This article has been written by Navya Raghunath Srivastav pursuing a Diploma in Corporate Law & Practice: Transactions, Governance and Disputes course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The corporate sector is a dynamic and evolving sector. With the emergence of new technologies, digitization, and globalisation, companies need to keep pace with the ever-evolving corporate sector, and for their survival, corporate governance policies are needed to create goodwill and attract investors and customers. 

Corporate governance policies are the policies that a company adopts in the functioning of the company to increase its profitability. This gives direction to the board of directors about the functioning of the company and sets procedures to function efficiently. Corporate governance policy sets a roadmap for a company on which the company functions. A good corporate governance policy includes financial management, duties of the board members, employee-employer relationship, recruitment practices, customer satisfaction, etc. 

Corporate governance policies are the most important factor for any company, and nowadays companies are taking care of society in terms of corporate social responsibility and giving society and environment-centric policies a place in corporate governance policies. 

Background behind corporate governance policy and corporate social responsibility

Corporate governance in the modern sense has been witnessed since the advent of the era of industrialisation, though its familiarity in modern days can be seen in the late 20th century. The induction of a proper form of corporate governance can be seen in 1970 in the USA. The objective of following certain policies was to reduce financial uncertainty and increase the productivity of the company.

Though, if talking about India, its presence can be seen in the 3rd century, when Chanakya emphasised the duties of the king in every sphere of governance, which included the profitable use of wealth, increasing the profitability of assets, ensuring security to each individual, etc.

In India, the principle of corporate governance was given legal shape in Clause 49 of the listing agreement of every stock exchange on the recommendation of the Kumar Mangalam Committee Report on Corporate Governance appointed by SEBI. The Companies Act of 2013 had a major impact on the Indian scenario of corporate governance as it incorporated rules and regulations for framing corporate governance policies.

In the 20th century, when globalisation was taking shape, the new duties of companies also arose in terms of charitable and philanthropic approaches of companies towards society. Now the company’s responsibilities were not limited to only the company itself; they extended to society as well. This responsibility of the company towards society is known as corporate social responsibility. Various countries, including India, have made it mandatory for companies to use a portion of their income for the welfare of society and the environment.

Currently, corporate governance policies are being framed in such a way that they cater to corporate social responsibility as well, though corporate governance policy and corporate social responsibility should not be confused as the same term as the objectives of both terms differ.

Comparative perspective of corporate governance policy and corporate social responsibility (CSR)

Corporate social responsibility (CSR) is the moral duty of a company towards society and the environment. Nowadays, companies are framing policies that also govern the need for CSR. Corporate governance policies are framed not only to increase the profitability of the company but also to attract investments and build goodwill. With the varying needs of society and market structure, companies’ strategies are getting more and more flexible. 

CSR and corporate governance policies are similar but not the same. Corporate governance policy is a broader term. It is related to the ethical conduct of stakeholders and board members. CSR is a company’s responsibility towards society and the environment. CSR is made mandatory for companies by enacting laws. In India, it is made mandatory under Section 135 of the Companies Act, 2013.

The difference between corporate governance policies and corporate social responsibility can be understood by the table given below:

From the above discussion, it is clear that corporate governance policy deals with the inside mechanism of a company, following which a company conducts business and CSR is the moral duty of a company towards society, environment, finances, etc.

With time, the emphasis on CSR has increased, and companies have started taking this into consideration and including policies concerning CSR. Now companies` governance policies include policies for the environment, society, etc. These policies not only make the governance of a company smooth but also cater to the responsibilities that arise for society. For example, Mamaearth is a skincare brand that ensures every purchase of a product will result in the plantation of a plant. Similarly, Shanti Aanwla, a hair oil brand, ensures that a certain percentage of income will be used for the education of girl children. These policies are ingested in the governance and with transparency, they build goodwill and attract customers as well.

Challenges faced by companies in framing policies dedicated to CSR

Companies are focusing on CSR and it can be seen in their governance policies as well. However, there are some challenges, like inappropriate funds, the lacuna in execution, the unavailability of resources, etc., that companies face in framing CSR-centric policies and in their execution. Some of the major challenges are given below:

• Balancing of stakeholders’ interests: This creates a major problem as sometimes the stakeholders’ interests get at stake by framing policies due to conflicts of interest. However, with general discussion and mutual understanding, both the company and stakeholders come to the same table to implement the policy.
• Changes in social and environmental conditions: The society is not the same as it used to be earlier and the same is true of the environment. With this change, it becomes difficult for companies to address a particular issue in the long term.
• Resource allocation: The resource allocation to cater to the CSR can be challenging. This resource can be both economic and human. During an economic crisis like COVID 19, such allocation gets more difficult, and CSR-dedicated policies suffer a lack of resources.
• Some of the other challenges include maintaining transparency, measuring CSR needs, globalisation, the goal of the policies, etc.

Thus, framing corporate governance policies dedicated to CSR is not a cakewalk, as it has to face the diverse needs of society and varying environmental conditions. With this variation, government guidelines make it mandatory for companies to frame CSR-centric policies and issue guidelines that the company has to adhere to while framing and implementing the policies.

Case study

Various companies involve CSR-centric policies in their corporate governance policies not only to cater to society or the environment but also to strengthen the image of the company in society. Apple, TATA, Samsung, Mamaearth, etc. are some of those companies that followed a CSR-centric approach in framing their corporate governance policies while adhering to the guidelines of the legal authority. Let us take the example of Apple Inc.

Apple Inc. is a company established in 1997. It is a global company with businesses and customers all across the world. Apple`s CSR-centric projects are as follows-

• The project is based on promoting education, including vocational education and livelihood enhancement.
• It ensures environmental sustainability in the course of conducting business and transactions.
• Apple, other than technology, also funds projects on healthcare, including preventive healthcare.
• Apple also provides financial assistance to reputed NGOs.

The company is using 2% of the precedent 3 years profit in CSR-centric projects in India only as per the guidelines of Section 135 of the Companies Act, 2013.

The company has different CSR committees for assessing and framing policies for CSR for better governance. To cater to the varying demands and status of society, the committee inspects the policies and amends them whenever and wherever they are needed.

With this example, it is clear that any company’s governance policy and adaptability according to changing needs help in the expansion of the company itself. Apple, being a global brand with an effective governance policy and CSR-centric policies, has earned goodwill and also made lots of customers. 

Conclusion

Corporate governance policy is a crucial aspect of the functioning of any company. It smooths the process with efficiency and less ambiguity. Corporate governance policies are nowadays not limited to the managerial aspect of a company. It also includes the CSR of a company. Companies frame policies that favour CSR. CSR seems to be dedicated to society and the environment but it also helps companies expand their businesses and attract investors by building goodwill. Though governance policies are a very broad term and have broad application, CSR can be assumed to be a subset of corporate governance policy. If corporate governance policy is an umbrella, then CSR can be a person under the umbrella. 

Both corporate governance policy and CSR are very important factors for a company. These are the brain and heart of a company that give a lifeline to a company and make a company run for a long period of time. The company should adopt CSR-centric policies as well in its management to expand globally and also to uplift society. CSR committees should be established by companies for time-to-time inspection of the policies and to adopt them accordingly.

References

• https://thecsruniverse.com/articles/a-brief-history-how-csr-came-into-existence
• https://www.thecorporategovernanceinstitute.com/insights/lexicon/why-does-corporate-governance-matter-a-look-back-at-history/#:~:text=In%20some%20ways%2C%20the%20concept,part%20of%20the%2020th%20century.
• https://lexpeeps.in/history-of-corporate-governance-in-india/
• https://www.apple.com/in/legal/more-resources/docs/Apple-India-CSR-Policy.pdf
• https://www.iberdrola.com/corporate-governance/governance-sustainability-system/corporate-governance-policies/general-corporate-governance-policy
• https://www.investopedia.com/terms/c/corp-social-responsibility.asp