CONTENTS

PART-I
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

PART-II
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

Executive Summary
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.

3 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

but is difficult to observe the separation of ownership and the management in case of small to medium Companies. executives and staff. 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. which lead to good brand value of the company. Emphasis should be placed on increased transparency and disclosure of company’s policies and strategies. The compliance requirements for CG & CSR are different for different types of companies.Good corporate governance is basically about making better decisions for the long term health of the company. Though. there must be an active internal conversation between the board. whether private or public. boycotts and regulation. 4 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . To implement CG & CSR. where the company is likely to be benefited from fewer disruptions to its business from strikes. a company is a separate legal entity different from its owners. where risk of the stack holders is limited.

customs. objectivity. plus a healthy board culture. with a strong emphasis on shareholders' welfare. administered or controlled. Definition Corporate Governance as 'an internal system encompassing policies. There are yet other aspects to the corporate governance subject. and the board of directors. policies. 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.CORPORATE GOVERNANCE INTRODUCTION Corporate governance is the set of processes. which serves the needs of shareholders and other stakeholders. and institutions affecting the way a corporation (or company) is directed. management. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency. 5 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Corporate governance is a multi-faceted subject. suppliers. creditors. such as the stakeholder view and the corporate governance models around the world. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation. laws. customers. by directing and controlling management activities with good business savvy. Other stakeholders include employees. regulators. processes and people. The principal stakeholders are the shareholders. which safeguards policies and processes'. and the community at large.

i. See also Corporate Social Entrepreneurship regarding employees who are driven by their sense of integrity (moral conscience) and duty to society. and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law. state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights. 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. “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. structural) perspective. Since that time.” HISTORY . the rights of individual owners and shareholders have become increasingly derivative and dissipated.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. and because the US's wealth has been increasingly securitized into various corporate entities and institutions.UNITED STATES In the 19th century. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms. to make corporate governance more efficient.e. Corporate Governance is viewed as business ethics and a moral duty. about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. 6 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . It is about commitment to values.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution.

S. by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. as well as lesser corporate debacles. In the first half of the 1990s. broad efforts to reform corporate governance have been driven. South Korea. Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. the issue of corporate governance in the U. Since the late 1970’s. by the unrestrained issuance of stock options. corporate governance has been the subject of significant debate in the U.g. therefore. In 1997. In the early 2000s. Tyco. wealth. Over the past three decades. Kodak. and Gardiner C. Global Crossing. Edwin Dodd. Indonesia. the East Asian Financial Crisis saw the economies of Thailand.: IBM. AOL. Arthur Andersen. in part.g.. not infrequently back dated). 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. Honeywell) by their boards. the massive bankruptcies (and criminal malfeasance) of Enron and WorldCom.In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle. Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today. such as Adelphia Communications. Berle and Means' monograph "The Modern Corporation and Private Property" (1932. Means pondered on the changing role of the modern corporation in society. The California Public Employees' Retirement System led a wave of institutional shareholder activism (something only very rarely seen before). Bold. received considerable press attention due to the wave of CEO dismissals (e. 7 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . corporate directors’ duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners. led to increased shareholder and governmental interest in corporate governance.S. and around the globe. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.

• The message for audit committees is: Uphold your responsibility for ensuring that the company’s internal and external audit processes are rigorous and effective. 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. This message is applicable to the public and private companies alike. including imprisonment. 8 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Nevertheless. It has been much debated and there are very mild protests in some quarters. will result in fines and criminal penalties. functions and activities. • The message for CEOs. important extracts from the BIS review 2003. Although internal auditors are not specifically mentioned in the Sarbanes-Oxley Act. This requires meaningful certifications. CFOs. codes of ethics. processes.Recent Developments in USA: History continues to tick and Sarbanes-Oxley Act of the US was a serious wakeup call. • The message for internal auditors is: You are uniquely positioned within the company to ensure that its corporate governance. and conduct of insiders that. 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. operations. • The message for external auditors is: Focus your efforts solely on auditing financial statements and leave the add-on services to other consultants. they have within their purview of internal control the responsibility to examine and evaluate all of an entity’s systems. if violated. financial reporting and disclosure controls. and the senior management is: Uphold your responsibility to maintain effective financial reporting and disclosure controls and adhere to high ethical standards. and risk management practices are functioning effectively.

Thus. as there are threats of fines and imprisonment. We all know that the independent Directors apart from receiving Director’s remuneration do not have any pecuniary relationship or 9 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . 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. However. which after a while become ritualistic. the role of the internal auditor has substantially got escalated and the external auditor perhaps took a back seat. 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. It would be good to be associated with the framing of the robust audit programme and the company’s disclosure control framework. HISTORY . In most Indian companies and the CIIs studies of 1999 chaired by Mr. we would like to turn to Indian situation. It is true that Audit Committees. The role of a company with a combination of Executive and Non-Executive Directors with at least 50% comprising non-executive directors is important. Some of the provisions in the Act are quite draconian particularly one would be the internal auditor of publicly traded financial services company. misfeasance and malfeasance of staggering proportions. call for tough Regulatory responses like the above Act and related rules introduced and interpreted by Securities and Exchange Commission in USA. By and large we have followed the Cadbury model. 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. 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. Managing Committees and Remuneration Committees have all come into existence. If there are different sections of companies. Auditors failing in their duties.INDIA: Next. There is one risk to merely lean heavily on the certification. All of these have to be in the public disclosure domain of the reports but outside the financial statements. Kumar Mangalam Birla was a landmark document with 25 recommendations. 19 of them are ‘mandatory’. Likewise. which offer turn-key management consultation. Complex collapses. 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.

At independence. There is sub-committee of the Board. 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. Corporate Governance in India The history of the development of Indian corporate laws has been marked by interesting contrasts. perhaps is missing in the Indian situation at the present moment is the equivalent legislation. There is urgency to ensure against controlling of companies in the group by a group of people who are not direct investors. four functioning stock markets (predating the Tokyo Stock Exchange) with clearly defined rules governing listing. inline with the Sarbanes-Oxley Act although. The Institute of Chartered Accountants of India have set up quite rigid Accounting Standards to be followed which have progressively tightened compliances. 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 10 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . India emerged far better endowed than most other colonies. 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. Publication of quarterly or half yearly results of the companies after What being vetted by the Audit Committee is now a well established practice. the dust has not settled down on the subject. India inherited one of the world’s poorest economies but one which had a factory sector accounting for a tenth of the national product.transactions with the company. a well-developed equity culture if only among the urban rich. 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. which also looks at the shareholders’ grievances and files its compliances to the stock exchange. 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. In terms of corporate laws and financial system. and a banking system replete with welldeveloped lending norms and recovery procedures. therefore. trading and settlements.

Along with the government owned mutual fund. As soon as a company is registered with the BIFR it wins immediate protection from the creditors’ claims for at least four years. Their nominee directors routinely served as rubber-stamps of the management of the day. 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. Frequently they bled the company with impunity. siphoning off funds with the DFI nominee directors mute spectators in their boards. In the absence of a developed stock market. protection and widespread red-tape that bred corruption and stilted the growth of the corporate sector. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision. In this respect. the three all-India development finance institutions (DFIs) – the Industrial Finance Corporation of India. The situation grew from bad to worse in the following decades and corruption. Borrowers therefore routinely recouped their investment in a short period and then had little incentive to either repay the loans or run the business.licensing. promoters of businesses in India could actually enjoy managerial control with very little equity investment of their own. they also held large blocks of shares in the companies they lent to and invariably had representations in their boards. This sordid but increasingly familiar process usually continued till the company’s net worth was completely eroded. nepotism and inefficiency became the hallmarks of the Indian corporate sector. Unfortunately. 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. after which period the delay has roughly doubled. 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). 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 Unit Trust of India. This stage would come after the company has defaulted on its loan obligations for a while. With their support. Very few companies have emerged successfully from the BIFR and even for those that 11 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Exorbitant tax rates encouraged creative accounting practices and complicated emolument structures to beat the system.

Given this situation. the boards of directors have largely functioned as rubber stamps of the management. 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. who could and should have played a particularly important role. Protection of creditors’ rights has therefore existed only on paper in India. the legal process takes over 10 years on average. but non-compliance was neither rare nor acted upon. Listing requirements of exchanges enforced some transparency. The nominee directors from the DFIs. While the Companies Act provides clear instructions for maintaining and updating share registers.needed to be liquidated. All in all therefore. 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. Sometimes non-voting preferential shares have been used by promoters to channel funds and deprive minority shareholders of their dues. Boards of directors have been largely ineffective in India in monitoring the actions of management. it is hardly surprising that banks. For most of the post-Independence era the Indian equity markets were not liquid or sophisticated enough to exert effective control over the companies. in reality minority shareholders have often suffered from irregularities in share transfers and registrations – deliberate or unintentional. minority shareholders and creditors in India remained effectively unprotected in spite of a plethora of laws in the books. They are routinely packed with friends and allies of the promoters and managers. by which time the assets of the company are practically worthless. have usually been incompetent or unwilling to step up to the act. Consequently. The Institute of Chartered Accountants in India has not been known to take action against erring auditors. Changes since liberalization 12 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . 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. in flagrant violation of the spirit of corporate law. flush with depositors’ funds routinely decide to lend only to blue chip companies and park their funds in government securities.

it has played a crucial role in establishing the basic minimum ground rules of corporate conduct in the country. An outline provided by the CII was given concrete shape in the Birla Committee report of SEBI. The Narayana Murthy committee’s definition is stricter. The SEBI committee recommendations have had the maximum impact on changing the corporate governance situation in India. One of the first among such endeavors was the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. 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. SEBI implemented the recommendations of 13 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Established primarily to regulate and monitor stock trading. 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. ¨ Independent directors defined separately within each code. Table 1 provides a comparative view of the recommendations of these important efforts at improving corporate governance in India. 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.The years since liberalization have witnessed wide-ranging changes in both laws and regulations driving corporate governance as well as general consciousness about it. 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. The Advisory Group on Corporate Governance of RBI’s Standing Committee on International Financial Standards and Codes also submitted its own recommendations in 2001. however. Concerns about corporate governance in India were. The committee was formed in 1996 and submitted its code in April 1998. 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.

and all newly listed companies. to companies with a paid up capital of Rs. 2003. to other listed companies with a paid up capital of over Rs. The Narayana Murthy committee worked on further refining the rules. on March 31. 2002. 60 50 % of Companies to which Applicable C olumn 1 40 30 20 10 Remuneration Committee 0 Report on Corporate Governance Management Audit Committee Shareholder's Greivance Committee Board of Directors Board Procedure Areas of Companies 14 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal No Response Shareholders .the Birla Committee through the enactment of Clause 49 of the Listing Agreements. 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. 25 crore at any time in the past five years. They were applied to companies in the BSE 200 and S&P C&X Nifty indices. paid much-needed attention to the subject of share transfers which is the Achilles’ heel of shareholders’ right in India. however. 2001. 3 crore on March 31. as of March 31. 10 crore or with a net worth of Rs. The Birla Committee.

Consequently. Besides in the area of corporate governance. Clearly much more needs to be accomplished in the area of compliance. 15 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .Fig shows the frequency of compliance of companies to the different aspects of the corporate governance regulation. developing a positive culture and atmosphere of corporate governance is essential in obtaining the desired goals. the spirit of the laws and principles is much more important than the letter. Corporate governance norms should not become just another legal item to be checked off by managers at the time of filing regulatory papers.

It is their responsibility to endorse the organization’s strategy. Other stakeholders who take part include financial institutions. whether direct or indirect. employees. Partly as a result of this separation between the two parties. With the significant increase in equity holdings of investors. In corporations. develop directional policy. human. in the effective performance of the organization. The Company Secretary. is a high ranking professional who is trained to uphold the highest standards of corporate governance. shareholders and Auditors). compliance and administration. Directors. the board of directors. 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). supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. benefits and reputation. there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. All parties to corporate governance have an interest. creditors. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. effective operations. the shareholder delegates decision rights to the manager to act in the principal's best interests. management. workers and management receive salaries. through providing financial capital and trust that they will receive a fair share of the 16 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . customers and the community at large.g. A board of directors often plays a key role in corporate governance. appoint. a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. the Chief Executive Officer. suppliers receive compensation for their goods or services. while shareholders receive capital return. A key factor is an individual's decision to participate in an organization e.PARTIES TO CORPORATE GOVERNANCE Parties involved in corporate governance include the regulatory body (e.g. Customers receive goods and services. In return these individuals provide value in the form of natural. suppliers. social and other forms of capital.

worldwide. who often had a vested. who usually had an emotional as well as monetary investment in the company (think Ford). of which there are many). Nowadays. pension 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). Unfortunately. However this growth occurred primarily by way of individuals turning over their funds to 'professionals' to manage. which are now almost all owned by large institutions. If some parties are receiving more than their fair return then participants may choose not to continue participating leading to organizational collapse. they will simply sell out their interest. The Board is now mostly chosen 17 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . markets have become largely institutionalized: buyers and sellers are largely institutions (e. mutual funds. 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. and the Board diligently kept an eye on the company and its principal executives (they usually hired and fired the President. The Board of Directors of large corporations used to be chosen by the principal shareholders. banks. and other financial institutions). exchange-traded funds. such as wealthy businessmen or families. other investor groups. buyers and sellers of corporation stocks were individual investors. there has been a concurrent lapse in the oversight of large corporations. hedge funds.g. 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. Over time. insurance companies. brokers.organizational returns. 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. personal and emotional interest in the corporations whose shares they owned. such as in mutual funds In this way.. Role Of Institutional Investors Many years ago. or Chief Executive Officer— CEO).

or the largest investment management firm for corporations. Since the marked rise in the use of Internet transactions from the 1990s. 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. Korean chaebol 'groups') .) has soared. State Street Corp. Finally. But. the largest pools of invested money (such as the mutual fund 'Vanguard 500'. based on the idea that this strategy will largely eliminate individual company’s financial or other risk and. 18 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Since the (institutional) shareholders rarely object. therefore. institutional investors support shareholder resolutions on such matters as executive pay and anti-takeover.. often still by large individual investors. 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). the interests of most investors are now increasingly rarely tied to the fortunes of individual corporations.g. aka. etc. exchange-traded funds (ETFs). and may be made up primarily of their friends and associates. such as officers of the corporation or business colleagues. Occasionally. So. these investors have even less interest in a particular company's governance. whereas stock in the USA or the UK and Europe are much more broadly owned. but rarely.by the President/CEO. Stock market index options . Even as the purchase of individual shares in any one corporation by individual investors diminishes. "poison pill" measures. the ownership of stocks in markets around the world varies. the sale of derivatives (e. 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. for example.) are designed simply to invest in a very large number of different companies with sufficient liquidity.

19 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. openness. It is important to understand. • Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations. but it is also a necessary element in risk management and avoiding lawsuits. • Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. though. • 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. In particular. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. performance orientation. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. 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. responsibility and accountability. mutual respect. senior executives should conduct themselves honestly and ethically. There are issues about the appropriate mix of executive and non-executive directors. especially concerning actual or apparent conflicts of interest. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. 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. and commitment to the organization. trust and integrity. and disclosure in financial reports.PRINCIPLES OF CORPORATE GOVERNANCE Key elements of good corporate governance principles include honesty.

Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear. • 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.these should be constantly evolving due to 20 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . For quite some time it was confined only to corporate management. The quantity. 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 audits other senior executives • Nevertheless "corporate governance. for it must include a fair. many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries. and the commitment to run a transparent organization. the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment). factual information. It is something much broader. written objectives.Because of this." despite some feeble attempts from various quarters. Corporate governance must go well beyond law. The Ministry of Corporate Affairs has issued Corporate Governance Guidelines (Annexed as Annexure-II). That is not so. quality and frequency of financial and managerial disclosure. efficient and transparent administration and strive to meet certain well defined. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. remains an ambiguous and often misunderstood phrase.

Perpetuation for its own sake may be counterproductive. For example. Examples include: • Monitoring by the board of directors: The board of directors. an independent third party (the external auditor) attests the accuracy of information provided by management to investors. they may not always result in more effective corporate governance and may not increase performance. a former member of the General Motors board of directors. therefore. to monitor managers' behavior. It could be argued. Moreover. John G. 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. Regular board meetings allow potential problems to be identified. An ideal control system should regulate both motivation and ability. That responsibility cannot be relegated to management. discussed and avoided. with its legal authority to hire. • Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors.interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector. fire and compensate top management.[7] Different board structures are optimal for different firms. wrote: "The Board is responsible for the successful perpetuation of the corporation. MECHANISMS AND CONTROLS Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection." However it should be noted that a corporation should cease to exist if that is in the best interests of its stakeholders. Smale. Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. that executive directors look beyond the financial criteria. audit 21 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . ex ante. safeguards invested capital. Whilst non-executive directors are thought to be more independent. the ability of the board to monitor the firm's executives is a function of its access to information.

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


• • • •

statements)

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

Weakness

Instability

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

research into the relationship between specific corporate governance controls and some definitions of firm performance has been mixed and often weak. Others have found a negative relationship between the proportion of external directors and profitability. from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco.CORPORATE GOVERNANCE AND FIRM PERFORMANCE In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002. who had no management ties. It is unlikely that board composition has a direct impact on profitability. Remuneration/Compensation 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. whilst the 'least admired' firms returned 80%. 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. Board composition Some researchers have found support for the relationship between frequency of meetings and profitability. found that those "most admired" had an average return of 125%. McKinsey found that 80% of the respondents would pay a premium for well-governed companies. 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. undertook formal evaluation of its directors. The following examples are illustrative. On the other hand. while others found no relationship between external board membership and profitability. The size of the premium varied by market. In a recent paper Bhagat and Black found that companies with more independent boards are not more profitable than other companies. Antunovich et al. one measure of firm performance. Egypt and Russia) Other studies have linked broad perceptions of the quality of companies to superior share price performance.

in particular. Gumport issued in 2006. 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. and external and internal monitoring devices may be more effective for some than for others. use of options faced various criticisms. Not all firms experience the same levels of agency conflict. Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares. and less interested in the welfare of their shareholders.S. 26 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .S. The results suggest that increases in ownership above 20% cause management to become more entrenched. while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. in part. However. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. 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. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. These authors argued that. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. performance of the company. Even before the negative influence on public opinion caused by the 2006 backdating scandal. Numerous authorities (including U. corporate stock buybacks for U.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. rather than the short-term. Low average levels of pay-performance alignment do not necessarily imply that this form of governance control is inefficient.

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. While corporate practices in the US companies came under attack. the telecom behemoth.A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed. it appeared that the problem was far more widespread. Recent research has established that financial development is largely dependent on investor protection in a country – de jure and de facto. the issue has always been central to finance and economics. Boards of directors have frequently been silent spectators with the DFI nominee directors unable or unwilling to carry out their monitoring functions. Worse. shocked the business world with both the scale and age of their unethical and illegal operations. serious efforts have been directed at overhauling the system with the SEBI instituting the Clause 49 of the Listing Agreements dealing with corporate governance. the Houston. Since liberalization. Concentrated ownership of shares. pyramiding and tunneling of funds among group companies mark the Indian corporate landscape. 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. they seemed to indicate only the tip of a dangerous iceberg. 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. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc. however. With the legacy of the English legal system. Enron. The issue is particularly important for developing countries since it is central to financial and economic development.. and WorldCom. Texas based energy giant. revealed significant and deep-rooted 27 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Corporate governance of Indian banks is also undergoing a process of change with a move towards more market-based governance.

There are several channels through which the causality works. Adam Smith. Even the prestigious New York Stock Exchange had to remove its director. 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. Good corporate governance also lowers the cost of capital by reducing risk and creates higher firm valuation once again boosting real investments. have an unmistakably positive effect on economic growth and poverty reduction. Corporate governance has been a central issue in developing countries long before the recent spate of corporate scandals in advanced economies made headlines. as well as higher growth and employment. Indeed corporate governance and economic development are intrinsically linked. of course. Effective corporate governance systems promote the development of strong financial systems – irrespective of whether they are largely bank-based or market-based – which. Effective corporate governance enhances access to external financing by firms. been an important field of query within the finance discipline for decades. There is a 28 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Corporate governance has. 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. in turn.problems in their corporate governance. It was clear that something was amiss in the area of corporate governance all over the world. Researchers in finance have actively investigated the topic for at least a quarter century1 and the father of modern economics. 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. Poor corporate governance also hinders the creation and development of new firms. himself had recognized the problem over two centuries ago. amidst public outcry over excessive compensation. leading to greater investment. However. Dick Grasso. As for equity financing. 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.

and a generally high level of corruption. All these features make corporate governance a particularly important issue in India. a history of managing agency system. In addition. Good corporate governance can significantly reduce the risk of nation-wide financial crises. good corporate governance can remove mistrust between different stakeholders.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. a dominance of family firms. Such financial crises have massive economic and social costs and can set a country several years back in its path to development. Managers enjoy actual control of business and may not serve in the best interests of the shareholders. 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. 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. There is a strong inverse relationship between the quality of corporate governance and currency depreciation. Effective corporate governance mechanisms ensure better resource allocation and management raising the return to capital. 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. Finally. These potential problems of corporate governance are universal. 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. reduce legal costs and improve social and labor relationships and external economies like environmental protection. Indeed poor transparency and corporate governance norms are believed to be the key reasons behind the Asian Crisis of 1997.

the efficient market hypothesis (EMH) asserts that financial markets are efficient). be corrected by the working of the external auditing process. • Monitoring costs: A barrier to shareholders using good information is the cost of processing it. it can involve non-disclosure of information. criteria for recognition. This should. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. the 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. which suggests that the small shareholder will free ride on the judgements of larger professional investors. In the extreme. Accountants and auditors are the primary providers of information to capital market participants. especially to a small shareholder. • Role of the Accountant & Auditors: Financial reporting is a crucial element necessary for the corporate governance system to function effectively. One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. 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 .SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE • Demand for information: In order to influence the directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. and even the definition of the accounting entity. Current accounting practice allows a degree of choice of method in determining the method of measurement. and rely on auditors' competence. ideally. • Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations. The traditional answer to this problem is the efficient market hypothesis (in finance.

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. views inevitably led to the client prevailing. The Enron collapse is an example of misleading financial reporting. 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. 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 . is as follows. 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 numerous shareholders who contribute to the capital of the company are the actual owners of business. However. to select and dismiss accounting firms contradicts the concept of an independent auditor. The power of the corporate client to initiate and terminate management consulting services and. or if the informed user is unable to exercise a monitoring role due to high costs (see Systemic problems of corporate governance above). The main challenge comes from the fact that such contracts are necessarily “incomplete”. 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. In discussions of accounting practices with Arthur Andersen. appoints a team of managers who actually handle the day-to-day functioning of the company and report periodically to the Board. However. more fundamentally. the third party was an entity in which Enron had a substantial economic stake. CENTRAL ISSUES IN CORPORATE GOVERNANCE The basic power structure of the joint-stock company form of business. The Board. Enron concealed huge losses by creating illusions that a third party was contractually obliged to pay the amount of any losses.client pressure to appease management. the partner in charge of auditing. Similar provisions are in place under clause 49 of SEBI Act in India. in turn. in principle. Even if this power pattern held in reality.

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. Consequently the supervisory role of the Board is often severely compromised and the management. the company would become a takeover target. The list of possible situations is infinitely long. In real life. can potentially use corporate resources to further their own self-interests rather than the interests of the shareholders. so that the management can be held for violation of such a contract in the event it does something else under the circumstances. 32 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . the Managing Director in British-style organizations) functions with negligible accountability. 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. It is thus the fear of a takeover rather than shareholder action that is supposed to keep the management honest and on its toes. If and when the acquisition actually happens. Because of this “incomplete contracts” situation. As this would drive down the share price. 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 acquiring company would get rid of the existing management.business situation. who really has the keys to the business. Clearly the former does not have the expertise or the inclination to run the business in the situations unspecified in the contract. 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. In companies with highly dispersed ownership. The efficient limits to these powers constitute much of the subject of corporate governance. The underlying premise is that shareholders dissatisfied with a particular management would simply dispose of their shares in the company. On his part the CEO frequently packs the board with his friends and allies who rarely differ with him. so these residual powers must go to management. the manager (the CEO in the American setting. some “residual powers” over the funds of the company must be vested with either the financiers or the management. no contract can be written between representatives of shareholders and the management that specifies the right course of action in every situation. Consequently. 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.

This last refers to the use that managers put the retained earnings of the company. even when they are the majority shareholders. Essentially corporate governance deals with effective safeguarding of the investors’ and creditors’ rights and these rights can be threatened in several other ways. commonly a family. family businesses and corporate groups are common in many countries including India. 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 . however. these features do not exist in developing countries like India.This mechanism. In the absence of profitable investment opportunities. need not coincide with those of the other – minority – shareholders. Their own interests. managerial entrenchment (i. of the issues in corporate governance. 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. or maintain control through the aid of other block holders like financial institutions. More often than not. managerial control of these businesses are often in the hands of a small group of people.e. In addition. These range from Keiretsus in Japan and Chaebols in Korea to the several family business groups in India like Birlas and Ambanis. though perhaps the most important. managers resisting replacement by a superior management) and sub-optimal use of free cash flows. who either own the majority stake. 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. For instance. Box 1 gives a brief comparison of the two systems. transfer pricing. these funds are frequently squandered on questionable empire-building investments and acquisitions when their best use is to be returned to the shareholders. 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. Keeping a professional management in line is only one. that is transacting with privately owned companies at other-than-market rates to siphon off funds. Common areas of management action that may be sub-optimal or contrary to shareholders’ interests (other than outright stealing) involve excessive executive compensation.

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. One way to solve the corporate governance problem is to align the interests of the managers with that of the shareholders. again for Fortune 500 companies) till it begins to rise again. firm value is seen to increase for a while (till ownership reaches about 5% for Fortune 500 companies). German civil law and Scandinavian civil law. has interesting implications for firm value. 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. Such violations of minority shareholders’ rights also comprise an important issue for corporate governance. Legal systems in most countries have their roots in one of the four distinct legal systems the English common law. 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.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. The first index captures the extent to which the written law 34 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . 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. French civil law. however. Managerial ownership of corporate equity. The recent rise in stock and option related compensation for top managers in companies around the world is a reflection of this effort. As managerial ownership (as a percentage of total shares) keeps on rising. The Indian legal system is obviously built on the English common law system. then falling for a while (when the ownership is in the 5%-25% range. A more traditional manifestation of this idea is the fact that family business empires are usually headed by a family member. Legal environment.

e. for instance has a shareholder rights index of 5. English-origin legal systems provide the best protection to shareholder rights.45 companies per million citizens as compared to 27. 0.05). Zimbabwe. Thus.60 for the English-origin countries. highest in the sample examined – equal to that of the USA.33 each. The ratio of the stock market capitalization held by minority shareholders (i. Japan and Switzerland. Canada. India has 7. shareholders other than the three largest shareholders in each company) to the GNP of a country averages a remarkable 0. This difference in protection of shareholders’ rights has led to completely different trajectories of financial and economic developments in the different countries.46. for instance has a score of 4. 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 . The English-origin systems spawn the highest number of firms per capita (on average 35. 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. Colombia. Peru and Philippines. UK.46) and French-origin countries (6. substantially higher than the average ratio for German. Scandinavian and French-origin countries of 0. Indonesia.17 on this index – ranking 41st out of 49 countries studied – ahead only of Nigeria. English-origin countries (6. Germany. Pakistan.68). The Rule of law index is another story.79 and 10. Most advanced countries have very high scores on this index while developing countries typically have low scores. India. Here the Scandinavian-origin countries have an average score of 10 – the maximum possible – followed by the German-origin countries (8.26 for Scandinavian-origin countries and 16. Pakistan and South Africa (all English-origin-law countries) and better than all the other 42 countries in the study including countries like France.21 respectively. Thus it appears that Indian laws provide great protection of shareholders’ rights on paper while the application and enforcement of those laws are lamentable.protected shareholders while the latter reflects to what extent the law is enforced in reality. India.30 and 0. Sri Lanka. They are also the best performers in mobilizing external finance.00 for German and French-origin countries respectively).79 companies per million citizens. Hong Kong.

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

prevalence of

family-owned businesses –

organizational forms

that reduce

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 Board considers itself as a Trustee of its Shareholders and acknowledges its responsibilities towards them for creation and safeguarding their wealth. In accordance with the Tata Steel Group Vision. A very Large. 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 . Tata Steel has ensured corporate governance at all stages of the business process. As a part of its growth strategy. 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.CORPORATE GOVERNANCE IN LARGE COMPANIES: CASE STUDY 1 OF 3: TATA STEEL LIMITED. Every year the company aims to exceed its targets on Employee and customer Satisfaction Indexes and the corporate citizenship index. Tata Steel Group (‘the Group’) aspires to be the global steel industry benchmark for value creation and corporate citizenship. 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 Company emphasises the need for full transparency and accountability in all its transactions. 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. in order to protect the interests of its stakeholders. A Company signing to the Tata Code of Conduct entitles that company to use the brand name. the Company believes in adopting the ‘best practices’ that are followed in the area of Corporate Governance across various geographies. • Audit committee. Listed Company Good Corporate Governance should be an integral part of all processes. It prescribes principles by which all employees are expected to act.

Andrew Roob Dr. T. environment and people.2009 Chairma n 9 3 4 2 3 2 1 Membe r 1 4 6 4 11 6 9 1 3 No. The names and categories of the Directors on the Board. Wadia Mr. The necessary disclosures regarding Committee positions have been made by the Directors. As on 31st March. Suresh Krishna Mr. Tata (Chairman) Mr. across all the companies in which he is a Director. 2008 Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No. James Leng Mr. J. NIEX: Non-Independent Executive 40 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . 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. J. B. The Company is in compliance with clause 49 of the Listing Agreement pertaining to compositions of directors. Philippe Varin Mr. INE: Independent Non-Executive. as also the number of Directorships and Committee Memberships held by them in other companies are given below: Name Categor y No. Subodh Bhargava Mr.03.03. Irani Mr.necessary in order to achieve its goals of value creation. Palia Mr. R. Jacobus Schraven Dr. Ishaat Hussain Dr. Muthyraman NINE INE INE INE INE NINE NINE INE INE INE INE NINE NINE NI EX NINE: Non-Independent Non-Executive.09 Chairma n 3 2 3 3 Membe r 3 2 4 2 5 1 Mr. Nusli N. their attendance at Board Meetings during the year and at the last Annual General Meeting. the Company has 14 Directors on its Board. S. The number of Non-Executive Directors (NEDs) is more than 50% of the total number of Directors. of directorships in other public companies* as on 31. 2. M. 2009. of which 8 Directors are independent. 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. Anthony Hayward Mr. Mukherjee Mr. 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). safety. of committee positions held in other public companies** as on 31. N.

Ten Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. The Company has received confirmations from the Non-Executive Directors regarding compliance of the Code for the year under review. 28th August 2008. Steps are taken by the Company to rectify instances of non-compliance. 18th December 2008.28. 2nd December 2008. The Board periodically reviews compliance reports of all laws applicable to the Company. to whom the Company paid retiring benefits aggregating to Rs. It has also adopted the Tata Code of Conduct for Non-Executive Directors of the Company. the Company did not have any material pecuniary relationship or transactions with Non-Executive Directors. Audit Committee 41 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . The Company has adopted the Tata Code of Conduct for Executive Directors. Board Meetings are held at the Registered Office of the Company. Irani and Dr. During 2008-09. Mukherjee. T. 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. The Agenda along with the explanatory notes are sent in advance to the Directors.35. 31st July 2008. J. Senior Management Personnel and other Executives of the Company. Additional meetings of the Board are held when deemed necessary by the Board. 8th January 2009. Both the Codes are posted on the website of the Company. other than Dr. 24th October 2008. The dates on which the Board Meetings were held were as follows: 8th April 2008.86 lakhs respectively. 3.68 lakhs and Rs. 26th June 2008. Dates for the Board Meetings in the ensuing year are decided well in advance and communicated to the Directors. J. The information as required under Annexure IA to Clause 49 is being made available to the Board. if any. 28th January 2009 and 27th February 2009.

M. The terms of reference of the Audit Committee are broadly as follows: a. internal control systems. Andrew Robb. scope of audit and observations of the Auditors/Internal Auditors. Chartered Accountant Mr. e. Ishaat Hussain Member. 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. Non Executive -doNon Independent.The Company had constituted an Audit Committee in the year 1986. Subhodh Bhargava. Chairman Mr. The Company Secretary acts as the Secretary of the Audit Committee. S. To review the quarterly. 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. The composition of the Audit Committee and the details of meetings attended by the Directors are given below: Names of Members Category No. of meetings attended during the Mr. Palia. To review compliance with internal control systems. Member Independent. Non Executive year 2008-09 8 8 9 Audit Committee meetings are attended by the Group Chief Financial Officer. 1956. The dates on which the said meetings were held were as follows: 42 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . c. Chief (Corporate Audit) and Chief Financial Controller (Corporate) and Representatives of Statutory Auditors. Recommending the appointment of statutory auditors and branch auditors and fixation of their remuneration. Auditors of the Company concerning the accounts of the Company. financial management of the Company. b. Non Executive 6 Independent. Nine Audit Committee Meetings were held during 2008-09. including Statutory & Internal Audit Reports. 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. d. Member Mr.

The Company. 2nd December. Recommend to the Board. 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. The broad terms of reference of the Remuneration Committee are as follows: a. 28th January. has not yet introduced the Employees’ Stock Option Scheme. b. retirement benefits to be paid to the Managing Director and Whole-time Directors under the Retirement Benefit Guidelines adopted by the Board. d. Under the Policy. each employee of the Company has an assured access to the Ethics Counsellor/ Chairman of the Audit Committee. Finalise the perquisites package of the Managing Director and Whole-time Directors within the overall ceiling fixed by the Board. Review the performance of the Managing Director and the Whole-time Directors. 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 . perquisites and commission to be paid to the Company’s Managing Director and Whole-time Directors. however. Remuneration Committee The Company had constituted a Remuneration Committee in the year 1993. 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. 30th July. 2008. after considering the Company’s performance. The Whistle Blower Policy is an extension of the Tata Code of Conduct. actual or suspected fraud or violation of the Company’s Code of Conduct. 29th January 2009 and 26th February 2009. c. 2008. 4. 24th October. 2008. The disclosures reported are addressed in the manner and within the time frames prescribed in the Policy. Recommend to the Board remuneration including salary.8th April. 27th August. 2005. 23rd June 2008. Whistle Blower Policy The Audit Committee at its meeting held on 25th October. 2009. 2008. 2008. The Remuneration Committee also functions as the Compensation Committee as per SEBI guidelines on the Employees’ Stock Option Scheme.

Suresh Krishna. The Company has complied with the non-mandatory requirement of Clause 49 regarding the Remuneration Committee. Remuneration Committee. remuneration package of the industry and c. 1956). 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.000 per meeting to the NEDs for attending the meetings of the Board.5. perquisites and allowances (fixed component) and commission (variable component) to Managing and Whole-time Directors. 2006. Executive Committee of the Board. 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 Non-Executive Directors (NEDs) are paid remuneration by way of Commission and Sitting Fees.20. which are aligned to the Company’s objectives. Audit Committee and Committees constituted by the Board from time to time. The distribution of Commission amongst the NEDs is placed before the Board. In terms of the shareholders’ approval obtained at the AGM held on 5th July. Non executive during the year 2008-09 1 1 Independent. S. N. Member Mr. The Company pays remuneration by way of salary. Palia. R. Salary is paid within the range approved by the Shareholders. 2008. The Company pays sitting fees of Rs. Tata.000 per meeting. Annual 44 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Remuneration Policy The Company while deciding the remuneration package of the senior management members takes into consideration the following items: a. viz.Mr. Chairman Mr. the Company pays to the NEDs sitting fees of Rs. Non executive Non Independent.M. For other meetings. Member Independent. employment scenario b. Non Executive One meeting of the Remuneration Committee was held on 26th June. Investor Grievance Committee and Ethics Committee. 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.

increments effective 1st April each year. Member Independent. the Board has constituted 4 more Committees. Non Executive No. Within the prescribed ceiling. 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. of meetings attended during 2008-09 1 Mr. 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. 1956. 2009. non-receipt of balance sheet and non-receipt of declared dividend. Chairman Category Not Independent. 5. the perquisites package is approved by the Remuneration Committee. viz. The composition of the Investors’ Grievance Committee is given below: Names of Members Mr. Executive Committee of the Board. as recommended by the Remuneration Committee. Shareholders’ Committee An Investors’ Grievance Committee was constituted on 23rd March. The Nomination Committee has been constituted on 18th May. 2000 to specifically look into the redressal of Investors’ complaints like transfer of shares. capital budgets and other major capital schemes. etc. Ishaat Hussain. 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. 45 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . divestments. Non-Executive 1 One meeting of the Investors’ Grievance Committee was held on 31st March. acquisitions. Suresh Krishna. subject to overall ceilings stipulated in Sections 198 and 309 of the Companies Act. Committee of Directors and the Ethics and Compliance Committee. are approved by the Board. The ceiling on perquisites and allowances as a percentage of salary is fixed by the Board. changes in organizational structure and also to periodically review the Company’s business plans and future strategies. 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. the Nomination Committee. to consider new businesses. Committees In addition to the above Committees.

m.m. where last three Annual General Meetings (AGMs) Details of Location Birla Matushri Sabhagar.The Committee of Directors has been constituted to approve of certain routine matters such as Opening and Closing of Bank Accounts of the Company.m.30 p. as amended (the Regulations).30 p. General Body Meetings a) Location and time. 2008 at 3. The Code is based on the principle that Directors. 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. 2006 at 11. 5th July. d) No Extra-Ordinary General Meeting of the shareholders was held during No Postal Ballot was conducted during the year. Officers and other Employees. to appoint proxies to attend general meetings on behalf of the Company etc. 6. 19. 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. Officers and Employees of a Tata Company owe a fiduciary duty to. Date & Time 28th August.00 a. to grant limited Powers of Attorney to the Officers of the Company. proposed for the ensuing Annual General Meeting need to be passed by Postal Special Resolutions passed in previous 3 Annual General Meetings: 7. Disclosures 46 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . among others. 1992. Mumbai 400 020. Ethics and Compliance Committee In accordance with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations. were held: Financial Year 2007-08 2006-07 2005-06 b) c) Ballot. Sir Vithaldas Thackersey Marg. 2007 at 3. 29th August. 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.

There are no materially significant related party transactions which have potential conflict with the interest of the Company at large. The Company has moved towards a regime of unqualified financial statements. 8. No personnel has been denied access to the Ethics Counsellor/Chairman of the Audit Committee. 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. 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. 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. SEBI and other statutory authorities on all matters relating to capital markets during the last three years.i) The Board has received disclosures from key managerial personnel relating to material. No penalties or strictures have been imposed on the Company by the Stock Exchanges. Means of Communication 47 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . ii) The Company has complied with the requirements of the Stock Exchanges. SEBI or other statutory authorities relating to the above. financial and commercial transactions where they and / or their relatives have personal interest. for employees to report concerns about unethical behaviour. 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.

mission. by giving complete financial details. opportunities and threats. Investors can also submit their queries and get feedback through online interactive forms.2009 at 3. time & venue: 27.30 p. Results: The quarterly and annual results along with the Segmental Report are generally published in The Times of India. segment/product wise performance. updates and news.08. Management Discussion & Analysis Report – The MD&A Report forms a part of the Directors’ Report. Company’s Corporate Website – The Company’s website is a comprehensive reference on Tata Steel’s management. shareholding patterns. 19.Half-yearly report: The half-yearly results of the Company are published in the newspapers and posted on the website of the Company. outlook. corporate sustainability. corporate governance. policies. corporate benefits. internal control and systems. The Indian Express. General Shareholder Information AGM: Date.tatasteel. sales network. share transfer agents and frequently asked questions. Birla Matushri Sabhagar. 9. vision. The section on ‘Investor Relations’ serves to inform the shareholders. are discussed in the said report. Free Press Journal. registrars. 2009. Nav Shakti. investor relations. risks and concerns. 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. Loksatta and also displayed on the website of the Company www. Mumbai 400 020 As required under Clause 49 IV(G)(i).com shortly after its submission to the Stock Exchanges. 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. 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 . etc. All matters pertaining to industry structure and developments. information relating to stock exchanges. Sir Vithaldas Thackersey Marg.m.

.Date of Book Closure –Wednesday.2009 Unclaimed Dividend – • All unclaimed/unpaid dividend amounts upto the FY ended 31. 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. July 8. are requested to forward their claims in prescribed Form No. 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. who have not yet encashed their dividend warrant(s) for the said period. Next to Reserve Bank of India CBD.03. 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 . Shareholders. Bandra East.1995 have been transferred to the General Revenue Account of the Central Government. Dalal Street. 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. ‘A’ Wing. 1978 to:Office of Registrar of Companies Central Government Office Bldg. • The unclaimed dividend declared in respect of the FY 2001-02 is in the process of being transferred to IEPF. II to the Companies Unpaid Dividend (Transfer to General Revenue Account of the Central Government) Rules. The Company has paid annual listing fees to each of the above Stock Exchanges for the financial year 2008-09. July 14. 2009 to Tuesday. Mumbai 400 001 National Stock Exchange of India Exchange Plaza. 2nd Floor. Bandra-Kurla Complex. 2009 (both days inclusive) Dividend Payment Date –The dividend warrants will be posted on or after 28.08.

04.00 797.80 584.35 168.94.70 150.12.08. 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.75 166.00 711.95 7.95 6.99 0.85 150.62.065.592.63.969 509 376 376 425 Voting strength % 31-0309 23.44 33.412.0 156.45.35 4.25 648.986 43.35 6.12 247.2009 (%) 31.27.279 223.19 28.20 151.55 5.00 Number of Shareholders 31.95 1.334.42.165 247.2008 (%) 60.96 8 9 42.186.30 15.679 868.00 100.00 Categories of Shareholders – Ordinary Shares Category No. Mutual Funds & Trusts Foreign Institutional Investors Total 857.379 589.07 06.425 239.06 4.522 438.828 691.85. Other information to the shareholders Dividend History for the Last 10 years Financial Year 2007-08 2006-07 2005-06 Dividend Date 29.03.07.40.4 730.166.32 71 0 Individuals Unit Trust of India LIC of India Govt.312.76 2 96.08.82.03.83.55 571.765 438.97.09 4 6 248.98. of Shares) 817.23.417.80 3.09. of Shares) 818.50 5.564 100.96 19.83 13.05 166.943 691.013 740.10 148. & Other PFI Tata Group Companies Companies (Others) Banks.Market Price Data: High.59.95.) (No.787 199.55 160.958.01.38 4.13.03 3.) (Rs.41.20 0.41 33. of Shareholders 31-0331-03-08 09 848.80.05 711.65 160.041 687.38.01 10.53. Low (based on the closing prices) and volume during each month in last financial year.73.83.70 16.20 100.27.) (Rs.195 National Stock Exchange High Low Volume (Rs.24 100.15 4.20 31-03-08 21.20 584.60 3.18.818 85.00 2.63.45 80 8 47.12.42.65 168.40.25 427.584.01 11.515 57 43.65.76.85 3.22.109 223.61.415 32.80 19.347.840 741.49 0.90 .60 645.68 4.45 7.15 6.51.549 5 32.98.8 33.348.25 2.22. of Ordinary Shares held 31-0331-03-2008 2009 175.85 148.41 31.760 1 1 1 1 19 16 16 16 7.883 229.06 50 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal Rate 160% 155% 130% .) (No.30 11. 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 64.978 228.413.56 5.856 922.500 50.32.110 199.08 30.813 869.21 9 730.25 797.58.806 239.30 3.76 0.92.84 142.75 12.48 No.944 589.500 6.86.549 246.14.80 21.20 425.75 571.50 152.10 8.588.23.59 74.539.80 7.02.00 10.94 4.619 679.02.762 Registrar and Transfer Agents: TSR Darashaw Limited are the Registrar and Share Transfer Agents of the Company.65 8.53 3.10 5.95.993.788 922.

02 20.00 30.01 23.2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 28.03 12.06.04 24.99 130% 100% 80% 40% 50% 40% 40% 51 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .07.05 23.07.07.05.07.07.

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. 2008. AKC and Mr. VKS Mr. three in numbers. None of the Directors is disqualified under Section 274. 1 2 3 Membe r Mr. 30th March. i. 2008. is advisable. The Company does not follow any Corporate Governance Philosophy. 23rd December. where possible. Corporate Governance Report as required under Clause 49 of the Listing Agreements is not applicable. No.e. The dates on which the Board Meetings were held were as follows: 30th May. 9th September. (Name changed) is an Unlisted Public Limited Company on which compliance of the Provisions of the Corporate Governance. 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 . The names and designations of the Directors on the Board and their attendance at Board Meetings during the year are given below: S. 2008. VKS is the Chairman & Managing Director of the Company. Five Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. 2008. for F/Y 20082009 Governance Structure ABC Ltd. Mr. 1956. AKC Mr. 2009. Mr. since the company is an Unlisted Company. 16th June.CORPORATE GOVERNANCE IN SMALL COMPANIES: CASE STUDY 2 of 3: CORPORATE GOVERNANCE IN ABC LTD. BP are the other members of the Board.

While all the Directors are stationed at different locations other than Delhi. Board Meetings are shown to be held at the Registered Office of the Company in Delhi. Mr. sometimes even after closing of relevant year and are never communicated to the Directors. Shareholders’ Committee The company is not required to have Shareholders’ Committee. despite of the fact that there is no proof of his presence in Delhi on the Board Meeting Dates. since the company is a closely held Unlisted Public Limited Company. BP. is shown present in all the Board Meetings. the company is not required to have an Audit Committee. Audit Committee Depending upon the size of the company. However. Whistle Blower Policy No Whistle Blower Policy is being observed in the company. Remuneration Policy The company does not follow any Remuneration Policy. Shareholding Pattern 53 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . The remuneration of key managerial personnel is decided by CMD of the company. The Agenda of the Board Meetings are never being sent to the Directors. Remuneration Committee There is a requirement of Remuneration Committee in the company. 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.Dates for the Board Meetings in the ensuing year are decided as per the requirement of the company. solely at his discretion. located at Bangalore. The Director.

00 Hours at the registered office of the Company. General Body Meeting Annual General Meeting for the Year ending 31st March. The Board of the Company should contain a proper balance between Independent & Non Independent Directors. the Chairman & Managing Director of the Company & Mrs. enquiries under different legislations have been initiated against the company. Moreover. No Ordinary Businesses were 54 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . 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.000 1.000 1. VKS.11% 0. SP Mr.02% Working of the Company CMD is solely managing all the day to day working of the Company.02% 0.000 1.000 8. SS Total No of Shares 6. While statutory liabilities of the company.000 1.000 76. VKS. JT Mr. VKS Ms.02% 0. 2009 at 12. Major portion of capital is held by Mr.There are seven member of the Company.00. The other share holders’ have small share in the shareholding of the Company.000 Amount 64. wife of Mr. The Agenda of the AGM along with Annual Report was never sent to the shareholders. No 1 2 3 4 5 6 7 Member’s Name Mr. solely managed by CMD of the Company. The Company is experiencing a One Man Show where all the major decisions of the Company are being taken by CMD of the Company.200 7.600 800 100 100 100 100 65.41.16% 0. AKC Mr. RC Ms.000 Percentage 98. Table showing the Shareholding pattern of the Company S. The funds of the company are being transferred to other group companies. salaries of employees of other group companies are paid from this company. Due to which.02% 0.12. No AGM was actually conducted.65% 1. there is a clear conflict between the Company’s interest and the personal interest of the Managing Director. 2009 was shown to be held on 30th September. JT. Therefore. which leads to default in Corporate Governance. BP Mr. like Service Tax & TDS for F/y 2008-09 are still not fully paid till date.

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. Statutory Compliance Corporate governance also focuses on statutory compliance under different laws. Secretarial Audit Based on the size of the Company.discussed at the meeting. the normal working of the company was disrupted. factual information. 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. Enquiries under different legislations were initiated against the company. However. None of the Special Business is passed in this Annual General Meeting. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Due to which. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all stakeholders have access to clear. the company obtains a Compliance Certificate under Section 383 A of the Companies Act. The Company also incurred expenses towards penalty and interest charges for delay in paying taxes & late filings under Income tax. 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. Discloser and Transparency The Company lacks on the ground of Discloser & transparency as the Company does not have well defined accountability & authority structure. the company is not required to have Secretarial Audit. 55 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . TDS.

• Company’s Corporate Website – The Company’s website is a comprehensive reference on the company’s management. corporate sustainability. • Management Discussion & Analysis Report – The MD&A Report does not form part of the Directors’ Report. etc.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. no information under this clause is mandatory. • Presentation to Institutional Investors or to analysts – Since the company is closely held Public Limited Company. the Company is not required to publish its half-yearly results in the newspapers. risks and concerns. segment / product wise performance. opportunities and threats. vision. 56 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . which is a requirement of Listing Agreement. policies and sales network. outlook. are not discussed in the said report. internal control and systems. General Shareholder Information Since the company is a closely held company. etc. All matters pertaining to industry structure and developments. mission. the company is not required to make any presentation to Institutional Investors.

Mr. the Board of Directors of the company is duly constituted. 10th January. 2008. 2008. Board of Directors The Board of Directors of the Company comprises of three directors. is advisable. 2008. 2009. 2009. None of the Director is disqualified under Section 274. 8th January.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. are the other members of the Board. more than the minimum number of Directors required for the private limited Company as per the Companies Act. 2008. 2008. 2008. 9th March. Mr. Corporate Governance Report as required under Clause 49 of the Listing Agreements is not applicable. where possible. JS Mrs. MKA Mr. 1 2 3 Member Mr. The dates on which the Board Meetings were held were as follows: 31st May. The Company under review is a real estate company. Mr. MKA. JS and Mrs. MKA is the Chairman of the Company. since the company is an Unlisted Company. 2nd June. 20th November. 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 . URA. 29th August. 10th November. The Company does not follow any Corporate Governance Philosophy. 2009. the mother of the Director. No. The names and designations of the Directors on the Board and their attendance at Board Meetings during the year are given below: S. 1956. Nine Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. 31st October. Therefore.

Remuneration Policy The company does not follow any Remuneration Policy. the mother of a Director Mr. Shareholders’ Committee The company is not required to have Shareholders’ Committee. MKA. URA. agenda of the Board meetings are also never communicated to the Directors. Mr. is shown to be present in all the Board Meetings. since the company is a Private Limited Company. Board Meetings are shown to be held randomly at the Registered Office or at corporate office of the Company. Table showing the Shareholding pattern of the Company 58 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Actual Board Meetings are never conducted. the company is not required to have an Audit Committee. MKA. Shareholding Pattern The Authorized Share Capital of the Company as on 31st March. MS. Mr. Audit Committee Depending upon the size of the company. the company is not required to have a Remuneration Committee. Mrs. Whistle Blower Policy No Whistle Blower Policy is being observed in the company. The Board Meeting dates are never decided in advance . The Major Shareholders of the Company are Mr. 2009 is Rupees Five Crores and Paid up Share capital is Rupees Four Crores and seventy Three Lac. The remuneration of key managerial personnel is decided by the Management of the company. who is a house wife & is not involved in business affairs of the company at all. M/s RSSIL. Therefore. There are eleven member of the Company. JS. Remuneration Committee Since the company is a Private Limited Company.Dates for the Board Meetings in the ensuing year are decided according to the statutory requirement for compliance of provisions under different Acts.

000 5. The funds are transferred without deciding terms & conditions for repayment and are interest-free.000 1.000 45. MS is an Architect.000 50. The funds of the company are being regularly transferred to other group companies. MKA Mr.S.00. KK Mr. The company is regular in paying its statutory liabilities.000 11. No 1 2 3 4 5 6 7 8 9 10 11 Member’s Name Mr.000 4. The management is planning to offer a position on the Board of the company in order to have professional competence in the Board.00. in which Mr.75.50. General Body Meeting 59 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .000 1.00. MKA & Mr.000 1. The two Directors Mr. RBA Mrs.000 8. JS are managing the day to day affairs of the company. MS Mr.00.73% 16. However.27% 1.50.48% 23. One of the major Shareholder Mr.00.00 0 Percentage 25.000 Amount 1.17% 2.00.000 60.10. URA Mr. JS are directors.50.00.000 13.30.000 6. 500 crores. DS M/s PI Total No of Shares 12.000 1.16% 1.07.91% 3.50.06% 0.000 4.000 10.75% 1.00. MKA & Mr. For the new project.25% 22. MA Mrs. JS M/s RSSIL Mrs.00. JS Mrs.05.20.000 15. the Company has a huge requirement of funds. 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 5. which is prejudicial to the interests of the company.95% Working of the Company The company is engaged in real estate activities since 2004.000 60.27% 1.00. The existing projects of the company are in completion stage. The Company has commenced a new very prestigious project in Uttaranchal.30.50.000 80.000 55.000 6. 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.000 47.73. The project cost is approx.

1956 from a practising Company Secretary. at the registered office of the Company. However. 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. factual information. Secretarial Audit Based on the size of the Company.M. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all stakeholders have access to clear. Statutory Compliance Corporate governance also focuses on statutory compliance under different laws. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. 2009 at 11. 2009 was shown to be held on July 31. Means of Communication 60 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Ordinary & Special Businesses were passed in this Annual General Meeting without discussion. However. The Company should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. 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. No AGM was actually conducted. the company obtains a Compliance Certificate under Section 383 A of the Companies Act. the company is not required to have Secretarial Audit.Annual General Meeting for the Year ending 31st March. The Agenda of the AGM along with Annual Report was never sent to the shareholders. The company tries to comply with all the statutory laws applicable to the company.00 A. no periodical reviews are conducted to have a check and to meet the statutory compliances.

vision. The website lack any information on corporate governance. the company is not required to make any presentation to Institutional Investors. internal control and systems. mission. the Company is not required to publish its half-yearly results in the newspapers. which is a requirement of Listing Agreement. etc. policies and sales network. outlook. opportunities and threats. no information under this clause is mandatory. corporate sustainability. are not discussed in the said report. 61 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Company’s Corporate Website – The Company’s website is a comprehensive reference on the company’s management. Presentation to Institutional Investors or to analysts – Since the company is a Private Limited Company.Half-yearly report: Since the company is an Private Limited Company. risks and concerns. General Shareholder Information Since the company is a closely held company. segment/product wise performance. Management Discussion & Analysis Report – The MD&A Report does not form part of the Directors’ Report. All matters pertaining to industry structure and developments. etc.

owns the Taj Mahal Hotel Mumbai.. Salute To Shri Ratan Tata Shri Ratan Tata. a 5 star property also belongs to Indian Hotels. which was the target of the terrorists on 26/11/2008.. the chairman of Indian Hotels. Hotel President.. 62 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal ..CORPORATE SOCIAL RESPONSIBILITY What Ratan Tata did for the Mumbai victims.

6. 1600 employees were covered by this facility. Ratan Tata personally visited the families of all the 80 employees who in some manner – either through injury or getting killed – were affected. 3. A psychiatric cell was established in collaboration with Tata Institute of Social Sciences to counsel those who needed such help. 5. They were all accommodated in Hotel President for 3 weeks. Employee outreach centers were opened where all help. 4. 7. 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. 10. 8. sanitation. 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. first aid and counseling was provided. 63 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . The relief and assistance was extended to all those who died at the railway station.A. water. 9. surroundings including the “Pav-Bhaji” vendor and the pan shop owners. the salaries were sent by money order. The thoughts and anxieties going on people’s mind was constantly tracked and where needed psychological help provided. food. Relief and assistance to all those who were injured and killed.The dependents of the employees were flown from outside Mumbai to Mumbai and taken care off in terms of ensuring mental assurance and peace. The Tata Gesture 1. 2. During the time the hotel was closed.

Counselor for life for each person 64 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . 10K per month for all these people for 6 months. All loans and advances were waived off – irrespective of the amount. 16. 14. This was the most trying period in the life of the organisation. b. 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. the police staff. d. 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.In a record time of 20 days. Full Medical facility for the whole family and dependents for rest of their life. 13.Ratan Tata himself asked the families and dependents – as to what they wanted him to do. She was taken to Bombay hospital and several lacs were spent by the Tatas on her to fully recover her. Tata will take responsibility of life education of 46 children of the victims of the terror. 17. Complete responsibility of education of children and dependents – anywhere in the world. 12. 15. Full last salary for life for the family and dependents. Senior managers including Ratan Tata were visiting funeral to funeral over the 3 days that were most horrible.New hand carts were provided to several vendors who lost their carts.The settlement for every deceased member ranged from Rs. Each one of them was provided subsistence allowance of Rs. the pedestrians who had nothing to do with Tatas were covered by compensation. the railway employees. c.11. e.

It is not some training and development that created such behaviour. IISc is one such institute. How was such passion created among the employees? How and why did they behave the way they did? 2. 6. He created several institutions which later became icons of progress. The organisation is clear that it is not something that someone can take credit for. The hotel business was started by Jamshedji Tata when he was insulted in one of the British hotels and not allowed to stay there. He could afford fencing only 400 acres. He was told by the rulers that time that he can acquire land for IISc to the extent he could fence the same. If someone suggests that – everyone laughs. 5. culture and modernity.B. 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 . When the HR function hesitatingly made a very rich proposal to Ratan – he said – do you think we are doing enough? 7. Epilogue 1. 3. The organisation has always been telling that customers and guests are #1 priority 4. with the way Tata culture exists and above all with the situation that prevailed that time. It has to do with the DNA of the organisation.

A growing body of evidence asserts that corporations can do well by doing good. 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. Essentially. Critics argue that CSR distracts from the fundamental economic role of businesses. CSR is the deliberate inclusion of public interest into corporate decision-making. sustainable responsible business (SRB). Planet. is a form of corporate self-regulation integrated into a business model. ethical standards. others argue that it is nothing more than superficial windowdressing. in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate. regardless of legality. stakeholders and all other members of the public sphere. and voluntarily eliminating practices that harm the public sphere. The practice of CSR is subject to much debate and criticism.INTRODUCTION Corporate social responsibility (CSR). These companies are practicing Corporate Social Responsibility (CSR) in a manner that generates significant returns to their businesses. CSR-focused businesses would proactively promote the public interest by encouraging community growth and development. and international norms. short-term profits. Profit. Ideally. CSR policy would function as a built-in. consumers. However. responsible business. Consequently. Furthermore. Corporate Social Responsibility has been redefined throughout the years. or corporate social performance. communities. it essentially is 66 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . business would embrace responsibility for the impact of its activities on the environment. Proponents argue that there is a strong business case for CSR. others yet argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations. also known as corporate responsibility. and the honoring of a triple bottom line: People. self-regulating mechanism whereby business would monitor and ensure its support to law. corporate citizenship. employees.

The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with noneconomic social values. 67 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . descriptive approaches are also taken. social responsibility charters). meaning those on whom an organization's activities have an impact. higher UK road tax for higheremission vehicles). Public sector organizations (the United Nations for example) adhere to the Triple Bottom Line (TBL). Historically. interest in business ethics accelerated dramatically during the 1980s and 1990s. Simultaneously. was used to describe corporate owners beyond shareholders as a result of an influential book by R Freeman in 1984. after many multinational corporations formed. In academia. In the increasingly conscience-focused marketplaces of the 21st century.g. the demand for more ethical business processes and actions (known as ethicism) is increasing. corporations have re-branded their core values in the light of business ethical considerations (e.g. Business ethics can be both a normative and a descriptive discipline. In some cases. both within major corporations and within academia. pressure is applied on industry to improve business ethics through new public initiatives and laws (e. ISO 26000 is the recognized international standard for CSR (currently a Draft International Standard). For example.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. It is widely accepted that CSR adheres to similar principles but with no formal act of legislation. As a corporate practice and a career specialization. the field is primarily normative.g. The UN has developed the Principles for Responsible Investment as guidelines for investing entities. 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. ethics codes. 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. The term stakeholder. although it was seldom abbreviated. BP's "beyond petroleum" environmental tilt).

By acting in a self-interested manner. In the century after Adam Smith. especially in Europe and the United States. However.Corporate Social Responsibility is the way companies manage their businesses to produce an overall positive impact on society through economic. 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. 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. environmental and social actions. the Industrial Revolution contributed to radical change. In the eighteenth century the great economist and philosopher Adam Smith expressed the traditional or classical economic model of business. 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 . but also meet the needs of others. The viewpoint expressed by Adam Smith over 200 years ago still forms the basis for free-market economies in the twenty-first century. The concept of CSR is a relatively new one—the phrase has only been in wide use since the 1960s. In essence. Millions of people obtained jobs that paid more than they had ever made before and the standard of living greatly improved." which. by some definition. while the economic. ethical. 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. In the late nineteenth century many of these individuals believed in and practiced a philosophy that came to be called "Social Darwinism. legal. HISTORY The nature and scope of corporate social responsibility has changed over time. and their founders and owners became some of the richest and most powerful men in the world. in simple form. 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. individuals would produce and deliver the goods and services that would earn them a profit. and discretionary expectations placed on organizations may differ. Large organizations developed and acquired great power.

Many legal mandates were placed on business related to equal employment opportunity. were exploitative of workers. at the same time that many of them were giving away millions of dollars of their own money. consumerism. Furthermore. Based on the general idea that those with great power have great responsibility. Between 1900 and 1960 the business world gradually began to accept additional responsibilities other than making a profit and obeying the law. were enacted to rein in the large corporations and to protect employees. and the environment. product safety. or the larger society. Indeed. not as representatives of their companies. although many of the great tycoons of the late nineteenth century were among the greatest philanthropists of all time. consumers. An associated movement. society began to expect business to voluntarily participate in solving societal problems whether they had caused the problems or not. competitive strategies and did not allow for much concern about the impact of the successful corporation on employees. and society at large. their giving was done as individuals. such as the Sherman Antitrust Act. Laws and regulations. sometimes called the "social gospel.and social policy. and environmentalism affected society's expectations of business. even brutal. This view of corporate social responsibility is the prevailing view in much of the world today. The labor movement also called for greater social responsiveness on the part of business. This type of philosophy justified cutthroat. 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. In the 1960s and 1970s the civil rights movement. INDIAN SCENARIO 69 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . the community. 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. worker safety. the companies that made them rich were practicing business methods that." advocated greater attention to the working class and the poor. by today's standards at least. Around the beginning of the twentieth century a backlash against the large corporations began to gain momentum. Thus. Big business was criticized as being too powerful and for practicing antisocial and anticompetitive practices.

The adult literacy software has been a significant factor in reducing illiteracy in remote communities. TNS Automotive. Bharat Petroleum and Maruti Udyog came on top with 134 points each. Unilever is using micro enterprises to strategically augment the penetration of consumer products in rural markets. due to the efforts of organizations such as the Tata Group. health. India has consistently ranked among the top three along with Singapore and Hong Kong. The findings revealed that over 90 per cent of all major Indian organizations surveyed were involved in CSR initiatives. India has been ranked second in global corporate social responsibility. Ministry of Corporate Affairs has issued Corporate Social responsibility Guidelines (Annexed as Annexure-III) In June 2008. which ranks the top 10 Asian countries on corporate governance parameters. and made major efforts to improve the livelihood standards of rural communities. Corporate companies like ITC have made farmer development a vital part of its business strategy. the private sector was more involved in CSR activities than the public and government sectors. for the last eight years. The study was based on a public goodwill 70 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . India was aware of corporate social responsibility (CSR). 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. The leading areas that corporations were involved in were livelihood promotion. In fact. In a survey carried out by the Asian Governance Association.Even much before the issue became a global concern. the holding group of the Tata Group is today owned by a trust). State-owned Bharat Petroleum and Maruti Udyog were ranked as the best companies in India. Most of CSR ventures were done as internal projects while a small proportion were as direct financial support to voluntary organizations or communities. environment. (Around 66 per cent of Tata Sons. education. IT companies like TCS and Wipro have developed software to help teachers and children in schools across India to further the cause of education. followed by Tata Motors (133) and Hero Honda (131). and women's empowerment. In another study undertaken by automotive research company. Banks and insurance companies are targeting migrant laborers and street vendors to help them through microcredits and related schemes.

Indian companies have made little progress in reporting development projects. especially as it helps companies spread their brand name. The effort is significant because it brings together a wide range of Indian companies to share ideas on innovating sustainable programmes.index and India received 119 points in the index against a global average of 100. 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. Prime Minister Manmohan Singh said "Corporate social responsibility must not be defined by tax planning strategies alone. such as labour rights and fighting corruption. Anil Dhirubhai Ambani Group and media company Bennett. Addressing business leaders in May last year. The network alliance stems from the first sustainability summit that was organized in January by the Associated Chambers of Commerce and Industry of India. Rather. Thailand was at the top slot with 124 points. Coleman and Co. Several foundations run by corporate houses plan to devise a common strategy to ensure transparency in their social and community development operations. such as tracking spending in and progress of such projects in their annual reports. which factors the needs of the community and the regions in which a corporate entity functions. it should be defined within the framework of a corporate philosophy. 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. Among them are Multi Commodity Exchange of India Ltd." 71 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . a charter for improving the global business environment through standards. Ltd. And only 48 companies have so far given their commitment to support the United Nations Global Compact. CSR could prove to be a valuable asset in an age of mergers and acquisitions.

000 crore on social expenditure during the last financial year. spends an average of Rs150 crore as part of its annual revenue expenditure. A recent KPMG study among 27 Indian companies showed that a mere 8% mentioned their social expenditures in their annual reports. Singhal. An estimated 100 corporate foundations and 25 foreign firms are involved in CSR activities in India. Quoting from a government report. he said. but statistics on input and output are elusive. "Most companies tend to give to charities than make long-term development commitments. a 10-year-old movement started by an NGO called Coalition for Environmentally Responsible Economies (CERES) and the United Nations Environment Programme. up from Rs17. When a company voluntarily opens up for self-evaluation. it creates value for shareholders when competing with other companies. an analyst said. the Indian corporate sector spent Rs30. such as Tata Steel Ltd. making it difficult to measure the overall impact. the country's largest steel company. According to Times' Pandey.Some say companies have an inherent "mental block" in reporting development programmes. spent Rs100 crore on CSR last year. 72 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . too. companies drew a total exemptions of Rs5. exclusive of dividend tax." said Parul Soni. These figures. and only 25% filed CSR reports at all. This encourages companies to make voluntary disclosures and lays down framework on improving reporting principles. this was 2% of its profit after tax.K. according to SAIL spokesperson N. the Steel Authority of India Ltd (SAIL). which runs a 850-bed hospital and rural projects in 800 villages around Jamshedpur. Yet others. Companies. sound improbable as Indian companies still do not distinguish between philanthropy and internal practices to benefit stakeholders such as employees and community.500 crore the previous year. continue to rely on different models to earmark its social expenditure. But a quarter of them are also signatories of the Global Reporting Initiative.500 crore under income-tax laws last year. associate director of KPMG's Aid and Development Services. For instance.

environmental or otherwise. how labour is employed. i. companies and individual businessmen for sustainable development and preservation of resources for future generations. Creating decent jobs. the government. BUSINESS AND PUBLIC DEVELOPMENT We are convinced that sustainable development of business is closely linked to public welfare and sustainable development of the society. how natural resources are consumed. Being 73 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . whether tax. investing in development of production and human resources. based on the following principles: • • • • • • • Providing quality products and services to consumers. Integrating public expectations and generally accepted ethics into business practice. too. is exploring to widen the scope of public-private partnerships to build and maintain schools and hospitals in return for a fixed annuity payment. In the modern world. already runs an anti-tuberculosis programme with the government of Uttar Pradesh. how business impacts local development and so on. is today owned by a trust. Pharmaceuticals company Jubilant Organosys Ltd.What eventually makes up for CSR of a company ultimately depends on leadership. Strict compliance with laws. PRINCIPLES OF CORPORATE SOCIAL RESPONSIBILITY Corporate social responsibility is a philosophy of conduct and a concept of doing business applied by the business community. Apart from schools and hospitals that are run by trusts and societies. Doing business efficiently to create economic value added and improve national competitiveness for the benefit of shareholders and the society. labour. Integrity and reciprocity in relationships with all stakeholders. Contributing to the evolution of civil society through partnerships and social developmental projects. as part of company decision. the holding group of the Tata group. output is no longer the only public concern over business and the society has its expectations as to how business is run.e. about 66% of Tata Sons.

74 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . rational choice. as to doing business in a socially acceptable way. and. 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. and this is one of the ways our CSR shows itself. 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. we pursue long-term objectives and sustainability correlated with our business development strategies. 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. In our daily activities. networking and ongoing development. the top managers' approach towards general humanitarian development issues is critical for the society to evolve. That said. We believe the impact that businesses of any size and origin has locally. We do business in a market-driven way. whether formal or not. We understand that neglect of the society's expectations is fraught with serious risks. to facilitate well-balanced public development. The top managers' community commits to address social issues under the principles of equity and integrity. The community of top managers acknowledges the importance of its resources and is up to responsible contribution to societal development.essential for public welfare. with its pursuit of profit. business faces ever more requirements of the society. Issues left unsolved are likely to cause extra costs and conflicts about the ways of settling them. Yet we are not irresponsive to the society that lets us do our business. we trust public institutions to perform the duty of formulating proposals that would be of value for the society at large. in the bottom line. is essential for public development. utility maximization. That is why we seek to address the interests and expectations of all concerned stakeholders in our development strategies.

• Health and safety: introducing and maintaining health and safety standards in addition to those required by laws. CSR can be viewed as compliance with the laws and regulations set by the public sector. improving labour efficiency locally.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. mitigating social costs of business expansion. • Environmental management and resource saving: implementing relevant programs to mitigate any adverse environmental impact. ATTAINING SUSTAINABLE RESPONSIBILITY GROWTH THROUGH CORPORATE SOCIAL Impact for business: From cost to growth Governments have historically arbitrated much of the relationship between society and business. • Personnel development: offering competitive compensation and benefits. and in its most rudimentary form. investing in human capital. encouraging personal involvement. • Supporting local communities: assisting local communities to enhance their managerial and developmental efficiency. supporting voluntary work. Although regulation can have 75 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . • Socially responsible restructuring: doing business and restructuring in a way acceptable to the local community. • Encouraging charity and voluntary work: introducing an effective operating framework for charity projects.

Today. • Over half (54 percent) believe that their companies’ CSR activities are already giving them an advantage over their top competitors. • Over two-thirds (68 percent) of the business leaders are focusing on CSR activities to create new revenue streams. companies have started shifting their thinking about what it means to be socially and environmentally responsible. Many companies have clung to this narrow compliance-based view of CSR for decades. but compliance alone won’t build brands. Quite recently. Nor will compliance offer the growth opportunities that strong brands and reputations bring with them. companies look at compliance as a cost of doing business – and as a source of potentially costly hits in terms of litigation and reputation. however.significant social value. 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. Failure to abide by local and global regulations can destroy business reputations and brands. 76 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .

companies are beginning to see that CSR can bring competitive differentiation. often in the form of goodwill and indirectly from a financial perspective. they start their journey along a continuum described in this curve. and favorable positioning in the talent wars. IBM works with public and not-for-profit organizations to make the World Community Grid available to a volunteer force of more than 210. company skills and market needs.000 people who donate the idle processing power of their computers to create a “virtual supercomputer” devoted solely to humanitarian research. The program is strategic 77 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . For example. permission to enter new markets. which is a way to align charitable giving with business strategy. Our survey results showed that surprisingly few companies are engaged in what appears to be a very fundamental area for reputation building. 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. 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).32% Activities have recently begin in this Area 49% Activities are matured in this area No activities in this Area 19% Figure: Focusing CSR to create new revenue streams When aligned with business objectives. These efforts reinforce a company’s social commitment with ongoing returns. That area is strategic philanthropy. When businesses do start to move beyond compliance.

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. It also regains heat from effluence to warm process water and thereby further reduces its carbon emissions. 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. Companies are finding that many CSR initiatives. For example.to IBM because it demonstrates how leading-edge technologies the company is developing can meet major global challenges. But in order to have a lasting impact on society and on the business. help reduce overall cost structures or increase productivity. and it gives the company feedback on the performance of those technologies in real world applications. uses its own by-products (biomass) to power its operations. Demonstrating cost savings is another means to engender sustained support. a Canadian pulp and paper company. including those that reduce energy consumption or benefit the environment. operation and distribution Efficienc y Access to new markets. Catalyst Paper Corporation. Because the positive financial impact of traditional philanthropy is often indirect. 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 . efforts aren’t always sustained. So the closer you align philanthropy to the core strategy of the business the easier it is to consistently support the efforts. they must be maintained and leveraged.

Figure Together with efficiency gains and a switch to natural gas. 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 Figure 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 67% 30% 44% 38% Activities are mature in this area 19% 48% 28% Compliance Strategic w ith regulations philanthrophy and standards 44% 47% 49% Formal company values system Cost saving Creating new revenue streams Activities have been started recently in this area Figure 79 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . In 2005 and 2006 alone. The maximum benefit from the CSR opportunity takes place when all activities on the CSR Value Curve become integrated into a single strategy. more than half their activities have only broadened quite recently. an indication of gathering momentum and continued opportunity. Interestingly. business leaders in our survey are already focusing their CSR activities to develop capabilities in many areas across the CSR Value Curve. the company has lowered its greenhouse gas emissions by 70 percent and its energy use by 21 percent since 1990. As Figure shows. business partners and customers.4 million through a 2 percent reduction in fuel consumption. the company saved US$4.

Watchdog organizations are working hard to keep people aware of what businesses are doing. aligning philanthropy with business priorities Information: From visibility to transparency Companies are more visible. services and operations Collaborate with consumers and business partners on their CSR initiatives Engage their full base of employees in their CSR objectives (i.e. Myspace and YouTube to proliferate their messages. companies can easily lose control of their own brands and reputations. Customers are joining with activist NGOs and advocacy groups. Since 1990 the Web has spurred the growth of more than 100.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. 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. They use blogs.000 new citizen groups devoted to social and political issues. 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. podcasts. CSR supply chain processes Consider themselves very effective at developing products and services with a positive societal or environmental impact Integrate • Place critical importance on. and consider themselves very effective at. especially as they expand their sphere of operations and their markets. not top down) Place critical importance on. In fact. more exposed. and consider themselves very effective at. text messaging. 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. 80 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . composition and impact of their products.

consumers today are information omnivores. Visibility extends beyond products to business practices as well. asking about carbon dioxide emissions and the impact of hazardous components in the supply chain (see Figure). Companies are digging deeper into their partners’ operations.” Customers want to know more Compared to their predecessors a generation ago. Others research the environmental impact of the materials used to create the products they consider. and the lending policies of the financial institutions they deal with. Consumers are scrutinizing procurement and sourcing policies. 81 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . 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. opinions about global companies are being formed for the first time. China’s CSR expectations are rising rapidly to levels of western countries. making today’s reputation a key factor in future growth. “buyer beware. Citizens in China and India are making the transition from producers to consumers and profoundly believe in the social responsibilities of business.” has now become “seller beware. Exposure is crossing into business relationships as well. India’s are already there and Brazil’s far exceed them. Moreover. This quest for information is intensifying.The traditional adage. in many emerging economies. They’re looking at the global impact of their choices across the entire supply chain – labor conditions in contract factories. They’re checking on trading practices product composition and lifecycle management. 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. Heightened visibility into business is not restricted to the more mature economies.

Required by Business Partners to adopt environment standards 120% 100% 80% 10% 39% 9% 13% 12% Don't Know No 47% 60% 40% 20% 0% Waste Management Water Management 43% 52% Yes 52% 45% 44% 36% Product Composition and lifecycle Figure 82 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal Carbon Management .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.

companies are finding it necessary to take the wraps off information they once considered private or proprietary. Yet. This disconnect suggests that most companies are either simply confident of their ability to meet regulatory requirements or. visibility is best met with a continuous exchange of information – or transparency. guessing at what customers expect. • • A full 63 percent believe they have sufficient information about the sources and composition of their products and services to satisfy customer concerns.Transparency meets visibility The best response to all this exposure? In today’s open environment. “need to know” restrictions tend to fall away. indicating that transparency is in fact tracking to visibility (see Figure). With relentless pressure from watchdog groups. Our survey results chart a marked increase in both information requested by advocacy groups and information provided by business. 83 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . So. at best. two-thirds of those same leaders admit they don’t understand their customers’ CSR concerns well. • 75 percent said the number of advocacy groups collecting information on their business has increased in the past 3 years. • 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.

service and operations. transparency. enterprise and/or productts Inform ation com panies provide on the am ount of sourcing. trying to engage stakeholders without full transparency is disingenuous at best. aligning philanthropy with business priorities. Typically. but interaction among the parties giving and receiving information. customer care. It could even backfire. well: companies have limited the ways in which they directly interact with most customers and other constituents on CSR issues. Believe they are more effective at improving labor 84 practices. • Report more success than their peers in increasing strategy. Second. Impact of customer intimacy Companies that understand their customers’ CSR concerns Yet. or public relations functions. By CA Ajay Singhal . 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. Figure Relationships: From containment to engagement When CSR strategies are effective. adopting ethical and green procurement.Information explosion over the last 3 years 80% 70% 60% 50% 40% 30% 20% 10% 75% 75% 17% 13% 6% 1% 0% 3% 0% Increased No Change Decreased Don't Know The num ber of advocacy groups collecting and reporting information on your industry. and adopting a formal company value system than their peers. as discussed in the previous section. • • manufacturing Analysis of Corporate Governance & Corporate Social Responsibility and logistics processes. you can’t call it transparency if you simply spew information out into the marketplace. marketing. True communication requires not just context. composition and im pact of its products. engagement begins and ends with sales. First. or unleash what is effectively a data dump on your customers.

Companies that mainly collaborate with stakeholders on CSR initiatives Employees Business partners Investors Community Consumers Government 27% 23% 21% 20% 17% 15% 0% 10% All Companies 41% 37% 35% 30% 28% 25% 30% 40% 50% 20% Understand customers' CSR concerns welll 85 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . And the numbers aren’t much better for business partners and communities – 23 percent and 20 percent respectively (see Figure). business will need to both practice openness and ensure that its full employee base is prepared to enter into a dialogue with customers. requires significantly more interaction with customers – from senior managers to shop assistants. Only 17 percent of our survey respondents said they really engage and collaborate with customers regarding CSR activities.Driving transparency. And at all these touch points. 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. Businesses have a long way to go.

This is a 20% significant opportunity lost (see Figure). for example. 10% 0% Board of directors Corp/Business unit leaders Front-line Managers % response Em ployees Families 31% 19% 86 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . With CSR. All too often in corporate life. Are they prepared to have a real dialogue. Research at Marks 70% & Spencer. one in which they learn about the customers’ needs? Not frequently enough.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. as our survey results show. a bank. according to the respondents of the survey. CSR objectives and initiatives. However. the in CSRannounces aand initiatives average Company engagement CEO objectives vision and the employee is mystified or indifferent. 60% 58% 50% 46% Developing and implementing a CSR strategy is a unique opportunity to rally the 40% 30% company. shows that employees rate higher on every measure of CSR 62% commitment than customers. it can be different. 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. a showroom.

partners and NGOs. Other companies provide incentives for individual actions that make a significant difference. Since its inception. however.Figure Some companies engage employees by posing grand challenges. it can be a powerful recruitment and retention tool in an environment where the war for talent is shaking up whole industries. will hinge on the depth and vitality of the interactions they support. Every business will find its own way to engage employees.2 billion pounds of pollutants and generated savings of nearly $1 billion. 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 . customers. 3M’s Pollution Prevention Pays (3P) rewards employees who have breakthrough ideas for eliminating pollution at its source.000 3P projects have prevented the creation of more than 2. The success of all these programs. counting only first year savings from the projects. in which groups collaborate around a common goal to develop a product or service with societal or environmental benefits. nearly 6. Moreover. Employee engagement on CSR initiatives can have another positive affect. Those that consistently combine clear transparency with deep interaction will best be able to advance sustainability in businesses and society. A recent study found that 44 percent of young professionals say they would discount an employer with a bad reputation.

all in compliance with the ethics of business conduct. 2. That means getting involved in identifying CSR-based growth platforms. 88 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . equity and impartiality. social or cultural developmental initiatives evolving wherever business plants are located. they want to be a part of a movement to create a better world – and to do that from inside business. 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. Business partners. 3. are also keen for their business to be sustainable and its non-financial risks managed and mitigated. 4. State and local authorities are to express the society's consolidated standpoint in their current plans and development strategies. it is composed of the most important stakeholders). to the extent they are keen for the financial returns and expansion of their business. and getting closer to customers. whether collective or individual.company with a good CSR reputation. The top managers' community shares the common goals of the national social and economic policy and supports any economic. 1. getting creative in applying innovative solutions. Shareholders and investors. It is our assumption that employers work on making their relationships with employees mutually beneficial. CSR RELATIONSHIP WITH KEY STAKEHOLDERS Currently. We endorse that employers must consistently comply with national legislation labour-wise and fully perform their obligations under any labour contracts. respect and promote social partnerships built at their enterprises and within the society in general. Personnel and unions. which guide business conduct. we see business community dialoguing with the following key stakeholders (the list is not exhaustive.

5. corporate social responsibility needs to go on in a self-regulated mode led by professional business associations or. Charity does not cover all CSR issues. CORPORATE SOCIAL RESPONSIBILITY CHALLENGES The current stage of corporate social responsibility development challenges business community in the ways we identify below. Consumers. if forced under any extraneous standards or regulations. 1. its practical development risks being hindered. We share the opinion that consumers are to be offered only quality products and services. 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. a point we insist on. 6. but rather represents only one component of it. 89 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .We are working towards introduction of legal and generally recognized standards of business conduct to be observed by the entire business community. 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. We find it indispensable to comply with consumer protection laws without fail. The community initiates and maintains ongoing exchange of information and knowledge between businesses of various scales. To this end. CSR should be clearly distinguished from charity. Non-government organizations. As seen by the top managers' community. nationally and internationally. 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. regionally. The top managers' community ensures consistent CSR policy locally. 2.

They have taken initiatives to work in the areas of Research and Education. There is a case. thus revealing CSR as a dynamic system of relations. Infosys promoted. Yet. True. Welfare activities undertaken by the Infosys Foundation. Community Service. ITC Limited 90 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . rather than confined to any single methodology. Employment. The vast societal impact of business compels CSR-concerned companies. those who declare and publicly demonstrate their corporate social responsibility are to be commanded for that. 6. in 1996. 5. to be ready for an open and goal-oriented dialogue with all stakeholders. if it provides a tool to augment investment attractiveness and capitalization of the business. to amplify CSR interpretation from merely risk management considerations to discovery of new business opportunities. the Education and Research Department (E&R) at Infosys also works with employee volunteers on community development projects. Rural Reach Programme. as seen across our community. the Infosys Foundation as a not-for-profit trust to which it contributes up to 1%PAT every year. Additionally. A CSR policy can only be considered good. there is still much to be done in promoting and disseminating best CSR practices. which we welcome.3. Infosys leadership has set examples in the area of corporate citizenship and has involved itself actively in key national bodies. Education and Arts & Culture. It is therefore essential for CSR practice to be diverse and innovative. Healthcare for the poor. without giving up their interests and with due regard to the feedback. 4. from our perspective. upheld by the top managers' community. CORPORATE SOCIAL RESPONSIBILITY: INITIATIVES AND EXAMPLES Infosys Technologies Limited Infosys is actively involved in various community development programs.

K. Volunteers from among Satyam associates and their family members lead the services and perform the required tasks. 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.5 Crore in the form of grants. ITC touches the lives of nearly 3 million villagers across India. Mahindra Education Trust was established in 1953 by late Mr. C. Through these rural partnerships. Its vision is to transform the lives of people in India through education. We aim to increase the number of Nanhi Kalis (children) to 10. 7. investing in rainwater harvesting to bring much-needed irrigation to parched dry lands. Kesav Nori of Tata Consultancy Services in May 2000 to address the problem of illiteracy. C. by reaching out to the underprivileged children especially in rural areas. ITC is now engaged in elevating this partnership to a new paradigm by leveraging information technology through its trailblazing 'e-Choupal' initiative. Registered as Satyam Alambana Trust in 2000. empowering rural women by helping them evolve into entrepreneurs. F C Kohli along with Prof.300 children under it. Mahindra & Mahindra The K. across age groups and across income strata. and providing infrastructural support to make schools exciting for village children. C. Tata Consultancy Services The Adult Literacy Program (ALP) was conceived and set up by Dr. The Nanhi Kali project has over 3. Satyam Computer Services Limited Alambana (support) is the corporate social responsibility arm of Satyam Computer Services Limited. formed to support and strengthen the vulnerable and underprivileged sections in urban India. Mahindra Education Trust undertakes a number of education initiatives. Alambana's services are directed primarily at the disadvantaged sections in all the cities that Satyam has offices in. The Trust has provided more than Rs.000 in the next 2 years. It promotes education mainly by the way of scholarships. scholarships and loans. ALP believes illiteracy is a major social concern 91 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . The K. Mahindra with an objective to promote education. Alambana aims at transforming the quality of life among urban population. financial assistance and recognition to them. which make a difference to the lives of deserving students.ITC partnered the Indian farmer for close to a century. P N Murthy and Prof.

Aptech students donated part of the proceeds from the sale of their art work to NGOs. companies. an innovative teaching strategy that uses multimedia software to teach adults to read within about 40 learning hours. 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. Aptech Limited Aptech Limited.The 92 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . local stakeholders and international organizations. Udayan. nongovernmental organizations (NGOs). catalyzing universal elementary education and maximizing access to micro financial services. it uses a TCS-designed Computer–Based Functional Literacy Method (CBFL). a leading education player with a global presence. including the Barrackpur-based NGO. government departments. especially the underprivileged. 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. As a global player with complete solutions-providing capability. Aptech has a long history of participating in community activities. It has.affecting a third of the Indian population comprising old and young adults. a residential school for children of leprosy patients in Barrackpur. Thus. This is undertaken in collaboration with research agencies. by promoting early child health. established in 1970. ensure essential early childhood education and schooling as well as access to basic financial services. in association with leading NGOs. has played an extensive and sustained role in encouraging and fostering education throughout the country since inception. To propagate education among all sections of the society throughout the country. Aptech fosters tie-ups with leading NGOs throughout the country. provided computers at schools. The group identifies and supports initiatives designed to break the intergenerational cycle of poor health and nutrition. 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. To accelerate the rate of learning. education to the underprivileged and conducted training and awareness-camps.

Hindustan Construction Company (HCC) HCC plays an active role in CSR initiatives in the fields of Health.Trained volunteers and equipment resources from Engineering Construction & Logistics companies will complement the existing efforts of Government. Rajasthan (this Project is being implemented in partnership with the NGO Bodh Shiksha Samiti. GEF Objectives include providing equal opportunities in pre-primary& primary education to all children. The need for a trained and effective participation from industry was first felt there. And shortly thereafter. Disaster Management. India Aluminium Company Limited The Women's Empowerment project was initiated by Indal-Muri in Jharkhand where the Company operates an alumina refining plant. Alwar District. effective and activity based. The idea was further strengthened during the 9/11 incident where again the industry participated in the relief operations. NGO's and International Organizations in disaster management. Disaster Resource Network DRN is a worldwide initiative. Goodearth Education Foundation (GEF) Work of GEF was initiated in 1996 with a project in the Rai Bareilly district in Uttar Pradesh. GEF is currently implementing projects in Thane district. and quality of education by ensuring that it is relevant. The members of Engineering and Logistics segment of WEF came together to establish this network. It was during the WEF annual meet that the massive earthquake struck Gujarat in January 2001. Himachal Pradesh (10 Balwadis).000 children. Maharashtra (in 56 schools & balwadis). and Environment. DRN Worldwide was formally launched in New York in January 2002. covering 71 schools & balwadis) and Solan district.India Initiative was launched. It was implemented in collaboration with an NGO. promoted by the World Economic Forum (WEF).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. 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 . DRN . Education. The four-year project covered 63 government schools and benefited 15. CARE-Jharkhand.

5 acre land. totally free of cost. The company’s commitment to the school goes much beyond just providing monetary support towards infrastructure and maintenance of school building. scaffolder and electrical wireman trades to a wide spectrum of the rural poor. we could build a better community and society tomorrow. The Manapakkam and Panvel facilities together provide training to about 300 candidates annually who are inducted after a process of selection. which are running successfully with members trained in various vocational income– generating skills. carpentry and masonry trades.000 skilled workmen in various trades. agricultural methods for better yields and health care initiatives. The Project has helped set up around 100 Self Help Groups so far. As a result of the good response it received in Chennai.population of Silli block caused by low agricultural productivity. JCB India Ltd. the minimum qualification being tenth standard. Since inception. with about sixty percent of them 94 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . bar-bending. 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. unresponsive health/ Integrated Child Development Services (ICDS) schemes. in the vicinity of the company premises as its social responsibility. masonry. initially offering training in formwork. lack of or low cash income. carpentry. basic training in formwork. employing about 32 million-strong workforce. these two units have produced about 2. 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. CSTI imparts. The reason for adopting this particular school was the poor management of the school in terms of infrastructure. plumbing and sanitary. Chennai. They strongly believe that children are the foundation of our nation and they could be helped. CSTI set up a branch at Panvel. resources and quality of education. close to its Construction Division Headquarters at Manapakkam. Mumbai. Larsen & Toubro (L & T) Limited Considering that construction industry is the second largest employer in India after agriculture. JCB India adopted a Government school.

Philanthropy at Cisco is about building strong and productive global communities communities in which every individual has the means to live. The company pursues a strong “triple bottom line” which is described as profits. as it is the key to prosperity and opportunity. people and presence. Cisco invests its best-in-class networking equipment to those nonprofit organizations that best put it to work for their communities. and the chance to give back.being deployed to L&T’s jobsites spread across the country. 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. 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. It takes its responsibility seriously as a global citizen. the opportunity to learn. Education is a top corporate priority for Cisco. 95 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . CISCO System Inc.

But whilst many agree that CSR is the right thing for companies to do.” Erasing the distinction between corporate governance and corporate social responsibility also reveals the true difficulty of developing a well-rooted programme. that would probably take care of most CSR issues”.’ The costs associated with these programmes are clear but the correlation with better financial performance is hard to prove. Erik Belfrage* of Sweden’s SEB Bank believes that this debate misses a fundamental point: ‘doing good’ is not separate from ‘being good’. they argue. But it is not a natural thing to separate them. I think it is risk management. unions. If you have a well formed corporate governance programme in place. local communities. 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. proponents often grow uncomfortable when explaining the business case for ‘doing good. the objectives of CSR go beyond short-term economic gains. Social and environmental consequences are weighed against economic gains. boycotts and regulation. at least. NGOs and governments. “Corporate governance and corporate social responsibility are both extremely important to a company. But he concedes that this involves a long-term payback: “You must look at it over five years. 96 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . In any case. where the risk is the value of your brand.” The company is also likely to benefit from fewer disruptions to its business from strikes. “Good corporate governance is basically about making better decisions for the long term health of the company. Charitable giving or a well-managed publicity campaign might seem a quick fix but they will not yield long-term rewards. Enhanced brand value is the pay-off for getting this right.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.

It is a matter of efficiency. “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 doesn't work.’ We are living them. I share those values. We did that at SEB and it took us nearly three years.” 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. executives and staff. The media and organizations such as the International Chamber of Commerce also play an important role in communicating good and bad examples of governance. “You only have a split second to get the attention of a large group of people. it’s not anchored. There must be a lot of back and forth between the board. “A company must do a lot of homework when deciding its values. Once a company is confident in its dialogue with the public.This requires some soul searching. 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.” This in turn helps the company communicate with its external stakeholders. It’s an important occasion to communicate governance and brand value”. “There should be reporting. there should be limits to transparency. it will also find that building its brand value is easier and faster. “It is the only time that shareholders and stakeholders get together. Where it is a pet project of one executive. But now everyone in the bank can say ‘Yes.” 97 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . but the reaction is often excessive. “If openness becomes a natural part of business life.” This process begins with an active internal conversation: “This requires involving everyone. Similarly. when there is no real response from employees. then communicating becomes more natural”.

98 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Though. where risk of the stack holders is limited. whether private or public. but is difficult to observe the separation of ownership and the management in case of small to medium Companies. a company is a separate legal entity different from its owners. 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.The compliance requirements for CG & CSR are different for different types of companies.

com www.gov.unpan1.google.org www.sebi.cipe.com www.waynevisser.mca.com www.un.wikipedia.scribd.in www.tatasteel.Bibliography www.bseindia.org 99 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .com www.nseindia.in www.com www.com www.gov.org www.

Stock options should be vested at least a year after should their be retirement. else at least one-third. companies. else at least 30% . e) Directors should be paid a net commission profits for not a exceeding 1% (3%) of e) Audit Committee: A board must have a qualified and independent audit committee. b) There shall be no nominee All by directors to be with and shareholders with turnover exceeding Rs. 100 crores. of minimum 3 members. It should Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . b) For a listed company suggested.APPENDICES 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. elected same responsibilities accountabilities. c) No single person should hold more directorships than 10 in listed executive Chairman. majority and 100 chair e) Audit Committee: Should comprise entirely of “financially literate” non-executive members with at least one member having accounting or related financial management expertise. all non-executive. Independent directors¨ treated the same way as non-executive directors. directors. c) Non-executive paid for job Chairman related c) Non-executive director should have an office and be expenses. if the Chairman is also the MD. the Audit Committee. informed business management strategies. at least half of the board should be independent directors¨. 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. compensation to be fixed by board and ratified by shareholders and reported.

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.company with (out) an MD over and fees.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. explicit with time of re-appointment. reviewing than ranging in matter within its TOR. responsible for the appointment. less 50% attendance should not be reappointed. all g) Key information that non-executive 101 and be must be presented to chaired by an independent Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . may above Stock be sitting options independent with at least one having financial knowledge. remuneration packages for executive directors. 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. independent director s of the parent company. removal remuneration chief internal auditor. should the the considered too. committee should meet at least thrice a year -. 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. and and internal auditors with farresponsibilities. any approved by audit committee. “Whistle blowers” should have direct policy affirmed management). It should have at least 3 directors. and Its accounting to review a mandatory list of documents including information relating to subsidiary companies. executives as necessary and secretary The should be he seceretary of committee.

j) Code of conduct for Board and and senior annual auditors and assist the accounting reporting. nominee directors from shareholding below 5% or total FI holding below 10%. information boards stipulated. i) Reduction in number of nominee should companies individual directors. Minimum available to i) While independent and non-executive should enjoy directors some protection from civil and criminal litigation. 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.the board is listed in the code. FIs withdraw with FI members management affirmation of compliance to it. all non-executive. competent and willing to work more than other non-executive directors. director. a re -appointment h) Audit Committee: Listed companies with turnover over Rs. 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.100 crores or paid-up capital of Rs. 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.20 crores should have an audit committee of at least three members.

domestic issues should be same as those for GDR issues. material contingent liability and and CFOs on company development. c) Stock exchanges should require certificate accounts compliance from CEOs Management Discussion & Analysis segment of annual includes industry report discussion structure that of and c) Management should provide comments. comprehensiveness of financial directors’ of internal affirmation control as well as appropriate disclosure to auditors and audit committee. shareholders about the high and low monthly averages of their share prices and about share. of each a clear description. performance prospects business (exceeding turnover). etc. well and front. as risks threats. Companies should move towards a regime of unqualified financial statements. e) Security analysts with the must client paid-up disclosure exceeding Rs. If a company no need consolidates. opportunities. subsidiary accounts but the definition of “group” should include parent c) A mandatory and subsidiaries. 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 . as and d) CEO/CFO certification veracity and proper of and knowledge. to annex of 10% and major of segments accounts for subsidiaries they have majority shareholding. followed by auditor’s its risks. statements reports and maintaining should financial 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. b) b) Disclosure list pertaining to “related till party” ICAI’s transactions provided by committee norm is established. b) Consolidation of group accounts should be optional and subject to FI’s and IT department’s assessment norms.a) Companies inform should their a) Companies provide where should consolidated a) Management should explain and justify any deviation from accounting standards in financial statements. 20 crore. outlook.

b) Half-yearly results and financial significant action in this matter. (re)appointment of their of directors. be to presentation to analysts communicated the Internet. The delegated authority should attend to share transfer formalities at least once in a fortnight. investors. accept further deposits interor the corporate dividends investments or declare default is made good. should results. possibly over approved by auditors on audit committee should advise b) In case of multiple credit ratings. they should all be reported in a format showing relative position of the company c) Same disclosure norms for foreign and domestic creditors. companies directors. Special Disclosure for IPOs a) Companies making Initial Public Offering (“IPO”) should inform the Audit Committee of categorywise uses of funds every quarter. 104 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . events reports be mailed to shareholders c) 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. e) On informed expertise. of are they and where names Other issues Creditors’ Rights a) FIs should rewrite loan covenants nominee and eliminating directors debt Shareholders’ Rights a) Quarterly etc. It should get uses The for non-pre-specified an annual the basis. Board except in case of serious systematic default or provision of insufficient information.client company.

105 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .

while appointing employees and Executive Directors. This letter should also be placed by the company on its website. inter-alia. and recommending appropriate Independent Directors and Non-Executive Directors [NEDs]. including sitting fees and stock options etc. and in case the company is a listed company. The Code of Business Ethics that the company expects its directors and employees to follow. A. The list of actions that a director should not do while functioning as such in the company. This Committee should consider: • proposals for searching. The expectation of the Board from the appointed director.1 Appointments to the Board i. Provision for Directors and Officers (D&O) insurance. The companies may have a Nomination Committee comprising of majority of Independent Directors. APPOINTMENT OF DIRECTORS A.as is done by them The letter should specify: • • • • • • • • The term of the appointment.3 Nomination Committee i. ii. Companies should issue formal letters of appointment to Non-Executive Directors (NEDs) and Independent Directors .. to promote balance of power. if any. 106 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). independence of a director and availability of time with him or her to devote to the job. evaluating. also on the website of the stock exchange where the securities of the company are listed. 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. include the criteria for determining qualifications. 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. A. and The remuneration.2 Separation of Offices of Chairman & Chief Executive Officer To prevent unfettered decision making power with a single individual. based on an objective and transparent set of guidelines which should be disclosed and should. The fiduciary duties that come with such an appointment alongwith accompanying liabilities. positive attributes.Annexure-II CORPORATE GOVERNANCE VOLUNTARY GUIDELINES ISSUED BY MINISTRY OF CORPORATE AFFAIRS BOARD OF DIRECTORS A. if any. if any. including its Chairman. as far as possible.

and thereafter annually. ii. A. ii. The Board should put in place a policy for specifying positive attributes of Independent Directors such as integrity. An Individual may not remain as an Independent Director in a company for more than six years. the following categories of companies should be included:• • ii. private companies that are either holding or subsidiary companies of public companies. 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. and in case the company is a listed company.4. iv. Such a policy may be subject to approval by shareholders. For reckoning the maximum limit of directorships. Disclosure about such policy should be made by the Board in its report to the shareholders. INDEPENDENT DIRECTORS B. foresight.2 Tenure for Independent Director i. public limited companies. managerial qualities and ability to read and understand financial statements. iii. knowledge. experience and expertise. 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. Number of Companies in which an Individual may become a Director i. iii. B. experience and effectiveness of individual directors as well as the Board as a whole. No individual may be allowed to have more than three tenures as independent Director in the manner suggested in 'i' and 'ii' above. The Nomination Committee should also evaluate and recommend the appointment of Executive Directors. also on the website of the stock exchange where the securities of the company are listed.1 Attributes for Independent Directors i. 107 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . A period of three years should elapse before such an individual is inducted in the same company in any capacity. With a view to enable Board to take proper and reasoned decisions. if any. This certificate should be placed by the company on its website. Nomination Committee should ensure that the Board comprises of a balanced combination of Executive Directors and NonExecutive Directors. B.• determining processes for evaluating the skill. ii. All Independent Directors should provide a detailed Certificate of Independence at the time of their appointment.

2 Remuneration of Non-Executive Directors (NEDs): i. 108 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .1 Remuneration C. subject to an appropriate ceiling depending on the size of the company. ii.iv.1. C. some should not be paid a commission on profits while others are paid a fixed amount. REMUNERATION OF DIRECTORS C.e. 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. It should also be ensured that relationship of remuneration to performance is clear. ii. The companies should have the option to: (a) Pay a fixed contractual remuneration to its NEDs. to NEDs. iii. ii.3 Independent Directors to have the Option and Freedom to meet Company Management periodically i. B. 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.1 Guiding Principles-Linking Corporate and Individual Performance i. In order to enable Independent Directors to perform their functions effectively. or (b) Pay upto an appropriate percent of the net profits of the company. not linked to profits.1. The companies should ensure that the level and composition of remuneration is reasonable and sufficient to attract. Incentive schemes should be designed around appropriate performance benchmarks and provide rewards for materially improved company performance. Remuneration Policy for the members of the Board and Key Executives should be clearly laid down and disclosed. they should have the option and freedom to interact with the company management periodically. The maximum number of public companies in which an individual may serve as an Independent Director should be restricted to seven. retain and motivate directors of the quality required to run the company successfully. reflecting short and long term performance objectives appropriate to the company's circumstances and goal. The companies should have the option of giving a fixed contractual remuneration. Remuneration packages should involve a balance between fixed and incentive pay. Benchmarks for performance laid down by the company should be disclosed to the members annually. i. The choice should be uniform for all NEDs. C.

majority of whom should be non executive directors with at least one being an Independent Director. considered suitably. iv. it should be disclosed to the shareholders in the Annual Report of the company. including any compensation payments. This Committee should comprise of at least three members.2 Remuneration Committee i. retain and motivate Independent Directors of quality to contribute to the company. This Committee should also recommend and monitor the level and structure of pay for senior management. This Committee should have responsibility for determining the remuneration for all executive directors and the executive chairman.e.4. It should be ensured that no director is involved in deciding his or her own remuneration. C. criteria and the basis of remuneration policy of the company which should be disclosed to shareholders and their comments. If stock options are granted as a form of payment to NEDs. ii. so that their independence is not compromised. iii. then the NEDs should not be eligible for any commission on profits.1. Companies should have Remuneration Committee of the Board. one level below the Board. The IDs may not be allowed to be paid stock options or profit based commissions. such as retirement benefits or stock options. especially if he/she is a nonexecutive chairman the Chairman of the Audit Committee and/or other committees members of Board committees.1. so as to align NEDs to a greater share of variable pay. 109 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . C. ii. iv. • • 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. This Committee should also determine principles. If such a structure (or any similar structure) of remuneration is adopted by the Board. Remuneration of Independent Directors (IDs) i. there is any deviation from such policy. the justification/reasons should also be indicated/ disclosed adequately. then these should be held by the concerned director until three years of his exit from the Board. These should not be more than one-third of the total remuneration package.iii. if any. In order to attract. they should be paid adequate sitting fees which may depend upon the twin criteria of Net Worth and Turnover of companies. Whenever. C. i.3 Structure of Compensation to NEDs i. • ii. If the option chosen is 'i(a)' above. The companies may use the following manner in structuring remuneration to NEDs: • Fixed component: This should be relatively low.

risk optimization as a part of a risk management policy or strategy. The disclosure should also include a statement of those elements of risk. In order to safeguard shareholders' investment and the company's assets. ii. The companies should ensure that directors are inducted through a suitable familiarization process covering. B. its committees and its individual directors has been conducted. operational and compliance controls and risk management systems. including financial. The Directors should be given substantial time to study the data and contribute effectively to Board discussions. Risk Management i. the Board should. the Board should also adopt suitable methods to enrich the skills of directors from time to time. in a timely manner. inter-alia. Besides this. procedures and resources available to ensure that every Director is supplied. II. Training of Directors i. the authority delegated to it by the Board. Enabling Quality Decision making The Board should ensure that there are systems. their roles. conduct a review of the effectiveness of the company's system of internal controls and should report to shareholders that they have done so. E. 110 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal .v. RESPONSIBILITIES OF THE BOARD5 A. The review should cover all material controls. and what it has done for the year under review to the shareholders in the Annual Report. 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. risk minimization. at least annually. with precise and concise information in a form and of a quality appropriate to effectively enable/ discharge his duties. its Audit Committee and its executive management should collectively identify the risks impacting the company's business and document their process of risk identification. D. responsibilities and liabilities. may threaten the existence of the company. its role. 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. The Board should state in the Annual Report how performance evaluation of the Board. Board to place Systems to ensure Compliance with Laws i. This Committee should make available its terms of reference. ii. The Board. C. which is overseen once every six months by the Board. There should be a statement to this effect by the Board 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.

review the company's internal financial controls. • review and monitor the external auditor's independence and objectivity and the effectiveness of the audit process. III. All the members of audit committee should have knowledge of financial management. For every agenda item at the Board meeting.Role and Responsibilities i. IV. The Chairman of such Committee should be an Independent Director. It should follow the “comply or explain” principle. iii. internal audit function and risk make recommendations in relation to the appointment. have obtain professional advice from external sources. 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. Audit Committee . Audit Committee – Enabling Powers: i.ii. Audit Committee – Constitution The companies should have at least a three-member Audit Committee. The Audit Committee should have the responsibility to – • • • monitor the integrity of the financial statements of the company. the external auditor and to approve the remuneration and terms of engagement of the external auditor. The Audit Committee should also monitor and approve all Related Party Transactions including any modification/amendment in any such transaction. AUDITORS 111 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . reappointment and removal of management systems. with Independent Directors constituting the majority. 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. access to information contained in the records of the company. audit or accounts. C. have independent back office support and other resources from the company. iii. ii. The Independent Directors should discuss such Impact Analysis and offer their comments which should be suitably recorded. and The Audit Committee should also have the facility of separate discussions with both internal and external auditors as well as the management. The Audit Committee should have the power to – • • ii. B. AUDIT COMMITTEE OF BOARD A. 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.

Certificate of Independence i. Appointment of Internal Auditor 112 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . and removal of the statutory auditor. Every company should obtain a certificate from the auditor certifying his/its independence and arm's length relationship with the client company. E. In the latter case. he should specifically indicate the effect of such non receipt of information on the financial statements. with reasons. This period should be five years for the firm. B. With a view to ensure proper and accountable audit. C. Need for clarity on information to be sought by auditor and/or provided by the company to him/it i. 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 Certificate of Independence should certify that the auditor together with its consulting and specialized services affiliates. ii. the company may adopt a policy of rotation of auditors which may be as under:• • ii. if any. 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. To discharge its duty. with the auditor.to be rotated once every three years Audit firm . of the audit firm and other related aspects. iii. 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. A cooling off period of three years should elapse before a partner can resume the same audit assignment. Audit partner . qualifications and experience of audit partners. Rotation of Audit Partners and Firms i. either the appointment/re-appointment or undertaken by the auditor.A. Appointment of Auditors i.to be rotated once every five years. 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. The Audit Committee should have regard to the profile of the audit firm. The Audit Committee of the Board should be the first point of reference regarding the appointment of auditors. ii. the audit firm. along with the annual audit remuneration. strengths and weaknesses. 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. D. ii.

Back 113 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . or violation of the company's code of conduct or ethics policy. The Board should give its comments on the Secretarial Audit in its report to the shareholders. VI. the Board may appoint an internal auditor and such auditor. and also allow direct access to the Chairperson of the Audit Committee in exceptional cases. ii. To ensure this. the companies may get the Secretarial Audit conducted by a competent professional. should not be an employee of the company. it is important that the Board processes and compliance mechanisms of the company are robust. V. The companies should ensure the institution of a mechanism for employees to report concerns about unethical behavior.In order to ensure the independence and credibility of the internal audit process. INSTITUTION OF MECHANISM FOR WHISTLE BLOWING i. actual or suspected fraud. where appointed. 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.

2. customers. 3. inform them of inherent risks and mitigate them where they occur. which should be an integral part of overall business policy and aligned with its business goals.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. 6. Respect for Workers' Rights and Welfare: Companies should provide a workplace environment that is safe. They should provide all employees with access to training and development of necessary skills for career advancement. Respect for Human Rights: Companies should respect human rights for all and avoid complicity with human rights abuses by them or by third party. should manage natural resources in a sustainable manner and ensure optimal use of resources like land and water. recycle. Activities for Social and Inclusive Development: 114 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . Transparency and Accountability. The CSR Policy should normally cover following core elements: 1. on an equal and non-discriminatory basis. 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. Respect for Environment: Companies should take measures to check and prevent pollution. They should uphold the freedom of association and the effective recognition of the right to collective bargaining of labour. promoting efficient use of energy and environment friendly technologies. should proactively respond to the challenges of climate change by adopting cleaner production methods. corrupt or anti-competitive. hygienic and humane and which upholds the dignity of employees. suppliers. society at large etc. including shareholders. 5. unfair. employees. and create value for all of them. They should not engage in business practices that are abusive. Ethical functioning: Their governance systems should be underpinned by Ethics. and be responsive towards all stakeholders. Care for all Stakeholders: The companies should respect the interests of. manage and reduce waste. project affected people. The policy should be framed with the participation of various level executives and should be approved by the Board. have an effective grievance redressal system. They should develop mechanism to actively engage with all stakeholders. 4.

Back 115 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal . This would help companies to improve on their CSR strategies and effectively project the image of being socially responsible. They may evolve a system of need assessment and impact assessment while undertaking CSR activities in a particular area. health. particularly in the vicinity of their operations. Implementation Guidance: 1. 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. Independent evaluation may also be undertaken for selected projects/activities from time to time. parameter. activities and progress in a structured manner to all their stakeholders and the public at large through their website. and other communication media. particularly targeting at disadvantaged sections of society. organizational mechanism and responsibilities.. They may influence the supply chain for CSR initiative and motivate employees for voluntary effort for social development.Depending upon their core competency and business interest. annual reports. time schedules and monitoring. 2. skill building for livelihood of people. These could include: education. companies should undertake activities for economic and social development of communities and geographical areas. This amount may be related to profits after tax. The CSR policy of the business entity should provide for an implementation strategy which should include identification of projects/activities. Companies may partner with local authorities. To share experiences and network with other organizations the company should Companies should allocate specific amount in their budgets for CSR activities. 3. The companies should disseminate information on CSR policy. setting measurable physical targets with timeframe. cultural and social welfare etc. 4. business associations and civil society/nongovernment organizations.

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