South American nations compete to attract foreign investment, with the sought-after profile for potential investors being those committed to long-term residence in the country and a desire to contribute to the region’s economic development.
Corporate governance is a self-regulatory tool that motivates Latin American governments to encourage investors’ participation with such objectives.
Considering the prevailing trend in South America and the crucial role of corporate governance, the question arises: What is the most effective approach to enhance the practice of good corporate governance in the business world of South America?
One option involves government intervention to regulate the legal system, establishing laws that businesses must adhere to, with sanctions imposed for non-compliance. Alternatively, an approach centered on self-regulation can be promoted within organizations, defining values and principles of good practice through codes of conduct and corporate governance.
In this scenario, the state government would be responsible for formulating recommendations, particularly for publicly listed businesses, to enhance corporate governance practices as part of their social corporate responsibility policies.
This discussion suggests the potential use of solidarity as a means to foster self-regulation in companies, emphasizing the practice of good corporate governance in the workplace.
Solidarity, often invoked in Latin America for social uprisings or strikes against government and multinational company activities, could take on a different role in business.
While commonly associated with benevolence, acts of charity, or economic collaboration in philanthropy, the question arises: Can solidarity, typically linked to social and humanitarian causes, be applied as a business activity?
This inquiry delves into the multifaceted nature of solidarity and its potential impact on corporate governance, forming the core of my recent book, “Solidarity & Corporate Governance,” derived from my doctoral thesis at the University of Navarra in 2013.
The academic work posits that solidarity encompasses various elements, including principles and ethical corporate values, which can be integrated into the good corporate governance framework, significantly influencing companies’ operations.
The Idea Of Solidarity
Traditionally, in civil law, which follows the Romano-Germanic judicial system, solidarity is a legal institution of civil rights associated with the compliance of private contracts. According to this concept, any party indebted to an obligation must bear the consequences in case of a breach of contract that harms the interests of the creditors.
Creditors are legally entitled to demand fulfillment from any debtor adhering to the contract terms or seek financial compensation for damages in the event of non-compliance.
In contemporary contexts, the concept of solidarity extends beyond the realm of law. It finds application in other disciplines, such as economics, where its elements can enhance corporate governance policies and the social corporate responsibility of businesses.
My book suggests that incorporating the criteria of solidarity can elevate the performance of corporations, rendering them more productive, efficient, and impactful in their internal and external environments.
Similarly, applying the criteria of ‘solidarity’ contributes to a corporation’s perception and reputation in the market, positioning it favorably compared to other entities. Following this rationale, companies seeking such classification must consistently implement the necessary criteria.
Thus, solidarity enhances a company’s corporate reputation, fostering economic and ‘non-economic’ value in society.
However, merely using the term ‘solidary’ is insufficient; simultaneous and permanent implementation of its elements is essential. These elements include unity, association, reciprocation, a commitment to community or social interest, gratuity, justice, and respect for human dignity.
Integrating these ‘solidary company’ elements as values or corporate principles in governance programs can reduce social and economic inequality within the organization, improve efficiency and productivity, and benefit all stakeholders (investors, directors, employees, clients, creditors, and the general public).
In essence, practicing solidarity’s elements reduces inefficacy, enhances productivity, and improves stakeholders’ quality of life, accompanied by an enhanced corporate reputation.
Additionally, a solidary company can contribute to better sustainability levels, a more robust application of the ‘long-term’ concept, and the encouragement of investor activism.
In Latin America, the societal perception of encountering ‘solidary companies’ that willingly share benefits and promote regional development could alter the negative image such companies may have.
Moreover, the elements of solidarity serve as an efficient mechanism for self-regulation in companies through codes of conduct or codes of good corporate governance.
The practice of solidarity, as proposed, does not negate its association with charity but emphasizes its elements while improving a company’s activities through corporate governance.
Solidarity can manifest in two forms: as a duty or as a value present in codes of conduct or corporate governance. In this context, anyone associated with a business must practice solidarity in their daily work, defending the interests of the entire organization.
Solidary action requires a continuous pursuit of economic equality and the defense of the institution’s interests without diminishing individual rights. CEOs and boards of directors have an obligation to ensure their work benefits the common good of the company and its stakeholders.
The application of solidarity underscores the importance of fiduciary duties and fulfilling the ‘comply or explain’ criterion, preventing individual opportunism. Corporate solidarity is the means to establish a sound common practice within the company, ensuring its survival in the market.
Solidarity, Business, And Corporate Governance
Solidarity can significantly enhance the practice of good corporate governance in business.
The primary objective extends beyond defending the interests of individual actors to safeguarding the interests of all stakeholders within the corporation. From this perspective, the interests of each member of the company hold importance for the overall success of the organization.
In alignment with a ‘solidary’ focus, all businesses should foster the active participation of investors in the company and seek the support of other members, including directors, employees, creditors, and consumers.
Their effective participation enhances economic value and generates long-term benefits for all.
The components of solidarity—unity, association, and the common good—play a pivotal role in corporate governance
Their incorporation allows for improving criteria related to the ‘long term,’ ‘value creation,’ and ‘sustainability’ within the company, serving stakeholders’ interests. Creating businesses entails generating economic value for those who work in them or depend on their activities.
The challenge for contemporary corporations is to sustain their economic activities while expanding into new markets, ensuring the continued generation of economic well-being for all stakeholders.
The board of directors assumes the central role of integrating the aspirations of each stakeholder and must govern in favor of fulfilling these varied interests.
Many social corporate responsibility programs in Latin America are perceived as ineffective because the population believes that only multinational companies benefit from exploiting natural resources without significant returns for local communities.
In this context, solidarity emerges as a key player in corporate governance. Implementing and practicing solidarity components in business’ good corporate governance programs can instill confidence in investors, improve relations between shareholders and executives, and enhance worker productivity.
Consequently, transparency, security, and confidence levels among market participants are elevated, contributing to an improved corporate reputation.
Applying the principles of solidarity to corporate governance can be argued to reduce inequality and distrust among principals and agents without relying on government-enforced obligatory regulations.
Businesses that incorporate solidarity into their corporate governance programs integrating them within their corporate social responsibility initiatives, can prevent opportunistic behavior by their managers and generate a positive corporate reputation in society.
A solidary corporate approach means aligning objectives to achieve a common good or social interest for all stakeholders.
Codes of ethical conduct and good corporate governance serve as spaces where solidary precepts can influence internal and external company activities, ensuring confidence and credibility within the sector.
Corporate credibility in Latin America, particularly in the mining and hydrocarbon sectors, is crucial, with concerns raised by citizens about multinational companies regarding the environment, respect for human rights, and the commitment to social governability.
A study by the Spanish consultancy group MERCO highlights that citizen concerns related to businesses include ethical conduct (degree of honesty), transparency levels, good governance, attention to employees, social contribution, and commitment to climate change.
Addressing these concerns can influence stakeholder decisions and impact the company’s survival. Including solidarity criteria can potentially improve social perception among citizens and others in the market.
Also Read: The Calm After The Storm
Solidarity And The Influence Of International Organisations
My book not only proposes the inclusion of solidarity and its hypothesis in the corporate governance of businesses but also emphasizes its influence on international organizations promoting corporate governance implementation in business.
Specifically, international organizations, credit rating agencies, and consulting and auditing firms are discussed. The core idea is that solidarity and its elements can be incorporated into these organizations’ recommendations to their corporate clients and governments.
For instance, the Organisation for Economic Development (OECD) is suggested to include solidarity in its corporate governance recommendations due to its substantial influence on Latin American companies and governments.
In this context, the elements of solidarity can play a pivotal role in the organization’s proposals regarding the advantages enjoyed by companies implementing ethical standards. The proposal of standards or the ethical value of solidarity could serve as a deterrent against illegal conduct or opportunistic behavior among company managers.
Company decisions would need to consider stakeholders’ interests, thereby significantly influencing the implementation of compliance mechanisms necessary to ensure effective corporate governance practices.
Similarly, the United Nations (UN) issues material recommendations on corporate governance to promote international commerce. These proposals encourage companies to enhance transparency levels for improved corporate efficiency and suggest strengthening the role of investors in business governance, hiring independent advisors, and adopting the ‘comply or explain’ criterion.
The addition of solidarity could enhance the efficiency of the United Nations’ recommendations by integrating its elements, such as duties or ethical values, into corporate governance proposals. This integration would ensure the most effective implementation of corporate governance in business.
Taking a different perspective, the European Commission has formulated recommendations on corporate governance practices in the European Union.
These include promoting innovation, forming competitive markets, especially in the financial sector, selecting independent directors, involving shareholders, incorporating diversity in the board of directors, and supervising CEO management.
The most significant recommendation is creating a legal framework for corporate governance practices, including mechanisms for state supervision.
Similar to the OECD, solidarity would involve providing elements that become part of the principles or corporate values businesses use to adhere to the Commission’s recommendations.
“In Latin America, the programmes of social corporate responsibility are ineffective, in many cases, because the populations perceives that only multinational companies obtain the benefits of exploiting their natural resources while they themselves do not receive any significant benefit”
The World Bank offers insightful guidelines on the role of corporate governance in business, aiming to strike a balance between governmental supervision and the exercise of corporate liberty. The Bank recommends that businesses establish a system of ‘checks’ and ‘balances’ to oversee the CEO’s and their team’s management.
In this context, the board of directors is positioned as a preventive and punitive instrument against any opportunistic acts of directors or managers.
From a solidary perspective, integrating its elements would streamline the company’s supervision and internal control processes, compelling the management team to consider the interests of all stakeholders.
Credit rating agencies for businesses can leverage solidary criteria and evaluation mechanisms to assess the company’s state and its financial products.
Solidarity and its elements can be included as criteria in evaluating corporate governance fulfillment, serving as an incentive for an effective fulfillment program dedicated to safeguarding stakeholders’ interests.
Consulting and auditing firms could adopt similar solidary criteria, where corporate governance becomes an essential mechanism to enhance advisory processes for their clients.
Recommendations aligned with the solidarity criterion would improve these companies’ reputations in the market.
In business, solidarity has often been confined to charitable practices within a company’s social corporate responsibility program.
However, this narrow interpretation only emphasizes one element – gratuity – and neglects others such as unity, association, reciprocity, the common good, and justice. These elements collectively provide a more comprehensive criterion for enhancing a company’s operations.
This article argues for the benefits of incorporating solidarity and its principles and values into all aspects of business practices.
It highlights the positive impact on economic productivity and underscores the necessary benefits and values that must be upheld for a business to be considered ‘solidary.’
Applying the concept of solidarity as part of corporate governance policies serves as a viable mechanism for self-regulation within companies, aiming to improve their practices of social corporate responsibility and enhance their corporate reputation.