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Chapter: Business Science - Business Ethics, Corporate Social Responsibility and Governance - Corporate Social Responsibility And Governance

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Definition, Evolution and need for CSR(Corporate Social Responsibility)

The heart of corporate governance is transparency, disclosure, accountability and integrity. It is to be borne in mind that mere legislation does not ensure good governance. Good governance flows from ethical business practices even when there is no legislation.

Definition,  Evolution and need for CSR(Corporate Social Responsibility)

 

Meaning:

 

The heart of corporate governance is transparency, disclosure, accountability and integrity. It is to be borne in mind that mere legislation does not ensure good governance. Good governance flows from ethical business practices even when there is no legislation.

 

Noble laureate Milton Friedman defined Corporate Governance as "the conduct of business in accordance with shareholders' desires, which generally is to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs.

 

Governance is concerned with the intrinsic nature, purpose, integrity and identity of an organization with primary focus on the entity's relevance, continuity and fiduciary aspects.

 

The root of the word Governance is from 'gubernate', which means to steer. Corporate governance would mean to steer an organization in the desired direction. The responsibility to steer lies with the board of directors/ governing board. Corporate or a Corporation is derived from Latin term "corpus" which means a "body". Governance means administering the processes and systems placed for satisfying stakeholder expectation. When combined Corporate Governance means a set of systems procedures, policies, practices, standards put in place by a corporate to ensure that relationship with various stakeholders is maintained in transparent and honest manner.

 

Definitions of Corporate Governance:

 

1.     "Corporate Governance is concerned with the way corporate entities are governed, as distinct from the way business within those companies is managed. Corporate governance addresses the issues facing Board of Directors, such as the interaction w ith top management and relationships with the owners and others interested in the affairs of the company" Robert Ian (Bob) Tricker (who introduced the words corporate governance for the first time in his book in 1984)

 

2.     "Corporate Governance is about promoting corporate fairness, transparency and accountability".

 

James D. Wolfensohn (Ninth President World Bank)

 

 

OECD

 

Corporate governance structure specifies the distribution of rights and responsibilities among different participants in the company such as board, management, shareholders and other stakeholders; and spells out the rules and procedures for corporate decision- making. By doing this, it provides the structure through which the company's objectives are set along with the means of attaining these objectives as well as for monitoring performance.

 

Cadbury Committee, U.K

"(It is) the system by which companies are directed and controlled"

 

Corporate Governance is a system of structuring, operating and controlling a company with the following specific aims:—

(i)Fulfilling long-term strategic goals of owners;

 

(ii) Taking care of the interests of employees;

(iii) A consideration for the environment and local community;

 

(iv)           Maintaining excellent relations with customers and suppliers;

(v)           Proper compliance with all the applicable legal and regulatory requirements.

 

"Corporate governance deals with laws, procedures, practices and implicit rules that determine a company's ability to take informed managerial decisions vis-à-vis its claimants - in particular, its shareholders, creditors, customers, the State and employees. There is a global consensus about the objective of 'good' corporate governance: maximizing long-term shareholder value."

 

Confederation of Indian Industry (CII) - Desirable Corporate Governance Code (1998)

 

"Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure."

 

Report of Kumar Mangalam Birla Committee on Corporate Governance constituted by SEBI (1999)

"Corporate Governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company."

 

Report of N.R. Narayana Murthy Committee on Corporate Governance constituted by SEBI (2003)

 

"Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders."

 

NEED FOR CSR:

 

Corporate social responsibility (CSR) promotes a vision of business accountability to a wide range of stakeholders, besides shareholders and investors. Key areas of concern are environmental protection and the wellbeing of employees, the community and civil society in general, both now and in the future.

 

The concept of CSR is underpinned by the idea that corporations can no longer act as isolated economic entities operating in detachment from broader society. Traditional views about competitiveness, survival and profitability are being swept away.

 

Some of the drivers pushing business towards CSR include:

 

1. The shrinking role of government

 

In the past, governments have relied on legislation and regulation to deliver social and environmental objectives in the business sector. Shrinking government resources, coupled with a distrust of regulations, has led to the exploration of voluntary and non-regulatory initiatives instead.

 

2. Demands for greater disclosure

 

There is a growing demand for corporate disclosure from stakeholders, including customers, suppliers, employees, communities, investors, and activist organizations.

 

3. Increased customer inte rest

 

 

There is evidence that the ethical conduct of companies exerts a growing influence on the purchasing decisions of customers. In a recent survey by Environics International, more than one in five consumers reported having either rewarded or punished companies based on their perceived social performance.

 

4. Growing investor pressure

 

Investors are changing the way they assess companies' performance, and are making decisions based on criteria that include ethical concerns. The Social Investment Forum reports that in the US in 1999, there was more than $2 trillion worth of assets invested in portfolios that used screens linked to the environment and social responsibility. A separate survey by Environics International revealed that more than a quarter of share-owning Americans took into account ethical considerations when

 

buying and selling stocks . (More on socially responsible investment can be found in the 'Banking and investment' section of the site.)

5. Competitive labor markets

 

Employees are increasingly looking beyond paychecks and benefits, and seeking out whose philosophies and operating practices match their own principles. In order to hire and retain skilled employees, companies are being forced to improve working conditions.

 

6. Supplier relations

 

As stakeholders are becoming increasingly interested in business affairs, many companies are taking steps to ensure that their partners conduct themselves in a socially responsible manner. Some are introducing codes of conduct for their suppliers, to ensure that other companies' policies or practices do not tarnish their reputation.

 

Some of the positive outcomes that can arise when businesses adopt a policy of social responsibility include:

 

1. Company benefits:

 

·     Improved financial performance;

 

·     Lower operating costs;

 

·     Enhanced brand image and reputation;

·     Increased sales and customer loyalty;

·     Greater productivity and quality;

 

·     More ability to attract and retain employees;

·     Reduced regulatory oversight;

 

·     Access to capital;

·     Workforce diversity;

·     Product safety and decreased liability.

 

2. Benefits to the community and the general public:

·     Charitable contributions;

 

·     Employee volunteer programmes;

 

·     Corporate involvement in community education, employment and homelessness programmes;

 

·     Product safety and quality.

3. Environmental benefits:

 

·     Greater material recyclability;

·     Better product durability and functionality;

·     Greater use of renewable resources;

 

·     Integration of environmental management tools into business plans, including life-cycle assessment and costing, environmental management standards, and eco-labelling.

 

Nevertheless, many companies continue to overlook CSR in the supply chain - for example by importing and retailing timber that has been illegally harvested. While governments can impose embargos and penalties on offending companies, the organizations themselves can make a commitment to sustainability by being more discerning in their choice of suppliers.

 

The concept of corporate social responsibility is now firmly rooted on the global business agenda. But in order to move from theory to concrete action, many obstacles need to be overcome.

 

A key challenge facing business is the need for more reliable indicators of progress in the field of CSR, along with the dissemination of CSR strategies. Transparency and dialogue can help to make a business appear more trustworthy, and push up the standards of other organizations at the same time.

 

NEED FOR CORPORATE GOVERNANCE

 

Corporate Governance is integral to the existence of the company.

 

Corporate Governance is needed to create a corporate culture of Transparency, accountability and disclosure. It refers to compliance with all the moral & ethical values, legal framework and voluntarily adopted practices.

 

Corporate Performance: Improved governance structures and processes help ensure quality decision-making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance.

 

This can be linked with improved corporate performance- either in terms of share price or profitability. Enhanced Investor Trust: Investors consider corporate Governance as important as financial performance when evaluating companies for investment. Investors who are provided with high levels of disclosure & transparency are likely to invest openly in those companies. The consulting firm McKinsey surveyed and determined that global institutional investors are prepared to pay a premium of up to 40 percent for shares in companies with superior corporate governance practices.

 

Better Access to Global Market: Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector. Combating Corruption: Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide environment where corruption will certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud and malpractices within the organization.

 

Easy Finance from Institutions: Several structural changes like increased role of financial intermediaries and institutional investors, size of the enterprises, investment choices available to investors, increased competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance. Evidence indicates that well- governed companies receive higher market valuations. The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company.

 

Enhancing Enterprise Valuation: Improved management accountability and operational transparency fulfill investors' expectations and confidence on management and corporations, and return, increase the value of corporations.

 

Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures efficient risk mitigation system in place. The transparent and accountable system that Corporate Governance makes the Board of a company aware of all the risks involved in particular strategy, thereby, placing various control systems to monitor the related issues. Accountab ility: Investor relations' is essential part of good corporate governance. Investors have directly/ indirectly entrusted management of the company for the creating enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its shareholders in order to maintain good investor‘s relation. Good Corporate Governance practices create the environment where Boards cannot ignore their accountability to these stakeholders.

 

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