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Corporate Management

This book is a part of the course by Jaipur National University, Jaipur.This book contains the course content for Corporate Management.

JNU, JaipurFirst Edition 2013

The content in the book is copyright of JNU. All rights reserved.No part of the content may in any form or by any electronic, mechanical, photocopying, recording, or any other means be reproduced, stored in a retrieval system or be broadcast or transmitted without the prior permission of the publisher.

JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the content whenever the need arises, and to vary it at any time without prior notice.

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Index

ContentI. ...................................................................... II

List of FiguresII. .........................................................VI

List of TablesIII. ........................................................ VII

AbbreviationsIV. .....................................................VIII

Case StudyV. .............................................................. 115

BibliographyVI. ........................................................ 120

Self Assessment AnswersVII. ................................... 123

Book at a Glance

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Contents

Chapter I ....................................................................................................................................................... 1Introduction to Management ...................................................................................................................... 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 Introduction ............................................................................................................................................. 21.2 Definition of Management: Its Nature and Purpose ................................................................................ 21.3 Functions of Management ........................................................................................................................ 21.4 Management as an Essential for Any Organisation ................................................................................. 21.5 Management at Different Organisational Levels ..................................................................................... 21.6 Managerial Skills and the Organisational Hierarchy ............................................................................... 31.7 Aims of Managers .................................................................................................................................... 3 1.7.1 Productivity, Effectiveness and Efficiency .............................................................................. 4 1.7.2 Definition of Productivity ........................................................................................................ 4 1.7.3 Definitions of Effectiveness and Efficiency ............................................................................ 41.8 Managing: Science or Art ........................................................................................................................ 41.9 The Scientific Approach........................................................................................................................... 51.10 Role of Management Theory ................................................................................................................. 51.11 Management Techniques ........................................................................................................................ 51.12 Systems Approach to Operational Management .................................................................................... 61.13 Inputs and Stakeholders ......................................................................................................................... 61.14 Managerial Transformation Process ...................................................................................................... 61.15 The Communication System .................................................................................................................. 71.16 Functions of Managers ........................................................................................................................... 7Summary ....................................................................................................................................................... 9References ..................................................................................................................................................... 9Recommended Reading ............................................................................................................................... 9Self Assessment ........................................................................................................................................... 10

Chapter II ................................................................................................................................................... 12Historical Preview and Evolution of Corporate Ethics .......................................................................... 12Aim .............................................................................................................................................................. 12Objectives .................................................................................................................................................... 12Learning outcome ........................................................................................................................................ 122.1 Introduction ............................................................................................................................................ 132.2 The ‘Ethics in Business’ Sense of Business Ethics ................................................................................ 132.3 Emergence of Societies .......................................................................................................................... 132.4 Business Ethics as a Movement ............................................................................................................. 142.5 Framework for Understanding the Development of Business Ethics .................................................... 14 2.5.1 Early Twentieth Century Interest in Business Ethics ............................................................. 15 2.5.2 Business Ethics: 1960-2008 ................................................................................................... 162.6 The Institutionalisation of Business Ethics ............................................................................................ 172.7 Globalisation of Business Ethics ........................................................................................................... 182.8 Need for Standardisation of Ethical Conduct ........................................................................................ 192.9 Ethical Fallouts ...................................................................................................................................... 19 2.9.1 Nike ........................................................................................................................................ 20 2.9.2 Primark ................................................................................................................................... 20 2.9.3 Realisation from Ethical Fallout ............................................................................................ 21Summary ..................................................................................................................................................... 22References ................................................................................................................................................... 22Recommended Reading ............................................................................................................................. 22Self Assessment ........................................................................................................................................... 23

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Chapter III .................................................................................................................................................. 25Corporate Governance ............................................................................................................................. 25Aim .............................................................................................................................................................. 25Objectives .................................................................................................................................................... 25Learning outcome ........................................................................................................................................ 253.1 Introduction ........................................................................................................................................... 263.2 Corporate Governance Abuses and the General Scene .......................................................................... 273.3 Objectives of Corporate Governance ..................................................................................................... 283.4 Code Convergence in Asia ..................................................................................................................... 283.5 The Cadbury Committee ........................................................................................................................ 283.6 Developments in India ........................................................................................................................... 293.7 Good Governance and Value Addition................................................................................................... 293.8 History of Corporate Governance .......................................................................................................... 303.9 Corporate Governance Rating/Benchmarking ....................................................................................... 313.10 Need for Corporate Governance .......................................................................................................... 323.11 Evidence of Corporate Governance from the Arthashastra ................................................................. 333.12 Elements of Good Corporate Governance ........................................................................................... 34Summary ..................................................................................................................................................... 37References ................................................................................................................................................... 37Recommended Reading ............................................................................................................................. 37Self Assessment ........................................................................................................................................... 38

Chapter IV .................................................................................................................................................. 40Legal Framework of Corporate Governance in India ........................................................................... 40Aim .............................................................................................................................................................. 40Objectives .................................................................................................................................................... 40Learning outcome ........................................................................................................................................ 404.1 Introduction ............................................................................................................................................ 414.2 Board Structure ...................................................................................................................................... 41 4.2.1 Composition ........................................................................................................................... 41 4.2.2 Separation of Roles of Chairman and Chief Executive ......................................................... 42 4.2.3 Board Meetings ...................................................................................................................... 424.3 Disclosure and Transparency in Terms of Companies Act, 1956 .......................................................... 434.4 Disclosures of Listing Agreement .......................................................................................................... 464.5 SEBI Requirements ................................................................................................................................ 504.6 Corporate Governance in Public Sector Undertaking ............................................................................ 504.7 Corporate Governance in Insurance Sector ........................................................................................... 51Summary ..................................................................................................................................................... 52References ................................................................................................................................................... 52Recommended Reading ............................................................................................................................. 52Self Assessment ........................................................................................................................................... 53

Chapter V .................................................................................................................................................... 55Legal Framework of Corporate Governance: An International Perspective ....................................... 55Aim .............................................................................................................................................................. 55Objectives .................................................................................................................................................... 55Learning outcome ........................................................................................................................................ 555.1 Introduction ............................................................................................................................................ 565.2 United States of America ....................................................................................................................... 565.3 Corporate Governance in The United Kingdom .................................................................................... 605.4 Corporate Governance in Australia ........................................................................................................ 63Summary ..................................................................................................................................................... 68References ................................................................................................................................................... 68Recommended Reading ............................................................................................................................. 69Self Assessment ........................................................................................................................................... 70

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Chapter VI .................................................................................................................................................. 72Corporate Governance Forums ................................................................................................................ 72Aim .............................................................................................................................................................. 72Objectives .................................................................................................................................................... 72Learning outcome ........................................................................................................................................ 726.1 Introduction ............................................................................................................................................ 736.2 Institute of Company Secretaries of India ............................................................................................. 736.3 National Foundation for Corporate Governance .................................................................................... 75 6.3.1 Mission of NFCG ................................................................................................................... 75 6.3.2 The Internal Governance Structure of NFCG ........................................................................ 756.4 Organisation for Economic Development and Co-operation ................................................................. 766.5 Global Corporate Governance Forum .................................................................................................... 776.6 The Institute of Directors, UK ............................................................................................................... 796.7 Commonwealth Association of Corporate Governance ......................................................................... 79 6.7.1 CACG Guidelines (Principles for corporate governance in the commonwealth) ................. 806.8 International Corporate Governance Network ....................................................................................... 806.9 The European Corporate Governance Institute ...................................................................................... 806.10 The Asian Corporate Governance Association .................................................................................... 816.11 Corporate Secretaries International Association .................................................................................. 81Summary ..................................................................................................................................................... 83References ................................................................................................................................................... 83Recommended Reading ............................................................................................................................. 84Self Assessment ........................................................................................................................................... 85

Chapter VII ................................................................................................................................................ 87Corporate Sustainability ........................................................................................................................... 87Aim .............................................................................................................................................................. 87Objectives .................................................................................................................................................... 87Learning outcome ........................................................................................................................................ 877.1 Introduction ............................................................................................................................................ 887.2 Concept .................................................................................................................................................. 887.3 Sustainable Development ....................................................................................................................... 88 7.3.1 Role of Business in Sustainable Development ...................................................................... 897.4 What is Corporate Sustainability?.......................................................................................................... 907.5 Kyosei .................................................................................................................................................... 927.6 Triple Bottom Line (TBL) ..................................................................................................................... 947.7 Global and Industry Challenges ............................................................................................................. 95Summary ..................................................................................................................................................... 96References ................................................................................................................................................... 96Recommended Reading ............................................................................................................................. 96Self Assessment ........................................................................................................................................... 97

Chapter VIII ............................................................................................................................................... 99Corporate Social Responsibility ............................................................................................................... 99Aim .............................................................................................................................................................. 99Objectives .................................................................................................................................................... 99Learning outcome ........................................................................................................................................ 998.1 Introduction .......................................................................................................................................... 1008.2 Corporate Social Responsibility - Defined .......................................................................................... 1008.3 Difference between CSR and Philanthropy/Charity ............................................................................ 1028.4 Advantages of Good Corporate Citizenship ........................................................................................ 1028.5 Corporate Citizenship-Beyond the Mandate of Law ........................................................................... 1038.6 Factors Influencing CSR ...................................................................................................................... 1038.7 Corporate Social Responsibility Voluntary Guidelines, 2009 ............................................................. 1048.8 Triple Bottom Line Approach of CSR ................................................................................................. 106

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8.9 Some CSR Reporting Frameworks ...................................................................................................... 1078.10 CSR Assessment .................................................................................................................................110Summary ....................................................................................................................................................111References ..................................................................................................................................................111Recommended Reading ............................................................................................................................112Self Assessment ..........................................................................................................................................113

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List of Figures

Fig. 1.1 Time spent in carrying out managerial functions ............................................................................. 3Fig. 1.2 Input-output model ........................................................................................................................... 6Fig. 1.3 Management model .......................................................................................................................... 7Fig. 3.1 The role of corporate governance ................................................................................................... 33Fig. 3.2 Various stakeholders affected by the governance practices of the company .................................. 34Fig. 7.1 Three key aspects of sustainable development ............................................................................... 94

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List of Tables

Table 2.1 Conceptualisation of the field of marketing ................................................................................. 14Table 2.2 Business ethics timeline ............................................................................................................... 16Table 5.1 Key regulatory requirements of the main types of security ......................................................... 61Table 6.1 Principles of corporate governance .............................................................................................. 76Table 6.2 Forum’s four focus areas .............................................................................................................. 78Table 6.3 Programmes for implementation of its initiatives ........................................................................ 78Table 6.4 Objects of IOD ............................................................................................................................. 79Table 7.1 The corporate philosophy of canon is kyosei ............................................................................... 94Table 8.1 Indicative CSR audit programme ................................................................................................110

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Abbreviations

ABI - Association of British InsurersACGA - Asian Corporate Governance AssociationAPA - American Philosophical AssociationARCG - Asian Roundtable on Corporate GovernanceCACG - Commonwealth Association of Corporate GovernanceCCMC - Central Coordination and Monitoring CommitteeCEPAA - Council on Economic Priority Accreditation AgencyCII - Confederation of Indian IndustriesCISA - CertifiedInformationSystemsAuditorCOSO - Committee of Sponsoring OrganisationsCPM - Critical Path MethodCSIA - Corporate Secretaries International AssociationCSR - Corporate Social ResponsibilityDCA - Department of Company AffairsDII - Defence Industry InitiativeEBEN - European Business Ethics NetworkECGI - European Corporate Governance InstituteESOP - Employees Stock Option SchemeFSA - Financial Services AuthorityICAI - Institute of Chartered Accountants of IndiaICGN - International Corporate Governance NetworkICSA - Institute of Chartered Secretaries and AdministratorsICSI - Institute of Company Secretaries of IndiaIRDA - Insurance Regulatory and Development AuthorityMBO - Managing by ObjectivesMD - Managing DirectorMDGs - Millennium Development GoalsNCCG - National Centre for Corporate GovernanceNFCG - National Foundation for Corporate GovernanceNYSE - New York Stock ExchangeOECD - Organisation for Economic Co-operation and DevelopmentPERT - Programme Evaluation and Review TechniqueSEBI - Securities and Exchange Board of IndiaSEC - Securities and Exchange CommissionSMART - Simple, Moral, Accountable, Responsive and TransparentSOX - Sarbanes Oxley ActFSGO - The Federal Sentencing Guidelines for OrganisationsTBL - Triple Bottom LineTQM - Total Quality ManagementUNCED - United Nations Conference on Environment and Development

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Chapter I

Introduction to Management

Aim

The aim of this chapter is to:

introduce management •

explainthedefinitionofmanagement,itsnatureandpurpose•

explicate the functions of management•

Objectives

The objectives of this chapter are to:

enlist the managerial skills and the organisational hierarchy•

elucidate management at different organisational levels•

explain aims of managers•

Learning outcome

At the end of this chapter, you will be able to:

identify the functions of managers•

understand the communication system•

definethemanagement•


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1.1 Introduction One of the most important human activities is ‘managing’. Ever since people began forming groups to accomplish aims they could not achieve as individuals, managing has been essential to ensure the coordination of individual efforts. As society has come to rely increasingly on group efforts and as many organised groups have grown larger, the task of managers has been rising in importance. The purpose of this book is to promote excellence of all persons in organisations, but especially managers, aspiring managers, and other professionals.

1.2 Definition of Management: Its Nature and PurposeManagement is the process of designing and maintaining an environment in which, individuals working together in groups,accomplishefficientlyselectedaims.Thisbasicdefinitionneedstobeexpandedasfollows:

Asmanagers, people carry out themanagerial functions of planning, organising, staffing, leading and•controlling. Management applies to all kinds of organisations.•It applies to managers at all organisational levels.•The aim of all managers is the same, i.e., to create a surplus.•Managingisconcernedwithproductivitythatimplieseffectivenessandefficiency.•

1.3 Functions of ManagementMany scholars and managers have found that the analysis of management is facilitated by a useful and clear organisationofknowledge.Asafirstorderofknowledgeclassification,wehaveusedthefivefunctionsofmanagers,planning,organising,staffing,leading,andcontrolling.Thus,theconcepts,principles,theory,andtechniquesareorganised around these functions and become the basis for discussion.

This framework has been used and tested for many years. Although there are different ways of organising managerial knowledge, most textbook authors today have adopted this or a similar framework even after experimenting at times with alternative ways of structuring knowledge.

Although the emphasis here is on the managers’ tasks in designing an internal environment for performance, it must never be overlooked that managers must operate in the external environment of an enterprise as well as in the internal environment of an organisation’s various departments. Clearly, managers cannot perform their tasks well unless they understand, and are responsive to the many elements of the external environment, economic, technological, social, political and ethical factors that affect their areas of operations.

1.4 Management as an Essential for Any OrganisationManagers are charged with the responsibility of taking actions that will make it possible for individuals to make theirbestcontributionstogroupobjectives.Managementthusappliestosmallandlargeorganisations,toprofitandnot-for-profitenterprises,tomanufacturingaswellasserviceindustries.Theterm‘enterprise’referstobusiness,government agencies, hospitals, universities and other organisations, because almost everything said in this book refers to business as well as non-business organisations. Effective managing is the concern of the corporation president,thehospitaladministrator,thegovernmentfirst-linesupervisor,theBoyScoutleader,thebishopinthechurch, the baseball manager, and the university president.

1.5 Management at Different Organisational LevelsManagers are charged with the responsibility of taking actions that will make it possible for individuals to make their best contributions to group objectives to be sure, a given situation may differ considerably among various levels in an organisation or various types of enterprises. Similarly, the scope of authority held may vary and the types of problems dealt with may be considerably different. Furthermore, the person in a managerial role may be directingpeopleinthesales,engineeringorfinancedepartment.However,thefactremainsthat,asmanagers,allobtain results by establishing an environment for effective group endeavour.

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All managers carry out managerial functions. However, the time spent for each function may differ. Figure below shows an approximation of the relative time spent for each function. Thus, top-level managers spend more time on planningandorganisingthanlower-levelmanagers.Leadingtakesagreatdealoftimeforfirst-linesupervisors.The difference in time spent on controlling varies only slightly for managers at various levels

Top Leval

ManagersMiddle Leval

Managers

First Leval

Supervisors

Plan

ning

Organizational Hierarchy 0 % 100 %Precent Effort

Org

aniz

ing

Lead

ing

Con

trolin

g

Fig. 1.1 Time spent in carrying out managerial functions(Source:http://www.jamk.fi/instancedata/prime_product_intranet/jamk/embeds/wwwstructure/35950_Reading_

material_1.pdf)

1.6 Managerial Skills and the Organisational HierarchyRobertL.Katzidentifiedthreekindsofskillsforadministrators.Tothesemaybeaddedafourth,theabilitytodesignsolutions. The managerial skills can be enumerated as follows:

Technicalskillistheknowledgeofandproficiencyinactivitiesinvolvingmethods,processes,andprocedures.•Thus,itinvolvesworkingwithtoolsandspecifictechniques.Forexample,mechanicsworkwithtools,andtheirsupervisorsshouldhavetheabilitytoteachthemhowtousethesetools.Similarly,accountantsapplyspecifictechniques in doing their jobs.Human skill is the ability to work with people; it is the cooperative effort; it is the teamwork; it is the creation •of an environment in which people feel secure and free to express their opinions.Conceptualskillistheabilitytoseethe‘bigpicture’,torecognisesignificantelementsinasituation,andto•understand the relationships among the elements. Designskillistheabilitytosolveproblemsinwaysthatwillbenefittheenterprise.Tobeeffective,particularly•at upper organisational levels, managers must be able to do more than see a problem. If managers merely see the problem and become ‘problem watchers’, they will fail. They must have, in addition, the skill of a good design engineer in working out practical solutions to various problems.The relative importance of these skills may differ at various levels in the organisation hierarchy. Technical skills are of greatest importance at the supervisory level. Human skills are also helpful in the frequent interactions with subordinates. Conceptual skills, on the other hand, are usually not critical for lower-level supervisors. At the middle management level, the need for technical skills decreases; human skills are still essential; and the conceptual skills gain in importance. At the top management level, conceptual and design abilities and human skills are especially valuable, but there is relatively little need for technical abilities. It is assumed, especially in largecompanies,thatchiefexecutivescanutilisethetechnicalabilitiesoftheirsubordinates.Insmallerfirms,however, technical experience may still be quite important.

1.7 Aims of ManagersNon-businessexecutivessometimessaythattheaimofbusinessmanagersistomakeprofits.Profitisameasureof surplus of sales dollars (or in any other currency) over expense dollars. In a very real sense, in all kinds of organisations, whether commercial and noncommercial, the logical and publicly desirable aim of all managers should be a surplus, managers must establish an environment in which people can accomplish group goals with the least amount of time, money, materials, and personal dissatisfaction, or where they can achieve as much as possible of a


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desired goal with available resources. In a non-business enterprise, such as a police department as well as in units ofabusiness(suchasanaccountingdepartment)thatarenotresponsiblefortotalbusinessprofits,managersstillhave budgetary and organisational goals and should strive to accomplish them with the minimum of resources.

1.7.1 Productivity, Effectiveness and EfficiencyAnother way to view the aim of all managers is to say that they must be productive. After World War II, the United States was the world leader in productivity. In the late 1960s, productivity began to decelerate. Today, government, private industry, and universities recognise the urgent need for productivity improvement. Until very recently, the worldfrequentlylookedtoJapantofindanswerstotheproductivityproblems,butthisoverlookstheimportanceof effectively performing fundamental managerial and non-managerial activities.

1.7.2 Definition of ProductivitySuccessful companies create a surplus through productive operations. Although there is not complete agreement on thetruemeaningofproductivity,wewilldefineitastheoutput-inputratiowithinatimeperiodwithdueconsiderationfor quality. It can be expressed as follows:

Productivity =

Thus, productivity can be improved by increasing outputs with the same inputs, by decreasing inputs, but maintaining the same outputs, or by increasing output and decreasing inputs to change the ratio favourably. In the past, productivity improvementprogrammesweremostlyaimedatworker-levels.Yet,asPeterF.Drucker,oneofthemostprolificwriters in management, observed, “The greatest opportunity for increasing productivity is surely to be found in knowledge, work itself, and especially in management.”

1.7.3 Definitions of Effectiveness and EfficiencyProductivityimplieseffectivenessandefficiencyinindividualandorganisationalperformance.Effectivenessistheachievementofobjectives.Efficiencyistheachievementoftheendswiththeleastamountofresources.Toknowwhether they are productive, managers must know their goals and those of the organisation.

1.8 Managing: Science or ArtManaging, like so many other disciplines, medicine, music composition, engineering, accountancy, or even baseball is in large measure an art, but founded on a wealth of science. It is making decisions on the basis of business realities. Yet, managers can work better by applying the organised knowledge about management that has accrued over decades. It is this knowledge, whether crude or advanced, whether exact or inexact, that, to the extent it is well organised, clear, and pertinent, constitutes a science. Thus, managing as practised is an art; the organised knowledge underlying the practice may be referred to as a science. In this context, science and art are not mutually exclusive but are complementary.

As science improves, so should the application of this science (the art) as has happened in the physical and biological sciences. This is true because the many variables with which managers deal are extremely complex and intangible. However, such management knowledge as is available can certainly improve managerial practice. Physicians without the advantage of science would be little more than witch doctors. Executives who attempt to manage without such management science must trust luck, intuition, or past experiences.

Inmanaging,as inanyotherfield,unlesspractitionersare to learnbytrialanderror(andithasbeensaid thatmanagers’ errors are their subordinates’ trials), there is no place they can turn for meaningful guidance other than the accumulated knowledge underlying their practice.

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1.9 The Scientific ApproachThescientificapproachfirst requiresclearconcepts,mental imagesofanythingformedbygeneralisationfromparticulars. These words and terms should be exact, relevant to the things being analysed, and informative to the scientistandpractitioneralike.Fromthisbase,thescientificmethodinvolvesdeterminingfactsthroughobservation.After classifying and analysing these facts, scientists look for causal relationships. When these generalisations or hypotheses are tested for accuracy and appear to be true, and therefore have value in predicting what will happen in similar circumstances. They are called principles. This designation does not always imply that they are unquestionably or invariably true, but that they are believed to be valid enough to be used for prediction.

Theoryisasystematicgroupingofinterdependentconceptsandprinciplesthatformaframeworkforasignificantbodyofknowledge.Scattereddata,suchaswhatwemayfindonablackboardafteragroupofengineershasbeendiscussing a problem, is not information unless the observer has knowledge of the theory that will explain relationships. Theoryis,asC.G.Homanssaid,“initslowestformaclassification,asetofpigeonholes,afilingcabinetinwhichfact can accumulate. Nothing is more lost than a loose fact.”

1.10 Role of Management TheoryIn thefield ofmanagement, the role of theory is to provide ameans of classifying significant and pertinentmanagement knowledge. In designing an effective organisation structure, a number of principles are interrelated and have a predictive value for managers. Some principles give guidelines for delegating authority; these include the principle of delegating by results expected, the principle of equality of authority and responsibility, and the principle of unity of command. Principles in management are fundamental truths (or what are thought to be truths at a given time), explaining relationships between two or more sets of variables, usually an independent variable and a dependent variable. Principles may be descriptive or predictive, and are not prescriptive. That is, they describe how one variable relates to another and what will happen when these variables interact. They do not prescribe what we should do. For example, in physics, if gravity is the only force acting on a falling body, the body will fall at an increasing speed; this principle does not tell us whether anyone should jump off the roof of a high building. Or take theexampleofParkinson’sLaw:Worktendstoexpandtofillthetimeavailable.EvenifParkinson’ssomewhatfrivolous principle is correct (as it probably is), it does not mean that a manager should lengthen the time available for people to do a job.

To take another example, in management, the principle of unity of command states that more often an individual reports to a single superior, the more is that individual likely to feel a sense of loyalty and obligation, and less likely will there be confusions about instructions. The principle merely predicts and in no sense implies that individuals should never report to more than one person. Rather, it implies that if they do so, their managers must be aware of the possible dangers and should take these risks into account in balancing the advantages and disadvantages of multiple commands.

Like engineers who apply physical principles to the design of an instrument, managers who apply various theories to managing must usually blend principles with realities. A design engineer is often faced with the necessity of combiningconsiderationsofweight,size,conductivity,andotherfactors.Likewise,amanagermayfindthattheadvantages of giving a controller authority to prescribe accounting procedures throughout an organisation outweigh the possible costs of multiple authorities. But if they know theory, these managers will know that such costs as conflictinginstructionsandconfusionmayexist,andtheywilltakesteps,suchasmakingthecontroller’sspecialauthority crystal clear to everyone involved to minimise or outweigh any disadvantages.

1.11 Management TechniquesTechniquesareessentiallywaysofdoingthings,methodsofaccomplishingagivenresult.Inallfieldsofpractice,they are important. They certainly are in managing, even though few really important managerial techniques have been invented. Among them are control techniques like the Program Evaluation and Review Technique (PERT) or the Critical Path Method (CPM), rate-of-return-on-investment control, various devices of organisational development, ManagingbyObjectives(MBO),andTotalQualityManagement(TQM).Techniquesnormallyreflectthetheoriesand are a means of helping managers undertake activities most effectively.


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1.12 Systems Approach to Operational ManagementAn organised enterprise does not, of course, exist in a vacuum. Rather, it depends on its external environment; it is a part of larger systems, such as the industry to which it belongs, the economic system, and society. Thus, the enterprise receives inputs, transforms them, and exports the outputs to the environment, as shown by the very basic model in Fig.1.3. However, this simple model needs to be expanded and developed into a model of operational management thatindicateshowvariousinputsaretransformedthroughthemanagerialfunctionsofplanning,organising,staffing,leading and controlling. Clearly, any business or other organisation must be described by an open-system model that includes interactions between the enterprise and its external environment.

1.13 Inputs and StakeholdersThe inputs from the external environment may include people, capital, and managerial skills, as well as technical knowledge and skills. In addition, various groups of people make demands on the enterprise. For example, employees wanthigherpay,morebenefits,andjobsecurity.Ontheotherhand,consumersdemandsafeandreliableproductsata reasonable price. Suppliers want assurance that their products will be bought. Stockholders want not only a high return on their investment, but also security for their money.

Federal, state, and local governments depend on taxes paid by the enterprise, but they also expect the enterprise to comply with their laws. Similarly, the community demands that enterprises be ‘good citizens’, providing the maximumnumberofjobswithminimumpollution.Otherclaimantstotheenterprisemayincludefinancialinstitutionsand labour unions; even competitors have a legitimate claim for fair play. It is clear that many of these claims are incongruent, and it is the managers’ job to integrate the legitimate objectives of the claimants.

Re-energizing theSystem

Inputs TransformationProcess

ExternalEnvironment

Output

Fig. 1.2 Input-output model(Source:http://www.jamk.fi/instancedata/prime_product_intranet/jamk/embeds/wwwstructure/35950_Reading_

material_1.pdf.)

1.14 Managerial Transformation ProcessManagershavethetaskoftransforminginputs,effectivelyandefficiently,intooutputs.Ofcourse,thetransformationprocesscanbeviewedfromdifferentperspectives.Thus,onecanfocusonsuchdiverseenterprisefunctionsasfinance,production, personnel and marketing. Writers on management look on the transformation process in terms of their particularapproachestomanagement.Specifically,asyouwillsee,writersbelongingtothehumanbehaviourschoolfocus on interpersonal relationships; social systems theorists analyse the transformation by concentrating on social interactions; and those advocating decision theory see the transformation as sets of decisions. However, we believe that the most comprehensive and useful approach for discussing the job of managers is to use the managerial functions ofplanning,organising,staffing,leadingandcontrollingasaframeworkfororganisingmanagerialknowledge.

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Management

Planing

Organizing Leading

Staffing Controlling

Fig. 1.3 Management model(Source:http://www.jamk.fi/instancedata/prime_product_intranet/jamk/embeds/wwwstructure/35950_Reading_

material_1.pdf.)

1.15 The Communication SystemCommunication is essential to all phases of the managerial process: It integrates the managerial functions and links the enterprise with its environment. A communication system is a set of information-providers and information-recipients and the means of transferring information from one group to another group with the understanding that the messages being transmitted will be understood by both groups. For example, the objectives set in planning are communicated, so that the appropriate organisation structure can be devised. Communication is essential in theselection,appraisal,andtrainingofmanagerstofilltherolesinthisstructure.Similarly,effectiveleadershipand the creation of an environment conducive to motivation depend on communication. Moreover, it is through communication that one determines whether events and performance conform to plans. Thus, it is communication that makes managing possible.

The second function of the communication system is to link the enterprise with its external environment. Effective managers will regularly scan the external environment. While it is true that managers may have little or no power to change the external environment, they have no alternative but to respond to it. For example, one should never forget that the customer, who is the reason for the existence of virtually all businesses, is outside the company. It isthroughthecommunicationsystemthattheneedsofcustomersareidentified;thisknowledgeenablesthefirmtoprovideproductsandservicesataprofit.Similarly,itisthroughaneffectivecommunicationsystemthattheorganisation becomes aware of the competition, other potential threats and constraining factors.

1.16 Functions of ManagersManagerial functions provide a useful framework for organising management knowledge. There have been no new ideas,researchfindings,ortechniquesthatcannotreadilybeplacedintheclassificationsofplanning,organising,staffing,leadingandcontrolling.

Planning Planning involves selecting missions, objectives and the actions to achieve them. It requires decision-making, i.e., choosing future courses of action from among the alternatives. There are various types of plans, ranging from overall purposes and objectives to the most detailed actions to be taken, such as to order a special stainless steel bolt for an instrument or to hire and train workers for an assembly line. No real plan exists until a decision, a commitment of human or material resources or reputation has been made. Before a decision is made, all we have is a planning study, an analysis, or a proposal, but not a real plan.


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OrganisingPeopleworkingtogetheringroupstoachievesomegoalmusthaverolestoplay,muchlikethepartsactorsfillinadrama,whethertheserolesaretheonestheydevelopthemselves,areaccidentalorhaphazard,oraredefinedandstructuredbysomeonewhowantstomakesurethatpeoplecontributeinaspecificwaytogroupefforts.Theconceptofa‘role’impliesthatwhatpeopledohasadefinitepurposeorobjective;theyknowhowtheirjob-objectivefitsintogroup effort, and they have the necessary authority, tools, and information to accomplish the task. Organising is that partofmanagingthatinvolvesestablishinganintentionalstructureofrolesforpeopletofillinanorganisation.Itisintentional in the sense of making sure that all the tasks necessary to accomplish goals are assigned to people who can do them the best. Imagine what would have happened if such assignments had not been made in the programme offlyingthespecialaircraftVoyageraroundtheglobewithoutstoppingorrefueling.Thepurposeofanorganisationstructure is to help in creating an environment for human performance. It is a management tool and not an in itself. Althoughthestructuremustdefinethetaskstobedone,therolessoestablishedmustalsobedesignedinthelightof the workers’ abilities and motivation.

StaffingStaffinginvolvesfilling,andkeepingfilled,thepositionsintheorganisationstructure.Thisisdonebyidentifyingtheworkforce requirements, inventorying the people available, recruiting, selecting, placing, promoting, and planning the career, compensating, and training or otherwise developing both candidates and current job holders to accomplish theirtaskseffectivelyandefficiently.

LeadingLeadingisinfluencingpeople,sothattheywillcontributetotheorganisationandgroupgoals.Ithastodopredominantlywith the interpersonal aspect of managing. All managers would agree that their most important problems arise from people, their desires and attitudes, their behaviour as individuals and in groups and that, effective managers also need to be effective leaders. As leadership implies followership and people tend to follow those who offer a means of satisfying their own needs, wishes and desires, it is understandable that leading involves motivation, leadership styles and approaches and communication.

ControllingControlling is the measuring and correcting of activities of subordinates, to ensure that the events conform to plans. It measures performance against goals and plans, shows where negative deviations exist, and, by adopting appropriate measures to correct deviations, ensures the accomplishment of plans. Although planning must precede controlling, plansarenotself-achieving.Theplanguidesmanagersintheuseofresourcestoaccomplishspecificgoals.Theactivities are then checked to determine whether they conform to plans.

Controlling activities generally relate to the measurement of achievement. Some means of controlling, like the budget for expense, inspection records and the record of labour hours lost are generally familiar. Each measures and shows whether the plans are working out. If deviations persist, correction is indicated. Nothing can be done about reducing scrap,buyingaccordingtospecifications,orhandlingsalesreturnsunlessoneknowswhoisresponsibleforthesefunctions. Compelling events to conform to plans would mean locating the persons who are responsible for results that differ from the planned action, and then taking necessary steps to improve performance. Thus, controlling what people do controls outcomes.

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SummaryOne of the most important human activities is ‘managing’.•Management is the process of designing and maintaining an environment in which, individuals working together •ingroups,accomplishefficientlyselectedaims.Many scholars and managers have found that the analysis of management is facilitated by a useful and clear •organisation of knowledge.Managers are charged with the responsibility of taking actions that will make it possible for individuals to make •their best contributions to group objectives.All managers carry out managerial functions.•RobertL.Katzidentifiedthreekindsofskillsforadministrators.•Technical skills are of greatest importance at the supervisory level.•At the top management level, conceptual and design abilities and human skills are especially valuable, but there •is relatively little need for technical abilities.Non-businessexecutivessometimessaythattheaimofbusinessmanagersistomakeprofits.•Successful companies create a surplus through productive operations.•Principles may be descriptive or predictive, and are not prescriptive.•Techniques are essentially ways of doing things, methods of accomplishing a given result.•Managershavethetaskoftransforminginputs,effectivelyandefficiently,intooutputs.•Communication is essential to all phases of the managerial process.•Effective managers will regularly scan the external environment.•

ReferencesThe Global History of Corporate Governance. • [Pdf] Available at: <http://www.nber.org/chapters/c10267.pdf> [Accessed 22 November 2013].Corporate Governance and Leadership. • [Pdf] Available at: <http://councilonbusinessandsociety.com/images/uploads/Corporate_Governance_and_Leadership_White_Paper.pdf>[Accessed22November2013].Monks, R. A. G. and Minow, N., 2012. • Corporate Governance. John Wiley & Sons.Whittaker, D . H . and Deakin, S., 2009. • Corporate Governance and Managerial Reform in Japan. Oxford University Press.IFC Global Corporate Governance Forum’s series: “Beyond the Boardroom”. • [Video online] Available at: <http://www.youtube.com/watch?v=_o_GSaaUWUY>[Accessed22November2013].Ms. Beth Payne (US Consul General, Kolkata). • [Video online] Available at: <http://www.youtube.com/watch?v=vs31ZmZkBZg&list=PLE1D2A8E0B2BE079D> [Accessed 22 November 2013].

Recommended ReadingBernhard, G., Luttermann, C., Saenger, I., Sandrock, O and Casper, M., 2012. • German Corporate Governance in International and European Context. Springer.Mallin, C . A., 2011. • Handbook on International Corporate Governance: Country Analyses. Edward Elgar Publishing, U.K.Rasheed, A . and Yoshikawa, T., 2012. • The Convergence of Corporate Governance: Promise and Prospects. Palgrave Macmillan.


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Self AssessmentWhat is the process of designing and maintaining an environment in which, individuals working together in 1. groups,accomplishefficientlyselectedaims?

Human resourcesa. Managementb. Socialisingc. Planningd.

Whatarethefivefunctionsofmanagers?2. Planning,organising,staffing,secondary,andcontrolling.a. Planning,logistic,staffing,leading,andcontrolling.b. Planning,branding,staffing,leading,andcontrolling.c. Planning,organising,staffing,leading,andcontrollingd. .

__________managerscarryoutmanagerialfunctions.3. Somea. Allb. Noc. Twod.

Match the following4. 1. Technical skill A. The ability to work with people

2. Human skill B.Is the knowledgeof andproficiency in activities involvingmethods,processes and procedures.

3. Conceptual skill C.Theabilitytosolveproblemsinwaysthatwillbenefittheenterprise.

4. Design skill D. The ability to see the big picture

1-C, 2-D, 3-A, 4-Ba. 1-A, 2-B, 3-C, 4-Db. 1-B, 2-A, 3-D, 4-Cc. 1-D, 2-C, 3-B, 4-Ad.

____________isameasureofsurplusofsalesdollars(orinanyothercurrency)overexpensedollars.5. Managementa. Profitb. Efficientmanagementc. Incomed.

___________companiescreateasurplusthroughproductiveoperations.6. Successfula. Managementb. ITc. Existingd.

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Which of the following statement is false?7. Management applies to all kinds of organisations.a. The aim of all managers is the same, i.e., to create a surplus.b. Managingisconcernedwithproductivitythatimplieseffectivenessandefficiency.c. Technical skills are of least importance at the supervisory level.d.

Which of the following statement is true?8. Principles may not be expressive or predictive, and are not prescriptive.a. Principles may be descriptive or predictive, and are not prescriptive.b. Management is descriptive or predictive, and is not prescriptive.c. Fundamentals may be vivid or predictive, and are not prescriptive.d.

Whatisessentialintheselection,appraisal,andtrainingofmanagerstofilltherolesinthisstructure?9. Communicationa. Planningb. Managingc. Staffingd.

What involves selecting missions, objectives and the actions to achieve them?10. Organisinga. Planningb. Staffingc. Leadingd.


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Chapter II

Historical Preview and Evolution of Corporate Ethics

Aim


introduce corporate or business ethics•

explain ‘ethics in business’•

explicate emergence of societies•

Objectives


explain business ethics as a movement•

elucidate framework for understanding the development of business ethics•

explicate the institutionalisation of business ethics•

Learning outcome


identify ethical fallouts-Nike and Primark•

understand the need for standardisation of ethical conduct•

describe globalisation of business ethics•

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2.1 Introduction‘Corporate or Business Ethics’ can be used in different ways. Primarily the ‘term’ refers to the recent developments and to the period, approximately in early 1970s, when the term ‘business ethics’ came into common use in the United States. As the term became more popular in the media and public discourse, it often became equated with either business scandals or more broadly with what can be called ‘ethics in business’. In this broader sense, the history of business ethics goes back to the origin of business, meaning commercial exchanges and economic systems. The third stand corresponds to a third sense of business ethics which refers to a movement within business or the movementtoexplicitlybuildethicsintothestructuresofcorporationsintheformofethicscodes,ethicsofficers,ethics committees and ethics training. The term, moreover, has been adopted world-wide, and its meaning in Europe, for instance, is somewhat different from its meaning in the United States.

2.2 The ‘Ethics in Business’ Sense of Business EthicsIn a broad sense, ‘ethics in business’ is simply the application of everyday moral or ethical norms to business. In general, in the United States this focuses on the moral or ethical actions of individuals. It is in this sense that many people, while discussing business ethics, immediately raise examples of immoral or unethical activities by individuals. Included with this notion, however, is also the criticism of multinational corporations that use child labour or pay pitifully low wages to employees in less-developed countries or who utilise suppliers that run sweat shops. Many businesspersonsarestronglyinfluencedbytheirreligiousbeliefsandtheethicalnormsthattheyhavebeentaughtas part of their religion, and apply these norms in their business activities.

‘The need for ethics in business, how people interpreted?’ this strand of the story is perhaps the most prominent one in the thinking of ordinary persons when they hear the term business ethics. The media carries stories about Enron officialsactingunethicallyandabouttheunethicalactivitiesofArthurAndersenorWorldCom,andsoon,andthegeneral public takes this as representative of business ethics or the need for it.

2.3 Emergence of SocietiesThedevelopmentofthefieldwasnotrestrictedtotextbooksandcourses.Whatdifferentiatesearliersporadicandisolated writings and conferences on ethics in business from the development of business ethics after the mid 70s is that, only in the latter period did business ethics become institutionalised at many levels. By mid 80s, there were at least 100 courses in business ethics taught across the country to 40,000 students. Not only were there at least twenty textbooks in the area and at least ten casebooks, but there were also societies, centres and journals of business ethics.

TheSocietyforBusinessEthicswasstartedin1980.ThefirstmeetingoftheSocietyforBusinessEthicswasheldin conjunction with the meeting of the American Philosophical Association (APA) in December in Boston. Other business related associations and organisations gave increasing attention to business ethics, including the Social Issues in Management Division of the Academy of Management, which was established in 1976. The association, such as the International Association for Business and Society also emerged. With the American development, EuropeansorganisedtheEuropeanBusinessEthicsNetwork(EBEN),whichhelditsfirstmeetingin1987.Inlightof this development, the fraternity of European country separately developed their own ethics network or business ethics society. In general, the European approach to business ethics has placed more emphasis on economic and social structures, and less emphasis on the activities of corporations, than the US approach. Both approaches were captured in the International Society for Business, Economics and Ethics, which was founded in 1989. That society in turn helped national groups throughout the world to develop local or regional societies of business ethics, so that now there are societies in a large number in both developed and less-developed countries.

By1990,businessethicswaswellestablishedasanacademicfield.Althoughtheacademiciansfromthestarthadsought to develop contacts with the business community, the history of the development of business ethics as a movement in business, though related to the academic developments, can be seen to have a history of its own.


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2.4. Business Ethics as a MovementBusiness ethics as a movement refers to the development of structures internal to the corporation that helps it and its employees act ethically, as opposed to structures that provide incentives to act unethically. The said structures may include clear cut lines of responsibility, a corporate ethics code, an ethics training programme, an ombudsman oracorporateethicsofficer,ahotorhelpline,ameansoftransmittingvalueswithinthefirmandmaintainingacertain corporate culture and so on. Some companies have always been ethical and have structured themselves and their culture to reinforce ethical behaviour. Johnson & Johnson’s well-known Credo was written and published by General Robert Wood Johnson in 1943. Most companies in the 1960s had paid little attention to developing such structures. That slowly began to change, and the change became a movement, when more and more companies started responding to growing public pressure, media scrutiny, their own corporate consciences, and, perhaps most importantly, to legislation. One can see that big business responded to criticism in the 1960s by turning to corporate social responsibility, and the movement can be traced back to that period.

TheUSCivilRightsActof1964wasthefirstpieceoflegislationtohelpjump-startthebusinessethicsmovement.The Act prohibited discrimination on the basis of race, colour, religion or national origin in public establishments connected to interstate commerce, as well as places of public accommodation and entertainment. Many corporations addedequalopportunityofficestotheirhumanresourcesdepartmentstoensurecompliance,andingeneraltheconsciousness of business about discrimination, equal opportunity, and equal pay for equal work came to the fore. This in turn led to more consciousness of workers’ rights in general, and corporate America’s need to respect them. The US Occupational Safety and Health Act of 1970 enforced the mandate to take those aspects of workers’ rights seriously.

In the same year, the Environmental Protection Act forced business to start internalising the costs of what had previouslybeenconsideredexternalities,suchasthedischargeoftoxiceffluentsfromfactorysmokestacks.In1977,followingaseriesofscandalsinvolvingbriberybyUSfirmsabroadincludingtheLockheed$12millionbriberycasethat led to the fall of the Japanese government at the time, the US government passed the Foreign Corrupt Practices Act.TheActwashistoricbecauseitwasthefirstpieceoflegislationthatattemptedtocontroltheactionsofUScorporations in foreign countries. The Act prohibited US companies from paying large sums of money (or their equivalent)tohigh-levelgovernmentofficialsofothercountriestoobtainspecialtreatment.Anumberofcompaniesprior to the Act had already adopted the policy of refusing to pay bribes as a matter of ethical principle. IBM, among others, was known for adherence to this policy, as was Motorola. The Act forced all companies to live up to the already existing ethical norms. Its critics complained, however, that it put U. S. companies at a disadvantage vis-à-vis companies from other countries that were permitted to pay bribes. The US government applied what pressure itcouldtoencourageothercountriestofollowitslead,andfinallytwentyyearslatertheOECDcountriesagreedto adopt similar legislation.

2.5. Framework for Understanding the Development of Business EthicsBusiness ethics can be approached from different perspectives. Business ethics can be approached from a normative (what should occur) or a descriptive perspective (what does occur). Business ethics has macro or societal dimensions aswellasmicroorfirm-levelconsiderationsandmanagerialdimensions.Thecontextoftable2.1issimilartoaconceptualisationofthefieldofmarketingbyHuntin1991.

Micro Macro

Normative Values/norms and principlesfor organisational decisions

Norms and principles and a fair economic system, i.e., distributive justice

DescriptiveCodes, standards of conduct,and compliance systems forOrganisations

Public policy and the legalisation of business ethics, i.e., U.S. Sarbannes Oxley Act, EU privacy laws

Table 2.1 Conceptualisation of the field of marketing

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The scope of ethics is so broad that it affects almost every decision made during social interactions. Table 1.1 is an attempttonarrowandfocusourobservationstotypologiesfromanorganisationalperspective.Somedefinitionsand discussion of this framework are necessary to properly interpret and provide a foundation for the understanding of the historical advancements of business ethics.

Normative decisions in an organisational culture relate to what can be, that is, what a business organisation ought to consider in evaluating and improving their ethical conduct. Normative decisions are based on deontological and teleological norms. Deontological norms involve hyper norms and local norms described by Donaldson and Dunfee as integrative social contracts. In deontological evaluation, the decision-maker evaluates the inherent rightness or wrongness of the behaviour implied by each alternative (Hunt and Vitell, 2006). Deontology assumes there is an absolutefixednorm,orexpectedbehaviour,toresolveanethicalissue.Thedecisioniscomparedtopredeterminednorms that could relate to honesty, fairness, and trust or other norms of behaviour.

Teleological decisions are based on the following four elements:Perceived consequences at each decision for stakeholder groups•Probability that the consequence will occur to each stakeholder group•Desirability of each consequence•Importance of each stakeholder group (Hunt and Vitell, 2006).•

Teleology is often called consequentialism because individuals using teleology base their decisions on philosophies, such as egoism and utilitarianism. Utilitarians believe that they should make decisions that result in achieving the greatestbenefitforallthoseaffectedbyadecision.Therefore,teleologicaldecisionsarebasedonflexibledecisionsbasedontheconsequencesorthebenefittohistory.Descriptiveorpositiveperspectivesattempttodescribe,explain,predict, and understand business ethics activities and phenomena that actually exist (Hunt, 1991). In other words, a descriptive approach to business ethics examines what actually exists, not what organisations ought to do. In anorganisation,adescriptiveperspectivewouldexaminepoliciesonconflictsofinterest,strategies,compliancesystems, and various artifacts of ethical standards in the organisation.

In table 2.1, micro is referred to as the business ethics conduct of individual units (organisations, business persons, or individuals, such as an entrepreneur). Macro refers to the impact of business decisions on the various stakeholders in society. For example, decisions made by an organisation about the nutrition of food advertised and sold to children could affect the obesity rates and therefore the health and wellbeing of this important vulnerable group of consumers. The impact of the aggregation of organisations or the complete system of micro-decisions on stakeholders creates macro business ethics issues often addressed in the public policy and the formal institutionalisation of business ethics through government.

2.5.1 Early Twentieth Century Interest in Business EthicsMost contemporary timelines, such as the Ethics Resource Centre Timeline (Table 1.2) traces the history of business ethics issues since 1960. Although we will attempt to trace the history since 1960, it is appropriate to start by tracing theoriginsofbusinessethicsthoughtoverthepast100years.ThefirstmanagerialtextbookonbusinessethicswasBusiness Ethics by Frank Chapman Sharp and Phillip D. Fox (1937). The preface starts off with the statement “this book deals with the right and wrong of the transactions that take place in the competitive business world.” Based onourresearch,thiswasthefirsttextbookbasedonorganisationalethicaldecision-makingfromamicroandmacrodescriptive perspective, in the world not just in the United States. The chapters in this book provide evidence that many of the topics of concern today were also of interest nearly 70 years ago.


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1960s 1970s 1980s 1990s 2000+

Environmental issues

Employee militancy (us vs. them)

Bribery and illegal contracting practices

Unsafe work practices in third world countries

Emerging technology issues: cyber crime and privacy

Employer/employee tensions

Human rights issues (forced labour, low wages and work environment)

Deceptive advertising

Increased corporate liability for personal damage

Intellectual property theft

Civil rights and race relation issues

Firms start practice of covering up and not confronting issues

Financial fraud (savings and loan scandals)

Financial mismanagement and fraud

International corruption

Changing work ethics

Federal Corrupt Practices Act (1977)

Transparency issues arise

Federal sentencing guidelines for Org (1991)

Sarbanes Oxley Act (2002)

Drug use escalated Compliance and legal to values orientation

Defence Industry initiatives (1986)

Global Sullivan principles (1999)

UN Convention Against Corruption (2003)

Table 2.2 Business ethics timeline(Source: Ethics Resource Center, Business Ethics Timeline, www.ethics.org/resources/busienss-ethics-timeline.asp)

2.5.2 Business Ethics: 1960-2008Thetimeframe1960-2008isselectedtoreflectalmostfiftyyearsofincreasinginterestandrapidchangeinbusinessethics. Also, this time period shaped the current managerial view of business ethics that is seen in global ethics programmes in corporations. We will focus especially on the discussion of developments since the 1990 because this has been a critical period of time with respect to global ethics crises and public policy developments designed to institutionalise business ethics around the world.

Embedding business ethicsBy the 1980s, many companies had started responding to calls for ethical structures, and more and more started adopting ethical codes and instituting ethics training for their employees. Each wave of scandals that occurred every ten years or so, resulted in more pressure for the companies and they incorporated ethics into their structures. In 1984, the Union Carbide disaster at its plant in Bhopal, India, which killed thousands of people and injured thousands of people, focused world attention on the chemical industry. This led to the chemical industries adopting a voluntary code of ethical conduct known as Responsible Care, which became a model for other industries. In 1986, in response to a series of reported irregularities in defence contracts, a special Commission Report on the situation led to the establishment of the Defence Industry Initiative (DII) on Business Ethics and Conduct, signed by thirty-two major defencecontractors(itsoonincreasedtofifty).Eachsignatoryagreedtohaveawrittencodeofethics,establishappropriate ethics training programmes for their employees, establish monitoring mechanisms to detect improper activity, share their best practices, and be accountable to the public.

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TheDIIbecamethemodelforwhathasbeenthemostsignificantgovernmental impetustothebusinessethicsmovement, namely, the 1991 US Federal Sentencing Guidelines for Corporations. That law took the approach of providing an incentive for corporations to incorporate ethical structures within their organisations. If a company could show that it had taken appropriate measures to prevent and detect illegal and unethical behaviour, its sentence, if found guilty of illegal behaviour, would be reduced considerably. Appropriate measures included having a code ofethicsorofconduct,ahigh-placedofficerinchargeofoversight,anethicstrainingprogramme,amonitoringandreportingsystem(suchasa‘hotline’),andanenforcementandresponsesystem.Finesthatcouldreachupto$290millioncouldbereducedbyupto95percent,ifacompanycouldshowbonafideinstitutionalstructuresthatwerein place to help prevent unethical and illegal conduct.

The result was a concerted effort on the part of most large companies to incorporate into their organisations the structuresrequired.ThisledtothedevelopmentofacorporatepositionknownastheCorporateEthicsOfficer,andin1992totheestablishmentoftheCorporateEthicsOfficerAssociation.Themostrecentlegislativeincentivetoincorporate ethics in the corporation came in the Sarbanes-Oxley Act of 2002, passed as a result of a rash of scandals involving Enron, WorldCom, Arthur Andersen and other prominent corporations. The Act requires, among other things,thattheCEOandCFOcertifythefairnessandaccuracyofcorporatefinancialstatements(withcriminalpenaltiesforknowingviolations)andacodeofethicsfor thecorporation’sseniorfinancialofficers,aswellasrequiring a great deal more public disclosure. Corporations have responded to legislative and popular pressure in a variety of ways. The language of social responsibility rather than explicitly ethical language is still probably the most commonly used. Self-monitoring of adherence to a corporation’s stated principles and self-adopted standards is becoming more common, and some companies have voluntarily adopted monitoring of their practices, policies andplants by independent auditors.Thenotionof aTripleBottomLine,which involvesfinancial, social andenvironmental corporate reporting, has been adopted by a number of companies. Other popular reporting mechanisms include corporate environmental sustainability reports and social audits, which vary considerably in what is reported and how it is reported. Ethical investing is another aspect of the movement, and managers of ethical investment funds have begun proposing stockholder proposals as a means of encouraging more ethical behaviours on the part of corporations in which they own stock.

2.6 The Institutionalisation of Business EthicsBy 1990, business ethics was well established as an academic discipline. On the other hand, this was the beginning oftherapidacceptanceofbusinessethicsinorganisations.Thefirstdevelopmentoccurredinthe1980s,buttheinstitutionalisation of business ethics through public policy moved rapidly through the 1990s and 2000s.

Wide spread and highly visible organisational misconduct and scandals such as Enron, WorldCom in the United States and in Europe, Parmalat (Italy), and Royal Ahold (Netherlands) have plagued global businesses. All four of these companies have engaged in massive accounting frauds to overstate their earnings and had operated unethical organisational cultures.Managers involved in channel stuffing, inventory shifting strategies, deceptive salestechniques,financialfraud,andotherschemestoinflateearnings.Misconductrelatedtoemployees,suppliers,andconsumers created discussions about right and wrong, as well as the appropriate legal consequences. Organisational ethics programmes in the US were developed in public corporations as ethics became more institutionalised by the Federal Sentencing Guidelines for organisations, especially the 2004 amendment and the Sarbanes-Oxley Act (2002). These public policy approaches to institutionalisation represent a macro/descriptive approach to business ethics. In Europe, the European Union has a strong Directive on Data Protection (1995) and anticompetitive legislation thatisbeingstrictlyenforcedtopreventprice-fixing.Forexample,BritishconsumeraffairswatchdoggroupshavetriggeredagovernmentinvestigationofpricefixingatfoodandpackagegoodsfirmsincludingProcter&Gamble,Reckitt Benckiser, Mars, Unilever, & Tesco PLC (Wall Street Journal, April 29, 2008).

The Federal Sentencing Guidelines for Organisations (FSGO), approved by Congress in November 1991, set the tone for organisational ethical compliance programmes in the 1990s. The guidelines, which were based on the six principles of the DII, broke new ground by codifying into law incentives to reward organisations for taking action to prevent misconduct, such as developing effective internal legal and ethical compliance programmes (Conaboy, 1995) Provisions in the guidelines mitigate penalties for businesses that strive to root out misconduct and establish high ethical and legal standards (United States Code Service, 1995). On the other hand, under FSGO, if a company


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lacks an effective ethical compliance programme and its employees violate the law, it can incur severe penalties. The guidelinesfocusonfirmstakingactiontopreventanddetectbusinessmisconductincooperationwithgovernmentregulations. At the heart of the FSGO is the carrot-and-stick approach: By taking preventive action against misconduct, a company may avoid onerous penalties should a violation occur. A mechanical approach using legalistic logic will notsufficetoavertseriouspenalties.Thecompanymustdevelopcorporatevalues,enforceitsowncodeofethics,and strive to prevent misconduct.

Inthe1990s,ethicalandlegalmisconductbecamemorewidespreadonaglobalbasis.IssuessuchasfinancialmismanagementcontributedtotheAsianfinancialcrisis.Reportsoffraudinfinancialreportingandissuesrelatedto sexual harassment and discrimination were wide spread. This period was also known as a time of excessive executive greed with exorbitant pay-packages associated with mergers and acquisitions. Pay was not effectively tiedtoperformanceandmanynon-performingCEOsfoundthemselvesoustedandfinanciallycomfortableasaresult of their lavish severance packages. In the 2000s, the interest in business ethics has accelerated rapidly. Such abuses increased public and political demands to improve ethical standards in business. A survey of twenty thousand peopleacrosstwentycountriesrevealedthattrustinglobalcompanieshasdeclinedsignificantly(Ferrell,Fraedrich,Ferrell, 2008).

Toaddressthelossofconfidenceinfinancialreportingandcorporateethics,theU.S.Congressin2002passedtheSarbanes–Oxley Act, the most far-reaching change in organisational control and accounting regulations since the US Securities and Exchange Act of 1934. The new law made securities fraud a criminal offence and stiffened penalties for corporate frauds. It also created an accounting oversight board that required corporations to establish codes of ethicsforfinancialreportinganddevelopgreatertransparencyinfinancialreportstoinvestorsandotherinterestedparties.Additionally,thelawrequiredtopexecutivestosignoffontheirfirms’financialreports,andtheyriskedfinesandlongprisonsentencesiftheymisrepresentedtheircompanies’financialposition.Thelegislationfurtherrequired company executives to disclose stock sales immediately and prohibited companies from giving loans to top managers (CNN, 2002).

The 2004 amendment to the FSGO requires that a business’s governing authority be well informed about its ethics programme with respect to content, implementation, and effectiveness. This places the responsibility squarely on theshouldersofthefirm’sleadership,usuallytheboardofdirectors.Theboardisrequiredtooverseethediscoveryof risks and to design, implement, and modify approaches to deal with those risks. The Sarbanes–Oxley Act and the FSGO have institutionalised the need to discover and address ethical and legal risks. Top management and the boardofdirectorsofacorporationareaccountablefordiscoveringrisksassociatedwithethicalconduct.Specificindustries, such as the public sector, energy and chemicals, health care, insurance, and retail have to discover the unique risks associated with their operations and develop an ethics programme to prevent ethical misconduct before it creates a crisis.

Mostfirmsaredevelopingformalandinformalmechanismstohaveinteractivecommunicationandtransparencyabout issues associated with the risk of misconduct. Business leaders should understand that their greatest danger is not discovering serious misconduct or illegal activities somewhere in the organisation (Ferrell, Fraedrich and Ferrell, 2008). It is important that the shift has been away from trust in individuals to do the right thing based on moral judgement to formal ethics programmes based on values and culture.

2.7 Globalisation of Business EthicsWithglobalisation,thebusinessethicsmovementhasnotremainedconfinedtotheUnitesStates.Othercountrieshave adopted legislations similar to that of the United States, and the UN has developed a voluntary Global Compact for Corporations. The Compact, which was endorsed by all governments, contains nine guiding principles, which focus on human rights, labour standards, and the protection of the environment. Over 1,500 companies worldwide have joined the compact, and it seems likely that more and more will feel the pressure to become signatories and to abide by the required standards.

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2.8 Need for Standardisation of Ethical ConductAt a philosophical level, the need for ethical standards can be debated. Some may argue that adoption of code ofethicsshouldbevoluntarytocompaniesandnotmandated.Thischaptercapturestheevolutionofthefieldofethics into a global movement and its incorporation into business practice. It must be noted that there are two major paradigms in scholarship of ethics in business, one based in social sciences that addresses the question of ‘what is’ and the other based on moral philosophy on ‘what should be’. In our report, the focus is largely on the former aspect.Thisbalanceneededtobe,includingethicalpractices.Thechoiceoffirmsonwhethertofollowacodeofethics or not can be explained through the typical game theoretic formulation of prisoner’s Dilemma. In the absence of direct economic gains, this formulation indicates that corporations would either choose to adopt a code of ethics togetherornotadoptatall.Asofnow,thelatterconditionseemstoholdasfirmspromotingethicsasapartoftheirorganisationalcultureseemtobedoingsowithoutanyapparenteconomicbenefits.Therefore,itisimperativethatefforts are made in formulating a practicable code of ethics.

Practicality may be an essential component of formulated code of ethics because ethics (social welfare in general) maynotaugmentprofitability,andasaconsequencemayconflictwithfirm’sshareholder’sinterests;thisispossiblybest articulated in Nobel Laureate Milton Friedman’s comment, ‘Business of Business is Business’. In a failing or turbulent society, business cannot succeed. However, ignoring social welfare would not be advisable as there are anecdotal evidences to suggest that lack of adherence could lead to detrimental business consequences. Nike and Primark are illustrative examples, where lack of adherence to ethical standards had led to major business fallouts. At a larger level, there is a growing demand for accountability that the corporations need to heed; and, through a standardised code, there is a need to reach a mutual threshold that would be acceptable to the society and the shareholder’s economic interests. The question is how the threshold should be determined, particularly when business contexts vary from organisation to organisation.

The suggested answer is two-fold, there should be minimum mandated threshold, and there should be room for additions based on requirement. In line with this approach, this study outlines the base-line codes or the minimum thatneedstobepractised.Theactualcontentdevisedbyafirmmayincludeadditionsbasedonrequirements.

2.9 Ethical FalloutsOver the decades, media has brought out to the attention of public numerous social and ethical issues that have framed the business and society relationship for Indian industry. Most of this has been reported as some form of business criticism. The recent period of criticism began with the scandals which opened up in the late 2001 and is still continuing. The exposure of Enron scandal brought out to general public the degree of fraud impacting investors and employees. Other corporate names have appeared in the media for violations of public trust and corporate ethics. Serious questions have been raised about issues such as corporate governance, executive compensation, backdated stock options, healthiness of fast foods, minimum wages, labour working conditions and safety and so on.

Other general issues regarding sexual harassment, downsizing pension programmes, reduced health insurance benefitsandmisuseofcorporatepower,toxicwastedisposalandhazardousmethodsofmanufacturingalsopointtowards the continuing tension between business and society. Most of these incidents happen when public realise thatthereissomethingwrong.Theseexamplesofbothspecificcorporateincidentsandgeneralbusinessissuesarevery prominent in newspapers, magazines, internet and televisions. This raises serious questions regarding business organisationsbeingethicalandfulfillingtheircorporatesocialresponsibility.

Businessfirmsareoftencriticisedonoccurrenceofanysuchincidentandareusuallyfoundtobeseekingadefensiveside. Businesses must weigh the pros and cons of these issues and adopt the best possible response considering the variousconflictingpointofviewsgiven.Thissectionpresentstwocasesthatreiteratetheroleofbusinessinsocietyand the case studies provided bring out the ethical issues that have arisen in past in giant organisations and their responses and measures to deal with these issues in pursuance of their corporate social responsibilities.


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2.9.1 NikePhillip H. Knight founded Nike in 1964 under the name ‘Blue Ribbon Sports’. The idea was born as a result of a paper written by Knight during his MBA programme to import athletic shoes from Japan to US market which was otherwise dominated by Germans. The Nike brand was created in 1972, the company went public in 1980, and todayNikeisoneofthelargestmanufacturersofathleticgoodsintheworld.Nikethoughidentifiedasafootwearmanufacturer, gets approximately one-third of its revenue from apparel; and the manufacturing mostly takes place in factories located in Asia.

Ethical concernsDue to increasing scope and costs, the suppliers have had subcontracts with cheaper labour markets in other third world countries such as Indonesia, China, and Vietnam rather with Japan. Since the mid 90’s, Nike has faced a barrage of criticism from labour rights activists, the media and others for human rights violations in their factories in the third worldcountries.Theaccusationsincludeddeficienciesinhealthandsafetyconditions,extremelylowwages,andindiscriminatehiringandfiringpractices.RobertaBaskinsCBSreportin1993broughtoutseveralcasesofhumanrights violations in the factories located in Indonesia prominently owned by Koreans. Another of Nike’s problem was factory conditions in Vietnam. Ernst and young, commissioned by Nike to audit one of its factories reported the presence of unacceptable standards of chemicals and cases of employee health problems. Nike hired Andrew Young, a former UN ambassador to visit and report the conditions of factories in the third world countries.

The 1997 Report stated that:There were no infringements of health and labour codes of conduct.•The pay in Nike controlled factories was substantially higher than minimum required wages.•Nike typically subsidised meals and medical treatments of its employees.•

However,in1998,MarcKasky,acorporatecriticrespondedtotheconflictbetweencontentsofthisreportandthereport submitted by Ernst and Young. It was claimed that Nike was consciously misleading the public by claiming itself to be provider of above stated facilities.

Fallout and responsePublic protests against Nike took the form of boycotts and picketing of Nike stores and universities began cancelling their deals with Nike to produce branded athletic goods. Nike had already established the Code of Conduct in 1992 but this was not enforced. More recent efforts were made to enforce standards in the form of monitoring by both Nike production department and through independent consultants. Suppliers were required to sign the code of conduct and display it on their factories.

Nike started extensive public relations campaign. A workplace code of conduct was established to regulate working conditionsinforeignfactories.NikefinallyintervenedinthewagepolicyofitsfactoriesinIndonesiaandannouncedwage rises above minimum legal wage in 1999. Universities form a core segment of Nike’s market and therefore letters detailing the acceptable conditions in the factories and stressing Nikes commitment to corporate social responsibility were sent. Representatives also visited university campuses stressing Nike’s commitment towards corporate citizenship. A key visit in this context was Knights visit to university of North Carolina. Numerous press conferences were also held with college newspapers across US universities.

2.9.2 PrimarkPrimark is one of the UK High Street’s success stories in recent years, its mixture of low prices and accessible fashion hasprovedtobeahitwithvaryingagegroups.Itcurrentlyhasmorethan170storesandhasmadea£200mprofitFY2010 on total sales of more than £1.6bn. The store is a favourite destination for bargain hunters who follow style whilekeepinglowonbudget.Primark’sflagshipstoreislocatedinLondonOxfordStreet.Worthanestimated£5bn,the Primark chain now has 4.8 million sq feet of retail space across 177 stores in three countries, employing 25,000 people. As this child labour scandal shows, the Irish conglomerate, which sells one in every 10 items of clothing bought in Britain today, had little control over a part of its supply chain.

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Ethical concernsThe BBC’s Panorama programme, which carried out a six-month investigation, alerted Primark that the suppliers sub-contractedsmallerfirms,whichusedchildlabourtocarryoutembroideryandsequinwork.Theinvestigationfound that in the refugee camps of southern India, young children had been working long hours in foul conditions to sew the designs that we see. The Primark supplier in question, a major Indian exporter called Fab n Fabric, had employed a subcontractor who had discovered the ultimate disposable workforce, child refugees. In Bhavanasagar, many of the children hand-sewing Primark garments had been born in the camp. Others orphaned or detached from families by war, were more recent arrivals. Home for most are crude huts, amalgams of straw and broken pieces ofcorrugatediron.Thechildworkershadnofixedhoursofwork,norwasthereanytradeuniontofightfortheircause.

Forthosewhogotpaidatall,thecombinedwagesoffivechildrenwaslessthanthatofoneadult.LeadingEuropeanand US retailers have come under growing pressure to ensure that workers in their supply chain, particularly in labour-intensive markets, such as India and China are not exploited.

Fallout and responsePrimark sacked three of its clothing suppliers in India. According to Primark, the garments affected accounted for 0.04% of the retailers’ worldwide sourcing. As soon as it was alerted of the practices by The Observer and the BBC, it cancelled new orders with the factories concerned and withdrew thousands of garments from its stores. Under the terms of its code of practice for suppliers, Primark prohibits the use of child labour in its manufacturing chain. Primark says it will terminate relations with suppliers guilty of certain ‘transgressions’ and those unwilling to make the ‘necessary changes’ to their employment practices when breaches of its code are uncovered.

APrimarkspokesmantoldTheObserverthatthefirmisappointinganagency‘asapartnertoactasitseyesandearson the ground’ and is establishing a charitable foundation for children. He said: ‘Primark is an ethical organisation and takes its responsibilities seriously, and it is an absolute outrage for anyone to suggest otherwise. The Primark BetterLivesFoundationwillprovidefinancialassistancetoorganisationsdevotedtoimprovingthelivesofyoungpeople,includingthoseidentifiedbytheBBC.Millionsofpeoplewillcontinuetobenefitfromourbusiness.

2.9.3 Realisation from Ethical FalloutThe outsourcing of work to third world countries in search of cheap labour and low cost of production, the inhumane labour working conditions, safety and non-eco-friendly methods of manufacturing and waste disposal have given rise to various ethical issues and has raised a big question mark about the corporate social responsibility of business and relationship between business and society. There are countless ethical issues arising in large multinational organisations which claim to be ethical and following their corporate social responsibility, but are only focused towardsincreasingtheirprofitsbytheendoftheyear.Thisisoneofreasonsfortheneedfordevelopingandfollowingcode of ethics in organisations.


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Summary‘Corporate or Business Ethics’ can be used in different ways.•In a broad sense, ‘ethics in business’ is simply the application of everyday moral or ethical norms to business.•Thedevelopmentofthefieldwasnotrestrictedtotextbooksandcourses.•The Society for Business Ethics was started in 1980.•Business ethics can be approached from different perspectives.•By the 1980s, many companies had started responding to calls for ethical structures, and more and more started •adopting ethical codes and instituting ethics training for their employees.By 1990, business ethics was well established as an academic discipline.•In the 1990s, ethical and legal misconduct became more widespread on a global basis.•Mostfirmsaredevelopingformalandinformalmechanismstohaveinteractivecommunicationandtransparency•about issues associated with the risk of misconduct.Withglobalisation,thebusinessethicsmovementhasnotremainedconfinedtotheUnitesStates.•Over the decades, media has brought out to the attention of public numerous social and ethical issues that have •framed the business and society relationship for Indian industry.Phillip H. Knight founded Nike in 1964 under the name ‘Blue Ribbon Sports’.•Primark is one of the UK High Street’s success stories in recent years, its mixture of low prices and accessible •fashion has proved to be a hit with varying age groups.

ReferencesDeveloping Code of Ethics for Indian Industry. • [Pdf] Available at: <http://nhrc.nic.in/Documents/reports/misc_dev_code_of_ethics_for_indian_industry_ICSM.pdf>[Accessed21November2013].Historical Developments of Business Ethics: Then to Now. • [Pdf] Available at: <http://danielsethics.mgt.unm.edu/pdf/Historical%20Development%20of%20Business%20Ethics.pdf> [Accessed 21 November 2013].Ghosh, B . N ., 2006. • Business Ethics & Corporate Goverance. Tata McGraw-Hill Education, New York.Bhanumurthy, K . V. and Krishna, U., 2010. • Politics, Ethics and Social Responsibility of Business. Pearson Education India.CSHL Public Lecture: Hominid Evolution How it has shaped human behavior, ethics and morality. • [Video online] Available at: <http://www.youtube.com/watch?v=bXsTpWT2oe8> [Accessed 21 November 2013].Looking Back: The History of Corporate Social Responsibility by Archie Carroll #ethicsmatter. • [Video online] Available at: <http://www.youtube.com/watch?v=iTJlzSxDgkM> [Accessed 21 November 2013].

Recommended ReadingFernando, A. C., 2009. • Business Ethics: An Indian Perspective. Pearson Education India.Mika, A., 2011. • The Importance of Codes of Ethics. Diplomarbeiten Agentur.Nitecki, M. H. and Nitecki, D . V. , 1 9 9 3 . • Evolutionary Ethics. SUNY Press.

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Self AssessmentInabroadsense,ethicsinbusinessissimplytheapplicationof_________moralorethicalnormstobusiness.1.

officea. individualb. everydayc. businessd.

What can be used in different ways?2. Corporate or Production Ethicsa. Corporate or Business Ethicsb. Mutual or Commercial Ethicsc. Values or Business Rulesd.

When did The Society for Business Ethics start?3. 1970a. 1965b. 1947c. 1980d.

Match the following4.

1. European Business Ethics Network A. Founded Nike in 1964 under the name ‘Blue Ribbon Sports’.

2. The US Civil Rights Act of 1964 B.Gavethefirstmanagerialtextbookonbusinessethics, Business Ethics

3. Phillip H. Knight C.Helditsfirstmeetingin1987.

4. Frank Chapman Sharp and Phillip D. Fox (1937)

D.Wasthefirstpieceoflegislationtohelpjump-startthe business ethics movement.

1-C, 2-D, 3-A, 4-Ba. 1-B, 2-C, 3-D, 4-Ab. 1-A, 2-B, 3-C, 4-Dc. 1-D, 2-A, 3-B, 4-Cd.

Business ethics as a movement refers to the development of structures internal to the corporation that helps it 5. anditsemployeesactethically,asopposedtostructuresthatprovideincentivestoact___________.

ethicallya. unethicallyb. morallyc. legallyd.

What has macro or societal dimensions as well as micro or firm-level considerations and managerial 6. dimensions?

Environmental Protection Acta. The US Civil Rights Actb. European Business Ethics Networkc. Business ethicsd.


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What is Teleology often called?7. Utilitariansa. Consequentialismb. Descriptivec. Deontologicald.

_____________believethattheyshouldmakedecisionsthatresultinachievingthegreatestbenefitforallthose8. affected by a decision.

Utilitariansa. Descriptiveb. Deontologicalc. Consequentialismd.

Which of the following statement is true?9. Withglobalisation,thebusinessethicsmovementhasremainedconfinedtotheUnitedStates.a. Withglobalisation,theGlobalCompactforCorporationshasremainedconfinedtotheUnitedStates.b. Withglobalisation,thebusinessethicsmovementhasnotremainedconfinedtotheUnitedStatesc. .WithGlobalCompact,thebusinesscorporationhasremainedconfinedtotheUnitedStates.d.

Which of the following statement is false?10. At a philosophical level, the need for ethical standards can be debated.a. Thefirstmanagerialtextbookonbusinessethicswas‘BusinessEthics’byFrankChapmanSharpandPhillipb. D. Fox (1937).Deontologyassumesthereisanabsolutefixednorm,orexpectedbehaviour,toresolveanethicalissue.c. Perceived decisions are based on deontological and teleological norms.d.

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Chapter III

Corporate Governance

Aim


introduce corporate governance•

explain corporate governance abuses and the general scene •

explicate the ‘code convergence in Asia’•

Objectives


enlist the corporate developments in India•

elucidate the Cadbury committee•

explain the objectives of corporate governance•

Learning outcome


identify the history of corporate governance •

understand corporate governance rating/benchmarking•

recognise the need for corporate governance•


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3.1 Introduction The concept of corporate governance is gaining momentum because of various factors as well as the changing business environment. The European Economic Community (EEC), The General Agreement on Tariffs and Trade (GATT) and World Trade Organisation (WTO) regulations have also contributed to the rising awareness and are compelling us to think in terms of adhering to the good governance practices. Corporate governance, by the very natureoftheconcept,cannotbeexactlydefined.However,therecanbenotwoopinionsthat“effectiveaccountabilityto all shareholders is the essence of corporate governance.”

Thefollowingdefinitionshouldhelpusunderstandtheconceptbetter.“Corporategovernanceisnotjustcorporatemanagement;itissomethingmuchbroadertoincludeafair,efficientandtransparentadministrationtomeetcertainwell-definedobjectives.Itisasystemofstructuring,operatingandcontrollingacompanywithaviewtoachievelong-term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. When it is practised under a well laid out system, it leads to the building of a legal, commercial and institutional framework and demarcates the boundaries within which these functions are performed.”

Corporate governance cannot disregard the diverse interests, shareholders, lenders, employees, government, etc. It is believed that shareholders would increasingly assert their rights. The lending institutions, having to justify theirperformanceinamarket-drivenenvironment,havenochoicebuttodemandeffectiveandefficientcorporategovernance. FIIs with substantial foreign investment in India would demand greater transparency and internationally recognised, sound corporate practices. The new paradigm of governance to bring about quality corporate governance is not only a necessity to serve the diverse corporate interests, but it is also a key requirement in the best interests of the corporates themselves.

Corporate practices in the matter of disclosure, transparency, group accounting, role of directors, and degree of accountability to the shareholders, lenders and overall public good are some of the critical issues which require a fresh and closer look. A framework for addressing concerns public good, such as regard for environment, overall conservation of resources and cost-effective managerial input. All these would, among other things form a part of the core of corporate governance. Government can play a catalytic role in creating the environment for quality governance through an appropriate regulatory framework.

Corporate leadership and its mindset would also determine the sort of governance that would ultimately evolve. The Cadburycommitteehasalsodefinedtheterm‘CorporateGovernance’andaccordingtothecommittee,itmeans,“(Itis)thesystembywhichcompaniesaredirectedandcontrolled.”Itmayalsobedefinedasasystemofstructuring,operatingandcontrollingacompanywiththefollowingspecificaims:

Fulfillinglong-termstrategicgoalsofowners•Taking care of the interests of employees•A consideration for the environment and local community•Maintaining excellent relations with customers and suppliers•Proper compliance with all the applicable legal and regulatory requirements•

WemayalsonotewhattheCIIconstitutedcommitteehastosayonthedefinition,“Corporategovernancedealswith laws, procedures, practices and implicit rules that determine the company’s ability to take informed managerial decisions vis-à-vis its claimants–in particular, its shareholders, creditors, customers, the State and employees. There is global consensus about the objective of “good corporate governance and maximising long-term shareholder value.” Further the Kumar Mangalam Birla committee constituted by SEBI has observed that, “Strong corporate governance isindispensablefinancialreportingstructure.”AccordingtoICSI,“Wemaydefinecorporategovernanceasablendofrules,regulations,lawsandvoluntarypracticesthatenablecompaniestoattractfinancialandhumancapital,performefficientlyandtherebymaximiselong-termvaluefortheshareholdersbesidesrespectingtheaspirationsof multiple stakeholders including that of the society.”

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In India, the question of corporate governance has come up mainly in the wake of economic liberalisation and de-regulation of industry and business, as well as the demand for a new corporate ethos and stricter compliance with thelawoftheland.InthecontextofthisuniquesituationinIndiawherethefinancialinstitutionsholdsubstantialstakes in companies, the accountability of the directors, including non-executive directors and nominees, has come into sharp focus.

In the UK and USA, the corporate system and structure is characterised by diffused ownership and shareholding, as a large percentage of shares is subscribed by the public. They have a well-developed capital market with active shareholder participation. Firms are subject to strict disclosure norms and investor protection. The focus of good governance in these countries ‘is the code of best practices’. However, the Japanese and German models are somewhat different.There isacloseassociationbetween thefinancial institutionsand thefirms,aswith thepredominantshareholders. Both have close relationship towards their commitment to a philosophy of lifetime association. In India, a strident demand for evolving a code of good practices by the corporates themselves is emerging. In the global perspective, it may constitute a necessity to cut through the maze of prevalent questionable practices, indefensible management attitudes to stakeholders and penetrable non-disclosures.

3.2 Corporate Governance Abuses and the General SceneIn the Indian business groups, the concept of dominant shareholders is more amorphous. The promoters’ shareholding isspreadacrossseveralfriendsandrelativesandalsocorporateentities.Itmaybedifficulttoestablishthetotaleffective holding of this group. However, the aggregate holding of all these entities taken together is typically swellbelowamajoritystake.Asfinancialinstitutionshavehistoricallyplayedapassiverole,itpavesthewayforthe promoters acting as the dominant shareholders; despite not being the largest single shareholder. The promoters are thus enabled to play all the games that a dominant shareholder can play, namely structuring of businesses and transfer of assets between group companies, preferential allotments of shares to themselves, payment for ‘services’ to closely held group companies and the like. This has led to the situation of what could be termed, “There may be manyfinanciallysickcompaniesbutnofinanciallysickpromoters.”Thuscorporategovernanceabusesperpetratedbyadominantshareholderposesadifficultregulatorydilemma;Theregulatoryinterventionisthereforerequiredto be concerned with micro-management which are related to routine business decisions. The general scene with regard to the Indian corporate sector, as perceived by Dilip Kumar Sen may be noted as follows:

Companies are often run as if they were the managing directors or CEO’s personal freedom.•Thoseatthehelmareonlyabouttheprincipalshareholders’interests,anybenefittoothershareholdersisonly•consequential;Majority of directors are unaware that they are agents of shareholders and their position is one of trust and •faithParticipation of non-executive directors in meetings whether of the board or any committee thereof is inversely •proportional to the health of the bottom line, i.e., better the bottom line lesser the participation.Most directors do not consider it necessary to update themselves on changes in laws and regulations;•Non-executive directors do not see themselves as watch-dogs of the owners.•Boardroomsareinvariablyfilledupby‘yes’menwhodonotraiserelevantquestions.•Except in a crisis, even nominee directors tend to play a passive role at board meetings and do not oppose the •proposals of the management.

Therefore, it can be concluded that, “Hence, no amount of regulation can enforce the true spirit of good corporate governance practices in a company, unless it comes from within the organisation.”


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3.3 Objectives of Corporate GovernanceThe development of corporate governance concept is naturally and essentially related to the ‘objectives of corporate governance’ and it may be important to note what the ‘introductory framework’ has to say on this. “Good governance isintegraltotheveryexistenceofacompany.Itinspiresandstrengthenstheinvestor’sconfidencebyensuringthecompany’scommitmenttohighergrowthandprofits.Itseekstoachievefollowingobjectives:

That a properly structured board capable of taking independent and objective decisions is in place at the helm •of affairs.That the board is balanced as regards the representation of adequate number of non-executive and independent •directors who will take care of the interests and well being of all the stakeholders.That the board adopts transparent procedures and practices and arrives at decisions on the strength of adequate •information.That the board has an effective machinery to sub serve the concerns of stakeholders.•That the board keeps the shareholders informed of relevant developments impacting the company.•That the board effectively and regularly monitors the functioning of the management team.•That the board remains in effective control of the affairs of the company at all times. The overall endeavour of •the board should be to take the organisation forward, to maximise long-term value and shareholders’ wealth.”

3.4 Code convergence in AsiaThe points of convergence, according to ‘Code Convergence in Asia: Smoke or Fire?’ the following observation has been made: “Although Asian countries are not moving towards identical systems of governance, there is a striking agreement among the proponents of reform in each country on the centrality of certain principles and these include the following:

Enhancing shareholder value as the primary focus of companies, and upholding or extending shareholder •rights (this is accepted, even in places like China, as a fundamental prerequisite for the development of capital markets).The need for non-executive and independent non-executive directors to provide an ‘outside’ view on strategic •direction and to counterbalance the executives on the board (or to help strengthen the supervisory board vis-à-vis the management board in two-tier systems).The usefulness of board committees responsible for audit, nomination and compensation and comprising a •majority of independent directors.The importance of higher levels of information disclosure from listed companies. •Allowing or encouraging institutional investors to act as a check against management and a lever for enhancing •board independence.

Some of these principles have been incorporated into laws and regulations governing companies and securities trading, or have been expressed in the listing rules of stock exchanges. Most are now included in codes of best practice developed over the past two years, and may or may not be mandatory.”

3.5 The Cadbury CommitteeAspateofscandalsandfinancialcollapsesin theUKinthelate1980sandearly1990smadetheshareholdersandbanksworryabouttheirinvestments.TheUKGovernmentthereforerecognisedtheinsufficiencyofexistinglegislationroleofself-regulationasameasureofcontrollingscandalsandfinancialcollapses.Inordertopreventrecurrence of business failures, the Cadbury committee was set up by the London stock Exchange in May 1991 inter alia to help raise standards of corporate governance. The ‘code of best practices’(1992) of the Cadbury committee report spelt out the methods of governance needed to achieve a balance between the essential powers of the Board and their proper accountability.

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3.6 Developments in IndiaOn account of the interest generated by Cadbury committee report and also in the wake of government initiatives to respond to corporate developments world over, the following major developments have taken place:

The Confederation of Indian Industries (CII), the Associated Chambers of Commerce and Industry and the •Securities and Exchange Board of India constituted committees to recommend initiatives in corporate governance. TheCII,in1996,tookaspecialinitiativeoncorporategovernance.ItwasthefirstinstitutionalinitiativeinIndian industry. The objective being to develop a code for corporate governance to be adopted by the Indian companies(privatesector,thepublicsector,banksandfinancialinstitutionswhicharecorporateentities),acode by CII carrying the title ‘Desirable Corporate Governance’ was released.The SEBI appointed committee, known as the Kumar Mangalam Birla committee’s recommendations led to •the addition of Clause 49 in the Listing Agreement. Compliance of provisions of Clause 49 was largely made mandatory by the listed companies. The committee recommended that there should be a separate section on corporate governance in the Annual Report of companies. This section was required to detail the steps taken tocomplywiththerecommendationsofthecommitteeandthusinformtheshareholdersofspecificinitiativestaken to ensure corporate governance. The committee accorded recognition to the three vital aspects of corporate governance, namely accountability, transparency and equality of treatment for all stakeholders.The Department of Company Affairs (DCA) appointed a study group on 15-5-2000 under the Chairmanship •of the then Secretary DCA to suggest ways and means of achieving corporate governance. The study group appointed a task force. The study groups recommended the setting up of an independent, autonomous centre for corporate excellence with a view to accord accreditation and promote policy research and studies, training andeducationandawards,etc.,inthefieldofcorporateexcellencethroughimprovedcorporategovernance.Itfavoured greater shareholders’ participation, formal recognition of corporate social responsibility, non-executive directorsbeingchargedwithstrategicandoversightresponsibilities,minimisationofinterest-conflictpotential,and also suggested application of corporate governance principles to public sector.The Department of Company Affairs also constituted on August 21, 2002 a high-level committee, popularly known •as Naresh Chandra committee, to examine various corporate governance issues and to recommend changes in the diverse areas, such as the statutory auditor-company relationship, rotation of statutory auditors, procedure for appointment and determination of audit fees, restrictions if necessary on non-audit fees, independence of auditing functions,ensuringpresentationof‘trueandfair’statementofthefinancialaffairsofcompanies,certificationoffinancialstatementsandaccounts,regulationofoversightfunctionaries,settingupanindependentregulatorandtheroleofindependentdirectors.Thecommitteehasmadeverysignificantrecommendationsforchanges;inter alia, in the Companies Act.Yet another major development includes the constitution of a committee by SEBI under the Chairmanship of Shri •N.R. Narayana Murthy, for reviewing the implementation of corporate governance code by listed companies. The mandatory recommendations of the committee on various matters are detailed in the Annexure.The Department of Company Affairs also has set up a proactive standing company law advisory committee to •advise on issues like inspection of corporates for wrong doings, role of independent directors and auditors and their liability, suggesting steps to enhance imposition of penalties. A high powered Central Coordination and Monitoring Committee (CCMC) co-chaired by Secretary DCA and Chairman SEBI was also set up to monitor action against vanishing companies and unscrupulous promoters, who misused funds raised from public.SEBI has also undertaken a project for development of a comprehensive instrument by a reputed rating agency •for rating the good corporate governance practices of listed companies.

3.7 Good Governance and Value AdditionWhatbenefitsorvalueadditionthecorporatesarelikelytoachievethroughsoundandeffectivecorporategovernancepractices? The answer, as provided by ICSI runs as follows and the road map is factors which add greater value through good governance, may be summarised as follows:

Adoption of good governance practices stability and growth to the enterprise.•Goodgovernancesystem,demonstratedbyadoptionofgoodcorporategovernancepractices,buildsconfidence•amongst stakeholders as well as prospective stakeholders. Investors are willing to pay higher price to the corporate demonstrating strict adherence to internationally accepted norms of corporate governance.


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Effective governance reduces perceived risks, consequently reduces cost of capital; it also enables board of •directors to take quick and better decisions which ultimately improves bottom line of the corporates.In today’s knowledge-driven economy, demonstrating excellence in skills has become the ultimate tool in the •hands of board of directors to leverage competitive advantage.Adoption of good corporate governance practices provides long-term sustenance and strengthens stakeholders’ •relationship.A good corporate citizen becomes an icon and enjoys a position of respect.•Potential stakeholders aspire to enter into relationships with enterprises whose governance credentials are •exemplary.

3.8 History of Corporate GovernanceThe seeds of modern corporate governance were probably sown by the Watergate scandal in the United States. As a result of subsequent investigations, US regulatory and legislative bodies were able to highlight the control failures thathadallowedseveralmajorCorporationstomakeillegalpoliticalcontributionsandtobribegovernmentofficials.ThisledtothedevelopmentoftheForeignandCorruptPracticesActof1977intheUSAthatcontainedspecificprovisions regarding the establishment, maintenance and review of systems of internal control.

This was followed in 1979 by the Securities and Exchange Commission of the USA’s proposals for mandatory reportingoninternalfinancialcontrols.In1985,followingaseries’ofhighprofilebusinessfailuresintheUSA,the most notable one of which being the Savings and Loan collapse, the Treadway Commission was formed. Its primary role was to identify the main causes of misrepresentation in Financial Reports and to recommend ways of reducing incidence thereof. The Treadway Report published in 1987 highlighted the need for a proper control environment, independent audit committees and an objective internal audit function. It called for published reports on the effectiveness of internal control. It also requested the sponsoring organisations to develop an integrated set of internal control criteria to enable companies to improve their controls. Accordingly COSO (Committee of Sponsoring Organisations) was born.

Thereportproducedby it in1992stipulatedacontrol framework,whichhasbeenendorsedandrefinedin thefour subsequent UK reports: Cadbury, Rutteman, Hampel and Turnbull. While developments in the United States stimulated a debate in the UK, a spate of scandals and collapses in that country in the late 1980s and early 1990’s led the Shareholders and Banks to worry about their investments. These also led the Government in UK to recognise that the then existing legislation and self-regulation were not working.

Theissueofcorporategovernancebecameparticularlysignificantinthecontextofglobalisationbecauseonespecialfeature of the late 20th century/21st century globalisation is that in addition to the traditional three elements of the economy, namely physical capital in terms of plant and machinery, technology and labour, the volatile element offinancialcapitalinvestedintheemergingmarketsandinthethird-worldcountriesisanimportantelementofmodern globalisation and has become particularly powerful. Thanks to the ubiquitous application of information technology, at the touch of a computer mouse, it is possible now to transfer billions of dollars across borders. The significanceandtheimpactofthevolatilityofthefinancialcapitalwasrealisedwheninJune1997thecurrencyofSouth East Asian countries started melting down in countries like Thailand, Indonesia, South Korea and Malaysia. It was realised by the World Bank and all investors that it is not enough to have good corporate management but one should have also good corporate governance because the investors want to be sure that the decisions taken are ultimately in the interest of all stake holders. Honesty is the best policy is a fact that is now being re-discovered.

Inpracticalterms,corporategovernancehasmeantthatthereshouldbeattheboard-levelnon-officialdirectorswhoarcprofessionalsandwhohavenoconflictinginterestsandwhocanparticularlyoperatetwokeycommittees,the Ethics Committee and the Finance Committee to see that there is greater transparency in the management of the enterprise. Corporate governance ultimately has to come to mean better transparency in the operations without sacrificingbusinessstrategyorbusinesssecretswhicharenecessaryforsuccessinthemarketplace,andabsolutelyethical behaviour where the conduct of the company will not only be legal but also ethical.

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3.9 Corporate Governance Rating/BenchmarkingAccording to SEBI sources, SEBI has no intention to making rating of governance of listed companies mandatory. AccordingtoSEBI,itmaybewrongtoconcludethatgovernancenormscompelledcompaniestosacrificelong-terminterests or outlook in the pursuit of short-term interests and responses to market signals. SEBI has commissioned a study to determine the cost of compliance incurred by companies in respect of the regulatory framework, including Clause 49 of the listing agreement.

The Narayana Murthy committee on corporate governance code had gone about its work in a highly professional and democratic manner and SEBI wanted that the professionals should study the issues raised and its recommendations, including the proposal for facilitation of ‘whistle blowing’. ICRA which rated companies, adopted certain parameters andproceduresforthepurposeandtheagencyclarifiedthatitnormallyrequiredfourtosixweeksandtheratingwasnotanauditorcertificationofregulatorycompliancebythelistedcompanyandtheexercisewasnotaguaranteeagainst fraud. Its primary focus in the rating was on the business processes. Key variables analysed in rating included the shareholding structure, governance structure, management processes, board structure and processes, stakeholder relationship,transparencyanddisclosuresandfinancialdiscipline.

The starting point was an assessment of the corporates compliance with statutory regulations as laid down in clause 49 of the listing agreement. Feedback from independent directors was a ‘key part’ of the rating process. International Finance Corporation, Washington which also carried out rating of companies followed OECD guidelines. The corporation faced the task of adopting the model and developing best practices suited to companies in emerging economies. Global experience showed that good governance helped corporates in accessing capital, especially long-termfinanceandequity.TheIFC,asamajorlender,lookedatcorporategovernanceasatooltoreduceinvestorrisk and took account of the risk to reputation arising from bad governance. It was observed that companies which focusedmuchonshort-termprofitstendedtoloseinthelong-term.Furtheraccordingtointernationalresearch,corporates with sound governance practices received higher premium for the shares in the stock market. Measuring Corporate governance practice: It may be noted that Standard & Poor has recently launched a new service, known as Corporate Governance Scores, to evaluate corporate governance practices, both at a country and at a company level. In the case of country governance assessment, the analysis starts with an evaluation of governance issues at the country-level. Depending upon the level of support, a country would be assessed as providing ‘strong support’, ‘moderate support’ or ‘weak support’.

The primary focus of this analysis is at the country or national-level. However, when the external environment is affectedbythepoliciesofregional/stategovernments,thefocusofanalysiswouldbemodifiedtoconsidersuchinfluences.Inthecountry,governanceanalysisofthefollowingfourmainareasisconsidered:legalinfrastructure,regulation, information infrastructure and market infrastructure.

The second part of the analysis is concerned with company analysis which is concerned with evaluating the practices at individual companies. Standard and Poor assigns scores to a company’s overall practices using a synthesis of the OECD’s and other international codes and guidelines of corporate governance practices. The analysis has four main components. These four components and sub-categories are as follows:

Component 1 concerned with ownership structure, relates to transparency of ownership structure, concentration •andinfluenceofownership.Component2concernedwithfinancialstakeholderrelations,hassub-categories,suchasregularityof,accessto,•and information on shareholder meeting, voting and shareholder meeting procedures and ownership rights. Component3concernedwithfinancialtransparencyandinformationdisclosurecomprisessub-categorieslike•quality and content of public disclosure, timing of, and access to, public disclosure and independent and standing of the company’s auditor. Component 4, concerned with board structure and process, is related to board structure and composition, role and •effectiveness of board, role and independence of outside directors and directors and executives’ compensation, evaluation and succession policies.


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The Anglo-Saxon system focuses primarily on the shareholder, while others, such as the German system, attempt to achieve a greater balance of interest between shareholders and other external stakeholders (creditors, employees, the community, the environment, etc.). By addressing the interest of both creditors and shareholders, the scoring model recognises the importance of stakeholder’s right beyond the rights of the shareholder. Finally, how can corporate governancescoresbenefitfromdifferentsections?Investorscanusethescorestoidentifyandcomparecorporategovernance standards of different companies in their portfolios or the risk characteristics associated with the corporate governance practices of potential investments. Corporate governance scores and the accompanying analysis also help investors understand how a company’s management treats the interest or shareholders, including minorities.

3.10 Need for Corporate GovernanceCorporate Governance is needed to create a corporate culture of transparency, accountability and disclosure. It refers to compliance with all the moral and ethical values, legal framework and voluntary adopted practices. This enhances customer satisfaction, shareholder value and wealth. The advantages of corporate governance are as follows:

Corporate performance: Improved governance structures and processes help to ensure quality decision-making, •encourage effective succession planning for senior management and enhance the long-term prosperity of companies,independentofthetypeofcompanyanditssourcesoffinance.Thiscanbelinkedwithimprovedcorporateperformance-eitherintermsofsharepriceorprofitability.Enhancedinvestortrust:Investorsconsidercorporategovernanceasimportantasfinancialperformancewhen•evaluating companies for investment. Investors who are provided with high levels of disclosure and transparency arelikelytoinvestopenlyinthosecompanies.TheconsultingfirmMcKinseysurveyedanddeterminedthatglobal institutional investors are prepared to pay a premium of up to 40 percent for shares in companies with superior corporate governance practices.Better access to global market: Good corporate governance systems attract investment from global investors, •whichsubsequentlyleadstogreaterefficienciesinthefinancialsector.Combating corruption: Companies which are transparent and have a sound system provides full disclosure of •accounting and auditing procedures. It allows transparency in all business transactions, and provide environment wherecorruptionwillcertainlyfadeout.Corporategovernanceenablesacorporationtocompetemoreefficientlyand prevent fraud and malpractices within the organisation.Easyfinancefrominstitutions:Severalstructuralchangeslikeincreasedroleoffinancialintermediariesand•institutional investors, size of the enterprises, investment choices available to investors, increased competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need for good corporate governance. Evidence indicates that well-governed companies receive higher market valuations. The credit-worthiness of a company can be trusted on the basis of corporate governance practiced in the company.Enhancing enterprise valuation: Improvedmanagement accountability andoperational transparency fulfill•investors’ expectations and confidenceonmanagement and corporations, and return, increase thevalueofcorporations.Reducedriskofcorporatecrisisandscandals:Effectivecorporategovernanceensuresefficientriskmitigation•system in place. The transparent and accountable system that corporate governance makes the board of a company aware of all the risks involved in particular strategy, thereby, placing various control systems to monitor the related issues.Accountability: Investor-relations are essential part of good corporate governance. Investors have directly/•indirectly entrusted management of the company for the creating enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its shareholders in order to maintain good investor’s relation. Good corporate governance practices create the environment where boards cannot ignore their accountability to these stakeholders.

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3.11 Evidence of Corporate Governance from the ArthashastraKautilya’s Arthashastra maintains that for good governance, all administrators, including the king were considered servants of the people. Good governance and stability were completely linked. If rulers are responsive, accountable, removable, recallable, there is stability. If not there is instability. These tenets hold good even today. The substitution of the state with the corporation, the king with the CEO or the board of a corporation, and the subjects with the shareholders, bring out the quintessence of corporate governance, because central to the concept of corporate governance is the belief that public good should be ahead of private good and that the corporation’s resources cannot beusedforpersonalbenefit.Kautilya’sfour-folddutyofakingisasfollows:

Raksha: Literally means protection, in the corporate scenario it can be equated with the risk management •aspect.Vriddhi: Literally means growth, in the present day context can be equated to stakeholder value enhancement•Palana: Literally means maintenance/compliance, in the present day context it can be equated to compliance •to the law in letter and spirit.Yogakshema: Literally means well being and in Kautilya’s Arthashastra, it is used in context of a social security •system. In the present day context, it can be equated to corporate social responsibility.

Arthashastra talks of self-discipline for a king. The six enemies which a king should overcome are lust, anger, greed, conceit, arrogance and foolhardiness. In the present day context, this addresses the ethics aspect of businesses and the personal ethics of the corporate leaders. Corporate governance is managing, monitoring and overseeing various corporate systems in such a manner that corporate reliability, reputation are not put at stake. Corporate governance pillars on transparency and fairness in action satisfying accountability and responsibility towards the stakeholders.

Responsibility

Fairness

Transparency

Accountability

CorporateGovernance

Fig. 3.1 The role of corporate governance(Source: Governance, business ethics and sustainability, http://www.icsi.in/Study%20Material%20Professional/

GBES.pdf)


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The long-term performance of a corporate is judged by a wide constituency of stakeholders.

Customers

Stakeholders

Government

Employees

Vendors

Society

Fig. 3.2 Various stakeholders affected by the governance practices of the company(Source: Governance, business ethics and sustainability, http://www.icsi.in/Study%20Material%20Professional/

GBES.pdf)

3.12 Elements of Good Corporate GovernanceSome of the important elements of good corporate governance are discussed in the following paragraphs.

Role and powers of BoardGoodgovernanceisdecisivelythemanifestationofpersonalbeliefsandvalueswhichconfiguretheorganisationalvalues, beliefs and actions of its board. The board as a main functionary is primarily responsible to ensure value-creation for its stakeholders. The absence of clearly designated role and powers of board weakens accountability mechanism and threatens the achievement of organisational goals. Therefore, the foremost requirement of good governanceistheclearidentificationofpowers,roles,responsibilitiesandaccountabilityoftheBoard,CEO,andthe Chairman of the Board. The role of the board should be clearly documented in a board charter.

LegislationClear and unambiguous legislation and regulations are fundamental to effective corporate governance. Legislation thatrequirescontinuinglegalinterpretationorisdifficulttointerpretonaday-to-daybasiscanbesubjecttodeliberatemanipulation or inadvertent misinterpretation.

Management environmentManagement environment includes setting-up of clear objectives and appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skills for the jobs, establishing clear boundaries for acceptable behaviours, establishing performance evaluation measures and evaluating performanceandsufficientlyrecognisingindividualandgroupcontribution.

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Board skillsTobeable toundertake its functionsefficientlyandeffectively, theboardmustpossess thenecessaryblendofqualities, skills, knowledge and experience. Each of the directors should make quality contribution. A board should have a mix of the following skills, knowledge and experience:

Operational or technical expertise, commitment to establish leadership•Financial skills•Legal skills•Knowledge of government and regulatory requirements•

Board appointmentsToensurethatthemostcompetentpeopleareappointedintheboard,theboardpositionsshouldbefilledthroughtheprocessofextensivesearch.Awell-definedandopenproceduremustbeinplaceforreappointmentsaswellasforappointment of new directors. Appointment mechanism should satisfy all statutory and administrative requirements. High on the priority should be an understanding of skill-requirements of the board particularly at the time of making a choice for appointing a new director. All new directors should be provided with a letter of appointment setting out in detail their duties and responsibilities.

Board induction and trainingDirectors must have a broad understanding of the area of operation of the company’s business, corporate strategy and challenges being faced by the board. Attendance at continuing education and professional development programmes is essential to ensure that directors remain abreast of all developments, which are or may impact on their corporate governance and other related duties.

Board independenceIndependentboardisessentialforsoundcorporategovernance.Thisgoalmaybeachievedbyassociatingsufficientnumber of independent directors with the board. Independence of directors would ensure that there are no actual orperceivedconflictsofinterest.Italsoensuresthattheboardiseffectiveinsupervisingand,wherenecessary,challenging the activities of management. The board needs to be capable of assessing the performance of managers with an objective perspective. Accordingly, the majority of board members should be independent of both the management team and any commercial dealings with the company.

Board meetingsDirectorsmustdevotesufficienttimeandgivedueattentiontomeettheirobligations.Attendingboardmeetingsregularly and preparing thoroughly before entering the boardroom increases the quality of interaction at board meetings. Board meetings are the forums for board decision-making. These meetings enable directors to discharge their responsibilities. The effectiveness of board meetings is dependent on carefully planned agendas and providing relevantpapersandmaterialstodirectorssufficientlypriortoBoardmeetings.

Code of conductIt is essential that the organisation’s explicitly prescribed norms of ethical practices and code of conduct are communicated to all stakeholders and are clearly understood and followed by each member of the organisation. Systems should be in place to periodically measure, evaluate and if possible recognise the adherence to code of conduct.

Strategy settingThe objectives of the company must be clearly documented in a long-term corporate strategy including an annual business plan together with achievable and measurable performance targets and milestones.

Business and community obligationsThough basic activity of a business entity is inherently commercial, yet it must also take care of community’s obligations. Commercial objectives and community service obligations should be clearly documented after approval by the board. The stakeholders must be informed about the proposed and ongoing initiatives taken to meet the community obligations.


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Financial and operational reportingThe board requires comprehensive, regular, reliable, timely, correct and relevant information in a form and of a quality that is appropriate to discharge its function of monitoring corporate performance. For this purpose, clearly definedperformancemeasures,financialandnon-financialshouldbeprescribedwhichwouldaddtotheefficiencyand effectiveness of the organisation.

The reports and information provided by the management must be comprehensive but not so extensive and detailed as to hamper comprehension of the key issues. The reports should be available to board members well in advance to allow informed decision-making. Reporting should include status report about the state of implementation to facilitatethemonitoringoftheprogressofallsignificantboardapprovedinitiatives.

Monitoring the Board performanceThe board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance indicators besides peer review. The board should establish an appropriate mechanism for reporting the results of board’s performance evaluation results.

Audit committeesThe audit committee is inter alia responsible for liaison with the management; internal and statutory auditors, reviewing the adequacyof internal control and compliancewith significant policies andprocedures, reportingtotheboardonthekeyissues.Thequalityofauditcommitteesignificantlycontributestothegovernanceofthecompany.

Risk managementRisk is an important element of corporate functioning and governance. There should be a clearly established process of identifying, analysing and treating risks, which could prevent the company from effectively achieving its objectives. It also involves establishing a link between risk-return and resourcing priorities. Appropriate control procedures in the form of a risk management plan must be put in place to manage risk throughout the organisation. The plan should cover activities as diverse as review of operating performance, effective use of information technology, contracting out and outsourcing.

The board has the ultimate responsibility for identifying major risks to the organisation, setting acceptable levels of risk and ensuring that senior management takes steps to detect, monitor and control these risks. The board must satisfy itself that appropriate risk management systems and procedure are in place to identify and manage risks. For this purpose, the company should subject itself to periodic external and internal risk reviews.

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SummaryThe concept of corporate governance is gaining momentum because of various factors as well as the changing •business environment.Corporate governance cannot disregard the diverse interests, shareholders, lenders, employees, government, etc.•Corporate leadership and its mindset would also determine the sort of governance that would ultimately •evolve.In the Indian business groups, the concept of dominant shareholders is more amorphous.•Good governance is integral to the very existence of a company.•AspateofscandalsandfinancialcollapsesintheUKinthelate1980sandearly1990smadetheshareholders•and banks worry about their investments.The seeds of modern corporate governance were probably sown by the Watergate scandal in the United •States.The Treadway Report published in 1987 highlighted the need for a proper control environment, independent •audit committees and an objective internal audit function.According to SEBI sources, SEBI has no intention to making rating of governance of listed companies •mandatory.Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure.•Kautilya’s Arthashastra maintains that for good governance, all administrators, including the king were considered •servants of the people.Goodgovernanceisdecisivelythemanifestationofpersonalbeliefsandvalueswhichconfiguretheorganisational•values, beliefs and actions of its board.Tobeabletoundertakeitsfunctionsefficientlyandeffectively,theboardmustpossessthenecessaryblendof•qualities, skills, knowledge and experience.Directorsmustdevotesufficienttimeandgivedueattentiontomeettheirobligations.•The board has the ultimate responsibility for identifying major risks to the organisation, setting acceptable levels •of risk and ensuring that senior management takes steps to detect, monitor and control these risks.

ReferencesIntroduction to Corporate Governance. • [Pdf]Available at: <http://shodhganga.inflibnet.ac.in/bitstream/10603/1558/10/10_chapter1.pdf>[Accessed21November2013].Corporate Governance. • [Pdf] Available at: <http://www.oecd.org/investment/toolkit/policyareas/corporate governance/44931152.pdf> [Accessed 21 November 2013].Fernando, A. C., 2009. • Corporate Governance: Principles, Policies and Practices. Pearson Education India.Joshi, V., 2004. • Corporate Governance: The Indian Scenario. Foundation Books, New Delhi.Corporate Governance - What do shareholders really value? (LECTURE ONLY). • [Video online] Available at: <http://www.youtube.com/watch?v=s5Eoy988728> [Accessed 21 November 2013].Corporate Governance. • [Video online]Available at: <http://www.youtube.com/watch?v=PC_acEzfL9Q>[Accessed 21 November 2013].

Recommended ReadingBaker, H. K. and Anderson, R., 2010. • Corporate Governance: A Synthesis of Theory, Research, and Practice. John Wiley & Sons.Tricker, B. and Tricker, R . I , 2012. • Corporate Governance: Principles, Policies and Practices. Oxford University Press.Martin, D. 2 0 0 6 . • Corporate Governance: Practical Guidance on Accountability Requirements. Thorogood Publishing Press, London.


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Self AssessmentThe concept of corporate governance is gaining momentum because of various factors as well as the changing 1. business__________.

valuea. environmentb. levelc. locationsd.

Corporategovernancecannot___________thediverseinterests,shareholders,lenders,employees,government,2. etc.

disregarda. recogniseb. corporatec. determined.


1. Raksha A. It can be equated to stakeholder value enhancement

2. Vriddhi B. It can be equated to compliance to the law in letter and spirit.

3. Palana C. It can be equated with the risk management aspect.

4. Yogakshema D. It can be equated to corporate social responsibility.1-C, 2-A, 3-B, 4-Da. 1-C, 2-A, 3-B, 4-Db. 1-C, 2-A, 3-B, 4-Dc. 1-C, 2-A, 3-B, 4-Dd.

What is needed to create a corporate culture of transparency, accountability and disclosure?4. Corporate managementa. Good governanceb. Value addition c. Corporate governanced.

The seeds ofmodern corporate governancewere probably sown by the ________scandal in theUnited5. States.

Exchangea. Watergateb. Internalc. Treadwayd.

Whichofthefollowingconsiderscorporategovernanceasimportantasfinancialperformancewhenevaluating6. companies for investment?

Investorsa. Improved governanceb. Financial stakeholderc. Potential stakeholdersd.

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TheTreadwayReportpublishedin_______highlightedtheneedforapropercontrolenvironment,independent7. audit committees and an objective internal audit function.

1947a. 1980b. 1987c. 1945d.

Which of the following statement is true?8. Dependent board is essential for sound corporate governance.a. Independent board is essential for sound corporate governance.b. Independent life is essential for sound corporate governance.c. Independent board is unnecessary for sound corporate governance.d.

Which of the following statement is false?9. The board as a main functionary is primarily responsible to ensure value-creation for its stakeholders.a. Risk is an important element of corporate functioning and governance.b. Directorsmustdevotesufficienttimeandgivelessattentiontomeettheirobligations.c. Board meetings are the forums for board decision-making.d.

________newdirectorsshouldbeprovidedwithaletterofappointmentsettingoutindetailtheirdutiesand10. responsibilities.

Alla. Twob. Fourc. Nod.


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Chapter IV

Legal Framework of Corporate Governance in India

Aim


introduce legal and regulatory framework of corporate governance•

explain board structure•

explicate disclosure and transparency in terms of companies act, 1956•

Objectives


enlist disclosures of listing agreement•

elucidate SEBI requirements •

explain corporate governance in public sector undertakings•

Learning outcome


identify separation of roles of chairman and chief executive•

understand corporate governance in insurance sector•

describe powers of the board•

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4.1 IntroductionThe heart of corporate governance is transparency, disclosure, accountability and integrity. Legal and regulatory framework of corporate governance in India is mainly covered in SEBI guidelines and Companies Act, 1956. However, it is not restricted to only SEBI Guidelines and the Companies Act, 1956. A gamut of legislations like the Competition Act, the Consumer Protection laws, the Labour Laws, the Environment Laws, the Money Laundering Laws, etc. seeks to ensure good governance practices among the corporates.

Itistobeborneinmindthatmerelegislationdoesnotensuregoodgovernance.Goodgovernanceflowsfromethicalbusiness practices even when there is no legislation. Corporate governance is not just a legal concept, it is a governance concept, and it is something which has to come from within. However, one cannot have abstract concepts applicable to corporates at large and there lies the need for a legislative framework. In Indian context, there is no single apex regulatory body which can be said to be the regulator of corporate, but there exists a coordination mechanism among various functional regulators. For example, in India, we have different regulators for the following bodies:

Corporates (MCA)•Capital market and stock exchanges (SEBI)•Money market and banking (RBI)•Insurance-life and non life (IRDA)•Communication (TRAI)•Foreign business (FIPB/SIA)•Imports and exports (FEMA, DGFT)•Intermediaries, banking companies and insurance business (FIU-India)•Listed companies, Stock brokers (Stock Exchanges)•Professions (Professional Institutes like ICSI, ICAI, ICWAI, etc.)•

The success of regulation rests on the intention and integrity of the regulator and the regulated. A common law system operates in India. Entities are incorporated as companies in terms of the Companies Act, 1956 and governed by the Companies Act, 1956 (as amended from time-to-time). The Companies Act is administered by the Ministry of Corporate Affairs.The Securities and Exchange Board of India (SEBI) is the prime regulatory authority which regulates all aspects of securities market enforces the Securities Contracts (Regulation) Act including the stock exchanges. Companies that are listed on the stock exchanges are required to comply with the Listing Agreement.

4.2 Board StructureThe board structure in India is unitary. Section 252 of the Companies Act, 1956 stipulates that every public company shall have minimum three directors. In the case of a public company or a private company which is a subsidiary of a public company, the maximum number of directors stipulated is 12 (in case of companies incorporated before 21-07-1951, the maximum number would be determined by the provisions in this regard in its Articles). In case a company wishes to increase the number of directorship beyond twelve, it would require the approval of the Central Government. The listing agreement does not stipulate on the size of the board.

4.2.1 CompositionSection 269 of the Companies Act, 1956 stipulates that every public company and a private company, which is a subsidiary of a public company, must have a Managing Director or a whole-time Director, if the paid up share capital is Rs.5 crores or more. In terms of the listing agreement the following terms should be complied:

The board of directors of the company shall have an optimum combination of executive and non-executive •directorswithnotlessthanfiftypercentoftheboardofdirectorscomprisingofnon-executivedirectors.Where the chairman of the board is a non-executive director, at least one-third of the board should comprise •of independent directors and in case he is an executive director, at least half of the board should comprise of independent directors.


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“Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the board-level or at one level below the board, at least one-half of the board of the company shall consist of independent directors.”

Theexpression‘independentdirector’shallmeananon-executivedirectorofthecompanywhosatisfiesthefollowingcriteria:

Apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions •with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director.Is not related to promoters or persons occupying management positions at the board level or at one level below •the board.Hasnotbeenanexecutiveofthecompanyintheimmediatelyprecedingthreefinancialyears.•Is not a partner or an executive or was not partner or an executive during the preceding three years, of any of •the following:

Thestatutoryauditfirmortheinternalauditfirmthatisassociatedwiththecompany. �Thelegalfirm(s)andconsultingfirm(s)thathaveamaterialassociationwiththecompany. �

Is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect •independence of the director.Is not a substantial shareholder of the company, i.e., owning two percent or more of the block of voting •shares.Is not less than 21 years of age.•

4.2.2 Separation of Roles of Chairman and Chief ExecutiveIn India, there is no legal requirement contemplating separation of the role chairman and chief executive, the separation of the roles of the chairman and non-executive director determines the composition of the board in terms of the listing agreement. The listing agreement further provides that a non-executive chairman may be entitled to maintainachairman’sofficeatthecompany’sexpenseandalsoallowedreimbursementofexpensesincurredinperformance of his duties.

Number of directorshipSection275oftheCompaniesAct,1956stipulatesthatapersoncannotholdofficeatthesametimeasaDirectorinmorethanfifteencompanies.However,incomputingthisnumberoffifteendirectorships,thefollowingdirectorshipswill be omitted:

Private companies (other than subsidiaries or holding companies of public companies).•Unlimited companies.•Associations,notcarryingonbusinessforprofitor,whichprohibitpaymentofadividend.•Alternate directors, (i.e., he is appointed to act as a director, only during the absence or incapacity of some •other director).

In terms of the listing agreement, a director shall not be a member in more than 10 committees or act as chairman ofmorethanfivecommitteesacrossallcompaniesinwhichheisadirector.

4.2.3 Board MeetingsAs per Section 285 of the Companies Act, 1956, in every company, a meeting of its board of directors shall be held at least once in every three months and at least four such meetings shall be held in every year. Notice of every meeting of the board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India to every other director. The quorum for a meeting of the board of directors of a company shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one), or two directors, whichever is higher.

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Powers of the boardIn terms section 291 of the Companies Act, 1956, the board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do.

The board shall not exercise any power or do any act or thing which is required, whether by this or any other Act or by the memorandum or articles of the company, to be exercised or done by the company in general meeting. As per Section 292, the board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the board:

The power to make calls on shareholders in respect of money unpaid on their sharesa. aa) Thepowertoauthorisethebuy-backreferredtointhefirstprovisotoclause(b)ofsub-

section (2) of section 77AThe power to issue debenturesb. The power to borrow moneys otherwise than on debenturesc. The power to invest the funds of the companyd. The power to make loanse.

The board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, themanageroranyotherprincipalofficerofthecompany,thepowersspecifiedinclauses(c),(d)and(e).Theboardisrequiredtospecifyinclearandquantifiedtermstheextentofdelegation.Thepowersoftheboardarenotspelt out in the listing agreement.

4.3 Disclosure and Transparency in Terms of Companies Act, 1956In terms of Companies Act, 1956 the aspect of disclosure and transparency spans over several sections. With the e-filingofformswiththeRegistrarofCompanies,TheMinistryofCorporateAffairshasputinplaceamechanismthatis imaginative, technologically savvy and stakeholder friendly. Through the application of Information Technology to the government functioning in order to bring about Simple, Moral, Accountable, Responsive and Transparent (SMART) Governance, the MCA aims at moving from paper based to nearly paperless environment.

ThefilingthatacompanyisrequiredtomakeundertheCompaniesActincludesthestepswhichareexplainedinthe paragraphs below.

Company registrationAll the forms required for the purpose of incorporating companies in India.

Compliance related filingAllthestatutoryfilingofe-Forms,whetherannuallyoreventbasedisgroupedundercompliancerelatedfilingservices.Thefilingrequirementsincludethefollowing:

Annual returns by companies having share capital•Annual returns by companies not having share capital•BalanceSheetandProfit&LossAccount•Return of allotment including details of shares issued for consideration other than cash•Return of buy back of securities•Return of deposits by the company which has accepted public deposits during the year•Return of appointment of Managing Director, whole time Director•Notice of appointment of auditor•Statutory report•Cost audit report.•


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Change servicesChange services cover matters in respect of Indian companies, especially the following matters:

Pertaining to any change in the capital structure•Increase in authorised capital•Increase in the number of members•Thechangeofsituationofregisteredofficeofthecompany•Change of directors, manager and secretary•

Foreign companies are required to intimate the ROC about the following:Changes in the charter statutes or any instrument governing the company•Changesintheregisteredoffice•Principal place of business or the persons appointed as Director, Secretaries and authorised representatives•

Charge managementCompaniesarerequiredtofileparticularsforregistrationofchargecreatedormodifiedandthesatisfactionofchargewith the concerned ROC.

Investor servicesAn e-Form has been prescribed for complaints with respect to each company. The nature of complaint may relate to any of the following aspects:

Share/dividend•Debenture/bond•Fixed deposits•Miscellaneous•

Provisions relating to managerial personnelThis includes applications pertaining to the following circumstances:

Increase in the number of directors•Appointment or reappointment of managing Director (MD)/Whole time Director (WTD)/Manager•Fixing/increasing the remuneration or waiving off excess/overpayment to the concerned managing authority•Payment of commission to directors•Modificationofthetermsandconditionsfortheappointmentofmanagingdirectors,whole-timedirectorsand•non-rotational directorRemovingdisqualificationofdirectors.•

Approval services-HeadquartersApproval from MCA (Headquarters) is inter alia required in the following cases:

Exemption from attaching annual accounts of subsidiary(s)•Exemption or extension time for repayment of deposits•Recognition as a Nidhi company•Appointment of sole selling agent•Appointment of sole buying agent•Declaration of dividend out of reserves•Exemption from providing depreciation•Consentforholdingofficeorplaceofprofit•Providingloanorguaranteeorsecurityinconnectionwiththeloantoorbyspecifiedcategoryofpersons•

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Modificationoftheformandcontentofbalancesheetandprofitandlossaccount•Appointment of cost auditor•

Forms in this category include 23AAA, 65, 63, 24B, 24AB, 23C, 23AAB, DD-C, etc.

Approval services – Regional DirectorThe approval of the Regional Director is required in respect of the following matters:

Issue of licence under Section 25 to an existing company•Issue of licence under Section 25 to a new association•Approval of contract under Section 297•Rectificationofnameofcompany•Appointment/removal of auditor•Shiftingof registeredofficeof thecompany from the jurisdictionofoneROC toanotherwithin the same•StateOpening of new branches by a Nidhi Company•

Forms in this category include 1AD, 64 and 24A.

Approval services-ROCsROCs are empowered to accord approval, or to give any direction in relation to the matters pertaining to the change of name of an existing company and the conversion of a public company to private company. In addition, ROC approval is required in following cases:

Extension of time period for holding (AGM)•Holding AGM at place other than registered address•Declaring of company as defunct•Extension of the period of annual accounts•Amalgamation of companies•Compounding of offences•

Forms in this category include 1B and 61.

Informational servicesInformationalservicescoverthoseforms,whicharetobefiledwithROCforinformationalpurposes,incompliancewith the provisions of the Companies Act. In following cases, forms relating to following informational services arerequiredtobefiled:

Consentandwithdrawalofconsentofpersonschargedasofficersindefault•Declaration of solvency in case company decides to buy back its shares•Resolutions and agreements•Notice of address of place where books of accounts are kept•Information in relation to transfer of shares by a company to another company•Order received from court or Company Law Board•

Forms in this category include 1AA, 23, 23AA, 35A, 21, 22B, Form CSR


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4.4 Disclosures of Listing AgreementThe listing agreement contemplates the following disclosures which are discussed in detail below.

Clause 19A company is required to comply with the following formalities:

To give prior intimation to the exchange about the board meeting at which proposal for buyback of securities, •declaration/recommendation of dividend or rights or issue of convertible debentures or of debentures carrying a right to subscribe to equity shares or the passing over of dividend is due to be considered at least 2 days in advance.To give notice simultaneously to the stock exchanges in case the proposal for declaration of bonus is communicated •to the board of directors of the company as part of the agenda papers.

Clause 20The company will, immediately on the date of meeting of its board of directors held to consider or decide the same, intimate the following details to the exchange within 15 minutes of the closure of the board meetings by letter/fax:

All dividends and/or cash bonuses recommended or declared or the decision to pass any dividend or interest •payment.Thetotalturnover,grossprofit/loss,provisionfordepreciation,taxprovisionsandnetprofitsfortheyear(with•comparisonwiththepreviousyear)andtheamountsappropriatedfromreserves,capitalprofits,accumulatedprofitsofpastyearsorotherspecialsourcetoprovidewhollyorpartlyforthedividend,evenifthiscallsforqualificationthatsuchinformationisprovisionalorsubjecttoaudit.The decision on buyback of securities.•

Clause 22The company will, immediately on the date of the meeting of its board of directors held to consider or decide the same, intimate the following details to the exchange within 15 minutes of the closure of the board meetings by letter/fax:

Short particulars of any increase of capital whether by issue of bonus shares through capitalisation, or by way •of right shares to be offered to the shareholders or debenture holders, or in any other ways.Short particulars of the reissue of forfeited shares or securities, or the issue of shares or securities held in reserve •for future issue or the creation in any form or manner of new shares or securities or any other rights, privileges orbenefitstosubscribeto.Short particulars of any other alterations of capital, including calls.•Any other information necessary to enable the holders of the listed securities of the company to appraise its •position and to avoid the establishment of a false market in such listed securities.

Clause 29The Company will promptly notify the exchange of any proposed change in the general character or nature of its business.

Clause 30The Company will promptly notify the following details to the exchange:

Of any change in the company’s directorate by death, resignation, removal or otherwise.•Of any change of managing director, managing agents or secretaries and treasurers.•Of any change of auditors appointed to audit the books and accounts of the company.•

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Clause 31The company will forward the following documents to the exchange promptly and without application:

Sixcopiesofthestatutoryanddirectors’annualreports,balancesheetsandprofitandlossaccountsandofall•periodical and special reports as soon as they are issued and one copy each to all the recognised stock exchanges in India.Six copies of all notices, resolutions and circulars relating to new issue of capital prior to their dispatch to the •shareholders.Three copies of all the notices, call letters or any other circulars including notices of meetings convened u/s •391 or section 394 read with section 391 of the Companies Act, 1956 together with Annexure thereto, at the same time as they are sent to the shareholders, debenture holders or creditors or any class of them or advertised in the press.Copy of the proceedings at all annual and extraordinary general meetings of the company.•Three copies of all notices, circulars, etc., issued or advertised in the press either by the company, or by any •company which the company proposes to absorb or with which the company proposes to merge or amalgamate, or under orders of the court or any other statutory authority in connection with any merger, amalgamation, re-construction, reduction of capital, scheme or arrangement, including notices, circulars, etc. issued or advertised in the press in regard to meetings of shareholders or debenture holders or creditors or any class of them and copies of the proceedings at all such meetings.

Clause 32Thecompanywillsupplyacopyofthecompleteandfullbalancesheet,profitandlossaccountandthedirector’sreport, to each shareholder and upon application to any member of the exchange. The company will also give a cashflowstatementalongwithbalancesheetandprofitandlossaccount.Thecashflowstatementwillbepreparedinaccordancewiththeaccountingstandardsoncashflowstatement(AS-3)issuedbytheInstituteofCharteredAccountantsofIndia,andthecashflowstatementshallbepresentedonlyundertheindirectmethodasgiveninAS-3.

Thecompanywillmandatorilypublishconsolidatedfinancial statements in its annual report inaddition to theindividualfinancialstatements.Thecompanywillhavetogetitsconsolidatedfinancialstatementsauditedbythestatutoryauditorsofthecompanyandfilethesamewiththestockexchange.Companiesshallberequiredtomakedisclosures in compliance with the accounting standard or related party disclosures in the annual report.

Clause 35Theissuercompanyagreestofilewiththeexchangethefollowingdetails,separatelyforeachclassofequityshares/securityintheformatsspecifiedinthisclause,incompliancewiththefollowingtimelines,namely:

One day prior to listing of its securities on the stock exchanges.•On a quarterly basis, within 21 days from the end of each quarter.•Within 10 days of any capital restructuring of the company resulting in a change exceeding +/-2% of the total •paid-up share capital.

Clause 36The company will keep the exchange informed of events such as strikes, lock-outs, closure on account of power cuts, etc., both at the time of occurrence of the event and subsequently after the cessation of the event in order to enable the shareholders and the public to appraise the position of the company and to avoid the establishment of a false market in its securities. The company will also immediately inform the exchange of all the events, which will have bearing on the performance/operations of the company as well as price-sensitive information.


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Clause 41Thecompanyhasanoptioneithertosubmitauditedorunauditedquarterlyandyeartodatefinancialresultstothestockexchangewithinforty-fivedaysofendofeachquarter(otherthanthelastquarter).Inrespectofthelastquarter,thecompanyhasanoptioneithertosubmitunauditedfinancialresultsforthequarterwithinforty-fivedaysoftheendofthefinancialyearortosubmitauditedfinancialresultsfortheentirefinancialyearwithinsixtydaysoftheendofthefinancialyear.

Thefinancialresultscoveredunderthissub-clauseshallbesubmittedtothestockexchangewithinfifteenminutesof conclusion of the meeting of the board or committee (consisting of not less than one third of the directors and shall include the managing director and at least one independent director) in which results were approved pursuant, throughsuchmodeasmaybespecifiedbythestockexchange.

Thefinancialresultssubmittedtothestockexchangeshallbesignedbythechairmanormanagingdirector,orawhole-time director. In the absence of all of them, it shall be signed by any other director of the company who is duly authorisedbytheboardtosignthefinancialresults.Thecompanyshallgivepriorintimationofthedateandpurposeofmeetingsoftheboardorcommitteeinwhichthefinancialresultswillbeconsideredatleastsevenclearcalendardays prior to the meeting (excluding the date of the intimation and date of the meeting) to the stock exchange.

The company shall also simultaneously issue a public notice in at least in one English daily newspaper circulating in the whole or substantially the whole of India and in one daily newspaper published in the language of the region, wheretheregisteredofficeofthecompanyissituated.Thecompanyshall,within48hoursofconclusionoftheBoardorCommitteemeetingatwhichthefinancialresultswereapproved,publishacopyofthefinancialresultswhich were submitted to the stock exchange in at least in one English daily newspaper circulating in the whole or substantially the whole of India and in one daily newspaper published in the language of the region, where the registeredofficeofthecompanyissituated.‘Quarter’meanstheperiodofthreemonthscommencingonthefirstdayofApril,July,OctoberorJanuaryofafinancialyear.

Clause 49SEBI requires the listed companies to include a separate report on corporate governance in their annual report by including Clause 49 in the listing agreement (Text of Clause 49 is placed as Annexure). The disclosures about corporate governance to be made in the annual report are as under:

Disclosures on mandatory requirements•Disclosure on non-mandatory requirements•

Disclosures about mandatory requirementsAs per clause 49-I(B), all fees, compensation, if any, paid to non-executive directors including independent directors shallbefixedbytheboardofdirectorsandshallrequirepreviousapprovalofshareholdersinthegeneralmeeting.The shareholders resolution shall specify the limits for the maximum number of stock options that can be granted tonon-executivedirectorsincludingindependentdirectorsinanyfinancialyearandinaggregate.

Undertheaforesaidclause,paymentofcompensationincludingstockoptionstonon-executivedirectors,asfixedby the board of directors, requires prior approval of shareholders in general meeting. In case of stock options, the shareholder’sresolutionmustspecifythelimitsforthemaximumnumberofstockoptionsduringafinancialyear,granted to each and in aggregate to the non-executive (independent or non-independent) directors. As per Clause 49-IV (E), all pecuniary relationships or transactions of non-executive directors vis-a-vis the company should be disclosed in the annual report.

Further, the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the annual report:

All elements of remuneration package of individual directors summarised under major groups, such as salary, •benefits,bonuses,stockoptions,pension,etc.Detailsoffixedcomponentandperformance-linkedincentives,alongwiththeperformancecriteria.•

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Service contracts, notice period and severance fees.•Stock option details, if any and whether issued at a discount as well as the period over which accrued and over •which exercisable.The company shall publish its criteria of making payments to non-executive directors in its annual report. •Alternatively, this may be put up on the company’s website and reference drawn thereto in the annual report.The company shall disclose the number of shares and convertible instruments held by non-executive directors •in the annual report.Non-executive directors shall be required to disclose their shareholding (both own or held by / for other persons •onabeneficialbasis)inthelistedcompanyinwhichtheyareproposedtobeappointedasdirectors,priortotheir appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director.

Board disclosures-risk managementClause 49-IV(C) provides that the company shall lay down procedures to inform board members about the risk assessment and minimisation procedures. These procedures shall be periodically reviewed to ensure that executive managementcontrolsriskthroughmeansofaproperlydefinedframework.

Some of the advantages of implementing risk management policies are effective strategic planning; better cost control; enhancing shareholders value by minimising losses and maximising opportunities; increased knowledge and understanding of exposure to risk; a systematic, well-informed and thorough method of decision-making; increased preparedness for outside review; minimised disruptions; better utilisation of resources; strengthening culture for continued improvement; creating best practices and quality organisation.

Disclosure of relationships between directorsAs per Clause 49-IV(G)(ia), disclosure of relationships between directors inter-se shall be made in the annual report. It should also include, notice of appointment of a director, prospectus and letter of offer for issuances and any related filingsmadetothestockexchangeswherethecompanyislisted.

Disclosure of certain information on websiteAs per Clause 49-IV(G)(ii), the company should place the following information on its website :

Quarterly results.•Presentation made by the company to analysts.•

Alternatively, the details shall be sent in such a form, so as to enable the stock exchange on which the company is listed to put it on its own website.

Report on corporate governanceClause 49-VI provides that there shall be a separate section on corporate governance in the annual reports of company, with a detailed compliance report on corporate governance. Non-compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specificallyhighlighted.Thecompaniesshallsubmitaquarterlycompliancereporttothestockexchangeswithin15 days from the close of quarter as per the following format. The report shall be signed either by the Compliance OfficerortheChiefExecutiveOfficerofthecompany.

Non-mandatory requirementsThese requirements may be implemented at the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance)/non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the annual report.


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4.5 SEBI RequirementsThe Securities and Exchange Board of India, the apex capital markets regulator has through the listing agreement between public listed companies whose securities are listed on stock exchanges and the stock exchange enjoined certain duties on companies with respect to related party transactions.

As per Clause 49 of the listing agreement, the term ‘related party transactions’ shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered AccountantsofIndia.Sub-ClauseIIDrequiresauditcommitteetoreview,withthemanagement,theannualfinancialstatements before submission to the board for approval, with particular reference to disclosure of any related party transactions.

Sub-ClauseIIErequiresAuditCommitteetomandatorilyreviewtheinformationrelatedtostatementofsignificantrelatedpartytransactions(asdefinedbytheauditcommittee),submittedbymanagement.Sub-ClauseIVrequiresthe following disclosures about the basis of related party transactions:

A statement in summary form of transactions with related parties in the ordinary course of business shall be •placed periodically before the audit committee.Details of material individual transactions with related parties which are not in the normal course of business •shall be placed before the audit committee.Details of material individual transactions with related parties or others, which are not on an arm’s length basis •shouldbeplacedbeforetheauditcommittee,togetherwithmanagement’sjustificationforthesame.

4.6 Corporate Governance in Public Sector UndertakingThe Ministry of Heavy Industries and Public Enterprises, Department of Public Enterprises has issued guidelines oncorporategovernanceforcentralpublicsectorenterpriseswhichwererevisedbyanotificationno.18(8)/2005-GM dt. 14th May 2010.The guidelines were evolved through a consultation process where the stakeholders have participated. These guidelines keep in view the provisions in the relevant laws, rules and instructions.

ApplicabilityFor the purpose of the guidelines, the public sector enterprises have been categorised in two groups as listed entities and non-listed entities.

CPSEs listed on Stock ExchangesAll listed CPSEs are required to follow the SEBI Guidelines on corporate governance. In addition, they shall follow those provisions of these guidelines which do not exist in the SEBI guidelines and also do not contradict any of the provisions of the SEBI guidelines.

Non-listed CPSEsEach CPSE should strive to institutionalise good corporate governance practices broadly in conformity with the SEBI Guidelines. The guidelines provide that the provisions shall also be applicable to all the unlisted CPSE’s on mandatory basis.

Composition of boardThe board of directors of the company shall have an optimum combination of functional, nominee and independent directors. The number of functional directors (including CMD/MD) should not exceed 50% of the actual strength of the board. The number of nominee directors appointed by government/other CPSEs shall be restricted to a maximum of two.

In case of a CPSE listed on the stock exchanges and whose board of directors is headed by an executive chairman, the number of independent directors shall be at least 50% of board members; and in case of all other CPSEs (i.e., listed on stock exchange but without an executive chairman or not listed CPSEs), at least one-third of the board members should be independent directors. There shall be a separate section on corporate governance in each annual report of company, with details of compliance on corporate governance.

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The CPSEs are required to submit quarterly progress reports, within 15 days from the close of each quarter, in the prescribed format to respective Administrative Ministries/Departments. The administrative ministries will consolidate the information obtained from the CPSEs and furnish a comprehensive report to the DPE by 31st May of every financialyearonthestatusofcomplianceofcorporategovernance.

4.7 Corporate Governance in Insurance SectorThe Insurance Regulatory and Development Authority (IRDA) has outlined Corporate Governance Guidelines For Insurance Companies (dt. 25-08-2009) which are in addition to provisions of the Companies Act, 1956, Insurance Act, 1938 and requirement of any other laws or regulations framed there under. Where any provisions of these guidelinesappeartobeinconflictwiththeprovisionscontainedinanylaworregulations,thelegalprovisionswillprevail. However, where the requirements of these guidelines are more rigorous than the provisions of any law, these guidelines shall be followed.

The Insurance Act stipulates that the insurance companies in India would be public companies and hence, would require a properly constituted board. Accordingly, the authority advises all insurers to familiarise themselves with corporate governance structures and requirements appropriate to listed entities under clause 49 of the listing agreement.

The IRDA (Preparation of Financial Statements and Auditors Report of Insurance Companies) Regulations, 2002 empower the authority to issue directions/guidelines on appointment, continuance or removal of auditors of an insurance company. The statutory auditors recommended by the audit committee are required to be appointed at a general body meeting of the shareholders of the insurer. The guidelines provide for joint audit of each insurance companybytwostatutoryauditors.Inorderforanauditfirmtobeeligibletobeappointedasstatutoryauditors,the following conditions must be complied with:

Beincontinuouspracticeforaperiodoffifteenyears.•Atleastonepartner/employeeshouldhaveCISA(CertifiedInformationSystemsAuditor/ISA(Information•SystemsAudit)orequivalentqualification.Oneofthejointauditorsmayhaveatermof5yearsandtheother4yearsinthefirstinstance.Thereafter,the•maximumdurationforwhichanauditorcanberetainedisaperiodoffiveyears.In appointment of the statutory auditors, the insurer must ensure compliance with the requirements on cooling •off period of two years on completion of the tenure of 4/5 years as the case may be.No audit firm shall carry out more than two statutory audits of insurance companies (life /non-life/ •reinsurance


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SummaryThe heart of corporate governance is transparency, disclosure, accountability and integrity.•Legal and regulatory framework of corporate governance in India is mainly covered in SEBI guidelines and •Companies Act 1956.Corporate governance is not just a legal concept, it is a governance concept, and it is something which has to •come from within.The success of regulation rests on the intention and integrity of the regulator and the regulated.•Section 252 of the Companies Act, 1956 stipulates that every public company shall have minimum three •directors.Section275oftheCompaniesAct,1956stipulatesthatapersoncannotholdofficeatthesametimeasaDirector•inmorethanfifteencompanies.In terms of Companies Act, 1956 the aspect of disclosure and transparency spans over several sections.•The Company will promptly notify the exchange of any proposed change in the general character or nature of •its business.Clause 49-VI provides that there shall be a separate section on corporate governance in the annual reports of •company, with a detailed compliance report on corporate governance.The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close •of quarter as per the following format.The Ministry of Heavy Industries and Public Enterprises, Department of Public Enterprises has issued guidelines •oncorporategovernanceforcentralpublicsectorenterpriseswhichwererevisedbyanotificationno.18(8)/2005-GM dt. 14th May 2010.All listed CPSEs are required to follow the SEBI Guidelines on corporate governance.•The board of directors of the company shall have an optimum combination of functional, nominee and independent •directors.The statutory auditors recommended by the audit committee are required to be appointed at a general body •meeting of the shareholders of the insurer.

ReferencesLegal Framework and Corporate Governance: An Indian Perspective. • [Pdf] Available at: <http://www.ijcem.org/papers012012/ijcem_012012_03.pdf>[Accessed22November2013].Corporate Governance in India: A legal Analysis. • [Pdf] Available at: <http://psrcentre.org/images/extraimages/312018.pdf> [Accessed 22 November 2013].Das, S. C., • Corporate Governance in India: An Evaluation. PHI Learning Pvt. Ltd., New Delhi.Laxmikanth, M ., • Governance In India. Tata McGraw-Hill Education, New Delhi.Indian Legal System Reform: Empirical Baselines and Normative Frameworks - Welcome Address. • [Video online] Available at: <http://www.youtube.com/watch?v=s8Pmotwesfg > [Accessed 22 November 2013].Introduction to Corporate Governance.flv. • [Video online] Available at: <http://www.youtube.com/watch?v=AHh6_Y6HcA4>[Accessed22November2013].

Recommended ReadingThankom, A. and Turner, J., 2009. • Corporate Governance and Development: Reform, Financial Systems and Legal Frameworks. Edward Elgar Publishing, USA.Swamy, S., 2009. • Corruption and Corporate Governance in India: Satyam, Spectrum, and Sundaram. Har Anand Publications, New Delhi.Dewan, S . M., • Corporate Governance in Public Sector Enterprises. Pearson Education, India.

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Self AssessmentTheheartofcorporategovernanceis_____________,disclosure,accountabilityandintegrity.1.

ambiguitya. transparencyb. leadingc. legislatived.

Goodgovernanceflowsfromethicalbusinesspracticesevenwhenthereisno__________.2. integritya. accountabilityb. legislationc. coordinationd.

What stipulates that every public company shall have minimum three directors?3. Section 25 of the Companies Act, 1946a. Section 22 of the Companies Act, 1957b. Section 2 of the Companies Act, 1956c. Section 252 of the Companies Act, 1956d.

Which of the following is the prime regulatory authority which regulates all aspects of securities market enforces 4. the Securities Contracts (Regulation) Act including the stock exchanges?

The Securities and Exchange Board of India (SEBIa. )Market and Banking (RBI)b. Simple, Moral, Accountable, Responsive and Transparent (SMART)c. The Insurance Regulatory and Development Authority (IRDA)d.

Who administers The Companies Act?5. The Securities and Exchange Board of India (SEBI)a. The Companies Act, 1956 b. CertifiedInformationSystemsAuditorc. The Ministry of Corporate Affairsd.


1.Company registration A.Allthestatutoryfilingofe-Forms,whetherannuallyoreventbasedisgrouped under this service.

2. Compliance relatedfiling

BCompaniesarerequiredtofileparticularsforregistrationofchargecreatedormodifiedandthesatisfactionofchargewiththeconcernedROC.

3. Change services C. All the forms required for the purpose of incorporating companies in India.

4. Charge management D. Cover matters in respect of Indian companies, especially those pertaining to any change in the capital structure.

1-C, 2-A, 3-D, 4-Ba. 1-B, 2-C, 3-A, 4-Db. 1-A, 2-D, 3-B, 4-Cc. 1-D, 2-B, 3-C, 4-Ad.


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Which of the following statement is true?7. An e-Form has been rejected for complaints with respect to each company.a. An e-Form has been prescribed for complaints with respect to each companyb. .An e-Form has been un-prescribed for complaints with respect to each company.c. An e-Form has been disorganised for complaints with respect to each company.d.

What provides that the company shall lay down procedures to inform board members about the risk assessment 8. and minimisation procedures?

Clause 49-IV(C)a. Clause 49-IV(G)(ia)b. Clause 49-IV(G)(ii)c. Clause 49-VId.

WhatmeanstheperiodofthreemonthscommencingonthefirstdayofApril,July,OctoberorJanuaryofa9. financialyear?

Semi-quartera. Monthly- quarterb. Quarterc. Forth nightd.

Thenumberoffunctionaldirectors(includingCMD/MD)shouldnotexceed________oftheactualstrength10. of the board.

70%a. 50%b. 55%c. 40%d.

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Chapter V

Legal Framework of Corporate Governance: An International Perspective

Aim


introduce international legal framework of corporate governance•

explain corporate governance in US [The Sarbanes Oxley Act (SOX), 2002]•

explicate corporate governance in the United Kingdom•

Objectives


enlist board composition•

elucidate corporate governance in Australia•

explain New York stock exchange listing rules•

Learning outcome


identify audit committee and audit committee charter•

understand corporate governance principles by the ASX corporate governance council•

describe the board structure•


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5.1 IntroductionInternationalbodies,governments,financialinstitutions,publicandprivatesectorbodiesareencouragingdebatesand spearheading initiatives towards good corporate governance. Better regulatory and self-regulatory corporate governance frameworks and enforcement mechanisms are being implemented through tougher legislations and corporate governance codes.

Much of the debate surrounding corporate governance relate to issues, such as the separation of the role of the chairmanandthechiefexecutiveofficer,theestablishmentofaudit,remunerationandnominationcommitteesandthe increased number of independent non-executive directors on the board. This chapter will discuss the corporate governance regimes relating to these issues in the United States of America, United Kingdom and Australia. Boards of companies in these countries are unitary in structure. They have only one board, rather than having a board of owners and a board of managers or employees, as some nations do like Germany, France, etc.

5.2 United States of AmericaUS Securities and Exchange Commission (SEC) is one of the most powerful machineries for exerting pressure on behalf of Federal Government on the companies. It regulates many processes affecting companies, stakeholders and the market. There are elaborate and important rules on disclosures and procedures for complying with the same. SEC regulations are a vital part of the US corporate governance as it largely controls information.

Corporate governance in US [The Sarbanes Oxley Act (SOX), 2002]The SOX Act was signed into law by the US President on 30th July, 2002. The Sarbanes Oxley Act is also known as the ‘Public Company Accounting Reform and Investor Protection Act of 2002’. This legislation brought with it fundamental changes in virtually every area of corporate governance and particularly in auditor independence, conflictsofinterest,corporateresponsibility,enhancedfinancialdisclosures,andseverepenalties,bothfinesandimprisonment for willful default by managers and auditors. The main provisions of the Act are:

The Act called for establishment of the Public Company Accounting Oversight Board, whose duties are as •follows:

Registerandregulateallpublicaccountingfirmsthatprepareauditreports. �Establish or adopt, or both, by rule, auditing, quality control, ethics, independence, and other standards �relating to the preparation of audit reports.Conductinspectionsofregisteredpublicaccountingfirms. �Conduct investigations and disciplinary proceedings concerning, and impose appropriate sanctions, where �justifiedupon,onregisteredpublicaccountingfirmsandassociatedpersonsofsuchfirms.Perform such other duties or functions as the board determines which are necessary or appropriate to �promote high professional standards among, and improve the quality of audit services offered by, registered publicaccountingfirmsandassociatedpersonsthereoforotherwisetocarryoutthisAct,inordertoprotectinvestors, or to further the public interest.Enforce compliance with professional standards, and the securities laws relating to the preparation and �issuance of audit reports and the obligations and liabilities of accountants with respect thereto, by registered publicaccountingfirmsandassociatedpersonsthereof.Set the budget and manage the operations of the board and the staff of the board. �

Itprohibitsanypublicaccountingfirmfromprovidingnon-auditserviceswhileauditingfirm.Theseservices•are as follows:

Bookkeepingorotherservicesrelatedtotheaccountingrecordsorfinancialstatementsoftheauditclient �Financial information systems design and implementation �Appraisal or valuation services, fairness opinions, or contribution-in-kind reports �Actuarial services �Internal audit outsourcing services �Management functions or human resources �

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Broker or dealer, investment adviser, or investment banking services �Legal services and expert services unrelated to the audit �Any other service that the board determines, by regulation, is impermissible �

The lead audit and reviewing partner must rotate off the audit every 5 years. It shall be unlawful for a registered •publicaccountingfirmtoprovideauditservicestoanissuer,ifthelead(orcoordinating)auditpartner(havingprimary responsibility for the audit), or the audit partner responsible for reviewing the audit, has performed auditservicesforthatissuerineachofthe5previousfiscalyears.The Act calls for the formation of an independent and competent audit committee, which is directly responsible •fortheappointment,compensation,andoversightoftheworkofanyregisteredpublicaccountingfirmandofauditor’sactivities.Itrequiresthateachmemberofafirm’sauditcommitteebeamemberoftheboardofdirectors and be ‘independent’. In order to be considered independent, a member of an audit committee may notacceptanyconsulting,advisory,orothercompensatoryfeefromtheissuer;orbeanaffiliatedpersonoftheissuer or any subsidiary thereof.Eachregisteredpublicaccountingfirmthatperformsforanyissueranyauditshalltimelyreporttotheaudit•committee of the issuer the following details:

All critical accounting policies and practices to be used. �Allalternative treatmentsoffinancial informationwithingenerallyacceptedaccountingprinciples that �havebeendiscussedwithmanagementofficialsoftheissuer,ramificationsoftheuseofsuchalternativedisclosuresandtreatments,andthetreatmentpreferredbytheregisteredpublicaccountingfirm.Otherwrittencommunicationsbetweentheregisteredpublicaccountingfirmandthemanagementofthe �issuer, such as any management letter or schedule of unadjusted differences.

Each audit committee shall establish procedures for:- (i) the receipt, retention and treatment of complaints •received by the issuer regarding accounting, internal accounting controls, or auditing matters; and (ii) the confidential,anonymoussubmissionbyemployeesoftheissuerofconcernsregardingquestionableaccountingor auditing matters.TheActrequiresthattheprincipalexecutiveofficerorofficersandtheprincipalfinancialofficerorofficers,•orpersonsperformingsimilarfunctions,tocertifythatthefinancialstatementsaccuratelyandfairlyrepresentthefinancialconditionandresultsofoperationsof thecompany, ineachannualorquarterlyreportfiledorsubmitted.TheActrequiresrapiddisclosureofmaterialchangesinthefinancialconditionsoroperationsofthefirm,which•may include trend and qualitative information and graphic presentations, as necessary or useful for the protection of investors and in the public interest.Itprohibitsloanstoanyofthefirm’sdirectorsorexecutives.Itshallbeunlawfulforanyissuertoextendor•maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loantoorforanydirectororexecutiveofficer(orequivalentthereof)ofthatissuer.It requires that each annual report contains an internal control report. This report shall state the responsibility of •managementforestablishingandimplementingadequateproceduresforfinancialreporting,aswellascontainan assessment of effectiveness of internal control structure and procedures, any code of ethics and contents of that code.

New York Stock Exchange listing rulesCompanies listed on the New York Stock Exchange are required to comply with certain standards regarding corporate governance NYSE listing rules. The relevant provisions of the New York Stock Exchange’s listing rules are summarised below. Section 303A of NYSE listing rules requires that companies listed on the exchange must comply with certain standards regarding corporate governance. Consistent with the NYSE’s traditional approach, as well as the requirements of the Sarbanes-Oxley Act of 2002, certain provisions of Section 303A are applicable to some listed companies, but not to others. Section 303A applies in full to all companies listing common equity securities, with the following exceptions:


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A company in which, more than 50% of the voting power is held by an individual, a group or another •company.

Limited partnerships and companies in bankruptcy proceedings need not comply with the requirements. �Listed companies that are foreign private issuers are permitted to follow home country practice in lieu of �this provision.

The broad provisions Listed companies must have a majority of independent directors. Effective boards of directors exercise independent judgement in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality ofboardoversightandlessenthepossibilityofdamagingconflictsofinterest.Inordertotightenthedefinitionof‘independent director’ for purposes of the following standards:

Nodirectorqualifiesas‘independent’unlesstheboardofdirectorsaffirmativelydeterminesthatthedirectorhas•nomaterialrelationshipwiththelistedcompany(directlyorasapartner,shareholderorofficerofanorganisationthat has a relationship with the company). It is best that boards making ‘independence’ determinations broadly consider all relevant facts and circumstances since it cannot be limited. In particular, when assessing the materiality of a director’s relationship with the listed company, the board should consider the issue not merely from the standpointofthedirector,butalsofromthatofpersonsororganisationswithwhichthedirectorhasanaffiliation.Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familiar relationships, among others. However, as the concern is independence from management, the exchange doesnotviewownershipofevenasignificantamountofstock,byitself,asabartoanindependencefinding.In addition, a director is not independent if:•

The director is, or has been within the last three years, an employee of the listed company, or an immediate �familymember is,orhasbeenwithin the last threeyears, anexecutiveofficer,of the listedcompany.EmploymentasaninterimchairmanorCEOorotherexecutiveofficershallnotdisqualifyadirectorfrombeing considered independent following that employment.The director has received, or has an immediate family member who has received, during any twelve-month �periodwithinthelastthreeyears,morethan$120,000indirectcompensationfromthelistedcompany,otherthan director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).Thedirectorisacurrentpartneroremployeeofafirmthatisthelistedcompany’sinternalorexternalauditor �orthedirectorhasanimmediatefamilymemberwhoisacurrentpartnerofsuchafirmorthedirectorhasanimmediatefamilymemberwhoisacurrentemployeeofsuchafirmandpersonallyworksonthelistedcompany’s audit or the director or an immediate family member was within the last three years a partner or employeeofsuchafirmandpersonallyworkedonthelistedcompany’sauditwithinthattime.The director or an immediate family member is, or has been with the last three years, employed as an �executiveofficerofanothercompanywhereanyofthelistedcompany’spresentexecutiveofficersatthesame time serves or served on that company’s compensation committee.Thedirectorisacurrentemployee,oranimmediatefamilymemberisacurrentexecutiveofficer,ofa �company that has made payments to, or received payments from, the listed company for property or services inanamountwhich,inanyofthelastthreefiscalyears,exceedsthegreaterof$1million,or2%ofsuchother company’s consolidated gross revenues.An ‘immediate family member’ includes a person’s spouse, parents, children, siblings, mothers and �fathers-in-law, sons and daughters-in-law, brothers and sisters in law, and anyone (other than domestic employees) who shares such person’s home. Listed companies need not consider individuals who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated.

Executive sessionsTo empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management. Regular scheduling of such meetings is important not only to foster better communication among non-management directors,

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but also to prevent any negative inference from attaching to the calling of executive sessions. A non-management director must preside over each executive session, although the same director is not required to preside at all executive sessions.

It further provides that listed companies may instead choose to hold regular executive sessions of independent directors only. An independent director must preside over each executive session of the independent directors, although the same director is not required to preside at all executive sessions of the independent directors. If a listed company chooses to hold regular meetings of all non-management directors, such listed company should hold an executive session including only independent directors at least once a year.

Corporate governance guidelinesListed companies must adopt and disclose corporate governance guidelines. The following subjects must be addressed in the corporate governance guidelines:

Directorqualificationstandards•Director responsibilities•Director access to management and, as necessary and appropriate, independent advisors•Director compensation•Director orientation and continuing education•Management succession•Annual performance evaluation of the board•

Code of business conduct and ethicsListedcompaniesmustadoptanddiscloseacodeofbusinessconductandethicsfordirectors,officersandemployees,andpromptlydiscloseanywaiversofthecodefordirectorsorexecutiveofficers.EachlistedcompanyCEOmustcertify to the NYSE each year that he or she is not aware of any violation by the listed company of NYSE corporate governancelistingstandards,qualifyingthecertificationtotheextentnecessary.

Audit committeeListed companies must have an audit committee. Composition of audit committee includes:

The audit committee must have a minimum of three members.•All the members of the audit committee must be independent•Eachmemberoftheauditcommitteemustbefinanciallyliterate;assuchqualificationisinterpretedbythe•company’sboardinitsbusinessjudgement,ormustbecomefinanciallyliteratewithinareasonableperiodoftime after his or her appointment to the audit committee.Inaddition,atleastonememberoftheauditcommitteemusthaveaccountingorrelatedfinancialmanagement•expertise,asthecompany’sboardinterpretssuchqualificationinitsbusinessjudgement.

Audit committee charterThe audit committee must have a written charter that addresses:

The committee’s purpose which includes assisting board oversight of the following factors:•Theintegrityofthecompany’sfinancialstatements. �The company’s compliance with legal and regulatory requirements. �Theindependentauditor’squalificationsandindependence. �The performance of the company’s internal audit function and independent auditors. �To prepare an audit committee report as required by the SEC to be included in the company’s annual proxy �statement.

Annual performance evaluation of the audit committee.•The duties and responsibilities of the audit committee which are as follows:•


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Obtain and review a report by the independent auditor describing the firm’s internal quality-control •proceduresDiscussthecompany’sannualauditedfinancialstatementsandquarterlyfinancialstatementswithmanagement•and the independent auditorDiscussthecompany’spressreleasesaboutitsearnings,aswellasfinancialinformationandearningsguidance•provided to analysts and rating agenciesDiscuss policies with respect to risk assessment and risk management•Meet separately, periodically, with management, with internal auditors and with independent auditors•Reviewwiththeindependentauditoranyauditproblemsordifficultiesandmanagement’sresponse•Set clear hiring policies for employees or former employees of the independent auditors•Report regularly to the board of directors•

Remuneration/compensation committeeListed companies must have a compensation committee composed entirely of independent directors. The compensation committee must have a written charter that addresses the following:

The committee’s purpose and responsibilities which include, direct responsibility to:•Review and approve corporate goals and objectives relevant to CEO compensation, evaluate the CEO’s �performance in light of those goals and objectives, and, either as a committee or together with the other.Independent directors (as directed by the board), determine and approve the CEO’s compensation level �based on this evaluation.Make recommendations to the board with respect to non-CEO compensation, incentive-compensation plans �and equity-based plans.Produce a compensation committee report on executive compensation to be included in the company’s �annual proxy statement.

An annual performance evaluation of the compensation committee.•

Nominating/corporate governance committeeListed companies must have a nominating/corporate governance committee composed entirely of independent directors. The nominating/corporate governance committee must have a written charter addressing the following:

The committee’s purpose and responsibilities which include:•Toidentifyindividualsqualifiedtobecomeboardmembers,consistentwithcriteriaapprovedbytheboard, �and to select, or to recommend that the board select, the director nominees for the next annual meeting of shareholders.To develop and recommend to the board a set of corporate governance principles applicable to the �corporation.To oversee the evaluation of the board and management. �

An annual performance evaluation of the committee.•

5.3 Corporate Governance in The United KingdomUK combined Code 2008, has set standards of good practice in relation to issues such as board composition and development,remuneration,accountabilityandauditandrelationswithshareholders.Significantdeclineineconomicconditions led to revision of the Combined Code by Financial Reporting Council during 2009 by Sir David Walker. It was announced that the code would be known as the UK Corporate Governance Code 2010, in order to make the code’s status as the UK’s recognised corporate governance standard known to foreign investors, and to foreign companies listed in the UK. The new code applies to accounting periods beginning on or after 29th June, 2010 and, as a result of the new listing regime introduced in April 2010, applies to all companies with a Premium Listing of equity shares regardless of whether they are incorporated in the UK or elsewhere. All companies with a Premium Listing are required under the FSA Listing Rules to report in their annual report on how they have applied the

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code. The code is a guide to a number of key components of effective board practice. It is based on the underlying principles of all good governance: accountability, transparency, probity and focus on the sustainable success of an entity over the longer term.

While considering the new UK Corporate Governance Code, it is worthwhile to consider the new listing regime in UK. The new regime has segmented the listing of companies under two tiers i.e., standard and premium. Under standard listing the companies shall comply with EU minimum standards and premium listings shall be also be required to comply with super-equivalent rules. All types of security other than equity shares with full voting rights mustbelistedunderthestandardsegment,withinwhichtherearefivecategories,shares,GDRs,debtanddebt-likesecurities, securitised derivatives, and miscellaneous securities. Financial Services Authority (FSA), UK has sought to apply rules on a consistent basis between UK incorporated companies and overseas companies willing to list on UK Exchange. It requires companies with a standard listing of GDRs or shares (other than preference shares which are specialist securities) to include a corporate governance statement in the director’s report specifying the governance codethatappliestothemaswellasdetailsofinternalfinancialcontrolandriskmanagementarrangements.

Shares which have full voting rights are regarded as eligible for premium listing by the FSA. It further requires overseas premium listed companies, which are new applicants, to provide in their constitutions for shareholders to have pre-emption rights on secondary share issues. The standard listing segment, which was previously only available to overseas companies, shall now be available to UK companies also. New listing regime poses to strengthen the rules for overseas premium listed companies by requiring them to ‘comply or explain’ against the combined code on corporate governance and to offer pre-emption rights to their shareholders.

Premium Listing

StandardListing

Admissionrequirements all types of listing

Minimum market capitalization of £700,000 for equ ity (sh ares & DRs) and £200,000 for debt

Production of a prospectus forapproval by the UKLA (UK Listing Authority)

Admission to trading on the Main Market

The 'super equivalent'requirements for apremium listing

A minimum of 25 per cent ofshares must be in public hands

3 year trading record normally required

Clean annual repor

Clean w orking capital s tatement

3 year revenue earning record covering a t least 75% of the business

Table 5.1 Key regulatory requirements of the main types of security

The UK Corporate Governance Code is the re-fragmentation of the earlier UK Combined Code on Corporate Governance with several structural changes including new provisions relating to board evaluation and annual elections. It is subject to the existing comply or explain approach. The following paragraphs will deal with a few relevant developments in the code.

Board compositionThe board should include an appropriate combination of executive and nonexecutive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision-taking. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director:


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Hasbeenanemployeeofthecompanyorgroupwithinthelastfiveyears.•Has, or has had within the last three years, a material business relationship with the company directly, or as a •partner, shareholder, director or senior employee of a body that has such a relationship with the company.Has received or receives additional remuneration from the company apart from a director’s fee, participates in •the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme.Has close family ties with any of the company’s advisers, directors or senior employees.•Holdscross-directorshipsorhassignificantlinkswithotherdirectorsthroughinvolvementinothercompanies•or bodies.Representsasignificantshareholder.•Hasservedontheboardformorethannineyearsfromthedateoftheirfirstelection.•

Except for smaller companies (a smaller company is one that is below the FTSE 350 throughout the year immediately prior to the reporting year), at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors.

Role of the boardUK Corporate Governance Code clearly provides that every company shall be headed by an effective board which shall collectively be responsible for the long-term success of the company. The board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed andmanaged.Theboardshouldsetthecompany’sstrategicaims,ensurethatthenecessaryfinancialandhumanresources are in place for the company to meet its objectives and review management performance. The code provides that the board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

The code encourages nomination committees explicitly to include the board’s gender mix in the factors that are taken into account when considering the need for new appointments. The principle now reads: “The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard forthebenefitsofdiversityontheboard,includinggender.”

ChairmanIn addition to separation of roles between the chairman and chief executive officer the chairman is also heldresponsible for leadership of the board and ensuring its effectiveness on all aspects of its role. The chairman should also promote a culture of openness and debate by facilitating the effective contribution of non-executive directors in particular and ensuring constructive relations between executive and non-executive directors. The principle refers to the chairman’s responsibilities for ensuring a culture of openness and debate, and that adequate time is available for discussion. The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. The chairman should ensure effective communication with shareholders. A new provision has been added stating that the chairman should regularly review and agree with each director their training and development needs.

Senior independent directorsThe board should appoint one of the independent non-executive directors to be the senior independent director to provide a representing board for the chairman and to serve as an intermediary for the other directors when necessary. The senior independent director should be available to shareholders, if they have concerns which contact through the normal channels of chairman, chief executive or other executive directors has failed to resolve or for which suchcontactisinappropriate.Theseniorindependentdirectorisalsoexpectedtoattendsufficientmeetingswitharange of major shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders.

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Performance evaluation of directorsThe board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. The chairman should act on the results of the performance evaluation by recognising the strengths and addressing the weaknesses of the board. The board should state in the annual report how performance evaluation of the board, its committees and its individual directors has been conducted. Evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years. A statement should be made available of whether an external facilitator has any other connection with the company. The non-executive directors, led by the senior independent director, should be responsible for performance evaluation of the chairman, taking into account the views of executive directors.

Election of directorsThe code provides that all directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. It provides that the directors of FTSE 350 companies should be subject to annual election byshareholders.Allotherdirectorsshouldbesubjecttoelectionbyshareholdersatthefirstannualgeneralmeetingafter their appointment, and to re-election thereafter at intervals of no more than three years. Non-executive directors who have served longer than nine years should be subject to annual re-election. The names of directors submitted for electionorre-electionshouldbeaccompaniedbysufficientbiographicaldetailsandanyotherrelevantinformationto enable shareholders to take an informed decision on their election.

Accountability and risk managementThe code provides that the board should present a balanced and understandable assessment of the company’s position and prospects. The board’s responsibility extends to interim and other price-sensitive public reports and reports to regulators as well as to information required to be presented by statutory requirements. An explanation shall be added to the annual report stating the company’s strategy for generating long-term value (the business model) that would enhance the ability of investors and other users of report to assess the disclosures required under the business review.Thecodehasclearlyheldtheboardresponsiblefordeterminingthenatureandextentofthesignificantrisks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems.

RemunerationThe performance-related elements of executive director’s remuneration should be stretching and designed to promote thelong-termsuccessofthecompany.Levelsofremunerationshouldbesufficienttoattract,retainandmotivatedirectors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose.

Apart fromother things, remuneration for non-executive directors should reflect the time commitment andresponsibilities of their role. Remuneration for non-executive directors should not include share options or other performance-relatedelements.Payoutsunderincentiveschemesshouldbesubjecttonon-financialperformancecriteria where appropriate and compatible with the company’s risk policies and systems, and that companies should consider provisions that enable them to reclaim variable components in cases of mis-statement or misconduct. The code provides that for each resolution, where a vote has been taken on a show of hands, the company should ensure that the information relating to results is disclosed in meeting and also on the website of the company.

5.4 Corporate Governance in AustraliaAustralia’s corporate governance framework contains a range of measures that promote accountability of management andtransparencyoffinancialandotherinformation.Ontheregulatoryframeworkofcorporategovernance,theAustraliangovernmenthasundertakenasetofreformstoimprovedisclosurenormsoffinancialinformationandtoupdate accounting rules. In the matter of corporate governance in Australia, the recommendation of Shann Turnbull, a very well-known Australian expert in corporate governance deserves mention. He has recommended that there should be a ‘dual board structure’ along with a ‘corporate senate’ to oversee the regular board functioning. The corporatesenatewilldetermineaccountingpolicies,directauditactivities,arbitrateonboardconflicts,adviceAGMondirectors’benefits.ThesenatewillalsonominatedirectorsintheboardandwillactastrusteesforanyEmployeesStock Option Scheme (ESOP). The corporate senate will have maximum of 3 (three) members who will be elected


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on the basis of ‘one vote per shareholder’ instead of ‘one vote per share’ principle. The corporate senate should have no proactive power of any kind. However, it will have the ‘veto’ power over any activity in which the board has a conflictofinterests,andeventhatcanbeoverriddenbyavoteof75%oftheshares.

According to the 1998 International Survey of Institutional Investors carried out by Russell Reynolds Associates, the institutions have set high standards of corporate governance in Australia using the code of corporate practices and conduct as their basic model. As Australian companies begin to have global dimensions the pressure for good governance will increase in the coming days.

AccountabilityIntheareaofaccountability,therearecertainminimumobligationsandresponsibilitiesdirectorsmustfulfilincludingduties to:

Act in good faith.•Act in the best interests of the company.•Exercise their powers with appropriate care and diligence that is reasonable in all of the circumstances.•Not to make inappropriate use of inside information.•Not misuse their position for their own or a third party’s possible advantage (or to the possible detriment of the •company).Avoid inappropriate related party transactions.•Avoid insolvent trading.•

Transparency and disclosureThe principal objective of Australia’s corporate regulatory framework is to enhance disclosure and ensure transparency of corporate information as a means of promoting proper conduct of directors and senior management.

Among the areas covered by the Corporations Act are:TheformulationofAustralianAccountingStandardstoensurecompanyfinancialstatementscanbereliedon•by all stakeholders.Timely disclosure to the market of events that may affect the price of the company’s shares.•Informationaboutshareholdingsandbeneficialownershipofshares.•The entitlement of shareholders to information about the timing of general meetings and their purpose.•The entitlement of shareholders to ask questions about or comment on the company’s management.•The provision of information to shareholders in relation to related party transactions.•NotificationtoASICofinformationrelatingtodirectors,andcompanyofficersincludingCEO’sandcompany•secretaries.The maintenance by companies of registers of members, option holders and debenture holders.•Exposure of director’s remuneration and the number of meetings directors have attended.•

Australian Stock Exchange listing rulesThe Australian Stock Exchange through its listing rules regulates the behaviour of ASX listed companies. In addition to the listing rules, which are mandatory, the ASX has a set of guidance notes to assist listed companies to comply with both the spirit and letter of the rules.

Corporate governance principles by the ASX corporate governance councilThe ASX corporate governance council issued corporate governance principles issued by ASX corporate governance council in 2003 were revised in 2007 and came into effect from January 1, 2008. It has been further revised in 2010. The recommendations are not prescriptions, they are guidelines, designed to bring out effective governance structure. The approach is similar to the UK combined code, i.e., comply or explain. In Australia it is called, if not, why not approach!. If a company considers that a recommendation is inappropriate to a particular circumstance, it hastheflexibilitynottoadoptitandexplainwhyithasnotadopted.

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The recommendations are directed at companies and other types of listed entities. Where appropriate, the term, company is used in the principles and recommendations to encompass any listed entity, including listed managed investment schemes (trusts), and listed foreign entities. Some of the recommendations of the council are explained in the following paragraphs.

Board structureCompanies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. Majority of the board should be independent directors. The board of directors has to determine the independent status of a director. While determining the independent status of a director, the board should consider whether the director has the following credentials:

Isasubstantialshareholderofthecompanyoranofficerof,orotherwiseassociateddirectlywith,asubstantial•shareholder of the company.Is employed, or has previously been employed in an executive capacity by the company or another group •member, and there has not been a period of at least three years between ceasing such employment and serving on the board.Has within the last three years been a principal of a material professional adviser or a material consultant to the •company or another group member, or an employee materially associated with the service provided.Isamaterialsupplierorcustomerofthecompanyorothergroupmember,oranofficeroforotherwiseassociated•directly or indirectly with a material supplier or customer.Has a material contractual relationship with the company or another group member other than as a director.•

The chairman of the boardThe chairman of the board should be an independent director. The chairman is responsible for leadership of the board andfortheefficientorganisationandconductoftheboard’sfunctioning.Wherethechairmanisnotanindependentdirector, companies should consider the appointment of a lead independent director.

Theroleofchairmanandchiefexecutiveofficer(managingdirector)shouldnotbeexercisedbythesameindividual.Thedivisionof responsibilities between the chairman and the chief executiveofficer shouldbe agreedby theboard and set out in a statement of position or authority. Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.

Audit committeeTheboardisrequiredtoconstituteanauditcommittee.Theauditcommitteeshouldbeofsufficientsize,independenceand technical expertise to discharge its mandate effectively.

CompositionThe Audit Committee should:

Consist only of non-executive directors.•Consist of a majority of independent directors.•Be chaired by an independent chairman. The chairman of the board should not be the chairman of the audit •committee.Have at least three members.•

Theauditcommitteeshouldincludememberswhoareallfinanciallyliterate(thatis,beabletoreadandunderstandfinancialstatements);atleastonemembershouldhaverelevantqualificationsandexperience(thatis,shouldbeaqualifiedaccountantorotherfinanceprofessionalwithexperienceoffinancialandaccountingmatters).


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Terms of referenceThe audit committee should have a formal charter. The charter should clearly set out the audit committee’s role and responsibilities, composition, structure and membership requirements and the procedures for inviting non-committee members to attend meetings. The audit committee should be given the necessary power and resources to meet its charter. This will include rights of access to management, rights to seek explanations and additional information and access to auditors, internal and external, without management present. The audit committee should report to the board. The report should contain the following matters relevant to the committee’s role and responsibilities:

Assessment of whether external reporting is consistent with committee members’ information and knowledge •and is adequate for shareholder needs.Assessment of the management processes supporting external reporting.•Procedures for the selection and appointment of the external auditor and for the rotation of external audit •engagement partners.Recommendations for the appointment or, if necessary, the removal of the external auditor.•Assessment of the performance and independence of the external auditors. Where the external auditor provides •non-auditservices,thereportshouldstatewhethertheauditcommitteeissatisfiedthatprovisionofthoseserviceshas not compromised the auditor’s independence.Assessment of the performance and objectivity of the internal audit function, the results of the committee’s •review of risk management and internal control systems.Recommendations for the appointment or, if necessary, the dismissal of the head of internal audit.•

Remuneration committeeThe board should establish a remuneration committee. The remuneration committee should have a charter that clearly sets out its role and responsibilities, composition, structure and membership requirements and the procedures for non-committee members to attend meetings. The remuneration committee should be structured so that it:

Consists of a majority of independent directors.•Is chaired by an independent director.•Have at least three members.•

Responsibilities of the remuneration committeeResponsibilities of the remuneration committee should include a review of and recommendation to the board on the following matters:

The company’s remuneration, recruitment, retention and termination policies and procedures for senior •executives.Senior executives’ remuneration and incentives.•Superannuation arrangements.•The remuneration framework for directors.•

Nomination committeeThe board is required to constitute a nomination committee. The nomination committee should:

Consist of a majority of independent directors.•Be chaired by an independent director.•Have at least three members.•

Responsibilities of the committee should include recommendations to the board about the following:The necessary and desirable competencies of directors.•Review of board succession plans.•The development of a process for evaluation of the performance of the board, its committees and directors.•The appointment and re-election of directors.•

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Promote ethical and responsible decision-makingTo make ethical and responsible decisions, companies should not only comply with their legal obligations, but should also consider the reasonable expectations of their stakeholders including shareholders, employees, customers, suppliers, creditors, consumers and the broader community in which they operate. It is a matter for the board to consider and assess what is appropriate in each company’s circumstances. It is important for companies to demonstrate their commitment to appropriate corporate practices and decision-making. Companies should establish a code of conduct and disclose the code or a summary of the code as to reveal the following:

Thepracticesnecessarytomaintainconfidenceinthecompany’sintegrity.•The practices necessary to take into account their legal obligations and the reasonable expectations of their •stakeholders.The responsibility and accountability of individuals for reporting and investigating reports of unethical •practices.


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SummaryInternationalbodies,governments,financialinstitutions,publicandprivatesectorbodiesareencouragingdebates•and spearheading initiatives towards good corporate governance.US Securities and Exchange Commission (SEC) is one of the most powerful machineries for exerting pressure •on behalf of Federal Government on the companies.The SOX Act was signed into law by the US President on 30th July, 2002.•The Sarbanes Oxley Act is also known as the ‘Public Company Accounting Reform and Investor Protection •Act of 2002’.Companies listed on the New York Stock Exchange are required to comply with certain standards regarding •corporate governance NYSE Listing Rules.Listed companies must have a majority of independent directors.•Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and •familiar relationships, among others.UK combined Code 2008, has set standards of good practice in relation to issues such as board composition •and development, remuneration, accountability and audit and relations with shareholders.UK Corporate Governance Code clearly provides that every company shall be headed by an effective board •which shall collectively be responsible for the long term success of the company.Australia’s corporate governance framework contains a range of measures that promote accountability of •managementandtransparencyoffinancialandotherinformation.According to the 1998 International Survey of Institutional Investors carried out by Russell Reynolds Associates, •the institutions have set high standards of corporate governance in Australia using the code of corporate practices and conduct as their basic model.The Australian Stock Exchange through its listing rules regulates the behaviour of ASX listed companies.•Companies should have a board of an effective composition, size and commitment to adequately discharge its •responsibilities and duties.Theroleofchairmanandchiefexecutiveofficer (managingdirector) shouldnotbeexercisedby thesame•individual.It is important for companies to demonstrate their commitment to appropriate corporate practices and decision-•making.

ReferencesCorporate Governance. • [Pdf]Availableat:<http://str403.mbatrack.rochester.edu/Chapter_18_01/Ch018.pdf>[Accessed 22 November 2013].Global Perspectives on Corporate Governance and CSR. • [Pdf] Available at: <https://www.ashgate.com/pdf/SamplePages/Global_Perspectives_Corporate_Governance_CSR_Ch1.pdf>[Accessed22November2013].Sun, W., Stewart, J. and Pollard, D., 2011 • Corporate Governance and the Global Financial Crisis: International Perspectives. Cambridge University Press, New York.Calder, A ., 2008. • Corporate Governance: A Practical Guide to the Legal Frameworks and International Codes of Practice. Kogan Page Publishers, U.K.MCL Subject Forum 2013: (M2c) Comparative Corporate Governance. • [Video online] Available at: <http://www.youtube.com/watch?v=s8Pmotwesfg> [Accessed 22 November 2013].Corporate Governance and Short-Termism: Challenges and Solutions. • [Video online] Available at: <http://www.youtube.com/watch?v=uTvw4JBiokA> [Accessed 22 November 2013].

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Recommended ReadingIdowu, S. O. and Filho, W. L., 2009. • Professionals´ Perspectives of Corporate Social Responsibility. Springer.Thankom, A. and Turner, J., 2009. • Corporate Governance and Development: Reform, Financial Systems and Legal Frameworks. Edward Elgar Publishing, U.K.Clarke, T., 2007. • International Corporate Governance: A Comparative Approach. Routledge, New York.


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Self AssessmentWhich of the following is one of the most powerful machinery for exerting pressure on behalf of Federal 1. Government on the companies?

The Sarbanes Oxley Act (SOX)a. US Securities and Exchange Commission (SEC)b. New York Stock Exchange(NYSE)c. Financial Services Authority (FSA)d.

TheSOXActwassignedintolawbytheUSPresidenton___________.2. 30th July, 2002a. 30th August, 2001b. 29th June, 2002c. 17th July, 2003d.

What is ‘The Sarbanes Oxley Act’ also known as?3. Public Company Accounting Reform and Investor Protection Act of 2002a. Public Company Accounting Oversight Boardb. Composition of Audit Committeec. Financial Services Authority (FSA)d.


Nominating/corporate 1. governance committee

a. The role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed.

Role of the board2. b. Is also expected to attend sufficientmeetingswith a range ofmajor

shareholders to listen to their views in order to help develop a balanced understanding of the issues and concerns of major shareholders.

Chairman3. c. Must have a written charter addressing the committee’s purpose and responsibilities.

Senior independent 4. directors d. Should ensure effective communication with shareholders.

1-B, 2-C, 3-A, 4-Da. 1-A, 2-D, 3-B, 4-Cb. 1-D, 2-B, 3-C, 4-Ac. 1-C, 2-A, 3-D, 4-Bd.

___________ofNYSEListingRulesrequiresthatcompanieslistedontheexchangemustcomplywithcertain5. standards regarding corporate governance.

Section 30Ba. Section 203Cb. Section 303Ac. Section 03Dd.

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Which of the following statement is true?6. Listed companies must have a majority of independent directors.a. Listed companies must have a majority of dependent directors.b. Listed companies must have a majority of free directors.c. Not-listed companies must have a majority of independent directors.d.

Which of the following statement is false?7. Listed companies must adopt and disclose corporate governance guidelines.a. Listed companies must have an audit committee.b. Listed companies must have a compensation committee composed entirely of dependent directors.c. Listed companies must have a nominating/corporate governance committee composed entirely of independent d. directors.

____________corporategovernanceframeworkcontainsarangeofmeasuresthatpromoteaccountabilityof8. managementandtransparencyoffinancialandotherinformation.

Australia’sa. UK’sb. New York’sc. India’sd.

Companiesshouldhaveaboardofan___________composition,sizeandcommitmenttoadequatelydischarge9. its responsibilities and duties.

evolvea. effectiveb. effortlessc. exactd.

Which committee should have a formal charter?10. The central committeea. The corporate committeeb. The Australian committeec. The audit committeed.


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Chapter VI

Corporate Governance Forums

Aim


introduce corporate governance•

explain institute of company secretaries of India•

explicate national foundation for corporate governance•

Objectives


enlist steps to better corporate governance•

elucidate organisation for economic co-operation and development•

explain the global corporate governance forum•

Learning outcome


identify OECD principles of corporate governance•

understand the institute of directors, UK•

definecorporategovernance•

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6.1 IntroductionThe world has become a borderless global village. The spirit to implement internationally accepted norms of corporate governance standards found expression in private sector, public sector and the government thinking. The framework for corporate governance is not only an important component affecting the long-term prosperity of companies, but it is critical in terms of national governance, human governance, societal governance, economic governance and political governance, since the activities of the corporate have an impact on every aspect of the society as such. Theneedtofindaninstitutionalframeworkforcorporategovernanceandtoadvocateitscausehasresultedinthesetting up and constitution of various corporate governance forums and institutions, the world over. In this chapter, we will be discussing about some of the prominent forums and institutions of corporate governance.

6.2 Institute of Company Secretaries of IndiaInstitute of Company Secretaries of India’s vision, mission and philosophy are elaborated in the following paragraphs.

Vision and mission statementsRecognising the fact that corporate governance is the key to the development of corporate sector, the institute has adopted a farsighted vision, “To be a global leader in the development of professionals specialising in corporate governance.” The mission of the institute is “To continuously developing high-calibre professionals ensuring good corporate governance and effective management and to carry out proactive research and development activities for protection of interest of all stakeholders, thus contributing to public good.”

ICSI’s philosophy on corporate governanceTheICSI,afterextensiveresearch,hastakenaleadstepindefiningcorporategovernanceas“theapplicationofbest management practices, compliance of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”

ICSI initiativesThe ICSI initiatives are elaborated as follows:

ICSI has set up the ICSI-Centre for Corporate Governance Research and Training with the objective of •fostering and nurturing research initiatives among members of the Company Secretaries profession and other researchers.ICSI National Award for Excellence in Corporate Governance: This was instituted by the ICSI in 2001 to identify, •foster and reward the culture of evolving global best practices of corporate governance among Indian companies. Each year, the award is conferred upon two best governed companies and ICSI Life Time Achievement Award for Translating Excellence in Corporate Governance into Reality is bestowed on an eminent personality.Focus on corporate governance in the course curriculum: Considering corporate governance as core competency •ofCompanySecretaries,educationandtrainingforaCompanySecretarysignificantlyfocusesoncorporategovernance. One full paper on corporate governance titled ‘Governance, Business Ethics and Sustainability’ forms part of the syllabus in the Professional Programme.PMQcourseincorporategovernance:ICSIhaslaunchedaPostMembershipQualificationCourseincorporate•governance to enable its members gain acumen, insight and thorough expertise in corporate governance.Secretarial standards: As a pioneering initiative, ICSI issues Secretarial Standards to integrate, harmonise •and standardise the diverse secretarial practices prevalent in the corporate sector. So far, ICSI has issued 10 Secretarial Standards.Corporate governance modules of best practices: The Institute regularly brings out publications of interest to •members and corporate sector to inculcate the culture of good governance. One of the major publications of ICSI is Corporate Governance-Modules of Best Practices. The revised edition of this publication is brought out each year by incorporating the best practice of the corporates participating in the award.


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Director’s development and capacity building programmes: Recognising that leadership development in •boardroom is the key driver to better governance, the Institute organises directors’ development programmes. The Institute also conducts extensive programmes throughout India and abroad strengthening specialisation in corporate governance.Investor education and awareness: Committed to the cause of investor education, ICSI is actively engaged in •activities relating to investor awareness and education. More than 400 programmes have so far been conducted across the country. Booklets to educate investors have also been issued by the Institute in English, Hindi as well as other regional languages.ICSI recommendations to strengthen corporate governance framework: ICSI after a detailed study of corporate •governance standards, principles and practices across the world, made its recommendations to strengthen the corporate governance framework. Corporate Governance Voluntary Guidelines, 2009 issued by MCA draw substantially from the ICSI recommendations to strengthen the corporate governance framework.Founder member of National Foundation for Corporate Governance: The ICSI is one of the four founder trustees •of National Foundation for Corporate Governance, along with MCA, CII and ICAI. The vision of NFCG is to be a catalyst in making India the best in corporate governance practices.Founder member of Corporate Secretaries International Association (CSIA): ICSI is a founder member of •Corporate Secretaries International Association, along with the Chartered Secretaries Institutes of Australia, Hong Kong, Malaysia, Singapore, South Africa, UK and Zimbabwe. CSIA was launched in March 2010 and has issued ‘Twenty Practical Steps to Better Corporate Governance’.

ICSI’s approach-solution to critical development issuesThe ICSI’s approach to corporate governance provides the solution to the development issues. Wealth-creation, management and sharing are objectives of corporate governance in broadest sense. Maximum creation and effective management of wealth requires application of best management practices whereas sharing of wealth requires compliance of law in letter and spirit along with adherence to ethical standards and discharging corporate social responsibility, so as to develop trust amongst all the stakeholders.

Members of the institute are imparted wider knowledge of management functions, major laws applicable to a company as well as of good corporate governance practices and are subject to a strict professional code of conduct under the company secretaries Act, 1980, so as to ensure ethics in dealing with all stakeholders.

The ICSI National Award for Excellence in Corporate GovernanceIn pursuit of excellence and to identify, foster and reward the culture of evolving globally acceptable standards of corporate governance among Indian companies, the ‘ICSI National Award for Excellence in Corporate Governance’ was instituted by ICSI in the year 2001. The award comprising citation and trophy are based on the outcome of concerted and comprehensive process of evaluation which enables the jury to judge on the basis of parameters, the practices of corporate governance as followed by Indian corporates and acknowledge the best practices worthy ofbeingexemplified.TheunderlyingguidelinefortheCorporateGovernanceAwardistoidentifythecorporates,which follow the best corporate governance norms in letter and spirit.

The institution of the award aims at promoting the cause of corporate governance by:Recognising leadership efforts of corporate boards in practising good corporate governance principles in their •functioning.Recognising implementation of innovative practices, programmes and projects that promote the cause of •corporate governance.Enthusing the corporates in focusing on corporate governance practices in corporate functioning.•Implementation of acknowledged corporate governance norms in letter and spirit.•

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The Institute annually bestows upon a corporate leader the ‘ICSI Lifetime Achievement Award for Translating Excellence in Corporate governance into Reality’ keeping in view the attributes like:

Outstanding contribution to social upliftment and institution building.•Exemplary contribution in enhancement of stakeholders’ value.•A visionary with innovative ideas.•Long tradition of trusteeship, transparency and accountability.•Qualities of leadership, team spirit, integrity and accountability.•Proven track record of adherence of statutory obligations.•Social acceptance and approval.•

6.3 National Foundation for Corporate GovernanceWith the goal of promoting better corporate governance practices in India, the Ministry of Corporate Affairs, Government of India, has set up National Foundation for Corporate Governance (NFCG) in partnership with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI). In the year 2010, stakeholders in NFCG have been expanded with the inclusion of ICWAI and the National Stock Exchange.

6.3.1 Mission of NFCGThe mission of NFCG involves the following:

To foster a culture for promoting good governance, voluntary compliance and facilitate effective participation •of different stakeholders.To create a framework of best practices, structure, processes and ethics.•TomakesignificantdifferencetoIndiancorporatesectorbyraisingthestandardsofcorporategovernancein•India towards achieving stability and growth.

NFCG endeavours to build capabilities in the area of research in corporate governance and to disseminate quality and timely information to concerned stakeholders. It works to foster partnerships with national as well as international organisations. At the national-level, NFCG works with premier management institutes as well as nationally reputed professional organisations to design and administer Directors Training Programmes. The Foundation provides accreditation to these organisations based on their meeting the eligibility criteria designed along with continuing adherence to the same. On obtaining the accreditation these organisations, with the support of NFCG, would set up a ‘National Centre for Corporate Governance (NCCG)’ to provide a training to directors, conduct research and build capability in the area of corporate governance. NFCG also would work to have arrangements with globally reputed organisations with the aim of promoting bilateral initiatives to improve regulatory framework and practices of corporate governance in a concerted and coordinated manner.

6.3.2 The Internal Governance Structure of NFCGThe internal governance structure of NFCG consists of the following:

Governing council•Board of trustees•Executive directorate•

Governing councilGoverning Council of NFCG works at the apex level for policy-making. It is chaired by Minister in-charge, Ministry of Corporate Affairs, Government of India.

Board of trustees‘The Board of Trustees’ deals with the implementation of policies and programmes and lays down procedures for its smooth functioning. It is chaired by Secretary, Ministry of Corporate Affairs and Government of India.


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Executive directorateThe Executive Directorate provides the internal support to NFCG activities and implements the decisions of the Board ofTrustees.TheExecutiveDirectoristheChiefExecutiveOfficerofNFCG.TheExecutiveDirectorateexercisessuch powers as may be delegated to it by the Board of Trustees to carry out such functions as may be entrusted to it by the Board. The Executive Director also functions as the secretary of the council and the board and is supported by full-time dedicated professional secretariat.

6.4 Organisation for Economic Development and Co-operationThe Organisation for Economic Co-operation and Development (OECD) was established in 1961. The OECD was oneofthefirstnon-governmentorganisationstospellouttheprinciplesthatshouldgoverncorporates.TheOECDPrinciples of corporate governance set out a framework for good practice which was agreed by the governments of all 30 countries that are members of the OECD. They were designed to assist governments and regulatory bodies in both OECD countries and elsewhere in drawing up and enforcing effective rules, regulations and codes of corporate governance. They also provide guidance for stock-exchanges, investors, companies and others that have a role in the process of developing good corporate governance.

The original OECD Principles were issued in 1999, they became a generally accepted standard in this area. The original principles of OECD were revised and the revised principles were issued in 2004. The revision of the original principles was to take into account the developments and the corporate governance scandals highlighted the need for improved standards. It was recognised that the integrity of the stock market was critical and to the revised principles were designed to underpin this integrity.

Principles of Corporate Governance OECD

They call on governments to have in place an effective institutional and legal framework to support •good corporate governance practices.They call for a corporate governance framework that protects and facilitates the exercise of •shareholders’ rights.They also strongly support the equal treatment of all shareholders, including minority and foreign •shareholders.They recognise the importance of the role of stakeholders in corporate governance.•They look at the importance of timely, accurate and transparent disclosure mechanisms•They deal with board structures, responsibilities and procedures.•

Table 6.1 Principles of corporate governance

The OECD Steering Group on corporate governance co-ordinates and guides the organisation’s work on corporate governance and related corporate affairs issues, including state-owned assets, market integrity, company law, insolvency and privatisation. The mission of OECD has been to help its member countries to achieve sustainable economicgrowthandemploymentandtoraisethestandardoflivinginmembercountrieswhilemaintainingfinancialstability to contribute to the development of the world economy. In order to contribute to the development of the world economy, the OECD’s focus includes a growing number of other countries, in addition to its 30 members. It now shares its expertise and accumulated experience with more than 70 developing and emerging markets.

The OECD principles of corporate governance have provided governments, regulators and other standard setters with an international benchmark. The OECD works closely with a large number of developing and emerging market countries. In particular, the OECD organises Regional Corporate Governance Roundtables in Asia, Latin America, Eurasia, Southeast Europe and Russia. These Roundtables have used the OECD Principles to formulate regional reform priorities and are now actively engaged in implementing these recommendations.

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OECD principles of corporate governanceFirst released in May 1999 and revised in 2004, the OECD Principles are one of the 12 key standards for international financialstabilityandformthebasisforthecorporategovernancecomponentoftheReportontheObservanceofStandards and Codes of the World Bank Group.

The preamble to the OECD Principles states that they “are evolutionary in nature and should be reviewed in light ofsignificantchangesincircumstances.”Itisalsorecognisedthat,“Toremaincompetitiveinachangingworld,corporations must innovate and adapt their corporate governance practices, so that they can meet new demands and grasp new opportunities.”

Regional initiativesOECD corporate governance co-operation with non-OECD economies is organised around regional roundtables and country programmes which provide key forums for dialogue and the sharing of best policy practices.

Asian contextEstablished in 1999, the OECD-Asian Roundtable on Corporate Governance (ARCG) serves as a regional forum for exchanging experiences and advancing the reform agenda on corporate governance while promoting awareness and use of the OECD principles of corporate governance. It brings together policy makers, practitioners and experts on corporate governance from the Asian region, OECD countries and relevant international organisations.

6.5 Global Corporate Governance ForumThe Global Corporate Governance Forum (the Forum) was founded in 1999 by the World Bank and the Organisation forEconomicCo-operationandDevelopment(OECD)followingthefinancialcrisesinAsiaandRussiainthelatterpart of the 1990’s. It was established to promote initiatives to raise corporate governance standards and practices in developing countries and emerging markets, using the OECD Principles of Corporate Governance as the basis for its work. The Forum’s work programme was launched in 2002 in Monterrey, Mexico at the Financing for Development Meetings organised by the United Nations. It is a multi-donor trust funded IFC facility hosted by the joint IFC-WB Corporate Governance Department in Washington D.C. The forum is also funded by the governments of Canada, France, Luxembourg, Norway, Sweden and Switzerland.

The Forum promotes sustainable economic growth and poverty reduction within the framework of agreed international development targets. The Forum focuses on practical, targeted corporate governance initiatives at the local, regional and global levels. The Forum contributes to the efforts of the international community to promote the private sector asanengineofgrowth,reducethevulnerabilityofdevelopingandtransitioneconomiestofinancialcrises,andprovideincentivesforcorporationstoinvestandperformefficiently,inasociallyresponsiblemanner.Itfosterscooperation with various corporate governance programmes and plays a coordinating role among donors, founders and other relevant institutions. The Forum seeks to address the corporate governance weaknesses of middle-income and low-income countries in the context of broader national or regional economic reform programmes. The Forum has an extensive work programme to support corporate governance reform in developing countries. The focus of theworkprogrammeisbasedonfourcorepillarsasdefinedinitscharter.

The work programme of the Forum is executed, managed, and implemented by the Secretariat, which is the executive arm of the Forum. The Secretariat is also responsible for disbursing funding in accordance with the procedures and criteria agreed by the Steering Committee of Donors and Founders. The Global Corporate Governance Forum’s mandate is to promote global, regional and local initiatives that improve corporate governance policy standards and practices in developing countries on the following four areas:


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Forum’s four focus areas

Raisingawarenessandbuildingconsensusforimplementationofreformthroughmeetings,briefings,•policy papers and conferences.Sponsoring research relevant to the needs of developing countries to underpin reform efforts by sound •analysis through sponsoring papers and building sustainable networks for academics in developing countries.Disseminating best practice materials and publications and guidelines developed with leading global •specialists and practitioners.Supporting institution and capacity building and providing technical assistance to ensure implementation •atthefield-levelthroughtrainingprogrammes,toolkitsandotherdirectassistance.

Table 6.2 Forum’s four focus areas

The Forum is dedicated to advancing corporate governance in emerging-market and developing countries by creating and disseminating practical tools that provide expert guidance on corporate governance and its implementation.

Programmes for implementation of its initiatives

Corporate governance board leadership training

With the assistance of Institutes of Directors and other organisations, the Forum is training trainers to help board directors become ‘change agents’ within their organisations for the adoption of corporate governance best practices.

Corporate governance codes and scorecards

The Forum has supported scores of countries in drafting, implementing, and monitoring corporate governance codes of best practice and scorecards.

Media training programme on corporate governance reporting

In partnership with Thomson Reuters Foundation and Agence France Presse, the Forumtrainsfinancialjournaliststoimprovetheircoverageofcorporategovernance.By broadening awareness, the journalists help promote corporate governance best practices.

Resolving corporate governance disputes

To help companies manage corporate governance disputes more effectively, the Forum, in cooperation with IFC Advisory Services, promotes the use of alternative dispute resolution processes and techniques.

Research networkThe Forum supports a network of leading academics who generate high-priority research on corporate governance issues relevant to emerging markets and developing countries.

Table 6.3 Programmes for implementation of its initiatives

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6.6 The Institute of Directors, UKThe Institute of Directors (IOD) is a non-party non-political business organisation established in United Kingdom in 1903. The IOD seeks to provide an environment conducive to business success.

Objects of IOD

Topromote for thepublic-benefithigh levelsof skill, knowledge,professional competenceand•integrityonthepartofdirectors,andequivalentoffice-holdershoweverdescribed,ofcompaniesand other organisationsTo promote the study, research and development of the law and practice of corporate governance, and •to publish, disseminate or otherwise make available the useful results of such study or researchTo represent the interests of members and of the business community to government and in all •public forums, and to encourage and foster a climate favourable to entrepreneurial activity and wealth creationToadvancetheinterestsofmembersoftheInstitute,andtoprovidefacilities,servicesandbenefits•for them

Table 6.4 Objects of IOD

The day-to-day running of the Institute is managed by the Executive Director, headed by the Director General.

6.7 Commonwealth Association of Corporate GovernanceThe Commonwealth Association of Corporate Governance (CACG) was established in 1998 with the objective of promoting the best international standards germane to a country on corporate governance through education, consultation and information throughout the Commonwealth as a means to achieve global standards of business efficiency,commercialprobityandeffectiveeconomicandsocialdevelopment.

The CACG has two primary objectives:To promote good standards in corporate governance and business practice throughout the Commonwealth.•To facilitate the development of appropriate institutions which will be able to advance, teach and disseminate •such standards.

The CACG also aims to facilitate the development of institutional capacity that promotes good corporate governance by education, consultation and information in all Commonwealth countries. Corporate governance in the Commonwealth is important and is concerned with:

TheprofitabilityandefficiencyofCommonwealthbusinessenterprises,andtheircapacitytocreatewealthand•employment.The long-term competitiveness of Commonwealth countries in the global market.•ThestabilityandcredibilityoftheCommonwealthfinancialsectors,bothnationallyandinternationally.•The relationships between business enterprises within an economy and their sustained ability to participate in •the global economyThe relationship between such business enterprises and their various stakeholders comprising shareholders, •managers, employees, customers, suppliers, labour unions, communities, providers of finance, etc.TheCommonwealth Foundation is funded principally through annual contributions made by member governments. ABoardofGovernorscomprising,inthemain,UK-basedrepresentativesofmembergovernmentsandfiverepresentatives of civil society determines the policies. There are 53 countries of the Commonwealth, of which 46 are currently Commonwealth Foundation members. Membership of the Foundation is voluntary, and is open to all Commonwealth governments.


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6.7.1 CACG Guidelines (Principles for corporate governance in the commonwealthThe CACG guidelines set out 15 Principles of corporate governance which aim primarily at the boards of directors of corporations with a unitary board structure, as will most often be found in the Commonwealth. The principles apply equally to boards of directors of all business enterprises, public, private, family-owned or state-owned. The principles are applicable to both executive and non-executive directors. The term ‘director’ should be taken as being synonymous with any person responsible for the direction of a business enterprise. Similarly, the principles can be usefully applied to other forms of enterprise, such as non-governmental organisations and agencies.

6.8 International Corporate Governance NetworkTheInternationalCorporateGovernanceNetwork(ICGN)isanot-for-profitcompanylimitedbyguaranteeandnothaving share capital under the laws of England and Wales founded in 1995. It has four primary purposes:

To provide an investor-led network for the exchange of views and information about corporate governance •issues internationally.To examine corporate governance principles and practices.•To develop and encourage adherence to corporate governance standards and guidelines.•To generally promote good corporate governance.•

The network’s mission is to develop and encourage adherence to corporate governance standards and guidelines, and to promote good corporate governance worldwide.

Membership of ICGN is open to those who are committed to the development of good corporate governance. The Membershipsectionexplainsthebenefitsofmembership,differenttypesofmembershipandhowtojointheICGN.The ICGN is governed by the ICGN Memorandum and Articles of Association. The management and control of ICGN affairs are the responsibility of the Board of Governors. The Board in turn appoints a number of committees to recommend policy positions, to implement approved projects and to perform such functions that the Board may specify.ThefunctionsoftheICGNSecretariatwerefirstundertakenbytheAssociationofBritishInsurers(ABI)and then in 2000, by the Institute of Chartered Secretaries and Administrators (ICSA) in London.

Global corporate governance principles: revised (2009)The principles aim to assert standards of corporate governance to which the ICGN believes that all companies should aspire. The principles are intended to be of general application around the world, irrespective of legislative background or listing rules. These principles are the ICGN’s overarching set of principles.

6.9 The European Corporate Governance InstituteThe European Corporate Governance Institute (ECGI) was founded in 2002. It has been established to improve corporate governance through fostering independent scientific research and related activities.TheECGI is aninternational scientificnon-profit association. It provides a forum fordebate anddialoguebetweenacademics,legislators and practitioners, focusing on major corporate governance issues and thereby promoting best practice.

Its primary role is to undertake commission and disseminate research on corporate governance. Based upon impartial and objective research and the collective knowledge and wisdom of its members, it advises on the formulation of corporate governance policy and development of best practice and undertakes any other activity that will improve understanding and exercise of corporate governance.

It acts as a focal point for academics working on corporate governance in Europe and elsewhere, encouraging theinteractionbetweenthedifferentdisciplines,suchaseconomics,law,financeandmanagement.TheInstitutearticulates its work by expanding on the activities of the European Corporate Governance Network, disseminating research results and other relevant material. It draws on the expertise of scholars from numerous countries and brings together a critical mass of expertise and interest to bear on this important subject.

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Conference boardThe Conference Board was established in 1916 in the United States of America. The Conference Board is a not-for-profit organisationTheConferenceBoard creates anddisseminates knowledge aboutmanagement and themarketplace to help businesses strengthen their performance and better serve society.

It works as a global, independent membership organisation in the public interest; it conducts research, convenes conferences, makes forecasts, assesses trends, publishes information and analysis, and brings executives together to learn from one another. The Conference Board governance programmes helps companies improve their processes, inspirepublicconfidence,andensurethattheyarecomplyingwithregulations.TheConferenceBoardDirectors’Institute is a premier provider of governance education for directors. Through the Directors’ Institute, the programme provides corporate directors with a non-academic, impartial forum for open dialogue about the real-world business challenges they face. The Corporate Governance programme at The Conference Board has helped corporations develop strong core principles by improving their governance processes through a variety of programmes including director training and global ethics education.

The Conference Board Global Corporate Governance Research Centre brings together a distinguished group of senior corporateexecutivesfromleadingworld-classcompaniesandinfluentialinstitutionalinvestorsinanon-adversarialsetting.Insmallgroupsofprominentseniorexecutives,alldiscussionsareconfidential,enablingafree-flowingexchange of ideas and effective networking. This highly unique forum allows industry leaders to debate, develop, and advance innovative governance practices, and to drive landmark research in corporate governance.

6.10 The Asian Corporate Governance AssociationTheAsianCorporateGovernanceAssociation (ACGA) is an independent, non-profitmembershiporganisationdedicated to working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is fundamental to the long-term development of Asian economies and capital markets.

ACGA’s scope of work covers three areas:Research: Tracking corporate governance developments across 11 markets in Asia and producing independent •analysis of new laws and regulations, investor activism and corporate practices.Advocacy:Engaginginaconstructivedialoguewithfinancialregulators,stockexchanges,institutionalinvestors•and companies on practical issues affecting the regulatory environment and the implementation of better corporate governance practices in Asia.Education:Organisingconferencesandseminarsthatfosteradeeperunderstandingofthecompetitivebenefits•of sound corporate governance and ways to implement it effectively.

ACGA is funded by a network of sponsors and corporate members, including leading pension and investment funds,otherfinancialinstitutions,listedcompanies,multinationalcorporations,professionalfirmsandeducationalinstitutions. It is incorporated under the laws of Hong Kong and is managed by a secretariat based there. Its governing council comprises directors from around Asia.

6.11 Corporate Secretaries International AssociationCSIA, a Geneva registered body, which was established on March 2010 as an international organisation whose members comprise national bodies of professionals at the frontline of governance. It is dedicated to promoting the values and practices of governance professionals in order to create, foster or enhance the environment in which businesscanbeconductedinafair,profitableandsustainablemanner.CSIAissuedtwentypracticalstepstobettercorporate governance.


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Twenty practical steps to better corporate governanceTwenty practical steps to better corporate governance are listed as follows:

Recognise that good corporate governance is about the effectiveness of the governing body not about compliance •with codes.Confirmtheleadershiproleoftheboardchairman.•Check that non-executive directors have the necessary skills, experience and courage.•Consider the calibre of the non-executive directors.•Review the role and contribution of non-executive directors.•Ensure that all directors have a sound understanding of the company.•Confirmthattheboard’srelationshipwithexecutivemanagementissound.•Check that directors can access all the information they need.•Consider whether the board is responsible for formulating strategy.•Recognise that the governance of risk is a board responsibility.•Monitor board performance and pursue opportunities for improvement.•Review relations with shareholders, particularly institutional investors.•Emphasise that the company does not belong to the directors.•Ensurethatdirectors’remunerationpackagesarejustifiableandjustified.•Review relations between external auditors and the company.•Consider relations with the corporate regulators.•Develop written board-level policies covering relations between the company and the societies it affects.•Review the company’s attitudes to ethical behaviour.•Ensure that company secretary’s function is providing value.•Consider how corporate secretary’s function might be developed.•

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SummaryThe spirit to implement internationally accepted norms of corporate governance standards found expression in •private sector, public sector and the government thinkingTheneedtofindaninstitutionalframeworkforcorporategovernanceandtoadvocateitscausehasresultedin•the setting up and constitution of various corporate governance forums and institutions the world over.Considering corporate governance as core competency of Company Secretaries, education and training for •CompanySecretarysignificantlyfocusesoncorporategovernance.The ICSI’s approach to corporate governance provides the solution to the development issues.•In the year 2010, stakeholders in NFCG have been expanded with the inclusion of ICWAI and the National •Stock Exchange.NFCG endeavours to build capabilities in the area of research in corporate governance and to disseminate quality •and timely information to concerned stakeholders.NFCG also would work to have arrangements with globally reputed organisations with the aim of promoting •bilateral initiatives to improve regulatory framework and practices of corporate governance in a concerted and coordinated manner.Governing Council of NFCG works at the apex level for policy-making.•The Organisation for Economic Co-operation and Development (OECD) was established in 1961.•The Global Corporate Governance Forum (the Forum) was founded in 1999 by the World Bank and the •OrganisationforEconomicCo-operationandDevelopment(OECD)followingthefinancialcrisesinAsiaandRussia in the latter part of the 1990s.The IOD is a non party-political business organisation established in United Kingdom in 1903.•The Network’s mission is to develop and encourage adherence to corporate governance standards and guidelines, •and to promote good corporate governance worldwide.The European Corporate Governance Institute (ECGI) was founded in 2002.•The Conference Board was established in 1916 in the United States of America.•ACGA was founded in 1999 from a belief that corporate governance is fundamental to the long-term development •of Asian economies and capital markets.CSIA issued twenty practical steps to better corporate governance.•

ReferencesThe Global History of Corporate Governance. • [Pdf] Available at: <http://www.nber.org/chapters/c10267.pdf> [Accessed 22 November 2013].Corporate Governance and Leadership. • [Pdf] Available at: <http://councilonbusinessandsociety.com/images/uploads/Corporate_Governance_and_Leadership_White_Paper.pdf>[Accessed22November2013].Monks, R. A. G. and Minow, N., 2012. • Corporate Governance. John Wiley & Sons.Whittaker, D . H . and Deakin, S., 2009. • Corporate Governance and Managerial Reform in Japan. Oxford University Press.IFC Global Corporate Governance Forum’s series: “Beyond the Boardroom”. • [Video online] Available at: < http://www.youtube.com/watch?v=_o_GSaaUWUY>[Accessed22November2013].Ms. Beth Payne (US Consul General, Kolkata). • [Video online] Available at: <http://www.youtube.com/watch?v=vs31ZmZkBZg&list=PLE1D2A8E0B2BE079D> [Accessed 22 November 2013].


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Recommended ReadingBernhard, G., Luttermann, C., Saenger, I., Sandrock, O. and Casper, M., 2012. • German Corporate Governance in International and European Context. Springer.Mallin, C . A., 2011. • Handbook on International Corporate Governance: Country Analyses. Edward Elgar Publishing, U.K.Rasheed, A . and Yoshikawa, T., 2012. • The Convergence of Corporate Governance: Promise and Prospects. Palgrave Macmillan.

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Self AssessmentTheICSI,afterextensiveresearch,hastakenaleadstepindefiningcorporategovernanceas“theapplicationof1. best management practices, compliance of law in letter and spirit and adherence to ethical standards for effective managementanddistributionofwealthanddischargeofsocialresponsibilityforsustainable__________ofallstakeholders.”

increasea. developmentb. profitc. lossd.

Wealthcreation,managementandsharingare____________ofcorporategovernanceinbroadestsense.2. creationa. aimb. objectivesc. resultd.


National Foundation for Corporate 1. Governance (NFCG)

A. Deals with the implementation of policies and programmes and laying down the procedure for the smooth functioning.

2. Governing Council of NFCGB. Endeavours to build capabilities in the area of research in

corporate governance and to disseminate quality and timely information to concerned stakeholders.

3. Board of Trustees C.IstheChiefExecutiveOfficerofNFCG.

4. The Executive Directorate D. Works at the apex level for policy-making.

1-B, 2-D, 3-A, 4-Ca. 1-A, 2-C, 3-B, 4-Db. 1-C, 2-A, 3-D, 4-Bc. 1-D, 2-B, 3-C, 4-Cd.

When was the Organisation for Economic Co-operation and Development (OECD) established?2. 1950a. 1941b. 1961c. 1967d.

Whichofthefollowingwasoneofthefirstnon-governmentorganisationstospellouttheprinciplesthatshould3. govern corporate?

The OECDa. The NFCGb. The ICSIc. The CSIAd.


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When was the Global Corporate Governance Forum (the Forum) founded?4. 2004a. 1997b. 1929c. 1999d.

Which of the following statement is true?5. The original principles of NFCG were revised and the revised principles were issued in 2006.a. The original principles of OECD were revised and the revised principles were issued in 2004.b. The original principles of OECD were revised and the revised principles were issued in 1994.c. The original principles of NFCG were revised and the revised principles were issued in 2004.d.

The_____________wasestablishedin1916intheUnitedStatesofAmerica.6. European Corporatea. International Corporateb. Conference Boardc. Asian Corporated.

Which of the following statement is false?7. The Forum promotes sustainable economic growth and poverty reduction within the framework of agreed a. international development targets.The Forum has an extensive work programme to support corporate governance reform in developing b. countries.The work programme of the Forum is executed, managed, and implemented by the Secretariat, which is the c. executive arm of the Forum.The Forum’s work programme was launched in 2008 in Monterrey, Mexico at the Financing for Development d. meetings organised by the United Nations.

Which of the following is a non party-political business organisation established in United Kingdom in 1903?8. The Institute of Directorsa. The Commonwealth Association of Corporate Governance (CACG)b. The International Corporate Governance Networkc. The European Corporate Governance Institute (ECGI)d.

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Chapter VII

Corporate Sustainability

Aim


introduce corporate sustainability•

explain the concept of corporate sustainability•

explicate sustainable development•

Objectives


enlist the role of business in sustainable development•

elucidate corporate sustainability •

explain kyosei•

Learning outcome


identify corporate sustainability and corporate social responsibility•

understand triple bottom line (TBL)•

definesustainabledevelopment•


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7.1 Introduction“When we walk upon Mother Earth we always plant our feet carefully because we know the faces of our future generations are looking up at us from beneath the ground. We never forget them.” One of the fundamental characteristics of a corporate is perpetuity. In the eyes of law, it is treated as a separate legal entity which can hold assets and bear liabilities, can sue and be sued. Although laws grant a perpetual legal status to a corporate, in reality many a time it is observed that corporate becomes non-functional or goes towards a closure situation. Since incorporation, a corporate entity consistently endeavours to better and in long-run eyes towards achieving excellence.

Corporate survival and existence are directly co-related to its products and services being produced and offered to the society wherein it operates. In addition, it has to ensure minimal impairment of the nature for its business activities towards creation of saleable values for the society. It is therefore imperative for a corporate to ensure sustainability for having perpetuity.

7.2 ConceptThe word sustainable is derived from sustain or sustained. The synonyms of the word sustained as per the Collins Thesaurus include perpetual, prolonged, and steady. Two phrases, i.e., Sustainable development and corporate sustainabilityare intermingled.Ifweconsiderfirstoneasauniversalset,corporatesustainability isoneof thesignificantsub-setofsuchuniversalset.

7.3 Sustainable DevelopmentSustainable development is a broad, concept that balances the need for economic growth with environmental protection and social equity. It is a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional changes are all in harmony and enhance both current and future potential to meet human needs and aspirations. Sustainable development combines economics, social justice, environmental science and management, business management, politics and law.

In 1987, a report of the World Commission on Environment and Development of the United Nations (popularly knownasBrundtlandReport)firstintroducedtheconcept.TheCommissiondescribessustainabledevelopmentasaprocess of change in which the exploitation of resources, the direction of investments, the orientation of technological development instrumental change, and the ability of biosphere to absorb the effects of human activities are consistent with future as well as present needs.

It indicates development that meets the needs of the present generation without compromising the ability of the future generations to meet their needs. The principle behind it is to foster such development through technological and social activities which meets the needs of the current generations, but at the same time ensures that needs of the future generation are not impaired. For example, natural energy resources like Coal, Petroleum, etc., should be prudently used and wastage should be avoided, so that future generation can have these energy resources for their survival also.

WCED recognised that the achievement of sustainable development could not be simply left to government regulators andpolicy-makers.Itrecognisedthatindustryhasasignificantroletoplay.Whilecorporatesarethedriversforeconomic development, they are required to be more proactive in balancing this with social equity and environmental protection. This is all the more so because on the one hand, they have been a huge cause of some of the unsustainable conditions, and one the other they have access to the resources necessary to address the problems.

The contribution of sustainable development to corporate sustainability is two-fold. First, it helps set out the areas that companies should focus on environmental, social, and economic performance. Second, it provides a common societal goal for corporations, governments, and civil society to work towards ecological, social and economic sustainability. However, sustainable development by itself does not provide the necessary arguments for why companies should care about these issues. Those arguments come from corporate social responsibility and stakeholder theory.

Corporate sustainability encompasses strategies and practices that aim to meet the needs of stakeholders today while seeking to protect, support and enhance the human and natural resources that will be needed in the future.

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Four fundamental principles of sustainable development agreed by the world community are:Principle of intergenerational equity: Need to preserve natural resources for future generation.•Principle of sustainable use: Use of natural resources in a prudent manner without or with minimum tolerable •impact on nature.Principle of equitable use or intergenerational equity: Use of natural resources by any state/country must take •into account its impact on other states.Principle of integration: Environmental aspects and impacts of socio-economic activities should be integrated •so that prudent use of natural resources is ensured.

This was reinforced at the United Nations Conference on Environment and Development (UNCED) held in Rio de Janeiro in 1992. It is now universally acknowledged that the present generation has to ensure that the people coming ahead, the generations still unborn, have a world no worse than ours and hopefully better. The generations followed these fundamental natural laws for thousands of years. However, scenario started changing rapidly during industrial revolution in Europe and afterwards this started growing side-by-side with advancement of modern society worldwide.

The question is whether we can live in harmony with the environment without warming the planet by sending more greenhouse gases into the atmosphere and without contributing to the current ongoing mass extinction of animals and plantsornot.TheUSEnvironmentalProtectionAgencydefined,“Sustainabledevelopmentmarriestwoimportantthemes, that environmental protection does not preclude economic development and that economic development must be ecologically viable now and in the long-run.” Hence, sustainability encompasses ideas and values that inspire people to become custodian of the environment without compromising economic growth.

7.3.1 Role of Business in Sustainable DevelopmentTrade and industry being an integral part ‘Human society’ has now a pivotal role to play. In this direction, United Nations has already initiated UN Global Compact, a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. Through the process, a business can ensure that markets, commerce, technology andfinanceadvanceinwaysthatbenefiteconomiesandsocietieseverywhere.

Thisisthefirstinitiativeunderwhichbusinessworldisbeingalignedtocommongoals,suchasbuildingmarkets,combating corruption, safeguarding the environment and ensuring social inclusion, and it has resulted in unprecedented partnerships and openness among business, government, civil society, labour and the United Nations. Over 4700 corporates from over 130 countries are participants of Global Compact.

The Global Compact is a policy framework for the development, implementation, and disclosure of sustainability principles and practices designed to establish sustainable business models and markets building inclusive global economy.

The UN Global Compact has two objectives:Ten principles in business activities around the world•Catalyse actions in support of broader UN goals, including the Millennium Development Goals (MDGs)•

Theinitiativeisvoluntaryinnature.Thebenefitsofengagementincludethefollowing:Adopting an established and globally recognised policy framework for the development, implementation, and •disclosure of environmental, social, and governance policies and practices.Sharing best and emerging practices to advance practical solutions and strategies to common challenges.•Advancing sustainability solutions in partnership with a range of stakeholders, including UN agencies, •governments, civil society, labour, and other non-business interests.Linking business units and subsidiaries across the value chain with the Global Compact’s local networks around •the world, many of these in developing and emerging markets.


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Accessing the United Nations’ extensive knowledge of and experience with sustainability and development •issues.Utilising UN Global Compact management tools and resources, and the opportunity to engage in specialised •work streams in the environmental, social and governance realms.

In summary, the Global Compact exists to assist the private sector in the management of increasingly complex risks and opportunities in the environmental, social and governance realms. By partnering with companies in this way, and leveraging the expertise and capacities of a range of other stakeholders, the Global Compact seeks to embed marketsandsocietieswithuniversalprinciplesandvaluesforthebenefitofall.

7.4 What is Corporate Sustainability?Corporatesustainabilityindicatesnewphilosophyasanalternativetothetraditionalgrowthandprofit-maximisationmodel under which sustainable development comprising environmental protection, social justice and equity, and economicdevelopment aregivenmore significant focuswhile recognising simultaneouscorporategrowthandprofitability.

It is a business-approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments. Corporate sustainability describes business practices built around social and environmental considerations. Corporate sustainability encompasses strategies and practices that aim to meet the needs of stakeholders today, while seeking to protect, support and enhance the human and natural resources that will be needed in the future. Corporate sustainability leaders achieve long-term shareholder value by gearing their strategies and management to harness the market’s potential for sustainability products and services, while at the same time successfully reducing and avoiding sustainability costs and risks.

ThomasDyllickandKaiHockertsin‘BeyondtheBusinessCaseforCorporateSustainability’defineCorporateSustainabilityas,“meetingtheneedsofafirm’sdirectandindirectstakeholders(suchas,shareholders,employees,clients, pressure groups, communities, etc.) without compromising its ability to meet the needs of future stakeholders as well.”

TheAustraliangovernmentdefinesCorporateSustainabilityas“encompassingstrategiesandpracticesthataimto meet the needs of the stakeholders today, while seeking to protect, support, and enhance the human and natural resources that will be needed in the future.” Worldwide business communities are recognising the need to address the environmental and social impacts of their activities. The fundamental business objectives towards creating economic values clubbed the environmental and social value addition and evolved the concept of ‘triple bottom line’ under sustainable development. Corporate Boards are required to address issues, such as environment, social justiceandeconomicefficiencytoensuretheirlong-termexistence.

Concern towards social, environmental and economical issues, i.e., covering all the segments of stakeholders, are now basic and fundamental issues which permits a corporate to operate in long run sustainably. Following key drivers need to be garnered to ensure sustainability

Internal capacity building strength: In order to convert various risks into competitive advantage.•Social impact assessment: In order to become sensitive to various social factors, like changes in culture, living •habits, etc.Repositioning capability through development and innovation: Crystallisation of all activities to ensure consistent •growthCorporate sustainability is a business approach creating shareholder value in long-run.•

These may be derived by converting risks arising out of economic, environmental and social activities of a corporate into business opportunities keeping in mind the principles of sustainable development. As a good corporate citizen, the companies are required to focus on the following key aspects.

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Absolute value creation for the societyOrganisations should set its goal towards creation of absolute value to the society. Once it is ensured, a corporate never looks back and its sustainability in long-run is built up.

Ethical corporate practicesIn a short-run, enterprise can gain through non-ethical practices. However those cannot sustain in long-run. Society denies accepting such products or services. For example, in drug and pharmaceutical industry, many products are today obsolete due their side effects which such companies never disclosed to protect their sales volume. When they were banned by the WHO or other authorities, they had to stop their production.

Worth of earth through environmental protectionResources which are not ubiquitous and have economic and social value should be preserved for long-term use and be priced properly after considering environmental and social costs. For example, a power plant should build up itscostmodelefficientlyaftertakingintoaccountcostofitsfuturerawmaterialsourcing,R&Dcostforalternateenergy source, cost for proper pollution control measures and so on.

Equitable business practicesCorporates should not divulge themselves in unfair means and it should create candid business practices, ensure healthy competition and fair trade practices.

Corporate social responsibilityAs a corporate citizen, every corporate is duty bound to its society wherein they operate and serve. Although there are no hard and fast rules, CSR activities need to be clubbed and integrated into the business model of the company.

Innovate new technology/process/system to achieve eco-efficiencyInnovation is the key to success. Risks and crises can be eliminated through innovation. Learning and Innovative enterprise gets a cutting edge over others. These innovative processes bring sustainability if developments are aimed at satisfying human needs and bring quality of life, while progressively reducing ecological impact and resource intensity to a level at least in line with earth’s estimated carrying capacity.

Creating market for allMonopoly,unjustifiedsubsidies,pricenotreflectingrealeconomic,socialenvironmentalcost,etc.,arehindrancesto sustainability of a business. Simultaneously, a corporate is to build up its products and services in such a way so astocaterallsegmentsofcustomers/consumers.Customer’sconfidenceistheessencetocorporatesuccess.

Switching over from stakeholders dialogue to holistic partnershipA business enterprise can advance their activities very positively, if it makes all of stakeholders partner its progress. Itnotonlybuildsconfidenceofvariousstakeholders,butalsohelpsthemanagementtosteerthebusinessunderaverydynamicandflexiblesystems.Thisapproachoffersbusiness,governmentandotherstakeholdersofthesocietyto build up alliance towards bringing common solutions to common concerns being faced by all.

Compliance of StatutesCompliance of statutes, rules and regulations, standards set by various bodies ensure clinical check up of a corporate and it confers societal licence to the corporate to run and operate in the society.

Corporate sustainability and corporate social responsibilityAlthough scholars and practitioners often interpret corporate sustainability and corporate social responsibility as being nearly synonymous, pointing to similarities and the common domain. The two concepts have different backgrounds and different theoretical paths. According to management science, the notion of ‘corporate sustainability’ canbedefinedfirstasthecapacityofafirmtocreatevaluethroughtheproductandservicesitproducesandtocontinue operating over the years. Sustainability, in this context, entails the creation of a sustainable competitive advantage.


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Corporate sustainability can be considered as the attempt to adapt the concept of sustainable development to the corporate setting, matching the goal of value-creation with environmental and social considerations. According to the Dow Jones Sustainability Index, ‘Corporate sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and socialdevelopments.Thejournalofenvironmentalstrategydefinescorporatesustainabilityas‘thecapacityofanenterprise to maintain economic prosperity in the context of environmental responsibility and social stewardship. Accountabilityisthecapabilityofanorganisationtocontinueitsactivities,indefinitely,havingtakendueaccountof the impact on natural, social and human capitals.

Corporate sustainability includes an attempt to assimilate the environmental and social dimensions into business operations: processes, products and procedures. In practical terms, the corporate sustainability approach leads to a very concrete and pragmatic problem; how to measure performance based on the three dimensions outlined and how natural and social values can be incorporated into corporate accounting.

TheevolutionarypartoftheconceptofCSRisdifferentfromthatofCorporateSustainability.Thefirstrecognisedcontribution in the literature dates back to Bowen, who stressed the responsibilities of businesses and wrote that social responsibility refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.

Besides,economicandlegalresponsibilities(thatistobeprofitableandobeythelaw),companiesareexpectedtosatisfy other requirements, relevant to conformity to social norms and voluntary contributions to the community in which they operate. Another important CSR approach developed during the 1980s in the light of the growth of the stakeholder approach. Firms have obligations to a broader group of stakeholders than the simple shareholders, where astakeholderisanygrouporindividualwhocanaffectorisaffectedbytheachievementofthefirm’sobjectives.Business can be understood as a set of relationships among groups which have a stake in the activities that make up the business.

Although Corporate Sustainability and Corporate Social Responsibility gave different roots and have developed alongdiverse theoretical paths, they ultimately converged.This is evident in some recent definitions ofCSRprovided by international organisations like the Prince of Wales International Business Leaders Forum, corporate social responsibility means open and transparent business practices that are based on ethical values and respect for employees, communities and the environment. It is designed to deliver sustainable value to society at large, as well as to shareholders.

The concept of sustainable development has been transposed from the macro to the corporate dimension. Companies, in fact, are a productive resource of our socioeconomic system and key to the eventual implementation of sustainability. According to management theory, the attempt to include sustainability issues in the managerial framework can be divided into two separate issues, corporate sustainability and corporate social responsibility. The actualisation of the theoretical pillars of sustainable development within Corporate Sustainability /Corporate Social Responsibility seems crucial to effectively respond to the challenges posed by sustainability.

7.5 KyoseiAconcisedefinitionofthiswordwouldbe“livingandworkingtogetherforthecommongood”,butforsome,thedefinitionisbroader,“Allpeople,regardlessofrace,religionorculture,harmoniouslylivingandworkingtogetherinto the future.” Kyosei is a Japanese technique meaning ‘a spirit of cooperation’. Kyosei establishes harmonious relations between the company and the following:

Customers•Suppliers•Competitors•Governments•Natural environment•

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Kyoseiphilosophyreflectsaconfluenceofsocial,environmental,technologicalandpoliticalsolutions.Itbelievesthat peace, prosperity, social and environmental improvements come through positive action

ItworksinfivestagesEconomic survival of the company•Cooperating with labour•Cooperating outside the company•Global activism•Making the government/s a Kyosei partner•

Inthefirststageofkyosei,acompanymustworktosecureapredictablestreamofprofitsandtoestablishstrongmarketpositions.Atthisstage,corporateisatthestageofevolutionitisconcernedwithprofit-makingandforitseconomicsurvival.Stakeholder’sbenefitsarenotamajorconcernarea.Fromthisfoundation,itmovesontothesecond stage, in which managers and workers resolve to cooperate with each other, recognising that both groups are vital to the company’s success. Managers and workers unite in working for the prosperity of the corporation andbothhaveashareintheprofits.Labourdisputesgetresolvedatthisstage,butcommunitydevelopmentandenvironmental protection measures are yet to be undertaken by the company.

A small beginning is made by creating a cooperative spirit among employees. Many Japanese companies have eliminated the distinction between salaried and hourly workers. They did away with the rule that the workers had to use different cafeterias and rest rooms. In the third stage, this sense of cooperation is extended beyond the company to encompass customers, suppliers, community groups, and even competitors. At this stage, company assumes local social responsibilities. Companies respect the interests of their own stakeholders, customers, staff, shareholders, suppliers, competitors and the local community. Suppliers are provided with technical support and, in turn, deliver high quality materials on time. Competitors are invited in to partnership agreements and joint ventures, which results andhigherprofitsforbothparties.FormingKyoseipartnershipforthecommongoodisverydifferentfromformingacartelandfixingprices.Communitygroupsbecomepartnersinsolvinglocalproblems.

PartnershipwithCompetitorsotherthanformingcartelsandpricefixingisreflectedinactivitiesthattheydoforcommon good. For e.g., ATM facility of one bank, following the central bank guidelines can be used by customer of competitor’sbank.Thisbenefitsthecompetitorsandaddsvaluetotheircustomer-base.Atthefourthstage,acompanytakes the cooperative spirit beyond national boundaries and addresses some of the global imbalances. At this stage, company assumes global social responsibilities and cares for all its direct stakeholders including its local community andbeyond,itstrivestofulfillitscorporateobligationsonaglobalscale.Acompanycanhelpreducetrade-frictionby building production facilities and training local scientists and engineers in other countries. The company thereby, improves the standard of living of people in poor countries by exposing them to new technologies.

Itssocialresponsibilitiestranscendnationalboundaries.Inthefifthstage,whichcompaniesrarelyachieve,acompanyurges its national government to work toward rectifying global imbalances. At the global level, Kyosei will address the following issues by advocating political, economic and educational reforms:

Trade imbalances•Income imbalances•Environmental imbalances•

Kyosei philosophy banks upon the theory of corporate governance that makes governance function look outside in the following:

Governance leadership will pull and push executive leadership towards satisfaction of all stakeholders •Conflictsandtensionwillbereplacedbycreativelivingandworkingtogether•Spirit of happy cooperation is made all-pervasive•


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Strong relationships are the sine qua non of the Kyosei framework of responsibility. Togetherness and unity of life objectives are the idealist nature of Kyosei. Japanese companies like Canon strive hard to make the ideal a reality

The corporate philosophy of Canon is Kyosei

Aconcisedefinitionofthewordwouldbe“Livingandworkingtogetherforthecommongood,”butCanon’sdefinitionisbroader,“Allpeople,regardlessofrace,religionorculture,harmoniouslylivingandworkingtogether into the future.” Unfortunately, the presence of imbalances in the world in such areas as trade, income levels and the environment hinders the achievement of kyosei.

Addressing these imbalances is an ongoing mission, and Canon is doing its part by actively pursuing kyosei. Truly global companies must foster good relations, not only with their customers and the communities in which they operate, but also with nations and the environment. They must also bear the responsibility for the impact of their activities on society. For this reason, Canon’s goal is to contribute to global prosperity and the well-being of mankind, which will lead to continuing growth and bring the world closer to achieving kyosei.

Table 7.1 The corporate philosophy of canon is kyosei

7.6 Triple Bottom Line (TBL)In 1999, Elkington developed the concept of the Triple Bottom Line which proposed that business goals were inseparable from the societies and environments within which they operate. Whilst short-term economic gain could be chased, a failure to account for social and environmental impacts would make those business practices unsustainable. While each of the three pillars of sustainability, i.e., economic, social and environment is independently crucial and urgentintheshort-run,butinordertoreachthegoalofsustainabilityinthelong-run,thethreepillarsmustbesatisfiedsimultaneously.Thesethreedimensionsaredeeplyinterconnectedandtheyinfluenceandsupporteachother.

Social

Bearable

Viable EconomicEnvironment

Sustainable

Equalable

Fig. 7.1 Three key aspects of sustainable development(Source: http://www.icsi.in/Study%20Material%20Professional/GOVERNANCE,%20BUSINESS%20

ETHICS%20AND%20SUSTAINABILITY.pdf)

The Triple Bottom Line is made up of ‘social, economic and environmental’ aspects and is indicated by the phrase ‘People,Planet,Profit’.

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People‘People’meanshumancapital.Itimpliesfairandbeneficialbusinesspracticestowardlabourandthecommunityand region in which a corporation conducts its business would create long-term value. Well being of a corporate, its labour and other stakeholder interests are interdependent. For example, policy retraining use of child labour, fair pay to workforce, health and safety at work place, tolerable working hours, etc., and would not otherwise exploit a community or its labour force.

PlanetThe second aspect of TBL is ‘Planet’-the Natural Capital. It refers to sustainable environmental practices. A company which decides to follow TBL always keeps in mind that it does no harm to the nature or creates negative environmentalimpact.Reductionofecologicalfootprintbyefficientenergyconsumptionanduseofnon-renewableassets as well as by reduction of manufacturing waste is the core component.

A TBL company as a corporate policy debars itself from manufacturing harmful or destructive products, such as weapons, toxic chemicals, etc., those are injurious to the society as well as nature. Even if they are involved in such activities they ensure to protect nature as well as human society from its hazardous process and the products. Simultaneously,aTBLcompanyavoidsecologicallydestructivepractices,suchasoverfishingorotherendangeringdepletions of resources.

ProfitThethirdaspectoftriplebottomlineisprofit.TheconceptofprofitforTBLcompanyissomehowmorewiderinallperspectives.Itisthereflectionofeconomicimpacttheorganisationhasonitsbusinessactivitiesandthattooafter meeting all social and environmental cost. It somehow indicates real value addition a corporate made through its various activities. Worldwide, many corporates are now adopting Triple Bottom Line under vision and mission and practising the same through aligning their corporate polices in that direction. Many countries worldwide are now contemplating how to integrate this triple bottom line under their legal system.

7.7 Global and Industry ChallengesLeading sustainability companies display high levels of competence in addressing global and industry challenges in a variety of areas which are listed as follows:

Strategy: Integrating long-term economic, environmental and social aspects in their business strategies while •maintaining global competitiveness and brand reputation.Financial:Meeting shareholders’ demands for soundfinancial returns, long-term economic growth, open•communicationandtransparentfinancialaccounting.Customer and product: Fostering loyalty by investing in customer relationship management and product and •serviceinnovationthatfocusesontechnologiesandsystems,whichusefinancial,naturalandsocialresourcesinanefficient,effectiveandeconomicmanneroverthelong-term.Governance and stakeholder: Setting the highest standards of corporate governance and stakeholder engagement, •including corporate codes of conduct and public reporting.Human: Managing human resources to maintain workforce capabilities and employee satisfaction through •best-in-class organisational learning and knowledgemanagement practices and remuneration and benefitprogrammes.

The emergence of corporate responsibility, from being a niche interest of environmentalist and pressure groups, to public concern, has in part, stemmed from the realisation that corporate governance and social and environmental performanceareimportantelementsofsustainedfinancialprofitability.


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SummaryOne of the fundamental characteristics of a corporate is perpetuity.•Corporate survival and existence are directly co-related to its products and services being produced and offered •to the society wherein it operates.The word sustainable is derived from sustain or sustained.•Sustainable development is a broad, concept that balances the need for economic growth with environmental •protection and social equity.Sustainable development combines economics, social justice, environmental science and management, business •management, politics and law.In 1987, a report of the World Commission on Environment and Development of the United Nations (popularly •knownasBrundtlandReport)firstintroducedtheconcept.The contribution of sustainable development to corporate sustainability is two-fold.•The Global Compact is a policy framework for the development, implementation, and disclosure of sustainability •principles and practices designed to establish sustainable business models and markets building inclusive global economy.Corporate sustainability describes business practices built around social and environmental considerations.•Innovation is the key to success.•Kyosei is a Japanese technique meaning ‘a spirit of cooperation’.•Kyoseiphilosophyreflectsaconfluenceofsocial,environmental,technologicalandpoliticalsolutions.•A small beginning is made by creating a cooperative spirit among employees.•In 1999 Elkington developed the concept of the Triple Bottom Line which proposed that business goals were •inseparable from the societies and environments within which they operate.Many countries worldwide are now contemplating how to integrate this triple bottom line under their legal •system

ReferencesEnvironmental Aspect and Sustainability Reporting. • [Pdf] Available at: <http://www.cag.gov.in/html/reports/commercial/2007_9reg/chap_4.pdf>[Accessed22November2013].Overview of the links between Corporate Social Responsibility and Competitiveness. • [Pdf] Available at: <http://ec.europa.eu/enterprise/policies/sustainable-business/files/csr/documents/csrreportv002_en.pdf>[Accessed22November 2013].Tencati, A. and Perrini, F., 2011. • Business Ethics and Corporate Sustainability. Edward Elgar Publishing, U.K.Quaddus, M . A . and Siddique, M. A. B., 2011. • Handbook of Corporate Sustainability: Frameworks, Strategies and Tools. Edward Elgar Publishing.Public Lecture- Sustainability and the Future of Capitalism by Jonathon Porritt, February 2012. • [Video online] Available at: <http://www.youtube.com/watch?v=9XEiH93c8C8> [Accessed 22 November 2013].Sustainability Lecture series - 1. Innovation for Sustainable Development by Prof. Kemp. • [Video online] Available at: <http://www.youtube.com/watch?v=wN8Ra2w3r8c> [Accessed 22 November 2013].

Recommended ReadingBrockett, A. and Rezaee, Z., 2012. • Corporate Sustainability: Integrating Performance and Reporting. John Wiley & Sons.McElroy, M. W. W. and Engelen, J. 2012. • Corporate Sustainability Management: The Art and Science of Managing Non-Financial Performance. Routledge, New York.Kieff, F. S . and Paredes, T. A, 2010. • Perspectives on Corporate Governance. Palgrave Cambridge University Press.

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Self AssessmentOneofthefundamentalcharacteristicsofacorporateis____________.1.

perpetuitya. sustainb. legalc. closured.

Which of the following is the broad, concept that balances the need for economic growth with environmental 2. protection and social equity?

Corporate sustainabilitya. Sustainable developmentb. Global compactc. Millennium developmentd.


Principle of 1. intergenerational equity

A. Use of natural resources in a prudent manner without or with minimum tolerable impact on nature.

Principle of sustainable use2. B. Need to preserve natural resources for future generation.

Principle of equitable use 3. or intergenerational equity

C. Environmental aspects and impacts of socioeconomic activities should be integrated, so that prudent use of natural resources is ensured.

4. Principle of integration D. Use of natural resources by any state/country must take into account its impact on other states.

1-A, 2-D, 3-C, 4-Ba. 1-D, 2-C, 3-B, 4-Ab. 1-B, 2-A, 3-D, 4-Cc. 1-C, 2-B, 3-A, 4-Dd.

Sustainable development __________economics, social justice, environmental science andmanagement,4. business management, politics and law.

excludesa. prohibitb. banc. combinesd.

Which of the following is a policy framework for the development, implementation, and disclosure of 5. sustainability principles and practices designed to establish sustainable business models and markets building inclusive global economy?

The corporate sustainabilitya. The sustainable developmentb. The global compactc. The millennium developmentd.


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Which of the following statement is true?6. Organisations should not set its goal towards creation of absolute value to the society.a. Organisations should set its goal towards creation of absolute value to the individual.b. Organisations should set its goal towards creation of absolute value to the employee.c. Organisations should set its goal towards creation of absolute value to the society.d.

Monopoly,unjustifiedsubsidies,pricenotreflectingrealeconomic,socialenvironmentalcost,etc.arehindrances7. to__________ofabusiness.

successa. failureb. sustainabilityc. non-sustainabilityd.

Which of the following statement is false?8. In a short-run, enterprise can gain through non-ethical practices.a. Innovation is the key to breakdown.b. Risks and crises can be eliminated through innovation.c. CSR activities need to be clubbed and integrated into the business model of the Company.d.

What is made up of ‘social, economic and environmental’ aspects and indicated by the phrase ‘People, Planet, 9. Profit’phrase?

The sustainability developmenta. The triple bottom lineb. The corporate philosophyc. The corporate sustainabilityd.

Manycountriesworldwidearenowcontemplatinghowtointegratethistriplebottomlineundertheir_________10. system.

currenta. futureb. financialc. legald.

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Chapter VIII

Corporate Social Responsibility

Aim


introduce corporate social responsibility•

explain corporate citizenship beyond the mandate of law•

explicatefactorsinfluencingCSR•

Objectives


enlist advantages of good corporate citizenship•

elucidate corporate social responsibility voluntary guidelines, 2009•

explain triple bottom line approach of CSR•

Learning outcome


identify differences between CSR and philanthropy/charity•

understand some CSR reporting frameworks•

definecorporatesocialresponsibility•


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8.1 IntroductionCorporatesocialresponsibility(CSR)isaconceptwherebycompaniesnotonlyconsider theirprofitabilityandgrowth, but also the interests of society and the environment by taking responsibility for the impact of their activities on stakeholders, environment, consumers, employees, communities, and all other members of the public sphere. The basic premise is that when the corporations get bigger in size, apart from the economic responsibility of earning profits, therearemanyotherresponsibilitiesattachedtothemwhicharemoreofnon-financial/social innature.These are the expectations of the society from these corporates to give something in return to the society with whose explicit or implicit help these entities stand where they are.

Companies are aware that they can contribute to sustainable development by managing their operations in such a way as to enhance economic growth and increase competitiveness whilst ensuring environmental protection and promoting social responsibility, including consumer interests.

8.2 Corporate Social Responsibility - DefinedCorporate social responsibility is an evolving concept that is gaining importance and corporates are realising it as a business opportunity.

Corporate social responsibility is also called corporate citizenship or corporate responsibility. Generally, CSR is understoodtobethewayfirmsintegratesocial,environmentalandeconomicconcernsintotheirvalues,culture,decision-making, strategy and operations in a transparent and accountable manner and thereby establish better practiceswithinthefirm,createwealthandimprovesociety.

The three concepts that can explain the term ‘corporate social responsibility’ are as follows:Corporate: Means organised business•Social: Means everything dealing with the people•Responsibility: Means accountability between the two•

Thereisnosinglecommonlyaccepteddefinitionofcorporatesocialresponsibility.Itcanbedefinedas,“Corporatesocial responsibility is operating a business in a manner which meets or excels the ethical, legal, commercial and public expectations that a society has from the business.”

Corporatesocialresponsibilityisnothing,butwhatanorganisationdoes,topositivelyinfluencethesocietyinwhichit exists. It could take the form of community relationship, volunteer assistance programmes, special scholarships, preservationofculturalheritageandbeautificationofcities.Thephilosophyisbasicallytoreturntothesocietywhatit has taken from it, in the course of its quest for creation of wealth.

AccordingtoBrowinH.R.,socialresponsibilityisdefinedas“theobligationofbusinessmentopursuethosepolicies,to make those decisions, or to follow those lines of action which are desirable in terms of objectives and values of society.” Business entity is expected to undertake those activities, which are essential for betterment of the society. Every aspect of business has a social dimension. Corporate social responsibility means open and transparent business practices that are based on ethical values and respect for employees, communities and the environment. It is designed to deliver sustainable value to society at large as well as to shareholders.

With the understanding that businesses play a key role of job and wealth creation in society, CSR is generally understood to be the way a company achieves a balance or integration of the following three aspects, while at the same time addressing shareholder and stakeholder expectations:

Economic•Environmental•Social imperatives•

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CSRisgenerallyacceptedasapplyingtofirmswherevertheyoperateinthedomesticandglobaleconomy.Theway businesses engage/involve the shareholders, employees, customers, suppliers, governments, non-governmental organisations, international organisations, and other stakeholders is usually a key feature of the concept. While the compliancewithlawsandregulationsonsocial,environmentalandeconomicobjectivessettheofficiallevelofCSRperformance, it is often understood as involving the private sector commitments and activities that extend beyond this foundation of compliance with laws.

The term ‘corporate social responsibility’ refers to the concept of business being accountable for how it manages the impact of its processes on stakeholders and takes responsibility for producing a positive effect on society. CSR hasbeendefinedas thecontinuingcommitmentbybusiness tobehavefairlyandresponsiblyandcontribute toeconomic development while improving the quality of life of the workforce and their families as well as the local community and society at large.

CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. The main function of an enterprise is to create value throughproducinggoodsandservices thatsocietydemands, therebygeneratingprofitfor itsownersandshareholders as well as welfare for society, particularly through an ongoing process of job-creation. However, new social and market pressures are gradually leading to a change in the values and in the horizon of business activity. Essentially, corporate social responsibility is an inter-disciplinary subject in nature and encompasses in its fold the following aspects:

Social, economic, ethical and moral responsibility of companies and managers.•Compliance with legal and voluntary requirements for business and professional practice.•Challenges posed by needs of the economy and socially disadvantaged groups.•Management of corporate responsibility activities.•

CSR is an important business strategy because, wherever possible, consumers want to buy products from companies they trust; suppliers want to form business partnerships with companies they can rely on; employees want to work for companies they respect; and NGOs, increasingly, want to work together with companies seeking feasible solutions and innovations in areas of common concern. CSR is a tool in the hands of corporates to enhance the market-penetration of their products, enhance its relation with stakeholders. CSR activities carried out by the enterprises affect all the stakeholders, thus making good business sense, the reason being contribution to the bottom line. The worldbusinesscouncilforsustainabledevelopmenthasproposedadefinitionofcorporatesocialresponsibilityas,“Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to the economic development while improving the quality of life of the workforce and their families as well as of the local community and the society at large.”

A contract with societyAccordingtoSirAdrianCadbury,“Thebroadestwayofdefiningsocialresponsibilityistosaythatthecontinuedexistence of companies is based on an implied agreement between business and society. In effect, companies are licensed by society to provide the goods and services which the society needs. The freedom of operation of companies is, therefore,dependenton theirdeliveringwhateverbalanceofeconomicandsocialbenefitssocietycurrentlyexpectsofthem.Theproblemforcompaniesisthatthebalanceofneedsandbenefitsiscontinuallychangingandthere is no generally accepted way of measuring those changes.

To start with, companies are expected to meet society’s demands for goods and services, to provide employment, to contributetotheexchequer,andtooperateefficientlyataprofit.Thereisnoconflictbetweensocialresponsibilityandtheobligationoncompaniestousescarceresourcesefficientlyandtobeprofitable.Anunprofitablebusinessis a drain on society. The essence of the contract between society and business is that companies shall not pursue theirimmediateprofitobjectivesattheexpenseofthelong-terminterestsofthecommunity”.


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8.3 Difference between CSR and Philanthropy/CharityPhilanthropy means the act of donating money, goods, time or effort to support a charitable cause in regard to a definedobjective.Philanthropycanbeequatedwithbenevolenceandcharityforthepoorandneedy.Philanthropycanbeanyselflessgivingtowardsanykindofsocialneedthatisnotserved,underserved,orperceivedasun-servedor underserved. Philanthropy can be by an individual or by a corporate.

TheetymologicaloriginofthewordisfromLateLatinphilanthropia,fromGreekphilanthrōpia,fromphilanthrōposlovingpeople, that is,philanthrōposhumanbeing. It is theactiveeffort topromotehumanwelfare.CorporateSocial Responsibility on the other hand is about how a company aligns their values to social causes by including and collaborating with their investors, suppliers, employees, regulators and the society as a whole. The investment inCSRmaybeonpeople-centricissuesand/orplanetissues.ACSRinitiativeofacorporateisnotaselflessactofgiving.Companiesderivelong-termbenefitsfromtheCSRinitiativesanditisthisenlightenedselfinterestwhichis driving the CSR initiatives in companies.

8.4 Advantages of Good Corporate CitizenshipBusiness cannot exist in isolation; business cannot be oblivious to societal development. The social responsibility of business can be integrated into the business purpose, so as to build a positive synergy between the two. The following are the advantages of CSR:

CSR creates a favourable public image, which attracts customers.•Reputation or brand equity of the products of a company which understands and demonstrates its social •responsibilities is very high. Customers trust the products of such a company and are willing to pay a premium on its products. Organisations that perform well with regard to CSR can build reputation, while those that perform poorly can damage brand and company value when exposed. Brand equity, is founded on values such as trust, credibility, reliability, quality and consistency.Corporate social responsibility (CSR) activities have its advantages. It builds up a positive image encouraging •social involvement of employees, which in turn develops a sense of loyalty towards the organisation, helping in creating a dedicated workforce proud of its company. Employees like to contribute to the cause of creating a better society. Employees become champions of a company for which they are proud to work.Societygainsthroughbetterneighbourhoodsandemploymentopportunities,whiletheorganisationbenefits•from a better community, which is the main source of its workforce and the consumer of its products.Public needs have changed leading to changed expectations from consumers. The industry/business owes its •very existence to society and has to respond to needs of the society.The company’s social involvement discourages excessive regulation or intervention from the government or •statutorybodies,andhencegivesgreaterfreedomandflexibilityindecision-making.The internal activities of the organisation have an impact on the external environment, since the society is an •inter-dependent system.A business organisation has a great deal of power and money, entrusted upon it by the society and should be •accompanied by an equal amount of responsibility. In other words, there should be a balance between the authority and responsibility.The good public image secured by one organisation by their social responsiveness encourages other organisations •in the neighborhood or in the professional group to adapt themselves to achieve their social responsiveness.The atmosphere of social responsiveness encourages co-operative attitude between groups of companies. One •company can advise or solve social problems that other organisations could not solve.Companies can better address the grievances of its employees and create employment opportunities for the •unemployed.A company with its ear to the ground through regular stakeholder dialogue is in a better position to anticipate •and respond to regulatory, economic, social and environmental changes that may occur.

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Financial institutions are increasingly incorporating social and environmental criteria into their assessment •of projects. When making decisions about where to place their money, investors are looking for indicators of effective CSR management.Inanumberofjurisdictions,governmentshaveexpeditedapprovalprocessesforfirmsthathaveundertaken•social and environmental activities beyond those required by regulation.

8.5 Corporate Citizenship-Beyond the Mandate of LawThe laws in India takes care of the basic CSR through various legislations under labour laws such as Factories Act, ESI Act, Workmen’s Compensation Act, 1923, Contract Labour ( Regulation an Abolition) Act, 1970, Equal Remunerations Act, The Minimum Wages Act, 1948, Employees’ Provident Fund and Miscellaneous Provisions Act 1952, environment protection laws such as The Water (Prevention and Control of Pollution) Act, 1974, (Prevention and Control of Pollution) Act, 1981 and Environment Protection Act, 1986.

The main object of the Factories Act, 1948 is to ensure adequate safety measures and to promote the health and welfare of the workers employed in factories. The Act also makes provisions regarding employment of women and young persons (including children and adolescents), annual leave with wages, etc. The Employees’ State Insurance Act,1948providesforcertainbenefitstoemployeesincaseofsickness,maternityandemploymentinjuryandalsomakes provisions for certain other matters in relation thereto.

The Workmen’s Compensation Act, 1923 is a social security legislation. It imposes statutory liability upon an employer to discharge his moral obligation towards his employees when they suffer from physical disabilities and diseases during the course of employment in hazardous working conditions. The Act also seeks to help the dependents of the workmen rendered destitute by the ‘accidents’ and from the hardship arising out from such accidents.

In 1972, the department of science and technology set up a national committee on environmental planning and coordination to identify and investigate problems of preserving or improving the human environment and also to propose solutions for environmental problems. In 1977, by an amendment to the constitution, Article 48A was introduced imposing a duty on the State to protect and improve the environment and safeguard the forests and wildlife of the country. Article 51A also, provides for the protection and improvement of the natural environment including forests, lakes, rivers and wild life and to have compassion for living creatures.

The Water (Prevention and Control of Pollution) Act was enacted in 1974 and the Air (Prevention and Control of Pollution) Act was passed by the Union of India in 1981. In 1986, the government enacted the Environment Protection Act to provide for the protection and improvement of environment and the prevention of hazards to human beings, otherlivingcreatures,plantsandproperty.However,overrelianceonregulationcanstiflecorporatecreativityandinnovation. Corporate citizenship is a commitment to improve community well-being through voluntary business practices and contribution of corporate resources leading to sustainable growth. Corporate responsibility is achieved when a business adapts CSR well aligned to its business goals and meets or exceeds, the ethical, legal, commercial and public expectations that society has of business.

The term corporate citizenship implies the behaviour, which would maximise a company’s positive impact and minimise the negative impact on its social and physical environment. It means moving from supply driven to more demand led strategies; keeping in mind the welfare of all stakeholders; more participatory approaches to working withcommunities;balancingtheeconomiccostand`benefitswiththesocial;andfinallydealingwithprocessesrather than structures. The ultimate goal is to establish dynamic relationship between the community, business and philanthropic activities so as to complement and supplement each other.

8.6 Factors Influencing CSRManyfactorsandinfluences,includingthefollowing,haveledtoincreasingattentionbeingdevotedtoCSR:

Globalisation coupled with focus on cross-border trade, multinational enterprises and global supply chains is •increasingly raising CSR concerns related to human resource management practices, environmental protection, and health and safety, among other things.


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Governments and intergovernmental bodies, such as the United Nations, the Organisation for Economic Co-•operation and Development and the International Labour Organisation have developed compacts, declarations, guidelines, principles and other instruments that outline social norms for acceptable conduct.Advances in communications technology, such as the internet, cellular phones and personal digital assistants, •are making it easier to track corporate activities and disseminate information about them. Non-governmental organisations now regularly draw attention through their websites to business practices they view as problematic.Consumers and investors are showing increasing interest in supporting responsible business practices and are •demanding more information on how companies are addressing risks and opportunities related to social and environmental issues.Numerousseriousandhigh-profilebreachesofcorporateethicshavecontributedtoelevatedpublicmistrust•of corporations and highlighted the need for improved corporate governance, transparency, accountability and ethical standards.Citizens in many countries are making it clear that corporations should meet standards of social and environmental •care, no matter where they operate.There is increasing awareness of the limits of government legislative and regulatory initiatives to effectively •capture all the issues that corporate social responsibility addresses.Businesses are recognising that adopting an effective approach to CSR can reduce risk of business disruptions, •open up new opportunities, and enhance brand and company reputation.

8.7 Corporate Social Responsibility Voluntary Guidelines, 2009Ministerial recommendatory initiative corporate social responsibility voluntary guidelines, 2009 recognises that CSR is not philanthropy and CSR activities are purely voluntary and that companies would like to do beyond any statutory requirement or obligation. It is recognised world over that integrating social, environmental and ethical responsibilities into the governance of businesses ensure their long-term success, competitiveness and sustainability. Thisapproachalsoreaffirmstheviewthatbusinessesareanintegralpartofsociety,andhaveacriticalandactiverole to play in the sustenance and improvement of healthy ecosystems, in fostering social inclusiveness and equity, and in upholding the essentials of ethical practices and good governance.

The CSR activity that a company pursues must be aligned to the business of the company; this ensures that such CSR also contributes to the growth of the company on a wider scale. It is not about pursuing an activity of CEO’s interest but should be relevant to company’s business. CSR is a much more holistic approach to business, which is designed to enhance corporate success because of its relevance, rather than represent something unconnected to an organisation’s core business. This is a win-win model.

Corporate Social Responsibility Voluntary Guidelines, 2009 provides that each business entity should formulate a CSR policy to guide its strategic planning and provide a roadmap for its CSR initiatives, which should be an integral part of overall business policy and aligned with its business goals. The policy should be framed with the participation of various level executives and should be approved by the Board.

The CSR Policy should normally cover following core elements:Care for all stakeholders: The companies should respect the interests of, and be responsive towards all •stakeholders, including shareholders, employees, customers, suppliers, project-affected people, society at large, etc., and create value for all of them. They should develop mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them where they occur.Respect for environment: Companies should take measures to check and prevent pollution; recycle, manage and •reduce waste, should manage natural resources in a sustainable manner and ensure optimal use of resources like land and water. The companies should proactively respond to the challenges of climate changes by adopting cleanerproductionmethods,promotingefficientuseofenergyandenvironmentfriendlytechnologies.

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Respect for workers’ rights and welfare: Companies should provide a workplace environment that is safe, hygienic •and humane and which upholds the dignity of employees. They should provide all employees with access to training and development of necessary skills for career advancement, on an equal and non-discriminatory basis. They should uphold the freedom of association and the effective recognition of the right to collective bargaining of labour, have an effective grievance redressal system, should not employ child or forced labour and provide and maintain equality of opportunities without any discrimination on any grounds in recruitment and during employment.Activities for social and inclusive development: Depending upon their core competency and business interest, •companies should undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations. These could include education, skill-building for livelihood of people, health, cultural and social welfare, etc., particularly targeting disadvantaged sections of society.

An effective CSR policy may include the following:Vision:TheCSRvisionof thecompanyshouldbesuch that itdefines thepurposeof thecompany’sCSR•initiatives;anddefinesthecompany’sCSRgoals.TheCSRvisionshouldbewellalignedtothebusinessgoalssothatitbenefitsthecompanyaswell.Implementation:•

Identificationofthrustareas �Identificationofmannerandnatureofprojects/activities �Definingmeasurabletargetsandtimeframefortheactivities �Performance management: Quality and standard of the work to be maintained �Organisational mechanism and assigning responsibilities for due performance of the CSR Projects �Manner of delivering CSR: Foundation/ partnership with non-government organisation/participation of �employees

Fund resources: Budget allocation and its utilisation•Medium of dissemination of information on CSR•Management commitment•

CSR is no more an expenditure, but an investment for future longevity and sustainability of the enterprise.

Channeling CSR ActivitiesVoluntary guidelines on corporate social responsibility, 2009 provide that companies may partner with local authorities, business associations and civil society/non-government organisations.

CSR involves both internal as well as external stake holders. Internal stakeholder includes the employees of the company, whereas, external stakeholders include community and environment, customers, vendors, shareholders, government. To carry out CSR effectively, it is essential that it has to be driven from top. So, leadership is very important in all CSR activities and it is the need of the hour to develop next generation of globally responsible leaders.

The implementation methodologies that companies can adopt for execution of their CSR initiatives can either be by imbibing them in day-to-day operations within the company or through foundation/ Trust route by allocating the funds to a separate entity with clearly stated objectives or by partnering with various non-governmental organisations.

Funding CSR initiativesFund allocation for CSR initiatives acts as a catalyst for the development of the organisations. Expenditure in CSR is not expenditure, but an investment in future sustainability. Voluntary guidelines on corporate social responsibility, 2009providethatcompaniesshouldallocatespecificamountintheirbudgetsforCSRactivities.Thisamountmayberelatedtoprofitsaftertax,costofplannedCSRactivitiesoranyothersuitableparameter.


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CSR in Public Sector EnterprisesGuidelines on corporate social responsibility for central public sector enterprises issued in March, 2010 have made CSRallocationoffundsmandatoryforPSUsfromthecurrentfinancialyear.APSUwithanetprofitoflessthanRs100crorewillhavetoallocate3-5%ofitsearningsonCSR.ThoseearningnetprofitsofRs100-500croreayear will have to earmark 2-3% on CSR. A company with a bottom line of Rs 500 crore and above will have to set aside 0.5-2% on CSR.

Thefollowingaretherecommendationsofparliamentarystandingcommitteeonfinance,thetwentyfirstreportonthe company’s bill, 2009:

Clause 120(3) of the company’s bill incorporated details about directors’ responsibility statement comprising •of disclosures about corporate social responsibility policy.Clause 147(2) of the company’s bill states that the duty of the director is to promote the objects of the company •in the best interests of its employees, the community and the environment.The aforesaid report has recommended that every company having net worth of Rs. 500 crore or more, or •turnoverofRs.1000croreormore;oranetprofitofRs.5croreormoreduringayeartoformulateaCSRpolicytoensurethateveryyearatleast2%ofitsaveragenetprofitsduringthethreeimmediatelyprecedingfinancialyearsshallbespentonCSRactivitiesasmaybeapprovedandspecifiedbythecompany.The directors shall be required to make suitable disclosures in this regard in their report to members.•IncaseanysuchcompanydoesnothaveadequateprofitsorisnotinapositiontospendprescribedamountonCSR•activities, the directors would be required to give suitable disclosure/reasons in their report to the members.

8.8 Triple Bottom Line Approach of CSRWithin the broader concept of corporate social responsibility, the concept of triple bottom line (TBL) is gaining significanceandbecomingpopularamongstcorporates.Coined in1997byJohnEllington,notedmanagementconsultant,theconceptofTBLisbasedonthepremisethatbusinessentitieshavemoretodothanmakejustprofitsfortheownersofthecapital,onlybottomlinepeopleunderstand.‘People,PlanetandProfit’isusedtosuccinctlydescribethetriplebottomlines.‘People’(humancapital)pertainstofairandbeneficialbusinesspracticestowardlabour and the community and region in which a corporation conducts its business. ‘Planet’ (natural capital) refers to sustainable environmental practices. It is the lasting economic impact the organisation has on its economic environment.ATBLcompanyendeavourstobenefitthenaturalorderasmuchaspossibleorattheleastdonoharmandcurtailsenvironmentalimpact.‘Profit’isthebottomlinesharedbyallcommerce.

The people-issues faced by the organisation include the following:Health•Safety•Diversity•Ethnicity•Education and literacy•Prevention of child labour•Differently-abled•

The planet-concerns include the following:Climate change•Energy•Water•Biodiversity and land-use•Chemicals, toxics and heavy metals•Air pollution•

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Waste management•Ozone layer depletion•Oceanandfisheries•Afforestation•

The need to apply the concept of TBL is caused due to the following acts:Increased consumer sensitivity to corporate social behaviour•Growing demands for transparency from shareholders/stakeholders•Increased environmental regulation•Legal costs of compliances and defaults•Concerns over global warming•Increased social awareness•Awareness about and willingness for respecting human rights•Media’s attention to social issues•Growing corporate participation in social upliftment•

Whileprofitabilityisapureeconomicbottom-line,socialandenvironmentalbottom-linearesemiornon-economicin nature so far as revenue-generation is concerned, but it has certainly a positive impact on long-term value that an enterprise commands. However, discharge of social responsibilities by corporates is a subjective matter as it cannot be measured with reasonable accuracy.

Gaining recognitionThe current generation is of people who are well aware of what goes on around them. People today know a lot about environment, how it affects them, how things we do affects the environment in turn. For the aware and conscientious consumers today, it is important that they buy products that do not harm the environment. They only like to deal with companies that believe and do things for the greater good of planet earth.

8.9 Some CSR Reporting FrameworksAn important aspect of corporate social responsibility (CSR) is the recognition that sound practices are often based on good standards of corporate governance. Good corporate governance provides the foundations of good corporate social responsibility (CSR) by developing value-creating relationships with all stakeholders. It is therefore important that the stakeholders are shared with transparency the activities pursued by the company in the social responsibility area. Voluntary guidelines on corporate social responsibility, 2009 provide that the companies should disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their website, annual reports, and other communication media.

The following are some of the main standards for social, ethical and environmental reporting currently in use internationally:

The AA 1000 –frameworkThis is developed by the Institute of Social and Ethical Accountability provides a standard for social and ethical accounting,auditingandreporting,includingmandatoryexternalverificationandstakeholderengagement.Itaimstoassistanorganisationinthedefinitionofgoalsandtargets,themeasurementofprogressmadeagainstthesetargets,the auditing and reporting of performance and in the establishment of feedback mechanisms. This is done by:

Developing stakeholder engagement strategy: An integrated strategy for stakeholder engagement that strengthens •both their relationships with stakeholders and their internal decision-making processes.Facilitation of stakeholder dialogues: Support through the planning, design, capacity- building, facilitation and •follow-up stages of stakeholder engagement to create processes that create change.


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Capacity building for stakeholder engagement: Engaging with stakeholders requires new skills and ways •of thinking through in-house training in stakeholder engagement, as well as ongoing mentoring support for leadership teams.

The social accountability SA 8000This is an international standard for social accountability initiated by Council on Economic Priority Accreditation Agency (CEPAA) conventions, the universal declaration on human rights and the Child. SA 8000 seeks to provide transparent,measurableandverifiableperformancestandardsintheareasofchildlabour;forcedlabour;healthandsafety; compensation; working hours; discrimination; discipline; free association and collective bargaining; and management systems. SA8000 covers the following areas of accountability:

Child labour: No workers under the age of 15; minimum lowered to 14 for countries operating under the ILO •ConventionForced labour: No forced labour, including prison or debt bondage labour; no lodging of deposits or identity •papers by employers or outside recruitersWorkplace safety and health: Provide a safe and healthy work environment; take steps to prevent injuries; •regular health and safety worker training; system to detect threats to health and safety; access to bathrooms and potable waterFreedom of association and right to collective bargaining: Respect the right to form and join trade unions •and bargain collectively; where law prohibits these freedoms, facilitate parallel means of association and bargainingDiscrimination: No discrimination based on race, caste, origin, religion, disability, gender, sexual orientation, •unionorpoliticalaffiliation,orageandnosexualharassmentDiscipline: No corporal punishment, mental or physical coercion or verbal abuse•Working hours: Comply with the applicable law but, in any event, no more than 48 hours per week with at least •one day off for every seven-day period; voluntary overtime paid at a premium rate and not to exceed 12 hours per week on a regular basis. Overtime may be mandatory, if part of a collective bargaining agreement.Remuneration:Wagespaidforastandardworkweekmustmeetthelegalandindustrystandardsandbesufficient•to meet the basic need of workers and their families; no disciplinary deductionsManagementsystemforHumanResources:Facilitiesseekingtogainandmaintaincertificationmustgobeyond•simple compliance to integrate the standard into their management systems and practices.

ISO 26000 is the international standard giving guidance on social responsibility and is intended for use by organisations of all types, both public and private sectors, in developed and developing countries. It provides guidance on principles of social responsibility, the core subjects and issues pertaining to social responsibility and on ways to integrate socially responsible behaviour into existing organisational strategies, systems, practices and processes.

It intends to assist organisations in contributing to sustainable development. It is intended to encourage them to go beyond legal compliance, recognising that compliance with law is a fundamental duty of any organisation and an essentialpartoftheirsocialresponsibility.Itisintendedtopromotecommonunderstandinginthefieldofsocialresponsibility, and to complement other instruments and initiatives for social responsibility, not to replace them.

ISO26000isnotamanagementsystemstandard.It isnot intendedorappropriateforcertificationpurposesorregulatory or contractual use. The Good Corporation, global standard of corporate social responsibility is developed bytheInstituteofBusinessEthics.Thiscoversfairnesstoemployees,suppliers,customersandprovidersoffinance;contributions to the community; and protection of the environment. Company performance is assessed annually by anindependentverifier.

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The UN Global CompactThe Global Compact is a voluntary corporate citizenship initiative with the following two objectives:

Making the principles of Global Compact a part of business strategy and operations.•Facilitating cooperation among key stakeholders and promoting partnerships in support of UN goals.•

The Global Compact’s operational phase was launched at UN headquarters in New York on 26th July, 2000. The secretary-general challenged business leaders to join an international initiative, the Global Compact that would bring companies together with UN agencies, labour and civil society to support ten principles in the areas of human rights, labour, environment and anti-corruption. Through the power of collective action, the Global Compact seeks to advance responsible corporate citizenship, so that business can be part of the solution to the challenges of globalisation. In this way, the private sector in partnership with other social actors can help realise the secretary-general’s vision, a more sustainable and inclusive global economy.

The Global Compact’s ten principles in the areas of human rights, labour, the environment and anti-corruption are discussed in the following paragraphs.

Human rightsPrinciple 1: Businesses should support and respect the protection of internationally proclaimed human rights.•Principle 2: Make sure that they are not complicit in human rights abuses.•

Labour standardsPrinciple 3: Businesses should uphold the freedom of association and the effective recognition of the right to •collective bargaining;Principle 4: The elimination of all forms of forced and compulsory labour.•Principle 5: The effective abolition of child labour.•Principle 6: The elimination of discrimination in respect of employment and occupation.•

EnvironmentPrinciple 7: Businesses should support a precautionary approach to environmental challenges.•Principle 8: Undertake initiatives to promote greater environmental responsibility.•Principle 9: Encourage the development and diffusion of environmentally friendly technologies.•

Anti-corruptionPrinciple 10: Businesses should work against corruption in all its forms, including extortion and bribery.•

Sector-specificstandardsaddressingissuesrelevanttoparticularbusinessactivitiesincludetheresponsiblecarescheme for the chemicals industry, the green globe audit and assurance scheme for hotels and the green alliance performance indicators for the waste management in industry.

Indian initiativesMinistry of Corporate Affairs in 2010 has launched CSR e-form, wherein the companies adopting and pursuing CSR activities may report their activities on voluntary basis. This will give the companies transparency and disclosure front and on the other hand stakeholders will have access to companies’ CSR activities.


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8.10 CSR AssessmentCSR audit has yet to gain momentum, but the concept aims to give an independent opinion by external auditor, on the extent of alignment of CSR objectives with the business goals and level of managerial commitment and performance withregardtoattainmentofsocialresponsibilityobjectivesdefinedbythecompany’sboard.

Segments Assessment Tools Scope

Objectives

Coverage The exhaustiveness of CSR objectives

Integration The extent to which the CSR objectives of the company are aligned with its business goals.

CommitmentThe clarity of roles and powers assigned to management for fulfillmentofCSRobjectives.Integrationofsocialresponsibilitythroughout the organisation.

Implementation

Processes

Identificationoftheimplementationprocedures,timeframes,riskandperformancemanagementtoolsforfulfillmentofCSRobjectives. Manner of delivering CSR activities either by way of foundation/trust route or by imbibing them into day-to-day activities.

Resources Allocation of funds, manpower, infrastructure, etc.

Monitoring/Reporting

Internal control systems to monitor the adequacy of mechanisms (includingperiodicreviews)inrelationtofulfillmentofCSRobjectives.Reporting: Communication of adequate data in relation to CSR objectives to various stakeholders.

Outcome

Impact analysis Analysing the impact of CSR activities carried out by the company in various areas and the quality maintained.

FeedbackIdentificationofcontrolweaknessesandmakerecommendationsfor improvement to CSR programmes of the company. Identificationofareasrequiringchanges.

Table 8.1 Indicative CSR audit programme

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SummaryCorporatesocialresponsibility(CSR)isaconcept,wherebycompaniesnotonlyconsidertheirprofitability•and growth, but also the interests of society and the environment by taking responsibility for the impact of their activities on stakeholders, environment, consumers, employees, communities and all other members of the public sphere.Corporate social responsibility is an evolving concept that is gaining importance and corporates are realising •it as a business opportunity.Corporate social responsibility is also called corporate citizenship or corporate responsibility.•Corporate social responsibility is operating a business in a manner which meets or excels the ethical, legal, •commercial and public expectations that a society has from the businessAccordingtoBrowinH.R.,socialresponsibilityisdefinedas“theobligationofbusinessmentopursuethose•policies, to make those decisions, or to follow those lines of action which are desirable in terms of objectives and values of society.”CSR is a concept whereby companies integrate social and environmental concerns in their business operations •and in their interaction with their stakeholders on a voluntary basis.Philanthropy means the act of donating money, goods, time or effort to support a charitable cause in regard to •adefinedobjective.Business cannot exist in isolation; business cannot be oblivious to societal development.•CSR involves both internal as well as external stake holders.•Within the broader concept of corporate social responsibility, the concept of triple bottom line (TBL) is gaining •significanceandbecomingpopularamongstcorporates.ATBLcompanyendeavourstobenefitthenaturalorderasmuchaspossibleorattheleastdonoharmand•curtailsenvironmentalimpact.‘Profit’isthebottomlinesharedbyallcommerce.The Global Compact’s operational phase was launched at UN headquarters in New York on 26 July, 2000.•An important aspect of corporate social responsibility (CSR) is the recognition that sound practices are often •based on good standards of corporate governance.Ministry of Corporate Affairs in 2010 has launched CSR e-form, wherein the companies adopting and pursuing •CSR activities may report their activities on voluntary basis.

ReferencesCorporate Social Responsibility: in Global Context. • [Pdf] Available at: http://www.researchgate.net/publication/228123773_Corporate_Social_Responsibility_In_Global_Context/file/9fcfd50eacf31d3681.pdf[Accessed 22 November 2013].Corporate Social Responsibility and Sustainable Business. • [Pdf] Available at: <http://www.ccl.org/leadership/pdf/research/CorporateSocialResponsibility.pdf> [Accessed 22 November 2013].Mallin, C . A., 2009. • Corporate Social Responsibility: A Case Study Approach. Edward Elgar Publishing, U.K.Mullerat, R ., 2011. • Corporate Social Responsibility: The Corporate Governance of the 21st Century. Kluwer Law International.Lec-30 Corporate Social Responsibilities. • [Video online] Available at: <http://www.youtube.com/watch?v=zrrdRMqHMQU> [Accessed 22 November 2013].What is Corporate Social Responsibility (CSR)?. • [Video online] Available at: <http://www.youtube.com/watch?v=E0NkGtNU_9w>[Accessed22November2013].


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Recommended ReadingHawkins, D. E., 2006. • Corporate Social Responsibility: Balancing Tomorrow’s Sustainability and Today’s Profitability. Palgrave Macmillan.Schwartz, M. S ., 2011. • Corporate Social Responsibility: An Ethical Approach. Broadview Press.Baxi, C . V. and Prasad, A, 2005. • Corporate Social Responsibility: Concepts and Cases: the Indian Experience. Excel Books India, New Delhi.

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Self AssessmentWhat is Corporate Social Responsibility also called?1.

Corporate Residency or Corporate Responsibilitya. Corporate Citizenship or Corporate Responsibilityb. Corporate Environment or Corporate Responsibilityc. Corporate Citizenship or Corporate Responsibilityd.

Corporatesocialresponsibilityisoperatingabusinessinamannerwhichmeetsor__________theethical,legal,2. commercial and public expectations that a society has from the business.

includesa. excludesb. excelsc. followsd.

What means accountability between the two?3. Corporatea. Socialb. Environmentc. Responsibilityd.


1. The UN Global Compact A. Is a social security legislation.

2. The Workmen’s Compensation Act, 1923 B. Is a voluntary corporate citizenship.

3. The main object of the Factories Act, 1948

C. Provides for the protection and improvement of the natural environment including forests, lakes, rivers and wild life and to have compassion for living creatures.

4. Article 51AD. Is to ensure adequate safety measures and to

promote the health and welfare of the workers employed in factories.

1-B, 2-A, 3-D, 4-Ca. 1-D, 2-C, 3-B, 4-Ab. 1-C, 2-D, 3-A, 4-Bc. 1-A, 2-B, 3-C, 4-Dd.

AccordingtoBrowinH.R.,_________responsibilityisdefinedas“theobligationofbusinessmentopursuethose5. policies, to make those decisions, or to follow those lines of action which are desirable in terms of objectives and values of society.”

corporatea. socialb. moralc. ethicald.


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Which of the following means the act of donating money, goods, time or effort to support a charitable cause in 6. regardtoadefinedobjective?

Philanthropya. Etymologicalb. Social Responsibilityc. Corporate Social Responsibilityd.

Which of the following statement is true?7. Business can exist in isolation; business can be oblivious to societal development.a. Business cannot exist in isolation; business cannot be oblivious to societal development.b. Business exists in isolation; business is oblivious to societal development.c. Business cannot exist in inclusion; business can be oblivious to societal development.d.

Good corporate governance provides the foundations of good corporate social responsibility (CSR) by developing 8. value-creatingrelationshipswithall_____________.

employeesa. organisationb. stakeholdersc. employersd.

When was the global compact’s operational phase launched at UN headquarters in New York? 9. 16a. th July, 200429b. th August, 200026c. th September, 200026d. th July, 2000

Which of the following has launched CSR e-form, wherein the companies adopting and pursuing CSR activities 10. may report their activities on voluntary basis?

Ministry of Moral Affairs in 2010a. Ministry of Corporate Affairs in 2010b. Ministry of Mutual Affairs in 2010c. Ministry of Social Affairs in 2010d.

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Case Study I

Management Control

“Unquestionably, the biggest challenge a company faces is not failure, but success. When a company is failing, it will try almost anything. On the other hand, a company that is successful generally does not know where the roots of that success lie. There is consequently a tendency to fall into a pattern of not changing anything.”

Moving ForwardAs a start-up company from the ‘frontier region’ of a developing country such as Lebanon, mobinets has certainly come a long way in building a very impressive international customer portfolio and notable business partnerships. The company has successfully built its brand equity, and the demand for its product is increasing at a much faster ratethanitsstaffing.Asaresult,asignificantchallengethatmobinetsfacesisflawlessdelivery,orasZeinBalhas,thefinancialdirector,putsit:“meetingthisrisingdemandwithoutcompromisingquality.”Tothiseffect,whilebeingvery selective about the projects that it undertakes, the company is improving its supply capabilities locally and in Morocco, the United Kingdom, and Dubai, by building its project management team (currently six individuals). However,itisnoeasytasktofindnewrecruitswiththerightqualifications.Candidateswithnetworkingandtelecomexperience at internationally renowned industry players are primary targets and then in-house training is offered to them to become adequately familiar with NEP’s unique features. That said, as part of its ongoing restructuring activities, mobinets has brought on board a telecom and IT international consultant to help it restructure the production and delivery departments, and implement best practices in accordance with the international standards of CMII and Six Sigma.

Organisational Structure and Decision MakingBecause of the company’s rapid growth, its organisational structure is still in the making. A staff recruitment plan isbeingpursuedtoachievetheorganisationalhierarchydepictedinfigure1.1.

SoftwareDevelopment Finance

Accounting & Budgeting

Collection

SolutionArchitect

IT AdminSystem

Integration

Chief Commercial Officer/ Chief

Marketing Officer

Chief Information

Officer

Chief Technical

Officer

Chief Financial

Officer

VP HRManager

Quality Assurance**

InternalAuditor**

HumanResources

Admin

Sales

TechnicalSales

Marketing

Business Development

Support

Project Management

TelecomDelivery

Research & Development

ProjectManagement

Product Management

CEO

Fig.1.1. Organisational hierarchy

Thepositionsmarkedwithasterisks infigure1.1arecurrentlyempty,asareanumberofpositionswithin thefunctionsunderthem.Amongthemostprominentvacanciesthatmobinetsisactivelyseekingtofillarethoseofquality assurance, training manager and sales director. In the meantime, the company is understaffed but employees areverydevotedandcooperative;manyofthemcurrentlyfillmultiplepositionsconcurrently.Itfollowsthatjobdescriptions and divisions of responsibilities are still not very clear and that the decision-making responsibility is shouldered to a large extent by Mr. Shalak because of his seniority in and vision for the company. Mobinets plans toapplyforISOcertificationduringthesummerof2013withthegoalofstreamliningallitshorizontalprocessesacross its six departments (Human Resources, Finance, Product Management, Production, Delivery, Sales and Marketing).


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Business Planning and Monitoring and CommunicationMobinets’ strategic plan is clear in the mindset of senior management and the board of directors. It is documented in the current-year budget and the high-level budget for the following two years. Communication of these plans, budgets, and key performance indicators (KPIs) to lower-level management and staff is done in an informal setting.

In terms of monitoring, management keeps a very close eye on things; it meets practically daily to address operational issues. Development of an internal dashboard to report performance on a monthly basis is under way, as is development ofanin-houseaccountingfunction.Thesedevelopmentswillenableaccesstofinancialandmanagementinformationin real time for planning and monitoring purposes and will greatly enhance internal communication across the organisation, both vertically and horizontally.

Risk Management Althoughnoformalprocessisinplace,riskmanagementiscarriedout.Mobinetshasidentifiedtwokeyrisks:

Insolvency, due to the inherent nature of the company’s cash collections cycle. Appropriate cash management is •thuscritical.Alldisbursements(exceptforpettycashpayments)havetobeapprovedbythefinancialdirector,to ensure that obligations are met in order of priority.Quality and timeliness of delivery, given the rapid growth in demand giving rise to the robust workforce growth, •which is certainly much needed but entails a notable percentage of newcomers who have yet to become well-versed with the unique features of mobinets products and services.

Internal Controls and Transaction Cycle ProcessesWhilemobinetsisactivelyworkingtoaddstaff,employeesarefillingmultipleroles.Policies,procedures,authorities,andjobdescriptionshaveyettobeformallyarticulated.Aninternalauditfunctionisdefinitelypartofthelong-term human resources plan. Meanwhile, management is exercising hands-on control over the different processes; allpurchases,expenditures,anddisbursementsaresubjecttoapprovalbyseniormanagement,namelythefinancialdirector,Mr.Shalak’ssister.ThefinalapprovalofallsalestransactionslieswithMr.Shalak.

(Source: Corporate Governance Case Study: mobinets [Online] Available at:<http://www.ifc.org/wps/wcm/connect/fca97900414cc4f9a02da39e78015671/CG_Case_Study_Mobinets.pdf?MOD=AJPERES> [Accessed 16 January 2014]).

QuestionsWhat is the challenge faced by the company?1. AnswerThe company has successfully built its brand equity, and the demand for its product is increasing at a much fasterratethanitsstaffing.Asaresult,asignificantchallengethatmobinetsfacesisflawlessdelivery,orasZeinBalhas,thefinancialdirector,putsit:‘meetingthisrisingdemandwithoutcompromisingquality’.

Whatistheriskidentifiedbythecompany?2. AnswerThecompanyhasidentifiedtwokeyrisks:•Insolvency,duetotheinherentnatureofthecompany’scashcollectionscycle.Appropriatecashmanagementisthuscritical.Alldisbursements(exceptforpettycashpayments)havetobeapprovedbythefinancialdirector,to ensure that obligations are met in order of priority.

•Qualityandtimelinessofdelivery,giventherapidgrowthindemandgivingrisetotherobustworkforcegrowth,which is certainly much-needed but entails a notable percentage of newcomers who have yet to become well-versed with the unique features of mobinets products and services.

How is the company handling these challenges?3. AnswerThe company is handling these challenges. As the company is understaffed but employees are very devoted and cooperative;manyofthemcurrentlyfillmultiplepositionsconcurrently.Whilemobinetsisactivelyworkingtoaddstaff,employeesarefillingmultipleroles.

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Case Study II

Corporate Social Responsibility in the US

US companies are not as heavily regulated as those in other developed nations, and corporate responsibility is not addressed as a regulatory compliance issue, but rather from a social and moral choice perspective.

In the US, the notion of a triple-bottom-line approach to business success has always been a voluntary one. So while stakeholders’expectationsthatcompaniesadoptmoresustainablebusinesspracticesthatbenefitpeopleandsocietyinadditiontoprofitsaregrowing,thetruthremainsthatcompaniesarenotobligedtoparticipate.

Aligning with, or perhaps because of, non-compulsory corporate responsibility practices, corporate activities encompassing corporate responsibility in the US go beyond environmental, legal and workplace issues to ones that best enhance a company’s external reputation. Philanthropy and employee engagement are key areas of a company’s corporateresponsibilityplatform.UScompanieshavehadtheluxuryofdefiningandinterpretingtheirownviewofresponsible business within the context of their own company. Subsequently, they have been able to measure and promote activities with greater freedom than their international counterparts.

Interestingly, US companies are much more explicit in their public statements on a commitment to corporate responsibilitythantheirpeerselsewhere,particularlyEurope.Butthelackofdefinitionhasledtoconfusiononterminology ranging from social responsibility to sustainability, community investment and corporate citizenship andconfusionastowhattheymean.Forsomecompanies,corporateresponsibilityisdefinedasphilanthropicgiving,while others include business activities ranging from raw material sourcing to employment practices. As corporate responsibility becomes more widely understood, accepted and practised within mainstream companies, however, there begins to be greater convergence of common activities included in a company’s corporate responsibility platform.

Changing attitudesSustainable business is undergoing what Aron Cramer, chief executive of Business for Social Responsibility, calls a‘confluenceofpractice’.Historically,corporateresponsibilityactivitieswithinacorporationhavebeenledbyasingle department responsible for reporting, implementing initiatives and communicating activities within areas, such as philanthropy, volunteerism and environmental affairs. Today, responsibility is increasingly embedded into core business functions and decisions, such as supply chain, transportation, engineering and marketing. Corporate responsibility experts are increasingly serving as resources for those functional decision-makers. Cramer says, “Companies are moving beyond philanthropy endeavours to look at corporate responsibility as a driver of innovation and competitiveness.”

Companies now understand that corporate responsibility innovation must begin at the research and development phase. “It’s less about managing risks and more about how sustainable business practices can impact competitive differentiation and drive innovation,” Cramer says.

Chipotle Mexican Grill, a US chain of quick-serve Mexican-style food, set out in 2001 to demonstrate that sustainably and responsibly sourced food could be provided in a low-cost, fast-food environment. Today, Chipotle serves more naturallyraisedmeatthananyrestaurantintheworld,andwasthefirstnationalUSchaintoservedairyproductsfrom animals treated without recombinant bovine growth hormone. Customers responded. Although Chipotle raised prices on some products following the switch to naturally raised meat products, sales for them doubled. Chipotle hasproduceddouble-digitprofitgainsineachofthepastnineyears,unlikemanywithinthecompetitivequick-service restaurant industry.


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Other companies have demonstrated a similar commitment to innovation and customer development GE’s ecomagination and healthy magination are two leading examples; another is Intel’s Classroom PC. Mitch Jackson, vice-president for environmental affairs and sustainability at FedEx, agrees. “Our goal is to get CSR to the research anddevelopment level,whichhelps us propel innovation forward andfind solutions to existing andpotentialcustomers’ needs in a sustainable way,” he says.

(Source: Case Study: Corporate Social Responsibility in the US [Online] Available at: <http://www.triplepundit.com/2011/03/case-study-corporate-social-responsibility/> [Accessed 16 January 2014])

QuestionsWhat is corporate social responsibility?1. Is CSR compulsory in US?2. What is the goal of environment affairs sustainability at FedEx?3.

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Case Study III

Coca-Cola’s Corporate Social Responsibility in India

AbstractWith the accelerating pace of globalisation and increasing competition, it becomes inevitable for companies to have clearlydefinedbusinesspracticeswithasoundfocusonpublicinterest.InIndia,theworld’slargestbeveragemakerCoca-Cola Inc. (Coke) was engaged in a number of community-focused CSR initiatives. These initiatives were further accelerated since 2003, following the various allegations and issues such as presence of pesticide residues in its beverages and water resource contamination issues that the soft drink giant faced in India. To address these issues and to rebuild its tarnished brand image in India, Coke engaged itself in a number of environment-focused CSR initiatives, like executing the eKO management system in 2003, under which it preserved local water resources. It also adopted measures to reduce water consumption in its production processes. This case facilitates discussion on whether Coke used CSR as a tool for its sustainability in India or only as a green washing effort to counter its allegations. The case also helps to emphasise the need for adopting ethical values in the business practices of multinationals operating in India.

Pedagogical Objectives:To discuss the challenges faced by Coke in India•To analyse measures taken by Coke to address these challenges•To examine the rationale behind Coke’s corporate social measures in India•To scrutinise whether MNCs in developing countries use CSR initiatives as a tool for its sustainability or only •as a green washing effort.To bring out a business model that integrates CSR initiatives in the value charter of a company.•

(Source: Coca-Cola’s Corporate Social Responsibility in India[Online]Availableat:<http://ibscdc.org/Case_Studies/Corporate%20Social%20Responsibility/CSR0046C.html> [Accessed 16 January 2014]).

QuestionsWhat were the challenges faced by Coke in India?1. When was the initiatives taken?2. What were the different measures taken by the company?3.


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Recommended ReadingAnderason, D. R., • An Introduction to Management Science. Cengage Learning.Taylor, B. W., 2008. • Introduction to Management Science. 9th ed., Pearson Education India, New Delhi.Peel, M., • Introduction to Management, a Guide for Better Business Performance. Universities Press, India.Fernando, A. C., 2009. • Business Ethics: An Indian Perspective. Pearson Education India.Mika, A., 2011. • The Importance of Codes of Ethics. Diplomarbeiten Agentur.Nitecki, M. H. and Nitecki, D . V. , 1 9 9 3 . • Evolutionary Ethic. SUNY Press.Baker, H. K. and Anderson, R., 2010. • Corporate Governance: A Synthesis of Theory, Research, and Practice. John Wiley & Sons.Tricker, B. and Tricker, R . I , 2012. • Corporate Governance: Principles, Policies and Practices. Oxford University Press.Martin, D., 2 0 0 6 . • Corporate Governance: Practical Guidance on Accountability Requirements. Thorogood Publishing Press, London.Thankom, A. and Turner, J., 2009. • Corporate Governance and Development: Reform, Financial Systems and Legal Frameworks. Edward Elgar Publishing, USA.Swamy, S., 2009. • Corruption and Corporate Governance in India: Satyam, Spectrum, and Sundaram. Har Anand Publications, New Delhi.Dewan, S . M., • Corporate Governance in Public Sector Enterprises. Pearson Education India.Idowu, S. O. and Filho, W. L., 2009. • Professionals´ Perspectives of Corporate Social Responsibility. Springer.Thankom, A. and Turner, J., 2009. • Corporate Governance and Development: Reform, Financial Systems and Legal Frameworks. Edward Elgar Publishing, U.K.Clarke, T., 2007. • International Corporate Governance: A Comparative Approach. Routledge, New York.Bernhard, G., Luttermann, C., Saenger, I., Sandrock, O and Casper, M., 2012. • German Corporate Governance in International and European Context. Springer.Mallin, C . A., 2011. • Handbook on International Corporate Governance: Country Analyses. Edward Elgar Publishing, U.K.Rasheed, A . and Yoshikawa, T., 2012. • The Convergence of Corporate Governance: Promise and Prospects. Palgrave Macmillan.Brockett, A. and Rezaee, Z., 2012. • Corporate Sustainability: Integrating Performance and Reporting. John Wiley & Sons.McElroy, M. W. W. and Engelen, J. 2012. • Corporate Sustainability Management: The Art and Science of Managing Non-Financial Performance. Routledge, New York.Kieff, F. S . and Paredes, T. A, 2010. • Perspectives on Corporate Governance. Palgrave Cambridge University Press.Hawkins, D. E., 2006. • Corporate Social Responsibility: Balancing Tomorrow’s Sustainability and Today’s Profitability. Palgrave Macmillan.Schwartz, M. S ., 2011. • Corporate Social Responsibility: An Ethical Approach. Broadview Press.Baxi, C . V. and Prasad, A, 2005. • Corporate Social Responsibility: Concepts and Cases: the Indian Experience. Excel Books India, New Delhi.

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Self Assessment Answers

Chapter Ib1. d2. b3. c4. b5. a6. d7. b8. a9. b10.

Chapter IIc1. b2. d3. a4. b5. d6. b7. a8. c9. d10.

Chapter IIIb1. a2. c3. d4. b5. a6. c7. b8. c9. a10.

Chapter IVb1. c2. d3. a4. d5. a6. b7. a8. c9. b10.


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Chapter Vb1. a2. a3. d4. c5. a6. c7. a8. b9. d10.

Chapter VIb1. c2. a3. c4. a5. d6. b7. c8. d9. a10.

Chapter VIIa1. b2. c3. d4. c5. d6. c7. b8. b9. d10.

Chapter VIIIb1. c2. d3. a4. b5. a6. b7. c8. d9. b10.