social responsibility

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Public Enterprise:Accountability andGovernance

UNIT 9 CORPORATE GOVERNANCE ANDCORPORATE SOCIALRESPONSIBILITY

Objectives

After reading the unit you should be able to:

• Understand the meaning & scope of Corporate Governance, Social Responsibility& Scope of Social Audit of PEs;

• Appreciate the need and importance of Corporate Governance of SocialResponsibility in the changes Scenario; and

• Discuss the Social Responsibility in PEs.

Structure

9.1 Corporate Governance: Concept

9.2 Committee Recommendations on Corporate Governance

9.3 Coporate Governance in Public Enterprises

9.4 Social Responsibility Strategies

9.5 Social Audit- Introduction

9.6 What is Social Audit

9.7 Social Audit in India

9.8 Benefits of Social Audit

9.9 Summary

9.10 Self Assessment Questions

9.11 References

9.12 Further Readings

9.1 CORPORATE GOVERNANCE : CONCEPT

“A code of corporate governance cannot be imported from outside, it has to bedeveloped based on the country’s experience. There cannot be any compulsion on thecorporate sector to follow a particular code. An equilibrium should be struck so thatcorporate governance is not achieved at the cost of the growth of the corporatesector.” —Sir Adian Cadbury

What is Corporate Governance?

Corporate Governance has succeeded in attracting a good deal of public interestbecause of its importance for the economic health of corporation and the welfare ofsociety, in general. However, the concept of corporate governance is defined inseveral ways because it potentially covers the entire gamut of activities having director indirect influence on the financial health of the corporate entities. As a result,different people have come up with different definition, which basically reflect theirspecial interests in the field. The best way to define the concept is perhaps to list afew of the different definitions rather than mentioning just one or two.

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Corporate Governanceand Corporate Social

Responsibility

Definitions

Adolf Berle has defined social responsibility as “the manager’s responsiveness topublic consensus” (www.bharatpetroleum.com).

Koontz and O’Donnell have given the definition of social responsibility thus: “Thepersonal obligation of the people as they act in their own interests to assure that therights and legitimate interests of others are not infringed”

(Hindu business line, 1998).

Corporate Governance can be defined as a systematic process by which companiesare directed and controlled to enhance their wealth generating capacity. Since largecorporations employ vast quantum of societal resources, we believe that thegovernance process should ensure that these companies are managed in a mannerthat meets stakeholders aspirations and societal expectations.

(Chartered Secretary, Oct, 1997).

9.2 COMMITTEE RECOMMENDATIONS ONCORPORATE GOVERNANCE

Cadbury Committee (1991)

The Cadbury Committee, under the chairmanship of Sir Adrian Cadbury, was set upby the London Stock Exchange in May 1991. The committee, consisting ofrepresentatives drawn from the top levels of British industry, was given the task ofdrafting a code of practices to assist public enterprise. In defining and applyinginternal controls to limit their exposure to financial loss, from whatever cause.

Birla Committee (2001)

The first formal committee was appointed by Securities and Exchange Board of India(SEBI), under the Chairmanship of Kumara Managalam Birla (known as BirlaCommittee). This was set up after the CII code on corporate governance wasframed; to study the corporate governance from listed companies’ perspective andculminated when its recommendations were included in the listing agreement.

The recommendations were applicable to listed companies; their directors,management, employees and professionals associated with such companies and otherbodies corporate.

The major recommendations of Birla Committee on corporate governance were:

• The Board of directors of a company should have an optimum combination ofexecutive and non-executive directors with not less than 50% of the Boardconsisting of non-executive directors. In case the company has a non-executivechairman, at least one-third of the board should consist of independent directors.

• Board meetings should be held at least four times in a year with a maximum timegap of four months between any two meetings.

• The Board should set up a remuneration committee to determine the company’spolicy on specific remuneration packages for executive directors.

• The Board should set up a qualified and independent audit committee.

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• Companies should required to give consolidated accounts in respect of all theirsubsidiaries. A company having multiple lines of business should be segmentalreporting.

• A management discussion and analysis report should form part of the annualreport to the shareholders covering industry structure, opportunities and threats,segment wise or product wise performance, outlook, and risks.

• Companies should arrange to obtain certificates from their auditors regardingcompliance of corporate governance provisions and the certificates should besent to stock exchanges and all the shareholders.

As mentioned, these recommendations were incorporated in the listing agreement(Clause 49) and were sought to be implemented within a time frame of three years.Later, these recommendations got statutory recognition when they were introduced aprovisions in the Companies (Amendment) Act, 2000.

Naresh Chandra Committee (2002)

Following the Enron fiasco and subsequent enactment of Sarbanes-Oxley Act in theUS, Government of India [Department of Company Affairs (DCA)] had set upanother committee to study corporate governance. This committee was formed underthe Chairmanship of Naresh Chandra (known as Naresh Chandra Committee/NCCommittee).

This committee examined various governance issues, such as:

a) Statutory Auditor – company relationship including independence of Auditfunctions and restriction on non-audit services.

b) Need for rotation of statutory audit firms.

c) Advantages of setting up an independent regulator.

d) Role of independent directors for their composition in Board.

After discussions with trade associations and professional bodies the committee madethe following recommendations.

• Disqualification for audit assignments like prohibition of non-audit services andany direct financial interest or any other business relationship with the audit clientby the audit firm.

• Prohibition of service during cooling off period i.e., no partner or member of theaudit team can joint the audit client nor any key officers of the client can join theaudit firm during this cooling off period (two years)

• Prohibition of undue dependence on an audit client; audit fee received from anyone audit client and its subsidiaries should not exceed 25% of the total revenuesof the audit firm.

• A special resolution should be passed in case an auditor is to be replaced, who isotherwise eligible for re-appointment and an explanatory statement shoulddisclose management’s reasons for such replacement.

• In case of all listed companies and companies whose paid up capital and freereserves exceeds Rs. 10 crore or a turnover of Rs. 50 crore, there should becertification by the CEO and the CFO to the effect that they have reviewed thefinancial statements and that these statements reflect a true and fair picture ofthe company.

• Independent directors should play a vital role in the board and all the committeesshould be constituted of independent directors.

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Responsibility

• The minimum Board size should be at least seven, of which four should beindependent directors.

• To specifically exempt independent directors from certain criminal and civilliabilities.

• DCA should encourage institutions to have regular training programs forindependent directors and make it mandatory for such directors to attend thesetraining sessions before assuming responsibilities.

Unlike the Birla committee, this committee focused on corporate governance fromthe perspective of companies in general, without bifurcating as listed or unlisted.

Narayan Murthy Committee

After this study, SEBI appointed a second committee under the chairmanship of N.RNarayana Murthy to analyze the compliances of clause 49. Narayana Murthycommittee focused mainly on the role of the audit committee and the boardcomposition, particularly independent directors. The objective of this committee wasto examine and recommend amendments to the law in order to maintain highstandards of corporate governance and also to ensure that corporate governance islooked beyond mere procedures and is implemented by companies to is protect theinterests of shareholders.

The recommendations of the committee, in short, are:

• Audit committees should consist of members who are ‘financially literate’ i.e.,ability to read and understand basic financial statements.

• Audit committees of listed companies should review the financial statements andcertify that they are true and report any material deviations from prescribedaccounting standards if any.

• A statement of all transactions with related parties should be placed before auditcommittee for formal approval.

• Procedures should be in place to inform board members about the riskassessment and minimization procedures.

• To lay down the code of conduct for all the board members and seniormanagement.

• Nominee directors, if appointed, shall be only by the shareholders and institutionaldirectors shall be subject to same liabilities as other directors.

• Non-executive director’s compensation should be fixed by the board and shouldbe approved by the shareholders.

• Companies to frame policies, where by personnel who observe any unethical orimproper practice are able to approach the audit committee directly. Further,companies should affirm annually that they have provided protection to such‘whistleblowers’.

A close look at the amendments proposed in the Companies (Amendment) Bill, 2003reveals that the changes proposed are based upon the recommendations of NareshChandra Committee and Narayana Murthy Committee.

Hopefully, these recommendations when accepted in true spirit, should raise thestandards of corporate governance in Indian firms and make them attractive fordomestic and global capital and should form as base for further evolution of structureof corporate governance.

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9.3 CORPORATE GOVERNANCE IN PUBLICENTERPRISES

Public sector enterprises are ‘generally autonomous bodies’ which are owned andmanaged by the government and which provide goods or services for a price. Theownership of the government extends to 51 percent, or more, in order to make it apublic enterprise/entity. Public enterprises are considered as important instruments forself-reliant economic growth. They also help speed up economic growth, provide therequired infrastructure, act as tools to achieve various social objectives like betterdistribution of income, expansion of employees’ employment opportunities, removal ofregional imbalances, reducing concentration etc. From a paltry Rs. 29 crore in 1951-52, with 29 PEs the investment in the central public sector went up to well overRs. 6,00,000 crores by 2000 with 240 PEs.

Public enterprises have been organized in many ways as distinct autonomous units,with varying degrees of legal and operational independence. Where an autonomouslegal entity is established by an Act of Parliament or legislature, it is called ‘publiccorporation’ or ‘statutory corporation’. These are the principally chosen asinstruments for the management of nationalized industries. The other popular methodfollowed is forming government companies under the provisions of the CompaniesAct, 1956 (Sec. 617), in which not less than 51 percent of the paid-up share capitalhe held by the central or the state governments, or jointly by the central and stategovernments. A subsidiary of a government company is also a governmentcompany.

The Board of Directors is the top management organ, and is responsible forimplementing the objectives of an enterprise. The board members are nominated bythe shareholders, i.e., government. Under the normal pattern, it includes theChairman-cum-Managing Director, one or more full-time functional directors,officials representing and administrative ministry of finance, and sometimes one ortwo other relate ministries, and lastly, one or two non-officials, selected for theirexpertise and business experience. Under the trusteeship and entrepreneurialfunctions concept, the board looks after its various categories of functions –establishment of basic policies including corporate strategies, decisions on majorfinancial matters, selection of key personnel, receiving working reports and, reviewingand passing judgment upon them.

The functioning of PE boards has been subjected to criticism on various grounds. Thevarious practices followed, it is complained, do not facilitate the emergence of anautonomous enterprise management with initiative and operating effectiveness, andyet be responsible and responsive to the government guidelines and policies. The 40th

Report of the Committee on Public Undertaking (73-74) regretted that theperformance of public undertakings continues to be judged by a variety of vagueobjects and considerations. It recommended government presenting a white paperwhich can set out the framework of governments general, economic, financial andsocial strategy for public sector undertakings, micro-objects – both financial andeconomic – of each public undertaking and their review, and also qualification of theirsocial objectives and obligations and the issue of government directives in appropriatecases. The nomination of government officials, according to experience, has also tobe termed as superfluous and non-functional. The enterprises are also facingproblems as the government is not strictly adhering to the policy that all heads ofpublic enterprises will have a five-year tenure. This was accepted to improve theefficiency of top management.

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Obligation to the Public Sector Enterprise

a) The role of the executives is to assist the PSE to achieve its objectives as speltout in the charter constituting the setting up of the enterprise.

b) It is the obligation of every employee of the public sector administrative ministryto uphold the Rule of Law and respect for human rights solely in the publicinterest while making recommendations or exercising administrative authority. Heor she must maintain the highest standards of probity and integrity.

c) In relation to the general public, the employees in the PSE and administrativeministries should conduct themselves in such a manner that the public feels thatthe decisions taken or the recommendations made by them are objective andtransparent and are not calculated to promote improper gains for the politicalparty in power or for themselves or for any third party. This would be particularlysignificant so far as the customers of the public service are concerned. This willapply also mutatis mutandis to the employee in the administrative ministryconcerned with the PSE.

d) Employees of the PSEs/administrative ministries should not seek to frustrate orundermine the policies, decisions and action taken in the public interest by themanagement decision. Where following the instruction of the superior authoritywould appear to conflict with the exercise of impartial professional judgment oraffect the efficient working of the enterprises, he/she should set out points ofdisagreement clearly in writing to the superior authority or seek explicit writteninstruction. This will apply also mutatis mutandis to the employee in theadministrative ministry concerned with the PSE.

e) Where an employee of the PSE has reasonable ground to believe that he or sheis being required by the superior authority to act in a manner which is illegal oragainst the prescribed rules and regulations or if any legal infringement comes tohis or her notice, he or she should decline to implement the instruction, and wouldalso have a right to bring the facts to the notice of the Chairman / ManagingDirector of the enterprise or the Secretary of the Administrative Ministry / theCabinet Secretary to examine the issue carefully to concerned employees in theadministrative ministry.

Accountability and Responsiveness to the Public

a) Consistent with accountability to the superior officers and the ministers inaccordance with provisions governing PSE/administrative ministry, the employeesin the public sector should practice accountability to the people in terms of qualityof service, timeliness, courtesy, people orientation on readiness to encourageparticipation of and form partnership with citizen groups, for responsive management.

b) Employees in the PSE/administrative ministry should be consistent, equitable andhonest in their treatment of the members of the public, with particular care forthe weaker section of society and should not even be or appear to be unfair ordiscriminatory. Decision in pursuit of discretionary powers should be justifiable onthe basis of non arbitrary and objective criteria.

c) Employees in the PSE/administrative ministry should accept the obligation torecognize and enforce customers right for speedy redressal of grievance andcommit themselves to provide services of declared quality and standard to customers.

d) Employment in the PSE/administrative ministry should respect the right of publicto information on all activities and transactions of the organizations except wherethey are debarred in the public interest from releasing information by provisionsof law or by valid instructions.

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Concern for Value of Public Assets and Funds

The employees in the PSE/administrative ministry should avoid wastage andextravagance and ensure effective and efficient use of the public money within theircontrol.

Non Abuse of Official Position

Employees of PSE/administrative ministry have a responsibility to make decisions onmerits. They are in a position of trust. They must not use their official position toinfluence any person to enter into financial or arrangements with them or with anyone else. They must not abuse their official position to obtain a benefit for themselvesor for someone else in financial or some other forms. This will apply also mutatismutandis to the employee in the administrative ministry concerned with the PSE.

Continuous Improvement through Professionalism and Teamwork

It shall be the duty of every employees of the PSE/administrative ministry tocontinuously upgrade his/her skills and knowledge, strive for creativity and innovationand nurture the values of team working and harmony. He / she should promote andexhibit public and private conduct in keeping with the appropriate behaviour andstandards of excellence and integrity. He / she should support the junior in the latter’sefforts to resist wrong or illegal directives and in abiding by the Code of ethics. At thesame time, they should reward good work and publish any dereliction of duty andobligations based on objectives and transparent criteria.

Public Accountability

For accountability in the case of central government enterprises, the appropriatelegislature is Parliament, and for state-owned enterprises, the respective stateassemblies. The principle followed here is, as Mr Appleby observes: “Parliamentperforms quite admirably when it debates the important questions of Policy. Thewisdom of non individual is substitute for the general wisdom of society, and thegeneral judgment of society is more closely approximated by a representativelegislature than by any other entity”.

PEs come in for parliamentary consideration through debates, short discussion,questions, Committee on Pubic Undertakings, and also public inquiryrecommendations made by COPU. The feeling is that MPs are mostly interested inraising issues of topical nature and those effecting their constituency / state and donot raise critical issues, such as the government’s failure to fulfil promises made invarious policy statements, eg., Policy Statement of July 1991. The COPU examinesthe reports and accounts of PEs, examines the Management Review andResponsibility

Appropriate Governance Model for PEs

In the literature on corporate governance a distinction is drawn between the “insidermodel” and the “outsider model” of corporate governance. The insider model is onein which a compact group of shareholders business families/houses in India and EastAsia exercise full control over the corporate entity in such a way that the professionalmanagers hardly enjoy any decision making powers. Overwhelming part of the Indiancorporate economy has adopted the insider model of corporate governance. Theboard of directors of such companies are often rubber-stamping authorities with theboards concurring with almost all the proposals made by the controlling families. Theoutsider model of corporate governance is characterized by a separation of control

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from ownership arising separation of control from ownership arising from a widelydispersed equity ownership among large number of institutional and innumerable smallshareholders. Consequently governance such corporate entities vests withprofessional managers and their board of directors. Growing importance of theeconomies of scale and scope has necessitated birth of the large firm with itsnecessitated birth of the large with its distant shareholders and professional managerswho have to handle complex tasks and responsibilities.

In the case of insider model, the debate on good governance is concentrated onensuring that the controlling business family does not appropriate most of the gains.Several studies on the last East Asian Crises have highlighted that the insider modelof corporate governance prevalent in these countries was largely responsible foraggravating the seriousness of this crisis. In the case of the outsider model, the mainconcerns relate to devising mechanisms to tackle what is known as the agencyproblem viz., how to ensure that professional managers function in the interests ofshareholders and the stakeholders.

In the case of PEs ascertaining wishes of the ultimate shareholders (Voters) isdifficult since it is not a practical proposition to put board resolutions for voting at theAGME/EGM in the same manner as in the case of typical listed company. Thecommon voters elect their representatives who in turn form a government in turn issupposed to ensure that voters wishes are translated into concentrate actions.

“In reality far more complex problems arise especially because the layered andhierarchical principal-agent structure that characterizes the public sector ownership.The ultimate owners of the public sector entities viz., the voters express theirinterests / objectives in a diffuse, indirect and cultured up manner. However, whenthe governments/ politicians act on behalf of the owners or the voters to crystallizeowners/voters’ interests in terms of specific objectives, they are prone to could theseobjectives to the extent that their self interests influence interpretation of votersobjectives. Since governments / politicians act as principals through civil service,another layer is added to the principal-agent chain. Civil servants too are liable to actas agents by allowing their own objectives to dominate their own actions duringadministration of public entities.

One may argue that already we have eminent bodies like the Public EnterpriseSelection Board (PESB). The PESB recommends personnel for the posts ofChairman, Managing Director, Chairman & Managing Director (CMD) andFunctional Directors in PEs as well as posts at any other level. PESB is alsoexpected to advise the government on such matters as (A) the desired structure ofthe boards, (b) performance appraisal system for both PEs and their managerialpersonnel, (c) build data bank on the performance of the PEs and their key personnel,(d) formulation and enforcement of code of conduct for PEs managerial personneland (e) suitable training and development programmes for management personnel inPEs. Despite all these lofty goals placed before the PSEB, the matters have notimproved much in regard to the PEs. Complaints about their performance in all thematters vested with the PESB continue to be voiced, sometimes loudly even in highlyrespectable and responsible quarters. Instances of PEs remaining headless for longperiods of their boards not being constituted with adequate number of functional andindependent directors continue to be frequent and numerous. Quite often theappointment process gets bogged down because of complaints with regard to integrityof the candidates being considered for the PEs boards. There are also instances ofspurious complaints lodged by competing candidates, thereby necessitating vigilanceinquiries. In many instances it is a hurdle race especially for competent and cleancandidates, who often prefer to remain out of the race if they attack higher value toenjoying peace of mind.

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9.3 SOCIAL RESPONSIBILITY OF BUSINESS

The growth of large corporations with their professional managers has changed thenature of society through its effect on competitive forces and the ownership ofprivate property. With their increases power in society, they are forced to concernthemselves with the nature of social responsibilities. Management must take decisionsinvolving moral issues and must adapt itself to the social forces that affect it. Theidea of social responsibility of business is based upon the concept that business issomething more than a purely economic institution.

Public Enterprises operates within the precincts of the society. While its immediatesociety, where it operates, provides its environment, material, manpower, market etc.the whole global society provides for its global corporate citizenship and ensures itsfacilities in terms of environment, market, perspectives, exposure to technology andintegration with priorities in the business scenario. The social responsibility of PublicEnterprises consists of its responsibility to its consumers and customers, its prospects,its immediate society (community), its human resources (people), its society at large,ecological environment, the Government, and its business environment. Socialresponsibility of business is not new to our country. In the olden days, whenever therewas a famine, the leading businessmen of the area would literally throw open theirgodowns and their treasure chests to provide food and other assistance to the needy.The history of every region of this country is replete with stories of the magnificentmanner in which businessmen rose to the occasion in times of calamity. Even inordinary times, it was the businessmen who looked after the welfare of the destitute,the goshalas, wells and ponds wherever what was difficult to get, the pathashalas andso on. So to accept social responsibility is no more than rededicating ourselves to thecherished values in the field of business. Gandhiji reminded of these values when hepropounded the theory of trusteeship. India is a democratic welfare state. She wantsto achieve welfare through democratic means. Business organization, which fit inwith such a specification, would have a better scope to survive and grow here. Inorder to make them suitable for such a business environment, they should foster acorporate objective of maximizing social benefit. This must be considered as thesocial responsibility of business. It pertinently means that every business enterprisehas a responsibility to take care of the society’s interest.

Though the fundamental purpose of Public Enterprises is to produce and distributegoods and services in such a manner that income exceeds costs, society expects thatbusiness is conducted in a socially responsible manner. Social responsibility embracesmultitude of internal and external relationships of the firm. Business enterprises,conscious of their social responsibility, would seek to comply with the laws concernedwith employment of women, non-discrimination in employment, ecological effects ofproduction, consumers, and employee welfare, and in general they would think of theimpact their action on the community.

Social and ethical aspects of business impinge upon the choice of strategy. Howsocietal values and expectations after business and how a firm perceives its socialand ethical obligations are interactive in character and both of these may becomeconstraints in strategy formation. That how consumerism, occupational health andsafety, product safety, concern for environmental protection, nutritional issues, beliefsabout ethics and morals and other for environmental protection, nutritional issues,beliefs about ethics and morals and other similar societal based factors impact uponthe strategies have to accommodate these factors. Some instances can be cited.Most of the Public and Private Enterprises adopted the villages for development.Most of the Enterprises launched awareness camps about AIDS. Cigarettemanufacturers have reduced the tar and nicotine content of cigarettes. Foodprocessors have altered the use of preservatives in food products and have begun topromote nutritional content and “natural” flavours.

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Responsibility

The lending institutions have given up their overly concern with safety or security ofmoney advanced and are now more concentrating on the competence of theentrepreneure and commercial viability of the project. All these instances demonstratehow business has adapted itself to changing social values and expectations.

Running the enterprise in a “socially responsible” manner implies that the activities ofthe organizational are in tune with what is generally perceived as in the publicinterest. It also implies that the firm responds positively to emerging societal prioritiesand balances the interests of its various stakeholders. Further, it realizes theimportance of being “good citizen” in the community and makes social and ethicalobligations an explicit and high priority consideration in conducting its affairs.

Being “socially responsible” has a positive appeal. The organization improves itsstanding in the public, which has the effect of enhancing its own performanceopportunities. If the firms ignore the changing priorities and expectations of society,the result could be greater public criticism and more onerous regulation by government.

Concern for social responsibility has led to the development of (more or less) formalprocedures to monitor corporate compliance with changing demands. One suchprocedure is “social audit”. It is also common knowledge these days that business hasattempted through advertising and public relations activity to explain and accentuateits consistency with various social objectives. Recognition of the need for socialresponsibility has also led several large enterprises to make intentional efforts to increasetheir sensitivity towards current and future pressures for changes in social expectations.

9.4 SOCIAL RESPONSIBILITY STRATEGIES

In view of the ongoing controversy regarding whether or not a business has socialresponsibility, it is not surprising to find a wide range of industry responses to theissue. Business responses to social responsibility tend to fall within four categories: (i)Social opposition, (ii) social obligation, (iii) social response, and (iv) social contribution.As illustrated in Fig. 9.1, these positions fall along a continuum, ranging from low tohigh levels of socially responsible behaviour.

Figure: 9.1: Approaches to Social Responsibility

Source: Gene Burton and Manab Thakur, Management Today

Degree ofSocial

Responsibility

SocialContribution

SocialResponse

SoOblig

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Social opposition: This view is taken by the business which feel that they have noobligation to society in which they operate. When they are caught for any offense,their immediate responses is to try cover it up while denying it.

Table 9.1: Common Characteristics of Socially Responsible Firms

1. Initially founded by far-sighted people who visibly set the firms moral tone.

2. Stuck to the basics and produced only high quality goods and services for specificmarket niches.

3. Developed a public image that emphasized that commitment to quality and often usednon-traditional means to promote it.

4. Firmly practiced the dual principles of self-management and decentralization.

5. Brought in outside people to provide needed talent and additional perspectives.

6. Encouraged all employees to become part of the shared mission through full workerparticipation in decisions.

7. Paid fairly and usually offered benefit packages exceeding the competition.

8. Emphasized a democratic people orientation and did without executive perks.

9. Constantly solicited feedback from customers on all subjects from product directionto corporate donations.

10. Top managers possessed an extensive knowledge of current events and took awide-ranging interest in affairs outside their business.

11. Offered donations in cash or services to people in need of help.

12. Took an active role in the operations of their local communities.

13. Deal with like minded businesses and encourage their employers to do the same.

14. Constantly look to the future but always pay attention to the past.

Social Responsibility Towards Different Groups

1. In addition to making a fair and adequate return on capital, business must be justand humane, as well as efficient and dynamic. The modern business has manifoldresponsibilities (a) it self, (b) to its customers; (c) employees; (d) owners,shareholders and partners, (e) community and (f) the state. The task ofmanagement is to reconcile and harmonise these separate and sometimesconflicting responsibilities.

2. The S.R. of Business can best be assumed in an atmosphere of freedom with theleast possible restraint on healthy competition. Concentration and monopoly haveto be watched and guarded, and wherever necessary, dispersed.

3. Every business has an overriding responsibility to make the fullest possible use ofits resources, both human and capital. Management has the responsibility toprovide security of employment with fair wages and equal opportunity forpersonal growth and advancement within the business, which is a requirement ofjustice, and means of securing efficient management.

4. It highlights the respective roles of the enterprises, the shareholders, the workers,the customers, the management and the community. The responsibility ofmanagement is to fulfill the fair first needs of these claimants besides, providingconsumer satisfaction.

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5. It laid emphasis on the reciprocal duties between business and the communitythrough laying down of practical measures like reliable means of communication,better education of he citizens about civil responsibilities, local meetings and socialaudit.

On the basis of the above seminar report, we may put down the social responsibilitiesof Business, in the Indian context in the flow chart given below

We discuss, in the paragraphs that follow, the S.R. of business towards thesedifferent groups. The following flowchart presents business’s social responsibilitiestowards different groups.

Business Firm’s Responsibilities

Towards Owners/ Towards Employees Towards CustomersShareholders

• Fair Dividend • Meaningful Work • Fair price

• Solvent and Efficient • Job Satisfaction • Superior QualityBusiness

• Optimum use of • Fairness Salaries • Superior ServiceResources & Benefits

• Planned Growth • Best Quality of • Superior Product DesignWork life

• Effective • Succession Planning • Quick and CompleteCommunication and Development Information

Towards Government Towards Society Towards Inter-Business

• Payment of Taxes, • Employment without • Fair CompetitionCustom Duties etc Discrimination

• Abide by the Laws • Employment to • Cooperation for SharingDisadvantaged Persons of Scarce Resources and

Facilities

• Observe the Policies • Community Welfare • Collaboration forServices Maximisation of Business

efficiency

• Maintain Law & • Business MoralitySecurity • Maintaining Pollution free

Environment

• Maintaining EcologicalBalance

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Social Audit, which is a tool for evaluating, verifying and reporting the performanceof the firm in the sphere of social responsibility. It will help a “socially consciousorganization” to bring about greater strategic articulation and desirable modificationsin its social policies and programs. In this unit the term social audit is defined and thedesirability of undertaking social audit by a business enterprise is discussed. Thevarious frameworks or methodologies for conducting social audit are explained. Thepotential difficulties that could be faced by an organization adopting social audit arediscussed and critically evaluated. The status and the state of art of social audit inrelation to India is examined and analysed. Finally, what looks like the future of socialaudit is explored.

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Case Study 1

SOCIAL RESPONSIBILITY OF BUSINESS:BHARAT PETROLUEM

Introduction

Bharat Petroleum Corporation Limited (BPCL) is a downstream oil refiningand marketing company. The company has its network spread over all the fourregions in India and is represented in almost all markets. It caters to differentpetroleum sectors – Liquefied Petroleum Gas (LPG) and Kerosene fordomestic consumption, automotive fuels and lubricants for vehicles, andfeedstock and fuels for industrial applications. The company also manufacturepetrochemicals like Benzene, Toluene, Linear Alkyl Benzene feedstock etc.With a sales turnover of Rs. 25,650 crore and profits of Rs. 701.30 crore in1999, BPCL is the 5th largest company by sales in India. Its strength lies in anefficient refinery and strong distribution network, which has given it a 20%market share in petroleum products in India. BPCL has a tie up with ShellPetroleum Co. of Netherlands to manufacture and market Shell lubricants inIndia. In a major expansion move, BPCL is increasing its refining capacitythrough 3 joint ventures and also adding on to its distribution strength by layinga similar number of pipelines. BPCL is also planning a foray intopetrochemicals through a 1.8 million tonnes (mt) naphtha craker plant in TamilNadu for around Rs. 7,000 crore and this project is scheduled to go on streamby 2002.

Ecological Concern

BPCL has been continuously striving towards conservation and improvementof the environment by adopting new technologies. In March 2003, BPCLintroduced low lead MS (with 0.15 gm of lead per liter) in the country. FromApril 1996, HSD with a maximum sulphur content of 0.5% by weight, wasintroduced in the metro cities and in the Taj Trapezium. From September 1996,HSD, with a maximum sulphur content of 0.25% by weight, was introduced inthe Taj Trapezium. To meet the requirement of HSD all over the country withthe revised specification of maximum sulphur content of 0.25% by weight,from April 1999, facilities for Diesel Hydro De-sulphurisation are being put upin the refinery. Distribution of other low sulphur fuels (which has maximumsulphur content of 1.8% by weight) was started in the National capital regionfrom October 1996, which ended the use on High Sulphur FO and RFO. BPCLconducted two advertising compaigns of behalf of the industry – the first on theimportance of LPG conservation and the second on the introduction of lowleaded petrol. On the pollution control front, BPCL has set up a specialsophisticated plant to meet the stringent standards set by Minimum NationalStandards for Effluents from Oil Refineries (MINAS). BPCL’s emissionstandards are far more stringent than the limits laid down by the PollutionControl Board. BPCL had also invested around Rs. 220 crore, in pollutionabatement and energy conservation systems.

Contd....

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Safety and Social Commitments.

Safety continued to be accorded the highest priority in BPCL both in refiningand marketing operations. In 2002-03, its refinery achieved 3 million man-hourswithout Lost Time Accident (LTA) on one occasion and one million man-hourswithout LTA on two occasions. The microprocessor based control system asits refinery monitors the operating conditions for safety hazards and therefinery is divided into three separate areas as high risk, low risk and mediumrisk. Each employee, irrespective of levels, is given fire-fighting training andmock drills are carried out at quarterly intervals for different range fires.Employees are given training on simulators so that they learn by committingmistakes on simulators and not in real conditions. BPCL’s Mumbai refinery hasa Mutual Aid agreement along with the neighboring 9 industries for fightingmajor fires.

As a result of higher exposure to various safety awareness programs, therehas been a reduction of injuries in BPCL’s refinery by 34% for its ownemployees, and 43% for contractors’ employees, in 1996-97. Moreover thefrequency of LTA has come down from 1.5% to 0.6% for its employees andfrom 5.6% to 1.7% for contractors employees. To enhance safetyperformance, BPCL introduced ‘safety by walk-around’ concept whereinexperienced officers were appointed as safety surveyors and safety samplingwas done by senior management staff. It also organized a safety symposium atits refinery in which members from the oil industry, government bodies. Oilawareness on LPG safety, BPCL also screened one-minute films on the safehandling of LPG, on popular TV channels.

BPCL sponsors many sporting events like Santosh Trophy, National FootballTournament, and also coaching camps for youngsters. Lifeline Express wascontributed to social welfare – a fully equipped train, which look the latestmedical technology to remote villages of India. The company has also adopted11 Scheduled caste/Scheduled tribes villages under the Component and Tribalsub-plan. The facilities provided by the company include community centers,tube/borewells, educational support medical facilities, vocational guidance andtraining to make villagers self-reliant and improve their standard of living.

Achievements

BPCL was adjudged the winner of the ‘Oil Industry Safety Awards’ for itssafety performance being the best among all the “LPG Marketing Organizationin 1995-96” for the fourth year in succession. BPCL’s annual report for 1994-95 was selected by ICAI as the best presented amongst the public sector/jointsector companies for the second year in succession. The South AsianFederation of Accountants also adjudged the same as the second bestpresented in the non-financial sector in the SAARC region. BPCL receivedISO-9002 certification from Bureau Veritas Quality International (BVQI) for15 out of its 22 bottling plants. BPCL has also received ISO-9002 accrediationfor its refinery, aviation service stations at Mumbai, Delhi, Calcutta andBangalore depots at Miraj and Mysore and lubricants blending plant atWadilube.

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Responsibility

Case Study 2

SOCIAL RESPONSIBILITYAFFLUENCE FROM EFFLUENTS

The Rashtriya Chemicals and Fertilizer’s Chembur plant is one of Bombay’smost well known cases of industrial pollution. The company, in the face ofsustained public pressure, is making attempts to reduce environmental damage.When the World Bank instituted the Industrial Pollution Control Project(IPCP). RCF was one of the first to approach IDBI. In January 1993, RCFentered into an agreement with the financial institution for a DM 12.5 million(approximately, Rs. 45 crore) loan at 15.5 percent.

RCF’s problem was its two ammonia plants. These plants have been scorespot for the company and have been shut down on more than one occasion. Atthe time the plants were setup, it was not mandatory, to include cost of pollutioncontrol equipment in the project cost. But as local residents started complainingabout the pollution levels, RCF started looking for alternatives.

There were modifications going on in both plants. RCF had to wait till thesewere complete to be able to estimate the volume of pollutants that wouldrequire treatment. Finally a Ministry of Environment notification in the late1980’s ordering them to clean up forced RCF into action.

In the process of manufacturing ammonia, certain gases are accumulatedwhich need to be removed by purging. Using cryogenic technology boughtfrom a German firm, RCF decided to set up a purge gas recovery plant, whichwould in the process of treating ane-rich fuel, both of which can be soldcommercially, thereby making pollution control not just pay for itself but alsogenerate additional resources. And at the end of the process, the plantproduces no effluents.

RCF’s choice of technology is determined by financial considerations. Theyhad three options. In the first case, they could simply treat the ammonia, whichis all they are required to do under the regulations. Their internal rate of return(IRR) for just ammonia recovery was an uneconomical 10.7 percent. Theirsecond option was to choose ammonia and synthetic gas recovery, for whichthe IRR was 27 percent. The final option, the one they chose, includes therecovery of liquid argon and gives them an IRR of 46.3 per cent. Pay backperiod is a brisk 26 months.

Whether RCF will actually earn its projected income is doubtful. Since the timethe plant has come up, argon prices have crashed due to excess capacity andintense competiters are mainly the steel and automobile industry, which useargon for welding. RCF officials however, say they are safe, because evenrecovery to synthetic gas stage gives them an IRR of 27 percent, leaving RCFa comfortable profit margin.

Social Opposition: This view is taken by the business which feel that they have noobligation to society in which they operate. When they are caught for any offense,their immediate response is to try to cover it up while denying it.

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9.5 SOCIAL AUDIT : INTRODUCTION

It is generally believed today that it is the duty of the privately owned enterprise toensure that it does not adversely affect the life of the community in which it operates.Though the duty is not clearly defined, it is usually thought that the corporate businessshould not cause pollution, should not discriminate in employment, should not makemoney from insavoury or immoral activities and should not withhold information fromconsumers about their products. It is also expected that they should make positivecontribution to the life of the community.

The corporate business has become an integral part of the functioning of any society.It is the recipient of the benefits and privileges of the State and society in which itoperates. The society therefore expects the corporate business to assumeresponsibility towards it. Earlier it had been assumed that the vast material resourceslike water, land and air could absorb the wastes of production and neutralise anypotential harmful effects. Man assumed that the natural environment would alwaysrenew itself. It is abundantly clear now that this is not so. It is common knowledgethat society is being threatened by pollution of land, sea and air. To an increasingdegree, business has been creating conditions that have resulted in many social ills,though the same may not be by design or choice. There are various social abuses,some germane to the profit persuit, some to the negligent and unscrupulous behaviorof business leaders. Most would agree that if these conditions are permitted tocontinue it must inevitably lead to social suicide. Steps must be taken to correct theabuses.

With changing social and economic values and with increasing expectations of societyfrom corporate business, the companies that adjust to the rational changes and help inpioneering such changes are likely to survive and flourish and those which oppose,block or restrict the changes may find it difficult to survive in future. Economic goalsor corporate business can no longer be separated from social goals.

Firms have to recognize their due responsibilities and consider these in the planningand action stages. They must have a social policy which means that they mustinclude in their accounting the direct costs to society of their operations to the extentpossible. They should communicate their social policy not only to the members of theorganization but also to outside groups. Social audit is a tool for judging how acorporate entity has implemented its social policy.

The increasing demand for socially oriented programmes of one kind or another andfor measurement and disclosure of environmental effects of organizational behaviourhas created pressure for adopting some kind of social auditing procedure. This unitattempts to provide a general definition of social audit, discusses the variousapproaches or methodologies for conducting social audit and points out the difficultiesencountered in measuring social performance etc.

9.6 WHAT IS SOCIAL AUDIT?

Social audit has been variously defined. As it happens with any new managementtechnique, there is not yet any definition which has gained acceptance. Bauer andFenn define Social audit as “a commitment to systematic assessment of and reportingof some meaningful definable domain of a company’s activities that have socialimpact”. The author’s emphasis is on the assessment and reporting of corporatesocial programmes.

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Responsibility

Dilley defines the social audit as “investigation of an enterprise’s performance as amember of the community in which it has its primary impact: such investigationsconsisting of the preparation of an inventory of the socially relevant activities of theenterprise, qualification (to the extent possible) of the social costs and benefitsresulting from those activities and compilation of the other quantitative informationproviding insight into the social performance of the enterprise” (Hindu Business Line,1997). Dilley’s definition highlights the making of an inventory of the socially relevantactivities and their quantification in terms of costs and benefits.

Caroll and Bailer, describe social auditing “as a form of measurement”. According tothem “Social audit is a natural evolutionary step in the concern for operationalisingcorporate social responsibilities and, in its essence, represents a managerial effort todevelop a calculus for gauging the firm’s socially oriented activities. That, it is anattempt to measure, monitor and evaluate the organizations performance with respectto its social programmes and social objectives” (Chartered Secretary, Oct, 1997)Ahmed Belkaoui has attempted to collate the definitions by Bauer and Fenn, and byDilley. He states that “Social Audit – much like the financial audit – is anidentification and examination of the activities of the firm in order to assess,evaluate, measure and report their impact on the immediate social environment”(Reddy, 1999). The words in bold are important in this definition which require someelaboration.

1. Identification assures a tracking down and inventory of all the firms activitieshaving potential impact on the firms environment identification will result in adefinition of the social dimensions of the firms activities in terms of social costsor social benefits depending on the nature of their impact on the socialenvironment.

2. Assessment and Evaluation imply the categorisation of the firms impact on itsenvironment as either positive social benefits or negative social costs.

3. Measurement implies the assignment of a quantitative or qualitative score tothe social costs and benefits identified in assessment and evaluation.

4. Reporting assumes the disclosure of the firms performance as measured.

Features of Social Audit

The nature of social audit can be made more clear if we bring out its salient features.

The areas for social audit include any activity (see Table 9.1) which has a significantsocial impact, such as activities affecting environmental quality, consumerism,opportunities for women and other disadvantaged people in society and similar others.

The second feature about social audit is that it can determine only what anorganization is doing in social areas, not the amount of social good that results fromthese activities. It is a process audit rather than an audit for results.

Thirdly, social performance is difficult to audit because most of the results of socialactivities occur beyond the company’s gate and the company has no means ofsecuring data on the results. Even if data are available it is difficult to establish howmany of them have occurred due.

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Table 9.2 Activities Covered by Social Audit

A. Ecology and Environmental Quality:

• Clear-up of existing pollution

• Design of processes to prevent pollution

• Aesthetic improvements

• Noise control

• Dispersion of industry

• Control of land use

• Required recycling

B. Consumerism:

• Truth in labeling, in advertising, and in all business activities

• Product warranty and service

• Control of harmful products

C. Community Needs:

• Use of business expertise to solve community problems

• Reduction of role of business in community power structure

• Aid with health care facilities

• Aid with urban renewal

D. Governmental Relations:

• Restrictions on lobbying

• Control of business in political action

• Extensive new regulation of business

• Restrictions on international operations

E. Business Giving:

• Financial support for artistic activities

• Donations to education

• Financial support for assorted charities

F. Minorities and Disadvantaged Persons:

• Training of hard-core unemployment

• Equal employment opportunities and quotas for minority employment

• Operation of programmes for alcoholics and drug addicts

• Employment of persons with prison records

• Building of plants and offices in minority areas

• Purchasing from minority businessmen

• Retraining of workers displaced by technology

G. Labour Relations:

• Improvement of occupational health and safety

• Prohibition of “export of jobs” through operations in nations with lawlabour costs.

• Provision of day-care centres for children of working mothers

• Expansion of employee rights

• Control of pensions, especially vesting of pension rights

• Impatience with authoritarian structures; demand for participation

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ResponsibilityH. Shareholder Relations

• Opening of boards of directors to members of public representing various interestgroups

• Prohibitions of operations in nations with “racist” or “colonial” governments

• Improvement of financial disclosure

• Disclosure of activities affecting the environment and social issues

I. Economic Activities

• Control of conglomerates

• Breakup of giant industry

• Restriction of patent use

Need for Social Audit

Thus, social audit need be adopted by every corporation to apprise its shareholders,investors customers, government and the community of the social activities andfinancial results of its working. Such information should be disclosed, as mentioned bythe National Association of Accountants’ Committee on Accounting for CorporateSocial Performance in Canada, for four major categories as below:

1) Community Involvement: Socially-oriented activities that are primarily ofbenefit to the general public. Examples include : general corporate philanthropy,housing construction, and financing, health, services, volunteer activities amongemployees, food programmes and community planning and improvement.

2) Human Resources: Social performance directed to the well-being ofemployees. Categories in this area include employment practices, trainingprogrammes, job enrichment, working conditions, promotion policies andemployee benefits.

3) Physical Resources and Environmental Contributions: Activities directedtowards alleviating or preventing environmental deterioration (pollution). Thiscategory includes the adherence to the law and going beyond it in areas such asair quality, water quality. Also included is the conservation of scare resourcesand the disposal of solid waste.

4) Production or Service Contribution: Concerned with the impact of thecompany’s product or service on society. This includes consumerism, productquality, packaging, advertising, warranty provisions and product safety.

In India, the companies in general and the public sector undertakings in particularshould make disclosure of information for the use of people outside the enterprise,which include:

i) financial institutions and creditors (who are interested in financial position, fund-flow and debt-paying capacity of the enterprise);

ii) shareholders, academic institutions and consultants (who are interested inquantitative and qualitative information regarding proper utilization of resourcestransferred to the concern);

iii) the government (for knowing about financial and statistical information forplanning and operating of those enterprises and initiating and administeringfinancial and economic polices and programmes at state and national levels

Contd....

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iv) trade unions, political leaders (require information for broad labour policydecisions, for etc); and

v) environments (who need information regarding air and water pollution ecologicalimbalances, depletion of resources and conservation of energy).

Disclosure of information should be thus financial and non-financial.

Financial Information

This includes the disclosure of financial position of the firm, the form of balancesheet, profit and loss accounts, special accounts, audit reports. Such information ismainly disclosed in quantitative form, such as income and expenditure of thecompany, sources and uses of funds, details about assets and liabilities, workingcapital, new capital investment, outstanding distribution of earnings, interest taxespaid, liquidity position and incentives. Financial information reveals the true position ofa company regarding its liquidity and bankruptcy.

Non-Financial Information

This includes information relating to social performance, human resources, marketingactivities, business environment, production etc. Such information may be disclosed inquantitative and qualitative terms, but the disclosure of information is to influenceprofitability in the long run and to build the company’s image.

Information on social performance generally includes various activities regardingemployee welfare, community work and involvement, social cultural programmes,role of company in solving social problems of the area, programmes dealing withtraining and developing human resources etc. Social programmes are specified inannual reports.

Information on human resources includes expenditure on recruitment, selection,training and development of employees, facilities for self-development in organization,special provision for development of hard-core unemployed persons, sponsoringexecutives for delivering lectures in universities, educational institutions and forforeign training. Such information is disclosed in the Directors’ Report and theChairman’s speech.

Information on marketing includes sales figures product-wise and plant-wise, cashand credit sales, pricing and impact of competition on pricing, product innovations anddevelopment, quality of product advertising and promotional efforts for distribution ofthe products, selling commission traveling expenditure of marketing personnel, etc.Such information is disclosed in the Directors report. Chairman’s statement or inadvertisements etc.

Environment information includes information about the political, economic, socio-cultural and technological environment, especially on such items as inflation,unemployment, impact of changes on taxes, changes in legal requirements of businessactivities, contribution and participation in company in community development,technological development, pollution control measures, use of indigenous materialsand efforts at conservation of natural and human resources. The disclosure ofinformation finds place in the annual reports and chairman’s speech.

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Responsibility9.7 SOCIAL AUDIT IN INDIA

In India, the TISCO has been the first company to set up a Social Audit Committeefor conducting social audit of its work under the chairmanship of Justice S.P. Kotwal,and Prof. Rajini Kothari and Prof. P.G. Mavalankar as members. This committeewas entrusted with the task of “examining and reporting whether, and the extent towhich, the TISCO has fulfilled the objectives contained in Clause 3A of its Articles ofAssociation regarding its social and moral responsibilities to the consumers,employees, shareholders, and the local community”. The Committee opined, “On anexamination of all aspects, the company has fulfilled its obligations to all concerned.”

Started with TISCO the social audit has picked up. UTI, the premier financialinstitution has also planned for a social audit. In the report for 1993-94, the chairmanof UTI has declared that “to address the question as to what extent this uniqueorganization has been able to fulfill its responsibilities vis-à-vis its various publics andsociety at large. And independent social audit committee of five eminent citizens hasbeen setup”.

9.8 BENEFITS OF SOCIAL AUDIT

The benefits of social audit are as follows:

1. Social audit enables the company to take close look at itself and understandhow far the company has lived up to its social objectives.

2. Related to the first benefit is the fact that social audit encourages greaterconcern for social performance throughout the organization.

3. Social audit provides data for comparing effectiveness of the different types ofprogrammes.

4. Social audit provides cost data on social programmes so that management canrelate the data to budgets, available resources, company objectives, andprojected benefits of programmes.

5. Social audit provides information for effective response to external claimantsthat make demands on the organization. News know what a business is doingin areas of their special interest, and a business needs to respond as effectivelyas possible. The social audit shows a business where it is vulnerable to publicpressure and where its strengths lie.

Activities

a) What activities of the organization in which you are working (or with which youhave been associated) fall, in your view, in the area of social audit?

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b) Discuss the social reporting done by your organization.

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9.9 SUMMARY

In recent times corporate governance and corporate social responsibility havebecome the talk of the day. In almost all business organizations, this concept is nowbeing used formally. This has gained a wide recognition as it is important for theeconomic health of the organization and the welfare of the society at large. Sinceearly 90s recommendations of different committees have been taken intoconsideration to understand the practical approach to the concept of corporategovernance.

Social responsibility in business or more popularly known as corporate socialresponsibility means that the organization has to work in tune with the public interect.This comprises of areas like social audit. This becomes a monitoring tool for thepublic enterprises so as to enhance the efficiency of these enterprises.

9.10 SELFASSESSMENT QUESTIONS

1. Define Corporate Governance?

2. Discuss the obligations of public enterprises?

3. How Corporate Governance is relevant in today’s context? Explain?

4. Why Social Responsibility is important for the business?

5. What are your recommendations of social responsibility?

6. Explore one successful enterprise of your choice, which is society oriented?

7. Bring out the features and benefits of social audits?

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Responsibility9.11 REFERENCES

www.bharatpetroleum.com

The Hindu business line, (1997).

Corporate Governance. (October, 1997). The New Paradigm, Chartered SecretaryOctober.

The Freedom to be Giants. (July 1997). in Leash, The Economic Times.

Reddy, B. Rathan. (1999). Essentials of Business Environment. Institute of PublicEnterprise.

Mishra, R.K. (2002). Restructuring of State Level Public Enterprise. Institute ofPublic Enterprise.

Mishra, R. K. & Reddy, Venugopal. (1995). Public Enterprises towards a WhitePaper.

Corporate Governance Putting Investors First: Scott C. Newquist with Max B.Russel, Jaico books. www.jaicobooks.com

‘Corporate Governance and PSU’. Dec. 19, (1996) The Economic Times..

Committee on Financial Systems. (1998). (Narasimham Committee-part II).

9.12 FURTHER READINGS

Corporate Governance. October, 1997. The New Paradigm, Chartered Secretary.

Reddy B. Rathan. (1999). Essentials of Business Environment,Institute of Public Enterprise.

Mishra, R. K. (2002). Restructuring of State Level Public Enterprise, 2002Institute of Public Enterprise.

Mishra, R. K.& Venugopal Y. (1995). Public Enterprises towards a White Paper.

social responsibility

Documents

governance companies

corporate sector

corporate entities

bodies corporate

governance unit

governance process

social audit social

remuneration committee