Tag: Corporate Governance Osmania University b.com Notes

Stakeholder

A stakeholder is someone who has an interest in or who is affected by your project and its outcome.

This may include both internal and external entities such as the members of the project team, project sponsors, executives, customers, suppliers, partners and the government.

Stakeholder management is the process of managing the expectations and the requirements of these stakeholders.

It involves identifying and analyzing stakeholders and systematically planning to communicate and engaging with them. 

A stakeholder is a party that has a financial interest in a company’s success or failure. It can be an individual, institution or group that can impact or be impacted by an organization’s projects and objectives. Stakeholders can be from within an organization or an external body.

Internal stakeholders are people with a direct relationship with the company through investment, employment or ownership. They include shareholders, managers, project coordinators, line managers and senior management. External stakeholders do not have a direct relationship with the organization but can impact or be impacted by its actions. Public groups, vendors, suppliers, customers, contractors, the host community, creditors and industry regulators are examples of external stakeholders.

Stakeholders can be shareholders of a company, but not all stakeholders are shareholders. They often have a long-term interest in an organization and desire for it to succeed. This is because stakeholders and a company often depend on each other. The firm’s success often translates to gains for the stakeholder.

For example, a company’s employees may want their organization to succeed so it can afford higher salaries and improved work benefits. The community hosting a new tech campus will also want the project to succeed because of the benefits it will bring to its members.

Shareholder

Shareholders provide companies with equity capital and are vested with ownership rights to the shares held. While shareholders are often referred to as owners of companies, this description overstates the rights of shareholders. Legally, in most jurisdictions, shareholders are entitled to own and sell their shares, and vote on certain corporate matters as specified by law and the corporate charter. The definition and exercise of ownership rights vary greatly across companies and especially across countries. The most common shareholding structure follows the one-share-one-vote principle, with each share of equity ownership providing a proportionate voting stake to the owner. However, many companies have multiple classes of shares that give some shareholders (typically founders and their families) greater voting rights. The technology sector in the U.S. in particular has seen a growing number of companies with multiple voting classes creating concern about the appropriateness of such voting control and the rights of minority or non-controlling shareholders in such companies.

Responsibilities for Shareholders Interests

The average shareholder, who is typically not involved in the day-to-day operations of the company, relies on several parties to protect and further his or her interests. These parties include the company’s employees, executives, and board of directors. However, each one of these parties has its own interests, which may conflict with those of the shareholder.

The board of directors is elected by the shareholders of a corporation to oversee and govern the management and to make corporate decisions on their behalf. As a result, the board is directly responsible for protecting and managing shareholders’ interests in the company.

Regulators, such as the U.S. Securities and Exchange Commission (SEC) also protect shareholders by helping to facilitate the smooth functioning of the financial markets. The SEC requires publicly-traded corporations to disclose their financial statements periodically throughout the year. As a result, investors and shareholders can access a company’s SEC filings, which might include news of mergers, acquisitions, and financial information pertinent to shareholders’ interests.

A shareholder is an individual or organization that owns shares in a corporation or project. The main interest of a shareholder is the profitability of the project or business. In a public corporation, shareholders want the business to make huge revenues so they can get higher share prices and dividends. Their interest in projects is for the venture to be successful. Unlike stakeholders, shareholders have extensive rights as outlined in the shareholders’ agreement or the corporation’s rules. Here are examples of shareholder rights:

• They can buy and sell their shares
• They receive dividends from the company’s profits
• They can nominate board members
• They can vote during the election of board members
• They can vote on mergers and acquisitions, takeover and changes to the company rules
• They can sue management over violation of fiduciary duty
• Unlike stakeholders, shareholders focus on a company’s profitability so they are in for the short term. They can sell their shares in the company and reinvest it in another entity, even a competitor.

Guidance on Stakeholders and Shareholders Interest

Shareholders and stakeholders often have divergent interests based on their relationship with the company or organization. This can lead to conflict during negotiations for mergers and acquisitions, as shareholders often support the move because of the higher dividend they will receive. However, company stakeholders like employees, suppliers and management may not support such deals because it can lead to job losses and disruption of supply chains.

In the past, shareholders had an overwhelming influence on their corporation’s policies because they have ownership and voting rights. Most companies emphasized profit maximization at the expense of other stakeholders. However, the growing importance of corporate social responsibility has given stakeholders more input in the affairs of organizations.

Corporate social responsibility demands that a company consider the interests of shareholders and other stakeholders when making decisions. Nowadays, many companies consider the input of different stakeholders who will be affected by their actions before they make a final decision.

For example, a company whose plants will pollute a community’s water supply may invest in a treatment plant to provide safe drinking water to affected areas. Corporate social responsibility can also motivate a firm to set up a college scholarship in the name of a retired executive.

Corporate Governance is intended to increase the accountability of your company and avoid massive disasters before they occur. Failed energy giant Enron, and its bankrupt employees and shareholders, is a prime argument for the importance of solid Corporate Governance. Well- executed Corporate Governance should be similar to a police department’s internal affairs unit, weeding out and eliminating problems with extreme prejudice.

It takes some combination of people, rules, processes and procedures to manage the business of a company. This is how we define corporate governance. Corporate governance forms the basis for corporations to make decisions that consider many environments, including economic, social, regulatory and the market environment. Corporate governance gets its roots in ethical behavior and business principles, with the goal of creating long-term value and sustainability for all stakeholders.

Corporate governance has a broad scope. It includes both social and institutional aspects. Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored & assessed, & how performance is optimized.

Corporate governance is the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form.

Corporate governance is the interaction between various participants (Shareholder, Board of Director and Company Management) in shaping corporation’s performance and the way it is proceeding towards. Corporate governance deals with determining ways to take effective strategic decisions and developed added value to the stakeholder.

Corporate governance ensures transparency which ensures strong and balance economic development. This is also ensures that the interest of all shareholders (Majority as well as minority shareholder) are safeguard.

Corporate board directors face the continual challenge of aligning the interests of the board, management, shareholders and stakeholders. They respond to their duties and responsibilities with full regard to transparency and accountability.

It’s often said that corporate boards are responsible for providing oversight, insight and foresight. That’s a tall order in today’s marketplace, which is complex and volatile. Good governance principles are fundamental to the work that board directors do.

The Role of the Board of Directors in Corporate Governance

Corporate boards have many duties and responsibilities. In every decision the board makes, they must consider how it will affect their employees, customers, suppliers, communities and shareholders.

Good corporate governance relies on distinct differences in the roles between board directors and managers. It was never intended for board directors to be directly involved in the daily operations of a corporation, and they certainly shouldn’t engage in micromanaging the management. The main role of board directors is oversight and planning. Despite the differences, board directors may delegate certain powers to the CEO or CFO under certain circumstances.

Boards also regularly delegate some of their duties to board committees.  Corporate board committees act as a subset of the full board. Committees devote the necessary time and resources to issues for which the full board doesn’t have time. Committees delve deep into issues, often calling in experts to assist them. Committees provide regular reports to the board on the matters they’re charged with handling.

Appropriate Board Composition

Boards tend to look differently in the early stages of development. Early-stage boards usually include one or more founders. Boards are typically smaller in the early stages, with five to seven board directors having various areas of expertise. Odd numbers prevent tie votes. Each board director gets one vote.

The size of boards typically increases with growth and is often related to the needs of the corporation and the normal practices for the industry. As boards acquire investors, they usually offer the CEO a board seat. Some investors will also insist that they get a board seat, so they can visibly oversee their investments. Investors also often have influence on recruiting independent board directors, who have increasing influence on the board and the corporation as the company grows.

Best practices for corporate governance encourage boards to offer the majority of board seats to independent directors. A well-composed board brings a diverse range of expertise, perspectives and knowledge into the boardroom. Regulators, investors and others are also making a big push for boards to consider diversity in a multitude of realms, including age, gender, experience, ethnicity, race, religion, skills and experiences.

Articulating Long-Term Plans to Shareholders and Stakeholders

The role of the board is to plan and strategize goals and objectives for the short- and long-term good of the company and to put mechanisms in place to monitor progress against the objectives. To this regard, board directors must review, understand and discuss the company’s goals. In particular, the board relies on independent directors to challenge the board’s perspectives to ensure sound decision-making.

The role must be confident in how they plan to address uncertainties and how they can capitalize on opportunities for the future, while identifying and managing real and potential risks. To inspire trust from investors, it’s necessary for board directors to be able to articulate their plans for the future so that investors have a clear picture of the long-term outlook.

The Corporate Board’s Role in Stewardship

In essence, board directors act as stewards of the company that govern for the present times and provide guidance and direction for the future. In their role as overseers, boards must continually assess a variety of risks in the following categories:

• Financial reporting
• Reputation
• Litigation
• Ethics
• Technology
• Health
• Safety
• Environment

Effective corporate governance entails that boards must develop written, clear descriptions of the roles for the board directors, the board chair, the CEO and the primary board committees. Boards should also develop and write policies for codes of business conduct, codes of ethics, environmental, social and governance (ESG), conflicts of interest and whistleblowing.

Good corporate governance promotes equity and deters fraud and other deceptive practices.

The Board’s Relationship with Management

It’s in the board’s best interest to develop good working relationships with managers. Corporations run best when the board and senior management hold the same perspectives on strategy, priorities and risk management.

Communication is a vital component of good corporate governance. Boards must communicate clearly and in a timely manner to develop a sense of mutual confidence and trust with their managers. It’s important for board directors to be having regular conversations with managers about risk mitigation and prevention. Managers need to understand risks so that they can put processes in place to protect the company. Risk conversations between boards and managers should cover a span of risk areas, including:

• Economic risks
• Market risks
• Operational risks
• Acquisitional risks
• Dispositional risks
• Infrastructure risks
• Technology risks
• Reputational risks
• Disclosure risks
• Compliance risks

Accountability is a concept in corporate governance that is the acknowledgement of responsibility by an organization for actions, decisions, products, and policies that it undertakes.

A customer of a business expects that a product manufactured and sold by a business has been designed, tested, and produced so that it is safe to use. An investor in a business expects that the managers of the company are working to maximize shareholder return and to not be wasteful of corporate resources. The federal government expects that a business pays its taxes properly and promptly. These are all examples of the expectations that stakeholders have of businesses to act in a responsible manner.

Rising stakeholder expectations are motivating organizations to consider the impacts of their actions in a broad, transparent, and systematic manner. Businesses are a major actor in modern society, and stakeholders expect that businesses be a positive contributor to societal well-being. Stakeholders want companies to be more than purveyors of a product or a service; they expect them to fulfill a more positive societal role.

Corporations today operate according to a model of corporate governance known as “shareholder primacy.” This theory claims that the purpose of a corporation is to generate returns for shareholders, and that decision-making should be focused on a singular goal: maximizing shareholder value. This single-minded focus which often comes at the expense of investments in workers, innovation, and long-term growth has contributed to today’s high-profit, low wage economy.

Many business leaders, policymakers, and average Americans accept this doctrine of corporate governance as “natural” law the unshakeable reality of business. However, shareholder-focused corporations are not natural market creations, and the idea of “maximizing shareholder value” is relatively recent. This misguided focus, driven by the neoliberal conception of shareholders as the only actor within the firm who is critical to corporate success, is the result of decades of flawed theory in corporate law and policy. Increasing economic evidence suggests that shareholder primacy is not benefiting other corporate stakeholders, including workers, suppliers, consumers, or communities.

With corporate rights should come societal responsibilities, but the rules of corporate America today do not guarantee that firms advance the public interest. Corporations are legal entities that exist only once a state government approves their incorporation, which grants them tremendous privileges to operate apart from the natural persons who form them and run them. These privileges as currently exercised have allowed corporations to organize trillions of dollars of capital and create wealth beyond what most countries possess, ultimately exacerbating economic inequality by building incredible wealth for shareholders while contributing to decades of wage stagnation.

It is time to change corporate governance law, reflected in a new framework, to ensure that the wealth created at the behest of public charters benefits the stakeholders who, collectively, generate prosperity. The changes to corporate governance that we recommend are intended to fundamentally rebalance power among stakeholders. Most notably, the rules that mandate the sole, shortsighted focus on stock price must be rewritten. Corporate decision-making must also consider every stakeholder who contributes to corporate success and ensure that all key stakeholders have a voice in governance of the firm.

This post explores policy reforms that can replace shareholder primacy with a new stakeholder corporate governance model. Specifically, we propose four legislative reforms:

• Boards of directors should be accountable to all stakeholders, not just shareholders. Specifically, board “fiduciary duty” should run to all stakeholders;
• Corporate purpose statements should include a requirement that corporations positively benefit society;
• Multiple stakeholders should be represented on corporate boards; and
• Large corporations should be required to charter federally, in order to enable the reforms above.

India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to The Company Act, 2013 in April 2014. Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger.

The amendment notified in the Schedule VII of the Companies Act advocates that those companies with a net worth of US$73 million (Rs 4.96 billion) or more, or an annual turnover of US$146 million (Rs 9.92 billion) or more, or a net profit of US$732,654 (Rs 50 million) or more during a financial year, shall earmark 2 percent of average net profits of three years towards CSR.

In the draft Companies Bill, 2009, the CSR clause was voluntary, though it was mandatory for companies to disclose their CSR spending to shareholders. It is also mandatory that company boards should have at least one female member.

CSR has been defined under the CSR rules, which includes but is not limited to:

• Projects related to activities specified in the Schedule; or
• Projects related to activities taken by the company board as recommended by the CSR Committee, provided those activities cover items listed in the Schedule.

Methodology of corporate social responsibility

CSR is the procedure of assessing an organization’s impact on society and evaluating their responsibilities. It begins with an assessment of the following aspects of each business:

• Customers;
• Suppliers;
• Environment;
• Communities;
  
• Employees

The most effective CSR plans ensure that while organizations comply with legislation, their investments also respect the growth and development of marginalized communities and the environment. CSR should also be sustainable involving activities that an organization can uphold without negatively affecting their business goals.

Organizations in India have been quite sensible in taking up CSR initiatives and integrating them into their business processes.

It has become progressively projected in the Indian corporate setting because organizations have recognized that besides growing their businesses, it is also important to shape responsible and supportable relationships with the community at large.

Companies now have specific departments and teams that develop specific policies, strategies, and goals for their CSR programs and set separate budgets to support them.

Most of the time, these programs are based on well-defined social beliefs or are carefully aligned with the companies’ business domain.

CSR trends in India

FY 2015-16 witnessed a 28 percent growth in CSR spending in comparison to the previous year.

Listed companies in India spent US$1.23 billion (Rs 83.45 billion) in various programs ranging from educational programs, skill development, social welfare, healthcare, and environment conservation. The Prime Minister’s Relief Fund saw an increase of 418 percent to US$103 million (Rs 7.01 billion) in comparison to US$24.5 million (Rs 1.68 billion) in 2014-15. The education sector received the maximum funding of US$300 million (Rs 20.42 billion) followed by healthcare at US$240.88 million (Rs 16.38 billion), while programs such as child mortality, maternal health, gender equality, and social projects saw negligible spend.

In terms of absolute spending, Reliance Industries spent the most followed by the government-owned National Thermal Power Corporation (NTPC) and Oil & Natural Gas (ONGC). Projects implemented through foundations have gone up from 99 in FY 2015 to 153 in FY 2016, with an increasing number of companies setting up their own foundations rather than working with existing non-profits to have more control over their CSR spending.

2017 CSR spends further rose with corporate firms aligning their initiatives with new government programs such as Swachh Bharat (Clean India) and Digital India, in addition to education and healthcare, to foster inclusive growth.

Corporate Social Reporting

Growth of corporate sector is the outcome of 20th century and number of corporations is rapidly increasing throughout the globe. Increased number of corporations not only domestic but global has led to the development of new type of financial reporting. The concept of scattered ownership gave birth to the concept of financial reporting whereas rapidly increased number of corporate sector particularly industrial corporate sector has given birth to the social corporate reporting.

Measurement and reporting of the social performance of profit oriented corporations form the core of social corporate reporting.

“The term corporate social performance reflects the impact of a corporation’s activities on the society. This embodies the performance of its economic functions and other actions taken to contribute to the quality of life. These activities may extend beyond meeting the letter of the law, the pressures of competition or the requirements of contracts.”

American Accounting Association committee on measurement of social costs supplement to the accounting review in 1974 has also emphasized on the role of corporate form of organisations in attaining their operational goals such as enhancement of profits by 8% p.a., increase in sales by 20%, a reduction in pollution levels by 30% and employee mix reflects the mix of minorities in working class where plants are located. General awareness among various classes of society has led to serious debate on social desirability of industrial units. Social accounting and reporting has emerged as contemporary accounting issues.

Problems and Prospects Concerning Social Corporate Reporting:

1. Interaction of Business with Society at Large:

A strong belief is that business carries out only economic functions of the society. Business units have some type of social responsibility to society. Cannon chairman of Marks and Spencer has rightly said that “Business only contributes fully to society if it is efficiently profitable and socially responsible” Business should undertake social activities with a business benefits is not a new concept. Wood another author has rightly said that “The basic idea of corporate social responsibility is that business and society are inter-woven rather than distinct entities.”

2. Issues of Environments and Package of Financial Statements:

In past, only social accounting was prevalent and emphasis was only on social disclosures. But in current global scenario, emphasis has shifted from social accounting to green accounting. Earlier the financial statements were being prepared for owners only, but now-a-days package of financial statements is prepared for stake holders. Those stakeholders have not just interest in the affairs of corporate unit, rather they also have keen interest on degree of influence over the shaping of those affairs.

3. Transparency and Accountability:

The concept of accountability is not fully understood by managers and few of them agree to the wider context within which the word accountability has been used business, law, government, politics and morality. The notion of accountability is commonly described in regard to organisation’s legal compliance and its financial reporting to shareholders and governmental agencies.

Thus accountability is concerned with responsibility of supplying information and the right to receive. Social responsibility is part of the reason for seeking greater accountability from corporate management. This responsibility keeps on changing and developing with the passage of time.

Nevertheless, just because the natural responsibilities are difficult, if not impossible to account for with accurate figures does not mean that such issues have to be neglected. An accountable organisation has to bring transparency by supplying financial and non-financial information to all the stakeholders particularly other than shareholders.

4. Stock Markets and Social or Environmental Disclosures:

Stock Markets throughout the world are playing a very dominant role for economic development particularly in developed economies like Japan, UK, USA, etc. Institutional investors are also playing their major role for fluctuations in share markets indices. Market prices of shares of every corporate unit reflect financial condition of corporate unit.

In most of the developed countries social and environmental disclosures in annual reports do play very crucial role in quoting the market price of shares. Any corporate unit cannot be run successfully without its concern for society in form of social desirability of the corporate unit.

5. Accounting and Sustainability:

The central to any discussion of accounting and the environment is very challenging and debatable question: Do we believe that the corporate unit which accounting serves and supports can deliver environmental security and sustainability? Sustainability relates to both present and future generations. Geno a famous author has argued that sustainability is corner stone of green accounting.

6. Social and Green Accounting:

Social Accounting literature concentrated only the questions of how a corporate unit should report on its social performance and how its performance should be assessed. Now standards are being issued on social accounting and reporting for instance, Global Reporting Initiative. Global warming is a burning issue for the whole world and that has given birth to the Environmental or Green reporting. Both country specific and comparative studies have recorded upward trend in environmental disclosures through annual reports.

7. Environmental Issues and Auditing Practices:

Grey, a prominent author has identified an increasing concern amongst auditors about potential risk exposure they face as a consequence of the environmental impact on the business. There are growing demands upon auditors to include environmental reports/data in their attestation of the financial statements. The main problem which auditors face while doing audit practices is standards. Every, accountant needs standards to do the audit concerning corporate social responsibility.

8. “Environmental Influence” on Corporate, Managers, and Accountants:

Research studies have. identified a number of reasons why corporate might be influenced to adopt more socially and environmentally responsible attitudes and behaviour. Generally external pressures from stakeholders like customers, competitors, environmentalists, NGOs, Governmental agencies etc. is there.

Corporate do environmental disclosures so as to satisfy needs of those stakeholders. Researches have also identified number of reasons why corporate might not be influenced to adopt environmental and social attitudes. One reason may be additional costs involved for such social and environmental activities and other reasons may be gathering of data, lack of understanding of the concepts of environmental accounting.

9. Accounting Education:

A lot of research is still needed in the field of accounting education in general and social and environmental in particular. Accountants themselves do not have accounting knowledge and -practice particularly in environmental accounting.” Another reason may be negative role being played by accounting teachers in the area. Every business is an open system Corporate unit have specific interaction with, society. Corporate social responsibility is a part of the reason for seeking greater accountability and transparency from corporate managements.

To account is to give a description or depiction of something that happens or happened. Accountability would therefore be taken to literally mean the process of giving an account of an event. The tricky part; about it, is that for the people to whom the account is being given, the accuracy and probity of the story is very important. To achieve this, accountability usually moves hand in hand with seven other principles. These include, “delegation, responsibility, disclosure, autonomy, authority, power and legitimacy.” :Chansa (2006).

Accountability is when an individual or department experiences consequences for their performance or actions. Accountability is essential for an organization and for a society. Without it, it is difficult to get people to assume ownership of their own actions because they believe they will not face any consequences.

Accountability, in terms of ethics and governance, is equated with answerability, blameworthiness, liability, and the expectation of account giving. As in an aspect of governance, it has been central to discussions related to problems in the public sector, nonprofit and private (corporate) and individual contexts. In leadership roles, accountability is the acknowledgment and assumption of responsibility for actions, products, decisions, and policies including the administration, governance, and implementation within the scope of the role or employment position and encompassing the obligation to report, explain and be answerable for resulting consequences.

In governance, accountability has expanded beyond the basic definition of “being called to account for one’s actions”. It is frequently described as an account giving relationship between individuals, e.g. “A is accountable to B when A is obliged to inform B about A’s (past or future) actions and decisions, to justify them, and to suffer punishment in the case of eventual misconduct” and more. Accountability cannot exist without proper accounting practices; in other words, an absence of accounting means an absence of accountability. Another key area that contributes to accountability is good records management.

Accountability is especially important in the world of corporate finance and accounting. Otherwise, investors and the public can lose faith in the trustworthiness of corporate financial reports, which has happened following high-profile accounting scandals in the past. Without checks, balances, and consequences for wrongdoing, the integrity of the capital markets would not be able to be maintained, damaging those markets’ ability to perform their vital social functions.

Corporate accounting scandals in the late 90s and early aughts, the global financial crisis and the rigging of interest and exchange rates have all served to erode public trust in financial institutions. Such scandals usually result in tougher regulations, and indeed there are compliance departments and entire armies of regulators and private watchdogs working to make sure that companies report their earnings correctly, trades are executed in a timely fashion, and information provided to investors is timely, informative, and fair.

But many leaders have called for the creation of a new culture of accountability in finance one that comes from within.

Importance of Accountability

The separation of ownership from management can cause conflict if there is a breach of trust by managers either by intentional acts, omission of key facts from reports, neglect, or incompetence. One way in which this can be avoided is for entities (in their entirety) to act with transparency and be accountable to the shareholders and other stakeholders. Therefore apart from just being a component of corporate governance, there are many advantages of accountability.

Firstly, it is a key to economic prosperity. If there is poor accountability by players in the economy, stakeholders may lose the confidence they have in it and hence become reluctant to put in their best. For instance; for some developing countries, lack of accountability may lead to a fall in the participation rate in their development programmes by their cooperating partners a situation that leads to further deterioration in the development process. Accountability is also a key to performance measurement. The more accountable corporate governors are, the more likely it is that results of performance measurement processes are going to be a true and fair representative of the performance being measured.

Accountability is a very important pillar of corporate governance. Without it, the agency problem would be hard to defeat. With it, the confidence of stakeholders is increased. It is achieved through faithfulness in various aspects of corporate governance especially reporting. The strength and accuracy of the reporting is also strengthened by various standards and regulations.

Examples of Accountability in Action

There are several examples of how the world of finance tries to implement accountability. An auditor reviewing a company’s financial statements is responsible for obtaining reasonable assurance that the financial statements are free from any material misstatements caused by error or fraud.

Accountability forces an accountant to be careful and knowledgeable in their professional practices, as even negligence can cause them to be legally responsible. As an example, an accountant is accountable for the integrity and accuracy of the financial statements, even if errors were not made by them. Managers of a company may try to manipulate their company’s financial statements without the accountant knowing. There are clear incentives for the managers to do this, as their pay is usually tied to company performance.

This is why independent outside accountants must audit the financial statements, and accountability forces them to be careful and knowledgeable in their review. Public companies are also required to have an audit committee as a part of their board of directors who are outside individuals with accounting knowledge. Their job is to oversee the audit.

The Committee (1978), inter alia, looked into the social responsibilities of companies. Every company apart from being able to justify itself on the test of economic viability will have to pass the test of a socially responsible entity.

In this context, it will be judged by various tests dependent upon the circumstances in each company and in each area.

Thus, a chemical company which may declare very high dividend may yet be responsible for polluting the water and air and would have to be named as a socially irresponsible company.

Similarly, the waste discharge from the factories resulting in loss of fish and thereby depriving a large number of fishermen of their livelihood and also posing a risk to those eating fish would certainly be ranked as an irresponsible act. No company in these days can disown its social responsibility.

For securing responsible behaviour, the committee was in favour of “openness in corporate affairs” i.e. adequate disclosure of information for the benefit of shareholders, creditors, workers and the community.

It suggested that social costs-benefit analysis, which was one of the prime considerations for investment decisions in the public sector, ought to be taken into account in the matter of investments in the private sector.

The accountability of the public sector to the people through Parliament must find its parallel in the private sector in the form of social accountability, at least to the extent of informing the public about the extent and the manner in which it has or has not been able to discharge its social obligations in the course of its own economic operations.

It is in this sense that social responsibility of business, as far as the private sector is concerned, is but social accountability and is a mere extension of the principle of public disclosure to which the corporations must be subject.

Other relevant suggestions of the Committee are as follows:

1. The test for judging a company’s consciousness towards the interests of the public may include: the interest it makes in the area of its operation, the welfare of its employees, the spread of adult literacy and so on.
2. It should be obligatory on a company to give a social report every year showing to what extent it has been able to meet its social obligations.
3. While quantifying the contribution that a company claims to have made towards social obligations, the social report should specify that no part of the benefits from contribution made by the company have gone either to the directors or their relatives or to any association in which the directors and their relatives have any personal interest.
4. The Companies Act should be suitably amended requiring every company to give along with the director’s report a social report, which will indicate and quantify, the various activities relating to social responsibilities carried out by a company in the previous year.
5. A majority of the population of the country lives in rural areas and its well-being is essential. A company which consciously and with deliberate choice establishes its business in such areas will certainly be held to have played a more socially responsible role even though in terms of its returns on investment it is less profitable than other companies.
6. Social responsiveness may also be judged from the policy of employment followed by a company so far as the socially handicapped and the weaker sections of the community are concerned.

In 1980 there was a significant development in that the TISCO invited a team of eminent persons to undertake a “social audit” of their organisation and published the findings in the form of a report

CSR in India

India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to The Company Act, 2013 in April 2014. Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger. Company having:

• Minimum net worth of rupees 500 Crore.
• Turnover up to “1000 Crore”
• having a net profit of at least ‘5crore’

During any financial year, are covered by this provision.

The Company should constitute a Corporate Social Responsibility Committee as follows:

• The Committee shall consist of minimum 3 including 1 Independent Director, however in case of Private Company or the Company, which is not required to appoint Independent Director on board, or Foreign Company committee can be formulated with 2 directors.
• The CSR Policy shall be formulated in accordance with Schedule VII and the CSR Committee will be responsible for framing the policy, finalizing the amount to be spent on CSR, monitoring & implementation of the Scheme.
• If Company ceases to fulfill the eligibility criteria for three consecutive years, then the company is not required to comply until the company will meet the eligibility criteria once again.

Current CSR Practices of the Firms in India

Brief on CSR Activities as prescribed under Schedule VII of Companies Act, 2013

• Objective to efface the daily life segments including poverty, malnutrition and hunger while enhancing the standard of living and promoting the facets of better health care and sanitation.
• Introducing varied projects for Rural Development.
• Initiative to promote the different segments of education including special education and programs to enhance the vocation skills for all ages like children, women, elderly and conducting other livelihood enhancement projects.
• Aim to bring the uniformity in respect of different sections of the society to promote gender equality and other facilities for senior citizens and developing hostels for women and orphans and taking initiative for empowering women and lowering inequalities faced by socially and economically backward groups.
• Elevate the segment of flora and fauna to bring the ecological balance and environmental sustainability in respect of animal welfare, conservation of natural resources and ago forestry while maintaining the quality of air, water and soil.
• Enhancement of Craftsmanship while protecting art and culture and measures to restore sites of historical importance and national heritage and promoting the works of art and setting up of public libraries.
• Steps to bring worthy to the part of war windows, armed force veterans and their departments.
• Sports programs and training sessions to enhance the level of rural sports, nationally recognized sports, Paralympic sports and Olympics sports.
• Favoring to Prime Minister’s National Relief Fund and contribution to other fund set up by the central government to promote socio-economic development and welfare of the schedule castes and Schedule Tribes and for supporting backward classes, minorities and women.
• To uplift the technology of incubator that’s comes under academic institutions and which are approved by the Central Government.

Example:

• Tata Group: The Tata Group conglomerate in India carries out various CSR projects, most of which are community improvement and poverty alleviation programs. Through self-help groups, it is engaged in women empowerment activities, income generation, rural community development, and other social welfare programs. In the field of education, the Tata Group provides scholarships and endowments for numerous institutions.
• Ultratech Cement: Ultratech Cement, India’s biggest cement company is involved in social work across 407 villages in the country aiming to create sustainability and self-reliance. Its CSR activities focus on healthcare and family welfare programs, education, infrastructure, environment, social welfare, and sustainable livelihood. The company has organized medical camps, immunization programs, sanitization programs, school enrollment, plantation drives, water conservation programs, industrial training, and organic farming programs.
• Mahindra & Mahindra: Indian automobile manufacturer Mahindra & Mahindra (M&M) established the K. C. Mahindra Education Trust in 1954, followed by Mahindra Foundation in 1969 with the purpose of promoting education. The company primarily focuses on education programs to assist economically and socially disadvantaged communities. CSR programs invest in scholarships and grants, livelihood training, healthcare for remote areas, water conservation, and disaster relief programs. M&M runs programs such as Nanhi Kali focusing on girl education, Mahindra Pride Schools for industrial training, and Lifeline Express for healthcare services in remote areas.

Current CSR Practices of the Firms in Abroad

CSR in US

US companies have had the luxury of defining and interpreting their own view of responsible business within the context of their own company. Subsequently they have been able to measure and promote activities with greater freedom than their international counterparts.

CSR in Australia

“Social responsibility is the responsibility of an organization for the impacts of its decisions and activities on society and the environment, through transparent and ethical behavior that contributes to sustainable development, including the health and the welfare of society

• Considers the expectations of stakeholders
• Follows applicable law and consistent with international norms of behavior and is integrated throughout the organization and practiced in its relationships.”

Corporate Social Responsibility or CSR has been debated since the early twentieth century, but there has been little agreement over its definition due to:

• Differences in national and cultural approaches to business
• Differences in motivation for CSR – doing it because it is morally correct or doing it because it makes good business sense
• Differences in disciplinary backgrounds, perspectives and methods of scholars engaged with CSR

CSR in Canada

Canada’s enhanced Corporate Social Responsibility (CSR) Strategy, “Doing Business the Canadian Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad” builds on experience and best practices gained since the 2009 launch of Canada’s first CSR strategy, “Building the Canadian Advantage: A Corporate Social Responsibility Strategy for the Canadian Extractive Sector Abroad.”

• Re-focusing the role of the Office of the CSR Counsellor, including strengthening its mandate to promote strong CSR guidelines to the Canadian extractive sector and advising companies on incorporating such guidelines into their operating approach. The CSR Counsellor will also build on the work conducted at missions abroad by refocusing efforts on working to prevent, identify and resolve disputes in their early stages;
• In situations where parties to a dispute would benefit from formal mediation, the CSR Counselor will encourage them to refer their issue to Canada’s National Contact Point (NCP), the robust and proven dispute resolution mechanism, guided by the OECD Guidelines for Multinational Enterprises on responsible business conduct, and active in 46 countries;
• Companies are expected to align with CSR guidelines and will be recognized by the CSR Counselor’s Office as eligible for enhanced Government of Canada economic diplomacy. As a penalty for companies that do not embody CSR best practices and refuse to participate in the CSR Counselor’s Office or NCP dispute resolution processes, Government of Canada support in foreign markets will be withdrawn;

CSR in United Arab Emirates

The concept of corporate social responsibility (CSR) in Dubai and the UAE has always been present from the earliest Islamic times, with people and organizations practising Islamic values, donating through philanthropy and Shariah compliant ways of commerce. In recent years, there have been worldwide initiatives to invest responsibly and focus on investing profits into community life and saving the environment.

The concept of corporate social responsibility (CSR) has witnessed various interpretations since its inception. Even though the present era of CSR has been significantly reassuring, there is an urgent need to understand the primary role of CSR. In order to do so, it becomes necessary to study the evolution of the concept of CSR over the years. This research compares the models of CSR on the basis of certain accepted indices, arguably the most relevant ones in this context, and establishes a line of evolution not a temporal convergence but a thematic convergence of the same thus concluding that the idea of CSR is gradually moving towards a consolidated form. There is a stark difference between the conception and the practical implementation of a model. Although several models have been proposed and modified since the 1950s, the question still remains whether an evolutionary line can be established as far as their practicability is concerned. Each organization or nation, as a whole, follows different strategies to implement CSR activities.

CSR contributes to another form of self-regulation that goes further and involves firms taking action to help people and the environment. CSR is described as “a belief that corporations have a social responsibility beyond pure profit.” In other words, “Firms are social entities, and so they should play a role in the social issues of the day. They should take seriously their ‘obligations to society’ and actively try to fulfill them.” As such, corporations should employ a decision-making process to achieve more than financial success on the assumption that CSR is integral to an optimum long-term strategy.

Corporate social responsibility (CSR) is a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public. By practicing corporate social responsibility, also called corporate citizenship, companies can be conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental.

Consumers today expect a lot out of companies. According to a study by Cone Communications, 9 out of 10 consumers expect companies to operate responsibly and address social and environmental issues rather than simply make a profit. In addition, 84 percent of consumers seek out responsible products.^[1]

To please consumers, many companies now practice corporate social responsibility. Corporate social responsibility (CSR), also known as corporate citizenship, is a business concept in which social and environmental concerns are integrated into a company’s operations. Whole Foods Market CEO John Mackey refers to CSR as conscious capitalism, in which businesses “serve the interests of all major stakeholders customers, employees, investors, communities, suppliers, and the environment.” Mackey witnessed the benefits of conscious capitalism when a Whole Foods Market store was terribly affected by a flood. Unexpectedly, customers and neighbors helped, employees worked for free, suppliers resupplied products on credit, and its bank loaned it money to restock. The Whole Foods store was able to reopen 28 days after the flood.

Although there are multiple versions of CSR, the general main categories of CSR include environmental efforts, philanthropy, ethical labor practices, and volunteerism. Let’s take a closer look at each of these.

Environmental Efforts

The primary focus of many companies in their commitment to CSR is through environmental efforts. For example, companies can have a large carbon footprint on the environment, which is the amount of greenhouse gases, especially carbon dioxide, emitted by an individual, organization, process, event, structure, or product. The majority of scientists believe that greenhouse gases are causing changes in the global climate, sea level, ecosystems, and thus, agricultural patterns. The carbon footprints of companies vary greatly depending on business operations, their size, and their location.

Any action taken to reduce a carbon footprint is considered beneficial for the environment. These efforts have included minimizing the amount of land occupied or used, constructing/occupying energy-efficient buildings, planting trees in the rainforest, and using locally sourced products. For example, the Bingham Hotel outside of London sources as much food as possible from suppliers within a 10-mile radius and the rest of its food from the British Isles.^[3] Purchasing locally sourced products supports local employment and reduces pollution by limiting the distances products must be transported.

Philanthropy

Many companies practice CSR by donating to various charities, starting charitable programs, and offering scholarships to underprivileged students wanting to attend college. Nu Skin, a personal-care company, developed a charity called Nourish the Children, which allows leaders, employees, and customers to donate nutrient-rich meals to children around the world. From 2002, when the program began, to 2017, people had donated more than 500 million meals through the program.

Ethical Labor Practices

Labor practices are often controversial from an ethical perspective. For example, Apple’s iPhones contain parts from companies in other countries. Specifically, the tin, which is used for a part, comes from mines in Indonesia. With labor laws that vary from one country to another, the company exercised due diligence in ensuring that its sourcing companies follow all applicable labor laws in their country of operation. But it was revealed to consumers in the United States that the tin was mined from companies in Indonesia that use child labor. Moreover, during the mining process, laborers as young as 12 years old were subject to the hazards of unstable soil. US consumers were appalled.

To address the issue, Apple instituted more robust labor practices, which were communicated to consumers. In a statement, Apple said, “the simplest course of action would be for Apple to unilaterally refuse any tin from Indonesian mines. That would be easy for us to do and would certainly shield us from criticism. But that would also be the lazy and cowardly path, since it would do nothing to improve the situation. We have chosen to stay engaged and attempt to drive changes on the ground.”^[5] For improved transparency, Apple has released annual reports that include details of its work with suppliers and their labor practices. Recent investigations have shown some improvements to the working conditions of the employees of Apple’s suppliers. However, the company still faces some criticism.

Volunteerism

Many companies are encouraging volunteerism by incorporating it into their policies and establishing employee volunteer programs. For example, some companies make a donation to the charities their employees volunteer at, in the amount equivalent to the employees’ regular pay for the same number of hours volunteered. Other companies offer gift cards to employees who volunteer. Companies are finding creative ways to encourage and reward the volunteerism of employees not only to help society and the environment but also so that consumers and stakeholders will perceive them as socially responsible.

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.