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2. Discuss how corporates can administer citizen rights through their core
business
Corporations can influence society through administering citizenship rights for
individuals.
two factors have led to corporations being in the position of administering
citizenship rights:
1. the process of globalisation
2. the smaller capacity of state governments
4. Outline the key elements and functions that support the practice of
corporate citizenship in this module
The key elements are:
Our understanding of corporate citizenship as the roles that corporates might
play in administering citizenship rights to citizens
Our understanding of corporations as privately-owned entities ultimately or
principally engaged in the pursuit of profit for the owners.
Chapter 1
1.1 Introduction
Climate change, natural and man- made disasters, pollution, poverty, inequality,
lack of ecosystem respect, rising numbers of endangered species, fast depleting
natural resources, the increasing human population, poor ethical conduct, human
rights abuses, ignorance, greed, irresponsible development and investments,
corruption, tax regulation, corporate scandals and global financial crises- these are
some of the many issues confronting society in general and, in the context of this
book, the business world in particular.
Whilst society, consisting of governments, the business world, non- profit
organisations (NPOs), non-governmental (NGOs) and other collective groups of
citizen has purportedly been moving towards addressing these issues. What then do
corporates need to do to adjust to the changing business landscape and do they
need to adjust the corporate role? Might corporate citizenship be the answer? What
is corporate citizenship? Where does the idea come from?
1.2 Corporate citizenship defined
Matten and Crane’s conceptualization of corporate citizenship and the purpose of
this book in general define it as the role of the corporation in administering
citizenship rights for individuals.
There are two features of this definition that appeal to us:
# First it is grounded in a thorough consideration of the idea of citizenship with a
specific emphasis on the liberal political-economic tradition that characterises most
industrialised societies and this provides a critical contextual framework for much
of what is considered in this book.
# Secondly it specifies emphatically that corporate citizenship is not about
corporates as citizens but rather that it is about the roles that corporates might play
in administering citizenship rights to citizens. Corporate citizenship encompasses
much more than corporate philanthropy and social investment-corporate charity if
you like which tended to be the focus of earlier manifestations of corporate
citizenship. This scope of citizenship is narrow and limited however the one that
we have chosen embraces the fact that business activity in general (that is the core
business activity) has the potential to influence the administering of citizenship
rights enormously.
There is evidence that proves that the earth’s temperature is increasing and
causing other changes in the natural environment. This evidence indicates
that 1) the global average temperature increased by more than 0.8 degrees
Celsius over the last century, 2) rising global temperatures have been
accompanied by other changes in weather and climate, for example, changes
in rainfall and more intensive rain as well as more frequent and severe heat
waves, 3) the planet’s oceans and glaciers have also experienced changes,
and oceans are becoming warmer and more acidic, ice caps are melting, and
sea levels are rising.
Human activities are mainly responsible for the climate changes observed
today. The earth goes through natural cycles of warming and cooling, which
are caused by factors such as changes in the sun and volcanic activities.
Too much carbon dioxide can hurt us. Carbon dioxide is a necessary
ingredient for plants to perform photosynthesis. Carbon dioxide is also a
critical element of out atmosphere. If too much carbon dioxide is added to
the atmosphere, global temperatures will increase, leading to climate
changes that can harm plants, animals and humans.
Climate change has an impact on society, the corporate sector, professions,
industries and individuals. As a society we have structures our lives around
historical and current climate actions. We are accustomed to a normal range
of conditions and may be sensitive to extremes that fall outside of this range.
The corporate sector is structured in such a way as to provide society with
products and services that are needed, in the conditions to which we are
accustomed. Corporates are therefore also sensitive to extremes that fall
outside of this range. Some types of professions may also face considerable
challenges from climate change. Example: professions that are closely
linked to weather and climate, such as outdoor tourism and agriculture, will
likely be more affected than others. Climate change also an affect on
industries, such as insurance industry. Insurance is one of the primary
mechanisms used to protect people against weather-related disasters. We
also rely on insurance to protect our investments in real estate, agriculture,
transportation, and utility infrastructure by distributing costs across society.
It is projected that climate change will increase the frequency and intensity
of extreme weather events, which will in turn increase losses of property and
cause costly disruptions to society. Individuals are affected by climate
change in a number of ways.
Society, corporates, professionals, industries and individuals are also greatly
affected by changes in legislation pertaining to climate change. Society,
workers, clients and governments also scrutinise corporates to ensure that
these policies and procedures are implemented.
Engagement of employees
A top-down and bottom-up approach to engaging employees is recognised as an
effective tactic for addressing climate change. Corporates should have a board
committee that oversees corporate initiatives on climate and the environment.
Employees could be incentivised to assess, manage and implement corporate
strategies and programmes that have a positive impact on the environment.
Create greenhouse gas reduction projects and targets
Corporates need to set tangible targets and significant greenhouse gas reduction
projects.
Chapter 2
Sustainable development and climate change
2.1 Introduction
In order for corporations to survive and thrive they need to understand the
changing business landscape and how environmental, social and governance (ESG)
issues are a means of addressing these rights. For corporates to ensure that their
practices are sustainable, they need to effectively consider the ESG issues in all the
business functions. Ideally corporates should not only look at the challenge of
unsustainability. Rather corporates should view sustainability as an absolute
necessity and an opportunity as well as a driver of innovation in their practices. In
order to do this, it is imperative that corporates understand the notion of
sustainable development. The environmental, social and economic issues related to
corporate citizenship are addressed in this chapter at a macro level and aim to
develop an understanding of the tension and alignment between these issues.
Sustainable development is a development that meets the needs of the present
without compromising the ability of future generations to meet their own needs.
This definition of sustainable development contains two key aspects1. The concept
of needs 2. The idea of limitation, imposed by the current state of technological
and social environment’s ability to meet present and future needs. The availability
of information enables us to measure the impacts and consequences of our actions
leading to unsustainable development more accurately than before. Furthermore,
the realities of various issues such as the impact of environmental degradation,
climate change, rising inequalities, and increasing scandals can no longer be
denied.
Biodiversity is often used as an indication of the state of the natural environmental
since it refers to diversity of micro organisms, plants and animals species as well as
the ecosystems within which they interact and live. The latest available World
Wildlife Fund for nature ( wwf) living planet report reveals that biological
diversity also referred to as biodiversity is decreasing sharply with an overall
decline of 52% between 1970 and 2010.
2.2 The emergence of sustainable development
The concept sustainable development can be traced as far back as some 300 years
ago to seventeenth-century Europe. This section however will cover the recent
history from 1945, the post war (World War 2) development era. The motivating
power behind the establishment of the post-war international economic system was
the task of reconstructing what had been damaged during World War 2. This
development was supported by institutions such as the International Bank for
Reconstruction and development that offers funding to developing countries. The
United Nations was established in 1945 a year after the International Bank for
Reconciliation and Development. A key priority for UN was to achieve
international problems of an economic, social, cultural or humanitarian character
and in promoting and encouraging respect for human rights and for fundamental
freedoms for all without distinction as to race, sex, language or religion. The initial
focus of the UN was on social and economic matters. While improving people’s
wellbeing continues to be a main priority of the UN, the global understanding of
development has changed over the years from a focus on social and economic
matters to a focus on the natural environment.
1886 – the idea of using the ‘citizenship’ metaphor first emerged (according to the
authors)
1943 – a paper titled ‘Are chain stores good citizens?’ was published in the
Journal of Marketing
1960s and 1970s – papers addressing corporate citizenship were written (as
referenced by Melé)
1980s – Matten and Crane’s world renowned article published in 2005 (which this
module quite heavily cites and leans on for conceptualisation), noted that the term
‘corporate citizenship’ had emerged since the 1980s as a prominent term in
management literature dealing with the social role of corporates.
Egoism
The egoism theory states that one should maximise ones own good and happiness.
This theory equates morality with self-interest and maintains that an act is morally
right if it best promotes the decision maker’s interest. The theory further states that
one can indirectly have interest in others and promote their wellbeing, if such
actions or behaviours would maximise what is good for oneself.
Thought processes such as ‘I will not steal, as I will get a criminal record’ and ‘I
will not lie about a particular matter, as it will negatively impact how my
community sees me’ are basic examples of reasoning within this theory’s
parameters.
This theory receives the most criticism – especially since it aligns morality with
self-interest.
Utilitarianism
Ethics of duty
This theory is based on moral duties that specify certain ways in which individuals
should act. Kant, who pioneered this theory saw humans as rational actors,
implying that they are independent moral agents capable of making their own
rational decisions regarding right and wrong. He also viewed morality as the same
for everyone everywhere. For Kant morality concerned certain eternal abstract and
unchangeable principles and used three imperatives to highlight what ought to be
done by individuals.
The ethics of duty theory has certain problems associated with it namely:
This theory concerns the notion of natural rights. It is concerned with basic rights
such as the right to life, freedom and privacy to which individuals are entitled. It is
therefore a decision makers duty to respect these rights. the theory states that a
decision or action is right when it respects the rights of individuals. The main
problem with this theory is that is based on western views or western morality.
Applying these views on societies with a different cultural and religious belief
could cause friction.
Ethics of justice
Justice concerns fair treatment of individuals with a fair end result. The theories of
justice seek to achieve fairness in terms of procedures and outcomes. The biggest
challenge with this theory is balancing fair procedures and fair outcomes.
Virtue ethics
Virtue ethics seeks to comprehensively describe character traits that constitute a
good human life. Central to this theory for Aristotle was ‘happiness’ – virtue
behaviour is an internal part of a good life.
Virtues are the traits that allow individuals to behave in ways that would develop
their highest potential, lead to happiness and enable them to pursue the ideals they
have adopted. Honesty, truthfulness, tolerance, integrity, patience, courage, self-
control, fairness and reliability are examples of virtues.
Feminist ethics
The feminist theory of ethics views ethics from a more feminine perspective. This
theory argues that woman (females) have different attitudes towards organising
social life, compared to men. These differences affect how ethical issues and
dilemmas are handled. It views moral issues and dilemmas of responsibility in
relationship to be resolved through personal and subjective assessments.
Discourse ethics
According to discourse ethics, there should be a process of norm generation
through rational reflection. Norm generation refers to the process of establishing a
rational ideal discourse about a specific problem. It is the procedure of parties
getting together to settle a conflict, solve a problem and provide a solution for a
specific situation that is accepted by all parties. Therefore it involves the time and
energy taken to interact with one another and for each affected party to share their
argument – and to then reach a mutual agreement on a specific norm that will be
applied in the situation (norm generation).
The challenge with applying this theory is that norm generation can be a very time
consuming process. If one party objects and a mutual agreement cannot be made,
then a moral decision hasn’t been reached.
The challenge inherent in this theory is that one needs to be in the situation or have
experience of the situation in order to truly tap into ones emotions and feelings and
question the practice.
the legislation mainly encompasses four categories of laws and regulation that
govern corporate activities, and these are:
Regulation of competition
Rivalry amongst corporations for customers and profits can in certain cases, lead to
questionable practices. Large corporations also have more advantage over others –
especially over the smaller business. Large corporations have access to more
resources, and can capitalise on economies of scale (cost per units are lower as
they produce on a larger scale, compared to a small business who produces on a
smaller scale, and therefore smaller business’s products cant always compete with
larger organisations). In addition, some corporations’ competitive strategies focus
on weakening a competitor – thereby weakening competition in the market.
Competition deteriorates when firms limit healthy competition (example; raising
entry barriers so that new competition can’t enter the market).
As a result, laws have been passed to regulate competition. These laws were
established to prevent anti-competition practices aimed at reducing or restricting
competition among corporations. Reducing or restricting competition is to in some
way, hinder healthy competition deliberately. These practices are known as anti-
competitive behaviour and include price fixing, predatory pricing ( a firm setting
their prices so low as to force a competitor out of the market) and rigging bids (to
agree in advance who to award a contract to). Rigging is achieved by setting a pre-
determined price on a tender, limiting other firm’s chances of competing.
Protection of consumers
There are various laws In South Africa that protect consumers rights, of which one
is the Consumer Act 68 of 2008. Other laws aimed at protecting consumers are:
These laws promote equity and safety in the workplace and are aimed at protecting
the rights of minorities, woman, senior citizens and people with disabilities, and
the safety of all workers. Exampes are:
These laws came into pass largely as a response to concerns over business’s impact
on the environment – such as toxic waste in the air and water. In South Africa,
various laws are aimed at protecting the environment.
Examples are:
The scope of ethics is broader than the scope of law. Unlike the law, ethics cover
every aspect of human conduct. Therefore, ethics exceeds the law.
In lieu of the relationship between the law and ethics, organisations ought to
always consider both their legal responsibility as well as their ethical
responsibility.
Management Definition:
Manager is an individual who is responsible for a certain group of tasks or
subset of corporation.
She has staff of people reporting to her
Responsible for successful execution of tasks assigned to section
Together with other managers she makes up the corporate
management team
Management team is responsible to attain vision, mission, goals and the
objectives of the corporation.
Responsibilities of Management:
5 Tasks – performed by all levels of management in all functional areas of
corporation
1. Set goals and objectives of corporation
Planning phase. Determine what needs to be done to meet the corporate
goals and objectives
2. Organise
Outline tasks and activities
Do job design and assign tasks to employees
Develop corporate design and structure
3. Communicate and motivate staff
Create team
Based on remuneration, placement, promotion
4. Develop people
Very important part
5. Measure performance
Establish appropriate standard and measures
Analyse actual performance
Take appropriate action
Levels of Management:
3 layers: Top, Middle, Lower
Top Responsible for corporation as a whole
Formulate vision, mission, long-term goals, strategies
Design broad organisation structure
Lead organisation and Control organisation
Determine Values and corporate culture
Middle Responsible for smaller sections and departments
Formulate medium term goals for functional areas
Implement policies, rules and procedures formulated by top
management
Typical: Marketing, Financial, Human Resources, Procurement,
and Operations Managers
Low Apply policies, procedures and rules
Focus to attain high levels of production
Organise sub section
Motivate individuals
Control outputs
Leadership vs Management
The meaning of the terms leadership and management differs
Responsible leadership
Today’s leaders act in a global stakeholder society. They need to be
responsible and accountable to shareholders for financial performance and
all stakeholders for the organisations’ impact on the economy, society and
environment. Responsible leaders deliver on the triple bottom-line of
organisation.
Create trust and value to all stakeholders
Triple bottom-line = Accounting framework with 3 parts: social,
environment, finance
(Also called 3 pillars of sustainability)
Personal value: individual’s absolute or relative and ethical value. The basis
of ethical action.
Value statements: Grounded in personal values. Define how people want to
behave.
Value system: Set of consistent values and measures.
Steward: guard the values and value system of organisation and protect the
personal and professional integrity of the organisation
Citizen: Business expected to use minimum inputs to deliver the maximum
output, be effective and efficient, and perform financially well. Contribute to
thriving community and good society. Must know both goals are connected.
Visionary: Responsible vision and build on sound values to lead to a
sustainable business. Ensure financial success, safe environment and society.
Servant: Server others. Be attentive, modest, supporting.
Coach: facilitate learning and development of others. Motivate to work
together and realise common vision.
Architect: Plan, design, construct organisation structure to support ethical
and effective achievement of triple bottom-line
Storyteller/meaning enabler: use storytelling to spread organisation vision
socially, culturally, environmentally
Change agent: initiate and support change towards value conscious and
sustainable business in a stakeholder society
Risk Sets overall tone and approach for risk exposure management
management Risk Strategy should include expression for risk appetite.
strategy Include Risk Strategy in overall business strategic planning
process.
Support management decisions – trade-off between risk and
return on investment.
Competitive advantage
When corporation is more profitable than its competitors by creating
products or services that are of a higher quality, lower cost or better value
than its competitors.
Sustained competitive advantage
When a corporate achieves “above average” performance in an industry for
at least 10 years or more.
Corporate citizenship (LU 1 & 2)
Concept through which business activity of corporates has the potential to
influence the administration of citizenship rights. It calls for corporates to
support government in addressing citizen rights through their business
activities.
CZ means that corporates need to do more than just focus on their own
financial performance but also focus on the sustainability of their business,
the environment, the economy and the society at large.
Sustainability
It is the business of staying in business, connected to the organisations
capacity to endure and perform over the long term.
Calls for the simultaneous pursuit of economic prosperity (profit),
environmental quality (planet) and social equity (people).
Sustainable corporate (Differentiate between the goal of a sustainable
corporate and the goal of a traditional corporate)
Characterised by its strongly internalised ideology of working for a
sustainable world.
Embed sustainability vs corporates seeing sustainability as an add-on
function or lay-out of additional costs or charitable deeds.
Accepts that sustainability, strategy, risk and performance are inseparable.
Realised that a corporate sustainability is enhanced by creating value in a
sustainable way.
Actively promote sustainability, implement financially viable business
models, that produce growth and performance.
Choose strategies that solve some of the complex social and environmental
problems.
Has a stakeholder focus instead off a narrow shareholder focus, engages
with a broader group of stakeholders (environmental & community groups)
vs just considering shareholders and stakeholders associated with financial
performance.
Greenwashing
Greenwashing (a compound word modelled on "whitewash"), also called
"green sheen", is a form of spin in which green marketing is deceptively
used to promote the perception that an organization's products, aims or
policies are environmentally friendly.
LU 8 Stakeholder Engagement
Background:
1984 R Edward Freeman wrote a book titled: Strategic Management: A
stakeholder approach. It introduced a stakeholder map that takes into account all
groups and individuals that can affect or be affected by the corporates purpose. He
defined stakeholders as “those groups without whose support the organisation will
cease to exist”
Donaldson and Preston: Stakeholder theories have multiple distinct aspects that are
mutually supportive and can be categorised in various approaches: descriptive,
instrumental, normative
Stakeholder identification
Stakeholders change often (dynamic), the identification process should take place
continuously.
Benefits of Stakeholder identification
Determine who and what really counts in organisation
Assisting in the analysis of the corporate’s external environment
Provide feedback on how Standard Operating Procedures affect stakeholders
within the corporation – day-to-day business
Provide feedback on how Standard Operating Procedures affect stakeholders
outside the corporation – influence cost of production and price
Explain approaches to stakeholder identification
Salient = degree to which managers give priority to competing stakeholder claims
(Approach developed by Mitchell, Agle and Wood)
1st identify stakeholders
2nd prioritise those identified
Based on 3 variables: Power, Legitimacy, Urgency
Power: Extent to which a party has/can gain access to physical, material, esteem or
social means to impose its will. Corporates can have power over stakeholders and
vice versa.
Legitimacy: Only entities with a legitimate claim or stake in the corporate should
be considered a stakeholder. All possible stakeholders should not be considered by
managers.
Urgency: the degree to which stakeholder claims call for immediate action. Time
sensitivity, criticality of relationship, importance of legitimate claim
Discuss the different classes of stakeholders and how they can prioritised
The more attributes a stakeholder possesses, the higher it will be prioritised.
Salience approach leads to 7 different classes of stakeholders, grouped into 3
groups
Group 1 – High salience
Definitive - Highest priority.
stakeholders possess power, legitimacy and urgency
Example: Board of directors with an urgent issue
Group 2 – Expectant (moderate salience)
Dominant - stakeholders possess power and legitimacy
Example: HR Department during wage negotiations
Dangerous - stakeholders possess power and urgency but no legitimacy
Might be violent and coercive
Group can be identified but does not have to be recognised
Example: activists that use unlawful tactics
Dependent - stakeholders possess legitimacy and urgency but no power
Are dependent on others to carry out their will
Example: During the BP oil spill the animals that suffered were
dependent stakeholders. They need animal right activists to Act on
their behalf
Group 3 – Latent (lowest salience)
Dormant - stakeholders possess power, but no legitimacy and urgency
Example: Temporary staff who demand to be permanently employed
and make use of protest actions and strike
Discretionary – possess only legitimacy. Most likely recipients of corporate
philanthropy. Corporate are not forced to engage but choose to do so.
Example: beneficiaries of charity
Demanding – urgent claims, but no power and or legitimacy
Example: Serial complainers or people with unjustified complaints
External:
o community – expect corporate to act more sustainable to their natural
environment
o natural environment – vital for human survival, should be preserved
for future generations
o Business, government and public (study guide page 72)
Discuss the consequences of a lack of adequate stakeholder engagement
Significant and costly disruptions in projects
Difficulty making decisions – stakeholders do not understand each other
Alienation – stakeholders feel excluded or concerns not heard
Distrust
No channels of communication
No established relationships
Damaged corporate reputation
Lost productivity
High staff turnover and frustration
What are the challenges and implications when corporates engage with
stakeholders?
Not identifying the correct stakeholders
Choosing incorrect engagement tools
Information that is not transparent
Not recognising that engagement requires internal support
Reaching out to stakeholders that avoid engagement – continue to try
May want to end formal relationship, try to maintain informal/dormant
relationship
Planning for violations of confidence and trust
Address these issues:
Acknowledge imperfections
Apologise for miscommunication
Acknowledge positive impact of stakeholder engagement
Chapter 9: Management Of Business Ethics
Ethics: a set of moral principles, norms or standards that govern human behaviour.
Business ethics: a guideline for human excellence or human quality in the
business environment.
Ethical issue: a situation, opportunity, or problem that requires of the decision
maker to choose between several actions that must be evaluated as ethical (right) or
unethical (wrong). Examples of ethical issues in the work place are lying, conflict
of interests, environmental issues, sexual harassment, fraud and privacy issues.
Ethical dilemma: a situation, opportunity or problem that requires the dicision
maker to choose among several unethical options. Ethical dilemmas are seen as
“grey area” – with no right answer or ethical conclusion to a specific problem.
Corporations manage ethics through policies, cods of conduct and ethical training.
Code of ethics/conduct
This includes the type of conduct desired and expected from employees
Ir is a document that develops an organisation’s core values, and forms
an ethical point of view within certain organisations, professions or
industry.
There are three types of codes of ethics, namely:
1. Organisational code of ethics
- Sets out the guiding principles of the organisation and a specific
to a single organisation.
- It encourages ethical behaviour within an individual
organisation, hence it is only relevant to a particular
organisation, and one cannot assume that the codes of ethics
will be the same from company to company.
- This document is also referred to as a code of conduct
2. Professional code of ethics
- Sets out the guiding principles for a specific group of
professionals
- The professionals with specific code of ethics in South Africa
are amongst others, medicine, law, engineering and
accountancy
Chapter 10
2. Briefly explain procurement and the extended supply chain as drivers for
improving corporate citizenship;
Procurement’s social responsibilities can be defined as meeting the discretionary
responsibilities expected by society. This includes activities relating to (i) the
community; (ii) affirmative action; (iii) the environment; (iv) ethics; (v) financial
vi) Human rights: Procurement staff and managers should treat other people,
including colleagues, superiors, subordinates, suppliers and potential suppliers
fairly, and with dignity and respect. Procurement should visit suppliers’ plants to
make sure that the working conditions of employees are of an acceptable standard,
they are treated fairly, and that no children or slave labour is used.
vii) Safety: Procurement should always take the safety of colleagues and customers
into consideration when purchasing materials, products and services. A particularly
important aspect is the procurement of quality materials, products and services.
Procurement must ensure that suppliers’ operations are conducted in a safe
manner, and that the materials are packed, transported and moved in the safest
possible manner to and in the organisation.
Supply chain management entails the planning and management of all activities
involved in sourcing and procurement, conversion (production or operations), all
logistics management activities and marketing. It also includes coordination and
collaboration with channel partners, which can be suppliers, intermediaries, third
party service providers and customers.
In the SCM approach, planning is done together (particularly on the quantities and
time of final products needed in the market); and a co-operative effort is made to
(i) cut costs over the supply chain; (ii) improve quality; (iii) assist other members
in the supply chain to reach the supply chain’s targets; (iv) improve the time it
takes from the raw materials sup~ plier to the final consumer; (v) share information
that may benefit or impact the supply chain; and (vi) work towards innovative
ideas (for example, product differentiation, such as low-calorie, low-alcohol beers
or new bottles), that may improve the competitiveness of the supply chain’s
offering to the final consumer.
The supplier selection process for large quantities, expensive and non standard
items is as follows:
Set specific and predetermined criteria
List possible suppliers
Determine short list
Conduct supplier quotations/negotiations
Choose supplier
Evaluate supplier performance continuously
Chapter eleven
Transport
Reverse logistics
Reverse logistics means the reverse flow of materials, products, packaging, scrap
or equipment backwards in the supply chain to be reused, refurbished,
reconditioned or recycled. It also includes the removal of waste to landfill. Reverse
logistics management forces organisations to consider different options in terms of
the impact on the environment. The bottom line of reverse logistics is that
materials or items must be transported in the opposite direction from the customer
or any place in the supply chain back to the source of origin (manufacturing point)
or to another site of disposal. Reverse logistics includes the return of goods or
materials during any stage of the supply chain process to its source. This may
include return of unsold goods to the supplier, product returns and exchanges
because of damage, incorrect orders or deliveries, warranties and repairs. This also
includes product recalls and waste management. A reverse logistics process may
also start with the end user’s decision that the product has reached the end of its
life and the materials need to be disposed of. These processes may include:
Chapter 12
Learning objectives
There is a term in management 'what gets measured gets managed' and it is a vital
aspect in the added-value debate. Human capital metrics, such as turnover, health
and safety, employee development and diversity, for example, are the traditional
HR metrics used to justify the HR department’s existence as well as the value it
adds to the corporate’s performance. The traditional metrics are often focused on
compliance (for example, race and gender representivity, organisational health and
safety targets and results, etc.), management information systems (for example,
voluntary employee turnover, number of promotions, absenteeism statistics, etc.).
Additional corporate citizenship related metrics should be added to the traditional
metrics to reveal the corporate’s commitment to corporate citizenship and the
degree to which it ‘walks its talk! Corporate citizenship metrics are more based on
the ‘how?’ while the traditional metrics are about the ’what?’ and ‘how many?’
Table 12.1 presents the typical traditional metrics and possible HR corporate
citizenship measures.
FINANCIAL MANAGEMENT
14.1 INTRODUCTION AND AIM OF THE LEARNING UNIT
Corporates need to realise healthy and acceptable profits in order to satisfy
their owners, investors, financiers, employees, government and other
stakeholders, and to ensure the long-term sustainability of the corporate.
14.2 THE FINANCIAL MANAGEMENT FUNCTION
14.2.1 Defining financial management: refers to the efficient and effective
management of money (funds) in such a manner as to accomplish the
objectives of the corporate. Corporates face three major financial
decisions:
Which real assets and /or financial assets and/or projects should
we invest in?
How should the corporate finance these real assets and/or
financial assets and/or projects?
How should the profit of the corporate be distributed?
14.2.2The fundamental objectives of financial management: The financial
management objectives usually centre on the maximisation of some
variable. Profit maximisation is often regarded as an appropriate and
fundamental objective of financial management, since all stakeholders
are interested in the financial well- being of corporates. A corporation
that doesn’t realise an acceptable level of profitability will not be
sustainable, and over time, will not be able to meet its financial
obligations. However, profit maximisation is only part of the total
picture in terms of financial management. Why Correia et al provide
several reasons:
Firstly it is possible for management to increase corporate’s
profit within a specific financial year by reducing costs such as
advertising and research and development, or a once-off
increase in earnings, such as once-off sale of valuable asset.
Second, profit maximisation does not directly factor in the time
value of money.
Third, accounting profits do not always reflect cash flows.
Fourth, accounting profits do not include an adjustment for the
cost of equity financing (capital contributed by the owner’s
corporation).
Finally accounting profits ignore the impact on risks on the
value of the corporation.
The following primary objective is adopted in this book- the maximisation of
the value of the corporate, and especially the claims that all stakeholders
have against the value of the corporate
Corporate value can only be maximised by responsible investment,
financing and profit distribution decisions made by the financial function.
14.2.3The ethics of maximising corporate value: There is absolutely nothing
wrong with the objective of maximising value. What may be wrong is
how value maximisation is achieved. Ethical standards are
fundamental in corporate finance and it makes sense over long term as
well. Financial managers should focus on the interests of all
stakeholders (including shareholders), but they should also act in a
responsible way. All kinds of managers, at all levels of management,
need to take decisions that entail the allocation of scarce resources in
the most effective and efficient way.
14.2.4The focus of financial management: Financial management faces
three basic decisions:
The selection of assets and/or projects to invest in: requires that the
finance function find assets or projects that will maximise the
value of the corporation. Assets can be short term of long term.
Short term assets are referred to as current assets e.g. Cash on
hand, inventory and the debtors of the corporation. A long term
assets are often referred to as fixed assets and include, buildings,
machinery, land and so on.
The financing of these investments: in these assets or projects the
requirement is the raising of the capital, either equity (capital
contributed by the owners of the corporation) or debt (capital
contributed by the non-owners of the corporation) to finance the
investment in assets (current and fixed assets) A general rule Is
that fixed assets should be financed by long term resources( such
as long-term loans, mortgages and equity)and that current assets
should be financed by short term resources( overdraft bank
accounts, suppliers ‘credit, short-term loans and retained earnings).
The distribution of corporate profits: Involves the distribution of
the net profit of the corporation. The net profit for a specific
financial period (usually a financial year) is calculated by sales
revenue, less cost of sales, operating expenses, interest paid and
taxes. Therefore the net profit is the amount available for
distribution as dividends to shareholders and retained earnings,
which can be re invested in the corporate
The effectiveness of the finance, investment and profit distribution
decisions, are measured by the increase or decrease in the value of the
corporation.
14.3 CORPORATE CITIZENSHIP AND THE FINANCE FUNCTION
14.3.1Responsible investment: can be interrogated from the view point of a
corporate that invests in assets and projects to ensure its long-term
growth and sustainability.
14.3.1.1 Responsible investment from the view point of the corporate
that invests in asset and projects (PRIs): define responsible investment
as an approach to investing in assets (real and financial), and/or
projects that aims to: incorporate environmental, social and
governance (ESG) factors into investment decisions; generate
sustainable, competitive long-term returns; improve the management
of risk; achieve a positive societal impact.
14.3.1.2 Responsible investment from the point of view of the
individual and institutional investor: Asset managers and asset owners
can implement ESG issues into the investment process in a number of
ways: Best-in-class: investing in companies that follow the ESG
performance standards; Negative screening investment strategy:
excluding companies that are involved in activities that are deemed
unacceptable or controversial; Positive screening investment strategy:
inclusion of a company or industry or project that is involved in
activities that promote and sustain communities, the environment and
governance; Impact investing strategy: investment in an industry that
is aimed at solving and /or environmental problems; Sustainable-
themed investing strategy: means the selection of assets specifically
relates the sustainability in single or multi-themed funds; Community
investing strategy: refers to an investor explicitly seeking to invest in
projects or institutions that will serve poor and underserved
communities in order to provide capital, credit and training
opportunities that these communities would otherwise lack.
14.3.2 Responsible financing: How should a corporate finance its real assets
and/or financial assets and/or projects?
14.3.2.1 Responsible finance from a corporate viewpoint: There are 2
broad categories of finance that are available to corporates: equity –
related instruments and debt-related instruments. The primary source
of finance is that provided by the owners of the corporation, in other
words, equity. In the case of a company, equity is contributed by
means of ordinary shares, retained earnings, and preference shares.
Debt- related instruments are categorised as long-term and medium
term finance, although the exact line of separation between long and
medium term is not clear. Debt-related instruments are associated with
interest that needs to be paid to the financier and debt can be secured
or unsecured. Secured debt is secured over one or more assets of the
corporate. In case of unsecured debt the financier does not have
preferential claim over any assets of the corporate- therefore, it is a
greater risk than the secured debt.
The relationship between debt and equity financing of the corporate,
is known as the capital structure of the corporate.
There are certain features that need to be considered in terms of
responsible finance: return, risk and control.
Return: making use of debt financing, the corporate will need
to make interest payments as agreed upon with the financier,
irrespective of the financial performance of the corporate.
Risk: the risk I associated with debt financing is higher than
that of equity financing, since debt requires the payment of
interest, whereas a corporation is not required to pay dividends
in poor financial circumstances.
Control: Making use of debt and equity financing has various
control implications for corporations. For instance, raising
finance through equity dilutes the control of existing
shareholders.
14.3.2.2 Responsible finance from a financier’s viewpoint: The term
responsible finance has different meanings for different people and different
situations.
Responsible finance can be define by the Responsible Finance Forum as a
guiding principle for how financial services should be delivered to meet the
challenge of promoting and advancing sustainable development.
In the financial market, three key stakeholder groups play crucial role in
terms of responsible finance:
1. The financial services industry: This industry plays a key role in
responsible finance through a variety of actions, such as compliance
with laws and regulations, adherence to industry codes of conduct,
standards, good practices and institutional commitment to
transparency and fairness in its operations.
2. Governments: governments play a key role in responsible finance
through policy and consumer protection regulation, and commitments
to increasing attention to financial literacy at the national level.
3. Consumers and corporations: play a key role through enhanced
consumer awareness and capability. Social media especially makes
consumers and corporates more aware of products and services
available in the financial services industry.
Advantages of responsible finance from a financier’s viewpoint:
Responsible finance activities are important contributors to macro-
and micro- economic strategies of governments that are aimed at
growing inclusive business and business development.
It is critical for the stability of financial markets.
It is crucial for access to finance, financial inclusion and inclusive
business agendas.
It contributes to economic development and poverty reduction.
The main instruments of responsible finance:
Consumer protection regulation
Financial institutions self-regulations
Financial education.
14.3.3Responsible distribution of profits: A corporate that realised a profit during
a specific financial year, needs to decide which proportion of the profit will
be invested back to its activities, and which proportion will be distributed
amongst shareholders.
When paying out dividends the most important factor to consider in the
dividend decision is the value maximisation of the corporate.
Other factors are:
Legal requirements
Contractual obligations
Information content of dividends
The nature of shareholders
14.4 INTEGRATED REPORTING
Definition:
The concise communication about how an organisation’s strategy, governance,
performance and prospects, in the context of its external environment, lead to
the creation of value over the short, medium and long term.
The IF framework assists corporations to prepare an IR, and is principles-based.
The IR framework provides among other things eight content elements that would
typically be covered in an IR.
1. Corporates overview and external environment:
What does the corporate do?
What are the circumstances under which the corporates operate?
2. Governance:
How does the governance structure support the corporates ability to
create value?
3. Business Model:
What does the corporate’s existing business model look like?
4. Risk and opportunities:
What are the specific risks and opportunities that affect the corporates
ability to create value?
How does the corporate deal with these specific risks and
opportunities?
5. Strategy and resource allocation:
Where is the corporate heading?
How is the corporate planning to get there?
6. Performance:
To what extent is the corporate achieving its strategic objectives?
What are the outcomes I n terms of the transformation process from
resources to final products or services?
7. Outlook:
What are the most likely challenges and uncertainties that the
corporate is encountering?
What are the potential implications on the business model and future
performance?
8. Preparation and presentation:
How does the corporate identify what is relevant information to
include the IR?
How the relevant information is quantified or evaluated?