Category: Management Notes

1. Environment

This area involves the environmental aspects of production, covering pollution control in the conduct of business operations, prevention or repair of damage to the environment resulting from processing of natural resources and the conservation of natural resources.

Corporate social objectives are to be found in the abatement of the negative external social effects of industrial production, and adopting more efficient technologies to minimize the use of irreplaceable resources and the production of waste.

2. Energy

This area covers conservation of energy in the conduct of business operations and increasing the energy efficiency of the company’s products.

3. Fair Business Practices

This area concerns the relationship of the company to special interest groups.

In particular it deals with:

• Employment of minorities
• Advancement of minorities
• Employment of women
• Employment of other special interest groups
• Support for minority businesses
• Socially responsible practices abroad.

4. Human Resources

This area concerns the impact of organizational activities on the people who constitute the human resources of the organization.

These activities include:

• Recruiting practices
• Training programs
• Experience building -job rotation
• Job enrichment
• Wage and salary levels
• Fringe benefit plans
• Congruence of employee and organizational goals
• Mutual trust and confidence
• Job security, stability of workforce, layoff and recall practices
• Transfer and promotion policies
• Occupational health

5. Community Development

This area involves community activities, health-related activities, education and the arts and other community activity disclosures.

6. Products

This area concerns the qualitative aspects of the products, for example their utility, life- durability, safety and serviceability, as well as their effect on pollution. Moreover, it includes customer satisfaction, truthfulness in advertising, completeness and clarity of labelling and packaging. Many of these considerations are important already from a marketing point of view. It is clear, however, that the social responsibility aspect of the product contribution extends beyond what is advantageous from a marketing angle.

1. Environmental Corporate Social Responsibility

One of the most common forms of corporate social responsibility, a number of companies focus their CSR efforts towards reducing their impact on the environment.

Whilst some UK businesses are now obliged by law to report on their greenhouse gas emissions, many others that are not required to are also beginning to address cutting their carbon footprint.

Though harmful effects on the environment were once dismissed as a necessary and unavoidable cost of doing business, pollution and excessive consumption of resources now also pose a social and political concern on a global level.

For this reason, environmental CSR has taken off, with many companies now prioritising the impact that their business has on the environment.

Broadly, environmental CSR tends to focus on a business cutting down its greenhouse gas emissions and waste. This involves re-evaluation of a business’s production processes in order to identify wasteful acts and cut these from the company’s business plan.

Example of Environmental Corporate Social Responsibility

One example of a business focusing on environmental responsibility in their CSR strategy is Unilever.

The UK’s largest deodorant manufacturer, in 2014 Unilever began compressing the cans of their deodorants, cutting the carbon footprint of each aerosol spray by 25% per can.

The business achieved this by using 50% less propellant gas and 25% less aluminium. The deodorants still last the same length of time as the older designs, however are half the size, meaning that 53% more cans fit into pallets and therefore fewer lorries are required, meaning a cut in transport emissions too.

In addressing everything from the product design phase to shipping, Unilever have cut their costs in addition to their impact on the environment.

2. Ethical Corporate Social Responsibility

Ethical corporate social responsibility programmes focus on ensuring that all stakeholders in a business receive fair treatment, from employees to customers.

Ethical responsibilities are self enforced initiatives that a company puts in place because they believe it is the morally correct thing to do rather than out of any obligation. Businesses consider how stakeholders will be affected by their activity and work to have the most positive impact.

Whilst economic and legal responsibilities are the primary concerns of a company, after addressing these fundamental requirements businesses can then begin to focus on their ethical responsibilities.

Ethical CSR initiatives are intended to enforce fairer treatment for all employees, with common examples including paying higher wages, offering jobs to those who might otherwise struggle to find work, ensuring that decent standards are maintained in factories and refusing to partner in business with unscrupulous businesses or oppressive countries.

Ethical CSR considers every level of the supply chain, including employees who may not be directly working for the business. For example, CSR programmes might be in place to ensure that people producing clothes for a company receive fair treatment, or to prevent small scale farmers from being exploited by offering fair payment for their crops.

Though sometimes difficult to enforce, these programmes are intended to help ensure that employees, customers, shareholders and all other stakeholders get the fairest deal possible.

Ethical CSR Company Example:

Cosmetics company Lush is known for its global campaigning against animal testing and strong ethical initiatives. Alongside the annual Lush Prize which fuels innovation of anti-testing methods, Lush has been dedicated to operating fair and direct trade.

The company consistently sources ingredients from producers directly, allowing them to ensure that their suppliers’ working conditions are dignified and they receive fair prices for their products.

Doing so also allows the company to ensure they source the safest and most suitable raw materials for their products, ensuring that consumers receive the best quality cosmetics.

The company also insists that their suppliers do not support child labour. If their producers become aware of any child labour, they are expected to support the child back into education through a training and transition programme.

Placing ethics above profits, the company has continued to partner with sustainable suppliers, working with them from the ground up to establish solid long-term relationships.

3. Philanthropic Corporate Social Responsibility

Philanthropic social responsibilities go beyond simply operating as ethically as possible and involve actively bettering society. This type of corporate social responsibility is frequently associated with donating money to charities, with many businesses supporting particular charities that are relevant to their business in some way.

However, philanthropic CSR does not only refer to charity donations. Other common philanthropic responsibilities include investing in the community or participating in local projects. The main intention is to support a community in some way that goes beyond just hiring.

By investing in the community, the business encourages loyalty from employees whilst benefiting from an improved support system. Corporate philanthropy also serves as a way of representing a company’s commitment to society, demonstrating that they value the community beyond simply providing a workforce or source of revenue.

For example, businesses might offer their employees the opportunity to volunteer with local charities during working hours or through matching gift programmes where workers’ donations to charities are matched by the company.

Philanthropic CSR Company Example:

Google is well known for its corporate philanthropy, running multiple charity programmes through Google.org that have provided over $100 million in grants and investments.

The company carries out a volunteer programme which allows employees to dedicate up to 20 hours of work time to volunteering in their communities each year.

In addition, Google has a matching gift programme in place where donations made by employees that are between $50 and $12,000 are matched at a 1:1 ratio.

However, beyond these programs, Google has carried out numerous initiatives focusing on improving particular regions. One such example of this is their work with Learning Equality towards making digital content accessible online in order to allow students without the internet to have better access to learning resources.

By making materials available through a cloud library, Google hopes to help contribute to reducing the gap between disadvantaged communities in India, Latin America and Africa and countries with better access to technology.

With the company’s motto being ‘You can make money without doing evil’, it makes sense that Google is known for its philanthropy, having a track record of meeting the interests of its stakeholders and their communities.

A CSR, corporate social responsibility or sustainability report is a periodical (usually annual) report published by companies with the goal of sharing their corporate social responsibility actions and results.

According to the Global Reporting Initiative, a CSR report can be defined as:

“A sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities. A sustainability report also presents the organization’s values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy.”

The report synthesizes and makes public the information organizations decide to communicate regarding their commitments and actions in social and environmental areas. By doing so, organizations let stakeholders (i.e., all parties interested in their activities) aware of how they are integrating the principles of sustainable development into their everyday operations.

Purpose of a CSR Report

The main intention of a CSR or sustainability report is to improve the transparency of organizations’ activities. The goal is twofold:

On one hand, CSR reports aim to enable companies to measure the impact of their activities on the environment, on society and on the economy (the famous triple-bottom-line). In this way, companies can get accurate and insightful data which will help them improve their processes and have a more positive impact in society and in the world.

On the other hand, a CSR or sustainability report also allows companies to externally communicate with their stakeholders what are their goals regarding sustainable development and CSR. This allows stakeholders such as employees, investors, media, NGOs, among other interested parties, to get to know better what are the short, medium and long-term goals of companies and make more informed decisions. These decisions can spread from investing in a business, buying its products, writing positive (or negative) reviews, protesting in the streets against the intentions or actions of an organization.

Important

As discussed above, CSR and sustainability reports can be used to achieve both internal and/or external goals.

The Internal Organizational Benefits of a Sustainability Report

Internally speaking, CSR reports are important because they allow companies to estimate the impact their operations have on the environment, society, and the economy. Through the (supposedly) detailed and meaningful data collected (or simply gathered) for the sustainability report, companies have a chance to improve their operations and to reduce operational costs. Not only do they become better prepared to optimize and reduce their energy consumption; as a result of reviewing their waste cycles product innovation strategies or circular economy opportunities can be found.

At the same time, collecting this data requires joint efforts from different departments. As a result of the hype that’s created, employees often end up becoming more conscious the company is focusing on CSR and sustainability, which leaves them proud increasing employee retention and decreasing turnover (and its costs). It’s good news for employer branding.

The External Organizational Benefits of a Sustainability Report

When it comes to external benefits, a CSR and sustainability report can help companies engage better with their interested parties. By letting their stakeholders know about the organization’s short, medium and long-term project decisions, companies can be better understood which may have positive financial outputs.

For instance, a sustainability report helps stakeholders become aware of whether a company is positively contributing to minimizing the negative impacts of an environmental hazard or that it is only focused on growing profits for its managers and investors. Silence is also a way of communication and if no sustainability report is found the odds are people will focus on the second option just mentioned.

In this way, consumers can decide whether they want to buy from a brand that protects orangutans by sourcing sustainable palm oil or one that produces clothes locally with little environmental harm and paying fair wages. Investors can anticipate if companies are becoming more resilient to face consequences of climate change and decide whether to invest in them or not. Journalists can share best case practices from companies leading the way on topics such as microplastics pollution or ocean acidification. NGOs can exert pressure and expose irresponsible practices.

Anglo-American Model

Under the Anglo-American Model of corporate governance, the shareholder rights are recognised and given importance. They have the right to elect all the members of the Board and the Board directs the management of the company. Some of the features of this model are:

• This is shareholder oriented model. It is also called Anglo-Saxon approach to corporate governance being the basis of corporate governance in Britain, Canada, America, Australia and Common Wealth Countries including India
• Directors are rarely independent of management
• Companies are run by professional managers who have negligible ownership stake. There is clear separation of ownership and management.
• Institution investors like banks and mutual funds are portfolio investors. When they are not satisfied with the company’s performance they simple sell their shares in market and quit.
• The disclosure norms are comprehensive and rules against the insider trading are tight
• The small investors are protected and large investors are discouraged to take active role in corporate governance.

German Model

This is also called European Model. It is believed that workers are one of the key stakeholders in the company and they should have the right to participate in the management of the company. The corporate governance is carried out through two boards, therefore it is also known as two-tier board model. These two boards are:

• Supervisory Board: The shareholders elect the members of Supervisory Board. Employees also elect their representative for Supervisory Board which are generally one-third or half of the Board.
• Board of Management or Management Board: The Supervisory Board appoints and monitors the Management Board. The Supervisory Board has the right to dismiss the Management Board and re-constitute the same.

Japanese Model

Japanese companies raise significant part of capital through banking and other financial institutions. Since the banks and other institutions stakes are very high in businesses, they also work closely with the management of the company. The shareholders and main banks together appoint the Board of Directors and the President. In this model, along with the shareholders, the interest of lenders is recognised.

Social Control Model

Social Control Model of corporate governance argues for full-fledged stakeholder representation in the board. According to this model, creation of Stakeholders Board over and above the shareholders determined Board of Directors would improve the internal control systems of the corporate governance. The Stakeholders Board consists of representation from shareholders, employees, major consumers, major suppliers, lenders etc.

Indian Model

In India there are mainly three types of companies’ viz. private companies, public companies and public sector undertakings. Each of these companies has distinct kind of shareholding pattern. Thus the corporate governance model in India is a mix of Anglo-American and German Models.

For the first time in the history of corporate governance in India, the Confederation of Indian Industry (CII) framed a voluntary code of corporate governance for the listed companies, which is known as CII Code of desirable corporate governance.

The main recommendations of the Code are summarised as:

(a) Any listed company with a turnover of Rs. 1000 million and above should have professionally competent and acclaimed non-executive directors,

Who should constitute:

• At least 30% of the board, if the chairman of the company is a non-executive director.
• At least 50% of the board if the chairman and managing director is the same person.

(b) For the non-executive directors to play an important role in corporate decision-making and maximising long-term shareholder value,

They need to:

• Become active participants in boards, not passive advisors,
• Have clearly defined responsibilities within the board, 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.

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

(d) 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-days discussion.

(e) As a general rule, one should not re-appoint any non-executive director who has not had the time to attend even one-half of the meetings.

(f) Various key information must be reported to, and placed before the board, viz., annual budgets, quarterly results, internal audit reports, show cause, demand and prosecution notices received, fatal accidents and pollution problem, default in payment of principal and interest to the creditors, inter corporate deposits, joint venture foreign exchange exposures.

(g) Listed companies with either a turnover of over Rs. 1000 million or a paid up capital of Rs. 200 million, whichever is less, should set up audit committees within 2 years. The committee should consist of a least three members, who should have adequate knowledge of finance, accounts, and basic elements of company law. The committees should provide effective supervision of the financial reporting process. The audit committees should periodically interact with statutory auditors and internal auditors to ascertain the quality and veracity of the company’s accounts as well as the capability of the auditors themselves.

(h) Consolidation of group accounts should be optional.

(i) Major Indian stock exchanges should generally insist on a compliance certificate, signed by the CEO and the CFO.

K.M. Birla Committee was set up by SEBI in the year 2000. In fact, this Committee’s recommendation culminated in the introduction of Clause 49 of the Listing Agreement to be complied with by all listed companies. Practically most of the recommendations were accepted and included by SEBI in its new Clause 49 of the Listing Agreement in 2000.

The main recommendations of the Committee are:

(a) The board of a company should have an optimum combination of executive and non­executive directors with not less than 50% of the board comprising the non-executive directors. In case, a company has a non-executive chairman, at least one-third of board should be comprised of independent directors and in case, a company has an executive chairman, at least half of the board should be independent.

(b) Independent directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transaction with the company, its promoters, management or subsidiaries, which in the judgement of the board may affect their independence of judgement.

(c) A director should not be a member in more than ten committees or act as chairman of more than five committees across all companies in which he is a director. It should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

(d) The disclosures should be made in the section on corporate governance of the annual report:

• All elements of remuneration package of all the directors, i.e., salary, benefits, bonus, stock options, pension etc.
• Details of fixed component and performance linked incentives along with the performance criteria,
• Service contracts, notice and period, severance fees,
• Stock option details, if any, and whether issued at a discount as well as the period over which accrued and exercisable.

(e) In case of appointment of a new director or re-appointment of a director, the shareholders must be provided with the information:

• A brief resume of the director,
• Nature of his experience in specific functional areas, and
• Names of companies in which the person also holds the directorship and the membership of committees of the board.

(f) Board meetings should be held at least four times in a year, with a maximum times gap of 4 months between any two meetings. The minimum information (specified by the committee) should be available to the board.

(g) A qualified and independent audit committee should be set up by the board of the company in order to enhance the credibility of the financial disclosures of a company and promote transparency. The committee should have minimum three members, all being non-executive directors, with majority being independent, and with at least one director having financial and accounting knowledge. The chairman of the committee should be an independent director and he should be present at AGM to answer shareholder queries.

Finance director and head of internal audit and when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee. The committee should meet at least thrice a year. One meeting should be held before finalization of annual accounts and one necessarily every six months. The quorum of the meeting should be either two members or one-third of the members of the committee, whichever is higher and there should be a minimum of two independent directors.

(h) The board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration package for executive directors including pension rights and any compensation payment. The committee should comprise of at least three directors, all of who should be non-executive directors, the chairman of the committee being an independent director.

(i) A board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressal of shareholder complaints like transfer of shares, non-receipt of balance sheet, declared dividends etc., The committee should focus the attention of the company on shareholders’ grievances and sensitize the management of redressal of their grievances,

(j) The companies should be required to give consolidated accounts in respect of all their subsidiaries in which they hold 51% or more of the share capital.

(k) Disclosures must be made by the management to the board relating to all material, financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the company at large. All pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report.

(l) As part of the Directors’ Report or as an additional thereto, a management discussion and analysis report should form part of the annual report to the shareholders.

(m) The half-yearly declaration of financial performance including summary of the significant events in last six months should be sent to each household of shareholders,

(n) The company should arrange to obtain a certificate from the auditors of a company regarding compliance of mandatory recommendations and annex the certificate with the Directors’ Report, which is sent annually to all the shareholders of the company,

(o) There should be a separate section on corporate governance in the annual reports of companies, with a detailed compliance report on corporate governance.

The King Report on Corporate Governance is a booklet of guidelines for the governance structures and operation of companies in South Africa. It is issued by the King Committee on Corporate Governance. Three reports were issued in 1994 (King I), 2002 (King II), and 2009 (King III) and a fourth revision (King IV) in 2016. The Institute of Directors in Southern Africa (IoDSA) owns the copyright of the King Report on Corporate Governance and the King Code of Corporate Governance. Compliance with the King Reports is a requirement for companies listed on the Johannesburg Stock Exchange. The King Report on Corporate Governance has been cited as “the most effective summary of the best international practices in corporate governance”.

Approach

Unlike other corporate governance codes such as Sarbanes-Oxley, the code is non-legislative and is based on principles and practices. It also espouses an apply or explain approach, unique to the Netherlands until King and now also found in the 2010 Combined Code from the United Kingdom.

The philosophy of the code consists of the three key elements of leadership, sustainability and good corporate citizenship. It views good governance as essentially being effective, ethical leadership. King believes that leaders should direct the company to achieve sustainable economic, social and environmental performance. It views sustainability as the primary moral and economic imperative of this century; the code’s view on corporate citizenship flows from a company’s standing as a juristic person under the South African constitution and should operate in a sustainable manner.

The purpose of King is to:

• Create an Ethical Culture in Organisations,
• Improve Their Performance and Increase the Value They Create,
• Ensure There Are Adequate and Effective Controls in Place,
• Build Trust Between All Stakeholders,
• Ensure the Organisation Has A Good Reputation,
• Ensure Legitimacy.

The key principles from the first King report covered:

• Board of directors’ makeup and mandate, including the role of non-executive directors and guidance on the categories of people who should make up the non-executive directors
• Appointments to the board and guidance on the maximum term for executive directors
• Determination and disclosure of executive and non-executive director’s remuneration
• Board meeting frequency
• Balanced annual reporting
• The requirement for effective auditing
• Affirmative action programs
• The company’s code of ethics

In the United States, a blue-ribbon committee (or panel or commission) is a group of exceptional people appointed to investigate, study or analyze a given question. Blue-ribbon committees generally have a degree of independence from political influence or other authority, and such committees usually have no direct authority of their own. Their value comes from their ability to use their expertise to issue findings or recommendations which can then be used by those with decision-making power to act.

A blue-ribbon committee is often appointed by a government body or executive to report on a matter of controversy. It might be composed of independent scientific experts or academics with no direct government ties to study a particular issue or question, or it might be composed of citizens well known for their general intelligence, experience and non-partisan interests to study a matter of political reform. The “blue-ribbon” aspect comes from the presentation of the committee as the “best and brightest” for the task, and the appointment of such a committee, ad hoc, is meant to signal its perspective as outsiders of the usual process for study and decisions.

The designation “blue-ribbon” is often made by the appointing authority, and may be disputed by others who might see the committee as less independent, or as a way for an authority to dodge responsibility.

Examples of high-level blue-ribbon committees in the United States would be the Warren Commission investigating the Kennedy Assassination, the 9/11 Commission investigating the September 11, 2001 terrorist attacks, the Iraq Study Group assessing the Iraq War and the Clinton Administration’s White House Task Force on National Health Care Reform. In each case, the committee did not have authority to indict or legislate, and their brief was to investigate and issue a report on the facts as they found them with recommendations for changes for government policy in the future. The current Blue Ribbon Panel on “sustaining America’s diverse fish & wildlife resources” emphasizes incentives of industries, businesses and landowners to aid in conservation funding to prevent species from being added to the endangered species list.

The term has leaked into official usage. From January 29, 2010 to January 2012, the U.S. had a Blue Ribbon Commission on America’s Nuclear Future. There are other government and private commissions with “Blue Ribbon Commission” in their names. These and others are often referred to simply as “the Blue Ribbon Commission” or “the blue ribbon commission”, creating the potential for confusion.

Greenbury Committee

The Greenbury Report released in 1995 was the product of a committee established by the United Kingdom Confederation of British Industry on corporate governance. It followed in the tradition of the Cadbury Report and addressed a growing concern about the level of director remuneration. The modern result of the report is found in the UK Corporate Governance Code at section D.

The Greenbury Committee was established in 1994 by the Confederation of British Industry in response to growing concern at the level of salaries and bonuses being paid to senior executives.

Its key findings were that Remuneration Committees made up of non-executive directors should be responsible for determining the level of executive directors’ compensation packages, that there should be full disclosure of each executive’s pay package and that shareholders be required to approve them. Remuneration should be linked more explicitly to performance, and set at a level necessary to ‘attract, retain and motivate’ the top talent without being excessive. It also proposed that more restraint be shown in awarding compensation to outgoing Chief Executives, especially that their performance and reasons for departing be taken into account.

Again this code of conduct was to be voluntary in the hope that self-regulation would be sufficient to correct things. It was judged that shareholders were not so much concerned with exorbitant amounts being paid out to executives than that the payouts be more closely tied to performance.

This Committee was established in November 1995 by the Financial Reporting Council (and sponsored in part by the London Stock Exchange, Confederation of British Industry, and Institute of Directors) to review matters arising from the Cadbury and Greenbury Committees and evaluate implementation of their recommendations.

Hampel Committee

The Committee declared at the outset that it would remain mindful of ‘the need to restrict the regulatory burden on companies and to substitute principles for detail wherever possible’, and disdained ‘prescriptive box-ticking’ in favour of highlighting positive examples of good practice. Finding that the balance between ‘business prosperity and accountability’ had shifted too far in favour of the latter, they decided that corporate governance was ultimately a matter for the board. If boards felt it was in the interests of enhancing ‘prosperity over time’ to have a unitary CEO and Chair, or not to put remuneration policy before the AGM for approval then that was their concern. Transparency was more important than adhering to any particular set of guidelines, and any shareholders unhappy with the board’s management had the option of using their votes accordingly.

The Hampel Report (January 1998) was designed to be a revision of the corporate governance system in the UK. The remit of the committee was to review the Code laid down by the Cadbury Report (now found in the Combined Code). It asked whether the code’s original purpose was being achieved. Hampel found that there was no need for a revolution in the UK corporate governance system. The Report aimed to combine, harmonise and clarify the Cadbury and Greenbury recommendations.

On the question of in whose interests companies should be run, its answer came with clarity.

The single overriding objective shared by all listed companies, whatever their size or type of business is the preservation and the greatest practical enhancement over time of their shareholders’ investment.

The Hampel Report relied more on broad principles and a ‘common sense’ approach which was necessary to apply to different situations rather than Cadbury and Greenbury’s ‘box-ticking’ approach.