28.12.2016 Note by Bala

Corporate Ethics, Corporate Governance &Corporate Social Responsibility

Note: To be read in conjunction with PPT slides and other material provided

Background:

The word ‘Ethics’ evolves from the Greek word, ‘Ethos’. ‘Ethos’ means ‘Character’ or ‘Custom’. As a corollary, ethical behaviour means ‘socially and morally’ acceptable behaviour. The experience of unethical behaviour is not new to human civilization. It has been in existence right from ancient civilizations. In the 6th century B.C. the philosopher Anacharsis once said, “ The market is a place set apart where men may deceive one another.” History is replete with examples of unethical behaviour, unethical practices inconsistent with common good for society, for people at large, for government etc. out of selfish interests and aggrandisement. We are familiar with the expression “Power corrupts ultimately”. Power referred to in this statement could mean one or more of these: Political, Economic, Social, Religious, Financial or Organizational. Power is vested in an individual or a group of individuals like ‘Board of directors’ in a business organization by the authority they enjoy and the position they come to occupy in their respective areas.

Power makes individuals or a group of individuals ‘heady like a drunken man’. Once an individual rises to a high position in politics or business, one tends to think that one is above law. This perception could lead one to questionable actions and behaviour. This is unethical behaviour. Business ethics is about: Decision-Making By People in Business According to Moral Principles or StandardsIn an organization, decisions are being taken regularly. Conflicting duties, loyalties or interests create moral dilemmas requiring decisions to be made. Ethical decision-making involves the ability to discern right from wrong along with the commitment to do what is right. In a highly competitive environment of business, principles are being compromised with frequently. The ultimate goal of any business is growth through profits. CEOs and Presidents and Managing Directors (may be the entire board of directors) achieve growth and market leadership, but at what cost?

Modern business had become conscious of the need for ethical behaviour due to a series of corporate frauds in the 70’s and 80’s of the twentieth century. As a result, taking the initiative in the international community, U.K. had appointed the Cadbury Committee to evolve the first codified set of ‘business ethics’. The committee had come out with the very first report that modern business knows as ‘Corporate governance’ (CG) report. ‘Corporate governance’ is nothing but codified corporate ethical practices expected to be followed by organizations globally. This is the very first step towards establishing code of conduct for business on a universal dimension. As we will see in the following paragraphs, the first step of business ethics led to ‘Corporate governance’. This in turn led to the ‘Corporate Social Responsibility’ as is being practiced today. Today, in terms of provisions of The Companies Act, 2013, Indian limited companies are required to publish as a part of their

annual reports, a section on ‘Corporate governance’ report on ethical practices being followed in their respective organizations. Corporate social responsibility obligation is not on all limited companies. The norms have been prescribed for those of the limited companies that are listed. The CSR spending is mandatory for such limited companies. Other limited companies can do voluntarily. Indian corporate history has adequate number of examples of limited companies undertaking ‘CSR’ initiatives on their own much before the mandatory ‘CSR’ rules came into existence.

What is the importance of ‘morals’?

Let us see what some great personalities had to say about ‘morals’.

• “The most important human endeavor is the striving for morality in our actions. Our inner balance and even our very existence depend on it. Only morality in our actions can give beauty and dignity to life. - Albert Einstein (in a letter 11/20/50)

• The historian Arnold Toynbee observed: "Out of 21 notable civilizations, 19 perished not by conquest from without but by moral decay from within."

In sharp contrast, let us also see what modern young generation feels about ‘ethical standards’. According to a recent poll of college seniors, 73% agreed with the statement that “What is right or wrong depends on differences in individual values and cultural diversity.” Only 25% agreed with the statement that “There are clear and uniform standards of right and wrong by which everyone should be judged."

Relative and absolute standards of morals: Relative is what is suitable for the circumstances and could vary from situation to situation or from time to time; absolute standards remain the same, standing the test of time well. It is the absence of absolute standards that leads to corruption of moral standards through their dilution. The following lines explain the effect of relative standards.Relativism allows for oppression of those with minority views by allowing the majority in any particular circumstance to define what is morally right or wrong.– “In Germany they first came for the Communists, and I didn't speak up because I wasn't a

Communist.– Then they came for the Jews, and I didn't speak up because I wasn't a Jew.– Then they came for the trade unionists, and I didn't speak up because I wasn't a trade unionist.– Then they came for the Catholics, and I didn't speak up because I was a Protestant.– Then they came for me — and by that time no one was left to speak up.” German anti-Nazi activist, Pastor Martin Niemöller

Relativists never need bother to examine why something is moral or immoral, they merely accept/tolerate alternative determinations, so that none are held to account.

Let us learn something fundamental about the three, corporate ethics, corporate governance and corporate social responsibility.

Business ethics

1.a. Examples of ethical practices by employees:

i. Work habitsii. Ethics in sales

iii. Ethics in advertisementiv. Ethics in purchase function

b. Unethical practices usually done by employees etc. Padding of labour charges and expense accounts Personal long distance phone calls on company accounts Untidy work areas, break areas and rest rooms Taking office supplies home Excessive breaks or sick days Improper use of copy machines and computer equipment Cheating the company in the matter of leave, absence, advance etc. Not conforming to expected business etiquette while dealing with external customers of

the organization Abusive behaviour Undue credit for any work, result, achievement etc. dishonesty, withholding information, distortion of facts misleading or confusing communications or positioning or advertising manipulation of people's feelings deception, trickery, kidology, rule-bending, fooling people exploitation of weakness and vulnerability excessive profit greed anything liable to harm or endanger people breach of the Psychological Contract - the Psychological Contract represents trust and

expectations between people in a relationship - notably within employer/employee relationships, extending to other organizational relationships too - (aside from Psychological Contract theory, specialised theory within Transactional Analysis helps explain this aspect of trust and expectations in human relationships)

avoidance of blame or penalty or payment of compensation for wrong-doing inertia-based 'approvals' and 'agreements' (in which action proceeds unless objected to) failing to consult and notify people affected by change secrecy and lack of transparency and resistance to reasonable investigation coercion or inducement harming the environment or planet unnecessary waste or consumption invasion of privacy or anything causing privacy to be compromised recklessness or irresponsible use of authority, power, reputation nepotism (the appointment or preference of family members) favouritism or decision-making based on ulterior motives (e.g., secret affiliations, deals,

memberships, etc) alienation or marginalisation of people or groups conflict of interests (having a foot in two or more competing camps) neglect of duty of care betrayal of trust breaking confidentiality

causing suffering of animals ' by standing' - failing to intervene or report wrong-doing within area of responsibility

(this does not give licence to interfere anywhere and everywhere, which is itself unethical for various reasons)

unfairness U nkindness lack of compassion and humanity

2. Cases in 2012 – Unethical corporate behavioura. Reebok India Limited, a subsidiary of Adidas AG – 870 crores fraud – MD & COOb. Series of technically bad orders placed by Emkay Global on NSE – 59 trades worth more

than US $ 125 million were halted by the system – NIFT fifty index came down by more than 900 points

c. Kingfisher airlines loses licence to flyd. Adani group – 1800 crores market capitalization lost over on line rumoure. Sahara told to pay US $ 3 billion to its bond holders

3. Cases in 2013 – Unethical corporate behaviour a. Ranbaxy – criminal guilty plea of US $ 500 million in fines and penalties

i. Fuzzed data submitted to regulators abroad, the FDA, USAii. Similarity between Satyam fraud and Ranbaxy case

iii. Not to hold independent directors on the board responsibleiv. Independent director's responsibility is limited to ensuring that he/she

understands the business model, best corporate governances practices (e.g. board process, risk management system, internal audit and statutory audit, whistle-blower policy, and transparency within and outside the Board) are in place and operating effectively, analysing information available through the Board processes or otherwise and acting proactively based on that analysis for the benefit of the company as a whole. If independent directors are held responsible for frauds perpetrated by or with the support of the top management, which has the ability to override internal controls, it will be difficult to induce professionals to join Boards of companies as independent directors.

4. How to be prepared for handling any unethical issues? a. Determine areas of possible negative ethics

i. Employees being highly stressed outii. International corporate relationships

b. Promote positive workplace behaviour ethicsi. Strong corporate image

ii. Professionalismiii. Honestyiv. Trustv. Responsibility

c. Continuous ethics training

5. Four fundamental ethical principles (a very simple introduction)

a. The Principle of Respect for autonomy Autonomy is Latin for "self-rule" We have an obligation to respect the autonomy of other persons, which is to respect the decisions made by other people concerning their own lives. This is also called the principle of human dignity. It gives us a negative duty not to interfere with the decisions of competent adults, and a positive duty to empower others for whom we’re responsible.

Corollary principles: honesty in our dealings with others & obligation to keep promises.

b. The Principle of Beneficence

We have an obligation to bring about good in all our actions.

Corollary principle? We must take positive steps to prevent harm. However, adopting this corollary principle frequently places us in direct conflict with respecting the autonomy of other persons.

c. The Principle of nonmaleficence

(It is not "non-malfeasance," which is a technical legal term & it is not "nonmalevolence," which means that one did not intend to harm.)We have an obligation not to harm others: "First, do no harm."Corollary principle: Where harm cannot be avoided, we are obligated to minimize the harm we do. Corollary principle: Don't increase the risk of harm to others.Corollary principle: It is wrong to waste resources that could be used for good.Combining beneficence and nonmaleficence: Each action must produce more good than harm.

d. The Principle of justice

We have an obligation to provide others with whatever they are owed or deserve. In public life, we have an obligation to treat all people equally, fairly, and impartially.Corollary principle: Impose no unfair burdens. Combining beneficence and justice: We are obligated to work for the benefit of those who are unfairly treated.

6. Ethical dilemmas: 1. A top employee at your small company tells you he needs some time off because he has

AIDS. You know the employee needs the job as well as the health insurance benefits.Providing health insurance has already stretched the company’s budget, and this will send premiums through the roof. You know the federal courts have upheld the right of an employer to modify health plans by putting a cap on AIDS benefits.Should you investigate whether this is a legal possibility for your company?

2. As a sales manager for a major pharmaceuticals company, you have been asked to promote a new drug that costs $2,500 per dose. You have read the reports saying the drug is only 1 percent more effective than an alternative drug that costs less than one-fourth as much. Can you in good conscience aggressively promote the $2,500-per-dose drug?

If you do not, could lives be lost that might have been saved with that 1 percent increase in effectiveness?

3. Your company is hoping to build a new overseas manufacturing plant. You could save about $5 million by not installing standard pollution control equipment that is required in the United States. The plant will employ many local workers in a poor country where jobs are scarce. Your research shows that pollutants from the factory could potentially damage the local fishing industry. Yet building the factory with the pollution control equipment will likely make the plant too expensive to build.

4. You are the accounting manager of a division that is $15,000 below profit targets. Approximately $20,000 of office supplies were delivered on December. The accounting rule is to pay expenses when incurred. The division general manager asks you not to record the invoice until February.

5. You have been collaborating with a fellow manager on an important project. One afternoon, you walk into his office a bit earlier than scheduled and see sexually explicit images on his computer monitor. The company has a zero-tolerance sexual harassment policy, as well as strict guidelines regarding personal use of the Internet. However, your colleague was in his own office and not bothering anyone else.

7. Three steps to solve ethical dilemmas: they flow upwards involving utility (value delivered to the stakeholders), Rights & Justice

a. Know your values stronglyb. Select a model of ethics suitable for the organizationc. Use a problem solving process

8. Three pillars of an ethical organization:

Pillar 1 – Ethical individualsa. Integrityb. Honestyc. Inspire trustd. Treat people righte. Play fairf. High level of moral development

Pillar 2 – Ethical leadershipa. Role modellingb. Uphold ethical values in organizationc. Communicate about ethics and valuesd. Reward ethical behavioure. Swift discipline of unethical behaviour

Pillar 3 – Organization’s structures and systemsa. Corporate cultureb. Code of ethicsc. Ethics committeed. Chief ethics officere. Ethics trainingf. Whistle-blowing mechanisms

9. Ethical leadership: a. ‘Ethics’ originates from the Greek word ‘Ethos’. It means character, conduct or customsb. With respect to leadership, ethics is about who leaders are—their character and what

they do, their actions and behaviours.c. Ethical leaders treat their followers with respect and dignityd. Their personal values determine what kind of ethical climate will develop in their

respective organizationse. Ethical leadership principles:

i. Respect for othersii. Service to others

iii. Justice to othersiv. Honesty/integrity to othersv. Building community with others

f. Ethical leader would ask the following questions to himself/herself:i. Is this the right and fair thing to do?

ii. Is this what a good person would do?iii. Am I respectful to others?iv. Do I treat others generously?v. Am I honest towards others?

vi. Am I serving the community?g. Principled leadership:

Principled leaders make a conscientious effort to get all the relevant information to make an informed decision and to see that their decisions are consistent with their val-ues and those of the organization.

h. How to get principled leadership?i. Upbringing and life experiences

ii. Reflectioniii. Role modelsiv. Code of ethics and communication

i. The challenges of principled leadership:i. They should be model citizens

ii. Stick to what you are good atiii. Establishing an inclusive corporate cultureiv. Have sound whistleblower protection or processes for information flowv. Boards of directors should encourage CEOs to speak out responsibly on critical

issues instead of scuttling them

j. Table 1:

The ethical leader

Is humble

The Unethical leader

Is arrogant and self-serving Is concerned for the greater good Excessively promotes self-interest Is honest and straightforward Practices deception Fulfils commitments Breaches agreements Strives for fairness Deals unfairly Takes responsibility Shifts blame to others

Shows respect for each individual Diminishes others’ dignity Encourages and develops others Neglects follower development Serves others Withholds help and support Shows courage to stand up for what is right

Lacks courage to confront unjust acts

Table 2: Examples of final (personal and ethical-social) and instrumental values (ethical-moral and values of competition)

Personal values: What are the most important things in your life?

Happiness, health, salvation, family, personal success, recognition, status, material goods, friendship, success at work, love.

Ethical-social values: What do you want to do for the world?

Peace, planet ecology, social justice

Ethical-moral values: How do you think you should behave towards people that surround you?

Values of competition:What do you believe is necessary to competeIn life?

Honesty, sincerity, responsibility, loyalty, solidarity, mutual confidence, respect for human rights

Money, imagination, logic, beauty, intelligence, positive thinking, flexibility,

k. One theory based on virtue (value) – traits of ethical leaders:i. Pride

ii. Patienceiii. Prudenceiv. Persistencev. Perspective

vi. Integrity

l. Table 3: Criteria for evaluation of ethical leadership

Ethical Leadership Unethical Leadership

Use of leader power and influence

Serves followers and the organization

Satisfies personal needs and career objectives

Handling diverse interests of multiple stakeholders

Attempts to balance and integrate them

Favours coalition partners who offer the most benefits

Development of a vision for the organization

Develops a vision based on follower input about their needs, values and ideas

Attempts to sell a personal vision as the only way for the organization to succeed

Integrity of leader behaviour Acts consistent with espoused values

Does what is expedient to attain personal objectives

Risk taking in leader decisions and actions

Is willing to take personal risks and make necessary decisions

Avoids necessary decisions or actions that involve personal risk to the leader

Communication of relevant information operations

Makes a complete and timely disclosure of information about events, problems and actions

Uses deception and distortion to bias follower perceptions about problems and progress

Response to criticism and dissent by followers

Encourages critical evaluation to find better solutions

Discourages and suppresses criticism or dissent

Development of follower skills and self-confidence

Uses coaching, mentoring and training to develop followers

Deemphasizes development to keep followers weak and dependent on the leader

Source: (G. A. Yukl & Yukl, 2002, p. 422)

m. Three actions that will ensure compliance with ethical standards in the organization:

The research finds that three ethics-related actions by management and coworkers have the greatest impact on employee ethics and compliance – an influence more profound than formal ethics programs and organized activities. They are:

i. Setting a good example;ii. Keeping promises and commitments; and

iii. Supporting others in adhering to ethics standards.

n. 5 key points that every ethics policy should contain: i. Detailed and well defined in the form of a manual

ii. Provide training for new and current employees regularlyiii. Use ethic policy for guidanceiv. Ability to learn from mistakes &v. Zero tolerance towards unethical practices

o. Benefits of an established framework for ethics at workplacei. Efficiency

ii. Consistencyiii. Payback & iv. Self respect

Corporate governance = Codified business ethics

1. Corporate governance towards: a. Employees – already listed aboveb. Customers

i. The right to safetyii. The right to be informed

iii. The right to choose c. Institutional Investors

i. Nomination obligations being complied withii. Giving them a say in the case of nominee director

iii. Being fair and transparent in reporting and other compliancesd. Creditors

i. Being fair in payment as per agreed termsii. Not exploiting them due to favourable market conditions

e. The Government:i. 100% conformity with all statutory obligations

ii. Fair in disclosures of material information

2. Five Golden Rules of best Corporate governance practices are: a. Ethics: a clearly ethical basis to the business b. Align Business Goals: appropriate goals, arrived at through the creation of a suitable

stakeholder decision making model c. Strategic management: an effective strategy process which incorporates stakeholder

value d. Organisation : an organisation suitably structured to effect good corporate

governance e. Reporting: reporting systems structured to provide transparency and accountability

3. Different models for CG: a. The Anglo-American model: This is also known as unitary board model, in which all

directors participate in a single board comprising both executive and non-executive directors in varying proportions.

b. The German model: Corporate governance in the German model is exercised through two boards, in which the upper board supervises the executive board on behalf of stakeholders and is typically societal oriented.

c. The Japanese model: This is the business network model, which reflects the cultural relationships seen in the Japanese keiretsu network. In this model the financial institution has accrual role in governance. The shareholders and the main bank together appoint board of directors and the president.

4. Obligation to society at large: a. National interest: A company should be committed in all its actions to benefit the

economic development of the countries in which it operates and should not engage in any activity that would militate against such an objective.

b. Political non-alignment: A company should be committed to and support a functioning democratic constitution and system with a transparent and fair electoral system and should not support directly or indirectly any specific political party or candidate for political office.

c. Legal Compliances: The management of a company should comply with all applicable government laws, rules and regulations.

d. Rules of Law: Good governance requires fair, legal frameworks that are enforced impartially. It also requires full protection of rights, particularly those of minority shareholders.

e. Honest and ethical conduct: Every officer of the company should deal on behalf of the company with professionalism, honesty, commitment and sincerity as well as high moral and ethical standards.

f. Corporate Citizenship: A corporate should be committed to be a good corporate citizen not only in compliance with all relevant laws and regulations but also by actively assisting in the improvement of the quality of life of the people in the communities in which it operates with the objective of making them self reliant and enjoy a better quality of life.

g. Ethical behavior: Corporations have a responsibility to set exemplary standards of ethical behaviour, both internally within the organizations, as well as in their external relationships.

h. Social concern: The Company should have concerns towards the society. It can help the needy people & show its concern by not polluting the water, air & land.

i. Healthy and safe working environment : A company should be able to provide a safe and healthy working environment

j. Competition: A company should market its products & services on its own merits & should not resort to unethical advertisements or include unfair & misleading pronouncements on competitors’ products & services.

k. Timely Responsiveness: Good governance requires that institutions & processes try to serve all stakeholders within a reasonable time frame.

5. Obligation to investor: a. Towards shareholder b. Measures promoting transparency and informed shareholder participation c. Financial reporting and records

6. Obligation to employeesa. Fair employment practices b. Equal opportunities c. Humane treatment

7. Obligation to customers a. Quality of products and servicesb. Products at affordable pricesc. Unwavering commitment to customer satisfaction

8. Managerial obligations a. Protecting company’s assetsb. Behavior toward government agenciesc. Control

9. The major challenges in CG in India are: a. Power of the dominant shareholdersb. Lack of incentives to organizations to put in an effective CG system – no direct

correlation between putting in expensive CG systems and practices and rewarding returns

c. Underdeveloped external monitoring systemsd. Shortage of independent and professional directorse. Weak regulatory oversight including multiplicity of them

10. CG practices currently are inadequate because: a. Primarily aimed at protecting shareholders from managerial excessesb. This serves no purpose when we know that majority of Indian companies are run by

dominant shareholders.c. A CG aimed at strengthening board processes alone would be inadequate when dealing

with governance abuses by dominant shareholders

11. This brings us to the differences in challenges in CG between western countries and India:a. The agency gap in western countries is between the management of large corporations

and dispersed stakeholders whereas in India it is the gap between dominant shareholders and minority shareholders

b. Much of the CG norms focus on boards, their committees, independent directors, succession planning for CEO etc. In India, however, boards are not so empowered and still are accountable to shareholders and majority shareholders (dominant shareholders who are invariably the promoters group) hold the sway anyway. Either through the board as executive director or through majority shareholding or both.

c. Therefore in most of the cases relating to CG in India, the conflict is between dominant shareholders and minority shareholders.

d. 663 of 993 companies studied in the survey in India are family businesses, the most among the South Asian and South-East Asian countries. The other countries are – Hong Kong, China, Indonesia, Singapore, Malaysia, South Korea, Philippines, Taiwan & Thailand.

12. Unconventional definition of ‘stake holders’:

Stakeholders can be found in any or all of the following groups depending on the type of organisation. Below are examples of stakeholder groups, including conventional 'investor' stakeholders, and more modern stakeholder ideas. Remember, a stakeholder is any group that is affected in one way or another by the activities of an organisation.

shareholders trustees guarantors investors funding bodies distribution partners marketing partners

licensors licensees approving bodies regulatory authorities endorsers and 'recommenders' advisors and consultants (yes, these people have something at stake too) employees - staff, managers, directors, non-executive directors customers suppliers the local population (community) the regional general public national general public international communities humankind Many of these groups would not conventionally be considered to be stakeholders, but

think about it: each of these groups could have an interest in and could be affected by the activities of an organisation. If a connection is not easy to see and understand it doesn't mean the connection doesn't exist.

Given that this sort of modern stakeholder perspective produces such a wide-ranging and extensive list of stakeholder groups, it's essential to apply (for any given situation) some method of evaluating and expressing relative stakeholder interests and needs, and also to measure and show the varying significance of the stakeholder relationships; the degree of impact or dependence.

13. Different CG models practiced in the world and differences among them (along with CG elsewhere)

Japan Germany Anglo-American

People Products Profits Products People Profits Profits Products People

The implications of these differences in priorities are quite profound and can be depicted in tabular form as follows:

Japan People have priority Emphasis on market sharecrop is a ‘generalist’

Germany Products have priority Emphasis on technology & engineering CEO is an engineer

Anglo-American Profits have priority Emphasis on share-holder value CEO is an MBA or an accountant.

Source: Lehmann, (1997).

Corresponding to these corporate governance models one can notice the following three government industry models to see the impact of government-industry relationships on corporate governance. These models can be summarised as shown in the following table: Models Countries Salient featuresGovernment as referee

USA, UK, HK, Australia & NZ

Govt. totally impartial to the markets Govt. stands on the sidelines

It interferes only if abuses need to be prevented or perpetrators of crimes need to be punished

Its emphasis on unregulated market forces and fairness

Minimize regulations Open, transparent and accountable forms of

governance Auditors and lawyers have an important role to play Corruption tends to be low

Government as manager

France, Italy, China, Vietnam, India, Spain, Singapore, Thailand, Malaysia, Indonesia

Govt. neither recognizes nor respects markets. They do not trust markets

Economic nationalism and protectionism Govt. Intervention and control Promotion of national corporate champions Corporate governance is opaque, secretive and closed

with little publicity Bureaucracy is powerful

Government as coach

Germany, Austria, Japan, SZ, Netherlands, Sweden, Norway, Denmark, Finland, Korea, Chinese Taipei,

Sidelines partiality Administrative guidance, support system, subsidies

etc. Organized competition Semi-transparent, semi-opaque corporate governance

with limited public accountability Considerable scope for corruption

Source: Lehmann, (1997)

14. Role of independent directors

a. Companies stand to gain from independent directors who are courageous enough to voice genuine concerns and constructively challenge executive decisions.

b. Independent directors are one of the most critical pillars of corporate governance. They are expected to act as an effective oversight body to protect the interest of investors, stakeholders, regulators, government and minority shareholders. They bring external and unbiased inputs which can bring a new and independent perspective, thereby giving a fillip to overall quality in governance.

c. The need to have independent directors is not borne solely out of regulatory compulsions. The growth story of the Indian economy fuelled by economic reforms has significantly contributed to a realisation that an independent check is needed to strike a right balance between growth and governance. In the zest to pursue all-out growth, corporate governance runs a risk of getting relegated to the sidelines.

d. A number of tests are enunciated in the listing agreement of stock exchanges for an independent director: he should not be an employee or a relative of the promoters, or a substantial shareholder, or have significant business dealings with the company. The Companies Act also mandates disclosure of interest by directors to identify potential conflicts beforehand. The underlying rationale idea behind all this is to stay clear of situations in which a director's other business dealings or relationships might pose a conflict, consequently impeding the board's ability to act impartially.

Appointment process

a. In the Indian capital markets, promoters have a controlling stake in the company. The provisions for appointment of directors under the Companies Act require a positive vote by a majority of shareholders, effectively making the promoter's nod in the appointment a prerequisite. Regulations in many countries mandate or suggest that boards have a nominating committee — preferably comprising non-executive and independent directors. In India, the proposed Companies Bill stipulates that listed companies have to constitute a nomination and remuneration committee consisting of non-executive and independent directors. The Committee shall identify candidates, recommend their appointment to the board and also carry out performance evaluation. Limiting the say on pay of promoters with regard to remuneration of independent directors could be a good way of insulating the latter from the influence of the executive management.

b. There is, however, a difference between being independent and unconnected. To be effective contributors, independent directors have to bring in knowledge, experience, insight and skill and industry expertise to enable them to ask the right questions. Companies can profit immensely from the presence of independent directors who are courageous enough to voice genuine concerns and constructively challenge executive decisions.

c. Having the right qualifications, experience and pedigree is only half the battle won. The time and more importantly, the quality of time spent by independent directors are what make a difference. Mere presence and participation in board meetings could best have an ornamental value. Interactions with executive management, reviewing industry publications and analysing data about the company's competitors are some of the ways to deliver value. Matured corporates follow a practice of prior circulation of pre-meeting material, focusing on quality rather than quantum. Right people need to be armed with the right tools in order to make the right impact.

d. Orientation and training programmes giving a background of a company's operations and organisational structure, its line of products and services, strategies, and key challenges and opportunities can tremendously shorten the learning curve of independent directors.

Current Liability Regime

a. The Indian law does not explicitly distinguish between executive and non-executive directors when it comes to determining penal consequences. The breather to independent directors given by the Ministry of Corporate Affairs gives them a shield in cases where contravention occurred without their knowledge or connivance and the directors have been diligent on their part.

b. This immunity, however, is limited only to offences under the Companies Act leaving ample scope for penal consequences under a plethora of other laws. The risk-reward proposition can act as a deterrent for independent directors while evaluating the option to join the boards.

c. While the burden of expectations on independent directors is huge, there is scope to improve the process of appointment, on-boarding, dissemination of information to help strengthen and empower the institution of independent directors. A clear and unambiguous liability regime that clears the grey areas can be a significant confidence-building measure. Clearly, there is considerable ground to cover before we can bridge the gap between what stakeholders and the government expect and what independent directors can practically deliver. The need of the hour is a paradigm shift in approach — from a tick in the box approach to a compliance with the law in spirit and in substance.

Corporate social responsibility (CSR)

CSR is essentially meant for making corporate entities spend a certain specific sum for the benefit of the society in the form of programs for promoting literacy, social health, protecting environment etc. It is the ultimate step by which business organizations are required to pay back the society in which they operate. Organizations function by drawing on resources from environment including labour. It is high time that they took initiatives to pay back to society if not fully, at least a part of their profits.

In India currently as per provisions of The Companies Act, 2013, CSR spending is mandatory for all limited companies having a turnover of more than Rs. 5 crores. This is to bring into CSR fold the SMEs too. Just to give a brief outline of the regulations relating to CSR as given in The Companies Act, 2013. For complete details please refer to Handout no. 2:

1. Why is the CSR clause of the new Companies Act, 2013 so critical for SMEs?

2. By requiring companies, with a minimum turnover of 5 crores INR, to spend on CSR activities, the

3. Companies Act, 2013 is likely to bring in many SMEs into the CSR fold. This will usher in a fresh set of challenges to a sector that is increasingly being asked by its B2B customers to comply with environmental and social standards, while remaining competitive in terms of price and quality. Thus, SMEs will have to

4. Quickly learn to be compliant with these diverse set of requirements and it is hoped that this handbook will

5. Facilitate their ability to comply with the CSR clause of the Companies Act, 2013.

Sustainability reporting in India for the top 100 listed companies (known as ‘BRR’):

Business responsibility reporting (BRR)The other reporting requirement mandated by the government of India, including CSR is by the SEBIwhich issued a circular on 13 August 2012 mandating the top 100 listed companies to report their ESGinitiatives. These are to be reported in the form of a BRR as a part of the annual report. SEBI has provided atemplate for filing the BRR. Business responsibility reporting is in line with the NVG published by the Ministry of Corporate Affairs in July 2011. Provisions have also been made in the listing agreement to incorporate the submission of BRR by the relevant companies. The listing agreement also provides the format of the BRR. The BRR requires companies to report their performance on the nine NVG principles. Other listed companies have also been encouraged by SEBI to voluntarily disclose information on their ESG performance in the BRR format.

Role of the board and the CSR committee:

Applicable to listed companies conforming to one of the following conditions:Net worth > 500 Crores INRTurnover > 1000 Crores INRNet profit > 5 Crores INR

1. CSR – examples of deficiencies in Indian companies: a. Pharma companies lagging behind in sustainability reporting – paper clipping – what is

the status now? Bala has to know before sharing with students2. CSR good examples of Indian companies

a. Positive behaviour by a corporate – Mahindra Trucks – Navistar brandi. Attention to the well being of the drivers

ii. Multilingual call centre for help while on the roadsiii. Promotes understanding of their rights and liabilities along with basic

ground rules including how to deal with accidents etc.iv. Driving lessons include how to deal with small mechanical problemsv. Introduction of awards system not only for drivers but also for the

dhabas which serve as lifeline to driving communityvi. Another initiative, ‘Outperformers league’ that invites industry captains,

legal experts, auto experts and drivers too.b. Another example of a very good CSR initiative by ITC – Waste management engaged in

recycling waste – nearly 8 lacs people are employed directly and indirectly in Tamil Nadu alone by ITC’s program – recycling more than 5000 tonnes a month.

3. CSR would include the following: a. the environment b. sustainability c. globalization effects - e.g., exploitation, child-labour, social and environmental

damage anywhere in the world d. corruption, armed conflict and political issues e. staff and customers relations - for instance education and training, health and

safety, duty of care, etc f. local community and other social impacts on people's health and well-being

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