Corporate governance and sustainability: A modern-day organisational perspective

This blog post will examine corporate governance (CG) and sustainability while attempting to evaluate how these complement each other in the context of Amazon, a modern-day corporation. Firstly, upon outlining the background and drawing on the key pillars of CG, this post critiques how Amazon’s CG practices impact its sustainability as an organisation. Finally, the blog will conclude by drawing general conclusions from the analysis and providing recommendations for Amazon to improve sustainability prospects.

Background

CG is a combination of policies, customs and measures designed to govern and manage organisations (Kavalíř 2005). All decisions and actions of the board of directors, managers and interactions with stakeholders such as employees and auditors fall under CG (Boeva, Zhivkova & Stoychev 2017). Depending on the organisation’s CG structure, the delegation of persons’ responsibilities and rights that provide authority to make decisions for the company differs (Thomsen 2004). However, ensuring the management of these affairs in the expected levels of standard denotes good governance (Weiss 2000).

Despite starting as just an online book retailer, Amazon is now the world’s biggest online retailer (Berg & Knights 2019). Arguably CG structure of Amazon holds the key to its success. Disclosure and accountability of actions, individuality and fair treatment are the critical facets of CG (B Tricker & I Tricker 2015).

Pillars of CG

Maintaining transparency between the management and all stakeholders is one of the crucial facets of CG as it establishes trust (Desoky & Mousa 2012). For instance, frequent updates and coherent financial reports make the shareholders aware of its long-term and short-term plans, inspiring investors to be more confident and support the company prosper (Drew & Kendrick 2005; Stănculescu & Mitrică 2015).

Amazon is a long-term oriented company that did not focus on short-term profits; hence reinvest all its annual earnings on further technological advancements (Kristensen et al. 2017). While the common shareholder would panic if there are no gains, the shareholders of Amazon were in line with its strategy as the company had maintained a strong level of disclosure. Therefore, admittedly transparency is one of the strongholds of Amazon’s CG structure. In contrast, falsifying balance sheets and hiding actual asset values from investors led to Enron Corporation’s downfall (Vinten 2002) [I].

Accountability is another facet that empowers organisations to take responsibility for their actions (Solomon 2020). The board of directors has to evaluate progress, set targets, take control and justify their decisions to stakeholders, creating a sense of obligation to make the right decisions (Solomon 2020).  Instigating internal control and risk management mechanisms such as audit committees ensures that even management actions do not go unnoticed, minimising deviation from organisational aspirations (Brennan & Solomon 2008). Amazon consists of a culture obsessed with customer satisfaction (Denning 2019). Influencing workers to follow the same priorities and set goals accordingly motivates employees (Baboolal-Frank 2021). As a result, Amazon’s workforce is responsible and productive, which leads to sustainability.

The next pillar is treating all stakeholders fairly in proportion to their rights (Tricker 2020). Also, willingness to receive inputs irrespective of the status of the donor results in symbiosis (Van-Buren III 1999). Amazon has come under scrutiny for the ill-treatment of diverse categories of employees (Boewe & Schulten 2017); hence it is an area for improvement within its CG framework.

The last pillar, independence, assures stakeholders that all of the company’s actions are objective, following the company code of conduct and not influenced by any other parties (Tricker 2020). In this regard, Amazon has evidenced clear distinction as management decisions have followed the company’s code, for example, not paying dividends for all shareholders (Gilbert 2013). Consequently, Amazon’s credibility has increased, inspiring more stakeholders to support their long-term vision as their decisions are not biased (Gilbert 2013) [I].

However, these pillars alone do not guarantee corporate sustainability for contemporary organisations (COs) (Kolk 2016). Even if an organisation manages to increase its short-term earnings without proper financial management, ethics and corporate social responsibility (CSR), no company can sustain its growth in the long term (Kolk 2016) [I].

For instance, CSR cannot be just limited to an activity but instead a fundamental aspect that defines how the public regards an organisation. Therefore to become sustainable, COs should be considerate of all their stakeholders, responsible towards the broader society and support the environment (Kolk 2016).

Ethics and sustainability

Acting ethically denotes the course of right action as per the standards that exist in the world (Fisher 2003).  While CG represents the people, decisions and actions; ethical behaviour is to do the proper thing (Fisher 2003). The leading cause of the ‘agency problem’ is when directors act unethically outside the shareholders’ interests or make decisions for their benefit (Noreen 1988), for example, the Enron scandal and Bernie Madoffs’ Ponzi schemes (Rapoport 2009). Prevalence in unethical acts such as corruption, price fixings, and customer misrepresentation in COs tarnishes organisations’ integrity, leading to loss of business (Rapoport 2009). Thus, directors need to ensure organisation acts objectively aligned with the code of ethics.

In the context of Amazon tax avoidance (Fisher 2014), meagre wages below even the national minimum wage and unfair exploitation of workers are strong allegations of unethical practice against them (O’Connor 2013). Amazon’s infamous strategy of reinvesting, where the financials show no profits gain, leaves no requirement to pay income tax. Even if, arguably, Amazon is acting within the law, it does not make tax avoidance ethical. In contrast, paying warehouse workers a salary below the minimum wage is illegal and unethical (O’Connor 2013). Failure to address these areas of concern will result in Amazons productivity levels, credibility and may even lead to the extent of losing its customers. Therefore, in general, COs should make sure all decisions made, and the practices followed are within the ethical standards to minimise the risk and ensure longstanding sustainability.

  CSR and sustainability

According to White (2006), the accomplishment of business targets whilst abiding by ethical standards and respecting people, society, and the natural ecosystem denotes CSR. Even though businesses are for-profit, profit should not be the only aspiration of a company (Cramer 2002). As per the triple bottom line (TBL) concept of sustainability, i.e. people, planet and profit (Mark-Herbert, Rotter & Pakseresht 2010), there is always a responsibility towards society and the environment. Therefore, CSR is not limited to charitable donations; instead, it includes all contributions made towards its stakeholders and surroundings (Meier & Cassar 2018). For example, treating employees better and recognising their interests will encourage them to increase productivity in the long run (Waddock 2003). Stakeholder theory affirms this notion linking strengthened relationships with stakeholders to sustainability (Garvare & Johansson 2010). Amazon has vowed to eradicate its carbon footprint and use only renewable energy consumption in the future (Luscombe 2020). Yet, it has overlooked addressing areas where it can make an immediate improvement, such as fixing its toxic work culture (Mergen & Ozbilgin 2021). Arguably, increasing engagement in CSR will considerably increase Amazons social capital and further strengthen its position. Hence, it is fair to argue that CSR integrates good governance practices and inspires corporate sustainability (Simpson & Taylor 2013).

Financial management and reporting

In pursuit of sustainability, similar to ethics and CSR components, managing the financial aspects and accurate reporting is equally essential (Al-Mamun & Ibrahim 2018; Harris 2005). One such crucial area of finance is to manage the working capital (WC) at an optimum level for which current assets must weigh out the current liabilities (Alnuaimi & Nobanee 2020). Amazon is a leader in this prospect as they use debt financing where the interest is tax-deductible to maintain an operational WC (Merlo & Wamser 2014). Efficient management of inventories and supply chains are also ways used by COs to ensure optimal WC levels. Failure to manage WC at an optimal level reduces the business’s liquidity to cover obligations, i.e. worker salary, risking insolvency even during the slightest emergency (Mandal & Goswami 2010).

Furthermore, the credibility and reliability of the reports develop trust amongst the stakeholders when deciding whether to engage with a specific organisation (Holder-Webb & Sharma 2010). The directors must make sure the financial statements are less complex, shorter in length and avoid window dressing to promote trust (Agarwal 2021). However, if the external auditors are not independent in their inspection, misrepresentation of financials similar to the Toshiba scandal in 2015, where profits were overstated, can happen (Awolowo 2018). 

Arguably, the independence and transparency of auditors correlate with ethical behaviour, which amounts to accountability. Even though Amazon has excelled in this department, it is noteworthy that as much as CG is essential for the success of COs, it alone by itself will not lead to sustainability [I].

Conclusion

Conclusively, the analysis established that, without ethical behaviour, CSR and financial management, CG does not lead to sustainability. In addition to CG practices consisting of accountability, transparency, fairness, and independence, the actions must be ethical, considering all stakeholders’ interests and surroundings to ensure sustainability. Moreover, the management of financials to earn a profit is equally essential. In the context of Amazon, regardless of unparalleled financial management, accountability and transparency, some of the organisational practices led by employees lack ethicality and fairness, not to mention the lack of consideration towards society and the environment. Thus, Amazon’s sustainability prospects are in jeopardy.

Recommendations

The best way for any CO to grow, utilise its strength to gain the maximum advantage while addressing the weak spots and threats. In the context of Amazon, ethics and CSR are their feeblest aspects. Hence, increasing the level of consideration given towards the company’s employees, such as raising the working environment standards, promoting equality and recognition systems (Kenny 2019), can be a good start. Savings from taxes can be utilised to increase employees’ wages and develop facilities (Kenny 2019). Simultaneously, Amazon should adopt a regenerative and distributive framework of functioning as elaborated through ‘doughnut economics’ concepts to promote sustainability (Raworth 2017).

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