CORPORATE GOVERNANCE & BUSINESS ETHICS

Role of CSR

5th March, 2018 (27)

 CORPORATE SOCIAL RESPONSIBILITY (CSR)
Legal requirements: The Companies Act 2013, mandates every
corporate meeting certain criteria(net profit > Rs 5 crs, OR T/O > Rs
1000 crs) liable to spend 2 % of the Average Net Profit of the last 3
years on CSR activities;

Also must constitute a CSR committee of 3 or more Directors, with at

least 1 Independent Director, and formulate a CSR Policy.
(The idea is to make CSR more than just ad-hoc philanthrophy)

Some other provisions:

Mandatory disclosure of CSR in accounts
Companies to be penalized for CSR default
 CORPORATE SOCIAL RESPONSIBILITY (CSR) - some views:
Rahul Bajaj : “ ….most of the corporates spend that amount for CSR
activities and I can't agree that philanthropy, CSR activities and our
generosity should be mandatory.”
Venu Srinivasan, chairman of TVS Motor, also said making the CSR
spend mandatory is similar to levying another tax
• Main objections :
• Another set of accounts to prepare & for the Government to check,
when there are already excessive inspections and controls
• Voluntary CSR wins goodwill precisely because it is voluntary.
Corporations are seen to do it because they care, and not because
they are forced to. If CSR is mandated, where is the heart?
CORPORATE SOCIAL RESPONSIBILITY (CSR)
Corporate Social responsibility (CSR) = Responsibility that
Corporates have towards Society in which they operate

Common Principles of CSR:

1. CSR is a business necessity
2. CSR is a must for SUSTAINABLE development
3. CSR is a way to manage business

It is NOT an optional, desirable extra, but about the way in which

business is managed. It is the way companies manage their
business to produce an overall positive impact on society.
CORPORATE SOCIAL RESPONSIBILITY (CSR)
The idea that CSR is important to profitability and can prevent the loss of
customers, & even employees is gaining increasing acceptance.
CSR is moving away from charity and dependence and starting to build
on empowerment and partnership.
Triple Bottom Line Reporting (TBL) == Measuring Corporate
performance on (i) Economic (ii) Social (iii) Environment indicators.
i.e. Focus on 3P’s – Concern for Profits, People, and Planet – goes beyond
compliance of the law, & acts in overall interests of society.
Recognizes that NO growth happens without destroying something else,
hence always necessary to question at what expense growth comes.
Valuation of a Company is done on the basis of its performance on these 3
aspects.
 CSR – Some Misconceptions
1. Companies invest the money – hence they can decide the modus
operandi of the CSR initiative
[Stakeholders must be involved to determine the initiative, as Company by
itself may not be able to fully understand the communities needs]

2. Financial resources are enough to meet CSR needs

[Well defined programs must have adequate human resources too]

3. CSR is same as sponsorships, donations, and charitable activities

[The concept has moved beyond this to include all segments of business
operations – employees, market, environment, and community]
 Case : Merck & River Blindness
Merck & Co., Inc. is one of the world's largest pharmaceutical companies.
Merck has over 70,000 employees and sells products and services in
approximately 150 countries. Merck had revenues of $ 40 Bn in 2016, $ 2
Bn in profits, & ranked 69th on the Fortune 500 list of America's largest
companies. One of the stated core values of the Company was- “Medicine is
for the welfare of the people, not for profits; Profits will always follow if we
remember this”

In the late 1970s, Merck research scientists discovered a POTENTIAL cure

for a severely devastating disease known as river blindness. The disease is
caused by the bite of flies that breed on the rivers of Africa and Latin
America. The parasite causes severe infections leading finally to total and
permanent blindness. People most affected by this sickness were the
extremely poor Africans and Latin Americans who lived in villages and
towns along the river sides. To prove its efficacy and safety, the drug
needed to undergo expensive clinical trials (approx. upto $ 100 mn!!)
Case : Merck & River Blindness
The Management were concerned because they knew that those who needed
the drug most could not afford to pay for the drug, even if it was sold at cost.
However, Merck research scientists argued that the drug was far too
promising from a medical standpoint to abandon. The Management relented
and a 7-year clinical trial was approved and went on to prove that the the
drug was both effective & safe.
Once the drug was approved for human use, Merck executives explored
various 3rd party payment options, for commercial production, including with
WHO, the U.S.A.I.D, and the U.S. Department of State , all without any
success!
It was a strange situation - A cure was now possible, but those who needed the
drug could not pay, and there were no Agencies willing to come forward &
pay for or subsidize the cost of the drug….... After all, it was a commercial
enterprise, and one of the values of the Co: was to grow profitably.
If you were the decision maker in Merck, in this situation, what do you think you
would have done? Which Governance theory would guide your actions?
 Case : Merck & River Blindness
Merck executives decided to manufacture and distribute the drug for free –
and simultaneously continue attempts to enroll other agencies in this program.
Since 1987, Merck has manufactured and distributed over 700 mn tablets of
Mectizan, at no charge.

The company's decision was grounded in its core values:

1. Our business is preserving and improving human life.
2. We are committed to the highest standards of ethics and integrity.
3. We are dedicated to the highest level of scientific excellence and commit
our research to improving human and animal health and the quality of life.
4. We expect profits, but only from work that satisfies customer needs and
benefits humanity.
 Case : Merck & River Blindness

George W. Merck, the company's president from 1925 to 1950,

summarized these values when he wrote, "medicine is for the people. It is not
for the profits. The profits follow, and if we have remembered that, they
have never failed to appear. The better we have remembered that, the
larger they have been."

Today, the Merck Mectizan Donation Program includes partnerships with

numerous NGO’s, Govt. organizations, Private foundations, WHO, The
World Bank, UNICEF, and the United Nations Development Program.

In total, approximately 30 million people in 32 countries are now treated

annually with Mectizan. Merck estimates that each pill is worth $1.50. The
United Nations reports that river blindness may soon be eradicated.
CORPORATE GOVERNANCE & BUSINESS ETHICS

IPR & other relevant legislation

Case :

Your Company operates in a highly competitive & price sensitive market. You
have recently recruited a Senior Manager to Head the Finance function, from
a major competitor “X”. The Manager appears to be a good fit in all
respects & has a lot of relevant experience.
During a Top Management meeting, where Product Costing (a highly sensitive
& confidential topic) is being discussed, the new employee, eager to make a
good impression says, “When I was with Co: X, I had made copies of all
their costing data & cost standards. Shall I get them for you to go through?”
Obviously, in the market that you operate in, this information would be very
useful for your organization & give your Company a competitive edge. You
have after all taken him for all his knowledge and experience.

Questions
What would be your actual response as the CEO, with responsibility for
Company’s profitability and well being? Give your reasoning.
Intellectual Property Rights

The E&Y Survey 2012, had identified “Data Theft & IP infringement” as one of
the Top 5 Fraud Risks in Corporate India.

“E & Y Survey 2012: Almost 60% of Companies surveyed had been subjected
to fraud in past year. Top 5 Fraud Risks:
a) Data theft and IP infringement
b) Bribery and Corruption
c)Fraud by Senior Management & Conflict of Interest
d) Vendor fraud or kickbacks
e) Regulatory non-compliance
KPMG survey of the same year : Primary reason for Financial Fraud was the
pressure created by the ‘goal’ of surpassing market expectations”
Intellectual Property Rights - Objectives

Intellectual Property is a product of human intellect, imagination, creativity –it is

an intellectual asset, and needs to be protected – just as we do with physical
assets.
Generally, believed that knowledge blossoms when freely shared, but in many
cases, such sharing is not encouraged or considered desirable.
• People spend a lot of resources, time, energy on developing new products /
inventions, and hence have a right to the fruits of their labor.
• Any use of these should be with their authorization and they need to get a
share of the benefits.
• Without this kind of protection, unlikely that people will make the effort to
come out with or share innovations.
The IPR Act aims to provide a secure environment to encourage such
innovations, and ensure that society is benefited also. Aims to strike a balance
between Public and private rights.
Intellectual Property Rights –status in India
In India, following legislations exist for IPR:
1) Patent Act (amended 2005) 2) Trade Marks Act, 1999
3) Copyright Act 4) Designs Act, 2000
Patent:
• Property Right granted to inventor for an invention (a new product or process,
involving an inventive step, capable of industrial application); Thus Ideas by
themselves, cannot be patented- need to explain HOW they can be used.
• Gives exclusive right to owner & prevents others from exploiting it
• Validity – generally 20 years

Trade marks:
• Any word, name, symbol or combination of these, to identify and distinguish
the goods of one manufacturer from goods manufactured by another.
• Extremely valuable asset for the organization
• Validity – generally indefinite
Intellectual Property Rights –status in India
Copyright:
• Protection granted to the author of any ORIGINAL work of authorship,
published or unpublished.
• A copyright protects an expression of the idea rather than the idea itself (eg.
Stories, song lyrics, computer programs etc)
• You have to own the work i.e. it was not done as an employee, or as a work
for hire
• Not even necessary to register it. It arises as soon as a work is recorded in
some material form.

Designs:
• For protection of industrial designs
• Registration of designs protects the appearance of a product, not their
function.
Consumer Protection Act, 1986
Concept of “CAVEAT EMPTOR” i.e. Consumer be aware; Principle that the buyer
alone is responsible for checking the quality of goods before buying them.
Organisations often take shelter under this principle to argue that it is the
consumer’s duty to educate himself about a product before buying it, and hence
they try to get away with misleading product information – eg Ribena case, OTC
drug comparison survey etc; This is now being restricted by Consumer protection
laws in many countries.
Basis:
• Consumers have a right to Truthful information, and information that is NOT
misleading or deceptive , about a product.
• The right to be protected from deceptive and misleading marketing tactics
• Right to be truthfully informed about quality & other claims of producers of
goods or services & the right to be protected from harmful products.
• For any violations, they have the right to seek redressal or compensationin
from appropriate Consumer Forums or Courts.
Environment Protection Act, 1986
Objective: To provide protection and improvement of the environment.

Environment – includes land, air, and water, and the Act seeks to protect the
environment from anything that is hazardous or harmful to it, or to the living
creatures in it.

Implications for Organizations:

They have to ensure that harmful or hazardous by-products of their processes,
are disposed off / released into the environment ONLY as provided under the
law. Thus, excess emissions, or pollutants, or discharge of effluents in excess of
notified standards is a punishable offence.

Penalty: Imprisonment for the Occupier (i.e. Owner, Director) upto 5 years, or
Fine, or Both