BFC5130: Case Studies in Banking and

Finance, Semester 2, 2020

(Teaching Week Nine-Case Eight)

Technical Notes for case 8:

Apple and its suppliers: Corporate social responsibility.

Case Instructor: Amale Scally

LEARNING OBJECTIVES
1. Introduce the concepts of corporate governance, corporate
social responsibility (CSR) and sustainability.
2. Examine and analyse different rationales for embedding a
concern with CSR in the company.
3. Evaluate ways to embed a commitment to CSR and
sustainability within a company.
4. Understand the challenges in addressing corporate social
responsibility issues through (internal) regulation.
5. Analyse the trade offs faced by companies as they commit to
social commitments whilst striving for strong financial returns.
CASE SYNOPSIS
 This case is set in 2014 and finds Apple implicated in alleged
labour rights violations in its supply chain. These alleged
violations relate to Pegatron, a large Apple supplier that
specialises in the assembly of iphones. It is not the first time
Apple finds itself in the spotlight as it faced similar allegations in
2009. At the time, another Apple supplier, Foxconn, was accused
of breaching labour rights and this had led to changes in Apple’s
CSR commitments. Although Apple had vowed to overcome
these issues, the case demonstrates that these are ongoing and
difficult issues to overcome. Apple is now accused of breaking
“promises”. The case explores Apple’s options in response to
these new alleged violations. This case offers insights into the
complexity of CSR issues, especially in the context of cross-
border, inter-organisational settings.
 Business and Economics

Technical Content
Additional Reading: references provided throughout for further reading as required; further research is
strongly encouraged.

CORPORATE GOVERNANCE,
SOCIAL RESPONSIBILITY and
SUSTAINABILITY: The case of
Apple
WHAT IS CSR?
CSR and CORPORATE GOVERNANCE
 CSR can be viewed as a model of corporate governance
(CG) which extends the fiduciary duties of companies
towards the firm’s shareholders to also fulfilling
fiduciary duties towards the firm’s stakeholders (
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102116).

 This constitutes a distinct shift from adopting a purely

“maximise shareholdolers’ wealth” approach to taking
into account management decisions on various
stakeholders.
 CORPORATE GOVERNANCE

Business dictionary definition:

The framework of rules and practices by which a board of directors ensures
accountability, fairness, and transparency in a company's relationship with all its
stakeholders (financiers, customers, management, employees, government, and
the community). The corporate governance framework consists of (1) explicit
and implicit contracts between the company and the stakeholders for
distribution of responsibilities, rights, and rewards, (2) procedures for
reconciling the sometimes conflicting interests of stakeholders in accordance
with their duties, privileges, and roles, and (3) procedures for proper
supervision, control, and information-flows to serve as a system of checks-and-
balances.
 CORPORATE GOVERNANCE :
A brief history
Early 1900s: large US companies controlled by small
number of wealthy individuals (entrepreneurs)-eg.
Rockefeller, Morgan, Ford…
Major owners of the shares in their companies
Major decision makers running “their” companies
Era of entrepreneurial capitalism
(ownership=control)
 CORPORATE GOVERNANCE :
A brief history
Era of entrepreneurial capitalism (ownership=control)

This Photo by Unknown Author is licensed under CC BY-SA

This Photo by Unknown Author is licensed under
CC BY-SA
 CORPORATE GOVERNANCE :
A brief history
1930s: ownership of US companies widens
Ownership and control separated
Era of managerial capitalism
Managers have great autonomy in making decisions
and running the firms (as long as make money and
abide by the laws imposed upon them)
Board of directors: typically selected/controlled by
managers/passive role
 CORPORATE GOVERNANCE :
A brief history
1970s: rise of institutional investors (eg. Pension
funds)
Acting as agents/fiduciaries for investees (individuals)
Active monitoring by these institutional investors
becomes more important
Era of fiduciary capitalism
 CORPORATE GOVERNANCE :
A brief history
70s and 80s: rise of discontent with management (huge
payouts, not commensurate with corporate earnings,
poor acquisitions, decreasing shareholder value)
Takeovers grew in popularity (especially led by small
number of “corporate raiders”)
Initially companies sought legal and regulatory
protection from these takeovers (“hostile takeovers”)
 CORPORATE GOVERNANCE :
A brief history
Hostile takeovers greatly decreased until resurgence
during early 2000s (recession)
Institutional investors’ active monitoring, large
shareholding and power changed the corporate
governance landscape
Boards increased the use of stock option plans for
management to minimize agency problems
 CORPORATE GOVERNANCE :
A brief history
This coincided with a spate of corporate scandals
(2001 especially) not only in the US (eg. Enron,
Worldcom) but also in Europe (An interesting read here:
https://www.jstor.org/stable/23170102)

Growing discontent about executive pay, off sourcing

of jobs, and growing concerns about social
responsibility
Enron scandal eroded the confidence of investors in
corporate governance, as internal and external controls
failed to warn the public about the firm’s losses
 CORPORATE GOVERNANCE :
A brief history
Edwards (2003): examined the motivations and
incentives of executives and effectiveness of corporate
governance mechanisms.
Key questions were asked:
https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles
/1661/U.S.%20Corporate%20Governance%2010-05.pdf
 CORPORATE GOVERNANCE :
A brief history
Impact on welfare of citizens was a major concern.
Structural and procedural reforms to make boards
more responsive, responsible, proactive, accountable,
transparent.
Major stock exchanges introduced new standards to
restore public confidence in firms.
Objective: strengthen corporate governance
requirements for listed firms.
 CORPORATE GOVERNANCE :
A brief history
Sarbanes-Oxley Act introduced in US in 2002
Similar measures around the world-eg: in Australia
https://asic.gov.au/regulatory-resources/corporate-governance/
 CORPORATE GOVERNANCE :
A brief history
2008 GFC: raised further questions about efficiency of
economic and financial systems, executive behavior,
board responsibility and oversight
Dodd-Frank Act 2010:
https://www.sec.gov/spotlight/dodd-frank/corporategovernance.s
html
Calls for further regulation but also calls for
institutional investors as shareholders to become
“stewards of the firms” through active monitoring.
 WHAT IS CORPORATE PURPOSE?
Shareholder vs stakeholder theories
Private vs public conceptions of the corporation
Shareholder capitalism: company is private
property of its owner-objective: maximize
shareholders’ wealth
Stakeholder capitalism: broader obligations including
employees, suppliers, distributors, customers and
society at large, ie. public responsibilities
 CORPORATE GOVERNANCE:
Further references
https://deloitte.wsj.com/riskandcompliance/2013/05/24/the-role-an
d-benefits-of-a-corporate-governance-framework/

https://www.governancemasters.com.au/what-corporate-governanc
e

https://www.dss.gov.au/sites/default/files/documents/05_2012/gov
_handbook_2010.pdf
 WHAT IS CSR?
 Corporate Social Responsibility:  a business philosophy which
stresses the need for firms to behave as good corporate citizens,
not merely obeying the law but conducting their production and
marketing activities in a manner which avoids causing
environmental pollution or exhausting finite world resources.
Some businesses have begun to behave in a more socially
responsible manner, partly because their managers want to do
so, and partly because of fear of environmentalist and consumer
pressure groups and the media, and concern for their public
image. It is argued that socially responsible behavior can pay off
in the long run, even where it involves some short-term sacrifice
of profit.
 SOURCE: Collins Dictionary of Business (2006).
 THE EVOLUTION OF CSR*
*Main reference: Carroll (1999), Corporate Social Responsibility: Evolution of a Definitional Construct, Business
and Society.

Concern for social impact from business activities is

not new.
However the origins of CSR as we know it can be
traced back to the 50s, with majority of literature
stemming from the US.
Social Responsibilities of the Businessman (Bowen,
1953): argued that the several hundred largest
businesses were “vital centers of power and decision
making”.
 THE EVOLUTION OF CSR
Hence, their actions impacted the lives of citizens and
society at large.
Key question he asked: “What responsibilities to
society may businessmen reasonably be expected to
assume?”
Bowen’s CSR definition (1953): “it refers to the
obligations of businessmen to pursue those policies to
make those decisions, or to follow those lines of actions
which are desirable in terms of the objectives and
values of our society”
 THE EVOLUTION OF CSR
The 60s saw growing interest in concept of CSR with
attempts to formalize a definition of CSR.
Keith Davis (1960) defined CSR as “businessmen’s
decisions and actions taken for reasons at least
partially beyond the firm’s direct economic and
technical interest”.
He put forward his “Iron Law of Responsibility” which
held that “social responsibilities of businessmen need to
be commensurate with their social power”.
 THE EVOLUTION OF CSR
Frederick (1960) and McGuire (1963) further
supported these views which were largely accepted
throughout the 70s and 80s.
McGuire (1963): “the idea of social responsibilities
supposes that the corporation has not only the
economic and legal obligations but also certain
responsibilities to society which extends beyond these
obligations”.
 THE EVOLUTION OF CSR
McGuire’s definition was more precise in that it
extended beyond economic and legal obligations.
His view was that the corporation has to take interest
in politics, welfare of the community, in education, in
the “happiness” of its employees, in the whole social
world.
Business must act “justly” as a proper citizen should
(introduces concept of business ethics here).
 THE EVOLUTION OF CSR

Ethics and social responsibility are intertwined.

Keith Davis expanded his earlier CSR definition in
1967 to include ethics.
Walton (1967): importance of volunteerism as
opposed to coercion (companies should voluntarily
commit to CSR rather than be regulated to do so)
 THE EVOLUTION OF CSR
70s: growth of definitions of CSR, becoming more
specific. Notion of corporate social responsiveness.
80s: less focus on definitions, more focus on attempts
to measure and conduct research on CSR.
90s: transition to stakeholder theory, business ethics
theory, CSP (corporate social performance) and
corporate citizenship.
Focus on operationalising the CSR concept.
 THE EVOLUTION OF CSR
From corporate governance to corporate responsibility:
the changing boardroom agenda (Sparkes, 2003):

https://iveybusinessjournal.com/publication/from-corpora
te-governance-to-corporate-responsibility-the-changing-b
oardroom-agenda/
 THE EVOLUTION OF CSR
Sparkes (2003) identifies 3 key drivers for change:
• Economics of reputation (brand image)
• Rapid growth of SRI (socially responsible investments)
• Political consensus that CSR must be encouraged
(ethics, whistleblowing clauses of SOX Act, changes in
UK, Australia, Canada legislation to encourage SRI
and shareholder voting)
 CORPORATE SUSTAINABILITY
“Mix sustainable development, corporate social
responsibility, stakeholder theory and accountability, and
you have the four pillars of corporate sustainability. It’s
an evolving concept that managers are adopting as an
alternative to the traditional growth and profit-
maximization model”. (Wilson, 2003)
https://iveybusinessjournal.com/publication/corporate-sus
tainability-what-is-it-and-where-does-it-come-from/
 CORPORATE SUSTAINABILITY
Social responsibility is essential to sustainable
development.

“A sustainable enterprise is able to continue its activities

in the long run, taking into account the impact of its
actions on natural, social, and human capital.”(ILO,
2013)
 CORPORATE SUSTAINABILITY

Sustainability can hence be thought of as more forward

looking as plans need to be made to secure the firm’s
future;
CSR is viewed as more backward looking with firms
assessing what they have done to contribute to society
(typically over a short period of time-eg. past year)
 CORPORATE SUSTAINABILITY
A new role within corporations- Corporate Sustainability
Officer:
https://www.iema.net/assets/newbuild/GACSO/defining%20the%2
0corporate%20sustainability%20professional%20May%202011.pdf

Career opportunities:
https://www.ed.ac.uk/careers/your-future/options/occupations/csr/w
hat-is-csr
 CSR AND HUMAN RIGHTS
An interesting read, relevant to the Apple case:
https://www.humanrights.gov.au/publications/corporate-social-re
sponsibility-human-rights
Role of regulation:
http://theconversation.com/what-is-corporate-social-responsibilit
y-and-does-it-work-89710
Reasons to give back:
https://www.businessinsider.com.au/3-reasons-why-corporate-so
cial-responsibility-is-a-vital-part-of-a-successful-business-2018-
6
 CSR-role of activism
The term activism is often associated with
protests/unrest…
However, activism (individual, institutional for eg.) can
and has been a driver of good corporate governance,
social responsibility, sustainability…
The rise of SRIs and ESG (environment, social and
governance) investments is testament to this.
Institutional investors have the power and are encouraged
to enact change through their shareholdings.
 CSR-role of institutional investors
Something to think about:
Why and how should institutional investors be
concerned about the corporate governance and
corporate social responsibility practices of the
companies they invest in?
What is the purpose of learning about corporate
governance and corporate social responsibility in a
finance unit?
 CSR-examples and UN initiatives
Government, industry and educational institutions:
https://www.asx.com.au/about/corporate-social-responsibility.htm
UN Global Initiative (2015): Sustainable Development Goals
(SDGs)
https://www.un.org/sustainabledevelopment/sustainable-developm
ent-goals/
UN Global Compact:
https://www.unglobalcompact.org/what-is-gc/mission/principles
 CSR-examples
Monash: adherence to UN’s SDGs and UN’s PRME:
https://www.monash.edu/sustainable-development/sustainable-dev
elopment/17-sdg-goals
https://www.unprme.org/
https://www.monash.edu/about/discover-sustainability
https://www.monash.edu/msdi/news-events/2018-news/transformi
ng-australia-sdg-progress-report
 Some recommended viewing
Movies about corporate financial scandals:
https://www.thestreet.com/story/13335463/1/11-movies-inspired-b
y-juicy-corporate-scandals.html

Apple’s broken promises (BBC Panorama-documentary-about

1 hour):
https://www.ign.com/videos/2015/7/22/apples-broken-promises-pc
mag-gr
QUIZ
1 Managerial capitalism refers to:
A. A corporate scenario where ownership and control are intimately linked.
B. A corporate scenario where ownership and control are separated.
C. A corporate scenario where managers own the firm.
D. None of the above.

2 The term CSR refers to

 
A. Corporate societal responsibility.
B. Corporate social responsibility.
C. Corporate sustainable responsibility.
D. None of the above.

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QUIZ
3 The stakeholder theory proposes that corporations have as a key objective
A. To maximise shareholders’ wealth.
B. To extend their obligations to include employees, distributors, suppliers, customers and society at large.
C. To focus on profit maximisation alone.
D. To focus on philanthropic and charitable purposes first and foremost.

4 The term “shareholder capitalism” relates to the view that:

A. A firm is a public entity with public responsibilities.
B. A firm is a private entity with its main goal being maximising the value of the firm for all stakeholders.
C. A firm is a public entity with responsibilities to its employees, managers and shareholders only.
D. None of the above.

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QUIZ
5 Institutional investors are playing an increasing monitoring role of the firms they invest in. They do this as they
as part of their:
A. Managerial duties
B. Entrepreneurial duties
C. Fiduciary duties
D. Environmental duties

6 Sustainable development within a corporation takes a

A. Forward looking long term approach.
B. Backward looking approach.
C. Short term approach.
D. None of the above.

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QUIZ
7 In the 70s and 80s, boards increased the use of stock option plans for management in order to:
A. Make managers agents of the firm.
B. Give more control to managers over the firm they worked for.
C. Minimise agency problems.
D. All of the above.

8 “Mix sustainable development, corporate social responsibility, __________ theory and accountability, and you
have the four pillars of corporate sustainability”-choose one option below to fill in the blank in this quote
A. Shareholder.
B. Corporate governance.
C. Stakeholder.
D. Fiduciary.

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 QUIZ ANSWERS
1 B
2 B
3 B
4 D
5 C
6 A
7 C
8 C

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