Evolution and need for CSR(Corporate
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.
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
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.
"(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
(i)Fulfilling long-term strategic goals
(ii) Taking care of the interests of
(iii) A consideration for the environment
and local community;
excellent relations with customers and suppliers;
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
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."
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:
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
Demands for greater disclosure
There is a growing demand for
corporate disclosure from stakeholders, including customers, suppliers,
employees, communities, investors, and activist organizations.
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.
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
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
6. Supplier relations
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
Some of the positive outcomes that
can arise when businesses adopt a policy of social responsibility include:
· Improved financial performance;
· Lower operating costs;
· Enhanced brand image and reputation;
· Increased sales and customer
· Greater productivity and quality;
· More ability to attract and retain
· Reduced regulatory oversight;
· Access to capital;
· Workforce diversity;
· Product safety and decreased
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.
· Greater material recyclability;
· Better product durability and
· 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.
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
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.