Corporate Governance and CSR
Corporate Governance is generally defined as the system to control and direct the businesses to achieve the objectives of the company. A good corporate governance system in a free market economy is a systemic integration of regulatory governance, market forces, stakeholder concerns and internal management with sufficient flexibility for dynamic variations of governing modes and mechanisms in different times and contexts. Here regulatory governance refers to public order and control over corporations by statutes, government and professional bodies, regulations and government policies. Market forces also influence governance and are a result of interplay of various market mechanisms such as supply and demand, price signals, free competition, case of entry and exit, market contract and market bid etc. Stakeholder concerns, direct or indirect, influence decision making and corporate behavior. Internal management is the arrangement of checks and balances among the shareholders general body meeting, the board of directors, and management within the corporation prescribed by companies law and corporate regulatory framework including internal rules.
With ever changing business environment the world over, the concepts of Corporate Governance and Corporate Social Responsibility have continuously been evolving to cope with emerging exigencies of business. In this context, it is worthwhile to look back at the global financial crisis of 2008 and how was it looked at through post-mortem by different agencies/countries. In United States, the overwhelming opinion was that there was no significant correlation between Corporate Governance and financial crisis. OECD held the view that financial crisis was closely associated with the insufficient implementation of corporate governance codes and principles while current corporate governance frameworkswere not wrong in general. The UK Financial Reporting Council subscribed to a similar view saying “The systemic failure of corporate governance is particularly associated with Anglo-American corporate governance model that has enabled, permitted or tolerated excess power and wealth at the hands of CEOs and cultivated a greed-is-good culture in banks”. Another view held by some economists and appears to be closer to ground reality was that “the financial crisis is both failure of the invisible hand of market and the failure of the visible hand of management”. In other words, it is not merely an implementation failure but also a systemic failure of institutional arrangements that were underpinned by increasingly popular paradigms or paradigmatic assumptions like market fundamentalism, self-regulation, self-interest, human behavior and shareholders’ primacy justifying short terms maximization. For stakeholder governance theorists specially from Germany and Japan where banks, employees, suppliers and major customers exert significant interests on corporate decision making through specific institutional arrangements “the financial crisis of 2008 was a result of failure of Anglo-American corporate governance system due to absence of stakeholder involvement in corporate governance”. Therefore, to prevent a repeat of such financial crisis there is not only a need to integrate best practices of different models of corporate governance but also there is more pressing need to focus on systems needed to promote ethical conduct from board room to the lowest level of employee so as to prevent implementation failure.
To understand this a little better we should take note of following facts from global as well as from Indian context.
A study of 1000 business executives in 1990 conducted in USA by Columbia University found that
Half of the respondents admitted having been rewarded for taking action on the job that they considered unethical;
One in three reported that refusing to take unethical actions resulted in penalties.
These were sure pointers to the need of immediate corrective measures and the failure to do so contributed in some measure to the financial crisis of 2008.
We are all aware that Indian business culture puts a premium on favour, friendship and clanship. Money begets power and power protects all means of making more and more money. That is why general public perception in our country is that
There are clear signs of ethical deterioration,
In business people have made immoral millions,
In government, a few officials and political executives are more often than not involved in accumulating ill-gotten wealth,
In education cheating scandals among students and violent reaction to any attempt to check are common place;
Uunder the table payments for admissionsin professional colleges are common,
They have to cheat to win;
They have to bribe to get even a legitimate claim from government or local bodies; and most disturbing public impression is that the honest and ethical individuals in all walks of life finish last; worse they are misfit in the social milieu.
In such a scenario, it is a moot point as to how to create an effective model of corporate governance which can align as nearly as possible the interests of individuals, of corporations and of society at large and prevent such major crisis in future.
There is no one-size-fit-all solution available across any counter or management research institution. Every society and State has to evolve its own formulation which can be embedded effectively in the available socio-economic milieu. Such a formulation should keep in view that ethics are integral part of life and running a business is also a part of life. Corporate ethics require direction and control of the enterprise based on the principle of integrity and fairness. It focusses on stakeholders and employees, quality of product and services, customer satisfaction, community, environment and above all the long term sustainability. Corporate ethics are implemented to define the framework of acceptable behavior, create bench mark for self-evaluation, enhance sense of community, create transparency in all business activities and comply with laws and norms not only in letter but also in spirit. Everyone in the company must be responsible for ethics and ethical behavior at all times. This can only be ensured by visible example from above, i.e. from top.
In Department of Public Enterprises, we realized this and therefore we put in place new guidelines on Corporate Social Responsibility and Sustainability enforced with effect from April 2013. According to these CSR is “companies (CPSEs) commitment to conduct their business in socially, economically and environmentally sustainable manner which is transparent and ethical at all times”. For raising awareness about these guidelines we have put these in public domain and also organizing seminars, workshops and other interactions. Financial component, now 2% of net profit as per new Companies Act, is a small sub-set of gamut of activities under CSR and Sustainability guidelines. Great emphasis is laid on following global best practices in reporting about CSR and Sustainability as well. Hopefully this will help CPSEs to not only grow but also compete globally.