Corporate Governance and Corporate Social Responsibility

Corporate Governance and Corporate Social Responsibility

Corporate Governance and Corporate Social Responsibility : A Comparative Study of provisions under 1956 and 2013 Indian Companies Act
1.

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.

2.

II. Audit Committee

III. Disclose of Interest by Director

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:

3.

I. Board of Directors[26]

II. Audit Committee[27]

4.

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.

5.

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.

6.

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.

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