In this article, Salma Jennath discusses the issue of corporate governance and social responsibility.

Corporate Governance is to conduct the business in accordance with owner or shareholders desires, which generally will be to make as money as possible while conforming to the basic rules of the society embodied in law and local customs.[1]

What is Corporate Social Responsibility or CSR? What all work does a corporation have to undertake in order to become socially responsible? Does a body corporate derive any benefit from being socially responsible other than moral satisfaction? How does it affect the governance of the corporation? These questions are answered briefly in this paper. In addition, a comprehensive comparison between India, UK and US with regard to their CSR policies, their development, impact and effectiveness is incorporated.

Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.[2] This is in contrast with the Friedmanite assertion that the only responsibility of businesses is to make money.[3] The four principles of good governance: Accountability, Transparency, Responsibility and Fairness are related to corporate social responsibility.

There are certain issues that have to be addressed by good corporate governance. These include creating sustainable value and performance, increasing credibility, increasing stakeholder satisfaction, keeping a balance between economic and social benefit, keeping the Board independent from management, etc. [4]

Correspondingly, there are certain benefits that can be derived from socially responsible corporate performance. In the long term, a corporate shall achieve an enhanced reputation with the public and the business community and there will be lesser government regulation and therefore, time and energy can be saved. It has been shown that there are improvements in financial performance, increased customer loyalty, boosted productivity and performance from workmen, etc.

India

The Indian government felt the need to introduce various reforms in corporate governance and create a system of ethical, transparent and accountable corporate functioning[5] after various scams in the corporate sector manipulated by Ramalinga Raju[6], Harshad Mehta[7], Ketan Parekh[8], etc.

In 1998, the Confederation of Indian Industry (CII) came up with a voluntary code of corporate governance, which was followed by the formulation of Clause 49 of the Listing Agreement as per the recommendations of the SEBI^* appointed Kumar Mangalam Birla Committee on Corporate Governance. Subsequently, there were many revisions to Clause 49[9], which focuses primarily on: Board composition and procedure, Audit committee responsibilities related party transactions, subsidiary companies, risk management, CEO/CFO certification of financial statements and internal controls, legal compliance and other disclosures.[10] Subsequently, in 2002, the Naresh Chandra Committee Report examined the Auditor-Company relationship and the role of independent directors, defined punitive measures for auditors committing irregularities and introduced CEO/CFO certification.

Other guidelines for good corporate governance include Corporate Governance Voluntary Guidelines (2009),[11] etc. In addition to all this, the National Stock Exchange of India (NSE) set up an independent expert advisory body called the NSE Centre for Excellence in Corporate Governance (NSE CECG) to encourage the Indian corporate to maintain standards of Corporate Governance.[12] The Companies Act, 2013 deals with several aspects of corporate governance such as director’s duties and related party transactions.

Corporate Social Responsibility can be divided into four: Economic, Legal, Ethical and Discretionary. It is practised by businesses to address stakeholder expectations and enhancing shareholder value. It is mandatory for every company having net worth of Rs 500 crores or more, or turnover of Rs 1000 crores or more or a net profit of Rs 5 crores or more during any financial year to constitute a Corporate Social Responsibility Committee of the Board consisting of a minimum three directors, of which at least one should be an independent director.[13] The main functions of the Committee include formulating a Corporate Social Responsibility Policy as specified in Schedule VII, recommending the amount of expenditure to be incurred and monitoring the said policy. The Board has to ensure that the mentioned duties are carried out. Supplementing this, there is Voluntary Guidelines for Corporate Social Responsibility, 2009.[14] The CSR Guidelines envisage the assimilation of social and environmental issues into businesses’ decisions, goals and operations and in interactions between corporations and their stakeholders.[15]

There are certain international instruments like the United Nations Global Compact Principles[16] and ISO 26000 Standard on Social Responsibility[17] of the International Organization of Standards, which identifies the contours of CSR and gives guidance to organizations for the integration of social responsibility within themselves respectively.

The emergence of all the new laws, regulations and guidelines has had a positive outcome. This is clearly laid out in a study[18] analyzing the corporate governance practices in three prominent Indian firms, namely, ITC Ltd., Reliance Industries Ltd., and Infosys Technologies Ltd. The companies have a very satisfying approach to Corporate Governance and CSR and they are doing very well. In addition to these companies, one of the companies that is leading in this respect is Tata, which was the pioneer of CSR activities in India.

United Kingdom

In the UK also there were many frauds that shook the corporate world, including that of Polly Peck[19], BCCI[20] and the Maxwell[21] group of companies, linked with corporate governance failures. A committee chaired by Adrian Cadbury prepared a report[22], which made three recommendations:

1. Separation of CEO and Chairman,
2. Inclusion of at least three non-executive directors (two of whom should have no personal or financial ties to executives), and
3. Creation of an Audit Committee composed of non-executive directors.

Later, there was the adoption of the UK Corporate Governance Code, which was a Cadbury Code, the Greenbury Report, the Hampel Report, Higgs Review, the Walker Review, etc. The contents of the code can be divided into five sections: Leadership, Effectiveness, Accountability, Remuneration, and Relations with shareholders.

The UK government seems very enthusiastic in developing CSR policies. British CSR minister Stephen Timms has drafted a global framework that will use British embassies and diplomatic staff ‘to promote CSR principles to governments, companies and civil society and explain the role they can play in promoting sustainable development.’ The government has recognized the need to raise social and environmental issues at international forums like the G8, the Doha Development Agenda and the Commission on Sustainable Development, as they would be encouraged to integrate CSR considerations into their actions. It seeks to form a CSR Academy to train them to practice good governance and wants to create partnerships with the businesses to help them to work on poverty eradication. In addition, the London Stock Exchange is also creating a centralized database to collect information on the social, environmental and ethical performance of companies.[23]

Fujitsu Services Ltd, Imperial Tobacco Group PLC, Jaguar Land Rover, etc have taken up CSR practices that are commendable.[24]

United States

The Foreign and Corrupt Practices Act was passed in 1977 followed by Securities and Exchange Commission in 1979 for the tightening of mandatory reporting of internal financial controls. Later, in 1987, the Treadway Commission submitted a report highlighting the need for a proper control environment, independent audit committees and an objective internal audit function.[25] In 1998, the New York Stock Exchange and the National Association of Securities Dealers jointly established the Blue Ribbon Committee on Audit Committee Effectiveness. However, even this did not prove to be very effective as there were many scams like the Enron and WorldCom, which led to the passage of the Sarbanes-Oxley Act (SOX) in 2002 to regulate auditing and corporate financial reporting.[26]

CSR practices in the United States was not voluntarily taken by the corporates but was a reaction to public responses to issues, which were not considered as part of their business responsibilities. There are four points put forward by the proponents of CSR, i.e., moral obligation, sustainability, license to operate, and repute. [27] One of the guidelines available is the OECD (Organization for Economic Cooperation and Development) Principles.[28]

There is a Corporate Social Responsibility team in the Bureau of Economic and Business Affairs, which promotes responsible and ethical business practices. It is their mission to provide guidance and support to companies and encourage them to adopt corporate policies that help companies “do well by doing good”.[29] There is a body called the US National Contact Point, which works with the Bureau to promote the OECD Guidelines for Multinational Enterprises.[30] An Award for Corporate Excellence program carried out by the Secretary of State to encourage corporates to conduct good governance. A few corporations, like Ben & Jerry’s, Patagonia, Microsoft[31] and the Body Shop have made a difference by taking up social responsibility.[32]

Analysis

• In all the three countries, the need for corporate governance arose due to some failures in the management of companies and various frauds that were conducted by officers and board members.

Each country has a statutory law, which sets out the principles of corporate governance.

• In the UK, it is mandatory to have a Nomination committee while in India it is not so. There is a distinction made between small and large quoted companies with regard to Audit committee in the UK while no such distinction is made in India. In both countries, there should be a Remuneration committee.[33] In US, the Sarbanes-Oxley Act makes only the Audit Committee mandatory.
• Clause 49 of the Listing Agreement was a transplant of governance reforms adopted in the US and the UK into the Indian context without any comprehensive analysis of Indian corporate structures. This is why Clause 49 was criticized a lot.[34]
• Unlike in India and UK, exchanges in the US have shown no movement to increase corporate governance and social responsibility.[35] The US seems more reluctant to take up CSR activities compared to the other two.

Corporate Governance and Corporate Social Responsibility are complementary and are closely linked with market forces. CSR operates in a free-form manner while CG operates within well-defined and accepted structures.[36] In India, UK and US, the importance of CSR and CG are being increasingly recognized and this had had a positive impact on the society as well as the corporates in general.

 “If you want to build a million-dollar enterprise, one can take all the shortcuts; but if you are keen on building a billion-dollar enterprise, there is no other way than to run your business rightly. Honesty has to be accepted as an axiom, which is the only way to do business. It gives you the mental and moral strength and ability to do it the right way.” N.R. Narayana Murthy

References

[1] Definition given by Economist and Noble laureate Milton Friedman

[2] Lord Holme and Richard Watts, Making Good Business Sense, The World Business Council for Sustainable Development publication

[3] See Richa Gautam, Integrating CSR into the Corporate Governance Framework: The Current State of Indian Law and Signposts for the Way Ahead

[4] See Güler Aras, David Crowther, Culture and Corporate Governance (2008, Social Responsibility Research Network, UK)

[5] See Afra Afsharipour, Directors as Trustees of the Nation? India’s Corporate Governance and Corporate Social Responsibility Reform Efforts.

[6] Satyam Computers Scandal (2009). The chairman, Ramalinga Raju, of Satyam Computer Services falsified the company’s accounts it make a change of US $1.47 billion. http://in.reuters.com/article/2015/04/09/satyam-computer-fraud-idINKBN0N00CQ20150409 last visited on 28^th September 2015.

[7] Mehta triggered an escalation in the Bombay Stock Exchange by trading in shares at a premium across any segments and scammed at good amount of Rs. 40 billion in 1992. http://indianeconomyataglance.blogspot.in/2009/03/harshad-mehtas-scam.html last visited on 28^th September 2015.

[8] Parekh swindled crores of rupees from banks and bought shares in smaller exchanges in fictitious names.

^*Securities and Exchange Board of India. http://www.icmrindia.org/free%20resources/casestudies/ketan-parekh-scam3.htm last visited on 28th September 2015.

[9] The Narayana Murthy Committee Report 2003 made revisions to Clause 49. Later, the original provisions were adopted again. The last amendment applicable w.e.f October 1, 2014 to comply with the provisions of Companies Act, 2013.

[10] http://taxguru.in/sebi/clause-49-listing-agreement-corporate-governance.html last visited on 26^th September 2015

[11] http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf last visited on 26^th September 2015.

[12] Corporate Governance in India: Development and Policies, ISMR, www.nseindia.com

[13] Section 135 of the Companies Act, 2013.

[14] www.mca.gov.in/Ministry/…/CSR_Voluntary_Guidelines_24dec2009.pdf

[15] supra note 5

[16] http://www.unglobalcompact.org/AbouttheGC/TheTENPrinciples/index.html

[17] http://www.iso.org/iso/socialresponsibility.pdf

[18] Debabrata Chatterjee, Corporate Governance and Corporate Social Responsibility: The Case of Three Indian Companies, International Journal of Innovation, Management and Technology, Vol. 1, No. 5, December 2010 ISSN: 2010-0248

[19] The CEO of Polly Peck International, Asil Nadir, stole more than £150m from Polly Peck and faced trial on 13 specimen charges and was found guilty on 10 counts of theft. http://www.theguardian.com/business/2010/aug/26/polly-peck-business-asil-nadir last visited on 28^th September 2015.

[20] This was one of the biggest banking scandals in UK. The money of money launderers and drug dealers flowed through the bank’s accounts. See http://news.bbc.co.uk/2/hi/business/3383461.stm last visited on 28^th September 2015.

[21] Robert Maxwell took money from the pension funds and channeled it to companies he was connected with outside of Britain to buy stock from MCC, which later became bankrupt. http://articles.baltimoresun.com/1991-12-22/news/1991356032_1_robert-maxwell-daily-mirror-britain last visited on 28^th September 2015.

[22] The Cadbury Report of 1992, which led to the formation of the Cadbury Code of Best Practices.

[23] Nathan E. Hurst, Corporate Ethics, Governance and Social Responsibility: Comparing European Business Practices to those in the United States, Santa Clara University.

[24] CR Index 2015: Company Listing available at www.bitc.org.uk/node/355077 last visited on 28^th September 2015.

[25] Speech delivered by Shri Vepa Kamesam, Chairman, Governing Council, Institute for Development and Research in Banking Technology (IDRBT), Hyderabad at the top management workshop on Corporate Governance & Corporate Social Responsibility in Public Enterprises, organized by ICFAI and Indian Institute of Public Administration at New Delhi on 8^th July, 2004.

[26]See L. Murphy Smith, Audit Committee Effectiveness. Did the Blue Ribbon Committee Recommendations make a difference? Int. J. Accounting, Auditing and Performance Evaluation, Vol.3, No.2, 2006.

[27] Michael E. Porter & Mark R. Kramer, Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility, Harvard Business Review (December 2006).

[28] The OECD Principles of 1999 and 2004 http://www.oecd.org/corporate/principles-corporate-governance.htm last visited on 26^th September 2015

[29] http://www.state.gov/e/eb/eppd/csr/ last visited on 28^th September 2015

[30] http://www.state.gov/e/eb/oecd/usncp/index.htm last visited on 28th September 2015

[31] Microsoft was ranked the corporation with the best CSR by Forbes magazine in 2012 http://www.forbes.com/sites/jacquelynsmith/2012/12/10/the-companies-with-the-best-csr-reputations/ last visited on 28^th September 2015.

[32] Supra note 27

³³http://www.grantthornton.co.uk/en/insights/corporate-governance-in-india-and-the-uk-a-comparative-analysis last visited on 28th September 2015

[34] Supra note 5

[35] Supra note 23

[36] Lawrence E Mitchell, The Board as a Path toward Corporate Social Responsibility in Doreen McBarnet, Aurora Voiculescu and Tom Campbell, The New Corporate Accountability: Corporate Social Responsibility and the Law (2007) 279 in M.M. Rahim, Corporate Social Responsibility, Corporate Governance and Corporate Regulation, Legal Regulation of Corporate Social Responsibility, Springer-Verlag Berlin Heidelberg 2003.