The Governance of Risk: Volume 5

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Table of contents

(18 chapters)

The relationship between economic or social or political activity and risk is widely recognised at a societal level, a market level and a business level, and equally widely discussed. The relationship between governance and risk at all of these levels is equally widely recognised but much less widely discussed. But the consequences of poor governance in this arena have been exposed to all in the recent financial and economic crisis as financial institutions and even countries have collapsed or come close to collapsing. The relationship between governance and risk is particularly important in the global environment in which we operate and needs to be more fully discussed and theorised. This book is designed to address important aspects of this topic and set it within the context of the global business and societal environment.

One of the children of Brundtland has been the concept of the triple bottom line – economic, environmental and social – as a means of planning for and measuring performance. This approach has largely been unquestioningly accepted. Despite this the agenda for socially responsible behaviour has evolved and developed. Now the concern is for the whole supply chain, which transcends the organisational boundary and throws a question over any idea of the triple bottom line. Corporate concern increasingly focuses upon two key issues, which are also of paramount importance to individuals: environmental degradation, particularly climate change, and human rights protection. In addition a lot of concern has been expressed as a result of revelations stemming from the economic and financial crisis, which have exposed significant failures in governance at corporate level and in markets and governments. Environmental degradation, human rights protection and governance operate at many levels from global to corporate. In many ways they parallel the idea of the triple bottom line but are not organisationally bounded. They represent issues of greater concern than merely corporate issues; they have an impact on the global and societal matters also. They are also totally connected to sustainable behaviour. In this chapter we therefore argue that this is the real triple bottom line, and discuss the implications.

Due to the economic crisis, organizations are changing their behaviours to be able to survive in that uncertain environment. In most of the cases, these changes could mean rethink about the CSR issues, so the aim of this chapter is to study the evolution in the Social and Environmental Scores of the Spanish companies before and during the financial crisis in order to analyse empirically the effect of the crisis on them.

The lexicon of corporate governance has ‘transparency’ as a key imperative. Yet transparency as a management principle begs explanation. It also raises several questions: transparent to whom, how and why? Who decides? Is full transparency desirable? What are its merits and benefits? What are the risks of increased transparency? The answers may lie somewhere between the shareholder and stakeholder views of the modern corporation, with the former defending shareholder-owner primacy and firm profit-maximisation, and the latter offering a values-based approach towards balancing the needs and expectations of all stakeholders. While corporate governance broadly addresses the needs of shareholders and investors, driven by the position that companies need to be better governed for stockholder value, the ‘stakeholder’ view of the corporation has gained ground over the past 20 or so years whereby the modern corporation is accountable not only to its owners, but also society.The transparency debate has emerged in parallel, and with it, issues of privacy and/or secrecy on one hand and the notion of ‘sunlight’ on the other. Transparency’s role has been variously described as the promotion of corporate disclosure and protection of the rights of minority shareholders in the information environment (Bushman & Smith, 2003); the promotion of corporate accountability and advancement of the rights of stakeholders (Clarke, 2004; Donaldson & Preston, 1995; Hess, 2007; Mallin, 2002); a tool to limit information asymmetries (Boatright, 2008; Florini, 2007a, 2007b; Hood, 2006; Lev, 1992); a means to create a level playing field through ethics and fairness (Boatright, 2008; Oliver, 2004); the promotion of market efficiency (Bessire, 2005; Heflin, Subramanyam, & Zhang, 2003); and the prevention of abuse through stakeholder activism (Bandsuch, Pate, & Thies, 2008; Roche, 2005). Aspirations aside, there is lack of consensus as to transparency's dimensions, drivers and dilemmas in corporate behaviour. Indeed, its perceived value to stakeholders and corporations alike remains questionable. In this chapter, the author discusses the governance of corporate transparency and argues that clarity and Board policy are needed to manage transparency activism and its resultant risks.

The chapter explores the corporate risks and opportunities in low carbon economy in order to provide references for business to tackle the global warming issue. It first discusses severe consequence of climate change and points out that the low carbon economy is to mitigate climate change. Then different perspectives of low carbon economy and similar connotations are introduced. It is found that companies are driven to practise environmental responsibility by various risks. In particular, these risks come from international policies, investors, national regulations, customers, peers, sub-sectors, and supply chains. Finally, the opportunities and benefits of low carbon responsibility are illustrated. The research shows that if the enterprises actively take low carbon responsibility, they will get the opportunities to develop corporate capabilities, benefits of early movement and advantages of brand effect.

In the ever increasing worldwide attention to the concept of sustainable development, industrial engineering as productivity champion has not received major attention. This is unfortunate as one can see it as the toolkit to attain sustainable development because industrial engineering is concerned with productivity as the measure for production and service efficiency. Without this it would be difficult to quantify the quality aspects of sustainable development and evaluate the integrated systems of man, money, materials, energy, knowledge, information and equipment, all instances of the three pillars.Energy efficiency is one route towards minimising environmental impact, achieving sustainability and therefore making possible sustainable development. This chapter analyses industrial engineering tools to assess how sustainable our current energy consumption is. For this analysis refrigerators are taken as the sample. This is due to general usage of refrigerators by all people everywhere and due to its major role in worldwide energy consumption. Energy labels are nowadays a common feature of refrigerators put into the market for sale, although this trend is diverse in different parts of the world which signals non-harmonized comprehension of sustainable development in the world.These are explored at a theoretical level to show that industrial engineering tools contribute to sustainability.The implications of using game theory to address these issues are substantial although not previously used.

The governance of capital market institutions did not receive much interest compared to their banking sector counterparts, partly due to their different ownership structures. Recent trends; increased competition, technological advances, structural changes, globalization, all had their share of impact on governance systems of capital markets institutions particularly on exchanges. Corporate governance of non-financial firms and capital markets institutions differ in several ways. Firstly the role of risk management differs since they may impose systemic risks to the financial system. Secondly well-implemented governance structures and processes are required but are not sufficient in capital markets since there are several conflicts of interests to be addressed. Therefore whether and how effectively they function is what matters. Thirdly the governance structures of such institutions exhibit different effectiveness on their decisions.The governance of FIs in capital markets is discussed in terms of board structure and management, risk governance, supervisors, shareholders, executive compensation, role of regulators, authorities and values and culture. The role of stock exchanges in corporate governance are discussed separately in terms of implementing corporate governance codes, demutualisation and its impact on regulations, transparency and accountability issues and the effects of M&As among exchanges. Market needs strong analytical tools and reliable benchmarks to assess governance risk. The corporate control and the regulation of the institutions by the exchanges when the corporations (regulated) are the competitors of the exchanges (regulators) or owned by the stockholders of the exchanges must be addressed. The risk of regulatory arbitrage, calls for the need of harmonisation among regulators. Better regulation of FIs and greater global coordination among regulators are seen as the most two important issues to prevent another crisis.

Many studies have been carried on the effect of trade preferences, in particular from the viewpoint of lesser developed countries. There has been little focus on the importer, who has to consider their business strategy and the risk of non-compliance of legislation before obtaining preferences. One of the main issues is compliance with the country of origin rule by an importer wishing to access preferential tariffs. The chapter provides an insight into the issues facing importers and considers whether the preferences are being used to their full potential. It raises the question: Are importers choosing not to use the reduction of import tariffs in relation to preference due to its complexity? This study was carried out to highlight importers’ issues by interviewing senior management of eight European companies in relation to their approach to generalised system of preference (GSP). The results provide an interesting evaluation of the importers’ many dilemmas when choosing to use trade preferences.

Considerations about governance at the level of local or national often focus on how engaged citizens are in protecting democracy, the influence of civil society on policy making and whether or not attaining specific developmental objectives can be justified if the rights of citizens are trampled on in the process. Corporate governance as well as the way national and local governments practise governance can have direct impact on communities located in areas near to extractive industries and even further afield. However, although risk analyses are considered in feasibility studies, including the conduct of environmental impact assessments of mining investments, what has attracted less attention are the consequences of poor governance in managing/mitigating risks when communities which traditionally are ‘resource guardians’ are not consulted during stakeholder discussions as part of investment negotiations.Academic literature and popular media are replete with examples of the high price paid by some communities, including loss of lives and livelihoods, when investors and governments ignore opportunities for meaningful engagement with stakeholders. And, although recommendations have been made on how to improve meaningful stakeholder engagement, the various discussions/articles have not revealed consensus on how best to create meaningful stakeholder engagement in regions rich in natural resources sometimes described as suffering from ‘resource curse’. In considering ways in which meaningful stakeholder engagement could convert the resource curse into ‘resource blessings’, the question may well be asked, what are the indicators of meaningful stakeholder engagement and how can this be strengthened through greater transparency in governance?Drawing on a case study of diamond mining in Botswana and the mining of platinum in South Africa, this chapter provides an overview of approaches to risk assessment by companies and governments and examines key indicators of governance which impact on the lives and livelihoods of communities directly affecting by mining operations. In addition, the author highlights how risks associated with poor governance can derail attainment of development objectives as well as opportunities that act as catalysts in transforming communities and meeting national development objectives.

This chapter is a case study of Companhia Siderúrgica Nacional (CSN, National Steel Company, Volta Redonda, Rio de Janeiro, Brazil), in order to compare two models of social responsibility adopted by the same company in two different historical periods: when it was state-owned company (since forties) and then when it was privatized in the 1990s. The results are preliminary for this case study, in that the research is ongoing. However, we can anticipate a main conclusion, that CSN has no social responsibility with its main stakeholders: the community of city Volta Redonda, where industrial activities are carried out. This research is relevant for future research in the comparative perspective, in poor or developing countries such as Brazil. We add that this study has led us to build the concept of territorial social responsibility, in order to broaden and move beyond the debate focused on social responsibility in the corporate world and move towards a transnational reflection of what is liability to the planet.

The study of Bharat Heavy Electricals Limited (BHEL)11BHEL was founded in 1950s. It has emerged as the largest engineering and manufacturing enterprise of its kind in India. Power equipment major BHEL has approached the government for the grant of coveted Maharatna status, which will give the company greater financial autonomy. At present, BHEL is a Navratna company. A company qualifying for the Maharatna status should have an average annual turnover of more than Rs 20,000 crores in the last three years, according to the new guidelines. Once a company gets the Maharatna status, its board would not be required to take the government’s permission for investments up to Rs 5,000 crores in a joint venture project or wholly owned subsidiary. For the Navratna companies, the limit is Rs 1,000 crores. was undertaken to understand the quality of corporate governance in public sector and to gain insight into the major infirmities in internal and external conditions that impinge on the quality of corporate governance in the public enterprises. In India, to bring in more transparency and accountability in the functioning of Central Public Sector Enterprises (CPSEs), the government of India in June 2007 introduced the Guidelines on Corporate Governance. These Guidelines were originally of voluntary nature. The government has acknowledged the need for continuing the adoption of good Corporate Governance Guidelines for ensuring robust public sector with high level of transparency and decided to make these Guidelines mandatory and applicable to all CPSEs. Thereby, government in March 2010 asked all the 246 CPSEs to mandatorily follow corporate governance norms and business ethics, a step to ensure more transparency in their functioning.

Güler Aras is Professor of Finance and Dean of the Faculty of Economics and Administrative Sciences, Yıldız Technical University, Turkey.

Cover of The Governance of Risk
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Book series
Developments in Corporate Governance and Responsibility
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Emerald Publishing Limited
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