Professional Documents
Culture Documents
Notes by
Dr. Anil Gor.
M.Com, LL.M.,M.F.M,Ph.D.,FCS,CAIIB.
E Mail : goranil@yahoo.co.in Mobile
09322242439
NLDIMSR
Corporate Governance
Problems in Corporate Governance:
Vanishing Companies: Between 1991
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Corporate Governance
Latest Developments:
Satyam
Libor fixation by Senior executives of international banks.
Five Large Banks: RBS, Citi group, HSBC, JP Morgan
NLDIMSR
Corporate Governance
Consider this:
Moral failure pervaded our public life :
One out of every five members of Indian
NLDIMSR
Corporate Governance
A cycles rickshaw driver in Kanpur routinely
NLDIMSR
Corporate Governance
With uplifted arms I cry, but no
one heeds;
From Dharma flow wealth and
pleasure,
Then why is dharma not pursued ?
- Mahabharat : XVIII
.5.49
6
NLDIMSR
Corporate Governance
Jack Welch :
You must be public about
consequences of breaking
core values. I dont want to
wake up one day with a
profitable corporation that
does not have soul.
7
NLDIMSR
Corporate Governance
Reasons for Poor Corporate Governance
in India:
Feudal mid set that exists in India
Manifold restrictions set by Government
Lack of concern for society
Sense of insecurity that prevails
NLDIMSR
Corporate Governance
What is Corporate Governance?
Corporate Governance is the social,
legal and economic proceess in which
companies function and are held
accountable. It is the system by
which companies are run
-Cadbury Committee Report.
9
NLDIMSR
Corporate Governance
Corporate Governance is the
10
NLDIMSR
Corporate Governance
Second school of thought believes that
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Corporate Governance
Standard & Poor:
Corporate Governance is the
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Corporate Governance
CII : Corporate Governance deals with
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Corporate Governance
Kumar Mangalam Birla Committee:
Strong Corporate Governance is
14
NLDIMSR
Corporate Governance
Theories associated with
development of corporate
Governance :
Agency Theory
Transaction Cost Economics
Stakeholder Theory
Stewardship Theory
15
NLDIMSR
Corporate Governance
Agency Theory :
Agency theory identifies the agency
relationship
where one party, the principal , delegates
work to another party , the agent.
Problems in agency relationship are :
Agent not acting in the best interest of the
principal, misusing powers for pecuniary
or other advantages and not taking
appropriate risks.
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NLDIMSR
Corporate Governance
In the context of corporations, and
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Corporate Governance
Transaction Cost Economics ( TCE ) Theory
NLDIMSR
Corporate Governance
Stake Holder Theory :
The stakeholder theory takes account of
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Corporate Governance
Stewardship theory :
The stewardship theory regards
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Corporate Governance
Development of Corporate
Governance :
Important Inter national Committees :
Cadbury committee (1992)
Greenbury committee (1995)
Hampel Committee (1998)
LSE Combined Code (1998)
OECD Principles of Corporate Governance (1999)
Blue Ribbon Committee (1999)
Surbanes Oxley Act 2002.
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NLDIMSR
Corporate Governance
Corporate Governance Reforms in
India :
Important Committees in India:
CII : Voluntary Code of Corporate Governance
(1998)
Kumar Mangalam Birla Committee (2000)
RBI Report of the Advisory Group on Corporate
Governance (2001)
Naresh Chandra Committee ( 2002)
Narayan Murthy Committee (2003)
JJ Irani Committee (2005)
22
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Corporate Governance
Characteristics Principles:
Transparency
Independence
Accountability
Responsibility
Fairness
Social Responsibility
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Corporate Governance
Objectives:
That a properly structured Board
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Corporate Governance
Objectives:
That Board adopts transparent
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Corporate Governance
Objectives:
That the Board effectively and
NLDIMSR
Corporate Governance
How is Corporate Governance
Enforced?
Companies Act, 2013
Through the listing Agreement with Stock
Exchange.
Through independent well published
ratings of companies on Corporate
Governance.
Through institutional activism.
Through self regulation
27
NLDIMSR
Corporate Governance
Scheme of Management under
NLDIMSR
Corporate Governance
Companies Act, 2013 provides for:
Detailed provisions for qualifications,
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Corporate Governance
Manner in which P&L, balance
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Corporate Governance
Changes introduced by Companies Act
2013 :
Sec. 2(51) : Key Managerial
Personnel :
i) CEO or MD or Manager
ii) Company Secretary
iii) Whole time Director
iv) CFO
v) Any other person notified.
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NLDIMSR
Corporate Governance
Sec.135 : CSR : Schedule VII List
of CSR activities
Sec.149 : Independent Director
Sec166 : Composition of Board :
Duties of Director
Sec.197 : Remuneration Committee
Sec. 205: Functions of Co secretary
and Secretarial audit
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NLDIMSR
Corporate Governance
Composition of the Board :
Every listed public limited company to have at least
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Corporate Governance
Requirement of Resident Director and
woman director
Requirement of at least one Resident
Director and one woman director has also
been introduced, so that it should not
happen that no responsible person is
available in case of companies promoted by
foreign investors having foreigners as
directors. The woman director is expected
to provide gender sensitivity to the Board.
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Corporate Governance
Limit to maximum number of
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Corporate Governance
Audit Committee of Board of Directors:
( Sec.178)
The Board of Directors of every listed companies is
compulsorily required to have Audit Committee of the
board consisting of minimum three independent
directors. This audit committee will inter alia, look
into :
the recommendations for appointment, remuneration
and terms of appointment of auditors of the company.
Review and monitor auditors independence ,
performance and effectiveness of audit process.
examination of financial statement and auditors report
thereon.
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Corporate Governance
approval or any subsequent modification of
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Corporate Governance
Nomination and Remuneration Committee
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Corporate Governance
Stakeholders Relationship Committee:
( Sec.178(5)&(6)):
The Board of Directors of a company which has
more than one thousand shareholders, debenture
holders, deposit holders and any other security
holders, shall appoint Stakeholders Relationship
Committee consisting of a chairperson who shall be
non executive director and such other members as
may be decided by the Board. The objective is to
address to shareholders grievances promptly and
systematically at a seniors level ie, Committee of
Board of Directors.
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NLDIMSR
Corporate Governance
Restrictions on powers of the Board of
Directors:
The Companies Act, 2013 has restricted loans to
the directors, Employees Stock Option Scheme
(ESOP) to independent directors, and imposed
process restrictions for entering into loans related
party transactions. The company would require the
approval by members by way of special resolution
for entering into related party transactions.
Further, directors are prohibited to enter into
forward transactions in securities of the company
or its holding company or subsidiary companies.
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NLDIMSR
Corporate Governance
Secretarial audit :
Secretarial audit has been made compulsory
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Corporate Governance
Strengthening whistle blowing policy:
The Companies Act has strengthened the
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Corporate Governance
Rotation of Auditors:
The companies Act provides for compulsory
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Corporate Governance
Corporate Social responsibility (CSR):
Every company fulfilling any one of the
NLDIMSR
Corporate Governance
Listing Requirements: Overview:
SEBI Guidelines : Cir. Dated 17th April ,2014:
Objectives of the guidelines/ principles:
A. Rights of shareholders
B. Role of Stakeholders
C. Disclosures & Transparency
D. Responsibilities of the Board
45
Disclosure of Information
Functions of Board
Composition of Board
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Corporate Governance
Independent Directors
D. Board committees
E. Code of Conduct
F Whistle Blower Policy
46
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Corporate Governance
A. Rights of Shareholders:
The company should seek to protect and
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Corporate Governance
Participate in key corporate governance decisions such as
48
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Corporate Governance
The company should ensure equitable treatment to all
49
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Corporate Governance
C. Disclosure and Transparency :
All material matters including financial
50
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Corporate Governance
D. Responsibilities of the Board :
1. Disclosure of information by the
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Corporate Governance
2. Key Functions of the Board:
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Corporate Governance
D. Aligning key executives and board remuneration
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Corporate Governance
3. Composition of the Board :
The Board of Directors shall have an optimum
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Corporate Governance
4. Independent Directors:
Independent director means a non executive director
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Corporate Governance
None of whose relatives to have pecuniary interests
Who, neither himself nor any of his relatives
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Corporate Governance
Is a chief executive or director by whatever
57
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Corporate Governance
Limit on Number of Independent directorship :
A. A person shall not serve as an independent director
58
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Corporate Governance
Formal Letter of appointment must be issued to
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Corporate Governance
Separate Meetings of the independent Directors:
Independent directors of the company to have one
60
NLDIMSR
Corporate Governance
Training of Independent Directors:
The company to provide training to
61
NLDIMSR
Corporate Governance
Non Executive Directors Compensation and
disclosures:
All fees /compensation, if any paid to non-executive
directors, including independent directors , shall be
fixed by the Board of Directors and shall require prior
approval of shareholders in the general meeting
Other provisions with regard to Board
meetings:
The Board to meet at least 4 times in a year
Maximum gap between two meetings : 120 days
A director can not be a member in more than 10
committees
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Corporate Governance
Director can not be a chairman of more than 5
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Corporate Governance
Code of conduct:
The Board shall lay down code of conduct
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Corporate Governance
Duties of Directors : Sec.166 :
Directors to Act subject to provisions of the Act, as per
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Corporate Governance
Duties of directors contd.-
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Corporate Governance
III Audit Committee:
A. Qualified and independent audit committee
to be set up subject to
1. Minimum 3 directors as members, two third
of the members to be independent directors.
2. All members to be financially literate.
Financially literate means the ability to read
and understand basic financial statements
such as Balance sheet P&L a/c and cash flows
3. Chairman of the Audit committee to be
independent director.
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Corporate Governance
4. Chairman of Audit Committee to be present at
AGM.
5. Audit Committee may invite such executives, as
it considered appropriate. The Finance Director, the
head of internal audit, and a representative of
statutory auditor may be present as invitees for the
meeting of the audit committee.
6. Company secretary to act as the secretary to the
committee.
Meetings of Audit Committee: Audit committee
to meet at least 4 times in a year and not more
than 4 months shall elapse btween two meetings.
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Corporate Governance
Powers of Audit Committee: These powers
include:
1. to investigate any activity within its terms of
reference
2. to seek information from any employee
3. to obtain outside legal or other professional advice.
4. to secure attendance of outsiders with relevant
expertise if it is considered necessary.
Role of Audit Committee:
Oversight of companys financial reporting process and
the disclosure of its financial information to ensure that
financial statement is correct, sufficient and credible.
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Corporate Governance
Role of audit Committee contd:
Recommendation for appointment, remuneration and
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Corporate Governance:
3. Major accounting entries based on the exercise of
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Corporate Governance
Approval of any subsequent modification of transactions of
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Corporate Governance
Discussion with internal auditors of any
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Corporate Governance
To review the functioning of whistle blower
mechanism
Approval of appointment of CFO ,after assessing
qualifications, experience and background.
Carrying out any other function as is mentioned in
terms of reference of Audit Committee.
Review of information mandatorily to be
done by Audit Committee:
Management Analysis and discussion of financial
condition and results of operations
Statement of significant related party transactions
submitted by management
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Corporate Governance
Management letters/ letters of internal
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Corporate Governance
IV. Nomination and Remuneration Committee:
A. The company shall set up a nomination and
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Corporate Governance
2. Formulation of criteria for evaluation of
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Corporate Governance
Subsidiary Companies:
At least one independent director on the Board of
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Corporate Governance
The term material non listed subsidiary shall mean an
NLDIMSR
Corporate Governance
VI Risk Management:
A. The company shall lay down procedures to inform
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Corporate Governance
VII . Related Party Transactions:
A. Related party transaction is a transfer of
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Corporate Governance
B) if entity is associate or joint venture of the other
party
C) Both entities are joint ventures of same third
party
The co has to formulate a policy on materiality of
related party transactions and also on dealing with
related party transactions.
Transactions with related party are material if
transaction, individually or with transactions entered
during the year together, exceed five percent of the
annual turn over or twenty percent of net worth of
the co as per audited b/s which ever is higher.
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Corporate Governance
All material party transactions shall require approval
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Corporate Governance
Communication to Shareholders
Disclosure of Resignation of Directors
Disclosure of formal letter of appointment to
independent directors
Disclosure in Annual report about training to
independent directors /evaluation of directors
Disclosure on utilization of proceeds from public
issues etc.
IX. CEO/CFO Certification.
X . Report on Corporate Governance
XI. Compliance : certificate/ quarterly report
to Stock exchange authorities.
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Corporate Governance
Information to be placed before
any updates.
2.Capital budgets and updates.
3.Quarterly results for company and its
operating divisions or business segments.
4. Minutes of meetings of all audit
committees and other committees of Board.
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Corporate Governance
5. Information on recruitment and
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Corporate Governance
8. Any material default in financial
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Corporate Governance
11. Transactions that may involve
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Corporate Governance
14. Quarterly details of foreign
NLDIMSR
Corporate Governance
Institutional Activism : CII , jointly with
NLDIMSR
Corporate Governance
What is most important parameter
92
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Corporate Governance
How do you percieve companies with good
NLDIMSR
Corporate Governance
Classification of BSE 500 on the BASIS OF
Ownership structure :
Promoter controlled : 72%
PSUs
: 13 %
MNCs
: 9%
Professional Cos
: 6%
Level of corporate Governance rating 4 being
highest :
MNcs
: 3.67
Professonal cos
: 3.17
PSUs
: 1.75
Promoters Controlled:
1.35
94
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Corporate Governance
Perceived shareholder returns acros distinct
NLDIMSR
Corporate Governance
Best Companies : : Rating with 8 BEING
HIGHEST
Tata Group : 7
HDFC
:5
Infosys
:5
HUL
:3
Nestle
:3
L & T
:3
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Corporate Governance
Voting on shareholder resolutions :
Are you ready to invest in non voting
shares of companies?
Yes : 72.2%
No.27.8%
Do you have an internal team in your
co to help finalise the voting decision?
Yes : 60 %
No : 40%
97
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Corporate Governance
For what percentage of your portfolio
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Corporate Governance
Most frequently opposed corporate actions
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Corporate GOVERNANCE
Engagement with Investee compnaies :
Engagement once a month or on quarterly basis
NLDIMSR
CORPORATE govenance
How do you respond to a companys
NLDIMSR
Corporate Governance
What has been your experience when you attempted to
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Corporate Governance
To summarise, investors percieve companies with
NLDIMSR
Corporate Governance
Those investors who are ready to stay in the
NLDIMSR
Corporate Governance
Self Regulation :
Code of Conduct at Tata Group of
companies :
Please read the mail forwarded.
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and
be
responsible
to
relevant
stakeholders:
Ensure that communications both to and from
shareholders and relevant stakeholders are
effective.
Understand and take into account the interest
of shareholders and relevant stakeholders.
Monitor
relations with shareholders and
relevant stakeholders by gathering appropriate
information and evaluation thereof.
Promote goodwill and support of shareholders
and NLDIMSR
relevant stakeholders.
109
proper way: In
furtherance of the reason for which they
were given those powers.
Act in Good Faith: Act in a way which they
honestly believe to be in best interest of
the company. In the event of conflict,
interest of the company shall prevail.
Act with due skill and care.
Consider the interest of the employees of
the company
110
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112
directors
responsible
for
scandals?
US experience:
World Com Inc. : Bernard Ebbers
CEO has just been sentenced for 25
years in prison for orchestrating the
record $11 billion accounting fraud. At
the trial he denied any knowledge of
massive book cooking at world com.
113
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115
Corporate Governance
Issues in Corporate Governance:
How independent does the board of
NLDIMSR
Corporate Governance
Issues in Corporate Governance:
the
interest of all of its employees with that
of the company?
Are we relying too much upon rules to
encourage good governance?
What does it mean to govern when
target is moving one?
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Corporate Governance
Problems in Corporate Governance:
Vanishing Companies: Between 1991
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Corporate Governance
Reasons for Poor Corporate
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125
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Corporate Governance
Comparative study :
USA, UK, Germany and Japan
130
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Corporate Governance
Comparative study :
Ownership
Control Rights
Governance Rules
Market for corporate Control
131
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Corporate Governance
1. Ownership :
USA : More than 50% of equity
132
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Corporate Governance
UK : 67 % of equity shareholding
NLDIMSR
Corporate Governance
Germany : 40 % of equity holding by large
companies, followed by
Institutional holding 11%
Banks
10%
Private Shareholders 11%
Balance by Govt and others
Smaller companies : Family owned
Substantial cross holding amongst companies
No role / limited role of private investors
Illiquid holdings
Strong control of com. Banks via proxy voting
on behalf of individual shareholders.
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Corporate Governance
Japan : Corporate cross shareholding
NLDIMSR
Corporate Governance
2. Control Rights :
USA :Management and control
136
NLDIMSR
Corporate Governance
Control Rights cotd:
Germany : Management and control of
NLDIMSR
Corporate Governance
3.Governance Rules :
USA :
Board members including CEO appointed by
shareholders
Audit committee with independent Directorship
set up compulsory as precondition for listing
Companies to ensure 50 % outstanding shares
voting at AGM
Proxy voting by mail permitted
Proportional representation for minority
shareholders interest
Preemptive right to issue new shares to retain
proportional holdings.
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Corporate Governance
Governance Rules : Contd:
UK: Board members appointed by
shareholders
Audit committee of at least 3 non
executive directors compulsory as
listing requirement
No requirement of quorum on AGM
139
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Corporate Governance
Governance Rules : Contd.
Germany : Two tier Board system :
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Corporate Governance
Governance Rules contd :
JAPAN : Single tier majority of all inside
NLDIMSR
Corporate Governance
4. Market for corporate control:
USA : Very strong capital markets
Role of Banks in governance not
important
Management take take overs
including hostile take over are
common.
142
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Corporate Governance
Market for corporate control Contd:
UK : Active and strong capital
market
M&As : Quite strong, active and
common
UK Banks not interested to take
equity stakes hence insignificant
role in corporate governance.
143
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Corporate Governance
Market for Corporate Control :
Germany : No market control for
NLDIMSR
Corporate Governance
Market for Corporate Control
contd
Japan : No market for corporate
control
Friendly M&As not uncommon.
Minimal hostile takeover activity.
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Corporate Social
Responsibility
NLDIMSR
Corporate Governance
Requirement of CSR in Companies Act 2013
Sec.135 : Corporate Social Responsibility :
Corporate Social Responsibility Committee:
Every company with net worth of Rs. 500 crores or more
Or Turnover of Rs. 1,000/- crore
Or a Net Profit of Rs. Five crore or more during any
financial year
Shall constitute a Corporate Social Responsibility
Committee of Board consisting of three or more directors
, out of which at least one director shall be independent.
Board of Directors report to members at AGM to disclose
constitution of Corporate Social Responsibility Committee
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Corporate Governance
Corporate Social Responsibility Committee:
The committee shall formulate and recommend to
NLDIMSR
Corporate Governance
Board to ensure that the CSR activities are
undertaken.
Board to ensure that company spends in every
financial year
At least two percent of the average net profits of the
company made during the three preceding financial
year , in pursuance of CSR policy of the company.
For taking up CSR activities, company shall give
preference to local area around it where it operates.
If Board fails to spend this amount, the Board should
specify the reasons why it could not send in its
financial report to the members of the company.
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Corporate Governance
Schedule VII :
Activities which may be included by companies in their
151
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Corporate Governance
Schedule vii :
vii. Employment enhancing vocational skills.
viii. Social business projects.
ix. Contribution to Prime Ministers National
NLDIMSR
Corporate Social
Responsibility
NLDIMSR
Corporate Social
Responsibility
NLDIMSR
Corporate Social
Responsibility
farmer :
He was a poor bee farmer earning a few thousand
rupees from bee farming.
He attended a seven day programme organised
by Lupin on bee farming.
Gupta helped him in getting Rs.10000/- loan from
local bank to buy five honey combed bee boxes.
Singhs income kept growing- presently earning
Rs.10 lakhs a year ( in 2003) and his customers
included Dabur. There are many like singh
whomake 4-5 lakhs from bee farming.
155
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Corporate Social
Responsibility
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NLDIMSR
Corporate Social
Responsibility
hand :
In 1960, way before nationalisation, Canara bank
provided educational loans at cheaper rates.
About 47000 employees of Canara Bank donate
Rs.3 /-per month to a social cause of their choice
Rs.16.9 lakh annually.
Apart from this, Bank contributes Rs. 10 crores,
nearly 1% of its profits.
Like Lupin, Canara bank CSR projects fall mostly
within the ambit of community development. Its main
thrust is on giving vocational skills to unemployed
people.
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Corporate Social
Responsibility
people.
One big initiative is Rural Entrepreneurship
Development Institutes and set up 20 such
vocational centres across India in partnership
with Syndicate Bank and Dharmastala
Manjunatheshwara Educational Trust.
Example of Ramakrishna who came out from
such centre runs a shop at Bidadi near
Jogaradoddi and makes Rs. 10000/- month
selling wooden carvings.
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Corporate Social
Responsibility
charity please
Ambuja Cement Foundation : a non profit
organisation set up by Gujarat Ambuja Cement in
1993 and now extends across seven states,
touching the lives of 4.5 lakhs people in nearly
300 villages.
ACF does not associate with corporate
philanthropy. Every project it undertakes involves
some contribution by stakeholders .
ACF projects are simple and need based. So,
water harvesting gains priority in Saurashtra.
159
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Corporate Social
Responsibility
NLDIMSR
Corporate Social
Responsibility
model :
ITCs Commitment Beyond the Market initiative is
mutually beneficial model where social development
is integrated with its businesses including cigarettes,
paper and paper boards, food products and hotels.
While its farm and social forestry projects aim at
increasing forest cover and ecological balance, for
ITC, it creates a source of timber .
Its watershed development projects improve soil
content in dry land, it gives ITC a bigger sourcing
area for agricultural inputs.
161
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Corporate Social
Responsibility
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Corporate Social
Responsibility
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Corporate Social
Responsibility
Winners of CSR awards in 2006:
Winner : SAIL : It has specific CSR policy
Spends 2% of distributable surplus on projects
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Corporate Social
Responsibility
165
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Corporate Social
Responsibility
CSR aciviies ?
Philanthropy
50%
Image building 42%
Employee morale 30%
Ethics
30%
166
NLDIMSR
Corporate Social
Responsibility
activities ?
Healthcare
Blood donation
Education
Opening schools
Relief Camps
167
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17%
16%
12%
10%
10%
Corporate Social
Responsibility
Target Groups:
Weaker sections of society
Company employees
Children
Rural community
Disaster affected
Community near workplace
Ailing / sick people
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43 %
37%
34%
29%
27%
23%
20%
CSR activities?
Donating money
Staff deputation
Staff volunteering
Company products
Enabling employment
Company facilities
169
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81%
24%
20%
19%
17%
25%
NLDIMSR
Corporate Social
Responsibility
policy on CSR :
Never thought of it
Already contributing
44%
39%
No specific reason
39%
Small size
24%
Decision with upper mgt
21%
Financial reasons
21%
Doing business honestly
15%
171
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Corporate Social
Responsibility
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Corporate Social
Responsibility
173
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Corporate Social
Responsibility
years
Boards
Investment community
Organised labour
Suppliers
174
NLDIMSR
Now
19
16
7
6
In next 5
16
19
7
5
Corporate Social
Responsibility
of business?
Increasing Environmental Concern :
61
Demand Supply gap of natural resources
38
Emergence of China / India on global market place : 37
Increasing Technological connectivity
33
Decreasing Trust in Business
18
Growing influence of NGOs
14
175
NLDIMSR
Corporate Social
Responsibility
Contd
Backlash against Globalisation
12
Over burdened Public Sector
Off shoring
12
Protectionism
06
176
NLDIMSR
12
Corporate Social
Responsibility
177
NLDIMSR
Corporate Social
Responsibility
Security of energy supply :
35
Access to clean water, sanitation :
12
HIV/ AIDS and other public health issues
08
178
NLDIMSR
Corporate Social
Responsibility
Barriers to CEO engagement :
179
NLDIMSR
Corporate Social
Responsibility
: 17
Lack of effective communication
infrastructure :13
Lack of Board support
: 07
Employee resistance
: 04
180
NLDIMSR
Corporate Social
Responsibility
Performance Gap :
181
NLDIMSR