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28.12.

2016

Note by Bala

Corporate Ethics, Corporate Governance &
Corporate Social Responsibility
Note: To be read in conjunction with PPT slides and other material
provided
Background:
The word ‘Ethics’ evolves from the Greek word, ‘Ethos’. ‘Ethos’ means
‘Character’ or ‘Custom’. As a corollary, ethical behaviour means ‘socially and
morally’ acceptable behaviour. The experience of unethical behaviour is not new
to human civilization. It has been in existence right from ancient civilizations. In
the 6th century B.C. the philosopher Anacharsis once said, “The market is a
place set apart where men may deceive one another.” History is replete
with examples of unethical behaviour, unethical practices inconsistent with
common good for society, for people at large, for government etc. out of selfish
interests and aggrandisement. We are familiar with the expression “Power
corrupts ultimately”. Power referred to in this statement could mean one or
more of these:
Political, Economic, Social, Religious, Financial or
Organizational. Power is vested in an individual or a group of individuals like
‘Board of directors’ in a business organization by the authority they enjoy and
the position they come to occupy in their respective areas.
Power makes individuals or a group of individuals ‘heady like a drunken man’.
Once an individual rises to a high position in politics or business, one tends to
think that one is above law. This perception could lead one to questionable
actions and behaviour. This is unethical behaviour. Business ethics is about:
 Decision-Making
 By People in Business
 According to Moral Principles or Standards
In an organization, decisions are being taken regularly. Conflicting duties,
loyalties or interests create moral dilemmas requiring decisions to be made.
Ethical decision-making involves the ability to discern right from wrong along
with the commitment to do what is right. In a highly competitive environment of
business, principles are being compromised with frequently. The ultimate goal of
any business is growth through profits. CEOs and Presidents and Managing
Directors (may be the entire board of directors) achieve growth and market
leadership, but at what cost?
Modern business had become conscious of the need for ethical behaviour due to
a series of corporate frauds in the 70’s and 80’s of the twentieth century. As a
result, taking the initiative in the international community, U.K. had appointed
the Cadbury Committee to evolve the first codified set of ‘business ethics’. The
committee had come out with the very first report that modern business knows
as ‘Corporate governance’ (CG) report. ‘Corporate governance’ is nothing but

codified corporate ethical practices expected to be followed by organizations
globally. This is the very first step towards establishing code of conduct for
business on a universal dimension. As we will see in the following paragraphs,
the first step of business ethics led to ‘Corporate governance’. This in turn led to
the ‘Corporate Social Responsibility’ as is being practiced today. Today, in terms
of provisions of The Companies Act, 2013, Indian limited companies are required
to publish as a part of their annual reports, a section on ‘Corporate governance’
report on ethical practices being followed in their respective organizations.
Corporate social responsibility obligation is not on all limited companies. The
norms have been prescribed for those of the limited companies that are listed.
The CSR spending is mandatory for such limited companies. Other limited
companies can do voluntarily. Indian corporate history has adequate number of
examples of limited companies undertaking ‘CSR’ initiatives on their own much
before the mandatory ‘CSR’ rules came into existence.
What is the importance of ‘morals’?
Let us see what some great personalities had to say about ‘morals’.

“The most important human endeavor is the striving for morality in our
actions. Our inner balance and even our very existence depend on it. Only
morality in our actions can give beauty and dignity to life. - Albert Einstein (in
a letter 11/20/50)
The historian Arnold Toynbee observed: "Out of 21 notable civilizations, 19
perished not by conquest from without but by moral decay from within."

In sharp contrast, let us also see what modern young generation feels about
‘ethical standards’.
According to a recent poll of college seniors, 73% agreed with the statement that
“What is right or wrong depends on differences in individual values and cultural
diversity.” Only 25% agreed with the statement that “There are clear and uniform
standards of right and wrong by which everyone should be judged."
Relative and absolute standards of morals:
Relative is what is suitable for the circumstances and could vary from situation to
situation or from time to time; absolute standards remain the same, standing the
test of time well. It is the absence of absolute standards that leads to corruption
of moral standards through their dilution. The following lines explain the effect of
relative standards.
Relativism allows for oppression of those with minority views by allowing the
majority in any particular circumstance to define what is morally right or wrong.
– “In Germany they first came for the Communists, and I didn't speak up
because I wasn't a Communist.
– Then they came for the Jews, and I didn't speak up because I wasn't a Jew.
– Then they came for the trade unionists, and I didn't speak up because I
wasn't a trade unionist.

Then they came for the Catholics, and I didn't speak up because I was a
Protestant.
– Then they came for me — and by that time no one was left to speak up.”
German anti-Nazi activist, Pastor Martin Niemöller

Relativists never need bother to examine why something is moral or immoral,
they merely accept/tolerate alternative determinations, so that none are held to
account.
Let us learn something fundamental about the three, corporate ethics,
corporate governance and corporate social responsibility.

Business ethics

1.
a. Examples of ethical practices by employees:
i. Work habits
ii. Ethics in sales
iii. Ethics in advertisement
iv. Ethics in purchase function
b. Unethical practices usually done by employees etc.
 Padding of labour charges and expense accounts
 Personal long distance phone calls on company accounts
 Untidy work areas, break areas and rest rooms
 Taking office supplies home
 Excessive breaks or sick days
 Improper use of copy machines and computer equipment
 Cheating the company in the matter of leave, absence, advance etc.
 Not conforming to expected business etiquette while dealing with
external customers of the organization
 Abusive behaviour
 Undue credit for any work, result, achievement etc.

dishonesty, withholding information, distortion of facts

misleading or confusing communications or positioning or advertising

manipulation of people's feelings

deception, trickery, kidology, rule-bending, fooling people

exploitation of weakness and vulnerability

excessive profit

greed

anything liable to harm or endanger people

breach of the Psychological Contract - the Psychological Contract
represents trust and expectations between people in a relationship notably within employer/employee relationships, extending to other
organizational relationships too - (aside from Psychological Contract
theory, specialised theory within Transactional Analysis helps explain
this aspect of trust and expectations in human relationships)

avoidance of blame or penalty or payment of compensation for wrongdoing

inertia-based 'approvals' and 'agreements' (in which action proceeds
unless objected to)

failing to consult and notify people affected by change

secrecy and lack of transparency and resistance to reasonable
investigation

coercion or inducement

harming the environment or planet

unnecessary waste or consumption

invasion of privacy or anything causing privacy to be compromised

recklessness or irresponsible use of authority, power, reputation

nepotism (the appointment or preference of family members)

favouritism or decision-making based on ulterior motives (e.g., secret
affiliations, deals, memberships, etc)

alienation or marginalisation of people or groups

conflict of interests (having a foot in two or more competing camps)

neglect of duty of care

betrayal of trust

breaking confidentiality

causing suffering of animals

'by standing' - failing to intervene or report wrong-doing within area of
responsibility (this does not give licence to interfere anywhere and
everywhere, which is itself unethical for various reasons)

unfairness
Unkindness

lack of compassion and humanity

2. Cases in 2012 – Unethical corporate behaviour
a. Reebok India Limited, a subsidiary of Adidas AG – 870 crores fraud – MD
& COO
b. Series of technically bad orders placed by Emkay Global on NSE – 59
trades worth more than US $ 125 million were halted by the system –
NIFT fifty index came down by more than 900 points
c. Kingfisher airlines loses licence to fly
d. Adani group – 1800 crores market capitalization lost over on line
rumour
e. Sahara told to pay US $ 3 billion to its bond holders
3. Cases in 2013 – Unethical corporate behaviour
a. Ranbaxy – criminal guilty plea of US $ 500 million in fines and penalties
i. Fuzzed data submitted to regulators abroad, the FDA, USA
ii. Similarity between Satyam fraud and Ranbaxy case
iii. Not to hold independent directors on the board responsible
iv. Independent director's responsibility is limited to ensuring that
he/she understands the business model, best corporate
governances practices (e.g. board process, risk management
system, internal audit and statutory audit, whistle-blower policy,
and transparency within and outside the Board) are in place and
operating effectively, analysing information available through
the Board processes or otherwise and acting proactively based
on that analysis for the benefit of the company as a whole. If
independent directors are held responsible for frauds
perpetrated by or with the support of the top management,
which has the ability to override internal controls, it will be
difficult to induce professionals to join Boards of companies as
independent directors.
4. How to be prepared for handling any unethical issues?
a. Determine areas of possible negative ethics
i. Employees being highly stressed out
ii. International corporate relationships
b. Promote positive workplace behaviour ethics
i. Strong corporate image
ii. Professionalism
iii. Honesty
iv. Trust
v. Responsibility
c. Continuous ethics training

5. Four fundamental ethical principles (a very simple introduction)
a. The Principle of Respect for autonomy
Autonomy is Latin for "self-rule" We have an obligation to respect the
autonomy of other persons, which is to respect the decisions made by

other people concerning their own lives. This is also called the principle
of human dignity. It gives us a negative duty not to interfere with the
decisions of competent adults, and a positive duty to empower others
for whom we’re responsible.
Corollary principles: honesty in our dealings with others & obligation to
keep promises.

b. The Principle of Beneficence
We have an obligation to bring about good in all our actions.
Corollary principle? We must take positive steps to prevent
harm. However, adopting this corollary principle frequently places us in
direct conflict with respecting the autonomy of other persons.

c. The Principle of nonmaleficence
(It is not "non-malfeasance," which is a technical legal term & it is not
"nonmalevolence," which means that one did not intend to harm.)
We have an obligation not to harm others: "First, do no harm."
Corollary principle: Where harm cannot be avoided, we are obligated to
minimize the harm we do.
Corollary principle: Don't increase the risk of harm to others.
Corollary principle: It is wrong to waste resources that could be used for
good.
Combining beneficence and nonmaleficence: Each action must produce
more good than harm.
d. The Principle of justice
We have an obligation to provide others with whatever they are owed
or deserve. In public life, we have an obligation to treat all people
equally, fairly, and impartially.
Corollary principle: Impose no unfair burdens. Combining beneficence
and justice: We are obligated to work for the benefit of those who are
unfairly treated.
6. Ethical dilemmas:
1. A top employee at your small company tells you he needs some time off
because he has AIDS. You know the employee needs the job as well as the
health insurance benefits.
Providing health insurance has already stretched the company’s budget,
and this will send premiums through the roof. You know the federal courts
have upheld the right of an employer to modify health plans by putting a
cap on AIDS benefits.
Should you investigate whether this is a legal possibility for your
company?
2. As a sales manager for a major pharmaceuticals company, you have been
asked to promote a new drug that costs $2,500 per dose. You have read
the reports saying the drug is only 1 percent more effective than an

alternative drug that costs less than one-fourth as much. Can you in good
conscience aggressively promote the $2,500-per-dose drug?
If you do not, could lives be lost that might have been saved with that 1
percent increase in effectiveness?
3.

Your company is hoping to build a new overseas manufacturing plant. You
could save about $5 million by not installing standard pollution control
equipment that is required in the United States. The plant will employ
many local workers in a poor country where jobs are scarce. Your research
shows that pollutants from the factory could potentially damage the local
fishing industry. Yet building the factory with the pollution control
equipment will likely make the plant too expensive to build.

4. You are the accounting manager of a division that is $15,000 below profit
targets. Approximately $20,000 of office supplies were delivered on
December. The accounting rule is to pay expenses when incurred. The
division general manager asks you not to record the invoice until February.
5. You have been collaborating with a fellow manager on an important
project. One afternoon, you walk into his office a bit earlier than scheduled
and see sexually explicit images on his computer monitor. The company
has a zero-tolerance sexual harassment policy, as well as strict guidelines
regarding personal use of the Internet. However, your colleague was in his
own office and not bothering anyone else.
7. Three steps to solve ethical dilemmas: they flow upwards involving utility
(value delivered to the stakeholders), Rights & Justice
a. Know your values strongly
b. Select a model of ethics suitable for the organization
c. Use a problem solving process
8. Three pillars of an ethical organization:
Pillar 1 – Ethical individuals
a. Integrity
b. Honesty
c. Inspire trust
d. Treat people right
e. Play fair
f. High level of moral development
Pillar 2 – Ethical leadership
a. Role modelling
b. Uphold ethical values in organization
c. Communicate about ethics and values
d. Reward ethical behaviour
e. Swift discipline of unethical behaviour
Pillar 3 – Organization’s structures and systems
a. Corporate culture
b. Code of ethics
c. Ethics committee
d. Chief ethics officer
e. Ethics training

f.

Whistle-blowing mechanisms

9. Ethical leadership:
a. ‘Ethics’ originates from the Greek word ‘Ethos’. It means character,
conduct or customs
b. With respect to leadership, ethics is about who leaders are—their
character and what they do, their actions and behaviours.
c. Ethical leaders treat their followers with respect and dignity
d. Their personal values determine what kind of ethical climate will
develop in their respective organizations
e. Ethical leadership principles:
i. Respect for others
ii. Service to others
iii. Justice to others
iv. Honesty/integrity to others
v. Building community with others
f. Ethical leader would ask the following questions to himself/herself:
i. Is this the right and fair thing to do?
ii. Is this what a good person would do?
iii. Am I respectful to others?
iv. Do I treat others generously?
v. Am I honest towards others?
vi. Am I serving the community?
g. Principled leadership:
Principled leaders make a conscientious effort to get all the relevant
information to make an informed decision and to see that their
decisions are consistent with their values and those of the organization.
h. How to get principled leadership?
i. Upbringing and life experiences
ii. Reflection
iii. Role models
iv. Code of ethics and communication
i. The challenges of principled leadership:
i. They should be model citizens
ii. Stick to what you are good at
iii. Establishing an inclusive corporate culture
iv. Have sound whistleblower protection or processes for
information flow
v. Boards of directors should encourage CEOs to speak out
responsibly on critical issues instead of scuttling them
j.

Table 1:

The ethical leader

The Unethical leader

Is humble
Is concerned for the greater good
Is honest and straightforward
Fulfils commitments
Strives for fairness
Takes responsibility
Shows respect for each individual
Encourages and develops others
Serves others

Is arrogant and self-serving
Excessively promotes self-interest
Practices deception
Breaches agreements
Deals unfairly
Shifts blame to others
Diminishes others’ dignity
Neglects follower development
Withholds help and support

Shows courage to stand up for
what is right

Lacks courage to confront unjust acts

Table 2: Examples of final
(personal and ethical-social) and
instrumental values (ethicalmoral and values of competition)
Personal values:
What are the most important
things in your life?
Ethical-social values:
What do you want to do for the
world?
Ethical-moral values:
How do you think you should
behave towards people that
surround you?
Values of competition:
What do you believe is necessary
to compete
In life?

Happiness, health, salvation, family, personal
success, recognition, status, material goods,
friendship, success at work, love.
Peace, planet ecology, social justice
Honesty, sincerity, responsibility, loyalty,
solidarity, mutual confidence, respect for
human rights
Money, imagination, logic, beauty,
intelligence, positive thinking, flexibility,

k. One theory based on virtue (value) – traits of ethical leaders:
i. Pride
ii. Patience
iii. Prudence
iv. Persistence
v. Perspective
vi. Integrity
l.

Table 3: Criteria
for evaluation of
ethical
leadership

Ethical

Unethical Leadershi

Leadership

Use of leader power
and influence

Serves followers and the
organization

Satisfies personal needs and career
objectives

Handling diverse
interests of multiple
stakeholders

Attempts to balance and
integrate them

Favours coalition partners who offer
the most benefits

Development of a
vision for the
organization

Develops a vision based
on follower input about
their needs, values and
ideas

Attempts to sell a personal vision as
the only way for the organization to
succeed

Integrity of leader
behaviour

Acts consistent with
espoused values

Does what is expedient to attain
personal objectives

Risk taking in leader
decisions and actions

Is willing to take personal
risks and make necessary
decisions

Avoids necessary decisions or actions
that involve personal risk to the
leader

Communication of
relevant information
operations

Makes a complete and
timely disclosure of
information about events,
problems and actions

Uses deception and distortion to bias
follower perceptions about problems
and progress

Response to criticism
and dissent by
followers

Encourages critical
evaluation to find better
solutions

Discourages and suppresses criticism
or dissent

Development of
follower skills and
self-confidence

Uses coaching, mentoring
and training to develop
followers

Deemphasizes development to keep
followers weak and dependent on
the leader

Source: (G. A. Yukl & Yukl, 2002, p. 422)

m. Three actions that will ensure compliance with ethical standards in the
organization:
The research finds that three ethics-related actions by management and
coworkers have the greatest impact on employee ethics and compliance –
an influence more profound than formal ethics programs and organized
activities. They are:
i. Setting a good example;
ii. Keeping promises and commitments; and
iii. Supporting others in adhering to ethics standards.
n. 5 key
i.
ii.
iii.
iv.
v.

points that every ethics policy should contain:
Detailed and well defined in the form of a manual
Provide training for new and current employees regularly
Use ethic policy for guidance
Ability to learn from mistakes &
Zero tolerance towards unethical practices

o. Benefits of an established framework for ethics at workplace
i. Efficiency
ii. Consistency
iii. Payback &
iv. Self respect

Corporate governance = Codified business ethics
1. Corporate governance towards:
a. Employees – already listed above
b. Customers

i. The right to safety
ii. The right to be informed
iii. The right to choose
c. Institutional Investors
i. Nomination obligations being complied with
ii. Giving them a say in the case of nominee director
iii. Being fair and transparent in reporting and other compliances
d. Creditors
i. Being fair in payment as per agreed terms
ii. Not exploiting them due to favourable market conditions
e. The Government:
i. 100% conformity with all statutory obligations
ii. Fair in disclosures of material information
2. Five Golden Rules of best Corporate governance practices are:
a. Ethics: a clearly ethical basis to the business
b. Align Business Goals: appropriate goals, arrived at through the
creation of a suitable stakeholder decision making model
c. Strategic management: an effective strategy process which
incorporates stakeholder value
d. Organisation : an organisation suitably structured to effect good
corporate governance
e. Reporting: reporting systems structured to provide transparency and
accountability
3. Different models for CG:
a. The Anglo-American model: This is also known as unitary board
model, in which all directors participate in a single board comprising
both executive and non-executive directors in varying proportions.
b. The German model: Corporate governance in the German model is
exercised through two boards, in which the upper board supervises
the executive board on behalf of stakeholders and is typically
societal oriented.
c. The Japanese model: This is the business network model, which
reflects the cultural relationships seen in the Japanese keiretsu
network. In this model the financial institution has accrual role in
governance. The shareholders and the main bank together appoint
board of directors and the president.
4. Obligation to society at large:
a. National interest: A company should be committed in all its actions
to benefit the economic development of the countries in which it
operates and should not engage in any activity that would militate
against such an objective.
b. Political non-alignment: A company should be committed to and
support a functioning democratic constitution and system with a
transparent and fair electoral system and should not support
directly or indirectly any specific political party or candidate for
political office.
c. Legal Compliances: The management of a company should comply
with all applicable government laws, rules and regulations.

d. Rules of Law: Good governance requires fair, legal frameworks that
are enforced impartially. It also requires full protection of rights,
particularly those of minority shareholders.
e. Honest and ethical conduct: Every officer of the company should
deal on behalf of the
company with professionalism, honesty,
commitment and sincerity as well as high moral and ethical
standards.
f. Corporate Citizenship: A corporate should be committed to be a
good corporate citizen not only in compliance with all relevant laws
and regulations but also by actively assisting in the improvement of
the quality of life of the people in the communities in which it
operates with the objective of making them self reliant and enjoy a
better quality of life.
g. Ethical behavior: Corporations have a responsibility to set
exemplary standards of ethical behaviour, both internally within the
organizations, as well as in their external relationships.
h. Social concern: The Company should have concerns towards the
society. It can help the needy people & show its concern by not
polluting the water, air & land.
i. Healthy and safe working environment : A company should be able
to provide a safe and healthy working environment
j. Competition: A company should market its products & services on
its own merits & should not resort to unethical advertisements or
include unfair & misleading pronouncements on competitors’
products & services.
k. Timely Responsiveness: Good governance requires that institutions
& processes try to serve all stakeholders within a reasonable time
frame.
5. Obligation to investor:
a. Towards shareholder
b. Measures promoting transparency and informed shareholder
participation
c. Financial reporting and records
6. Obligation to employees
a. Fair employment practices
b. Equal opportunities
c. Humane treatment
7. Obligation to customers
a. Quality of products and services
b. Products at affordable prices
c. Unwavering commitment to customer satisfaction
8. Managerial obligations
a. Protecting company’s assets
b. Behavior toward government agencies
c. Control

9. The major challenges in CG in India are:
a. Power of the dominant shareholders
b. Lack of incentives to organizations to put in an effective CG system –
no direct correlation between putting in expensive CG systems and
practices and rewarding returns
c. Underdeveloped external monitoring systems
d. Shortage of independent and professional directors
e. Weak regulatory oversight including multiplicity of them
10.CG practices currently are inadequate because:
a. Primarily aimed at protecting shareholders from managerial excesses
b. This serves no purpose when we know that majority of Indian
companies are run by dominant shareholders.
c. A CG aimed at strengthening board processes alone would be
inadequate when dealing with governance abuses by dominant
shareholders
11.This brings us to the differences in challenges in CG between western
countries and India:
a. The agency gap in western countries is between the management of
large corporations and dispersed stakeholders whereas in India it is the
gap between dominant shareholders and minority shareholders
b. Much of the CG norms focus on boards, their committees, independent
directors, succession planning for CEO etc. In India, however, boards
are not so empowered and still are accountable to shareholders and
majority shareholders (dominant shareholders who are invariably the
promoters group) hold the sway anyway. Either through the board
as executive director or through majority shareholding or both.
c. Therefore in most of the cases relating to CG in India, the conflict is
between dominant shareholders and minority shareholders.
d. 663 of 993 companies studied in the survey in India are family
businesses, the most among the South Asian and South-East Asian
countries. The other countries are – Hong Kong, China, Indonesia,
Singapore, Malaysia, South Korea, Philippines, Taiwan & Thailand.
12.Unconventional definition of ‘stake holders’:
Stakeholders can be found in any or all of the following groups depending on the
type of organisation. Below are examples of stakeholder groups, including
conventional 'investor' stakeholders, and more modern stakeholder ideas.
Remember, a stakeholder is any group that is affected in one way or another by
the activities of an organisation.







shareholders
trustees
guarantors
investors
funding bodies
distribution partners
marketing partners















licensors
licensees
approving bodies
regulatory authorities
endorsers and 'recommenders'
advisors and consultants (yes, these people have something at stake too)
employees - staff, managers, directors, non-executive directors
customers
suppliers
the local population (community)
the regional general public
national general public
international communities
humankind
Many of these groups would not conventionally be considered to be stakeholders, but
think about it: each of these groups could have an interest in and could be affected by
the activities of an organisation. If a connection is not easy to see and understand it
doesn't mean the connection doesn't exist.
Given that this sort of modern stakeholder perspective produces such a wide-ranging
and extensive list of stakeholder groups, it's essential to apply (for any given
situation) some method of evaluating and expressing relative stakeholder interests and
needs, and also to measure and show the varying significance of the stakeholder
relationships; the degree of impact or dependence.

13.Different CG models practiced in the world and differences among them
(along with CG elsewhere)
Japan
People Products Profits
Products People

Germany

Anglo-American

Products People Profits

Profits

The implications of these differences in priorities are quite profound and can
be depicted in tabular form as follows:
Japan People have priority Emphasis on market sharecrop is a ‘generalist’
Germany Products have priority Emphasis on technology & engineering CEO
is an engineer
Anglo-American Profits have priority Emphasis on share-holder value CEO is
an MBA or an accountant.
Source: Lehmann, (1997).
Corresponding to these corporate governance models one can notice the
following three government industry models to see the impact of governmentindustry relationships on corporate governance. These models can be
summarised as shown in the following table:

Models
Government as referee

Countries
USA, UK, HK, Australia
& NZ

Government as
manager

France, Italy, China,
Vietnam, India, Spain,
Singapore, Thailand,
Malaysia, Indonesia

Government as coach

Germany, Austria,
Japan, SZ, Netherlands,
Sweden, Norway,
Denmark, Finland,
Korea, Chinese Taipei,

Salient features
 Govt. totally impartial to the markets
 Govt. stands on the sidelines
 It interferes only if abuses need to be p
crimes need to be punished
 Its emphasis on unregulated market for
 Minimize regulations
 Open, transparent and accountable form
 Auditors and lawyers have an importan
 Corruption tends to be low
 Govt. neither recognizes nor respects m
markets
 Economic nationalism and protectionism
 Govt. Intervention and control
 Promotion of national corporate champi
 Corporate governance is opaque, secre
publicity
 Bureaucracy is powerful
 Sidelines partiality
 Administrative guidance, support system
 Organized competition
 Semi-transparent, semi-opaque corpora
public accountability
 Considerable scope for corruption

Source: Lehmann, (1997)
14.Role of independent directors
a. Companies stand to gain from independent directors who are
courageous enough to voice genuine concerns and constructively
challenge executive decisions.
b. Independent directors are one of the most critical pillars of corporate
governance. They are expected to act as an effective oversight body to
protect the interest of investors, stakeholders, regulators, government
and minority shareholders. They bring external and unbiased inputs
which can bring a new and independent perspective, thereby giving a
fillip to overall quality in governance.
c. The need to have independent directors is not borne solely out of
regulatory compulsions. The growth story of the Indian economy
fuelled by economic reforms has significantly contributed to a
realisation that an independent check is needed to strike a right
balance between growth and governance. In the zest to pursue all-out
growth, corporate governance runs a risk of getting relegated to the
sidelines.
d. A number of tests are enunciated in the listing agreement of stock
exchanges for an independent director: he should not be an employee
or a relative of the promoters, or a substantial shareholder, or have
significant business dealings with the company. The Companies Act
also mandates disclosure of interest by directors to identify potential
conflicts beforehand. The underlying rationale idea behind all this is to

stay clear of situations in which a director's other business dealings or
relationships might pose a conflict, consequently impeding the board's
ability to act impartially.

Appointment process
a. In the Indian capital markets, promoters have a controlling stake in the
company. The provisions for appointment of directors under the
Companies Act require a positive vote by a majority of shareholders,
effectively making the promoter's nod in the appointment a
prerequisite. Regulations in many countries mandate or suggest that
boards have a nominating committee — preferably comprising nonexecutive and independent directors. In India, the proposed Companies
Bill stipulates that listed companies have to constitute a nomination
and remuneration committee consisting of non-executive and
independent directors. The Committee shall identify candidates,
recommend their appointment to the board and also carry out
performance evaluation. Limiting the say on pay of promoters with
regard to remuneration of independent directors could be a good way
of insulating the latter from the influence of the executive
management.
b. There is, however, a difference between being independent and
unconnected. To be effective contributors, independent directors have
to bring in knowledge, experience, insight and skill and industry
expertise to enable them to ask the right questions. Companies can
profit immensely from the presence of independent directors who are
courageous enough to voice genuine concerns and constructively
challenge executive decisions.
c. Having the right qualifications, experience and pedigree is only half the
battle won. The time and more importantly, the quality of time spent
by independent directors are what make a difference. Mere presence
and participation in board meetings could best have an ornamental
value. Interactions with executive management, reviewing industry
publications and analysing data about the company's competitors are
some of the ways to deliver value. Matured corporates follow a practice
of prior circulation of pre-meeting material, focusing on quality rather
than quantum. Right people need to be armed with the right tools in
order to make the right impact.
d. Orientation and training programmes giving a background of a
company's operations and organisational structure, its line of products
and services, strategies, and key challenges and opportunities can
tremendously shorten the learning curve of independent directors.
Current Liability Regime
a. The Indian law does not explicitly distinguish between executive and
non-executive directors when it comes to determining penal
consequences. The breather to independent directors given by the
Ministry of Corporate Affairs gives them a shield in cases where
contravention occurred without their knowledge or connivance and the
directors have been diligent on their part.

b. This immunity, however, is limited only to offences under the
Companies Act leaving ample scope for penal consequences under a
plethora of other laws. The risk-reward proposition can act as a
deterrent for independent directors while evaluating the option to join
the boards.
c. While the burden of expectations on independent directors is huge,
there is scope to improve the process of appointment, on-boarding,
dissemination of information to help strengthen and empower the
institution of independent directors. A clear and unambiguous liability
regime that clears the grey areas can be a significant confidencebuilding measure. Clearly, there is considerable ground to cover before
we can bridge the gap between what stakeholders and the government
expect and what independent directors can practically deliver. The
need of the hour is a paradigm shift in approach — from a tick in the
box approach to a compliance with the law in spirit and in substance.
Corporate social responsibility (CSR)
CSR is essentially meant for making corporate entities spend a certain specific
sum for the benefit of the society in the form of programs for promoting literacy,
social health, protecting environment etc. It is the ultimate step by which
business organizations are required to pay back the society in which they
operate. Organizations function by drawing on resources from environment
including labour. It is high time that they took initiatives to pay back to society if
not fully, at least a part of their profits.
In India currently as per provisions of The Companies Act, 2013, CSR spending is
mandatory for all limited companies having a turnover of more than Rs. 5 crores.
This is to bring into CSR fold the SMEs too. Just to give a brief outline of the
regulations relating to CSR as given in The Companies Act, 2013. For complete
details please refer to Handout no. 2:

1. Why is the CSR clause of the new Companies Act, 2013 so
critical for SMEs?
2. By requiring companies, with a minimum turnover of 5 crores INR, to spend
on CSR activities, the
3. Companies Act, 2013 is likely to bring in many SMEs into the CSR fold. This
will usher in a fresh set of challenges to a sector that is increasingly being
asked by its B2B customers to comply with environmental and social
standards, while remaining competitive in terms of price and quality. Thus,
SMEs will have to
4. Quickly learn to be compliant with these diverse set of requirements and it
is hoped that this handbook will
5. Facilitate their ability to comply with the CSR clause of the Companies Act,
2013.

Sustainability reporting in India for the top 100 listed companies (known
as ‘BRR’):

Business responsibility reporting (BRR)
The other reporting requirement mandated by the government of India,
including CSR is by the SEBI

which issued a circular on 13 August 2012 mandating the top 100 listed
companies to report their ESG
initiatives. These are to be reported in the form of a BRR as a part of the
annual report. SEBI has provided a
template for filing the BRR. Business responsibility reporting is in line with the
NVG published by the Ministry of Corporate Affairs in July 2011. Provisions
have also been made in the listing agreement to incorporate the submission of
BRR by the relevant companies. The listing agreement also provides the
format of the BRR. The BRR requires companies to report their performance on
the nine NVG principles. Other listed companies have also been encouraged by
SEBI to voluntarily disclose information on their ESG performance in the BRR
format.

Role of the board and the CSR committee:
Applicable to listed companies conforming to one of the following
conditions:
Net worth > 500 Crores INR
Turnover > 1000 Crores INR
Net profit > 5 Crores INR
1. CSR – examples of deficiencies in Indian companies:
a. Pharma companies lagging behind in sustainability reporting – paper
clipping – what is the status now? Bala has to know before sharing with
students
2. CSR good examples of Indian companies
a. Positive behaviour by a corporate – Mahindra Trucks – Navistar brand
i. Attention to the well being of the drivers
ii. Multilingual call centre for help while on the roads
iii. Promotes understanding of their rights and liabilities along
with basic ground rules including how to deal with
accidents etc.
iv. Driving lessons include how to deal with small mechanical
problems
v. Introduction of awards system not only for drivers but also
for the dhabas which serve as lifeline to driving
community
vi. Another initiative, ‘Outperformers league’ that invites
industry captains, legal experts, auto experts and drivers
too.
b. Another example of a very good CSR initiative by ITC – Waste
management engaged in recycling waste – nearly 8 lacs people are
employed directly and indirectly in Tamil Nadu alone by ITC’s program –
recycling more than 5000 tonnes a month.
3. CSR would include the following:

a. the environment
b. sustainability
c. globalization effects - e.g., exploitation, child-labour, social and environmental
damage anywhere in the world
d. corruption, armed conflict and political issues

e. staff and customers relations - for instance education and training, health and
safety, duty of care, etc
f. local community and other social impacts on people's health and well-being

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