This article has been written by Paras Gupta, pursuing a Diploma in US Corporate Law and Paralegal Studies and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction

Corporate governance plays a vital role in the success or decline of any company, for it is the guiding principle on which the plans and operations of any company depend. For corporate governance to be company and stakeholders friendly, it must be led by Corporate Social Responsibility (CSR), and maintaining the quality of CSR is something that the companies of the present era find difficult. In India, after the pandemic, there has been a decline of 4% in the total CSR expenditure spent by the top 500 companies in the country. The reasons given for the same are many, be it lesser revenue generation, diversification of funds or any other reason, but the solutions kicked off for the same are none.

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Corporate Social Responsibility is a panacea for every company that is on the verge of dissolution, for quality CSR means a good impact on public image and a good impact on public image means attraction and retention of investors. Corporate Social Responsibility is something that companies lack in today’s time and is primarily responsible for them remaining stagnated at one position, seeing no hope for success and a dark future ahead. 

What is corporate governance

Corporate governance is a set of laws, rules, and processes that are the driving force behind the regulation and operation of a company. It is an interaction between various participants embodied in a company to make a roadmap on which the company will proceed and is essential in shaping its performance. Since corporate governance furnishes a framework for attaining a company’s objectives, it practically encloses every sphere of governance, from company disclosure and performance measurement to internal controls and action plans.

Good corporate governance is essential for any company, as it can facilitate the raising of capital, help build trust with public officials, the community and investors, and potentially lessen the risks of financial loss and corruption. It will further promote long-term returns, opportunities and economic viability and is a game plan for long term success and strength. On the other hand, bad corporate governance is something that a company should be feared of, as it will not only affect the trust of investors in a company but can also be a cause of the dissolution of a company as it can ultimately lead to a tussle between the stakeholders and the board of directors. Hence, there is no doubt that a company with good corporate governance performs better in commercial terms than a company with bad corporate governance.

4 P’s of corporate governance

Corporate governance is a complex beast. That’s why it has been divided into the four P’s by many government experts. These four P’s stand for the following:

  1. People: The journey of 4 P’s is cyclical, in which people stand supreme. People are a crucial stratum of a company, as they are the ones responsible for policy formation, developing a consistent approach to achieving the objectives of the policies, evaluating their outcomes, and using those outcomes to the advantage of the company.
  2. Purpose: Without a sense of purpose, no company, whether private or public, can achieve its full potential. Purpose is something for which people organise themselves into a company. This can vary between making a purpose and accomplishing a purpose. Purpose is something for which a company’s policies are formed. It may seem pointless and irrelevant to type up the minutes of a meeting but ultimately, these minutes are the ones that contribute to making the business effective enough to accomplish its stated purposes.
  3. Process: Process stands third in the count of 4 P’s. Governance is a process by which a company achieves its stated purposes and that process is developed by analysing the company’s performance. Over time, these processes are refined in order to achieve their purposes and it’s always a smart step to keep an eye on your governance processes. Though it may look hard enough to make the processes function, once they do, one can see the limitless help that they can provide to a company to help it grow.
  4. Performance: Performance stands last in this cyclic chain of 4 P’s as the aim of all the above P’s is to improve a company’s performance. Performance analysis is a key skill in any industry. To look at the results of a process, to find loopholes that led to its failure and to come up with solutions to improve it is part and parcel of a governance process.  

Essential elements of corporate governance 

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It is pertinent to be aware of the essential elements or guiding principles of corporate governance in order to make this process effective. The following are the essential elements of corporate governance:

  1. Risk management: Risk management is the identification and prioritisation of risks followed by the economical and coordinated application of resources to minimise, monitor and control the impact of unfortunate incidents. Basically, corporate governance aims towards the formation of such policies for the minimization of risks that can hamper the growth of a company. Furthermore, it is also important for the board and management to be aware of the risks and make all relevant parties aware of them in order to maintain their trust and worthiness
  2. Responsibility: The board acts as a cynosure here, for it is responsible for management activities and oversight of corporate matters. Recruiting and hiring a CEO is a prime responsibility of the board. Moreover, the board is responsible for acting in the best interest of its investors and the company.
  3. Accountability: It is pertinent to note here that the board and the company’s leadership are accountable for assessing the company’s potential, capacity and performance. Moreover, the board is accountable for explaining the purposes of the company’s activities and the results of its conduct.
  4. Fairness: For any organisation to be successful by leaps and bounds, it is important that there is fairness in the making of the policies and the system of governance. Similarly, it is with corporate governance. The company’s policies must treat vendors, employees, shareholders and communities fairly and with equal consideration.
  5. Transparency: The board must ensure transparency in its system of dealing with the stakeholders by providing accurate, timely and clear information about the conflict of interests, risk management and financial performance. 

What is corporate social responsibility

Corporate Social Responsibility is a type of self-regulation model for a company whereby it integrates its social and environmental concerns with the aim of social accountability and making a positive impact on society. CSR is generally understood as a “Triple-Bottom-Line Approach” whereby a company achieves a balance of environmental, economic and social imperatives while addressing the interests of its stakeholders. 

CSR is generally categorised into four categories i.e. philanthropic responsibility, environmental responsibility, economic responsibility and human/ethical responsibility. The company makes a concerted effort to operate in such a way that, while addressing all these responsibilities, it also addresses the interests and benefits of its investors and stakeholders. Hence, it helps in improving the positive brand image of the company while simultaneously improving various aspects of society.

Importance of corporate social responsibility in corporate governance

The importance of Corporate Social Responsibility in corporate governance:

  1. Improves customers’ perception of your brand: To stand out among the competition, it becomes pertinent that people have an optimistic attitude towards your company. Whether you are a public or private company, people will approach you only when you have a socially conscious image. Stakeholders, employees and consumers prioritise CSR when choosing a company or a brand and they hold corporations accountable for effecting social change with their practises, beliefs and profits. 

The Kantar Purpose 2020 study shows that a purposeful brand with positive insight in people’s eyes grows twice as fast as its competition. Moreover, over a period of 12 years, brands with high perceived positive impact had a brand value growth of 175%, compared to 86% for medium positive impact brands and 70% for low positive impact brands. 

  1. Attraction and retention of employees: Sustainability strategy is a prime factor in how today’s employees seek to work. The next generation of employees prefers to work for companies that follow the Triple-Bottom-Line Approach, i.e., planet, people and revenue, to those that don’t..

The Porter Novelli Purpose Tracker 2021 shows that 64% of people believe that it is no longer acceptable for companies to be silent on the issues of social justice, while 56% of people believe that companies that do not talk about social justice issues in their policies are out of touch and are not preferred by employees. 

  1. Increases your appeal to investors: By demonstrating a developed and purposeful Corporate Social Responsibility, a company is bound to become more influential and appealing to future and current investors. CSR goes hand in hand with social, environmental and governance metrics that help quantify the company’s social  efforts by external analysts and this becomes a key factor for investors’ continued interest and consideration.

Laws on corporate governance and CSR in various countries

Countries have passed various laws to deal with corporate governance with an effective CSR. Some of those countries and their laws are as follows:

India

In India, Section 135 of the Companies Act of 2013 deals with it. It was rather a bold attempt by the government of India to keep businesses accountable while improving corporate governance and business in India. Section 135 of the Companies Act, 2013, deals with the formation of a CSR committee in a company. It provides that a company whose net worth is more than INR 500 crores or more, whose turnover is INR 1000 crores or more or whose net profit is INR 5 crores or more must spend 2% of its average net profits of the last three financial years on CSR activities. 

The Companies Act, 2013, has been recently revised by the Government of India. The procedure for dealing with unspent CSR funds and the cost calculation of conducting social impact assessments of CSR activities have been amended. The amendment states that businesses with any spare amount of Corporate Social Responsibility must set up a Corporate Social Responsibility committee, which will oversee the implementation of CSR activity rules. The law now requires the companies to use their unspent amount earmarked for CSR activities in their accounts within three financial years and also requires the companies with a CSR budget of over INR 10 crores or more in their accounts to carry out an independent impact assessment of their activities with regard to their social responsibilities. 

USA

In the USA, though consumer preferences for companies with environmental and social accountability are growing, it is a sort of soft law there. Any US regulation or statute does not enforce Corporate Social Responsibility but is rather seen as obligatory by most companies because of internal norms and consumer expectations.   

United Arab Emirates (UAE)

In the UAE, CSR activities are mandatory for companies and to enforce this, there are also laws there. The registration in the CSR portal is mandatory for foreign companies whose businesses are carried out in the UAE, commercial companies that are legally registered and indirectly and directly owned companies of the federal government, whereas it is optional for free zone companies, cooperative societies, individual firms and civil and professional companies. Various types of social responsibilities taken on by the company include making dolls for refugee children, planting trees, cleaning the beach in furtherance of protecting marine life, roundtable sessions on corporate sustainability and charity runs.

Switzerland

The Swiss Code of Best Practice of 2014 defines corporate governance as including all principles to safeguard sustainable company interests. Principle 9 of the code provides that the board of directors should be guided by the “goal of sustainable corporate development”. Moreover, the rule under Swiss Corporate Law Reform 2023 requires the companies and enterprises indulged in extractive industries to publish a report of the payments given to the gender quotas and government agencies in furtherance of Corporate Social Responsibility. 

CSR disclosure and corporate governance challenges

Corporate governance and CSR Disclosure deal with the following challenges:

  • Failure to consider its panoramic view: The companies have failed to consider the panoramic view of the CSR disclosure because of their narrow perception of this subject. CSR has its impact both on the environment and society, and it impacts mostly all the stakeholders, which is paramount for the companies to realise in order to create new opportunities and use them to pass through every roadblock to their success.
  • Harmonising the interests of the shareholders with the company’s development goals: The integration of the interests of the shareholders with social responsibility and the creation of sustainable and shared value has become a big challenge for the companies. The companies are mostly left in the dubious position of deciding whether to give more preference to the interests of the stakeholders or its social responsibility rather than harmonising both for the simultaneous development of the interests of the stakeholders and its social responsibility.
  • Greenwashing: Greenwashing refers to the unethical and deceitful practise used by companies in order to mislead their customers and investors into thinking that they are an environment-friendly company, thereby making a positive impact on their minds.  Being profit-driven, as many companies are, helps them increase their consumer base without doing much about their responsibility for the environment and society. 
  • Lack of participation by the communities: The inadequate competition between the communities and organisations and the lack of interest of the communities for which Corporate Social Responsibility is to be undertaken act as a major setback towards the driving force of CSR. Moreover, not enough efforts are made to instill confidence and spread the activities of CSR among people.
  •  Lack of strategic planning: Strategic planning is mandatory for the success of any initiative in which companies fail massively. Due to a lack of strategic planning, innovation, proper experimentation and engagement, companies fail to make a meaningful impact on their strategic efforts. 
  • Lack of transparency: Transparency helps various stakeholders get a proper insight into the issues relevant to them. The more important CSR is for a company, the more important transparency is for it to build trust among corporations and communities. But the companies nowadays practise window-dressing that hides a lot of information from the stakeholders, which comes in between the building of trust among them.  

Conclusion  

For a company to write milestones in its success story, it is pertinent for it to make CSR its paramount concern. After the pandemic has shattered the economies of many and the hopes of none, it is important for the companies to take initiatives in order to build a quality CSR, keeping in mind and uprooting everything that comes in their path to achieve the same. It is time for the emerging economies to take some lessons from the emerging economies that have prioritised Corporate Social Responsibility over their profit motive if they want to stand firm with head and shoulders above; otherwise, that time is not too far away when the emerging economies will be seen rattling in this competitive field.

References

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