Corporate Governance 1. Executive Summary………………………………………………………...…..3 2. Corporate Governance Introduction…………………………………..…..5 3. Corporate Governance- History: United States……………………….….6 4. Corporate Governance- History: India………………………………………9 5. Corporate Governance in India………………..……………………………10 6. Changes Since Liberalization…………………………………………………9 7. Parties to Corporate Governance………………………………………..…16 8. Principles of Corporate Governance……………………………………...19 9. Mechanisms and Controls – Corporate Governance……………………21 • •
Internal Corporate Governance Controls External Corporate Governance Controls
10. Corporate Governance Models Around the World………………….…..23 11. Corporate Governance and Firm Performance……………………….…..24 12. CG Practices followed by India & Other Foreign Countries ……….……27 13. Systematic Problems of Corporate Governance…………………….…...30 14. Corporate Governance at Large Companies………..………….……….39 15. Corporate Governance at Small Companies…………………….……….51
1 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
Corporate Social Responsibility 16. What Ratan Tata Did………………………………………………………..66 17. Corporate Social Responsibility Introduction……………..……………..66 18. Corporate Social Responsibility- History…………………………………..68 19. Indian Scenario………………………………………………………..………69 20. Principles of Corporate Social Responsibility……………………..……..73 21. Corporate Social Responsibility Priorities………………………………….75 22. Sustainable Growth Through Corporate Social Responsibility ………75 23. Corporate Social Responsibility with Key Stakeholders………………888 24. Corporate Social Responsibility Challenges…………………………….89 25. Corporate Social Responsibility – Initiative & Examples……………..900 26. Conclusion…………………………………………………………………..96 27. Bibliography…………………………………………………………………99 28. Appendices …………………………………………………………………99
• • Annexure 1 Annexure 2 Annexure 3
2 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
Corporate Governance (CG) is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Corporate Social Responsibility (CSR) is a commitment to behave ethically and contribute to economic development while improving the quality of life of workforce and their families as well as the local community at large. It is a voluntary approach that a business enterprise takes to meet or exceed stakeholder expectations by integrating social, ethical, and environmental concerns together with the usual measures of revenue, profit, and legal obligation. It is also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its adherence to law, ethical standards, and international norms. Objective of the Project on Corporate Governance & Corporate Social Responsibility is:
• to study the Regulatory Disclosures under different laws and its actual
implementation by Companies,
• to understand the impact of CG & CSR in Socio- Economic Development, • to understand the significance of CG & CSR on the Shareholders interests and • to find out newer approach of CG & CSR for protecting the Stakeholders’
interest. Findings / To Summarize, the corporate governance and the corporate social responsibility are both extremely important to a company. If you have a well formed corporate governance programme in place, that would probably take care of most CSR issues.
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a company is a separate legal entity different from its owners. Though. The CG & CSR requirements for large listed Public limited companies are much more than the unlisted Public limited companies and even lesser for small Private limited companies. where risk of the stack holders is limited. where the company is likely to be benefited from fewer disruptions to its business from strikes. whether private or public. executives and staff. The compliance requirements for CG & CSR are different for different types of companies. which lead to good brand value of the company.Good corporate governance is basically about making better decisions for the long term health of the company. boycotts and regulation. To implement CG & CSR.
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. Emphasis should be placed on increased transparency and disclosure of company’s policies and strategies. but is difficult to observe the separation of ownership and the management in case of small to medium Companies. there must be an active internal conversation between the board.
objectivity. laws. Other stakeholders include employees.
Definition Corporate Governance as 'an internal system encompassing policies. such as the stakeholder view and the corporate governance models around the world. accountability and integrity. customs. by directing and controlling management activities with good business savvy. and institutions affecting the way a corporation (or company) is directed. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency. regulators. management. processes and people. plus a healthy board culture. policies. administered or controlled.
Corporate governance is a multi-faceted subject.
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. with a strong emphasis on shareholders' welfare. which serves the needs of shareholders and other stakeholders. and the board of directors. and the community at large. Sound corporate governance is reliant on external marketplace commitment and legislation. The principal stakeholders are the shareholders. creditors. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. suppliers. customers. There are yet other aspects to the corporate governance subject. which safeguards
policies and processes'. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.CORPORATE GOVERNANCE
INTRODUCTION Corporate governance is the set of processes.
HISTORY .” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. i. See also Corporate Social Entrepreneurship regarding employees who are driven by their sense of integrity (moral conscience) and duty to society. structural) perspective.e. state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights. to make corporate governance more efficient.
“Good Corporate Governance: Reduces risk Stimulates performance Improves access to capital markets Enhances the marketability of goods and services Improves leadership Demonstrates transparency and social accountability. about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. Corporate Governance is viewed as business ethics and a moral duty.Corporate Governance
as defined by SEBI committee (India) is the
acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms. and because the US's wealth has been increasingly securitized into various corporate entities and institutions. It is about commitment to values. the rights of individual owners and shareholders have become increasingly derivative and dissipated. and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law. Since that time.
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.UNITED STATES In the 19th century. This notion stems from traditional philosophical ideas of virtue (or self governance) and represents a "bottom-up" approach to corporate governance (agency) which supports the more obvious "top-down" (systems and processes.
: IBM. and Gardiner C. and around the globe. not infrequently back dated). The California Public Employees' Retirement System led a wave of institutional shareholder activism (something only very rarely seen before). broad efforts to reform corporate governance have been driven. therefore. the East Asian Financial Crisis saw the economies of Thailand. Tyco. Honeywell) by their boards. Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today. corporate governance has been the subject of significant debate in the U. South Korea. Indonesia. the massive bankruptcies (and criminal malfeasance) of Enron and WorldCom. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.. in part. In 1997. Since the late 1970’s. led to increased shareholder and governmental interest in corporate governance. such as Adelphia Communications. Over the past three decades. In the first half of the 1990s. AOL. received considerable press attention due to the wave of CEO dismissals (e.g. by the unrestrained issuance of stock options. In the early 2000s. by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and. as well as lesser corporate debacles. Bold. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. wealth.g.
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.S. Arthur Andersen. Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. Means pondered on the changing role of the modern corporation in society. Global Crossing. Edwin Dodd.In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle.S. Kodak. Berle and Means' monograph "The Modern Corporation and Private Property" (1932. the issue of corporate governance in the U. corporate directors’ duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners.
The message for audit committees is: Uphold your responsibility for ensuring that the company’s internal and external audit processes are rigorous and effective. and risk management practices are functioning effectively. Nevertheless. functions and activities.Recent Developments in USA: History continues to tick and Sarbanes-Oxley Act of the US was a serious wakeup call. important extracts from the BIS review 2003. processes.
The message for internal auditors is: You are uniquely positioned within the company to ensure that its corporate governance. It has been much debated and there are very mild protests in some quarters. they have within their purview of internal control the responsibility to examine and evaluate all of an entity’s systems. and conduct of insiders that. I am tempted to quote some of the
The message for boards of directors is: Uphold your responsibility for ensuring the effectiveness of the company’s overall governance process. Although internal auditors are not specifically mentioned in the Sarbanes-Oxley Act.
The message for external auditors is: Focus your efforts solely on auditing financial statements and leave the add-on services to other consultants. operations. financial reporting and disclosure controls. it is a call to get back to fundamentals and it identifies 58 separate provisions that affect internal auditing and the question of Directors of Boards looking the other way is unacceptable and must change. codes of ethics. and the senior management is: Uphold your responsibility to maintain effective financial reporting and disclosure controls and adhere to high ethical standards. if violated.
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. including imprisonment. This requires meaningful certifications. This message is applicable to the public and private companies alike. CFOs. will result in fines and criminal penalties.
The message for CEOs.
19 of them are ‘mandatory’. the audit committee is chaired by qualified independent Director preferably a Chartered Accountant and the members of the Audit Committee are invariably non-executive independent Directors.Thus. It is true that Audit Committees. Kumar Mangalam Birla was a landmark document with 25 recommendations. In most Indian companies and the CIIs studies of 1999 chaired by Mr. at least those who are involved in the audit exercise should disassociate themselves from being a part of consulting side of the company’s work. which offer turn-key management consultation. All of these have to be in the public disclosure domain of the reports but outside the financial statements. There is one risk to merely lean heavily on the certification. If there are different sections of companies. Managing Committees and Remuneration Committees have all come into existence. HISTORY . Some of the provisions in the Act are quite draconian particularly one would be the internal auditor of publicly traded financial services company. It would be good to be associated with the framing of the robust audit programme and the company’s disclosure control framework. we would like to turn to Indian situation. Further an internal auditor must have the highest ethics and be willing to sacrifice everything (consultation assignments) to maintain their independence within the auditing company. the role of the internal auditor has substantially got escalated and the external auditor perhaps took a back seat. We all know that the independent Directors apart from receiving Director’s remuneration do not have any pecuniary relationship or
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. However. Likewise. call for tough Regulatory responses like the above Act and related rules introduced and interpreted by Securities and Exchange Commission in USA. which after a while become ritualistic. as there are threats of fines and imprisonment. By and large we have followed the Cadbury model. the internal auditor’s voice is heard loud and clear by the Board and as such all those Boards who choose to ignore this valuable advice would in my opinion be consigned to the dust bin of history. Auditors failing in their duties. misfeasance and malfeasance of staggering proportions. a specific section of Sarbanes-Oxley Act requires senior management to assess and report on the effectiveness of disclosure controls and procedures as well as on internal controls for financial reporting. Complex collapses. The role of a company with a combination of Executive and Non-Executive Directors with at least 50% comprising non-executive directors is important.INDIA: Next.
a well-developed equity culture if only among the urban rich. The turn towards socialism in the decades after independence marked by the 1951 Industries (Development and Regulation) Act as well as the 1956 Industrial Policy Resolution put in place a regime and culture of
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. Publication of quarterly or half yearly results of the companies after What being vetted by the Audit Committee is now a well established practice. Corporate Governance in India The history of the development of Indian corporate laws has been marked by interesting contrasts. The 1956 Companies Act as well as other laws governing the functioning of joint-stock companies and protecting the investors’ rights built on this foundation. At independence. India inherited one of the world’s poorest economies but one which had a factory sector accounting for a tenth of the national product. the dust has not settled down on the subject.
perhaps is missing in the Indian situation at the present moment is the equivalent legislation. The Institute of Chartered Accountants of India have set up quite rigid Accounting Standards to be followed which have progressively tightened compliances. inline with the Sarbanes-Oxley Act although. and a banking system replete with welldeveloped lending norms and recovery procedures. There is urgency to ensure against controlling of companies in the group by a group of people who are not direct investors. which also looks at the shareholders’ grievances and files its compliances to the stock exchange.
The Audit Committee has wide powers and also
looks into the compliance with Accounting Standards and all of the other regular compliances like the stock exchange. four functioning stock markets (predating the Tokyo Stock Exchange) with clearly defined rules governing listing. In terms of corporate laws and financial system. trading and settlements. The beginning of corporate developments in India were marked by the managing agency system that contributed to the birth of dispersed equity ownership but also gave rise to the practice of management enjoying control rights disproportionately greater than their stock ownership. There is sub-committee of the Board. therefore.transactions with the company. This assumes importance as many mid-sized and small companies are family controlled and at times pyramidical structures are developed so that layered investments and crossholdings go unnoticed. legal requirements and it also looks into several internal control systems. India emerged far better endowed than most other colonies.
Their nominee directors routinely served as rubber-stamps of the management of the day. With their support. but this would be the stage where India’s bankruptcy reorganization system driven by the 1985 Sick Industrial Companies Act (SICA) would consider it “sick” and refer it to the Board for Industrial and Financial Reconstruction (BIFR). nepotism and inefficiency became the hallmarks of the Indian corporate sector. As soon as a company is registered with the BIFR it wins immediate protection from the creditors’ claims for at least four years. they were themselves evaluated on the quantity rather than quality of their lending and thus had little incentive for either proper credit appraisal or effective follow-up and monitoring. This sordid but increasingly familiar process usually continued till the company’s net worth was completely eroded. Unfortunately. Frequently they bled the company with impunity. they also held large blocks of shares in the companies they lent to and invariably had representations in their boards. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision. the Unit Trust of India. Borrowers therefore routinely recouped their investment in a short period and then had little incentive to either repay the loans or run the business. promoters of businesses in India could actually enjoy managerial control with very little equity investment of their own. Very few companies have emerged successfully from the BIFR and even for those that
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. protection and widespread red-tape that bred corruption and stilted the growth of the corporate sector. Along with the government owned mutual fund. the three all-India development finance institutions (DFIs) – the Industrial Finance Corporation of India. the Industrial Development Bank of India and the Industrial Credit and Investment Corporation of India– together with the state financial corporations became the main providers of long-term credit to companies. the corporate governance system resembled the bank-based German model where these institutions could have played a big role in keeping their clients on the right track. The situation grew from bad to worse in the following decades and corruption. Exorbitant tax rates encouraged creative accounting practices and complicated emolument structures to beat the system. In this respect. after which period the delay has roughly doubled. In the absence of a developed stock market.licensing. This stage would come after the company has defaulted on its loan obligations for a while. siphoning off funds with the DFI nominee directors mute spectators in their boards.
Financial disclosure norms in India have traditionally been superior to most Asian countries though fell short of those in the USA and other advanced countries. For most of the post-Independence era the Indian equity markets were not liquid or sophisticated enough to exert effective control over the companies. Minority shareholders have sometimes been defrauded by the management undertaking clandestine side deals with the acquirers in the relatively scarce event of corporate takeovers and mergers. Given this situation. The Institute of Chartered Accountants in India has not been known to take action against erring auditors. flush with depositors’ funds routinely decide to lend only to blue chip companies and park their funds in government securities. Consequently. All in all therefore. Boards of directors have been largely ineffective in India in monitoring the actions of management. have usually been incompetent or unwilling to step up to the act. Sometimes non-voting preferential shares have been used by promoters to channel funds and deprive minority shareholders of their dues. but non-compliance was neither rare nor acted upon. it is hardly surprising that banks. minority shareholders and creditors in India remained effectively unprotected in spite of a plethora of laws in the books. the boards of directors have largely functioned as rubber stamps of the management. who could and should have played a particularly important role. The nominee directors from the DFIs. Noncompliance with disclosure norms and even the failure of auditor’s reports to conform to the law attract nominal fines with hardly any punitive action. the legal process takes over 10 years on average. Changes since liberalization
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. While the Companies Act provides clear instructions for maintaining and updating share registers. Protection of creditors’ rights has therefore existed only on paper in India. in flagrant violation of the spirit of corporate law. Listing requirements of exchanges enforced some transparency. by which time the assets of the company are practically worthless.needed to be liquidated. in reality minority shareholders have often suffered from irregularities in share transfers and registrations – deliberate or unintentional. They are routinely packed with friends and allies of the promoters and managers.
Established primarily to regulate and monitor stock trading. largely triggered by a spate of crises in the early 90’s – the Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting preferential shares to their promoters at deeply discounted prices as well as those of companies simply disappearing with investors’ money. One of the first among such endeavors was the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The Advisory Group on Corporate Governance of RBI’s Standing Committee on International Financial Standards and Codes also submitted its own recommendations in 2001.The years since liberalization have witnessed wide-ranging changes in both laws and regulations driving corporate governance as well as general consciousness about it. An outline provided by the CII was given concrete shape in the Birla Committee report of SEBI.
A comparison of the three sets of recommendations in Annexure-1 reveal the progress in the thinking on the subject of corporate governance in India over the years. Concerns about corporate governance in India were. The Narayana Murthy committee’s definition is stricter. Table 1 provides a comparative view of the recommendations of these important efforts at improving corporate governance in India. it has played a crucial role in establishing the basic minimum ground rules of corporate conduct in the country. Later SEBI constituted two committees to look into the issue of corporate governance – the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three years later. SEBI implemented the recommendations of
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. The SEBI committee recommendations have had the maximum impact on changing the corporate governance situation in India. These concerns about corporate governance stemming from the corporate scandals as well as opening up to the forces of competition and globalization gave rise to several investigations into the ways to fix the corporate governance situation in India.
¨ Independent directors defined separately within each code. The committee was formed in 1996 and submitted its code in April 1998. however. Perhaps the single most important development in the field of corporate governance and investor protection in India has been the establishment of the Securities and Exchange Board of India (SEBI) in 1992 and its gradual empowerment since then.
25 crore at any time in the past five years. 10 crore or with a net worth of Rs. however. 2003. to other listed companies with a paid up capital of over Rs. 3 crore on March 31. The recommendations also show that much of the thrust in Indian corporate governance reform has been on the role and composition of the board of directors and the disclosure laws. 2001. to companies with a paid up capital of Rs. on March 31. as of March 31. The Narayana Murthy committee worked on further refining the rules. They were applied to companies in the BSE 200 and S&P C&X Nifty indices. 2002. paid much-needed attention to the subject of share transfers which is the Achilles’ heel of shareholders’ right in India.
% of Companies to which Applicable
C olumn 1
Report on Corporate Governance
Shareholder's Greivance Committee
Board of Directors
Areas of Companies
Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.the Birla Committee through the enactment of Clause 49 of the Listing Agreements. and all newly listed companies. The Birla Committee.
Clearly much more needs to be accomplished in the area of compliance.Fig shows the frequency of compliance of companies to the different aspects of the corporate governance regulation. Consequently. developing a positive culture and atmosphere of corporate governance is essential in obtaining the desired goals.
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. Corporate governance norms should not become just another legal item to be checked off by managers at the time of filing regulatory papers. Besides in the area of corporate governance. the spirit of the laws and principles is much more important than the letter.
appoint. The Company Secretary.PARTIES TO CORPORATE GOVERNANCE Parties involved in corporate governance include the regulatory body (e. effective operations. human. employees. benefits and reputation. in the effective performance of the organization. the shareholder delegates decision rights to the manager to act in the principal's best interests. Other stakeholders who take part include financial institutions. Directors. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. creditors. All parties to corporate governance have an interest. customers and the community at large. suppliers receive compensation for their goods or services. a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. In corporations. Customers receive goods and services. With the significant increase in equity holdings of investors.g. whether direct or indirect. known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators (ICSA). the board of directors. management. It is their responsibility to endorse the organization’s strategy. develop directional policy. social and other forms of capital. workers and management receive salaries. through providing financial capital and trust that they will receive a fair share of the
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. A board of directors often plays a key role in corporate governance. In return these individuals provide value in the form of natural. is a high ranking professional who is trained to uphold the highest standards of corporate governance. A key factor is an individual's decision to participate in an organization e. while shareholders receive capital return. shareholders and Auditors). Partly as a result of this separation between the two parties.g. there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. suppliers. the Chief Executive Officer. compliance and administration. supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities.
which are now almost all owned by large institutions. who usually had an emotional as well as monetary investment in the company (think Ford). Over time. and the Board diligently kept an eye on the company and its principal executives (they usually hired and fired the President. buyers and sellers of corporation stocks were individual investors. and other financial institutions).organizational returns. pension funds. personal and emotional interest in the corporations whose shares they owned.g. exchange-traded funds. The Board is now mostly chosen
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. brokers.. banks. who often had a vested. worldwide. the majority of investment now is described as "institutional investment" even though the vast majority of the funds are for the benefit of individual investors. The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improve regulation of the stock market (but not necessarily in the interest of the small investor or even of the naïve institutions. such as in mutual funds In this way. However this growth occurred primarily by way of individuals turning over their funds to 'professionals' to manage. mutual funds. there has been a concurrent lapse in the oversight of large corporations. If some parties are receiving more than their fair return then participants may choose not to continue participating leading to organizational collapse. markets have become largely institutionalized: buyers and sellers are largely institutions (e. Nowadays. Unfortunately. or Chief Executive Officer— CEO). if the owning institutions don't like what the President/CEO is doing and they feel that firing them will likely be costly (think "golden handshake") and/or time consuming. insurance companies. hedge funds. Note that this process occurred simultaneously with the direct growth of individuals investing indirectly in the market (for example individuals have twice as much money in mutual funds as they do in bank accounts). The Board of Directors of large corporations used to be chosen by the principal shareholders. of which there are many). they will simply sell out their interest. such as wealthy businessmen or families. other investor groups. Role Of Institutional Investors Many years ago.
Korean chaebol 'groups') . But. for example. such as officers of the corporation or business colleagues. the interests of most investors are now increasingly rarely tied to the fortunes of individual corporations.) has soared. State Street Corp. the largest pools of invested money (such as the mutual fund 'Vanguard 500'. exchange-traded funds (ETFs).) are designed simply to invest in a very large number of different companies with sufficient liquidity. both individual and professional stock investors around the world have emerged as a potential new kind of major (short term) force in the direct or indirect ownership of corporations and in the markets. often still by large individual investors. Occasionally. Even as the purchase of individual shares in any one corporation by individual investors diminishes. the ownership of stocks in markets around the world varies. but rarely. the President/CEO generally takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). Since the marked rise in the use of Internet transactions from the 1990s. Finally. institutional investors support shareholder resolutions on such matters as executive pay and anti-takeover.. So. the majority of the shares in the Japanese market are held by financial companies and industrial corporations (there is a large and deliberate amount of cross-holding among Japanese keiretsu corporations and within S.
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. these investors have even less interest in a particular company's governance. the sale of derivatives (e.by the President/CEO. aka. or the largest investment management firm for corporations. "poison pill" measures. Stock market index options . and may be made up primarily of their friends and associates. etc. based on the idea that this strategy will largely eliminate individual company’s financial or other risk and.g. therefore. whereas stock in the USA or the UK and Europe are much more broadly owned. Since the (institutional) shareholders rarely object.
There are issues about the appropriate mix of executive and non-executive directors. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. though. openness. performance orientation. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. especially concerning actual or apparent conflicts of interest. In particular. that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. and disclosure in financial reports. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. mutual respect. responsibility and accountability.
Role and responsibilities of the board: The board needs a range of skills
and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. senior executives should conduct themselves honestly and ethically. It is important to understand.
Interests of other stakeholders: Organizations should recognize that they
have legal and other obligations to all legitimate stakeholders. trust and integrity. and commitment to the organization.
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Integrity and ethical behavior: Ethical and responsible decision making is
not only important for public relations.PRINCIPLES OF CORPORATE GOVERNANCE Key elements of good corporate governance principles include honesty. Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders: Organizations should
respect the rights of shareholders and help shareholders to exercise those rights. but it is also a necessary element in risk management and avoiding lawsuits.
the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment).
Disclosure and transparency: Organizations should clarify and make
publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. efficient and transparent administration and strive to meet certain well defined. The Ministry of Corporate Affairs has issued Corporate Governance Guidelines (Annexed as Annexure-II). Issues involving corporate governance principles include: • • • • • • • internal controls and internal auditors the independence of the entity's external auditors and the quality of their oversight and management of risk oversight of the preparation of the entity's financial statements review of the compensation arrangements for the chief executive officer and the resources made available to directors in carrying out their duties the way in which individuals are nominated for positions on the board dividend policy
other senior executives
Nevertheless "corporate governance. for it must include a fair. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear. factual information. It is something much broader. For quite some time it was confined only to corporate management. That is not so. remains an ambiguous and often misunderstood phrase.Because of this. The quantity. and the commitment to run a transparent organization.these should be constantly evolving due to
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. Corporate governance must go well beyond law. written objectives. quality and frequency of financial and managerial disclosure. many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries." despite some feeble attempts from various quarters.
Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes." However it should be noted that a corporation should cease to exist if that is in the best interests of its stakeholders. audit
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. Different board structures are optimal for different firms. to monitor managers' behavior. the ability of the board to monitor the firm's executives is a function of its access to information. ex ante. An ideal control system should regulate both motivation and ability. Moreover.
Internal control procedures and internal auditors: Internal control
procedures are policies implemented by an entity's board of directors. Perpetuation for its own sake may be counterproductive. John G. MECHANISMS AND CONTROLS Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. Regular board meetings allow potential problems to be identified. therefore. For example. Smale.interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector. Whilst non-executive directors are thought to be more independent. Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. It could be argued. wrote: "The Board is responsible for the successful perpetuation of the corporation. that executive directors look beyond the financial criteria. a former member of the General Motors board of directors. safeguards invested capital. discussed and avoided. an independent third party (the external auditor) attests the accuracy of information provided by management to investors. fire and compensate top management. That responsibility cannot be relegated to management. with
its legal authority to hire. Examples include:
Monitoring by the board of directors: The board of directors. they may not always result in more effective corporate governance and may not increase performance.
committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting
Balance of power: The simplest balance of power is very common;
require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.
Remuneration: Performance-based remuneration is designed to relate
some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour. External corporate governance controls External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include: • • competition debt covenants demand and assessment of performance information (esp. financial government regulations managerial labour market media pressure takeovers
22 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
• • • •
CORPORATE GOVERNANCE MODELS AROUND THE WORLD
Although the US model of corporate governance is the most notorious, there is a considerable variation in corporate governance models around the world. The intricated shareholding structures of keiretsus in Japan, the heavy presence of banks in the equity of German firms, the chaebols in South Korea and many others are examples of arrangements, which try to respond to the same corporate governance challenges as in the US. In the United States, the main problem is the conflict of interest between widelydispersed shareholders and powerful managers. In Europe, the main problem is that the voting ownership is tightly-held by families through pyramidal ownership and dual shares (voting and nonvoting). This can lead to "self-dealing", where the controlling families favor subsidiaries for which they have higher cash flow rights. Table showing different Models around the World
Features Corporate Objectives Focus Measuring of Success Decision Making Control of Corporates ORIENTATION Long term investment Capital Market Primary Capital Market Secondary Investor commitments Major Investors Board Composition Goal of the Board Board Indepence over Management Executive Compensation Dividend Strength Anglo American Shareholders Value Capital Market Return On Financial Capital Check And Balance Separate From Ownership Physical capital R&D human capital Liquid German Long Term Corporate Body Return On Human capital Within Network Of Stakeholders Linked To Ownership Plant Equipment Employee Training Less Important Due To Close Ties With Banks Rare Hostile Takeovers High Banks Two Tier Board Upper : Supervisory Lower : Management Organizational Health High Moderate Moderate Long Term Industrial Strategy Stable Capital Strong Oversea Investment Japanese Long Term Keiretsu Business Network Return On Social Capital Within Network – Bankers Linked To Ownership Physical capital R&D human capital Less Important Due To Close Ties With Banks Rare Hostile Takeovers High Business Networks Executive And Non Ex Directors Organizational Health Low Low Low Long Term Industrial Strategy Stable Capital Indian Shareholders Value Maximize Surplus Return On Financial Capital Management Outside Stakeholders Linked To Ownership Physical Capital Less Important Due To institutional Funding Rare Hostile Takeovers Low Directors And Relatives Executive And Non Ex Directors Short Term Gains Moderate Subject To Govt. Approvals Moderate Subject To Govt. Approvals Low Uncertain Recent Govt. And Organ. Activism Cii
Frequent Hostile Takeovers Low Institutional Executive And Non Ex Directors Shareholder Wealth Little High High Dynamic Market Based Liquid Capital Internalization Non Problematic
23 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
Governance Procedures Vulnerable To Global Capitals Market
Secretive Corrupt Financial Speculation
Secretive Corrupt Financial Speculation. Lack Of Proper Disclosure
24 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
25 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. They defined a well-governed company as one that had mostly out-side directors. from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco. Board composition Some researchers have found support for the relationship between frequency of meetings and profitability. Others have found a negative relationship between the proportion of external directors and profitability. Egypt and Russia) Other studies have linked broad perceptions of the quality of companies to superior share price performance. McKinsey found that 80% of the respondents would pay a premium for well-governed companies. In a recent paper Bhagat and Black found that companies with more independent boards are not more profitable than other companies. while others found no relationship between external board membership and profitability. found that those "most admired" had an average return of 125%. In a study of five year cumulative returns of Fortune Magazine's survey of 'most admired firms'. and was responsive to investors' requests for information on governance issues. Antunovich et al. On the other hand. The following examples are illustrative. research into the relationship between specific corporate governance controls and some definitions of firm performance has been mixed and often weak. In a separate study Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns. It is unlikely that board composition has a direct impact on profitability. one measure of firm performance. The size of the premium varied by market. whilst the 'least admired' firms returned 80%. who had no management ties. undertook formal evaluation of its directors.CORPORATE GOVERNANCE AND FIRM PERFORMANCE In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002.
use of options faced various criticisms. Gumport issued in 2006. However. and less interested in the welfare of their shareholders.
26 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. the backdating of option grants as documented by University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of the Wall Street Journal. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. performance of the company.The results of previous research on the relationship between firm performance and executive compensation have failed to find consistent and significant relationships between executives' remuneration and firm performance. in part. Not all firms experience the same levels of agency conflict. These authors argued that. and external and internal monitoring devices may be more effective for some than for others. Numerous authorities (including U. rather than the short-term. Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend their decision horizons toward the long-term. Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares.S. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. Even before the negative influence on public opinion caused by the 2006 backdating scandal. Low average levels of pay-performance alignment do not necessarily imply that this form of governance control is inefficient. that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and. while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership.S. in particular. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. The results suggest that increases in ownership above 20% cause management to become more entrenched. corporate stock buybacks for U.
and WorldCom.. Enron. While corporate practices in the US companies came under attack.
CORPORATE GOVERNANCE PRACTICES FOLLOWED BY INDIA AND OTHER FOREIGN COUNTRIES Corporate Governance– Evolution and Challenges While recent high-profile corporate governance failures in developed countries have brought the subject to media attention. it appeared that the problem was far more widespread. shocked the business world with both the scale and age of their unethical and illegal operations. Since liberalization. revealed significant and deep-rooted
27 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed. Worse. the issue has always been central to finance and economics. however. Boards of directors have frequently been silent spectators with the DFI nominee directors unable or unwilling to carry out their monitoring functions. Recent research has established that financial development is largely dependent on investor protection in a country – de jure and de facto. The issue is particularly important for developing countries since it is central to financial and economic development. India has one of the best corporate governance laws but poor implementation together with socialistic policies of the pre-reform era has affected corporate governance. the telecom behemoth. the Houston. they seemed to indicate only the tip of a dangerous iceberg. Corporate governance of Indian banks is also undergoing a process of change with a move towards more market-based governance. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Concentrated ownership of shares. serious efforts have been directed at overhauling the system with the SEBI instituting the Clause 49 of the Listing Agreements dealing with corporate governance. and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a share repurchase plan. Large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc. With the legacy of the English legal system. pyramiding and tunneling of funds among group companies mark the Indian corporate landscape. Texas based energy giant.
It was clear that something was amiss in the area of corporate governance all over the world. There are several channels through which the causality works. have an unmistakably positive effect on economic growth and poverty reduction. Adam Smith. However. amidst public outcry over excessive compensation. There is a
28 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Good corporate governance also lowers the cost of capital by reducing risk and creates higher firm valuation once again boosting real investments.problems in their corporate governance. the ratio of stock market capitalization to GDP in the countries in the highest quartile of shareholder right enactment and enforcement is about four times as large as that for countries in the lowest quartile. The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than double that in the countries in the lowest quartile. Corporate governance has. in turn. himself had recognized the problem over two centuries ago. Even the prestigious New York Stock Exchange had to remove its director. of course. As for equity financing. leading to greater investment. as well as higher growth and employment. There have been debates about whether the Anglo-Saxon market-model of corporate governance is better than the bank-based models of Germany and Japan. Researchers in finance have actively investigated the topic for at least a quarter century1 and the father of modern economics. Effective corporate governance systems promote the development of strong financial systems – irrespective of whether they are largely bank-based or market-based – which. Corporate governance has been a central issue in developing countries long before the recent spate of corporate scandals in advanced economies made headlines. the differences in the quality of corporate governance in these developed countries fade in comparison to the chasm that exists between corporate governance standards and practices in these countries as a group and those in the developing world. Dick Grasso. Poor corporate governance also hinders the creation and development of new firms. been an important field of query within the finance discipline for decades. Effective corporate governance enhances access to external financing by firms. Indeed corporate governance and economic development are intrinsically linked.
Finally. There is a strong inverse relationship between the quality of corporate governance and currency depreciation. a dominance of family firms. reduce legal costs and improve social and labor relationships and external economies like environmental protection. and a generally high level of corruption.variation of a factor of in the “control premium” (transaction price of shares in block transfers signifying control transfer less the ordinary share price) between countries with the highest level of equity rights protection and those with the lowest.
29 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. the Indian financial sector is marked with a relatively unsophisticated equity market vulnerable to manipulation and with rudimentary analyst activity. a history of managing agency system. Effective corporate governance mechanisms ensure better resource
allocation and management raising the return to capital. Indeed poor transparency and corporate governance norms are believed to be the key reasons behind the Asian Crisis of 1997. Good corporate governance can significantly reduce the risk of nation-wide financial crises. Managers enjoy actual control of business and may not serve in the best interests of the shareholders. These potential problems of corporate governance are universal. All these features make corporate governance a particularly important issue in India. Such financial crises have massive economic and social costs and can set a country several years back in its path to development. good corporate governance can remove mistrust between different stakeholders. In addition. Making sure that the managers actually act on behalf of the owners of the company – the stockholders – and pass on the profits to them are the key issues in corporate governance. Limited liability and dispersed ownership – essential features that the joint-stock company form of organization thrives on – inevitably lead to a distance and inefficient monitoring of management by the actual owners of the business. The return on assets (ROA) is about twice as high in the countries with the highest level of equity rights protection as in countries with the lowest protection.
and rely on auditors' competence.
Supply of accounting information: Financial accounts form a crucial link in
enabling providers of finance to monitor directors.
Role of the Accountant & Auditors: Financial reporting is a crucial
element necessary for the corporate governance system to function effectively. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This may result in a conflict of interest which places the integrity of financial reports in doubt due to
30 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. The traditional answer to this problem is the efficient market hypothesis (in finance. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations. Accountants and auditors are the primary providers of information to capital market participants. criteria for recognition. especially to a small shareholder.SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE
order to influence
directors. ideally. and even the definition of the accounting entity. This should. the efficient market hypothesis (EMH) asserts that financial markets are efficient). which suggests that the small shareholder will free ride on the judgements of larger professional investors. In the extreme. Current accounting practice allows a degree of choice of method in determining the method of measurement. be corrected by the working of the external auditing process. it can involve non-disclosure of information.
shareholders must combine with others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.
Monitoring costs: A barrier to shareholders using good information is the
cost of processing it.
more fundamentally. Even if this power pattern held in reality. to select and dismiss accounting firms contradicts the concept of an independent auditor. The central issue is the nature of the contract between shareholder representatives and managers telling the latter what to do with the funds contributed by the former. The Board. Similar provisions are in place under clause 49 of SEBI Act in India. CENTRAL ISSUES IN CORPORATE GOVERNANCE The basic power structure of the joint-stock company form of business. The numerous shareholders who contribute to the capital of the company are the actual owners of business. The main challenge comes from the fact that such contracts are necessarily “incomplete”. the partner in charge of auditing.client pressure to appease management. However. in principle. appoints a team of managers who actually handle the day-to-day functioning of the company and report periodically to the Board. it would still be a challenge for the Board to effectively monitor management. Thus mangers are the agents of shareholders and function with the objective of maximizing shareholders’ wealth. The power of the corporate client to initiate and terminate management consulting services and. However. In discussions of accounting practices with Arthur Andersen. or if the informed user is unable to exercise a monitoring role due to high costs (see Systemic problems of corporate governance above). the third party was an entity in which Enron had a substantial economic stake. Enron concealed huge losses by creating illusions that a third party was contractually obliged to pay the amount of any losses. views inevitably led to the client prevailing. The Enron collapse is an example of misleading financial reporting. It is not possible for the Board to fully instruct management on the desired course of action under every possible
31 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. They elect a Board of Directors to monitor the running of the company on their behalf. good financial reporting is not a sufficient condition for the effectiveness of corporate governance if users don't process it. is as follows. in turn. Changes enacted in the United States in the form of the Sarbanes-Oxley Act (in response to the Enron situation as noted below) prohibit accounting firms from providing both auditing and management consulting services.
no contract can be written between representatives of shareholders and the management that specifies the right course of action in every situation. Most shareholders do not care to attend the General Meetings to elect or change the Board of Directors and often grant their “proxies” to the management. The inefficacy of the Board of Directors in monitoring the activities of management is particularly marked in the Anglo-Saxon corporate structure where real monitoring is expected to come from financial markets. On his part the CEO frequently packs the board with his friends and allies who rarely differ with him. The list of possible situations is infinitely long. some “residual powers” over the funds of the company must be vested with either the financiers or the management. Consequently the supervisory role of the Board is often severely compromised and the management. so that the management can be held for violation of such a contract in the event it does something else under the circumstances. It is thus the fear of a takeover rather than shareholder action that is supposed to keep the management honest and on its toes. Because of this “incomplete contracts” situation. so these residual powers must go to management. The efficient limits to these powers constitute much of the subject of corporate governance.business situation. Clearly the former does not have the expertise or the inclination to run the business in the situations unspecified in the contract. the manager (the CEO in the American setting. If and when the acquisition actually happens. Even those that attend the meeting find it difficult to have a say in the selection of directors as only the management gets to propose a slate of directors for voting. The reality is even more complicated and biased in favor of management. Often the CEO himself is the Chairman of the Board of Directors as well. In companies with highly dispersed ownership. Consequently.
32 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. can potentially use corporate resources to further their own self-interests rather than the interests of the shareholders. As this would drive down the share price. managers wield an enormous amount of power in joint-stock companies and the common shareholder has very little say in the way his or her money is used in the company. the company would become a takeover target. who really has the keys to the business. the acquiring company would get rid of the existing management. In real life. The underlying premise is that shareholders dissatisfied with a particular management would simply dispose of their shares in the company. the Managing Director in British-style organizations) functions with negligible accountability.
who either own the majority stake. these features do not exist in developing countries like India. An alternative corporate governance model is that provided by the bank-based economies like Germany where the main bank (“Hausbank” in Germany) lending to the company exerts considerable influence and carries out continuous project-level supervision of the management and the supervisory board has representatives of multiple stakeholders of the firm. though perhaps the most important. Their own interests. Box 1 gives a brief comparison of the two systems. Inter-locking and “pyramiding” of corporate control within these groups make it difficult for outsiders to track the business realities of individual companies in these behemoths. however. managers resisting replacement by a superior management) and sub-optimal use of free cash flows. In the absence of profitable investment opportunities. need not coincide with those of the other – minority – shareholders. of the issues in corporate governance. or maintain control through the aid of other block holders like financial institutions. In addition. Essentially corporate governance deals with effective safeguarding of the investors’ and creditors’ rights and these rights can be threatened in several other ways. family businesses and corporate groups are common in many countries including India. these funds are frequently squandered on questionable empire-building investments and acquisitions when their best use is to be returned to the shareholders. Keeping a professional management in line is only one. presupposes the existence of a deep and liquid stock market with considerable informational efficiency as well as a legal and financial system conducive to M&A activity. For instance. Common areas of management action that may be sub-optimal or contrary to shareholders’ interests (other than outright stealing) involve excessive executive compensation. managerial control of these businesses are often in the hands of a small group of people. This last refers to the use that managers put the retained earnings of the company. These range from Keiretsus in Japan and Chaebols in Korea to the several family business groups in India like Birlas and Ambanis. even when they are the majority shareholders. managerial entrenchment (i. This often leads to expropriation of minority shareholder value through actions like “tunneling” of corporate gains or funds to other corporate
33 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. that is transacting with privately owned companies at other-than-market rates to siphon off funds.This mechanism.e. transfer pricing. commonly a family. More often than not.
Researchers have used two indices for all these countries – a shareholder rights index ranging from 0 (lowest) to 6 (highest) and a rule of law index ranging 0 (lowest) to 10 (highest) – to measure the effective protection of shareholder rights provided in the different countries studied. French civil law. however. Both these aspects play important roles in determining the nature of corporate governance in the country in question– Recent research has forcefully connected the origins of the legal system of a country to the very structure of its financial and economic architecture arguing that the connection works through the protection given to external financiers of companies – creditors and shareholders. Legal systems in most countries have their roots in one of the four distinct legal systems the English common law. managers own enough to ensure that they keep their jobs come what may and can also find ways to make more money through uses of corporate funds that are sub-optimal for shareholders. The first index captures the extent to which the written law
34 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. One way to solve the corporate governance problem is to align the interests of the managers with that of the shareholders. has interesting implications for firm value. then falling for a while (when the ownership is in the 5%-25% range.10 The rationale for the decline in the intermediate range is that in that range. The legal environment encompasses two important aspects – the protection offered in the laws (de jure protection) and to what extent the laws are enforced in real life (de facto protection).entities within the group. Legal environment. Such violations of minority shareholders’ rights also comprise an important issue for corporate governance. As managerial ownership (as a percentage of total shares) keeps on rising. German civil law and Scandinavian civil law. Managerial ownership of corporate equity. again for Fortune 500 companies) till it begins to rise again. The Indian legal system is obviously built on the English common law system. A more traditional manifestation of this idea is the fact that family business empires are usually headed by a family member. ownership patterns and Corporate Governance The legal system of a country plays a crucial role in creating an effective corporate governance mechanism in a country and protecting the rights of investors and creditors. firm value is seen to increase for a while (till ownership reaches about 5% for Fortune 500 companies). The recent rise in stock and option related compensation for top managers in companies around the world is a reflection of this effort.
30 and 0. substantially higher than the average ratio for German. Scandinavian and French-origin countries of 0.21 respectively. Zimbabwe.46) and French-origin countries (6. Germany.33 each.00 for German and French-origin countries respectively). India. Pakistan and South Africa (all English-origin-law countries) and better than all the other 42 countries in the study including countries like France.e. India. Here the Scandinavian-origin countries have an average score of 10 – the maximum possible – followed by the German-origin countries (8. English-origin legal systems provide the best protection to shareholder rights. UK. Canada.26 for Scandinavian-origin countries and 16.46. 0. Peru and Philippines. The Rule of law index is another story. highest in the sample examined – equal to that of the USA. one of the lowest for English-origin countries but higher than many French-origin
35 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Colombia. Hong Kong. Pakistan.60 for the English-origin countries. shareholders other than the three largest shareholders in each company) to the GNP of a country averages a remarkable 0. Most advanced countries have very high scores on this index while developing countries typically have low scores. The English-origin systems spawn the highest number of firms per capita (on average 35. Japan and Switzerland. for instance has a shareholder rights index of 5.05). This difference in protection of shareholders’ rights has led to completely different trajectories of financial and economic developments in the different countries. for instance has a score of 4.68). The English common law countries lead the four systems in the shareholder rights index with an average of 4 (out of a maximum possible 6) followed by Scandinavianorigin countries with an average score of 3 with the French-origin and German-origin countries coming last with average scores of 2.17 on this index – ranking 41st out of 49 countries studied – ahead only of Nigeria. The ratio of the stock market capitalization held by minority shareholders (i. Thus. English-origin countries (6. They are also the best performers in mobilizing external finance.79 companies per million citizens. India has 7.protected shareholders while the latter reflects to what extent the law is enforced in reality.79 and 10. Thus it appears that Indian laws provide great protection of shareholders’ rights on paper while the application and enforcement of those laws are lamentable.45 companies per million citizens as compared to 27. Sri Lanka. Indonesia.
countries and Germany. As for the ratio of external capital to GNP, India has a score of 0.31 which puts it in the upper half of the sample. The primary difference between the legal systems in advanced countries and those in developing countries lies in enforcement rather than in the nature of laws-in books. Enforcement of laws play a much more important role than the quality of the laws on books in determining events like CEO turnover and developing security markets by eliminating insider trading. In an environment marked by weak enforcement of property rights and contracts, entrepreneurs and managers find it difficult to signal their commitment to the potential investors, leading to limited external financing and ownership concentration. This particularly hurts the development of new firms and the small and medium enterprises (SMEs). In such a situation many of the standard methods of corporate governance – market for corporate controls, board activity, proxy fights and executive compensation – lose their effectiveness. Large block-holding emerges as the most important corporate governance mechanism with some potential roles for bank monitoring, shareholder activism, employee monitoring and social control. Apart from the universal features of corporate governance, Asian economies as a group share certain common features that affect the nature of corporate governance in the region. In spite of their substantial variation in economic conditions and politico-legal backgrounds, most Asian countries are marked with concentrated stock ownership and a preponderance of family-controlled businesses while state-controlled enterprises form an important segment of the corporate sector in many of these countries. Corporate governance issues have been of critical importance in Asian countries particularly since the Asian crisis which is believed to have been partly caused by lack of transparency and poor corporate governance in East Asian countries. Research has established the evidence of pyramiding and family control of businesses in Asian countries, particularly East Asia, though this feature is prevalent in India as well. Even in 2002, the average shareholding of promoters in all Indian companies was as high as 48.1% it is believed that this is a result of the ineffectiveness of the legal system in protecting property rights. Concentrated ownership and family control are important in countries where legal protection of property rights is relatively weak. Weak property rights are also behind the
36 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
family-owned businesses –
transaction costs and asymmetric information problems. Poor development of external financial markets also contributes to these ownership patterns. The effect of this concentrated ownership by management in Asian countries is not straightforward. Similar to the effects for US companies, in several East Asian countries, firm value rises with largest owner’s stake but declines as the excess of the largest owner’s management control over his equity stake increases. In Taiwan, family-run companies with lower control by the family perform better than those with higher control. Recent research has also investigated the nature and extent of “tunneling” of funds within business groups in India. During the 90’s Indian business groups evidently tunneled considerable amount of funds up the ownership pyramid thereby depriving the minority shareholders of companies at lower levels of the pyramid of their rightful gains. Empirical analyses of the effects of ownership by other (non-family) groups in Asia are relatively scarce. The state is an important party in some countries in Asia, notably India and China. The corporate governance mechanism and efficiency in state-controlled companies are generally deemed to inferior. Several studies show that accounting performance is lower for state-owned enterprises in China. The non-linear effects of entrenchment are also present with state ownership. Institutional investors fulfill an important certification role in emerging markets, but there is little evidence of their effectiveness in corporate governance in Asia. Equity ownership by institutional investors like mutual funds has limited impact of performance in India. Ownership by other groups like directors, foreigners and lending institutions, on the other hand, appear to improve performance. In post-liberalization India, foreign ownership helps performance only if the foreigners constitute the majority shareholders. Hostile takeovers are all but absent in Asian countries. The premium for control is significant in most Asian countries and as high as 10% of the share price in Korea. External and minority representation in boards as well as participation by professionals are rare though increasing in Asian companies. Nevertheless, corporate governance is not entirely ineffective in Asia. In many Asian countries, including India, CEOs are more likely to lose their jobs when corporate performance is poorer. In India, enforcement of corporate laws remains the soft underbelly of the legal and corporate governance system. The World Bank’s Reports on the Observance of
37 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
Standards and Codes (ROSC) publishes a country-by-country analysis of the observance of OECD’s corporate governance codes. In its 2004 report on India, the ROSC found that while India observed or largely observed most of the principles, it could do better in certain areas. The contribution of nominee directors from financial institutions to monitoring and supervising management is one such area. Improvements are also necessary in the enforcement of certain laws and regulations like those pertaining to stock listing in major exchanges and insider trading as well as in dealing with violations of the Companies Act – the backbone of corporate governance system in India. Some of the problems arise because of unsettled questions about jurisdiction issues and powers of the SEBI. As an extreme example, there have been cases of outright theft of investors’ funds with companies vanishing overnight. The joint efforts of the Department of Company Affairs and SEBI to nail down the culprits have proved to be largely ineffective. As for complaints about transfer of shares and non-receipt of dividends while the redress rate has been an impressive 95%, there were still over 135,000 complaints pending with the SEBI. Thus there is considerable room for improvement on the enforcement side of the Indian legal system to help develop the corporate governance mechanism in the country.
38 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
The Company emphasises the need for full transparency and accountability in all its transactions. A Company signing to the Tata Code of Conduct entitles that company to use the brand name. Tata Steel Group (‘the Group’) aspires to be the global steel industry benchmark for value creation and corporate citizenship. It prescribes principles by which all employees are expected to act. Listed Company
Good Corporate Governance should be an integral part of all processes. As a part of its growth strategy. The Group expects to realise its Vision by taking such actions as may be
39 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. In order to improve its internal management system it has also adopted the following two systems of evaluation:
Tata Code of conduct Follows guidelines established by the UN Global Compact.
The Company’s Corporate Governance Philosophy:
The Company has set itself the objective of expanding its capacities and becoming globally competitive in its business. The Board considers itself as a Trustee of its Shareholders and acknowledges its responsibilities towards them for creation and safeguarding their wealth. in order to protect the interests of its stakeholders.
CORPORATE GOVERNANCE REPORT OF TATA STEEL FOR THE YEAR 2008-09
(As required under Clause 49 of the Listing Agreements entered into with the Stock Exchanges)
1. Every year the company aims to exceed its targets on Employee and customer Satisfaction Indexes and the corporate citizenship index. the Company believes in adopting the ‘best practices’ that are followed in the area of Corporate Governance across various geographies. Tata Steel has ensured corporate governance at all stages of the business process.CORPORATE GOVERNANCE IN LARGE COMPANIES: CASE STUDY 1 OF 3: TATA STEEL LIMITED. A very Large. In accordance with the Tata Steel Group Vision.
The names and categories of the Directors on the Board. None of the Directors on the Board is a Member on more than 10 Committees and Chairman of more than 5 Committees (as specified in Clause 49). J.03. Philippe Varin Mr. Suresh Krishna Mr. Mukherjee Mr. N. Jacobus Schraven Dr. Subodh Bhargava Mr. B. NIEX: Non-Independent Executive
40 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. of directorships in other public companies* as on 31. environment and people. of committee positions held in other public companies** as on 31. 2008 Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No. their attendance at Board Meetings during the year and at the last Annual General Meeting. The number of Non-Executive Directors (NEDs) is more than 50% of the total number of Directors.03. Palia Mr. M. S. Irani Mr.09 Chairma n 3 2 3 3 Membe r 3 2 4 2 5 1
Mr. across all the companies in which he is a Director. T. Andrew Roob Dr. James Leng Mr. As on 31st March.
2. the Company has 14 Directors on its Board. Wadia Mr. as also the number of Directorships and Committee Memberships held by them in other companies are given below:
Name Categor y No. of which 8 Directors are independent. Nusli N. safety. of Board Meetin gs Attende d during 200809 9 6 8 9 5 9 10 9 5 1 7 7 7 10 Whethe r attende d AGM held on 28th August. Ishaat Hussain Dr. Tata (Chairman) Mr.necessary in order to achieve its goals of value creation. The Company is in compliance with clause 49 of the Listing Agreement pertaining to compositions of directors. INE: Independent Non-Executive. J. R. Muthyraman
NINE INE INE INE INE NINE NINE INE INE INE INE NINE NINE NI EX
NINE: Non-Independent Non-Executive. The necessary disclosures regarding Committee positions have been made by the Directors. Anthony Hayward Mr. 2009.2009 Chairma n 9 3 4 2 3 2 1 Membe r 1 4 6 4 11 6 9 1 3 No.
Board of Directors:
The Company has a non-executive Chairman and the number of Independent Directors is more than one-third of the total number of Directors.
The Company has received confirmations from the Executive Director as well as Senior Management Personnel regarding compliance of the Code during the year under review. 28th August 2008. The dates on which the Board Meetings were held were as follows: 8th April 2008. to whom the Company paid retiring benefits aggregating to Rs.
3. The information as required under Annexure IA to Clause 49 is being made available to the Board. 24th October 2008. Additional meetings of the Board are held when deemed necessary by the Board. J. 28th January 2009 and 27th February 2009. Irani and Dr. Both the Codes are posted on the website of the Company. 26th June 2008.Ten Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. if any. It has also adopted the Tata Code of Conduct for Non-Executive Directors of the Company.68 lakhs and Rs. During 2008-09. The Company has adopted the Tata Code of Conduct for Executive Directors.35. 2nd December 2008. T. 18th December 2008. 31st July 2008.86 lakhs respectively. The Company has received confirmations from the Non-Executive Directors regarding compliance of the Code for the year under review. Mukherjee. other than Dr. Dates for the Board Meetings in the ensuing year are decided well in advance and communicated to the Directors. Audit Committee
41 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. the Company did not have any material pecuniary relationship or transactions with Non-Executive Directors. J. Senior Management Personnel and other Executives of the Company. Board Meetings are held at the Registered Office of the Company.28. The Agenda along with the explanatory notes are sent in advance to the Directors. Steps are taken by the Company to rectify instances of non-compliance. 8th January 2009. The Board periodically reviews compliance reports of all laws applicable to the Company.
Nine Audit Committee Meetings were held during 2008-09. S. b. Palia. The scope of the activities of the Audit Committee is as set out in Clause 49 of the Listing Agreements with the Stock Exchanges read with Section 292A of the Companies Act. The terms of reference of the Audit Committee are broadly as follows: a. Non Executive year 2008-09 8 8 9
Audit Committee meetings are attended by the Group Chief Financial Officer.The Company had constituted an Audit Committee in the year 1986. internal control systems. half-yearly and annual financial results of the To make recommendations to the Board on any matter relating to the Company before submission to the Board. Recommending the appointment of statutory auditors and branch auditors and fixation of their remuneration. e. scope of audit and observations of the Auditors/Internal Auditors. The dates on which the said meetings were held were as follows:
42 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. d. The Company Secretary acts as the Secretary of the Audit Committee. Chairman Mr. The composition of the Audit Committee and the details of meetings attended by the Directors are given below:
Names of Members Category No. M. Member Independent. Ishaat Hussain Member. Subhodh Bhargava. Auditors of the Company concerning the accounts of the Company. To review compliance with internal control systems. To review the quarterly. 1956. f. To review the findings of the Internal Auditor relating to various To hold periodic discussions with the Statutory Auditors and Internal
functions of the Company. Chief (Corporate Audit) and Chief Financial Controller (Corporate) and Representatives of Statutory Auditors. of meetings attended during the Mr. Member Mr. Chartered Accountant Mr. Non Executive -doNon Independent. Non Executive 6 Independent. Andrew Robb. financial management of the Company. c. including Statutory & Internal Audit Reports.
The disclosures reported are addressed in the manner and within the time frames prescribed in the Policy. 2008. The Remuneration Committee also functions as the Compensation Committee as per SEBI guidelines on the Employees’ Stock Option Scheme. 29th January 2009 and 26th February 2009. c. 2008. actual or suspected fraud or violation of the Company’s Code of Conduct. 27th August. Finalise the perquisites package of the Managing Director and Whole-time Directors within the overall ceiling fixed by the Board. 24th October. 2009. The Company. perquisites and commission to be paid to the Company’s Managing Director and Whole-time Directors. b. Recommend to the Board remuneration including salary. 28th January. Remuneration Committee The Company had constituted a Remuneration Committee in the year 1993. each employee of the Company has an assured access to the Ethics Counsellor/ Chairman of the Audit Committee. 2008. 2008.8th April. 2005. 2008. has not yet introduced the Employees’ Stock Option Scheme. Under the Policy. 30th July. 23rd June 2008. The broad terms of reference of the Remuneration Committee are as follows: a. however. Review the performance of the Managing Director and the Whole-time Directors. after considering the Company’s performance. The Whistle Blower Policy is an extension of the Tata Code of Conduct. The composition of the Remuneration Committee and the details of meetings attended by the Directors are given below:
Names of Members Category 43 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal No of Meetings attended
. which requires every employee to promptly report to the Management any actual or possible violation of the Code or an event he becomes aware of that could affect the business or reputation of the Company. approved framing of a Whistle Blower Policy that provides a formal mechanism for all employees of the Company to approach the Ethics Counsellor/Chairman of the Audit Committee of the Company and make protective disclosures about the unethical behaviour. d. retirement benefits to be paid to the Managing Director and Whole-time Directors under the Retirement Benefit Guidelines adopted by the Board.
Whistle Blower Policy The Audit Committee at its meeting held on 25th October. 2nd December. Recommend to the Board. 4.
Independent.M. R.000 per meeting. viz. Non executive
during the year 2008-09 1 1
Independent. N. employment scenario b.20. which are aligned to the Company’s objectives. Investor Grievance Committee and Ethics Committee. The Company pays remuneration by way of salary. remuneration package of the managerial talent of other industries The annual variable pay of senior managers is linked to the performance of the Company in general and their individual performance for the relevant year measured against specific Key Result Areas. The Commission is distributed on the basis of their attendance and contribution at the Board and certain Committee Meetings as well as time spent on operational matters other than at the meetings. Audit Committee and Committees constituted by the Board from time to time. The Company pays sitting fees of Rs. S. The distribution of Commission amongst the NEDs is placed before the Board. the Company pays to the NEDs sitting fees of Rs. 2006. Suresh Krishna. remuneration package of the industry and c. Non Executive One meeting of the Remuneration Committee was held on 26th June. The Company has complied with the non-mandatory requirement of Clause 49 regarding the Remuneration Committee. Remuneration Committee. perquisites and allowances (fixed component) and commission (variable component) to Managing and Whole-time Directors.5. Palia.
Remuneration Policy The Company while deciding the remuneration package of the senior management members takes into consideration the following items: a. Executive Committee of the Board. Non executive Non Independent.Mr. the Commission is paid at a rate not exceeding 1% per annum of the profits of the Company (computed in accordance with Section 309(5) of the Companies Act. 2008. 1956). For other meetings. Member Mr. Tata. In terms of the shareholders’ approval obtained at the AGM held on 5th July. Annual
44 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.000 per meeting to the NEDs for attending the meetings of the Board. Chairman Mr. Salary is paid within the range approved by the Shareholders. The Non-Executive Directors (NEDs) are paid remuneration by way of Commission and Sitting Fees.
Specific amount payable to such directors is based on the performance criteria laid down by the Board which broadly takes into account the profits earned by the Company for the year. The Nomination Committee has been constituted on 18th May. Suresh Krishna. non-receipt of balance sheet and non-receipt of declared dividend. the Nomination Committee. acquisitions. The ceiling on perquisites and allowances as a percentage of salary is fixed by the Board.
45 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Committee of Directors and the Ethics and Compliance Committee. of meetings attended during 2008-09 1
Mr. 5. 2006 with the objective of identifying Independent Directors to be inducted to the Board from time to time and to take steps to refresh the constitution of the Board from time to time. etc. the Board has constituted 4 more Committees. as recommended by the Remuneration Committee. Within the prescribed ceiling. subject to overall ceilings stipulated in Sections 198 and 309 of the Companies Act. viz. Commission is calculated with reference to net profits of the Company in a particular financial year and is determined by the Board of Directors at the end of the financial year based on the recommendations of the Remuneration Committee. Non-Executive 1 One meeting of the Investors’ Grievance Committee was held on 31st March. The terms of reference of the Executive Committee of the Board (ECB) are to approve capital expenditure schemes and donations within the stipulated limits and to recommend to the Board.increments effective 1st April each year.
Committees In addition to the above Committees. divestments. Executive Committee of the Board. changes in organizational structure and also to periodically review the Company’s business plans and future strategies. to consider new businesses. the perquisites package is approved by the Remuneration Committee. Member Independent. Chairman Category Not Independent. 2009. capital budgets and other major capital schemes. 2000 to specifically look into the redressal of Investors’ complaints like transfer of shares. The composition of the Investors’ Grievance Committee is given below:
Names of Members Mr. Non Executive No. 1956. Shareholders’ Committee An Investors’ Grievance Committee was constituted on 23rd March. Ishaat Hussain. are approved by the Board.
The Code also seeks to ensure timely and adequate disclosure of Price Sensitive Information to the investor community by the Company to enable them to take informed investment decisions with regard to the Company’s securities. None of the resolutions
the year. where last three Annual General Meetings (AGMs)
Details of Location Birla Matushri Sabhagar. 29th August. 1992. 2007 at 3.m. to grant limited Powers of Attorney to the Officers of the Company.
Financial Year 2007-08 2006-07 2005-06
b) c) Ballot. Officers and other Employees. Sir Vithaldas Thackersey Marg. The Code is based on the principle that Directors.The Committee of Directors has been constituted to approve of certain routine matters such as Opening and Closing of Bank Accounts of the Company. Disclosures
46 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Ethics and Compliance Committee In accordance with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations. Officers and Employees of a Tata Company owe a fiduciary duty to. Mumbai 400 020.m. proposed for the ensuing Annual General Meeting need to be passed by Postal Special Resolutions passed in previous 3 Annual General Meetings:
7. 19. to appoint proxies to attend general meetings on behalf of the Company etc. General Body Meetings a) Location and time.00 a.30 p.m. the shareholders of the Company to place the interest of the shareholders above their own and conduct their personal securities transactions in a manner that does not create any conflict of interest situation. among others. 5th July. 2008 at 3. 2006 at 11. 6. the Board of Directors of the Company adopted the revised Tata Code of Conduct for Prevention of Insider Trading and the Code of Corporate Disclosure Practices (the Code) to be followed by Directors. as amended (the Regulations). Date & Time 28th August. d)
No Extra-Ordinary General Meeting of the shareholders was held during No Postal Ballot was conducted during the year.30 p.
i) The Board has received disclosures from key managerial personnel relating
to material. ii) The Company has complied with the requirements of the Stock Exchanges. No personnel has been denied access to the Ethics Counsellor/Chairman of the Audit Committee. 8. No penalties or strictures have been imposed on the Company by the Stock Exchanges. financial and commercial transactions where they and / or their relatives have personal interest. Means of Communication
47 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. SEBI and other statutory authorities on all matters relating to capital markets during the last three years. There are no materially significant related party transactions which have potential conflict with the interest of the Company at large. iii) The Company has adopted a Whistle Blower Policy and has established the necessary mechanism in line with clause 7 of the Annexure 1D to Clause 49 of the Listing Agreement with the Stock Exchanges. The audit confirms that the total issued/paid up capital is in agreement with the total number of shares in physical form and the total number of dematerialized shares held with NSDL and CDSL. Secretarial Audit A qualified practicing Company Secretary carried out a secretarial audit to reconcile the total admitted capital with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) and the total issued and listed capital. iv) The Company has fulfilled the following non-mandatory requirements as prescribed in Annexure 1D to Clause49 of the Listing Agreement with the Stock Exchanges : • • The Company has set up a Remuneration Committee. for employees to report concerns about unethical behaviour. SEBI or other statutory authorities relating to the above. The Company has moved towards a regime of unqualified financial statements.
All matters pertaining to industry structure and developments. time & venue: 27. vision. The Indian Express. 19. by giving complete financial details. are discussed in the said report. corporate sustainability. policies. Free Press Journal.m. sales network. corporate governance. outlook. Nav Shakti. investor relations. etc. Birla Matushri Sabhagar. shareholding patterns. corporate benefits. The section on ‘Investor Relations’ serves to inform the shareholders. Management Discussion & Analysis Report – The MD&A Report forms a part of the Directors’ Report. Financial Calendar – Year ending AGM Dividend Payment
48 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
March 31 August Generally in August
. Results: The quarterly and annual results along with the Segmental Report are generally published in The Times of India.08. risks and concerns. information relating to stock exchanges. opportunities and threats. internal control and systems. particulars of Directors seeking reappointment are given in the Explanatory Statement to the Notice of the Annual General Meeting to be held on 27th August. Sir Vithaldas Thackersey Marg. 2009.Half-yearly report: The half-yearly results of the Company are published in the newspapers and posted on the website of the Company. mission. segment/product wise performance.2009 at 3.30 p. General Shareholder Information AGM: Date. 9. updates and news.com shortly after its submission to the Stock Exchanges.tatasteel. Presentation to Institutional Investors or to analysts –Official news releases and presentations made to Institutional Investors and analysts are posted on the Company’s website. Investors can also submit their queries and get feedback through online interactive forms. Loksatta and also displayed on the website of the Company www. Company’s Corporate Website – The Company’s website is a comprehensive reference on Tata Steel’s management. Mumbai 400 020
As required under Clause 49 IV(G)(i). registrars. share transfer agents and frequently asked questions.
.08.03. are requested to forward their claims in prescribed Form No. Next to Reserve Bank of India CBD. Bandra East. ‘A’ Wing. Dalal Street. July 14. 1978 to:Office of Registrar of Companies Central Government Office Bldg.Date of Book Closure –Wednesday.1995 have been transferred to the General Revenue Account of the Central Government.
The unclaimed dividend declared in respect of the FY 2001-02 is in the process of being transferred to IEPF. Mumbai 400 051
Global Depository Receipts (GDRs) issued by the Company in the International Market have been listed on the Luxembourg Stock Exchange and the Stock Code is USY8547N1139.2009 Unclaimed Dividend – • All unclaimed/unpaid dividend amounts upto the FY ended 31. 2009 to Tuesday. who have not yet encashed their dividend warrant(s) for the said period.
Listing on Stock Exchanges – The Company’s Ordinary shares and CCPS are listed on the following 2 Stock Exchanges in India: Bombay Stock Exchange Limited Ltd Phiroze Jeejeebhoy Towers. Belapur 400 614
All unclaimed/unpaid dividend amounts for the FY 1995-96 to 2000-01 have been transferred to Investor Education & Protection Fund and no claims will lie against the Company or the Fund in respect of the unclaimed amounts so transferred. Mumbai 400 001 National Stock Exchange of India Exchange Plaza. The Company has paid annual listing fees to each of the above Stock Exchanges for the financial year 2008-09. Shareholders. Bandra-Kurla Complex. II to the Companies Unpaid Dividend (Transfer to General Revenue Account of the Central Government) Rules. 2009 (both days inclusive) Dividend Payment Date –The dividend warrants will be posted on or after 28. 2nd Floor. July 8. Stock Codes/Symbols – Ordinary Shares (demat form) CCPS Market Information BSE 500470 710049 NSE TATASTEEL TATASTEEL Q1
49 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
334.65 168.80 7.806 239.19 28.20 584.969 509 376 376 425 Voting strength % 31-0309 23.65 160.986 43.25 797.762
Registrar and Transfer Agents: TSR Darashaw Limited are the Registrar and Share Transfer Agents of the Company.84 142.00 711.312.59.06 4.76 2 96.02.27.98.20 100.60 645.549 246. Distribution of Shareholding – Ordinary Shares
Number of Ordinary shares held 1 to 100 101 to 500 501 to 1000 1001 to 10000 10001 and above Total 64.564
100.787 199.856 922.30 15.415 32.41 31.00
10.80 3.25 2.818 85.50 152.45 7.95 1.56 5.85 3.03.06 50 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal Rate 160% 155% 130%
.59 74.21 9 730.549 5 22.214.171.1248 228.38 4.80.00
Categories of Shareholders – Ordinary Shares
Category No.943 691.2008 (%) 60.35 4.75 571.9126.96.36.199 0.765 438.425 239.Market Price Data: High.) (Rs.48 No.42.2009 (%) 31.96 19.95 6.760 1 1 1 1 19 16 16 16 7.379 589.15 4.500 6.13.55 5. of Shares) 818.42.828 691.23.788 922.412.041
687.63.20 31-03-08 21.500 50.08 30.95 7.) (No.68 4.515 57 43.04.08.41.61.45.70 16.679 868.25 427.08.94.82.03 3.32 71 0
Individuals Unit Trust of India LIC of India Govt.95.85 150.348.347.55 571.96 8 9 42. of Ordinary Shares held 31-0331-03-2008 2009 175.22.25 648.85.53 3.09.944 589.40.417.02.75 12.522 438.05 7188.8.131.52 3.166.013 740.883 229.45 80 8 47.) (No.32.50 5.83 13.76 0.00 7184.108.40.2063.15 6.44 33.35 220.127.116.112.80 19.00 2.40. Mutual Funds & Trusts Foreign Institutional Investors
857.539.07 06.07.09 4 6 248.813 869.4 730.80 21.8 33.109 223.110 199.195 National Stock Exchange High Low Volume (Rs.01 11.10 8.05 166.99 0.20 151.51.20 0.76.85 148.10 5.97.01 10.98.0 156.94 4.10 148.518.104.22.168 .20 425. Low (based on the closing prices) and volume during each month in last financial year.27.70 150.38.24 100.35 6.75 166. Other information to the shareholders Dividend History for the Last 10 years
Financial Year 2007-08 2006-07 2005-06 Dividend Date 29.584.12 247.65.65 8.165 247.30 22.214.171.124.30 3.23. of Shares) 817.01.279 223. & Other PFI Tata Group Companies Companies (Others) Banks.80 584.00 Number of Shareholders 31.413.840 741.83.41 33.) (Rs.065.00
100.55 160.619 679.03. of Shareholders 31-0331-03-08 09 848.
Month Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Bombay Stock Exchange High Low Volume (Rs.
07.05 23.07.07.03 12.06.00 30.01 23.02 20.04 24.99
130% 100% 80% 40% 50% 40% 40%
51 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.07.2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99
The dates on which the Board Meetings were held were as follows:
30th May. 2008. BP are the other members of the Board.CORPORATE GOVERNANCE IN SMALL COMPANIES:
CASE STUDY 2 of 3: CORPORATE GOVERNANCE IN ABC LTD. 9th September. AKC and Mr. 1 2 3 Membe r Mr. three in numbers. i. 23rd December. 2008. None of the Directors is disqualified under Section 274.e. 2008. No. 2008. AKC Mr. where possible. Mr. The Company does not follow any Corporate Governance Philosophy. Board of Directors The Board of Directors of the Company comprises of minimum number of Directors required for the public limited Company as per the Companies Act. for F/Y 20082009
Governance Structure ABC Ltd. since the company is an Unlisted Company. 2009. BP Designation CMD Director Director 52 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal No of Meetings Held During the Year 5 5 5 Meetings Attended 5 5 5
. Five Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. VKS is the Chairman & Managing Director of the Company. 30th March. 1956. 16th June. Corporate Governance Report as required under Clause 49 of the Listing Agreements is not applicable. Mr. (Name changed) is an Unlisted Public Limited Company on which compliance of the Provisions of the Corporate Governance. is advisable. VKS Mr.
The names and designations of the Directors on the Board and their attendance at Board Meetings during the year are given below:
Audit Committee Depending upon the size of the company. since the company is a closely held Unlisted Public Limited Company. Remuneration Policy The company does not follow any Remuneration Policy. Mr. Remuneration Committee There is a requirement of Remuneration Committee in the company. The remuneration of key managerial personnel is decided by CMD of the company. Whistle Blower Policy No Whistle Blower Policy is being observed in the company. The Director. despite of the fact that there is no proof of his presence in Delhi on the Board Meeting Dates. located at Bangalore. solely at his discretion. Board Meetings are shown to be held at the Registered Office of the Company in Delhi. The Agenda of the Board Meetings are never being sent to the Directors. no Remuneration Committee is formed by the company. The Corporate Governance practices are not at all followed to the mark as most of the decision in Board Meeting is influenced/ depends upon the Consent of the Managing Director. While all the Directors are stationed at different locations other than Delhi.Dates for the Board Meetings in the ensuing year are decided as per the requirement of the company. the company is not required to have an Audit Committee. Shareholders’ Committee The company is not required to have Shareholders’ Committee. is shown present in all the Board Meetings. However. BP. sometimes even after closing of relevant year and are never communicated to the Directors.
53 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
Major portion of capital is held by Mr. SP Mr. salaries of employees of other group companies are paid from this company. Moreover. No Ordinary Businesses were
54 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. No 1 2 3 4 5 6 7 Member’s Name Mr.02% 0. solely managed by CMD of the Company. JT Mr. Due to which. VKS.00 Hours at the registered office of the Company.02% 0. Therefore.000 1. wife of Mr.000 Percentage 98.16% 0.
General Body Meeting Annual General Meeting for the Year ending 31st March.There are seven member of the Company.600 800 100 100 100 100 65. VKS Ms.12.000 1. VKS.65% 1.000 1. While statutory liabilities of the company. No AGM was actually conducted.00. The Company is experiencing a One Man Show where all the major decisions of the Company are being taken by CMD of the Company. there is a clear conflict between the Company’s interest and the personal interest of the Managing Director. The other share holders’ have small share in the shareholding of the Company. SS Total No of Shares 6. which leads to default in Corporate Governance. like Service Tax & TDS for F/y 2008-09 are still not fully paid till date.41.11% 0. The Agenda of the AGM along with Annual Report was never sent to the shareholders. 2009 was shown to be held on 30th September.000 76. AKC Mr. 2009 at 12. BP Mr. JT.000 Amount 64. The Board of the Company should contain a proper balance between Independent & Non Independent Directors. The funds of the company are being transferred to other group companies.02%
Working of the Company CMD is solely managing all the day to day working of the Company.200 7. RC Ms.000 8.02% 0. enquiries under different legislations have been initiated against the company. The Company also lacks independent & professional Directors who can manage the Company in a professional way & can control the dictatorship of CMD of the company. Table showing the Shareholding pattern of the Company
S.000 1. the Chairman & Managing Director of the Company & Mrs.
Enquiries under different legislations were initiated against the company. the normal working of the company was disrupted. Discloser and Transparency The Company lacks on the ground of Discloser & transparency as the Company does not have well defined accountability & authority structure. Due to which.
55 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. None of the Special Business is passed in this Annual General Meeting.discussed at the meeting. The Company also incurred expenses towards penalty and interest charges for delay in paying taxes & late filings under Income tax. The Company under review have faced litigation proceedings for F/y 2008-2009 because of non compliance of statutory laws and non-payment of statutory liabilities. TDS. However. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all stakeholders have access to clear. 1956 from a practising Company Secretary. Service Tax & Addition fees towards Companies Act. The Company should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. the company obtains a Compliance Certificate under Section 383 A of the Companies Act.
Secretarial Audit Based on the size of the Company. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. factual information. the company is not required to have Secretarial Audit. Statutory Compliance Corporate governance also focuses on statutory compliance under different laws. The Company needs to improve its Compliance under different laws & to follow Corporate Governance principles to sustain the normal working of the company & to safeguard interest of all the stakeholders of the company.
All matters pertaining to industry structure and developments. policies and sales network. segment / product wise performance. General Shareholder Information Since the company is a closely held company. etc. are not discussed in the said report.Means of Communication
Half-yearly report: Since the company is an Unlisted Public Limited Company. The website is not updated regularly and lack on information on corporate governance. opportunities and threats.
56 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. mission. outlook. corporate sustainability.
Presentation to Institutional Investors or to analysts – Since the company is closely held Public Limited Company. no information under this clause is mandatory. internal control and systems. the company is not required to make any presentation to Institutional Investors.
comprehensive reference on the company’s management. vision. risks and concerns. the Company is not required to publish its half-yearly results in the newspapers. which is a requirement of Listing Agreement.
Management Discussion & Analysis Report – The MD&A Report does not form part of the Directors’ Report. etc.
MKA. MKA Mr. 8th January. 2008. 2008. Mr. 1 2 3 Member Mr. the Board of Directors of the company is duly constituted. where possible. 29th August. Nine Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months.CASE STUDY 3 OF 3: CORPORATE GOVERNANCE AT XYZ PRIVATE LIMITED for F/Y 2008-2009
Governance Structure XYZ Private Limited (Name changed) is a Private Limited Company on which compliance of the Provisions of the Corporate Governance.
The names and designations of the Directors on the Board and their attendance at Board Meetings during the year are given below:
S. 10th November. 2008. 9th March. 2008. 2009. 20th November. since the company is an Unlisted Company. the mother of the Director. Board of Directors The Board of Directors of the Company comprises of three directors. Mr. JS and Mrs. is advisable. 2009. The Company under review is a real estate company. URA Designation Chairman & Director Director Director No of Meetings Held During the Year 9 9 9 Meetings Attended 9 9 9
57 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. 10th January. 2009. Mr. The Company does not follow any Corporate Governance Philosophy. 31st October. None of the Director is disqualified under Section 274. 2008. URA. No. JS Mrs. 1956. more than the minimum number of Directors required for the private limited Company as per the Companies Act. MKA is the Chairman of the Company. The dates on which the Board Meetings were held were as follows:
31st May. Therefore. Corporate Governance Report as required under Clause 49 of the Listing Agreements is not applicable. 2008. are the other members of the Board. 2nd June.
since the company is a Private Limited Company. the company is not required to have an Audit Committee. Mr. The remuneration of key managerial personnel is decided by the Management of the company. Mr. agenda of the Board meetings are also never communicated to the Directors. the mother of a Director Mr. Remuneration Policy The company does not follow any Remuneration Policy. is shown to be present in all the Board Meetings. Actual Board Meetings are never conducted.Dates for the Board Meetings in the ensuing year are decided according to the statutory requirement for compliance of provisions under different Acts. Shareholding Pattern The Authorized Share Capital of the Company as on 31st March. Mrs. There are eleven member of the Company. JS. Shareholders’ Committee The company is not required to have Shareholders’ Committee. Board Meetings are shown to be held randomly at the Registered Office or at corporate office of the Company. the company is not required to have a Remuneration Committee. Whistle Blower Policy No Whistle Blower Policy is being observed in the company. MKA. The Major Shareholders of the Company are Mr. Remuneration Committee Since the company is a Private Limited Company. URA. Table showing the Shareholding pattern of the Company
58 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. MKA. Therefore. 2009 is Rupees Five Crores and Paid up Share capital is Rupees Four Crores and seventy Three Lac. who is a house wife & is not involved in business affairs of the company at all. MS. M/s RSSIL. The Board Meeting dates are never decided in advance . Audit Committee Depending upon the size of the company.
For the new project.30.00.50. KK Mr.S. In spite of above facts the Company lacks independent Directors on Board to provide a fair view & can improve the working of the company.000 1.000 45.00 0
Percentage 25.73% 16.16% 1. JS are managing the day to day affairs of the company.50.000 55. JS Mrs.000 1. the Company has a huge requirement of funds.30. The management is planning to offer a position on the Board of the company in order to have professional competence in the Board.50. URA Mr.17% 2.000 4.00. which is prejudicial to the interests of the company.91% 3.06% 0.00.07. General Body Meeting
59 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. MKA & Mr. The company is regular in paying its statutory liabilities. JS M/s RSSIL Mrs.73.48% 23.000 8.000 10.000 6. The funds of the company are being regularly transferred to other group companies.05. The two Directors Mr.000 4.75. in which Mr.75% 1.50. The project cost is approx.00.000 15. One of the major Shareholder Mr.000 13.000 1. 500 crores.00.10.000
Amount 1. DS M/s PI Total
No of Shares 12.000 5.000 60. The funds are transferred without deciding terms & conditions for repayment and are interest-free. MA Mrs.25% 22.000 5. MKA & Mr.000 11. MKA Mr.95%
Working of the Company The company is engaged in real estate activities since 2004.27% 1. The Company has commenced a new very prestigious project in Uttaranchal.00. The existing projects of the company are in completion stage.20. MS Mr.00.000 47.000 80. However. JS are directors.00.000 60. MS is an Architect. RBA Mrs.000 1. All the Directors of the company have their own monetary interest in the company as all of them are the major shareholders of the company.00.000 6.50.00. No 1 2 3 4 5 6 7 8 9 10 11
Member’s Name Mr.000 50.27% 1.
00 A. 2009 at 11. However. the company obtains a Compliance Certificate under Section 383 A of the Companies Act. factual information. The Company should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. Ordinary & Special Businesses were passed in this Annual General Meeting without discussion. Statutory Compliance Corporate governance also focuses on statutory compliance under different laws. at the registered office of the Company. The Agenda of the AGM along with Annual Report was never sent to the shareholders. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. However. Discloser and Transparency The Company is not up to mark on the ground of Discloser & transparency as the Company does not have well defined accountability & authority structure. Secretarial Audit Based on the size of the Company. no periodical reviews are conducted to have a check and to meet the statutory compliances. The company tries to comply with all the statutory laws applicable to the company.M. the company is not required to have Secretarial Audit. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all stakeholders have access to clear.
Means of Communication
60 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. 2009 was shown to be held on July 31. The Company needs to upgrade & improve the Compliance under different laws & to follow Corporate Governance principles to improve and sustain the normal working of the company & to safeguard the interest of all the stakeholders of the company. 1956 from a practising Company Secretary. No AGM was actually conducted.Annual General Meeting for the Year ending 31st March.
General Shareholder Information Since the company is a closely held company. mission. risks and concerns. the company is not required to make any presentation to Institutional Investors. segment/product wise performance. All matters pertaining to industry structure and developments. which is a requirement of Listing Agreement. corporate sustainability.
61 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. policies and sales network. internal control and systems. no information under this clause is mandatory. The website lack any information on corporate governance. Presentation to Institutional Investors or to analysts – Since the company is a Private Limited Company. are not discussed in the said report. etc. opportunities and threats.Half-yearly report: Since the company is an Private Limited Company. etc. outlook. vision. Company’s Corporate Website – The Company’s website is a comprehensive reference on the company’s management. the Company is not required to publish its half-yearly results in the newspapers. Management Discussion & Analysis Report – The MD&A Report does not form part of the Directors’ Report.
owns the Taj Mahal Hotel Mumbai.
62 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. which was the target of the terrorists on 26/11/2008. Hotel President..
Salute To Shri Ratan Tata
Shri Ratan Tata. a 5 star property also belongs to Indian Hotels... the chairman of Indian Hotels..CORPORATE SOCIAL RESPONSIBILITY
What Ratan Tata did for the Mumbai victims.
4. The thoughts and anxieties going on people’s mind was constantly tracked and where needed psychological help provided.
63 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Every employee was assigned to one mentor and it was that person’s responsibility to act as a “single window” clearance for any help that the person required.The dependents of the employees were flown from outside Mumbai to Mumbai and taken care off in terms of ensuring mental assurance and peace. Employee outreach centers were opened where all help. The relief and assistance was extended to all those who died at the railway
station. 8. The Tata Gesture 1. During the time the hotel was closed. All category of employees including those who had completed even 1 day as casuals were treated on duty during the time the hotel was closed.
2. the salaries were sent by money order. 9. sanitation. A psychiatric cell was established in collaboration with Tata Institute of Social Sciences to counsel those who needed such help. water. 3. 10. 7. first aid and counseling was provided. 5. Relief and assistance to all those who were injured and killed.A. 6. surroundings including the “Pav-Bhaji” vendor and the pan shop owners. food. They were all accommodated in Hotel President for 3 weeks. Ratan Tata personally visited the families of all the 80 employees who in
some manner – either through injury or getting killed – were affected. 1600 employees were covered by this facility.
Counselor for life for each person
64 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Complete responsibility of education of children and dependents – anywhere in the world. 15. e. the railway employees. a new trust was created by the Tatas for the purpose of relief of employees.A 4 year old granddaughter of a vendor got 4 bullets in her and only one was removed in the Government hospital. the pedestrians who had nothing to do with Tatas were covered by compensation. Each one of them was provided subsistence allowance of Rs. All loans and advances were waived off – irrespective of the amount. Full Medical facility for the whole family and dependents for rest of their life. 13.The settlement for every deceased member ranged from Rs. b. Tata will take responsibility of life education of 46 children of the victims of the terror. 14.
This was the most trying period in the life of the organisation. She was taken to Bombay hospital and several lacs were spent by the Tatas on her to fully recover her. Senior managers including Ratan Tata were visiting funeral to funeral over the 3 days that were most horrible. d. Full last salary for life for the family and dependents. 10K per month for all these people for 6 months.11. the police staff.New hand carts were provided to several vendors who lost their carts.Ratan Tata himself asked the families and dependents – as to what they wanted him to do.In a record time of 20 days. c. 36 to 85 lacs [One lakh rupees tranlates to approx 2200 US $ ] in addition to the following benefits: a.Whatg is unique is that even the other people.
B. He created several institutions which later became icons of
progress. IISc is one such institute. When the HR function hesitatingly made a very rich proposal to
Ratan – he said – do you think we are doing enough? 7. 6. He could afford fencing only 400 acres.
The organisation is clear that it is not something that someone
can take credit for.
3. How was such passion created among the employees? How
and why did they behave the way they did?
2. culture and modernity. The whole approach was that the organisation would spend
several hundred crore in re-building the property – why not spend equally on the employees who gave their life?
65 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. If someone suggests that – everyone laughs. He was told by the rulers that time that he can acquire land for IISc to the extent he could fence the same.
It has to do with the DNA of the organisation. with the way
Tata culture exists and above all with the situation that prevailed that time. Epilogue 1. 5. The organisation has always been telling that customers and guests are #1 priority 4. The hotel business was started by Jamshedji Tata when he was
insulted in one of the British hotels and not allowed to stay there. It is not some training and development that created such behaviour.
CSR-focused businesses would proactively promote the public interest by encouraging community growth and development. short-term profits. or corporate social performance. Critics argue that CSR distracts from the fundamental economic role of businesses.
The practice of CSR is subject to much debate and criticism. and the honoring of a triple bottom line: People. Planet.INTRODUCTION Corporate social responsibility (CSR). CSR policy would function as a built-in. others yet argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations. regardless of legality.
A growing body of evidence asserts that corporations can do well by doing good. is a form of corporate self-regulation integrated into a business model. also known as corporate responsibility. and voluntarily eliminating practices that harm the public sphere. consumers. Furthermore. Profit. CSR is the deliberate inclusion of public interest into corporate decision-making. self-regulating mechanism whereby business would monitor and ensure its support to law. These companies are practicing Corporate Social Responsibility (CSR) in a manner that generates significant returns to their businesses. Consequently. Essentially. Ideally. Corporate Social Responsibility has been redefined throughout the years. business would embrace responsibility for the impact of its activities on the environment. employees. responsible business. it essentially is
66 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. and international norms. others argue that it is nothing more than superficial windowdressing. communities. corporate citizenship. Proponents argue that there is a strong business case for CSR. sustainable responsible business (SRB). stakeholders and all other members of the public sphere. Well-known companies have already proven that they can differentiate their brands and reputations as well as their products and services if they take responsibility for the wellbeing of the societies and environments in which they operate. ethical standards. in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate. However.
the field is primarily normative. social responsibility charters). the demand for more ethical business processes and actions (known as ethicism) is increasing.g. although it was seldom abbreviated.titled to aid to an organization's mission as well as a guide to what the company stands for and will uphold to its consumers. ethics codes. was used to describe corporate owners beyond shareholders as a result of an influential book by R Freeman in 1984. pressure is applied on industry to improve business ethics through new public initiatives and laws (e. Simultaneously. Business ethics can be both a normative and a descriptive discipline. Public sector organizations (the United Nations for example) adhere to the Triple Bottom Line (TBL). corporations have re-branded their core values in the light of business ethical considerations (e. both within major corporations and within academia.
67 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. ISO 26000 is the recognized international standard for CSR (currently a Draft International Standard). higher UK road tax for higheremission vehicles). after many multinational corporations formed. BP's "beyond petroleum" environmental tilt).g. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with noneconomic social values. It is widely accepted that CSR adheres to similar principles but with no formal act of legislation. In some cases. As a corporate practice and a career specialization. The term stakeholder.g. Historically. The UN has developed the Principles for Responsible Investment as guidelines for investing entities. The term CSR came in to common use in the early 1970s. today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e. In the increasingly conscience-focused marketplaces of the 21st century. For example. meaning those on whom an organization's activities have an impact. In academia. Development Business ethics is one of the forms of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment. interest in business ethics accelerated dramatically during the 1980s and 1990s. descriptive approaches are also taken.
The viewpoint expressed by Adam Smith over 200 years ago still forms the basis for free-market economies in the twenty-first century. In the eighteenth century the great economist and philosopher Adam Smith expressed the traditional or classical economic model of business. environmental and social actions.Corporate Social Responsibility is the way companies manage their businesses to produce an overall positive impact on society through economic. even Smith recognized that the free market did not always perform perfectly and he stated that marketplace participants must act honestly and justly toward each other if the ideals of the free market are to be achieved.
HISTORY The nature and scope of corporate social responsibility has changed over time. The concept of CSR is a relatively new one—the phrase has only been in wide use since the 1960s. is the idea that the principles of natural selection and survival of the fittest are applicable to business
68 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. In essence. In the century after Adam Smith. this model suggested that the needs and desires of society could best be met by the unfettered interaction of individuals and organizations in the marketplace. but also meet the needs of others. Large organizations developed and acquired great power. and discretionary expectations placed on organizations may differ. By acting in a self-interested manner. while the economic. Many of the principles espoused by Smith were borne out as the introduction of new technologies allowed for more efficient production of goods and services. it is probably accurate to say that all societies at all points in time have had some degree of expectation that organizations would act responsibly. the Industrial Revolution contributed to radical change. However. But. in simple form. and their founders and owners became some of the richest and most powerful men in the world. ethical. individuals would produce and deliver the goods and services that would earn them a profit. In the late nineteenth century many of these individuals believed in and practiced a philosophy that came to be called "Social Darwinism. Millions of people obtained jobs that paid more than they had ever made before and the standard of living greatly improved." which. especially in Europe and the United States. legal. by some definition.
worker safety. product safety. In the 1960s and 1970s the civil rights movement. This was based on the view that corporations should go beyond their economic and legal responsibilities and accept responsibilities related to the betterment of society. many called for the business world to be more proactive in (1) ceasing to cause societal problems and (2) starting to participate in solving societal problems. consumers. and society at large. This view of corporate social responsibility is the prevailing view in much of the world today. the companies that made them rich were practicing business methods that. Laws and regulations. were enacted to rein in the large corporations and to protect employees. and
environmentalism affected society's expectations of business. or the larger society. the community. were exploitative of workers. such as the Sherman Antitrust Act. although many of the great tycoons of the late nineteenth century were among the greatest philanthropists of all time. at the same time that many of them were giving away millions of dollars of their own money.
69 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Based on the general idea that those with great power have great responsibility. their giving was done as individuals. This type of philosophy justified cutthroat. competitive strategies and did not allow for much concern about the impact of the successful corporation on employees. Many legal mandates were placed on business related to equal employment opportunity. consumerism. sometimes called the "social gospel." advocated greater attention to the working class and the poor. The labor movement also called for greater social responsiveness on the part of business. An associated movement. Between 1900 and 1960 the business world gradually began to accept additional responsibilities other than making a profit and obeying the law. by today's standards at least. society began to expect business to voluntarily participate in solving societal problems whether they had caused the problems or not. even brutal. Big business was criticized as being too powerful and for practicing antisocial and anticompetitive practices. and the environment.and social policy. Indeed. Thus. Around the beginning of the twentieth century a backlash against the large corporations began to gain momentum. not as representatives of their companies. Furthermore.
education. In fact. for the last eight years. The leading areas that corporations were involved in were livelihood promotion. The study was based on a public goodwill
70 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. In a survey carried out by the Asian Governance Association. Corporate companies like ITC have made farmer development a vital part of its business strategy. The findings revealed that over 90 per cent of all major Indian organizations surveyed were involved in CSR initiatives. due to the efforts of organizations such as the Tata Group. India was aware of corporate social responsibility (CSR). and women's empowerment. followed by Tata Motors (133) and Hero Honda (131). the private sector was more involved in CSR activities than the public and government sectors. Bharat Petroleum and Maruti Udyog came on top with 134 points each. and made major efforts to improve the livelihood standards of rural communities. TNS Automotive. India has consistently ranked among the top three along with Singapore and Hong Kong. health. which ranks the top 10 Asian countries on corporate governance parameters. In another study undertaken by automotive research company. State-owned Bharat Petroleum and Maruti Udyog were ranked as the best companies in India. environment. IT companies like TCS and Wipro have developed software to help teachers and children in schools across India to further the cause of education. a survey was carried out by TNS India (a research organization) and the Times Foundation with the aim of providing an understanding of the role of corporations in CSR. Most of CSR ventures were done as internal projects while a small proportion were as direct financial support to voluntary organizations or communities. Banks and insurance companies are targeting migrant laborers and street vendors to help them through microcredits and related schemes. the holding group of the Tata Group is today owned by a trust). Ministry of Corporate Affairs has issued Corporate Social responsibility Guidelines (Annexed as Annexure-III) In June 2008. India has been ranked second in global corporate social responsibility. Unilever is using micro enterprises to strategically augment the penetration of consumer products in rural markets.Even much before the issue became a global concern. The adult literacy software has been a significant factor in reducing illiteracy in remote communities. (Around 66 per cent of Tata Sons.
such as labour rights and fighting corruption. Indian companies have made little progress in reporting development projects. CSR could prove to be a valuable asset in an age of mergers and acquisitions. The effort is significant because it brings together a wide range of Indian companies to share ideas on innovating sustainable programmes. Coleman and Co. Audit firm KPMG will partner with them to offer guidance on evaluating corporate social responsibility or CSR programmes—a trend companies are slowly embracing as India's expanding economy contrasts sharply with growing local protests over land for future industrial projects. a charter for improving the global business environment through standards. The new network will also serve as a common ground to lobby with the government for tax exemptions and safeguard other interests in the future. which factors the needs of the community and the regions in which a corporate entity functions. The network alliance stems from the first sustainability summit that was organized in January by the Associated Chambers of Commerce and Industry of India. Prime Minister Manmohan Singh said "Corporate social responsibility must not be defined by tax planning strategies alone. Addressing business leaders in May last year. especially as it helps companies spread their brand name. And only 48 companies have so far given their commitment to support the United Nations Global Compact. Anil Dhirubhai Ambani Group and media company Bennett. such as tracking spending in and progress of such projects in their annual reports. Ltd. Several foundations run by corporate houses plan to devise a common strategy to ensure transparency in their social and community development operations. Thailand was at the top slot with 124 points."
71 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.index and India received 119 points in the index against a global average of 100. Among them are Multi Commodity Exchange of India Ltd. it should be defined within the framework of a corporate philosophy. Rather.
These figures. companies drew a total exemptions of Rs5. According to Times' Pandey. it creates value for shareholders when competing with other companies. a 10-year-old movement started by an NGO called Coalition for Environmentally Responsible Economies (CERES) and the United Nations Environment Programme. For instance. spent Rs100 crore on CSR last year. he said. Yet others. such as Tata Steel Ltd. "Most companies tend to give to charities than make long-term development commitments." said Parul Soni. the country's largest steel company. Singhal. exclusive of dividend tax. Companies. An estimated 100 corporate foundations and 25 foreign firms are involved in CSR activities in India. spends an average of Rs150 crore as part of its annual revenue expenditure. making it difficult to measure the overall impact.500 crore the previous year. A recent KPMG study among 27 Indian companies showed that a mere 8% mentioned their social expenditures in their annual reports. This encourages companies to make voluntary disclosures and lays down framework on improving reporting principles. up from Rs17. When a company voluntarily opens up for self-evaluation. But a quarter of them are also signatories of the Global Reporting Initiative. but statistics on input and output are elusive. the Steel Authority of India Ltd (SAIL). which runs a 850-bed hospital and rural projects in 800 villages around Jamshedpur.000 crore on social expenditure during the last financial year.500 crore under income-tax laws last year. according to SAIL spokesperson N.K.Some say companies have an inherent "mental block" in reporting development programmes. sound improbable as Indian companies still do not distinguish between philanthropy and internal practices to benefit stakeholders such as employees and community. too. continue to rely on different models to earmark its social expenditure. this was 2% of its profit after tax.
72 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. and only 25% filed CSR reports at all. associate director of KPMG's Aid and Development Services. Quoting from a government report. the Indian corporate sector spent Rs30. an analyst said.
is exploring to widen the scope of public-private partnerships to build and maintain schools and hospitals in return for a fixed annuity payment.e. BUSINESS AND PUBLIC DEVELOPMENT We are convinced that sustainable development of business is closely linked to public welfare and sustainable development of the society. output is no longer the only public concern over business and the society has its expectations as to how business is run. companies and individual businessmen for sustainable development and preservation of resources for future generations. the government. too. Pharmaceuticals company Jubilant Organosys Ltd. based on the following principles: • • • • • • • Providing quality products and services to consumers. Apart from schools and hospitals that are run by trusts and societies. labour. how natural resources are consumed. about 66% of Tata Sons. i. In the modern world. Strict compliance with laws. Doing business efficiently to create economic value added and improve national competitiveness for the benefit of shareholders and the society. Integrating public expectations and generally accepted ethics into business practice. environmental or otherwise.What eventually makes up for CSR of a company ultimately depends on leadership. Creating decent jobs. Being
73 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. is today owned by a trust. already runs an anti-tuberculosis programme with the government of Uttar Pradesh. whether tax.
PRINCIPLES OF CORPORATE SOCIAL RESPONSIBILITY Corporate social responsibility is a philosophy of conduct and a concept of doing business applied by the business community. as part of company decision. how labour is employed. how business impacts local development and so on. the holding group of the Tata group. Integrity and reciprocity in relationships with all stakeholders. Contributing to the evolution of civil society through partnerships and social developmental projects. investing in development of production and human resources.
Yet we are not irresponsive to the society that lets us do our business. to facilitate well-balanced public development. We understand that neglect of the society's expectations is fraught with serious risks.essential for public welfare. we pursue long-term objectives and sustainability correlated with our business development strategies. networking and ongoing development.
74 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. We believe promotion of corporate social responsibility principles to result in better mutual understanding and trust within the society and also in clearer outline of common humanitarian values. The community of top managers acknowledges the importance of its resources and is up to responsible contribution to societal development. Issues left unsolved are likely to cause extra costs and conflicts about the ways of settling them. That said. is essential for public development. That is why we seek to address the interests and expectations of all concerned stakeholders in our development strategies. we trust public institutions to perform the duty of formulating proposals that would be of value for the society at large. utility maximization. rational choice. We do business in a market-driven way. in the bottom line. whether formal or not. business faces ever more requirements of the society. In our daily activities. the top managers' approach towards general humanitarian development issues is critical for the society to evolve. Seeing that the business community engages substantial forces and resources. We seek to integrate such consolidated stances into our daily activities following the principles of transparency and expanding the dialogue with a wider range of stakeholders. as to doing business in a socially acceptable way. The top managers' community commits to address social issues under the principles of equity and integrity. with its pursuit of profit. and. and this is one of the ways our CSR shows itself. We believe the impact that businesses of any size and origin has locally. The community of top managers feels certain that business has the overall humanitarian interests of the society as a higher priority than those of any specific group.
ATTAINING SUSTAINABLE RESPONSIBILITY
Impact for business: From cost to growth Governments have historically arbitrated much of the relationship between society and business.
Environmental management and resource saving: implementing relevant programs to mitigate any adverse environmental impact. Although regulation can have
75 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. mitigating social costs of business expansion. supporting voluntary work.
Health and safety: introducing and maintaining health and safety standards in addition to those required by laws.
Encouraging charity and voluntary work: introducing an effective operating framework for charity projects.CORPORATE SOCIAL RESPONSIBILITY PRIORITIES The top managers' community has identified the following corporate social responsibility priorities:
Sound business practice: developing business for the sake of the society's welfare. encouraging personal involvement. investing in human capital.
Socially responsible restructuring: doing business and restructuring in a way acceptable to the local community. and in its most rudimentary form.
Personnel development: offering competitive compensation and benefits.
Supporting local communities: assisting local communities to enhance their managerial and developmental efficiency. improving labour efficiency locally. CSR can be viewed as compliance with the laws and regulations set by the public sector.
but compliance alone won’t build brands. • Over two-thirds (68 percent) of the business leaders are focusing on CSR
activities to create new revenue streams. Today. however. companies look at compliance as a cost of doing business – and as a source of potentially costly hits in terms of litigation and reputation.
76 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Failure to abide by local and global regulations can destroy business reputations and brands. Quite recently. Nor will compliance offer the growth opportunities that strong brands and reputations bring with them. companies have started shifting their thinking about what it means to be socially and environmentally responsible. • Over half (54 percent) believe that their companies’ CSR activities are already
giving them an advantage over their top competitors. As companies have gone global – either by entering new markets to sell their products and services or by working with new overseas suppliers – the costs of compliance have risen rapidly. a surprising number of companies already regard corporate social responsibility as a platform for growth and differentiation.significant social value. Many companies have clung to this narrow compliance-based view of CSR for decades.
permission to enter new markets. For example. How do you develop a CSR strategy? Our approach is to view a company’s current activities and objectives against the CSR Value Curve (see Figure below). company skills and market needs. When businesses do start to move beyond compliance. IBM works with public and not-for-profit organizations to make the World Community Grid available to a volunteer force of more than 210. These efforts reinforce a company’s social commitment with ongoing returns. which is a way to align charitable giving with business strategy.32%
Activities have recently begin in this Area
Activities are matured in this area No activities in this Area
Figure: Focusing CSR to create new revenue streams
When aligned with business objectives. often in the form of goodwill and indirectly from a financial perspective. Our survey results showed that surprisingly few companies are engaged in what appears to be a very fundamental area for reputation building. That area is strategic philanthropy. which captures the shift in thinking from CSR as a cost or risk mitigation effort to CSR as a strategic goal that brings in new revenues. they start their journey along a continuum described in this curve. companies are beginning to see that CSR can bring competitive differentiation. and favorable positioning in the talent wars. The program is strategic
77 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.000 people who donate the idle processing power of their computers to create a “virtual supercomputer” devoted solely to humanitarian research.
Demonstrating cost savings is another means to engender sustained support. Companies are finding that many CSR initiatives. new partnerships or product/service innovations that generate revenue
Incorporates the company’s value system and/or code of conduct to guide business behavior
Measurable cost saving through efficient or winwin scenarios
As Companies move from left to right on the value curve. and it gives the company feedback on the performance of those technologies in real world applications. It also regains heat from effluence to warm process water and thereby further reduces its carbon emissions. they must be maintained and leveraged. For example. greater returns are realized as CSR becomes more integrated into core business strategy
78 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. uses its own by-products (biomass) to power its operations. help reduce overall cost structures or increase productivity. So the closer you align philanthropy to the core strategy of the business the easier it is to consistently support the efforts. including those that reduce energy consumption or benefit the environment. a Canadian pulp and paper company. operation and distribution
Efficienc y Access to new markets. efforts aren’t always sustained.
CSR Value Curve
Growth platfor m
Valuesbased self Regulation Strategic Philanthro py Legal and Complianc e Alignment of charitable activities with social issues that support business objectives Adherence to law in the countries of production.to IBM because it demonstrates how leading-edge technologies the company is developing can meet major global challenges. Catalyst Paper Corporation. But in order to have a lasting impact on society and on the business. Because the positive financial impact of traditional philanthropy is often indirect.
Together with efficiency gains and a switch to natural gas. more than half their activities have only broadened quite recently. the company has lowered its greenhouse gas emissions by 70 percent and its energy use by 21 percent since 1990.4 million through a 2 percent reduction in fuel consumption. an indication of gathering momentum and continued opportunity. business leaders in our survey are already focusing their CSR activities to develop capabilities in many areas across the CSR Value Curve. In 2005 and 2006 alone. the company saved US$4. business partners and customers. The maximum benefit from the CSR opportunity takes place when all activities on the CSR Value Curve become integrated into a single strategy. Interestingly. with leadership from the top managers and full engagement by employees.
CSR gains momentum
(Percent responses) Companies that have focused their CSR activities in the following areas
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Activities are mature in this area
Compliance Strategic w ith regulations philanthrophy and standards
Formal company values system
Creating new revenue streams
Activities have been started recently in this area
79 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. As Figure shows.
podcasts. In fact. not top down) Place critical importance on. and consider themselves very effective at.000 new citizen groups devoted to social and political issues. especially as they expand their sphere of operations and their markets. companies can easily lose control of their own brands and reputations. text messaging.e.
80 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. composition and impact of their products. Our survey found that these companies are more than twice as likely to: Collaborate • • • • • • Understand their customers’ CSR expectations well Have increased the amount of information they provide about the sourcing. more exposed. aligning philanthropy with business priorities
Information: From visibility to transparency Companies are more visible. And the torrid pace of information traveling the Internet is transforming consumer expectations as customers gain continuous access to special-interest action plans and third-party scorecards that rate companies on environmental practices and ethical concerns. Myspace and YouTube to proliferate their messages. They use blogs. and consider themselves very effective at. services and operations Collaborate with consumers and business partners on their CSR initiatives Engage their full base of employees in their CSR objectives (i. than ever before. who no longer depend on door-to-door canvassing and street demonstrations to bring environmental and fair trade issues to worldwide attention.The CSR profile of outperforming companies Companies that report they are substantially outperforming their peers already grasp the benefits that result from a CSR strategy integrated into the core of their business. Watchdog organizations are working hard to keep people aware of what businesses are doing. Since 1990 the Web has spurred the growth of more than 100. CSR supply chain processes Consider themselves very effective at developing products and services with a positive societal or environmental impact
Place critical importance on. Customers are joining with activist NGOs and advocacy groups.
Companies are digging deeper into their partners’ operations. This quest for information is intensifying. consumers today are information omnivores. asking about carbon dioxide emissions and the impact of hazardous components in the supply chain (see Figure). making today’s reputation a key factor in future growth. In the UK 57 percent and in the US 59 percent of consumers say their knowledge about the contents of the food they buy has increased over the last two years. Others research the environmental impact of the materials used to create the products they consider. Exposure is crossing into business relationships as well. Some keep abreast of the nutrition and health issues of the products they consume by scouring Web sites as frequently as they read ingredient labels. They’re looking at the global impact of their choices across the entire supply chain – labor conditions in contract factories. in many emerging economies. and the lending policies of the financial institutions they deal with. Moreover. opinions about global companies are being formed for the first time. “buyer beware. Consumers are scrutinizing procurement and sourcing policies.” has now become “seller beware.The traditional adage. Citizens in China and India are making the transition from producers to consumers and profoundly believe in the social responsibilities of business. China’s CSR expectations are rising rapidly to levels of western countries.” Customers want to know more Compared to their predecessors a generation ago.
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. Visibility extends beyond products to business practices as well. Heightened visibility into business is not restricted to the more mature economies. They’re checking on trading practices product composition and lifecycle management. India’s are already there and Brazil’s far exceed them.
Required by Business Partners to adopt environment standards
120% 100% 80%
Don't Know No
60% 40% 20% 0% Waste Management Water Management
Yes 52% 45% 44% 36%
Product Composition and lifecycle
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.Given the extraordinary quest for information on the part of customers. it’s all the more surprising that businesses seem to know so little: Three-quarters of businesses admit they don’t understand their customers CSR expectations well.
Yet. indicating that transparency is in fact tracking to visibility (see Figure). So.
This disconnect suggests that most companies are either simply confident of their ability to meet regulatory requirements or. Our survey results chart a marked increase in both information requested by advocacy groups and information provided by business. • 75 percent said the number of advocacy groups collecting information on their business has increased in the past 3 years. two-thirds of those same leaders admit they don’t understand their customers’ CSR concerns well.
83 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. guessing at what customers expect. companies are finding it necessary to take the wraps off information they once considered private or proprietary.Transparency meets visibility The best response to all this exposure? In today’s open environment. With relentless pressure from watchdog groups. “need to know” restrictions tend to fall away. at best. visibility is best met with a continuous exchange of information – or transparency.
75 percent have also increased the amount of information they provide about the sourcing as well as social and environmental impact of their products and services and operations in the past 3 years.
A full 63 percent believe they have sufficient information about the sources and composition of their products and services to satisfy customer concerns.
First. composition and im pact of its products. or public relations functions. trying to engage stakeholders without full transparency is disingenuous at best. Typically. engagement begins and ends with sales. as discussed in the previous section. aligning philanthropy with business priorities. customer care. True communication requires not just context. but interaction among the parties giving and receiving information.
Impact of customer intimacy
Companies that understand their customers’ CSR concerns
Relationships: From containment to engagement When CSR strategies are effective.Information explosion over the last 3 years
80% 70% 60% 50% 40% 30% 20% 10%
17% 13% 6% 1% 0% 3%
Increased No Change
The num ber of advocacy groups collecting and reporting information on your industry. adopting ethical and green procurement. or unleash what is effectively a data dump on your customers. Second. you can’t call it transparency if you simply spew information out into the marketplace. service and operations.
Report more success than their peers in increasing strategy. well: companies have limited the ways in which they directly interact with most customers and other constituents on CSR issues. It could even backfire. enterprise and/or productts Inform ation com panies provide on the am ount of sourcing. transparency.
revenue and reducing costs as a result of their CSR Are more likely to focus on and believe they are effective at differentiating their products and services. goes hand-in-hand with stakeholder engagement with two important caveats.
By CA Ajay Singhal
. Believe they are more effective at improving labor
84 practices. and adopting a formal company value system than their peers. marketing.
manufacturing Analysis of Corporate Governance & Corporate Social Responsibility and logistics processes.
business will need to both practice openness and ensure that its full employee base is prepared to enter into a dialogue with customers.Driving
transparency. Companies that mainly collaborate with stakeholders on CSR initiatives
Employees Business partners Investors Community Consumers Government
27% 23% 21% 20% 17% 15% 0% 10%
41% 37% 35%
30% 28% 25% 30% 40% 50%
Understand customers' CSR concerns welll
Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Businesses have a long way to go. And the numbers aren’t much better for business partners and communities – 23 percent and 20 percent respectively (see Figure). And at all these touch points.
customers – from senior managers to shop assistants. The only way to get a better handle on stakeholder expectations – and forge mutual objectives – is to foster a relationship based on continuous engagement.
however. Only 17 percent of our survey respondents said they really engage and collaborate with customers regarding CSR activities.
However. CSR objectives and initiatives. shows that employees rate higher on every measure of CSR 62% commitment than customers. 10% 0%
Board of directors Corp/Business unit leaders Front-line Managers % response Em ployees Families
Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. according to the respondents of the survey. 60% 58% 50% 46% Developing and implementing a CSR strategy is a unique opportunity to rally the 40% 30%
company. Are they prepared to have a real dialogue. All too often in corporate life. as our survey results show. or even a factory floor and asks if the products they see are fair trade or sourced sustain ably? Do employees have the information at hand? Can they answer questions about the company’s labor practices and energy consumption as well as product disposal? Not usually. it can be different. for example. one in which they learn about the customers’ needs? Not frequently enough. a showroom. With CSR.Figure
Engagement starts from within What happens when a customer walks into a store. only 31 percent of businesses engage their employees on the companies. This is a
20% significant opportunity lost (see Figure). the in CSRannounces aand initiatives average Company engagement CEO objectives vision and the employee is mystified or indifferent. a bank. Research at Marks
70% & Spencer.
3M’s Pollution Prevention Pays (3P) rewards employees who have breakthrough ideas for eliminating pollution at its source. customers.Figure
Some companies engage employees by posing grand challenges. Employee engagement on CSR initiatives can have another positive affect. it can be a powerful recruitment and retention tool in an environment where the war for talent is shaking up whole industries. Since its inception. however. in which groups collaborate around a common goal to develop a product or service with societal or environmental benefits. partners and NGOs. Moreover.000 3P projects have prevented the creation of more than 2. nearly 6. Other companies provide incentives for individual actions that make a significant difference. there are plenty of studies and surveys that suggest the more socially and environmentally aware generation now leaving school doesn’t just want to join a
87 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. The success of all these programs. Those that consistently combine clear transparency with deep interaction will best be able to advance sustainability in businesses and society. will hinge on the depth and vitality of the interactions they support. A recent study found that 44 percent of young professionals say they would discount an employer with a bad reputation.2 billion pounds of pollutants and generated savings of nearly $1 billion. counting only first year savings from the projects. Every business will find its own way to engage employees.
they want to be a part of a movement to create a better world – and to do that from inside business. we see business community dialoguing with the following key
stakeholders (the list is not exhaustive. all in compliance with the ethics of business conduct. getting creative in applying innovative solutions.
2. The top managers' community shares the common goals of the national social and economic policy and supports any economic. and getting closer to customers.
1. equity and impartiality. whether collective or individual. That means getting involved in identifying CSR-based growth platforms. We endorse that employers must consistently
comply with national legislation labour-wise and fully perform their obligations under any labour contracts. with companies ensuring proper information openness and transparency. The community of top managers maintains that
business partners are to be treated under the principles of transparency. We advocate shareholders and investors to be treated under the principles of straightforward and constructive dialogue in line with corporate governance requirements.
3. Business partners. State and local authorities are to express the society's consolidated
standpoint in their current plans and development strategies. Shareholders and investors. It is our assumption that employers work on making their relationships with employees mutually beneficial.
CSR RELATIONSHIP WITH KEY STAKEHOLDERS Currently. to the extent they are keen for the financial
returns and expansion of their business. respect and promote social partnerships built at their enterprises and within the society in general. which guide business conduct. are also keen for their business to be sustainable and its non-financial risks managed and mitigated. Personnel and unions.company with a good CSR reputation. social or cultural developmental initiatives evolving wherever business plants are located.
88 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
4. it is composed of the most important stakeholders).
We share the opinion that consumers are to be offered only
quality products and services. We find it indispensable to comply with consumer protection laws without fail.
CORPORATE SOCIAL RESPONSIBILITY CHALLENGES The current stage of corporate social responsibility development challenges business community in the ways we identify below. a point we insist on. We insist that business engage in
relationships with non-government organizations under the principle of good will and with focus on the advantages reachable thereby. but rather represents only one component of it. regionally. The community initiates and maintains ongoing exchange of information and knowledge between businesses of various scales. corporate social responsibility needs to go on in a self-regulated mode led by professional business associations or. The top managers' community ensures consistent CSR policy locally. Consumers. To this end. if forced under any extraneous standards or regulations.
89 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Non-government organizations. As seen by the top managers' community.
6. 2. 1. nationally and internationally. we adopt modern production technologies and do our best for being conformant to international quality standards and responsive to the society's expectations when developing new products or services. Charity does not cover all CSR issues. its practical development risks being hindered. We advocate legal incentives for personal involvement in charity and also encourage voluntary engagement in it which is a way of showing leadership and improving reputation. CSR should be clearly distinguished from charity.
5.We are working towards introduction of legal and generally recognized standards of business conduct to be observed by the entire business community.
Education and Arts & Culture. rather than confined to any single methodology. in 1996. Employment. to be ready for an open and goal-oriented dialogue with all stakeholders. to amplify CSR interpretation from merely risk management considerations to discovery of new business opportunities. Infosys leadership has set examples in the area of corporate citizenship and has involved itself actively in key national bodies. if it provides a tool to augment investment attractiveness and capitalization of the business.3. 5. Rural Reach Programme. Additionally. Infosys promoted. Healthcare for the poor. There is a case.
CORPORATE SOCIAL RESPONSIBILITY: INITIATIVES AND EXAMPLES Infosys Technologies Limited Infosys is actively involved in various community development programs. without giving up their interests and with due regard to the feedback. A CSR policy can only be considered good. the Infosys Foundation as a not-for-profit trust to which it contributes up to 1%PAT every year. as seen across our community. there is still much to be done in promoting and disseminating best CSR practices. thus revealing CSR as a dynamic system of relations. those who declare and publicly demonstrate their corporate social responsibility are to be commanded for that. 4. Welfare activities undertaken by the Infosys Foundation. from our perspective. the Education and Research Department (E&R) at Infosys also works with employee volunteers on community development projects. It is therefore essential for CSR practice to be diverse and innovative. Yet. They have taken initiatives to work in the areas of Research and Education. 6. upheld by the top managers' community. Community Service. which we welcome. ITC Limited
90 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. The vast societal impact of business compels CSR-concerned companies. True.
The Nanhi Kali project has over 3. C. C. which make a difference to the lives of deserving students. ITC is significantly widening its farmer partnerships to embrace a host of value-adding activities: creating livelihoods by helping poor tribals make their wastelands productive. ITC touches the lives of nearly 3 million villagers across India. scholarships and loans. Through these rural partnerships. Volunteers from among Satyam associates and their family members lead the services and perform the required tasks. Registered as Satyam Alambana Trust in 2000. The K.000 in the next 2 years. Mahindra Education Trust undertakes a number of education initiatives.ITC partnered the Indian farmer for close to a century. formed to support and strengthen the vulnerable and underprivileged sections in urban India. Alambana aims at transforming the quality of life among urban population. C. Mahindra with an objective to promote education.5 Crore in the form of grants. and providing infrastructural support to make schools exciting for village children. by reaching out to the underprivileged children especially in rural areas. We aim to increase the number of Nanhi Kalis (children) to 10. It promotes education mainly by the way of scholarships. ALP believes illiteracy is a major social concern
91 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Alambana's services are directed primarily at the disadvantaged sections in all the cities that Satyam has offices in. K. P N Murthy and Prof. Mahindra & Mahindra The K. across age groups and across income strata.300 children under it. Mahindra Education Trust was established in 1953 by late Mr. investing in rainwater harvesting to bring much-needed irrigation to parched dry lands. financial assistance and recognition to them. Its vision is to transform the lives of people in India through education. Kesav Nori of Tata Consultancy Services in May 2000 to address the problem of illiteracy. Satyam Computer Services Limited Alambana (support) is the corporate social responsibility arm of Satyam Computer Services Limited. empowering rural women by helping them evolve into entrepreneurs. F C Kohli along with Prof. 7. Tata Consultancy Services The Adult Literacy Program (ALP) was conceived and set up by Dr. ITC is now engaged in elevating this partnership to a new paradigm by leveraging information technology through its trailblazing 'e-Choupal' initiative. The Trust has provided more than Rs.
affecting a third of the Indian population comprising old and young adults. Udayan. nongovernmental organizations (NGOs). a residential school for children of leprosy patients in Barrackpur. by promoting early child health. To propagate education among all sections of the society throughout the country. Aptech Limited Aptech Limited. including the Barrackpur-based NGO. it uses a TCS-designed Computer–Based Functional Literacy Method (CBFL). companies. To accelerate the rate of learning. Aptech students donated part of the proceeds from the sale of their art work to NGOs. an innovative teaching strategy that uses multimedia software to teach adults to read within about 40 learning hours. It has. ICICI Bank Ltd The Social Initiatives Group (SIG) of ICICI Bank Ltd works with a mission to build the capacities of the poorest of the poor to participate in the larger economy. The group identifies and supports initiatives designed to break the intergenerational cycle of poor health and nutrition. catalyzing universal elementary education and maximizing access to micro financial services. ensure essential early childhood education and schooling as well as access to basic financial services. in association with leading NGOs. This is undertaken in collaboration with research agencies. a leading education player with a global presence. local stakeholders and international organizations. The SIG works by understanding the status of existing systems of service delivery and identifying critical knowledge and practice gaps in their functioning It locates cost effective and scalable initiatives and approaches that have the potential to address these gaps and supports research to understand their impact. provided computers at schools. Thus. has played an extensive and sustained role in encouraging and fostering education throughout the country since inception. Aptech fosters tie-ups with leading NGOs throughout the country. government departments. Aptech has a long history of participating in community activities. especially the underprivileged. As a global player with complete solutions-providing capability.The
92 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. ICICI Bank believes that it can build the capacities of India’s poor to participate in larger socio-economic processes and thereby spur the overall development of the country. education to the underprivileged and conducted training and awareness-camps. established in 1970.
Disaster Management. And shortly thereafter. Himachal Pradesh (10 Balwadis). NGO's and International Organizations in disaster management. The members of Engineering and Logistics segment of WEF came together to establish this network. CARE-Jharkhand. The four-year project covered 63 government schools and benefited 15. GEF Objectives include providing equal opportunities in pre-primary& primary education to all children. Alwar District. DRN Worldwide was formally launched in New York in January 2002. Goodearth Education Foundation (GEF) Work of GEF was initiated in 1996 with a project in the Rai Bareilly district in Uttar Pradesh.company strongly believes that education is an integral part of the country’s social fabric and works towards supporting basic education and basic computer literacy amongst the underprivileged children in India. DRN . Education.Trained volunteers and equipment resources from Engineering Construction & Logistics companies will complement the existing efforts of Government. covering 71 schools & balwadis) and Solan district. promoted by the World Economic Forum (WEF). It was during the WEF annual meet that the massive earthquake struck Gujarat in January 2001. Maharashtra (in 56 schools & balwadis). Rajasthan (this Project is being implemented in partnership with the NGO Bodh Shiksha Samiti. GEF is currently implementing projects in Thane district. The need for a trained and effective participation from industry was first felt there. It was implemented in collaboration with an NGO. and Environment. Disaster Resource Network DRN is a worldwide initiative. and quality of education by ensuring that it is relevant. Hindustan Construction Company (HCC) HCC plays an active role in CSR initiatives in the fields of Health. India Aluminium Company Limited The Women's Empowerment project was initiated by Indal-Muri in Jharkhand where the Company operates an alumina refining plant.000 children.India Initiative was launched. The idea was further strengthened during the 9/11 incident where again the industry participated in the relief operations. effective and activity based. The central problem this project has attempted to address is the very low socio-economic condition of the rural and tribal
93 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
000 skilled workmen in various trades. L&T set out to regulate and promote Construction Vocational Training (CVT) in India by establishing a Construction Skills Training Institute (CSTI) on a 5. lack of or low cash income. CSTI imparts. The company’s commitment to the school goes much beyond just providing monetary support towards infrastructure and maintenance of school building. plumbing and sanitary. close to its Construction Division Headquarters at Manapakkam. CSTI set up a branch at Panvel. which are running successfully with members trained in various vocational income– generating skills. Chennai. Since inception. these two units have produced about 2. the minimum qualification being tenth standard. resources and quality of education. The Manapakkam and Panvel facilities together provide training to about 300 candidates annually who are inducted after a process of selection. JCB India adopted a Government school. JCB India Ltd.5 acre land. basic training in formwork. About 2000 women have been brought into the fold of this activity helping to improve not just their own lives but the quality of life of their children and families as well. unresponsive health/ Integrated Child Development Services (ICDS) schemes. Mumbai.population of Silli block caused by low agricultural productivity. scaffolder and electrical wireman trades to a wide spectrum of the rural poor. carpentry and masonry trades. As a result of the good response it received in Chennai. Larsen & Toubro (L & T) Limited Considering that construction industry is the second largest employer in India after agriculture. bar-bending. The Project has helped set up around 100 Self Help Groups so far. employing about 32 million-strong workforce. initially offering training in formwork. carpentry. we could build a better community and society tomorrow. totally free of cost. masonry. agricultural methods for better yields and health care initiatives. in the vicinity of the company premises as its social responsibility. They strongly believe that children are the foundation of our nation and they could be helped. with about sixty percent of them
94 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. The reason for adopting this particular school was the poor management of the school in terms of infrastructure.
The company pursues a strong “triple bottom line” which is described as profits. The company promotes a culture of charitable giving and connects employees to nonprofit organizations serving the communities where they live. eventuating in positive global impact. Education is a top corporate priority for Cisco. and the chance to give back. It takes its responsibility seriously as a global citizen.
95 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. CISCO System Inc. The success of this training-initiative demonstrates that adoption of systematic training techniques are bound to yield efficient and skilled personnel in the shortest possible time. and in the power to convert the potential of the Rural Youth in Construction and upgrading Rura Economy in a small way. the opportunity to learn. Cisco invests its best-in-class networking equipment to those nonprofit organizations that best put it to work for their communities. as it is the key to prosperity and opportunity.being deployed to L&T’s jobsites spread across the country. Philanthropy at Cisco is about building strong and productive global communities communities in which every individual has the means to live. people and presence.
that would probably take care of most CSR issues”. I think it is risk management. But he concedes that this involves a long-term payback: “You must look at it over five years. unions.
96 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Erik Belfrage* of Sweden’s SEB Bank believes that this debate misses a fundamental point: ‘doing good’ is not separate from ‘being good’. Charitable giving or a well-managed publicity campaign might seem a quick fix but they will not yield long-term rewards. If you have a well formed corporate governance programme in place. Social and environmental consequences are weighed against economic gains.” Erasing the distinction between corporate governance and corporate social responsibility also reveals the true difficulty of developing a well-rooted programme. In any case. proponents often grow uncomfortable when explaining the business case for ‘doing good. “Corporate governance and corporate social responsibility are both extremely important to a company.’ The costs associated with these programmes are clear but the correlation with better financial performance is hard to prove. they argue. Many have created so-called corporate social responsibility (CSR) programs that aim to balance their operations with the concerns of external stakeholders such as customers.CONCLUSION A fine line between corporate governance and corporate social responsibility Companies worldwide are increasingly worried about the impact of their business activities on society. But it is not a natural thing to separate them. where the risk is the value of your brand. But whilst many agree that CSR is the right thing for companies to do. NGOs and governments. local communities. the objectives of CSR go beyond short-term economic gains. at least. “Good corporate governance is basically about making better decisions for the long term health of the company. Enhanced brand value is the pay-off for getting this right.” The company is also likely to benefit from fewer disruptions to its business from strikes. boycotts and regulation.
” This process begins with an active internal conversation: “This requires involving everyone.” But how should a company report on its commitment to governance and CSR? Some countries are considering compulsory ‘triple bottom line’ reporting that adds environmental and social impact to required financial reporting. it doesn't work.” This in turn helps the company communicate with its external stakeholders. There must be a lot of back and forth between the board. I share those values.’ We are living them. executives and staff. Where it is a pet project of one executive. We did that at SEB and it took us nearly three years. it’s not anchored. it will also find that building its brand value is easier and faster. Similarly. then communicating becomes more natural”. But now everyone in the bank can say ‘Yes.”
97 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. It’s an important occasion to communicate governance and brand value”. Once a company is confident in its dialogue with the public. “If openness becomes a natural part of business life.This requires some soul searching. there should be limits to transparency. “There should be reporting. “You only have a split second to get the attention of a large group of people. The media and organizations such as the International Chamber of Commerce also play an important role in communicating good and bad examples of governance. when there is no real response from employees. “A company must do a lot of homework when deciding its values. but I don't know if it should be a separate report or integrated into existing communications” Something he would like to see added to annual reports are the oral statements made by the company’s chairman and management at the company’s annual general meeting. “It is the only time that shareholders and stakeholders get together. but the reaction is often excessive. “Sometimes companies going too far in giving information away to competitors there is pressure from both regulators and markets as well from within the companies themselves. Nonetheless. It is a matter of efficiency.
Though. a company is a separate legal entity different from its owners.
98 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.The compliance requirements for CG & CSR are different for different types of companies. where risk of the stack holders is limited. The CG & CSR requirements for large listed Public limited companies are much more than the unlisted Public limited companies and even lesser for small Private limited companies. whether private or public. but is difficult to observe the separation of ownership and the management in case of small to medium Companies.
in www.cipe.com www.google.com www.gov.org www.unpan1.in www.com www.org
99 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.wikipedia.scribd.gov.org www.waynevisser.com www.bseindia.tatasteel.sebi.un.com www.com www.nseindia.mca.Bibliography www.
else at least one-third. informed business
management strategies. e) Directors should be paid a net commission profits for not a exceeding 1% (3%) of
Audit Committee: A board must have a qualified and independent audit committee. majority and 100 chair
comprise entirely of “financially literate” non-executive members with at least one member having accounting or related financial management expertise. all non-executive. at least half of the board should be Independent directors.
compensation to be fixed by board and ratified by shareholders and reported. c) No single person should hold more directorships than 10 in listed
Annexure-I Recommendations of various committees on Corporate Governance in India
CII Code recommendations (1997) Birla Committee (SEBI) recommendations (2000) Board of Directors a) No need for German a) At least 50% non-executive members b) For a company with an a) Training of board members Narayana Murthy committee (SEBI) recommendations (2003)
style two tiered board. at least half of the board should be independent directors¨. else at least 30% . if the Chairman is also the MD. of minimum 3 members. Stock options should be vested at least a year after should their be retirement.
d) Maximum of 10 directorships and d) Non-executive directors should and clearly responsibilities be competent and have in defined like active 5 chairmanships per d) The board every risk should quarter and be of risk person.
c) Non-executive paid for job
should have an office and be expenses. Independent directors¨ treated the same way as non-executive directors. It should
Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
companies. b) For a listed company
the Audit Committee. b) There shall be no nominee All by directors to be with and shareholders
with turnover exceeding Rs. elected same
accountabilities. 100 crores.
and Its accounting to
documents including information relating to subsidiary companies. can seek legal/professional of outside It f) Boards as of subsidiaries parent and least one should follow similar composition rules should that of have at service as well as secure meetings. all
must be presented to
chaired by an independent
Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. removal remuneration chief internal auditor.one before finalization of annual accounts and one necessarily every six months with the quorum being the higher of two members or one-third of members with at least two It independent should and have can directors.
executives as necessary and secretary The should be he seceretary of committee. the auditors powers
should act as the bridge board.
access to information from employee any investigate outside attendance experts between statutory f) Attendance directors made Those record should at of be the f) Remuneration The committee Committee: remuneration should decide g) The Board report of a parent company should have access to minutes of board meeting in its subsidiaries and should affirm affairs. party” The access (and to this All it and all be by “related must should be be of employees be informed of such should annually transactions committee and
chairman should attend AGM answer The confer company shareholder committee with key queries.
remuneration packages for executive directors. any
approved by audit committee. should the the
considered too. may above Stock be sitting options
independent with at least one having financial knowledge.company with (out) an MD over and fees.
independent director s of the parent company. less 50% attendance should not be reappointed. responsible for the appointment. and and
internal auditors with farresponsibilities. reviewing than ranging in matter
within its TOR. It should have at least 3 directors.
time of re-appointment. committee should meet at least thrice a year -. “Whistle blowers” should have direct policy affirmed management).
Minimum available to
While independent and non-executive should enjoy directors some
protection from civil and criminal litigation.the board is listed in the code. competent and willing to work more than other non-executive directors. i) Reduction in number of nominee should companies individual directors.20 crores should have an audit committee of at least three members. h) g) The board should decide on the remuneration directors of and nonall executive Performance evaluation of non-executive directors by all his fellow Board members should inform decision.
Disclosure and Transparency
102 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. they may be held responsible of the legal compliance in the company’s affairs. with clear terms of reference and access to all financial information in the company with and in and should interact auditors board periodically statutory internal corporate and
remuneration information should be disclosed in annual report h) At least 4 board meetings a year with a maximum gap of 4 months between any 2 meetings.100 crores or paid-up capital of Rs. all non-executive. information boards stipulated. j) Code of conduct for Board and and senior annual
auditors and assist the accounting reporting. a re -appointment
h) Audit Committee: Listed companies with turnover over Rs.
nominee directors from
shareholding below 5% or total FI holding below 10%. FIs withdraw with FI
affirmation of compliance to it.
etc. e) Security analysts with the must client
towards a regime of unqualified financial statements. b) Consolidation of group accounts should be optional and subject to FI’s and IT department’s assessment norms. domestic issues should be same as those for GDR issues. 20 crore. material contingent liability and
and CFOs on company
development. to annex of 10% and major of segments
accounts for subsidiaries they have majority shareholding.a) Companies inform
a) Companies provide where
Management should explain
and justify any deviation from accounting standards in financial statements. If a company no need consolidates.
b) b) Disclosure list pertaining to “related till party” ICAI’s transactions provided by committee norm is established. outlook.
shareholders about the high and low monthly averages of their share prices and about share. well and front. followed by auditor’s its risks. opportunities. of each
a clear description.
disclose the relationship of their employers company as well as their actual or intended shareholding in the 103 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
subsidiary accounts but the definition of “group” should include parent c) A mandatory and subsidiaries. as and d) CEO/CFO certification veracity and proper of and knowledge. c) Stock exchanges should require certificate accounts compliance from CEOs Management Discussion & Analysis segment of annual includes industry report discussion structure that of and
Management should provide comments. performance prospects business (exceeding turnover). as risks threats. statements reports and maintaining should
operational performance managerial developments in HR/IR d) For companies with capital norms for d) Management inform board of all potential conflict of interest situations.
comprehensiveness of financial directors’ of internal affirmation
control as well as appropriate disclosure to auditors and audit committee.
companies directors. accept further deposits interor the corporate dividends
investments or declare default is made good. be to presentation to analysts communicated the Internet. possibly over
approved by auditors on audit committee should advise b) In case of multiple credit ratings.
events reports be mailed to shareholders
A board committee headed
by a non-executive director look into shareholder complaints / grievances
d) Companies defaulting on d) Company should delegate fixed deposits should share transfer power to an not and be permitted make loans until to officer/committee/registrar/shar e transfer agents. shareholders must be resume. Board
except in case of serious systematic default or provision of insufficient information.client company. b) Half-yearly results and financial significant action in this matter.
investors. e) On informed expertise. they should all be reported in a format showing relative position of the company c) Same disclosure norms for foreign and domestic creditors. It should get uses The for non-pre-specified an annual the basis. The delegated authority should attend to share transfer formalities at least once in a fortnight. (re)appointment of their of directors. Special Disclosure for IPOs a) Companies making Initial Public Offering (“IPO”) should inform the Audit Committee of categorywise uses of funds every quarter. should results.
104 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. of are they and where names
Creditors’ Rights a) FIs should rewrite loan covenants nominee and eliminating directors debt Shareholders’ Rights a) Quarterly etc.
105 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
there should be a clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/Chief Executive Officer (CEO).
The companies may have a Nomination Committee comprising of majority of Independent Directors.Annexure-II CORPORATE GOVERNANCE VOLUNTARY GUIDELINES ISSUED BY MINISTRY OF CORPORATE AFFAIRS
BOARD OF DIRECTORS A. independence of a director and availability of time with him or her to devote to the job. The expectation of the Board from the appointed director. as far as possible.as is done by them The letter should specify: • • • • • • • • The term of the appointment. if any. The Code of Business Ethics that the company expects its directors and employees to follow. This letter should also be placed by the company on its website. to promote balance of power.
Such formal letter should form a part of the disclosure to shareholders at the time of the ratification of his/her appointment or re-appointment to the Board. if any. inter-alia. evaluating. while appointing employees and Executive Directors.2 Separation of Offices of Chairman & Chief Executive Officer To prevent unfettered decision making power with a single individual.
ii. A. and recommending appropriate Independent Directors and Non-Executive Directors [NEDs]. if any. Provision for Directors and Officers (D&O) insurance. including sitting fees and stock options etc. the Board-level committee(s) in which the director is expected to serve and its tasks. The roles and offices of Chairman and CEO should be separated. including its Chairman.3 Nomination Committee
i.. include the criteria for determining qualifications. also on the website of the stock exchange where the securities of the company are listed. This Committee should consider: • proposals for searching. positive attributes. and The remuneration. A. and in case the company is a listed company. based on an objective and transparent set of guidelines which should be disclosed and should. The list of actions that a director should not do while functioning as such in the company. APPOINTMENT OF DIRECTORS A.1 Appointments to the Board i. 106 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. Companies should issue formal letters of appointment to Non-Executive Directors (NEDs) and Independent Directors . The fiduciary duties that come with such an appointment alongwith accompanying liabilities.
iv. This certificate should be placed by the company on its website. and in case the company is a listed company. No individual may be allowed to have more than three tenures as independent Director in the manner suggested in 'i' and 'ii' above. For reckoning the maximum limit of directorships. A. Such a policy may be subject to approval by shareholders. experience and expertise. ii. All Independent Directors should provide a detailed Certificate of Independence at the time of
ii. experience and effectiveness of individual directors as well as the Board as a whole. also on the website of the stock exchange where the securities of the company are listed. Disclosure about such policy should be made by the Board in its report to the shareholders.
With a view to enable Board to take proper and reasoned decisions. knowledge. A period of three years should elapse before such an individual is inducted in the same company in any capacity.
A separate section in the Annual Report should outline the guidelines being followed by the Nomination Committee and the role and work done by it during the year under consideration.2 Tenure for Independent Director i. public limited companies. and thereafter annually.
The Nomination Committee should also evaluate and recommend the appointment of Executive Directors. managerial qualities and ability to read and understand financial statements.
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. The Board should put in place a policy for specifying positive attributes of Independent Directors such as integrity.
In case an individual is a Managing Director or Whole-time Director in a public company the maximum number of companies in which such an individual can serve as a Non-Executive Director or Independent Director should be restricted to seven.1 Attributes for Independent Directors i. Number of Companies in which an Individual may become a Director i. Nomination Committee should ensure that the Board comprises of a balanced combination of Executive Directors and NonExecutive Directors.
iii. the following categories of companies should be included:• • ii. private companies that are either holding or subsidiary companies of public companies. foresight.
B. An Individual may not remain as an Independent Director in a company for more than six years. if any.4.•
determining processes for evaluating the skill. INDEPENDENT DIRECTORS B. iii.
e. Incentive schemes should be designed around appropriate performance benchmarks and provide rewards for materially improved company performance. iii. subject to an appropriate ceiling depending on the size of the company. ii.
B. Remuneration packages should involve a balance between fixed and incentive pay.1. ii. C. The companies should have the option of giving a fixed contractual remuneration.1 Guiding Principles-Linking Corporate and Individual Performance i. 108 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.1. to NEDs. some should not be paid a commission on profits while others are paid a fixed amount. Independent Directors should be provided with adequate independent office space and other resources and support by the companies including the power to have access to additional information to enable them to study and analyze various information and data provided by the company management. they should have the option and freedom to interact with the company management periodically. In order to enable Independent Directors to perform their functions effectively. C. reflecting short and long term performance objectives appropriate to the company's circumstances and goal.
The maximum number of public companies in which an individual may serve as an Independent Director should be restricted to seven. REMUNERATION OF DIRECTORS C. It should also be ensured that relationship of remuneration to performance is clear. Benchmarks for performance laid down by the company should be disclosed to the members annually. not linked to profits. The choice should be uniform for all NEDs. or (b) Pay upto an appropriate percent of the net profits of the company. The performance-related elements of remuneration should form a significant proportion of the total remuneration package of Executive Directors and should be designed to align their interests with those of shareholders and to give these Directors keen incentives to perform at the highest levels. The companies should have the option to: (a) Pay a fixed contractual remuneration to its NEDs. Remuneration Policy for the members of the Board and Key Executives should be clearly laid down and disclosed. The companies should ensure that the level and composition of remuneration is reasonable and sufficient to attract.1 Remuneration C. retain and motivate directors of the quality required to run the company successfully. ii.3 Independent Directors to have the Option and Freedom to meet Company Management periodically i. i.iv.2 Remuneration of Non-Executive Directors (NEDs): i.
If such a structure (or any similar structure) of remuneration is adopted by the Board.
If stock options are granted as a form of payment to NEDs. The IDs may not be allowed to be paid stock options or profit based commissions.
C. then these should be held by the concerned director until three years of his exit from the Board. it should be disclosed to the shareholders in the Annual Report of the company. 109 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. This Committee should also determine principles.1. criteria and the basis of remuneration policy of the company which should be disclosed to shareholders and their comments. one level below the Board. retain and motivate Independent Directors of quality to contribute to the company. they should be paid adequate sitting fees which may depend upon the twin criteria of Net Worth and Turnover of companies. considered suitably. majority of whom should be non executive directors with at least one being an Independent Director. C.e.2 Remuneration Committee i. ii.1. iv. so that their independence is not compromised. This Committee should comprise of at least three members. then the NEDs should not be eligible for any commission on profits.4.
Variable component: Based on attendance of Board and Committee meetings (at least 75% of all meetings should be an eligibility pre-condition) Additional variable payment(s) for being: o o o the Chairman of the Board.
If the option chosen is 'i(a)' above. the justification/reasons should also be indicated/ disclosed adequately.
ii. The companies may use the following manner in structuring remuneration to NEDs:
Fixed component: This should be relatively low. Remuneration of Independent Directors (IDs) i. These should not be more than one-third of the total remuneration package. iii. if any. such as retirement benefits or stock options.
iv. including any compensation payments.
C. so as to align NEDs to a greater
share of variable pay. This Committee should have responsibility for determining the remuneration for all executive directors and the executive chairman. Companies should have Remuneration Committee of the Board. there is any deviation from such policy.3 Structure of Compensation to NEDs i. This Committee should also recommend and monitor the level and structure of pay for senior management.iii. ii. It should be ensured that no director is involved in deciding his or her own remuneration. i. In order to attract. especially if he/she is a nonexecutive chairman the Chairman of the Audit Committee and/or other committees members of Board committees. Whenever.
There should be a statement to this effect by the Board in the Annual Report. Training of Directors i. risk optimization as a part of a risk management policy or strategy. at least annually.
This Committee should make available its terms of reference.
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. which is overseen once every six months by the Board. risk minimization. its role. ii. Besides this. B. responsibilities and liabilities.
II. the Board should also adopt suitable methods to enrich the skills of directors from time to time. The review should cover all material controls. C. The Board should state in the Annual Report how performance evaluation of the Board. may threaten the existence of the company. ii. its Audit Committee and its executive management should collectively identify the risks impacting the company's business and document their process of risk identification. conduct a review of the effectiveness of the company's system of internal controls and should report to shareholders that they have done so. the Board should. operational and compliance controls and risk management systems. its committees and its individual directors has been conducted. procedures and resources available to ensure that every Director is supplied. the authority delegated to it by the Board. with precise and concise information in a form and of a quality appropriate to effectively enable/ discharge his duties. that the Board feels. Evaluation of Performance of Board of Directors. Efforts should be made to ensure that every director has the ability to understand basic financial statements and information and related documents/papers. in a timely manner. In order to safeguard shareholders' investment and the company's assets. D. Risk Management i. The Directors should be given substantial time to study the data and contribute effectively to Board discussions. The Board should also affirm and disclose in its report to members that it has put in place critical risk management framework across the company. RESPONSIBILITIES OF THE BOARD5 A. The disclosure should also include a statement of those elements of risk. The Board. The companies should ensure that directors are inducted through a suitable familiarization process covering. E.v. inter-alia. including financial. their roles. and what it has done for the year under review to the shareholders in the Annual Report. Committees thereof and of Individual Directors The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. Board to place Systems to ensure Compliance with Laws i. Enabling Quality Decision making The Board should ensure that there are systems.
iii. there should be attached an “Impact Analysis on Minority Shareholders” proactively stating if the agenda item has any impact on the rights of minority shareholders. Audit Committee – Constitution The companies should have at least a three-member Audit Committee. The Audit Committee should have the power to – • • ii.Role and Responsibilities
i. internal audit function and risk make recommendations in relation to the appointment. and
The Audit Committee should also have the facility of separate discussions with both internal and external auditors as well as the management.
For every agenda item at the Board meeting. The Independent Directors should discuss such Impact Analysis and offer their comments which should be suitably recorded. have obtain professional advice from external sources. audit or accounts. The Chairman of such Committee should be an Independent Director. with Independent Directors constituting the majority. review the company's internal financial controls. III. B. reappointment and removal of
management systems. have independent back office support and other resources from the company. AUDITORS 111 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.ii. A statement in a prescribed/structured format giving details about all related party transactions taken place in a particular year should be included in the Board's report for that year for disclosure to various stake holders. C.
The Audit Committee should have the responsibility to – • • • monitor the integrity of the financial statements of the company. ii.
IV. All the members of audit committee should have knowledge of financial management.
The Directors' Responsibility Statement should also include a statement that proper systems are in place to ensure compliance of all laws applicable to the company. The Audit Committee should also monitor and approve all Related Party Transactions including any modification/amendment in any such transaction. • review and monitor the external auditor's independence and objectivity and the effectiveness of the audit process.
iii. Audit Committee . Audit Committee – Enabling Powers: i. It should follow the “comply or explain” principle. the external auditor and to approve the remuneration and terms of engagement of the external auditor. AUDIT COMMITTEE OF BOARD A. access to information contained in the records of the company.
iii. strengths and weaknesses. Rotation of Audit Partners and Firms i. Appointment of Internal Auditor 112 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
D. Need for clarity on information to be sought by auditor and/or provided by the company to him/it i. subsidiaries and associated companies or network or group entities has not/have not undertaken any prohibited non-audit assignments for the company and are independent vis-à-vis the client company. ii.
A cooling off period of three years should elapse before a partner can resume the same audit assignment. In any case the auditor concerned should be under an obligation to certify whether he had obtained all the information he sought from the company or not. the Audit Committee should: • • • discuss the annual work programme and the depth and detailing of the audit plan to be examine and review the documentation and the certificate for proof of independence of recommend to the Board. if any. Certificate of Independence i. either the appointment/re-appointment or undertaken by the auditor. ii. there should be clarity between company management and auditors on the nature and amount of information/documents/ records etc and periodicity/frequency for supply/obtaining such information/ documents/ records etc. Every company should obtain a certificate from the auditor certifying his/its independence and arm's length relationship with the client company. with the auditor. With a view to ensure proper and accountable audit. Audit partner . The Audit Committee should have regard to the profile of the audit firm.to be rotated once every five years.A. the company may adopt a policy of rotation of auditors which may be as under:• • ii. This period should be five years for the firm. To discharge its duty. E. B. of the audit firm and other related aspects. with reasons. Appointment of Auditors i. C. ii. In the latter case. and removal of the statutory auditor. The Audit Committee of the Board should be the first point of reference regarding the appointment of auditors.to be rotated once every three years Audit firm . The Certificate of Independence should certify that the auditor together with its consulting and specialized services affiliates. he should specifically indicate the effect of such non receipt of information on the financial statements. qualifications and experience of audit partners. In order to maintain independence of auditors with a view to look at an issue (financial or nonfinancial) from a different perspective and to carry out the audit exercise with a fresh outlook. the audit firm. along with the annual audit remuneration.
should not be an employee of the company. or violation of the company's code of conduct or ethics policy. INSTITUTION OF MECHANISM FOR WHISTLE BLOWING i. SECRETARIAL AUDIT Since the Board has the overarching responsibility of ensuring transparent. ethical and responsible governance of the company. The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism. VI.
113 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
.In order to ensure the independence and credibility of the internal audit process. it is important that the Board processes and compliance mechanisms of the company are robust. V. actual or suspected fraud. and also allow direct access to the Chairperson of the Audit Committee in exceptional cases. where appointed. The companies should ensure the institution of a mechanism for employees to report concerns about unethical behavior. To ensure this. the Board may appoint an internal auditor and such auditor. The Board should give its comments on the Secretarial Audit in its report to the shareholders. the companies may get the Secretarial Audit conducted by a competent professional. ii.
including shareholders. employees. customers. inform them of inherent risks and mitigate them where they occur. on an equal and non-discriminatory basis. hygienic and humane and which upholds the dignity of employees. The CSR Policy should normally cover following core elements: 1. corrupt or anti-competitive. 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. 2. 4. society at large etc. Transparency and Accountability. They should develop mechanism to actively engage with all stakeholders. project affected people. Respect for Workers' Rights and Welfare: Companies should provide a workplace environment that is safe. unfair. Respect for Environment: Companies should take measures to check and prevent pollution. They should not engage in business practices that are abusive. Respect for Human Rights: Companies should respect human rights for all and avoid complicity with human rights abuses by them or by third party. suppliers. have an effective grievance redressal system. recycle. which should be an integral part of overall business policy and aligned with its business goals. They should provide all employees with access to training and development of necessary skills for career advancement. Care for all Stakeholders: The companies should respect the interests of. They should uphold the freedom of association and the effective recognition of the right to collective bargaining of labour. Ethical functioning: Their governance systems should be underpinned by Ethics. The policy should be framed with the participation of various level executives and should be approved by the Board. 3. 5. manage and reduce waste. 6. should manage natural resources in a sustainable manner and ensure optimal use of resources like land and water. should proactively respond to the challenges of climate change by adopting cleaner production methods.Annexure-III CORPORATE SOCIAL RESPONISIBILITY VOLUNTARY GUIDELINES ISSUED BY MINISTRY OF CORPORATE AFFAIRS
Fundamental Principle Core Elements: Each business entity should formulate a CSR policy to guide its strategic planning and provide a roadmap for its CSR initiatives. promoting efficient use of energy and environment friendly technologies. Activities for Social and Inclusive Development: 114 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
. and be responsive towards all stakeholders. and create value for all of them.
This would help companies to improve on their CSR strategies and effectively project the image of being socially responsible. The companies should disseminate information on CSR policy. annual reports. Companies may partner with local authorities. These could include: education. cost of planned CSR activities or any other suitable
engage with well established and recognized programmes / platforms which encourage responsible business practices and CSR activities. organizational mechanism and responsibilities. setting measurable physical targets with timeframe. 2. parameter. Independent evaluation may also be undertaken for selected projects/activities from time to time. skill building for livelihood of people.. particularly in the vicinity of their operations. 4. time schedules and monitoring. The CSR policy of the business entity should provide for an implementation strategy which should include identification of projects/activities. activities and progress in
a structured manner to all their stakeholders and the public at large through their website.Depending upon their core competency and business interest. and other communication media. business associations and civil society/nongovernment organizations.
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. 3. They may evolve a system of need assessment and impact assessment while undertaking CSR activities in a particular area. particularly targeting at disadvantaged sections of society. health. cultural and social welfare etc. To share experiences and network with other organizations the company should Companies should allocate specific amount in their budgets for CSR activities. They may influence the supply chain for CSR initiative and motivate employees for voluntary effort for social development. This
amount may be related to profits after tax. Implementation Guidance: 1. companies should undertake activities for economic and social development of communities and geographical areas.