International Journal of Business

Management & Research (IJBMR)

ISSN(P): 2249-6920; ISSN(E): 2249-8036
Vol. 4, Issue 4, Aug 2014, 99-108
TJPRC Pvt. Ltd.

CORPORATE GOVERNANCE: CORPORATE ACCOUNTABILITY IS INEVITABLE

GEORGE THOMAS
Chairman, Kunnanatt College of Education, Cochin, Kerala, India

ABSTRACT
The ability to demonstrate high standards of Governance and Business Ethics will be one of the most important
corporate competencies in the 21st century, and will be one of the main differentiators of successful companies from the
rest
In a global economy, increasingly organizations have a responsibility to facilitate, demonstrate and promote
corporate social responsibility (CSR). Long-term sustainability demands that organizations rethink their business goals and
objectives from solely focusing on making a profit to corporate citizenship. More and more companies are accepting
corporate citizenship as a new strategic and managerial purpose requiring their attention. CSR is helping companies in
employee recruitment, retention and motivation and supporting other business objectives, such as reducing business risk
and enhancing brand image. There is strong evidence to show that organizations with strong CSR can outperform those
who have not yet addressed the issue.
The paper examines the importance of corporate accountability. More and more companies are waking up to the
fact that corporate accountability is not only important for the enhancement of their brand equity but it is something they
cant do withoutthey cant survive in the market. It therefore becomes imperative for the companies worldwide to
acknowledge this fact and take sincere endeavor to enhance transparency and accountability towards the employees,
the shareholders and the society at large.

KEYWORDS: Corporate Accountability, Governance, Strategising and Leading

INTRODUCTION
First they ignore you, then they ridicule you, then they fight you, and then you win. Mohandas Gandhi
If Gandhi was right, then the proponents of corporate social responsibility are somewhere between ridicule and
battle - or to put a happier face on it, close to victory. A recent series of articles in The Economist took on corporate social
responsibility (CSR). After acknowledging CSR as a winner in a self-described "battle of ideas," the author declared that
this was a great pity and suggested that corporations return to the business of making money, leaving the nurture of social
concerns to its proper steward: government. Arguably, if everyone did this, we really could leave businesspeople alone to
make money, and evaluate them solely on that standard. Unfortunately, until business leaves government alone, that is a
pipe dream. According to Nell Minow and Robert Monks, in their work Corporate Governance," [t]he economic power of
corporations is dominating the political process. And that power distorts the ability of the marketplace to discipline
corporations." People look to corporations to advance social agendas because government has become mired in special
interests (many of them corporate) that make public policy response nearly impossible in the absence of a crisis. When one
pole on the axis of social power is rendered mute, people gravitate to the other. Not all of this is necessarily bad for

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business, as some critics of CSR assume. Very little of CSR is about corporate charityone of the critics' favorite
stalking-horsesand a great deal is about creating value. Too often, people assume that unfettered business acting in its
own self interest will create an unfriendly, polluted world where nothing but making money is rewarded.
Businesses engage in pollution prevention, offer good wages and benefits, make reliable products, and support
communities primarily because they know they can save money and attract and retain talented employees by doing so.
These forms of CSR also enable corporations to be competitive when new regulations curtail practices that threaten
society's health and well-being. On the last point, however, there is greater divergence between the aims of enlightened
business and the wishes of society. While CSR is about smart business, there are also corporations who pretend to be good
corporate citizens while supporting armies of lobbyists in hopes of forestalling new regulations aimed at protecting
workers, consumers, or the environment. While any citizen can lobby, the power of political voice is vastly amplified by
money, which gives corporations a huge advantage. This is done even though shareholders, who have a claim on corporate
profits, may have their own ideas about the desired directions of public policy. Until we live in a world where business
attends to making money and leaves government to look after societal needs, we need a practical approach to the use of
corporate power to influence government. A first step in that direction is disclosure. At a minimum, shareholders should be
able to find out how corporate management spends their money in the political arena, which are the activities the
organization is indulged into and what could be the ramifications of these activities on society at large.

CORPORATE GOVERNANCE
The processes and structures by which the business and affairs of the corporation are directed and managed in
order to enhance long term share holder value through enhancing corporate performance and accountability, whilst taking
into account the interests of other stakeholders1
The system by which business corporations are directed and controlled. The Corporate Governance structure
specifies the distribution of rights and responsibilities among different participants in the corporation, and spells out the
rules and procedures for making decisions on corporate affairs2
Therefore the essence of Corporate Governance is

Corporate Governance goes beyond mere statutory compliance.

It is about responsible corporate behavior in all facets of an organization and towards all stake holders

The three pillars of Governance are fairness, transparency and accountability

It includes all the structures and processes by which corporations are governed effectively

It is aimed at creating sustainable, long term value for the stake holders

GOOD GOVERNANCE: THE VALUE PROPOSITION

Good Governance Builds Brand Image

As consumers move up the value chain, they increasingly look for products backed by ethical companies and
advertising

CG Committee, Singapore Government

Organization for Economic Co-operation and Development

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

Corporate Governance: Corporate Accountability is Inevitable

Consumers are reluctant to associate with companies perceived as unethical

Critical in case of B2B

101

Good Governance Attracts the Best Talent

Other things being similar, aspiring employees prefer to work for companies with high standards of business
ethics

Good governance is at the top of Maslows pyramid

Good Governance Enhances Borrowing Ability

Lenders like to lend to ethical people

Risk perception determines lending rates

Good Governance Attracts Like Minded Business Partners

Virtuous cycle

Long term relationships mean strong bottom line benefits for all

Good Governance Integrates the Corporation Strongly with the Societies in Which it Operates

Perceived as socially responsible

Significant benefits in the long term

Good Governance is Reflected Directly in the Share Price and PE Multiple

For institutional investors and analysts, integrity and transparency are key determinants for valuation of
companies

Companies with good Governance command PE multiples in excess of the industry average
Take the example of the PE of Infosys (30x) and Wipro (30x) which is much more than rest of industry

average of ~ 18x.

More pronounced in bad times

BAD GOVERNANCE: THE VALUE DESTRUCTION PROPOSITION

The Power of the Stock Markets

The stock market is very quick to punish unethical behavior

The speed and magnitude of the financial loss can be staggering

Corporate Governance Laws Have become Extremely Stringent

Punishment for non-compliance is rigorous.

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MEASURING CSR

Figure 1
Simon Knox, professor of brand marketing at Cranfield School of Management in the UK, and Stan Maklan,
visiting fellow with the marketing faculty with the marketing faculty at Cranfield, developed the above framework to link
CSR to business performance.
Knox says most efforts to measure CR too often fall on the left side of the diagram-setting CSR objectives,
identifying primary stakeholders, scoping obligations and developing some measure of employee awareness and their
buy-in towards such programs. But to be really effective companies need to measure the outcomes on the right side of the
diagram -employee retention, consumer and community buy-in. The key is to measure actual stakeholder behavior, not just
reported attitudes. Some, companies are actually doing it through consumer analytics using data mining tools.

LEGISLATIONS TO REGULATE CSR

Sarbanes Oxley Act 2003

Section 906

CEO and CFO to certify all public financial reports : information fairly represents, in all material aspects, the
financial condition and results of operations

Criminal penalties

Section 302: CEO and CFO to Certify Quarterly & Annually

SEC report being filed has been reviewed : no untrue statements, no material facts omitted

Material weaknesses in internal controls & frauds involving senior managers have been disclosed to Audit
Committee & Auditors

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

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Section 404: CEO and CFO to State in the Annual Report

Management to establish and maintain an adequate internal control system over all aspects of financial
reporting

Management to self-assess at the end of the year the effectiveness of such controls

External Auditors to attest the above statements

Independent audit by SEC

Governance Ratings

India: ICRA (CGR 1-6)

US: S&P (CGS 1-10)

PROGRESS ON CORPORATE RESPONSIBILITY SINCE RIO

Not surprisingly, corporations continue to be one of the main forces underlying the globalization of
unsustainability. While some exceptional companies sincerely try to operate on principles of social and environmental
responsibility, the vast number of corporations operates simply to maximize profits and market shares, externalizing their
costs to the environment and communities.
Today, eight years after the Earth Summit when the proposed Code of Conduct for Transnational Corporations
was tabled, we should see the report card on the promise that was made: that corporations could be trusted to regulate
themselves without public oversight that they would voluntarily move towards just and sustainable practices if left alone.
The NGO Taskforce on Business and Industry (ToBI) was created with the specific mission of reminding the governments
of this promise and their own responsibility to ensure that such promises are kept.
Eight years later, during the General Assembly Special Session, we see neither the report card nor evidence that
TNCs have done much more than fine-tune their equipment and public relations. Meanwhile, in a church across the street
from the United Nations, presentations by local communities and indigenous people from around the world to the
International Peoples Tribunal on Human Rights and the Environment revealed a common underlying theme.
Corporations continue strip-mining the land and contaminating fresh water with mine tailings and cyanide, poisoning the
people who live there. Soldiers continue forcing indigenous peoples off their ancestral farms and homelands, which are
then plundered by companies feeding industrialized societys fossil-fuel addiction. In general, the evidence points to a
world in which corporations continue to place profits above human rights and environmental integrity, while governments
either look the other way or add to the problem.
Eight years after Rio, the corporate world has shown some progress on eco efficiency and in some cases a greater
awareness of environmental and social impacts. However, the record of abuses and the efforts by corporations to avoid
responsibility for their actions cannot be ignored any longer.

GOVERNMENTS ROLE
As to the governments which should hold these corporations accountable for their actions, we discover a deadly
silence. At the CSD Intercessional, CSD-5, and the UN General Assembly Special Session (UNGASS), the NGO
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Taskforce on Business and Industry mounted a continuous campaign to engage government delegates in a dialogue with
NGOs on the topic of corporate responsibility and accountability. The main question was: What is governments role in
ensuring that corporations do not harm human communities or the environment?
In our statement and report, Minding Our Business: The Role of Corporate Accountability in Sustainable
Development, we identified the problem of societys inability to adequately deal with those corporations which refuse to be
responsible, and pointed out the responsibility of government to address this problem. We gave three case studies
illustrating the problem: the tragedy of Union Carbide in Bhopal, of Royal Dutch Shell in Nigeria, of the
Freeport-McMoRan mining company in Irian Jaya. In public panels and in government briefings we continued to raise the
question of the need for governments to define their responsibilities to the public; we proposed the creation of a UN Sub
commission on Corporate Accountability at the CSD to explore these issues and identify solutions. In the so-called NGO
Dialogue with Government, Maria Elena Hurtado of Consumers International again raised the question of the Sub
commission, but there was no dialogue, not one single word from the government delegates who heard her speak.
While no one overtly recommends that corporations should have no regulations or oversight at all, that they
should not be answerable to the law, or that the current laws should not be enforced, the trend appears to be moving in this
direction and most governments at the UN give the impression of either being intimidated or seduced by the power and
influence of the corporate sector. For many delegates it is perhaps political suicide to criticize or suggest holding such
economic giants accountable. Should it be surprising that so many delegates avoided and essentially remained silent in
response to our questions?

SURRENDERING RESPONSIBILITY
Behind this silence lies a tragic fact: while corporations refuse to voluntarily give up their unsustainable practices,
governments are voluntarily giving up their national sovereignty to corporations.
This surrender by government of their responsibility to people and planet can be heard in the official chorus of
calls for more deregulation and free trade, in providing more corporate rights and "breaking the barriers" of communities
trying to protect themselves from what amounts to corporate colonialism.
While individual citizens remain accountable to the laws of their national governments, transnational corporations
are increasingly allowed to operate in a global realm above all laws. It should not be surprising that there was little
discussion of corporate accountability at the UN Special Session: instead of accountability, the trend is toward corporate
immunity. Governments should realize that this trend of giving up their responsibility also means giving up their
legitimacy.

WHERE SHOULD SOCIETY INVEST ITS RESOURCES?

When governments abdicate their responsibility to protect the people from destructive acts, as witnessed in the
current Multilateral Agreement on Investment (MAI), they create a political and moral vacuum. This is a process by which
governments, in the name of free trade and economic growth, surrender their responsibility to hold corporations
accountable for their actions. In this transfer of rights and responsibilities to the corporate realm, the state essentially bows
to corporate lawlessness.

Impact Factor (JCC): 4.9926

Index Copernicus Value (ICV): 3.0

Corporate Governance: Corporate Accountability is Inevitable

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This MAI now being discussed by the OECD governments and WTO partners currently promotes corporate rights
over human rights and the well-being of local communities. Receiving extremely little coverage by the media, the MAI has
been described as a plan to systematically turn the global economy over to a handful of dominant corporations. If allowed
to continue on its current course, the MAI will overrule the protests of the Gwichin, the Dineh, the Ogoni, the Innu, the
people of Bhopal and Guyana and other local communities as barriers to investment and trade. The communities that came
before the Peoples Tribunal will have no legal standing before the law of the market. When corporate protectionism in the
name of "free trade" is made law, the laws protecting our freedoms will be traded away.
This abdication of responsibility by government is a silent admission of governments willing role to diminish
their own legitimacy and right to govern. The people must not allow their citizenship to be reduced to passive
consumerism. When government refuses to lead, leadership must then come from below. The voice of civil society must be
clear and strong: people must take priority over corporations.

THE CAMPAIGN FOR CORPORATE ACCOUNTABILITY

The campaign to ensure that corporations are accountable to society is also a campaign to make sure governments
are accountable to their people. The people in turn, individual citizens and community organizations, the nongovernmental
bodies making up civil society, must have a clear understanding of our own responsibility to tell government and business
what we want and need from them. As citizens, we must make sure that government does indeed represent our health and
well-being; as consumers, we must make sure that business does indeed produce the goods and services that are for the
good of people and the environment, and that serve the greater interests of society.
If we do not act as responsible citizens and engaged members of our communities and the larger world, we cannot
expect government or corporations to automatically act in our best interests. Without the oversight of the people, the laws
of the land will become empty rituals, and government will degenerate to an administrative organ to sort out differences
among a small community of corporate giants. Participation in the further development of the NGO Taskforce on Business
and Industry is one type of action which concerned citizens and organizations can take. In the coming year, TOBI will
engage in dialogue with Taskforce members, as well as government and business officials on what is needed to ensure
responsibility and accountability within business and industry, government, and civil society. We all must follow a
personal moral code as well as obey the laws of the larger society; the question is: How can we improve our institutions as
well as our individual behavior so that they sustain rather than undermine our communities and environment? TOBI will
continue to push for a Sub commission on Corporate Accountability at the CSD; we will relentlessly raise questions based
on the TOBI "seven-step agenda;" and we will work to promote the inevitable dialogue, negotiations, commitments,
implementation and monitoring that need to take place.
In the coming months, citizens can also engaged in various types of actions and strategies to protest efforts to
increase corporate immunity, as is taking place through the MAI and WTO. Communities can join hands and unite in a
common global struggle to reinstate integrity in government and economy. The discussion over the MAI provides a
strategic point of focus for this struggle a priority which the Sustainable Societies Caucus at CSD has adopted as part of
its work in the next year. Actions can be focused at various levels, for example:

Individual Corporations: Organize or support public pressure on individual corporations known for socially
irresponsible practices. Actions can include shareholder initiatives, consumer boycotts, and litigation and media

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campaigns. Highlight how these specific corporations will gain from MAI rulings, in contrast to the losses to
communities and environment. Support public campaigns now in progress addressing the abuses of specific
corporations, such as Shell, Texaco, Freeport-McMoRan, and others.

Industry Lobbies: Help publicize the ways in which industries such as mining, oil, chemicals, agribusiness,
and others, are corrupting the democratic process through inappropriate financial influence of political
institutions. Support public initiatives calling for the elimination of destructive subsidies, industry tax breaks and
other forms of "corporate welfare." Draw special attention to politicians who have allowed themselves to be
corrupted by corporate influences; applaud those with the integrity and courage to resist.

National and Local Government Representatives: Continually question government spokespersons, local and
national, as to where their priorities lie, specifically with regard to protecting the public interest in the MAI and
WTO proceedings. At every public hearing and gathering, challenge those who claim to be representatives of the
people to define and act on their responsibilities to protect the health and well-being of citizens, their communities
and environment -- or publicly admit that they put corporations before people.

THE UNITED NATIONS

In particular, the Commission on Sustainable Development (CSD), in its annual meetings to assess progress on
the Earth Summit agenda, should be one of the main places where the governments of the world should discuss and agree
upon their responsibility to ensure corporate accountability. The proposed Sub commission on Corporate Accountability
can provide an ongoing process through which governments define and act on their responsibility to make sure that
corporations are accountable to society. This process of defining the appropriate roles and responsibilities of government
and business should include the active participation of NGOs and other members of civil society. After all, government and
business are supposed to serve civil society, not the other way around; somewhere this fact has been forgotten.

CONCLUSIONS
Business being part of society needs of society have a direct bearing on business organizations. Giving quality
goods and services at reasonable price at the right time and place paves strong roots for organizations brand image.
Stability, profitability and growth of business organizations are always gifted to organizations who give due care to
societys needs. Tata for instance is a shining example. Setting up TISCO and TELCO in backward place like Jamshedpur
and the efforts made to convert it into a township with hospitals and institutions undoubtedly earned the goodwill of the
society for the promoters. Ethics, values and spirituality today are an integral part of course curriculum of good schools all
over the world. Public sector in general and Nav Ratnas in particular follow social responsibility principles and ethics.
With goods and services of international acceptable standards they have, on their agenda, programmes like literacy
campaigning, rural development, pollution control etc. According to the great son of India - Vivekanandas words India
needs to combine western world efficiency with Indian spiritual world. Let the corporate community of India give
credibility to our motherland by being accountable to societys needs and enjoy the goodwill of Indian customers for ever.
Let the slogan serve and survive be a guiding principle for all the corporate activity in Indian society.

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