to them by the millions of their users worldwide for free, it had failed to honour its obligations with regards to how those personal data and the privacy of their users were managed.

In the last number of years, the issue of how much these global corporations pay their fair portion of taxation was also raised and debated in many jurisdictions. Given the breadth of their operations across many geographical locations, they were able to structure their business arrangements in ways leading them to pay close to nothing. Legally, these corporations claimed that they had complied with the relevant taxation laws in all jurisdictions. However, when a average middle class person is subjected to a higher tax rate than corporations which made billions of dollars in profits, something is just not right.

Corporate conducts had also affected the environment, culture and lives of people around them. These are well documented in many countless cases globally. The Deepwater Horizon oil spill in the Gulf of Mexico was one disaster which resulted in severe damages to marine and wildlife habitats as well as the fishing and tourism industry in the affected areas. The Volkswagen scandal where emission test results were changed is another example of how much safety of people were risked in the pursuit of profits. Even corporate collapsed, mostly due to scandals and misadventures, had resulted in many employees being retrenched and lost their livelihood.

Limited corporations are the preferred structure used in many parts of the world for business. Apart from their ability to own assets, to sue and be sued in their own rights and having perpetual life, the separation of liability between their owners and the corporations is an important factor which makes the corporate structure an ideal way of risk taking. However, different from natural persons who actions and conducts are determined by their hearts, minds and souls, the conducts of corporations are influenced by many people - shareholders, directors and employees. Hence, the collective values, wants and ideals of these people, determined in complex legal and moral arrangements eventually shape the behaviours of corporations in dealing with their customers, suppliers, financiers, regulators and other stakeholders.

If a person who is a citizen of a country is expected to observe laws and behave in ways which benefit the society at large, should corporations carry the same responsibility of being good corporate citizens? While the answer appears to be obvious, why corporations, especially the larger ones ended up to be at the wrong side of the scale due to their conducts and behaviours?

As corporations are set up as means of creating value to their shareholders, maximisation of profits seems to be the normal order. Directors are pressured by shareholders to deliver more profits and dividends while investors and fund managers on the other hand demand corporations to provide ever-optimistic business outlook so that their share prices remain high. Senior management’s remuneration and bonuses are linked to performance, mainly profits. These various pressure points and conflicts in one way or another are pushing corporate interests away from the interests of the societies around them.

There are a number of efforts out there to bring good governance and corporate citizenship issues into board rooms and general meetings. Integrated reporting is one of them. In preparing integrated reports, corporations are required to define their value propositions and how they are achieved. The impact of their conducts on the stakeholders around them would need to be clearly articulated. It would be interesting to observe how much of the disclosure reported in integrated reports stimulate debates around good corporate citizenship.

Regulators in the financial services industry are also requiring financial institutions to re-design their remuneration structure so that excessive risk-taking is not encouraged. The issue of corporate culture is also under scrutiny. How much of that would change for the better would be something which we need to monitor.

The above observations are not meant to deny the benefits brought by corporations to our societies. Through their wealth creation activities, much progress had been achieved and shared across. However, as more corporations are becoming dominant in more aspects of our life, the need for them to be good corporate citizens is becoming more critical. 

This article was published in the Malaysian Reserve on 23 March 2018

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