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Louise Margaret Vlatko 88513255 +61 410 34 6464 lmvlatko@hotmail.com

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Executive MBA 21874_Corporate Governance and Sustainability Professor Thomas Clarke Assessment Item 3_: Individual Research Report 2,523 Words (excluding references) November 10th 2011

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21874| Corporate Governance and Sustainability | Professor Thomas Clarke Assessment Item 3 | individual Research Report (2,500 Words + references) OPTION A CORPORATE GOVERNANCE INDIVIDUAL RESEARCH ANALYSIS & REPORT
With reference to theory and practice demonstrate how corporate governance may contribute to higher standards and business performance in a particular industry or sector. Examine the evolution of corporate governance in the industry or sector Investigate the problems that have occurred Outline the development of approaches to reform Illustrate present good policy and practice

OR OPTION B INDUSTRY SECTOR SUSTAINABILITY ANALYSIS

Present a case analysis of an industry sector in which you explore the sustainability and CSR challenges for that sector, both internationally and in the Australian context. Drawing on theory and practice, provide recommendations for CSR and sustainability leadership in that sector Discuss the global forces impacting on the sector in terms of sustainability Are there other drivers of change that might be impacting on the sector? What phase of human and ecological development sustainability do you think the sector is in? Justify your answer with references to the text and other literature. Note that the organisation may be in different phases for human and ecological sustainability Draw up a sustainability plan with suggestions for some specific management strategies and organisational structures that could encourage the sector to make progress towards efficiency and strategic sustainability. For instance, what forms of partnership could progress the sector towards sustainability? Is it involved in any such partnerships? What impact from social and environmental risks could the sector face over the next decade? What could it do to lessen the impact of these risks? Discuss the type of sectoral changes required to move your organisation more along the path toward ecological sustainability. What models of leadership would assist in making these changes? Can you see any evidence of leadership for sustainability at your organisation?

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21874| Corporate Governance and Sustainability | Professor Thomas Clarke

Corporate Governance, Corporate Social Responsibility & Corporate Performance It Makes

Introduction Not long ago, organisations could decide if making both profit and principles was a worthwhile pursuit (Jackson & Nelson 2004). Today there is no choice organisations must develop strategies that deliver both return to investors and meet societys expectations. Currently, organisations operate in a rapidly changing environment of intense scrutiny from the public, investor, regulators and media. Following corporate collapses business leaders are under the increasing pressure to ensure this does not happen again. Business leaders therefore need to focus on better corporate governance, and protect intangible assets such as their organisations reputation and gaining public trust. Intense pressure is on organisations to perform financially and also address challenges such as proactive social, environmental, legal and reputation risk management, improved efficiencies, enhanced relationships with stakeholders and the permission to operate within communities in order to survive. Above all, leaders need to demonstrate they are acting responsibly. Furthermore, CEOs believe addressing corporate governance in conjunction with corporate social responsibility was critical to their organisations profitability and survival. Large publically-listed Australian organisations such as Lend Lease, Westfield and Westpac have not only survived but thrived by adapting to changes and are positioned at the precipice as leaders of a new world order.
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke Based on the theory corporate governance and corporate social responsibility lead to better financial outcomes, would it not make sense for private organisations to follow this trend? Research has exclusively focused on publically-listed organisations. Little research discusses private sector organisations particularly consultancies and practices. With fewer stakeholders or owners to pacify in the private sector, one assumes corporate governance and responsibility should be quick and easy. This article comments on the link between corporate governance (CG), corporate social responsibility (CSR) and improved financial performance in organisations, and the necessity for private consultancies in the property and construction industry to follow the new world order.

Corporate Governance (CG) To many directors, CG is seen as an onerous task. Shareholders and regulators demand code compliance and following procedures to be seen as operating effectively. Most managers view CG as merely following the rules, but CG is much more than this. Cadbury (1992) described CG succinctly: ..Corporate governance is the system by which companies are directed and controlled..... . However, good CG goes beyond just control. It is about the direction of the company, the leadership and strategy often neglected and pushed aside. Most discussion concentrates on financial performance and other boxticking compliance and control aspects of CG, whereas leadership and strategy are often relegated to workshops and corporate retreats. When financial issues arise, there are prompt calls for changes in CG for greater controls and transparency. All these aspects emphasis the control,
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke compliance and the accountability side of the CG coin, not the flipside of leadership and strategy. Both sides of the coin are important and involve management of stakeholders. Boards should have strategies to lead and be accountable to all its stakeholders, including owners, customers, employees, business partners, suppliers and the community (MacMillan, Money, Downing & Hillenbrand 2004). Good CG, therefore, is seeing both sides of the coin - control and accountability on one side, leadership and enterprise on the other. Underpinning both are the organisations relationships with its key stakeholders. Getting this right and good CG will prevail (MacMillan et al). Nowadays, CG has further impacts and is crucial to economic and social well-being, by providing incentives and performance measures to achieve business success, and providing accountability and transparency to ensure the equitable distribution of the resulting wealth (Clarke 2007). As CG has wider implications, a broader definition by Cadbury (2000) suggests ..Corporate governance is concerned with holding the balance between economic and social goals and between the individual and communal goals. The governance framework is there to encourage the efficient use of resources equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society..
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke Corporate Social Responsibility (CSR) Wikipedia defines CSR ... to embrace responsibility for the companys actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. These participants are vital in corporate decision-making, the core business of the company or firm, and the honouring of the triple bottom line : people, planet, profit... Debate over the definition of CSR has been raging for decades and continues today more than ever before. Milton Friedman (1970) argued the sole purpose of a business is to maximise returns and is responsible only to the shareholders, whilst they should operate within the law of the countries which they work, there is no other obligation to society. Others noted although the primary reason of being in business was for economic reasons, there were responsibilities other than economic and legal which go beyond these obligations. Carroll (1979) proposed businesses have obligations to society and must address economic, legal, ethical and discretionary expectations society has at that given point in time. According to the European Commission, CSR can make a substantial contribution towards sustainability and competitiveness in Europe and globally. They suggest CSR is more relevant now particularly with the current economic crisis in Europe, as CSR can help build (and rebuild) trust in business, thereby engaging with investors and stakeholders. This in turn leads to long-term profits, as stakeholders will continue to support and endorse sustainable businesses. Managers ought to serve the interests of all those that have a stake in the business or are affected by it (Robins 2005). As stakeholders views are crucial to organisations, they must manage these relationships by providing
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke information with the aim of obtaining support and approval (Oeyono, Samy, & Bampton 2011)

The Link between CG & CSR Jamlia, Safieddine & Rabbath (2008) proposed under the scope of CG, organisations are encouraged to promote ethics, transparency and accountability for all interactions. In addition, the organisations decisions should align with interests of different stakeholders who include owners, employees, customers, clients, suppliers, the community, society and environment. If CG is concerned with organisations holding the balance between economic and social goals and between the individual and communal goals (Cadbury, 2000), and CSR is an obligation of organisations to be responsible for the environment and stakeholders in a manner that goes beyond financial goals (Gossling & Vocht 2007), then one cannot address one (CG) without the other (CSR). Focussing CG on narrow internal controls and merely complying with regulations is no longer good enough and must evolve into a sustained and responsible monitoring of financial, social and environmental effects of the organisation on the community as a whole (Clarke 2007). Huang (2010) suggests CG cannot work effectively without a mutual effort to CSR because an organisation must respond to demands of several stakeholders as to create value for its shareholders and be profitable. Therefore, there is a link between CG and CSR. It is clear that CG requires organisations are responsible to the wishes of all important stakeholders, and ensuring transparency, trustworthiness and accountability to all stakeholders. Organisations with good CG will consider the relationships of stakeholders, customers and societys trust to be of the utmost importance in ensuring mutual sustained development.
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke Link to Financial Performance Emerging from a study of Standard and Poors 500 Index (2000 -2004), public corporations have responsibilities to a much wider group of stakeholders than just shareholders. Effective compliance and ethics programs are essential for organisations to achieve this goal. Verschoor (2004) demonstrates wellmanaged organisations which take ethical, social and environmental responsibilities seriously have a stronger long-term financial performance than other organisations. Clarke (2004) notes an inextricable link suggesting that the higher the standards of CG, the better the corporate performance, with countries known for their strong governance institutions will attract investment capital. Goldman Sachs also reported ...superior CG offers better relative investment performance or lower investment risk.... Is good CG therefore perhaps one reason why Australia fared reasonably well during the GFC?
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Practices Is CG and CSR relevant to private consultancies, particularly in the property and construction industry? Adams & Zutshi (2004) stated if CEOs of public organisations believed addressing CG and CSR concurrently was critical to their organisations survival and profitability, the answer for private organisations is simple. Yes. Private consultancies (Practices) have the enviable position of private ownership and control and thus reap the rewards (profits). Apart from regulatory financial audits, they avoid scrutiny from the public or their stakeholders, having no real reason to report on CG or CSR. This is evident in their corporate structure. Most Practices are either partnerships or proprietary limited companies, thereby allowing the owners to control the Practice through a Board of Directors. Directors are employees and owners of the Practices with no external or non-executive directors. The
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke main driver of these organisations is to maximise profits and be responsible only to the shareholders (Friedman 1970). This is not how nor the environment which leading organisations currently operate. The long term viability or sustainability then of Practices is questionable. Demand for transparency, accountability and responsibility is essential to the success of all organisations today. Leading Practices have been in business for over fifty (50) years and institutionalized, suggesting resistance to external pressures to conform to modern methods. Most Directors would oppose change to their Practice structure and strategy because ..if it aint broke then dont fix it.. To address this new challenge would require an external shock and fundamental cultural shift from shareholder to stakeholder focus. Stakeholders are defined as ...those groups without whose support the organisation would cease to exist... (Freeman & Reed, 1983) Practices in property and construction such as engineers, architects and particularly quantity surveyors currently face this dilemma.
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Link between Leading Organisations and Practices Who is the most important stakeholder to a Practice? This would unquestionably be the Client. Who are the most important Clients? The list would include but not limited to - institutional investors (AMP), property developers (Westfield), financial institutions (Westpac) and Contractors (Lend Lease). Westfield, Westpac and Lend Lease are clients noted for their robust CG and CSR policies and continually strive for further excellence and sustainability. Engaging with their stakeholders and building trustworthy relationships is a fundamental requirement of CG. Consultants (the Practices) to these organisations are intrinsically part of their Clients supply-chain and stakeholders.
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke As the aforementioned Clients are continually improving on Best Practice status, they would also demand stakeholders demonstrate similar commitment to their values , as ...a chain is only as strong as it weakest link.... Noting Practices generally have minimal regulatory CG and weak subsequent CSR strategy, suggests these Clients may choose to discontinue current stakeholder relationships and look elsewhere for like-minded Practices.

Corporate Governance & Corporate Social Responsibility in Practices Corporate Governance (CG) CG consists of two key drivers board control and ownership. Board control. Practices are institutions with internal Directors only.
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Institutionalised organisations reflect a pattern of doing things over time becoming de rigueur and conform to accepted norms of their profession/industry (DiMaggio & Powell 1983). They resist or avoid conforming to external pressures, as they were not founded in this way. Based on good CG, this structure may prove to be untenable for valued client/ stakeholder relationships. In order to positively influence CSR and CG and the quality decision-making for organisations, research suggests independent or non-executive directors at board level (Strandberg, 2005). These independent directors not only understand the business, but should also come from diverse backgrounds. As new challenges and opportunities arise in the market, these independents can bring objectivity, help challenge narrow thinking and yield innovative ideas not usual in a homogenous environment. Huang (2010) illustrated board composition with appointed independent directors, positively influences the financial performance of a firm.
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke

Problem: No leading Practice currently has independent directors on the Board Solution: Appoint independent directors on the Board from diverse but compatible
backgrounds

Ownership

Established earlier, Directors are also owners of knowledge-

based Practices. Grant (1997) recognised if knowledge was the key product of organisations and most knowledge is created and stored within individuals, then employees are the primary stakeholder. Apple, a shining example of knowledge-based enterprise recognised this fact and realised success could only happen by attracting the best employees with generous share options. (Clarke 2004) Lend Lease also exercises this option to their employees, hence no coincidence this organisation outperforms its peers in terms of profitability and employee engagement.

Problem: No leading Practice currently has employee share options Solution: If shared ownership is unpalatable, other employee benefits should be
considered e.g. improved remuneration, KPI bonuses, flexibility or other non-monetary rewards
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Corporate Social Responsibility (CSR) Perrini (2005) states stakeholders are demanding businesses demonstrate their ability to improve processes, give concrete proof that they are committed to sustainability by identifying, monitoring and reporting the social, environmental and economic impacts on society. CSR Reporting Discussions with a Director confirm the typical attitude of the profession apathy. CSR is still regarded by most Practices as a fancy name for philanthropy which starts and finishes with corporate giving (South China Morning Post 2008). Some Practices donate to charities, although most reluctantly participate by being named and shamed by the industry.
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21874| Corporate Governance and Sustainability | Professor Thomas Clarke Apart from wide acceptance that CSR enhances competitive advantage ensuring value for shareholders, other benefits include employee pride, motivation, commitment, productivity and therefore reduced turnover. Other positive outcomes also include improved reputation, trust, and corporate leadership (Strandberg 2005). Garvin (1991) suggested organisations with deep relationships to key stakeholders show better than average financial returns. Oeyono et al (2011) proposed good CSR practise could be demonstrated by producing a report identifying their social responsibilities via annual reports or web-sites..

Problem: Solution:

No leading Practice currently has CSR Reporting

Implementation of a widely-accepted reporting system e.g. GRI Guidelines can be used to enable the continual improvement of sustainability reporting. The Report also highlights areas for improvement such as diversity in the workplace, and other environmental and social issues

Conclusion It has been acknowledged in these studies that good corporate governance and corporate social responsibility is essential and the need to accept and acknowledge its impacts in business today. Corporate collapses removed any doubt about the requirements for better governance and responsibility by all organisations. Organizations not attempting to implement and adhere to this new world order run the very real risk of losing performance benefits and being less prepared for the coming wave of even more stakeholder and community scrutiny. RICS Modus magazine quotes ...Australias construction industry contracted for the fourteenth (14) straight month in July according to the Australian Industry group... With fewer projects in the pipeline, it is imperative for Practices to strengthen relationships with their most important stakeholder, the Client to least have a piece of a much smaller pie.

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21874| Corporate Governance and Sustainability | Professor Thomas Clarke It is no coincidence organisations such as Lend Lease, Westpac and Westfield (Clients) with robust corporate governance and corporate social responsibility outperform those reporting on the traditional single bottom line of profit margin and secure better financial outcomes. In conclusion, it makes sense for Practices to vastly improve their standards of CG and CSR to reflect the values of their most important stakeholder, the Client. Those Practices choosing to ignore the implications of CG and CSR jeopardize vital relationships critical to their profitability and survival.

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References
Adams, C.A. & Zutshi, A. (2004) Forum: Ethical investments_ Corporate Social Responsibility: Why Business Should Act Responsibly and Be Accountable , Australian Accounting Review, Vol.14, No.3 pp.31-39 Cadbury, A. (1992) Report of the Committee on the Financial Aspects of Corporate Governance London: Gee & Co, pp.15 Cadbury, A. (2000) World Bank Corporate Governance : A Framework for Implementation (Foreword) Washington: World Bank Clarke, T (2007) International Corporate Governance; A Comparative Approach pp. 2, 7, 22, 267-268 London: Routledge Carroll, A.B. (1979) A Three-Dimensional Conceptual Model of Corporate Performance Academy of

Management Review, Vol.4, pp. 497-505

DiMaggio, P.J. & Powell, W.W. (1983) The Iron Cage Revisited: Institutional isomorphism and collective rationality in organizational fields, American Sociological Review, Vol. 48, pp. 147-160 Freeman, R.E. & Reed, D.L. (1983) Stockholders and Stakeholders: A New Perspective on Corporate Governance California Management Review, Vol.25, No.3 pp. 88-106
Friedman, M. (1970) The Social Responsibility of Business is to Increase its Profits New York Times
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Magazine, 13 September 1970 pp. 32-33

Garvin, D.A. (1991) How the Baldridge Award Really Works Harvard Business Review, Vol.70, No.1, pp. 126-147 Gossling, T. & Vocht, C. (2007) Social role conceptions and CSR policy success Journal of Business

Ethics, Vol.47, No.4, pp. 363-372

Grant, R.M. (1997) The Knowledge-Based View of the Firm: Implications for Management Practice

Long Range Planning, Vol.30, No.3, pp.-450-454

Huang, C.J. (2010) Corporate governance, corporate social responsibility and corporate performance

Journal of Management & Organization, Vol.16, No.5, pp. 641-655

Jackson, I.A. & Nelson, J. (2004) Values-driven performance: Seven strategies for delivering profits with principles http://search.proquest.com/docview/21675047?accountid=17095 , (accessed 31 October 2011) Jamali, D, Saffieddine, A.M. & Rabbath, M. (2008) Corporate governance an corporate social responsibility synergies and interrelationships Corporate Governance, An International Review, Vol.16, No.5,, pp. 443-459

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MacMillan, K., Money, K., Downing, S. & Hillenbrand, C. (2004) Giving your organisation SPIRIT: an overview and call to action for directors on issues of corporate governance, corporate reputation and corporate responsibility Journal of General Management, Vol.30, No.2, pp. 15-42 Oeyono, J., Samy, M. & Bampton, R.. (2011) An examination of corporate social responsibility and financial performance A study of the top 50 Indonesian listed corporations Journal of Global

Responsibility, Vol.2, No.1, pp. 100-112

Perrini, P. (2005) Building a European Portrait of Corporate Social Responsibility Reporting European

Management Journal, Vol.23, No.6, pp. 611-627

RICS (2011) MODUS 11.11 Magazine available at www.rics.org/modus (accessed 3 November 2011) Robins, F. (2005) The Future of Corporate Social Responsibility, Asian Business & Management Vol.4, pp. 95-115 South China Morning Post (2008) Firms need to lift CSR Image: Taking a creative approach http://search.proquest.com/docview/266687720?accountid=17095 (accessed 30 October 2011) Sprinkle, G.B. & Maines, L.A. (2010) The benefits and costs of corporate social responsibility Business

Horizons, Vol.53, pp. 445-453

Strandberg ,C. (2005) The Convergence of Corporate Governance and Corporate Social Responsibility A Thought-Leaders Study available at www.corostrandberg.com (accessed 1 November 2011) Verschoor, C.C (1998) A Study of the link between a corporations financial performance and its commitment of ethics Journal of Business Ethics, Vol.17, No.13, pp. 1509-1516 Verschoor, C.C (2004) Does Superior Governance Still Lead to Better Financial Performance Strategic
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Finance, Vol.86, No.4, pp. 13-14

Wikipedia (2011), Corporate Social Responsibility, available at www.en.wikipedia.org/wiki/Corporate_social_responsibility (accessed 19 October 2011) Wilkes, J. (2004) Corporate governance and measuring performance Measuring Business Excellence, Vol.8, No.4, pp. 13-16

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