Corporate Governance and Corporate Social Responsibility
Chapter - I
Theoretical Background
Introduction
Earlier, a pre-conceived notion was existing in the society regarding the corporate sector as the people understood the nature and functioning of corporate entities as self-centered, profit oriented etc. Due to several corporate scams like ENRON etc. several issues were raised regarding the accountability of corporations and the need was felt by the several nations regarding the imposition of issues of ethics and good governance on corporations and from there itself the concept of corporate governance (CG) has been recognized and since then several regulations have been passed by various authorities to ensure good governance of the corporations across the country.
The corporate social responsibility finds it popularity during the 1970s when McDonald and Puxty (1979) observed that the aim of the corporations are no longer limited to the shareholders but has extended to the society as a whole and so they have responsibilities towards that society, therefore there is a shift towards the greater accountability of companies to all participants of a given society.[1]
Definition
As per N.R. Narayana Murthy Committee on Corporate Governance constituted by SEBI has observed:
"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."[2]
Whereas, according to European Union Commission [(2002) 347 final:5],
“CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”[3]
Since the above definition clearly suggests that, the concept of Corporate Governance and Corporate Social Responsibility involves a Company’s management practices, therefore, sometimes these two concepts seem to overlap with each other.
Previously, not much thought has been put into the inter-relationship between the Corporate Governance and Corporate Social Responsibility.
CHAPTER – II
Corporate Governance and Corporate Social Responsibility : A Comparative Study of provisions under 1956 and 2013 Indian Companies Act
Corporate Governance
I. Financial Statement and Board Reports etc.
| SNo. | Indian Companies Act, 1956 | Indian Companies Act, 2013 |
|---|---|---|
| I. | Section 217 2 (A) (a) requires a director of a given company to give Director�s responsibility statement confirming that: | I] Sec. 134 (3) (a): the extract of the annual return as provided under sub-section (3) of section 92;[5] |
| (i)For preparation of the annual accounts : | (Which was not there in the old Act of 1956). | |
| They have applied and followed applicable accounting standards and proper explanation relating to material departures has been made. | ||
| (ii) Selected and applied such accounting Policies consistently and took decisions which are reasonable to the Company at the end of the financial year and estimated prudently so as to give a fair idea of the State of Affairs at the end of such financial year. | II] Sec. 134 (3) (b): Number of meetings of the Board;[6] | |
| (iii) Proper measures been taken for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities. | (Earlier this was regulated by clause 49 of Listing Agreement, now it has been expressly provided under the New Act of 2013). | |
| (iv) Had prepared the annual accounts on a going concern basis.[4] | ||
| III] Sec. 134 (3) (d) : A statement on declaration given by independent directors under sub-section 6 of section 149;[7] | ||
| (which was not there in the old Act of 1956). | ||
| IV] Sec. 134 (3) (f) : | ||
| Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made� | ||
| (ii) by the company secretary in practice in his secretarial audit report; [8] | ||
| [Sec. 204 (3)] | ||
| (This requirement is not made under the old Act of 1956). | ||
| V] Sec. 134 (3) (g) : particulars of loans, guarantees or investments under Sec. 186;[9] | ||
| (Previously, in the old Act of 1956, the director�s were not required to give statements with respect to the abovementioned heads). | ||
| VI] Sec. 134 (3) (h):particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;[10] | ||
| (previously this was not there in the old Act of 1956). | ||
| VII] Sec. 134 (3) (n) : a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;[11] | ||
| (this provision has been newly introduced under the 2013 Act). | ||
| VIII] ] Sec. 134 (3) (o) : the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;[12] | ||
| (This is also a new requirement as CSR was nowhere defined or discussed under the old Act of 1956). | ||
| IX] Sec. 134 (3) (p) : in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;[13] | ||
| (Earlier it was not there in the Companies Act, 1956). | ||
II. Audit Committee
| SNo. | Title | Companies Act,1956 | Companies Act, 2013 | Analysis |
|---|---|---|---|---|
| (Section 292 A) | (Section 177) | |||
| (+) | ||||
| Draft Rules 12.4 | ||||
| I. | Companies which are required to Constitute Audit Committee | Every Public Company having paid-up capital of not less than Rs.5 Crores shall constitute an Audit | The Board of Directors of every listed company and every other public company: | Under the New Act, the Public Listed Company paid up capital has been raised from 50 to 100 crores and an additional condition has been specified under Draft Rules 12.4 (b) (ii) in order to widen the scope of Section 177 of the New Act of 2013. |
| Committee[14] | (a) having paid up capital of Rs. 100 crore or more as may be prescribed, shall constitute an Audit Committee. | |||
| (b)�����which have, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.200 Crores | ||||
| shall constitute an Audit Committee.[15] | ||||
| II. | Composition of the Audit Committee | The Audit Committee shall consist of minimum 3 Directors of which 2/3rd�shall be directors other than M.D or Whole time Directors. | The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority. | Here the role of independent directors have been added for the first time under the 2013 Act in order to provide effective monitoring of the financial reporting process. |
| S.292A (1) | S.177(2) and S.149(6). | |||
| III. | Financial Literacy | Nil | Majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement. | Previously, the Companies Act, 1956 have not provided any qualification regarding the ability of the members of the Audit Committee to understand the |
| S.177(2) (First Proviso) | Financial statement of the company, but now the 2013 Act expressly states that the �members of Audit Committee should be able to read and understand the financial statement in order to fix the liability of the members of the Audit Committee. | |||
| IV. | Terms of reference [S.292A (2)] | The Audit Committee shall act in accordance with the terms of reference to be specified in writing by the Board. What are all the terms rests with the sole decision of the Board. | Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board�which shall,�inter alia,�include- | Previously the terms of reference have not been specified under the old Act of 1956 but under the 2013 Act, it has been clearly defined. |
| (i)�the recommendation for appointment, remuneration and terms of appointment of auditors of the company; | ||||
| (ii)�review and monitor the auditor�s independence and performance, and effectiveness of audit process; | ||||
| (iii)�examination of the financial statement and the auditors� report thereon; | ||||
| (iv)�approval or any subsequent modification of transactions of the company with related parties; | ||||
| (v)��scrutiny of inter-corporate loans and investments; | ||||
| (vi) valuation of undertakings or assets of the company, wherever it is necessary; | ||||
| (vii)��evaluation of internal financial controls and risk management systems; | ||||
| (viii)�monitoring the end use of funds raised through public offers and related matters.[16] | ||||
| V. | Evaluation of the Performance of Audit Committee | Nil | [S.134 (3) (p) and Chapter IX - Draft Rules 9.10 (4)]: | Previously no provision dealt with the evaluation of the audit committee under the old Act of 1956 but under the 2013 Act, it has been specifically mentioned. |
| All the Companies which falls under the purview of constituting an Audit Committee | ||||
| (+) | ||||
| Companies with paid-up capital of Rs.25 Crores or more (calculated as at the end of the preceding financial year) should describe the manner of evaluating the performance of Board, Committees and Directors[17] | ||||
| VI. | No. of Audit Committee Meetings [S.292A(6)] | S.292 A (6) mandates for periodical discussion with auditors and review of half yearly and annual financial statement which implies that there shall be a minimum of at least 2 Audit Committee Meetings in an year.[18] | No. of Audit Committee Meetings [S.177(4)(iii)] and 2(40): | Under old act, there was a mandate for two audit committee meetings in a year but now its only 1 for companies and for listed companies they will meet quarterly. |
| S.177(4)(iii) states that the Audit Committee shall examine the�financial statement�and the auditors� report thereon. Hence unless otherwise required there shall be a minimum of at least 1 Audit Committee Meeting in an year. In case of Listed companies, the Audit Committee will meet once in a quarter to approve the quarterly financial results. | ||||
| VII. | Chairman of the Audit Committee and right to attend the AGM [S.292A (2) & (10)]: | Chairman of the Audit Committee and right to attend the AGM: | The Companies Act, 2013 does not contain any provision for the procedure of electing the Chairman of Audit Committee and his right to attend the AGM. | |
| a.�The members of the audit committee shall elect a Chairman from amongst themselves. | ||||
| b.�The Chairman of the audit committee� �shall attend the AGM to answer any queries relating to audit[19] | Nil | |||
| VIII. | Whistle Blower Mechanism | Vigil Mechanism: | Vigil Mechanism | Companies Act 1956 does not have a mechanism for Whistle Blowing; |
| [ S.177(9) & (10) and Draft Rules 12.5]: | Listing agreement has a provision on Vigil Mechanism, but has prescribed it as recommendatory only. | |||
| Nil | Every listed company, companies which accept deposits from the public and companies which have borrowed money from banks and public financial institutions in excess of Rs.50 crores shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed. | But, under the new Act of 2013 it has been specifically defined. | ||
| The vigil mechanism should provide for adequate safeguards against victimization of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases: | ||||
| Provided that the details of establishment of such mechanism shall be disclosed by the Company on its website, if any, and in the Board�s Report. | ||||
| If any of the members of the audit committee are conflicted in a given case, they should recluse themselves and the others on the committee would deal with the matter on hand. | ||||
| In case of companies are not required to constitute an Audit Committee, the Board of Directors shall nominate a Director to play the role of audit committee�for the purpose of vigil mechanism�to whom other Directors and employees may report their concerns. | ||||
III. Disclose of Interest by Director
| S.No. | Title | Companies Act, 1956 | Companies Act, 2013 | Analysis |
|---|---|---|---|---|
| I. | Disclosure of Interest by Directors | Sec.299 | Sec.184 | Under the old Act of 1956, the Company used to receive annual disclosure (only) from the directors (w.r.t. disclosure of his directorship and membership in other companies) and it shall be considered to having disclosed his concerns or interest in all those contracts that may be entered by the company in a future date after the disclosure being given and there was no disclosure that need to be given at the time of entering into the contract. |
| Sec.300 | But, under the new Act of 2013, disclosure is to be given even at the time when the company is discussing or entering into the contract or arrangement or proposed contract with the other company or body corporate. | |||
| Also imprisonment provision is introduced under new Act for noncompliance of Sec.184.[20] | ||||
Corporate Social Responsibility
Earlier, Under the 1956 Act, there was no definition of CSR but the Companies like TATA, ITC etc. were used to indulge in CSR activities in order to develop the society at large.
But under the New Act of 2013, CSR has been specifically defined under Section 135.[21]
Chapter – III
Corporate Governance and Corporate Social Responsibility: Their Inter-relationship
Within the purview of CG, companies are motivated to promote accountability and transparency in their management practices and to continue generating profits while maintaining the standards of governance as per the given norms by their respective national authorities who control and regulate them.
A Company’s decision should be aligned with the interests of several inside and outside stakeholders of the company. Here the concept of CSR finds its significance.
This figure will help in understanding the conceptual understanding of the relationship between Corporate Governance and Corporate Social Responsibility:
Recently, there are three relational models presented by various authors who are experts on corporate social responsibility in order to establish the inter-relationship between CG and CSR.
They are:
I] CG as a pillar for CSR
II] CSR as an attribute of CG
III] CG and CSR as coexisting components of same continuum.[22]
The researcher in this project has focused mainly on the second model of inter-relationship between Corporate Governance and Corporate Social Responsibility i.e. CSR as an attribute of CG.
The researcher has tried to explain the inter-relationship of CG And CSR under the abovementioned model. It is shown as follows:
CSR as an extended model of CG[23]
The Researcher will now discuss the case of an Indian public limited company, namely, IOC Ltd. (Indian oil Corporation) and its CG and CSR practices in order to establish:
a) the fact that Corporate Governance is an extended model of Corporate Social Responsibility or CSR as an attribute of CG; and
b) there exists an strong inter-relationship between the two concepts in the current scenario.
Current Scenario of IOC Limited
Here we have to analyze various facets in order to arrive at a particular conclusion as discussed above. They are:
a) Attitude towards Corporate Governance
b) Compliances on CG
c) CSR Practices.[24]
q Attitude towards Corporate Governance
Indian Oil relies on the fact that good Corporate Governance practices make sure of the ethical conduct of the affairs of the Company and helps in organizing the affairs of the company. The policy framework for effective implementation of CG, Indian Oil consists of the following:
ü Code of Conduct for Directors and Senior Management Personnel
ü Code of Conduct for prevention of Insider Trading and
ü Policy on risk assessment and minimizing procedures.[25]
q Compliance on Corporate Governance
The researcher will discuss the quarterly report on compliance on Corporate Governance of the IOCL. The quarterly report is given as under:
I. Board of Directors[26]
II. Audit Committee[27]
III.Disclosures[28]
CSR Practices[29]
The researcher is of this opinion that IOCL is successful in making and implementing policies for CSR activities because it has an efficient CG framework.
CHAPTER – IV CONCLUSION
According to the researcher, the interrelationship between the CG and CSR is very complex. It is impossible to separate the two concepts.
In the year 2004, Prof. Lorenzo Sacconi, while defining CSR, said that Corporate Social Responsibility is ‘a model of extended corporate governance whereby who runs a firm (entrepreneurs, directors, managers) have responsibilities that range from fulfilment of their fiduciary duties towards the owners to fulfilment of analogous fiduciary duties towards all the firm’s stakeholders.’[30]
However, Mark Walsh and John Lowry in their article on CG and CSR, used the interpretation of the term “corporate governance” narrowly while differentiating between Corporate Social Responsibility and Corporate Governance. According to their opinion, corporate governance is more concerned with the improvement of shareholder value and the protection of their interests. Also they hold this opinion that the environmental, labour and consumer obligations are more in connection with Corporate Social Responsibility than corporate governance.[31]
In this regard, Winberg and Randolph said that though in several situations, the concept of CSR overlaps with the concepts of corporate governance, yet the CSR tends to be primarily price-based and externally focused than Corporate Governance.[32]
The researcher is of this opinion that if the concept of corporate governance when interpreted narrowly, a sheer difference is shown between the concept of corporate governance and corporate social responsibility, whereas while interpreting the concept of corporate governance in a broadly fashion, there is a clear overlap between the concept of corporate governance and corporate social responsibility with respect to stakeholder theory.
References
[1] David Crowther, Corporate social responsibility: history and principles, pg.1,available at: http://www.davideacrowther.com/csrmodule/csrreading3b.pdf, accessed on: 31-08-2014.
[2] Meaning and concept of corporate governance, evolution of corporate governance in India and other
parts of world. Need and essence of corporate governance and role of CAG in this regard, available at:
<http://rtiallahabad.cag.gov.in/rti-website/rtiallahabad/downloads/material/Background%20training%20 materail%20on%20corporate%20governance.pdf>, accessed on : 31-08-2014.
[3]David Crowther and Guler Aras, Corporate Social Responsibility. (Ventus Publishing APS), p.11, available at: <http://www.mdos.si/Files/defining-corporate-social-responsibility.pdf>, accessed on: 31-08-2014.
[4] Sec.217(2A) (a) of the Companies Act, 1956, available at: <http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf> , accessed on: 02-09-2014.
[5] S.134 (3) (a) of the Companies Act,2013, page 78, available at: http://indiacode.nic.in/acts-in-pdf/182013.pdf, accessed on: 02-09-2014.
[6] Ibid.
[7] Id.
[8] Supra N.5
[9] Ibid.
[10] Id.
[11] Id. pg. 79.
[12]Id. pg. 79.
[13] Supra. N. 5
[14] Sec.292 (A) (a) of the Companies Act, 1956, p.141, available at: <http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf>, accessed on: 02-09-2014.
[15] Supra. N.8.
[16] S.177 (4) of the Companies Act,2013, page 104, available at: http://indiacode.nic.in/acts-in-pdf/182013.pdf, accessed on: 02-09-2014.
[17] Supra.N.12 pg. 79.
[18] Supra N.14 pg. 141.
[19] Supra, N. 14 pg. 141.
[20] Sec. 184 (4) of the Companies Act,2013, page 110, available at: http://indiacode.nic.in/acts-in-pdf/182013.pdf, accessed on: 17-09-2014.
[21] Sec.135 (1) :- Every company having net worth of rupees:
i) 500 CR. or more, or
ii) turnover of 1000 CR or more or
iii) a net profit of rupees five crore or more during any financial year
have to set up a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
Sec.135 (5) : The Board of every company as per sub-section (1), shall ensure that the
company spends, in every financial year, at least 2% of the average net profits of
the company made during the three immediately preceding financial years, in pursuance of
its Corporate Social Responsibility Policy.
2nd Proviso: If the company fails to spend such amount, the Board shall, in its
report made under clause (o) of sub-section (3) of section 134, specify the reasons for not
spending the amount.
[22] D. Jamali and M. Rabbath, CORPORATE GOVERNANCE (CG) AND CORPORATE SOCIAL RESPONSIBILITY (CSR) : SYNERGIES AND INTER-RELATIONSHIPS, available at: http://www.crrconference.org/downloads/crrc2007jamalirabbath.pdf, accessed on: 02-09-2014.
[23] Supra. N.22.
[24] Debabrata Chatterjee, Corporate Governance and Corporate Social Responsibility: The Case of Three Indian Companies, available at: http://www.ijimt.org/papers/88-M471.pdf, accessed on:13-09-2014.
[25]54th Annual Report on Corporate Governance, 19th June 2013, New Delhi, available at: http://www.iocl.com/AboutUs/AnnualReports/17_Report_on_Corporate_Governance_2013.pdf, accessed on:14-09-2014.
[26] IOCL,Quaterly Compliance Report on Corporate Governance, 30TH June 2014, available at: https://www.iocl.com/AboutUs/AnnualReports/Report_on_Corporate_Governance_June_14.pdf, accessed on 14-09-2014.
[27]Supra, N. 25.
[28]Supra N. 25.
[29] Indian Oil Corporation Ltd., 55th Report on Corporate Social Responsibility, available at: <https://www.iocl.com/AboutUs/AnnualReports/14AReportonCSRActivities2014.pdf>, accessed on : 14-09-2014.
[30] Lorenzo Sacconi, Corporate Social Responsibility As A Model Of “EXTENDED”Corporate Governance, p. 6, available at:< http://www.biblio.liuc.it/liucpap/pdf/142.pdf>, accessed on: 31-08-2014.
[31] Mark Walsh and John Lowry, Corporate Social Responsibility: The Corporate Governance of 21st Century, CSR and Corporate Governance,(Ramon Mullerat, 2005) p.38, 39.
[32] Danette Winberge and Phillip H. Randolph, Corporate Social Responsibility: What every In-House Council Should Know, ( 1st ed. 2004), p.72.