IPCC Paper 2:Business Law, Ethics & Communication Chapter 8

Dr. Anil Kumar

1

Meaning of Corporate Governance

Understanding the term “Stakeholder

Corporate Governance Initiatives in India & Abroad

Understanding Corporate Social Responsibility

Implementation of CSR

Benefits of CSR

‘Corporate governance’ is the act or manner of governing a company.

It is the relationship among various participants in determining the direction and performance of companies.

‘The system by which companies are directed and controlled’.

Corporate governance is about maintaining an appropriate balance of accountability between

three key players:

The corporation’s owners

The directors whom the owners elect,

The managers whom the directors select

Share Holders

Board of Directors

Management

It ensures that a company is managed in a manner that fits the best interests of all the stakeholders.

It helps in brand formation and development.

Good corporate governance also minimizes wastages, corruption, risks and mismanagement.

It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the company.

There is a positive impact on the share price.

It lowers the capital cost.

Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.

Good corporate governance ensures corporate success and economic growth.

A typical list of stakeholders of a company would be

Employees Trade Unions Customers Shareholders and investors

Suppliers Local communities Government

“Stakeholders” describes such constituents of an organisation - the individuals, groups or other

organizations which are affected by, or can affect the organisation in pursuit of its goals.

An introduction

The ‘Blue Ribbon Committee’ set up in the U.S. in 1998 by New York Stock Exchange and National Association of Securities Dealers studied the effectiveness of audit committees and provided recommendations for improvement.

The Cadbury Report, 1992 in UK became a pioneering reference code for stock markets.

Began in the early 1990s in UK.

The OECD (Organization for Economic Co-operation and Development ) Principles 1999 and 2004 reflect global consensus regarding the critical importance of corporate governance .

In 2002 the Sarbanes – Oxley Act, passed in response to major corporate scandals, is considered to be one of the most significant.

Corporate governance measures include appointing independent directors.

Placing constraints on management power and ownership concentration.

Ensuring proper disclosure of financial information and executive compensation.

1

• India has a long corporate history evolving from the enactment of its first Companies Act in 1850, but corporate governance assumed importance in India only in 1993.

2

• Interestingly, the first initiative in India, in this direction was voluntary, taken by the Confederation of Indian Industry (CII).

3

• It adopted a desirable code of corporate governance which despite being voluntary found quite a few takers among corporates in India.

4

• The Securities and Exchange Board of India (SEBI), the Indian market regulator, set up the Kumar Mangalam Birla Committee in 1999 to suggest measures to improve corporate governance.

5

• SEBI, on the recommendations of the Committee, released its code of corporate governance on a standard-rule basis compulsory for all the listed companies operating in India.

6

• The code of corporate governance is being implemented in India as part of the Listing Agreement with the stock exchange.

7

• Clause 49 was revised in 2005 on the basis of the recommendations of the Narayana Murthy Committee. So, at present Revised Clause 49 is relevant.

CSR can mean different things to different people:

For an employee it can mean fair wages, no discrimination, acceptable working conditions etc.

For a shareholder it can mean making responsible and transparent decisions regarding the use of capital.

For suppliers it can mean receiving payment on time.

For customers it can mean delivery on time, etc.

For local communities and authorities it can mean taking measures to protect the environment from pollution.

For non-governmental organisations and pressure groups it can mean disclosing business practices and performance

Improved employee recruitment, retention and motivation, improved stakeholder relations and a more secure environment in which to operate.

A stable socio-political-legal environment for business as well as enhanced competitive advantage through better corporate reputation and brand image.

The benefits of “good corporate citizenship” include:

Corporate citizenship denotes the extent to which businesses meet the legal, ethical, economic and voluntary responsibilities placed on them by their stakeholders.

CSR is pursued by businesses to balance their economic, environmental and social objectives while at the same time addressing stakeholder expectations and enhancing shareholder value.

Corporate Social

Responsibility

Economic Responsibilities

Legal Responsibilities

Ethical Responsibilities

Discretionary Responsibilities

Corporate Social Responsibility (CSR) refers to operating a business in a manner that accounts for the social and environmental impact created by the business.

Common CSR policies include:

Adoption of internal controls reform in the wake of Enron and other accounting scandals;

Commitment to diversity in hiring employees and barring discrimination;

Management teams that view employees as assets rather than costs;

High performance workplaces that integrate the views of line employees into decision- making processes;

Adoption of operating policies that exceed compliance with social and environmental laws;

Advanced resource productivity, focused on the use of natural resources in a more productive, efficient and profitable fashion

1 • Increased Stakeholder Activism

2 • Proliferation of Codes, Standards, Indicators and Guidelines

3 • Accountability Throughout the Value Chain

4 • Transparency and Reporting

5 • Convergence of CSR and Governance Agenda

6 • Growing Investor Pressure and Market-Based Incentives

7 • Advances in Information Technology

8 • Pressure to Quantify CSR “Return on Investment

1 • Companies implement CSR by putting in place internal management

systems that generally promote :

2 • Adherence to labour standards by them as well their business

partners;

3 • Respect for human rights;

4 • Protection of the local and global environment;

5 • Reducing the negative impacts of operating in conflict zones;

6 • Avoiding bribery and corruption and;

7 • Consumer protection.

The Iron Law of Responsibility

Achievement of long term objectives

Enhanced Brand Image and Reputation

Checks Government Regulation /Controls

Helps minimise Ecological Damage

Improved Financial Performance

Reduced Operating Costs

Increased Sales and Customer Loyalty Increased Productivity and Quality of Work life

Increased Ability to Attract and Retain Employees

IPCC Nov 2012 MM 5

Question

• What is meant by ‘stakeholder? Give the list of such stakeholders.

Stakeholders” describes such constituents of an organisation - the individuals, groups or other organizations which are affected by, or can affect the organisation in pursuit of its goals.

List of Stakeholders

Shareholders and Investors

Employees

Customers

Suppliers

Local community

Government

IPCC May 2012 MM 5

Question

• Explain the role played by different committees in regulating the corporate governance.

• Ensures that the company is run to enhance the interest of the shareholders while protecting the interest of other shareholders. Board of Directors

• Ensures adequacy of internal control, audit and financial disclosure. Audit Committee

• Recommends the compensation of the executive directors and other senior executives.

Compensation Committee

• Recommends nomination of directors on the board and the chief executive.

Nomination Committee

• Looks after the grievances of the investors. Investors Grievances Committee

Corporate Governance

Is the system, processes and mechanism by which a company is

directed and controlled.

It is about promoting fairness, transparency

and accountability.

Stakeholders Are the constituents of a

company - the individuals, groups or

others which are affected by, or can affect the company in pursuit

of its goals.

• Denotes the extent to which businesses meet the legal, ethical, economic and voluntary responsibilities placed on them by their stakeholders.

Corporate citizenship

• Is balancing the economic, environmental and social objectives while at the same time addressing stakeholder expectations and enhancing shareholder value.

CSR

• Adherence to labour standards; Respect for human rights; Protection of environment; consumer protection; and others

CSR Measures

include