Home Corporate Governance An overview on corporate governance and corporate social responsibility reporting

An overview on corporate governance and corporate social responsibility reporting

January 6, 2024

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This article has been written by Navya Raghunath pursuing Diploma in Corporate Law & Practice: Transactions, Governance and Disputes and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

The corporate sector is itself multidimensional and diverse in nature. With the advent of globalisation in developing countries like India, China, etc., countries needed a framework of corporate governance as was prevalent in developed countries like America, the U.K., etc. to facilitate the functioning of various aspects of the corporate field. There is a need for governance, as governance can be understood as the set of rules for the proper functioning of the political system and its acceptance by the public. In the same way, governance is required in the corporate field so that it can ensure the conflict free functioning of the corporate sector and in cases of dispute, corporate governance provides it with the mechanism to resolve the dispute.

Corporate governance is very much needed for the development of a nation, as the proper and smooth functioning of businesses in any country gives a boost to the economy and many big companies such as Apple, Samsung, Reliance, etc. have provided themselves with channelized corporate governance.

What are corporate governance and corporate social responsibility

Corporate governance can be understood as a set of rules and practices that are essential for the proper functioning of any company and companies are directed and regulated under the ambit of corporate governance. It eases out the function of any company. Stakeholders of any company include shareholders, senior management, suppliers, customers, the government, lenders, etc.; their interests are balanced by corporate governance. The object of corporate governance is to ensure that a company’s practices are ethical in nature and are for the benefit of society. For the said purpose in India, SEBI was born to facilitate corporate governance and boost the Indian corporate sector.

Various elements of corporate governance

Corporate governance establishes relationships among various stakeholders. There are various elements of corporate governance, such as:

Board of directors- The BOD plays a crucial role in corporate governance as it is the apex body in any company; moreover, shareholders , advisors, lenders , etc. also affect the governance of a company. Effective corporate governance mitigates the risk of a company and also ensures transparency in its conduct, which increases the accountability of the company. Above mentioned elements play the role of check and balance, as these elements ensure no policy or conduct is unethical and also ensure companies are efficiently conducting businesses to maximise profit and also ensure public welfare.

Shareholder’s rights- These rights are very crucial in corporate governance. Shareholders have the right to vote for the members of the board of directors who carry the management power of a company. Shareholders approve major transactions of a company, which gives shareholders the right to know and decide the way in which their money is being utilised. Shareholders enjoy special powers to vote, take part in company meetings and have the right to information.

Ethical behaviour- It is mandatory for any company to have good corporate governance. Companies need to frame policies that uplift everyone, including their employees and society. There should be transparency and fairness in companies`s conduct. Merely complying with the legal framework doesn`t make companies’ actions ethical but those actions must be for the betterment of the majority.

Risk mitigation- It should be a prima facie concern for any company. It is that process where companies identify potential risks that they can face and come up with a solution for tackling that risk and reducing the damage. This increases the accountability and profitability of the company.

Transparency and accountability- These are interrelated and can be considered two sides of the same coin. They act cooperatively. Transparency in company conduct and policies increases trust among employers, stakeholders and society. Transparency in a company’s conduct makes it accountable for its actions and performance.

All the above mentioned elements of corporate governance are very important for any company’s growth. Similarly, corporate social responsibility is equally important for a company to bloom.

There are three aspects: economic, environmental and social, and to balance the interest between these three aspects, the mechanism of corporate social responsibility (CSR) is practiced by companies. This approach is also known as the Triple Bottom Line approach. CSR is a form of business management where the sole motive of any business is not limited to profit earning but integrates social and environmental concerns into company policy and its conduct with stakeholders. Some examples of CSR are policies of companies focusing on reducing carbon footprint, charitable global giving, improving labour practices, focusing on environmental aspects, policies for customer welfare, etc. CSR not only makes companies socially responsible but also helps companies build trust among customers and attract foreign investment, which eventually boosts the company’s growth.

Relationship between corporate governance and corporate social responsibility

Every business entity is a corporate citizen, i.e., a business entity has a social responsibility towards society and a responsibility to meet ethical and environmental standards. The concept of corporate citizenship is relatable as it intends business entities to produce a higher standard of living in society while maintaining the profitability of stakeholders. For any company or business entity to be a good corporate citizen , it has to be well governed and responsible for it`s conduct towards stakeholders and society.

The term corporate social responsibility can be interpreted as the responsibility of companies to execute such policies and conduct that make them effective corporate citizens. Corporate governance and corporate social responsibility are two aspects of the same coin, where one is involved in the better management of a company and the latter makes companies focus on ethics and society.

According to the definition provided by the World Bank, “corporate social responsibility is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their lives in ways that are good for business and for development”.

Initially, CSR was considered for charity only but after the post liberation period of the 1990s, the shift from a charity based model to a stakeholder-participation model can be witnessed. Now CSR is getting infused into the corporate governance of the companies and stakeholders are taking active participation in it and the board of directors plays a crucial role in it as it is the apex managerial authority in any company. Inclusion of CSR in corporate governance helps companies gain trust and many companies are wisely using it. MAMAEARTH, a skin care brand, is a very beautiful example of the inclusion of CSR in corporate governance, as it has gained trust and is actively participating in planting trees with each order, which is a work for the environment. Tata, Hindustan, Unilever, etc. are such examples that hold a good image in society.

Now society itself is so aware that it itself is interlinking corporate governance and CSR.

Corporate social responsibility reporting and its need

As society as a whole is stepping towards a new era of technology and digitalisation, the environment is getting adversely impacted. During the period of the industrial revolution in England, evidence shows companies’ concern for workers and society. Though the modern terminology, i.e., the CSR report, was coined in 1953 by an American economist, Howard Bowen. But the term got more popular after the 1990s, when globalisation was happening.

Every action has an equal reaction and so has development. The phase of development brought all the adverse effects to the environment and also to society. To reverse the effect of such development, which resulted in environmental degradation, leaders from around the globe came together with a sustainable development goal (SDG). In the corporate world, companies make CSR reports to demonstrate to their stakeholders, including the government , how they are contributing to achieving these goals. The CSR report is also known as the Corporate Sustainability Report.

A CSR report is a document that companies present to stakeholders and the world to show their efforts towards the SDG and how they are impacting society and the environment. According to the Global Reporting Initiative, CSR reporting can be defined as “a sustainability report is a report published by a company or organisation about the economic, environmental and social impacts caused by its everyday activities. A sustainability report also presents the organisation’s values and governance model and demonstrates the link between its strategy and its commitment to a sustainable global economy.”

CSR reporting enables companies to measure the impact of their policies and day to day work on society and the environment. It helps companies evaluate themselves, and in improvising policies and optimising energy and resource consumption, it also enables them to represent their agenda towards society and the environment to stakeholders. This not only represents the company’s efforts but also builds trust among employees, society, customers, etc. It strengthens the public relations of a company and acts as a marketing asset for the company.

Corporate governance`s key element is transparency, which CSR reporting provides. A CSR report is a public document and is visible to all. As the world shifts towards sustainability, investor interest and a good CSR report attract investors and also increase the company’s profitability.

There are a number of reasons why CSR reporting is important for corporate governance.

First, it can help to improve a company’s reputation and brand image. A company that is committed to sustainability and social responsibility is more likely to be seen as a good corporate citizen. This can lead to increased customer loyalty and brand awareness.
Second, CSR reporting can help mitigate risk. By identifying and addressing potential risks, companies can reduce their exposure to lawsuits and regulatory fines.
Third, CSR reporting can help improve a company’s financial performance. By investing in sustainability and social responsibility, companies can reduce their costs and improve their efficiency.

In today’s competitive business environment, CSR reporting is an essential tool for corporate governance. By demonstrating their commitment to transparency and sustainability, companies can attract investors, improve their reputation, and reduce their risk.

Laws relating to corporate governance and corporate social responsibility

Corporate governance and CSR are not only important for a company individually but also for a nation, as a country’s corporate mechanism attracts investors and customers, which helps the economy of the country. Various countries have made legal provisions regarding governance and CSR.

In Indian context, corporate governance is covered in The Companies Act of 2013, Securities and Exchange Board of India (SEBI) Listing Regulations, SEBI( Prohibition of Insider Trading) Regulation of 2015, Independent Financial Reporting Authority (NFRA), Code of Conduct For Board Members and Senior Management, etc.

Section 135 of the Companies Act, 2013 discusses CSR as it mandates companies having a net worth of 500 crore or more a turnover of 1000 crore or more or a profit of 5 crore or more during the immediately preceding year to utilise at least two percent of the average profit earned in the last three years in socially responsible activities.

The Supreme Court of India has also iterated on the importance of CSR from time to time.

The Bhopal Gas Tragedy is considered to be one of the worst industrial disasters in history. On December 2, 1984, a leak in a pesticide plant owned by Union Carbide Corporation in Bhopal, India, released methyl isocyanate gas into the atmosphere. The gas killed an estimated 15,000 people and injured over 500,000 more.

In the aftermath of the tragedy, the Supreme Court of India held Union Carbide Corporation liable for the disaster and ordered the company to pay compensation to the victims. The court also directed the company to take steps to rehabilitate the victims and restore the environment.

The Bhopal Gas Tragedy had a profound impact on corporate accountability in India. The case made it clear that companies have a responsibility to protect the health and safety of their workers and the communities in which they operate. The case also highlighted the importance of environmental protection.

In the years since the Bhopal Gas Tragedy, India has enacted a number of laws and regulations to improve corporate accountability. These laws include the Factories Act of 1948, the Environment Protection Act of 1986, and the Consumer Protection Act of 1986. These laws require companies to comply with certain safety standards, to protect the environment, and to provide compensation to consumers who are injured by defective products.

The Bhopal Gas Tragedy was a tragedy, but it also led to important changes in corporate accountability in India. These changes have helped to make India a safer place for workers and consumers.

In addition to the legal changes that have been made in India, there has also been a growing movement for corporate social responsibility (CSR). CSR is the voluntary commitment by companies to improve their social and environmental performance. Companies that engage in CSR activities often do so in order to improve their reputation, attract and retain employees, and reduce their risk of litigation.

The Bhopal Gas Tragedy is a reminder of the importance of corporate accountability. Companies have a responsibility to protect the health and safety of their workers and the communities in which they operate. They also have a responsibility to protect the environment. By engaging in CSR activities, companies can help to make India a safer and more sustainable place to live and work.

In the US, CSR is not mandatory but companies follow it as a social and ethical norm. On the other hand , in the UAE, CSR related conduct is mandatory and companies have to conduct a CSR advocacy framework. The UAE made it mandatory for foreign companies working in the UAE to register on the CSR portal.

Challenges in corporate governance and corporate social responsibility

Corporate governance and CSR are nowadays the most important factors for a company. With the changing times and new demands of society, it has to face challenges in its regulation. The challenges are as follows:

Challenges in corporate governance

In corporate governance, the board of directors plays a crucial role, and there have to be efficient members belonging to the executive, non-executive, independent and female directors. In India, the presence of family members can be witnessed in the team of board members, which causes ill efficiency in the company and a lack of proper governance.

According to the report of the Kumar Manglam committee on corporate governance in 1999, there should be independent directors on the board of directors so that policies can be framed without any pressure. But it is not evident and most of the directors are appointed on the recommendation of companies` promoters and if any independent director is appointed, they can easily get removed from the position in case of any disagreement with the promoters.

Various fraud cases and scams related to misuse of public money, corrupt practices,etc. can be seen in the last few years, which has created a sense of mistrust among customers and investors.

With the advent of digitalisation, maintaining transparency and managing confidential information have become tough tasks. Malware attacks for data theft have also become so common. In this cutthroat competitive environment, any leakage of data adversely affects the governance of a company.

There are various other challenges, like shareholder activism, which focus on short term profit, and maintaining ethical balance in companies policies, which focus on all aspects like employee, performance of the company, society, environment, etc.

Challenges in corporate social responsibility

With changing market needs and changes in climate and social dynamics, companies`s corporate social responsibility has also increased. To keep pace with the changing scenarios, companies have to face various challenges like resource allocation, increasing globalisation, trust development, etc.

Companies need to find a balance where they can maximise profit while framing socially responsible policies. Some companies are incorporating such practices into their policies, though early stage companies are struggling with this.

The Corona pandemic has also hit hard, and it almost resulted in the layoff of large numbers of employees, which not only increased unemployment but also risked the secrecy of the company. Companies are still overcoming the losses caused, which resulted in less hiring of employees.

Climate change is hitting very hard. Companies are facing challenges in moving towards sustainability in supply chain management. Companies need to put in more effort so that negative social and environmental impacts can be avoided.

There is a lack of statutory guidelines in respect of CSR, which makes it difficult to streamline CSR activities and promote them. Indian law only focuses on big companies; small companies are still non-directed and are not under the umbrella of CSR.

Globally, CSR is not mandatory for every company. For example, the US, being one of the most developed nations, has no strict law regarding CSR. Lack of strict statutory provisions makes CSR a non-serious practice.

Conclusion

Good corporate governance and CSR are very important factors involved in any company’s growth. It is now a deeply rooted concept globally, as changing market structures have made it mandatory for companies to inculcate these practices in their policies to sustain themselves in the market. Efficient corporate governance helps companies reach new heights. Various successful companies, like Apple, Samsung, Tata, Jio, etc., have strong corporate governance. With the success of companies, their responsibility towards society also increases, which companies cater to with their policies like free education, scholarship programmes, plantation drives, etc.

Thus, both corporate governance and CSR nowadays are not distinct and are irreparable, as a good corporate governance policy focuses on ethical and social requirements that companies implement through CSR oriented policies.

References

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