Strategies for Corporate Social Responsibility(CSR)

STRATEGIES FOR CORPORATE SOCIAL RESPONSIBILITY:

Recommendations of Report of Committee on The Financial Aspects on Corporate Governance, 1992 under the chairmanship of Sir Adrian Cadbury set up by the London Stock Exchange, the Financial Reporting Council and accounting professions to focus on the control and reporting functions of boards, and on the role of auditors.

Role of Board of Directors

The Report introduced "The Code of Best Practice" directing the boards of directors of all listed companies registered in the UK, and also encouraging as many other companies as possible aiming at compliance with the requirements. All listed companies should make a statement about their compliance with the Code in their report and accounts as well as give reasons for any areas of non compliance. It is divided into four sections:

1. Board of Directors:

(a) The board should meet regularly, retain full and effective control over the company and monitor the executive management.

(b) There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision.

(c) Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board, with a recognized senior member, that is, there should be a lead

independent director.

(d) All directors should have access to the advice and services of the company secretary, who is responsible to the Board for ensuring that board procedures are followed and that applicable rules and regulations are complied with.

2. Non-Executive Directors:

(a) The non-executive directors should bring an independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct.

(b)  The majority of non-executive directors should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgment, apart from their fees and shareholding.

3. Executive Directors:

There should be full and clear disclosure of directors' total emoluments and those of the chairman and highest-paid directors, including pension contributions and stock options, in the company's annual report, including separate figures for salary and performance-related pay.

4. Financial Reporting and Controls:

It is the duty of the board to present a balanced and understandable assessment of their company's position, in reporting of financial statements, for providing true and fair picture of financial reporting. The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary. The board should ensure that an objective and professional relationship is maintained with the auditors.

Role of Auditors

The Report recommended for the constitution of Audit Committee with a minimum of three non-executive members majority of whom shall be independent directors.

The Report recommended that a professional and objective relationship between the board of directors and auditors should be maintained, so as to provide to all a true and fair view of company's financial statements. Auditors' role is to design audit in suc h a manner so that it provide a reasonable assurance that the financial statements are free of material misstatements.

The Report recommended for rotation of audit partners to prevent the relationships between the management and the auditors becoming too comfortable.

Rights & Responsibilities of Shareholders

The Report emphasizes on the need for fair and accurate reporting of a company's progress to its shareholders. The Report placed importance on the role of institutional investors/ shareholders and encouraged them to make greater use of their voting rights and take positive interest in the board functioning. Both shareholders and boards of directors should consider how the effectiveness of general meetings could be

increased as well as how to strengthen the accountability of boards of directors to shareholders.

Developments in India:

The initiatives taken by Government in 1991, aimed at economic liberalization and globalization of the domestic economy, led India to initiate reform process in order to suitably respond to the developments taking place world over. On account of the interest generated by Cadbury Committee Report, the Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry (ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted Committees to recommend initiatives in

Corporate Governance.

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

CII took a special initiative on Corporate Governance, the first institution initiative in Indian Industry. The objective was to develop and promote a code for Corporate Governance to be adopted and followed by Indian companies, whether in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. The final draft of the said Code was widely circulated in 1997. In April 1998, the Code was released. It was called Desirable Corporate Governance: A Code. A brief summary of the Desirable Corporate Governance Code is reproduced hereunder:

Recommendation I

The full board should meet a minimum of six times a year, preferably at an interval of two months, and each meeting should have agenda items that require at least half a day's discussion.

Recommendation II

•                     Any listed company with a turnover of Rs.100 crores and above should have professionally competent, independent, non-executive directors, who should constitute:

•                     At least 30 per cent of the board if the Chairman of the company is a non-executive director,

•                     At least 50 per cent of the board if the Chairman and Managing Director is the same person.

Recommendation III

No single person should hold directorships in more than 10 listed companies. This ceiling excludes directorships in subsidiaries (where the group has over 50 per cent equity stake) or associate companies (where the group has over 25 per cent but no more than 50 per cent equity stake).

Recommendation IV

For non-executive directors to play a material role in corporate decision making and maximizing long term shareholder value, they need to:

•                     become active participants in boards, not passive advisors;

•                     have clearly defined responsibilities within the board such as the Audit Committee; and

•                     know how to read a balance sheet, profit and loss account, cash flow statements and financial ratios and have some knowledge of various company laws. This, of course, excludes those who are invited to join boards as experts in other fields such as science and technology.

Recommendation V

To secure better effort from non-executive directors companies should:

• Pay a commission over and above the sitting fees for the use of the professional inputs. The present commission of 1% of net profits (if the company has a managing director), or 3% (if there is no managing director) is sufficient.

• Consider offering stock options, so as to relate rewards to performance. Commissions are rewards on current profits. Stock options are rewards contingent upon future appreciation of corporate value. An appropriate mix of the two can align a non-executive director towards keeping an eye on short- term profits as well as longer term shareholder value.

Recommendation VI

While re-appointing members of the board, companies should give the attendance record of the concerned directors. If a director has not been present (absent with or without leave) for 50 per cent or more meetings, then this should be explicitly stated in the resolution that is put to vote.

Recommendation VII

Key information that must be reported to, and placed before, the board must contain:

•                     Annual operating plans and budgets, together with up-dated long term plans.

•                     Capital budgets, manpower and overhead budgets.

•                     Quarterly results for the company as a whole and its operating divisions or business segments.

•                     Internal audit reports, including cases of theft and dishonesty of a material nature.

•                     Show cause, demand and prosecution notices received from revenue authorities which are considered to be materially important (Material nature if any exposure that exceeds 1 per cent of the

company's net worth).

•                     Default in payment of interest or non-payment of the principal on any public deposit and/or to any secured creditor or financial institution.

•                     Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems.

•                     Defaults such as non-payment of inter-corporate deposits by or to the company, or materially substantial non-payment for goods sold by the company.

•                     •        Any issue which involves possible public or product liability claims of a substantial nature, including any judgment or order which may have either passed strictures on the conduct of the company, or taken an adverse view regarding another enterprise that can have negative implications for the company.

•                     Details of any joint venture or collaboration agreement.

•                     Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.

•                     Recruitment and remuneration of senior officers just below the board level, including appointment or removal of the Chief Financial Officer and the Company Secretary.

•                     Labour problems and their proposed solutions.

•                     Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks of adverse exchange rate movement, if material.

Recommendation VIII

•                     Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs. 20 crores should set up Audit Committees within two years.

•                     Composition: at least three members, all drawn from a company's non-executive directors,

who should have adequate knowledge of finance, accounts and basic elements of company law.

• To be effective, the Audit Committees should have clearly defined Terms of Reference and its members must be willing to spend more time on the company's work vis-à-vis other non-executive directors.

•                     Audit Committees should assist the board in fulfilling its functions relating to corporate

accounting and reporting practices, financial and accounting controls, and financial statements and proposals that accompany the public issue of any security - and thus provide effective supervision of the financial reporting process.

•                     Audit Committees should periodically interact with the statutory auditors and the internal auditors to ascertain the quality and veracity of the company's accounts as well as the capability of the auditors themselves.

• For Audit Committees to discharge their fiduciary responsibilities with due diligence, it must be incumbent upon management to ensure that members of the committee have full access to financial data of the company, its subsidiary and associated companies, including data on contingent liabilities, debt exposure, current liabilities, loans and investments.

• By the fiscal year 1998-99, listed companies satisfying criterion (1) should have in place a strong internal audit department, or an external auditor to do internal audits.

Recommendation IX

Under "Additional Shareholder's Information", listed companies should give data on:

•                     High and low monthly averages of share prices in a major Stock Exchange where the company is listed for the reporting year.

•                     Statement  on  value  added,  which  is  total  income  minus  the  cost  of  all  inputs  and

administrative expenses.

• Greater detail on business segments, up to 10% of turnover, giving share in sales revenue, review of operations, analysis of markets and future prospects.

Recommendation X

Consolidation of Group Accounts should be optional and subject to:

•                     The FIs allowing companies to leverage on the basis of the group's assets, and

•                     The Income-tax Department using the group concept in assessing corporate income-tax.

•                     If a company chooses to voluntarily consolidate, it should not be necessary to annex the accounts of its subsidiary companies under Section 212 of the Companies Act.

•                     However, if a company consolidates, then the definition of "group" should include the parent company and its subsidiaries (where the reporting company owns over 50% of voting stake).

Recommendation XI

Major Indian stock exchanges should gradually insist upon a compliance certificate, signed by the CEO and the CFO, which clearly states that:

•                     The management is responsible for the preparation, integrity and fair presentation of the

financial statements and other information in the Annual Report, and which also suggest that the company will continue in business in the course of the following year.

•                     The accounting policies and principles conform to standard practice, and where they do not, full disclosure has been made of any material departures.

•                     The board has overseen the company's system of internal accounting and administrative

controls systems either through its Audit Committee (for companies with a turnover of Rs.100 crores or paid- up capital of Rs. 20 crores) or directly.

Recommendation XII

For all companies with paid-up capital of Rs. 20 crores or more, the quality and quantity of disclosure that accompanies a GDR issue should be the norm for any domestic issue.

Recommendation XIII

The Government must allow far greater funding to the corporate sector against the security of shares and other paper.

Recommendation XIV

It would be desirable for FIs as pure creditors to re-write their covenants to eliminate having nominee directors except:

•                     In the event of serious and systematic debt default; and

•                     In case of the debtor company not providing six- monthly or quarterly operational data to the concerned FI(s).

Recommendation XV

•                     If any company goes to more than one credit rating agency, then it must divulge in the prospectus and issue document the rating of all the agencies that did such an exercise.

•                     It is not enough to state the ratings. These must be given in a tabular format that shows where the company stands relative to higher and lower ranking. It makes considerable difference to an investor to know whether the rating agency or agencies placed the company in the top slots or in the middle or in the bottom.

•        It is essential that we look at the quantity and quality of disclosures that accompany the issue of company bonds, debentures, and fixed deposits in the USA and Britain - if only to learn what more can be done to inspire confidence and create an environment of transparency.

• Companies which are making foreign debt issues cannot have two sets of disclosure norms: an exhaustive one for the foreigners, and a relatively minuscule one for India n investors.

Recommendation XVI

Companies that default on fixed deposits should not be permitted to:

•                     accept further deposits and make inter-corporate loans or investments until the default is made good; and

•                     declare dividends until the default is made good.

Gist of Cove rage of CII Desirable Corporate Governance: A Code

Recommendation XVI

Recommendation I

Frequency of Board meetings

Recommendation II

Board Composition

Recommendation III

No. of directorships

Recommendation IV

Role,  Responsibilities,                    Qualifications  of      Non-executive

Recommendation V              Directors

Recommendation VI            Remuneration of non-executive directors

Recommendation VII           Disclosure of attendance record for reappointment

Recommendation VIII          Key information to the Board

Recommendation IX            Audit Committee

Recommendation X              Disclosure on shareholder information

Recommendation XI            Consolidated Accounts

Recommendation XII           Compliance certificate

Recommendation XIII          Disclosure relating to Global Depository Receipts (GDR)

Recommendation                 Funding

XIV

Nominee Director

Recommendation XV

Disclosure of Ratings

Default on fixed deposits by company