Chapter 1: Corporate governance

The tug of war between individual freedom and institutional power is a continuing theme of
history. Early on, the focus was on the church; more recently, it is on the civil state. Today, the
debate is about making corporate power compatible with the needs of a democratic society. The
modern corporation has not only created untold wealth and given individuals the opportunity to
express their genius and develop their talents but also has imposed costs on individuals and
society. How to liberalise individual energy without inicting unacceptable costs on individuals
and society has emerged as a key challenge.

Corporate governance lies at the heart of this challenge. It deals with the systems, rules, and
processes by which corporate activity is directed. Narrow denitions focus on the relationships
between corporate managers, a companys board of directors, and its shareholders. Broader
descriptions encompass the relationship of the corporation to all of its stakeholders and society,
and cover the sets of laws, regulations, listing rules, and voluntary private-sector practices that
enable corporations to attract capital, perform efficiently, generate prot, and meet both legal
obligations and general societal expectations. The wide variety of denitions and descriptions
that have been advanced over the years also reect their origin: lawyers tend to focus on the
contractual and duciary aspects of the governance function; nance scholars and economists
think about decision-making objectives, the potential for conict of interest, and the alignment of
incentives, while management consultants tend to adopt a more task-oriented or behavioral
perspective. Complicating matters, different denitions also reect two fundamentally different
views about a corporations purpose and responsibilities. Often referred to as the shareholder
versus stakeholder perspectives, they dene a debate about whether managers should run a
corporation primarily or solely in the interests of its legal ownersthe shareholders (the
shareholder perspective)or whether they should actively concern themselves with the needs of
other constituencies (the stakeholder perspective).

This question is answered differently in different parts of the world. In Continental Europe and
Asia, for example, managers and boards are expected to concern themselves with the interests of
employees and the other stakeholders, such as suppliers, creditors, tax authorities, and the
communities in which they operate. Reecting this perspective, the Centre of European Policy
Studies (CEPS) denes corporate governance as the whole system of rights, processes and
controls established internally and externally over the management of a business entity with the
objective of protecting the interests of all stakeholders.

In contrast, the Anglo-American approach to corporate governance emphasizes the primacy of

ownership and property rights and is primarily focused on creating shareholder value. In this
view, employees, suppliers, and other creditors have rights in the form of contractual claims on
the company, but as owners with property rights, shareholders come rst: Corporate governance
is the system by which companies are directed and controlled. Boards of directors are
responsible for the governance of their companies. The shareholders role in governance is to

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appoint the directors and the auditors and to satisfy themselves that an appropriate governance
structure is in place.

Perhaps the broadest, and most neutral, denition is provided by the Organization for Economic
Cooperation and Development (OECD), an international organization that brings together the
governments of countries committed to democracy and the market economy to support
sustainable economic growth, boost employment, raise living standards, maintain nancial
stability, assist other countries economic development, and contribute to growth in world trade.

Corporate governance is the system by which business corporations are directed and controlled.
The corporate governance structure species the distribution of rights and responsibilities among
different participants in the corporation, such as, the board, managers, shareholders and other
stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.
By doing this, it also provides the structure through which the company objectives are set, and
the means of attaining those objectives and monitoring performance.

The Evolution of governance

Early on in antiquity, the hard labour of subsistence living was transformed gradually by the
invention of tools-the beginnings of technology. With the development of new resources of
energy-first the steam engine and then electricity and the internal combustion engine-came
machines that dramatically increased productivity. In the past 50 yrs technological advances in
practically every field have exploded, nearly all traceable to the invention of the transistor. With
the subsequent development of digital technology, we have seen revolutions in electronics,
communications, transportation, medicine, and all forms of manufacturing, leveraged by an
exponential increase in our ability to gather and disseminate information. A requisite driver of
these evolutionary forces has been the advent of universal education. The breakthrough that
made education more readily available to the masses was the invention of movable type by
Gutenberg in 1438, and the evolution of printing that followed ushered in growing literacy that
became the foundation for an educated populace. We recognize the impact of this innovation in
the axiom, we learn to read so that we can read to learn.

As widespread literacy spawned education that has driven technology, there has been a
comparable evolution in how we govern our affairs. From the outset, humankind has sought to
discover the best ways to make decisions for its groups-to find ways to govern so as to resolve
disputes, control destructive behavior, and achieve goals that advance the mutual welfare of the
members of the society. The effectiveness of a given approach to governance has determined, to
a large extent, the survival and prosperity of that society. In the beginning, groups of people were
small, simple, and located in one place. Their governance processes could be equally simple.
Over time, these groups have become large, complex, far- reaching organizations. Tribal and

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feudal fiefdoms have evolved into nation-states. Small, local proprietorships have evolved into
large corporations. Their decision making processes likewise have matured to reflect the more
complex governance issues.

Among the seminal breakthroughs in this journey from simplicity to complexity in governance
were the social revolutions of the eighteenth and nineteenth centuries- particularly the American
and French revolutions and their accompanying periods of enlightment. Prior to that time, as
societies grew, they became progressively more stratified, with smaller ruling classes
accumulating greater wealth generated by the labours of the subservient masses. Rich nations
became ever more powerful and, by force, colonized weaker nations, particularly those endowed
with an abundance of natural resources. For centuries, governance was exercised by a privileged
few who gained power over the many. The powerful ruled until they were overthrown by a revolt
from within or defeated by a conqueror from outside. However, the nature of the society seldom
changed; it was simply a case of one monarchy or dictatorship replacing another. Some were
competent and benevolent, and the people benefited. More typically, there was incompetence,
corruption, and oppression of the citizenry.

The prevailing system of governance resulted from the actions of individuals, not from the
evolution of legal principles. As individuals gained power, however, they increasingly ruled by
oppressive force, often creating a backlash of revolution. The social revolutions that followed
were fueled by a hunger for individual freedom and by a sense of moral imperative of how
people should treat one another. Out of these revolutions grew the modern concept of
democracy- a rule of the people, by the people, and for the people- a concept implied in the
Constitution of the United States and articulated in Lincolns Gettysburg Address.

In the 19th century, state corporation laws enhanced the rights of corporate boards to govern
without unanimous consent of shareholders in exchange for statutory benefits like appraisal
rights, to make corporate governance more efficient. Since that time, and because most large
publicly traded corporations in the US are incorporated under corporate administration friendly
Delaware law, and because the US's wealth has been increasingly securitized into various
corporate entities and institutions, the rights of individual owners and shareholders have become
increasingly derivative and dissipated. The concerns of shareholders over administration pay and
stock losses periodically has led to more frequent calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars
such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing
role of the modern corporation in society. Berle and Means' monograph "The Modern
Corporation and Private Property" (1932, Macmillan) continues to have a profound influence on
the conception of corporate governance in scholarly debates today.

Since the late 1970s, corporate governance has been the subject of significant debate in the U.S.
and around the globe. Bold, broad efforts to reform corporate governance have been driven, in

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part, by the needs and desires of shareowners to exercise their rights of corporate ownership and
to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate
directors duties have expanded greatly beyond their traditional legal responsibility of duty of
loyalty to the corporation and its shareowners

Definition
The concept of corporate governance is poorly defined because it covers various economics
aspects. As a result of this different people have come up with different definitions on corporate
governance. It is hard to point on any one definition as the ultimate definition on corporate
governance. So the best way to define the concept is to provide a list of the definitions given by
some noteworthy people.

1. According to Sir Adrian Cadbury

"Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance framework is there
to encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society

2. According to Mathiesen (2002)

Corporate Governance is a field in economics that investigates how to secure efficient
management of corporations by the use of incentive mechanisms, such as contracts,
organizational designs and legislation. This is often limited to the question of improving
financial performance, for example, how the corporate owners can secure/motivate that the
corporate managers will deliver a competitive rate of return.

According to J. Wolfensohn, president of the World Bank, (in 1999)

Corporate governance is about promoting corporate fairness, transparency and accountability

5. Financial Times [1997]

"Corporate governance can be defined narrowly as the relationship of a company to its
shareholders or, more broadly, as its relationship to society

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7. According to OECD (Organization for Economic Co-operation and
Development)
Corporate governance is 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, such as, the board, managers, shareholders and other
stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.
By doing this, it also provides the structure through which the company objectives are set, and
the means of attaining those objectives and monitoring performance.

The definition given by OECD means that corporate governance is an arrangement which
manages the corporations. The configuration of corporate governance defines the duties and
obligations of all the members of the corporation, gives the structure of setting the objectives and
the method of attaining the set of objectives.

Thus we conclude from all the above stated definitions that corporate governance is a mode by
which the management is motivated to work for the betterment of the real owners of the
corporation i.e. the shareholders.

In other words corporate governance can be defined as the relationship of a company to its
shareholders or more broadly the relationship of the company to the society.

Corporate governance thus refers to the manner in which a company is managed and states the
rules, laws and regulation that affect the management of the firm. It also includes laws relating
to the formation of the firm, establishment of the firm and the structure of the firm. The most
important concern of corporate governance is to ensure that the managers and directors act in the
interest of the firm and for the shareholders.

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 Chapter 2: G-Cube Model of Corporate Governance

The model measures six parameters of Corporate Governance accounting quality, value creation,
fair policies & actions, communication, effective governing and reliability.

For accounting quality the managers look at all or any of the following variables: company
accounting policies, disclosure standards, proactive adoption of accounting policy improvements,
internal audit and control mechanisms for addressing auditors queries. The top companies were
ranked accordingly.

For value creation focus business strategy (driven by value creation focus), effective use of cash
surplus, capital structure, usage of IPO funds, shareholder friendliness are among the key
variables.

For Fair policies and actions the managers take the cue from fair treatment of minority
shareholders, transparency of trades by top management and ethical behavior with customers,
suppliers, tax authorities and government. Similar variables were used for ranking companies
based on other parameters.

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 Chapter 3: Historical Perspective of Corporate Governance
The seeds of modern corporate governance were probably sown by the Watergate scandal in the
United States. The global movement for better corporate governance progressed in fits and starts
from the mid-1980s up to 1997. There were the odd country-level initiatives such as the
Cadbury Committee Report in the United Kingdom (1992) or the recommendations of the
National Association of Corporate Directors of the US (1995). It would be fair to say, however,
that such initiatives were few and far between. And while there were the occasional international
conferences on the desirability of good corporate governance, most companies both global and
Indian knew little of what the phrase meant, and cared even less for its implications. More
recently, the first major stimulus for corporate governance reforms came after the South-East and
East Asian crisis of 1997-98. This was no classical Latin American debt crisis. Here were
fiscally responsible, healthy, rapidly growing, export-driven economies going into crippling
financial crises. Gradually, governments, multilateral institutions, banks as well as companies
began to understand that the devil lay in the institutional, microeconomic details the nitty-gritty
of transactions between companies, banks, financial institutions and capital markets; the design
of corporate laws, bankruptcy procedures and practices; the structure of ownership and crony
capitalism; sharp stock market practices; poor boards of directors showing scant regard to
fiduciary responsibility; poor disclosures and transparency; and inadequate accounting and
auditing standards.

Suddenly, corporate governance came out of dusty academic closets and moved centre stage.
Barring Japan and possibly Indonesia, countries in Asia recovered remarkably fast. By the year
2001, Thailand, Malaysia and Korea were on the upswing and on course to regain their historical
growth rates. With such rapid recovery, corporate governance issues were in the danger of being
relegated to the back stage once again. There were projects to be executed, under-value assets to
be bought, and profits to be made. International investors were again showing bullishness. In
such a milieu, there seemed no urgent need to impose concepts like better accounting practices,
greater disclosure, and independent board oversight. Corporate governance once again settled
into a phase of extended inactivity.

Indias experience was somewhat different from this Asian scheme of things. First, unlike South-
East and East. Asia, the corporate governance movement did not occur due to a national or
region-wide macro economic and financial collapse. Indeed, the Asian crisis barely touched
India.

Secondly, unlike other Asian countries, the initial drive for better corporate governance and
disclosure, perhaps as a result of the 1992 stock market scam, and the onset of international
competition consequent on the liberalization of economy that began in 1990, came from all-India
industry and business associations, and in the Department of Company Affairs.

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Thirdly, it is fair to say that, since April 2001, listed companies in India are required to follow
some of the most stringent guidelines for corporate governance throughout Asia and which rank
among some of the best in the world.

Even so, there is scope for improvement. For one, while India may have excellent rules and
regulations, regulatory authorities are inadequately staffed and lack sufficient number of skilled
people. This has led to less than credible enforcement. Delays in courts compound this problem.
For another, India has had its fair share of corporate scams and stock market scandals that has
shaken investor confidence. Much can be done to improve the situation.

Just as the global corporate governance movement was going into a bit of hibernation, there
came the Enron debacle of 2001, followed by other scandals involving large US companies such
as WorldCom, Qwest, Global Crossing and the exposure of lack of auditing that eventually led to
the collapse of Andersen. After having shaken the foundations of the business world, that too in
the stronghold of capitalism, these scandals have triggered another more vigorous phase of
reforms in corporate governance, accounting practices and disclosures this time more
comprehensively than ever before.

As a US based expert recently put it, Enron and WorldCom have done more to further the
cause of corporate transparency and governance in less than one year, than what activists could
do in the last twenty.

This is truly so. In June 2002, less than a year from the date when Enron filed for bankruptcy,
the US Congress introduced in record time the Sarbanes-Oxley Bill. This piece of legislation
(popularly called SOX) brought with it fundamental changes in virtually every area of corporate
governance and particularly in auditor independence, conflicts of interest, corporate
responsibility and enhanced financial disclosures. The SOX Act was signed into law by the US
President on 30 July 2002. While the US Securities and Exchanges Commission (SEC) is yet to
formalize most of the rules under various provisions of the Act, and despite there being rumbles
of protest in the corporate world against some of the more draconian measures in the new law, it
is fair to predict that the SOX Act will do more to change the contours of board structure,
auditing, financial reporting and corporate disclosure than any other previous law in US history.

Although India has been fortunate in not having to go through the pains of massive corporate
failures such as Enron and WorldCom, it has not been found wanting in its desire to further
improve corporate governance standards. On 21 August 2002, the Department of Company
Affairs (DCA) under the Ministry of Finance and Company Affairs appointed this Committee to
examine various corporate governance issues.

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 Recent Development in Corporate Governance
The Department of Company Affairs, in May 2000, invited a group of leading industrialists,
professionals and academics to study and recommend measures to enhance corporate excellence
in India. The Study Group in turn set up a Task Force, which examined the subject of Corporate
Excellence through sound corporate governance and submitted its report in Nov. 2000. The task
force in its recommendations identified two classifications namely essential and desirable with
the former to be introduced immediately by legislation and the latter to be left to the discretion of
companies and their shareholders. Some of the recommendations of the task force include:

Greater role and influence for nonexecutive independent directors

Stringent punishment for executive directors for failing to comply with listing and other
requirements
Limitation on the nature and number of directorship of managing and whole-time
directors
Proper disclosure to the shareholders and investing community
Interested shareholders to abstain from voting on specified matters
More meaningful and transparent accounting and reporting
Tougher listing and compliance regimen through a centralized national listing authority
Highest and toughest standards of Corporate Governance for listed companies
A code of public behavior for public sector units
Setting up of a centre for Corporate Excellence

Recently, the Government has announced the proposal for setting up the Centre for Corporate
Excellence under the aegis of the Department of Company Affairs as an independent and
autonomous body as recommended by the study group. The centre would undertake research on
Corporate Governance; provide a scheme by which companies could rate themselves in terms of
their corporate governance performance; promote corporate governance through certifying
companies who practice acceptable standards of corporate governance and by instituting annual
award for outstanding performance in this area. Governments initiative in promoting corporate
excellence in the country by setting up such a center is indeed a very important step in the right
direction. It is likely to spread greater awareness among the corporate sector regarding matters
relating to good corporate governance motivating them to seek accreditation from this body.
Cumulative effect of the companies achieving levels of corporate excellence would undoubtedly
be visible in the form of much enhanced competitive strength of our country in the global market
for goods and services.

A large number of public sector companies both in the banking industry and financial sector have
on their Boards representative of the Government / Reserve Bank of India. It is for debate
whether functionaries of the Government should sit on their boards. While there is no easy or
straightforward answer to this question, at some distant future it is hoped, all the Directors would
be truly independent. The subject is no doubt complex and can be looked upon from various
angles. Frauds in the banking system are also increasing but computer Management Information

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Systems should be able to detect them early and the Board must have the will to deal with such
mischief-maker in an exemplary manner. Zero tolerance should be the goal for frauds in the
banking system. It is the leader at the helm of affairs who makes a difference. A close
coordination exists through High Level Co-ordination Committee (HLCC) between RBI, SEBI,
IRDA and the Secretary Finance, Government of India who has a formal structure for reviewing
the affairs which impact the whole financial system. Although the US and UK models are
different, this model has served us well and we seem to be comfortable to continue with the same
for some more time to come.

There is an entire subject called whistle blowing and there is enormous literature on this
subject when to blow the whistle, who should blow the whistle and where the whistle should be
heard. These are the questions for which one needs to find the answers between spate of
anonymous letters to which any one working in public sector is used to and honest officials are
harassed sometimes on one side and the damaging investigative audit reports and doctored
balance sheets on the other side. Somewhere in between lies the governance and ethics; and
standards expected to be set up by the virtuous men appointed for heading these institutions. In
such organizations the shareholders and the other stakeholders derive full value. It is myopic,
bordering on foolishness, to look for astronomical return by the shareholders, who would allow
the boards to indulge in unethical practices like market rigging, insider trading, speculation and
host of other irregular practices for the sole purpose of making huge profits. One cannot argue
that the shareholders value is enhanced by higher profits and dividends are distributed by the
board acting merely as an agent of the shareholder who becomes the principal. Here lies the test
of governance of the board of directors walking the well defined, honest and straight path in
conducting the affairs in the required atmosphere of transparency seen and perceived by all the
stakeholders, the markets and the regulators. Then only can one confidently state that corporate
governance has taken firm roots in this country.

Chapter 4: Scope & Importance of Corporate Governance

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Corporate governance is all about ethics in business. It is about transparency, openness and fair
play in all aspects of business operations, the key aspects of corporate governance include:

Accountability of Board of Directors & their constituent responsibilities to the ultimate

owners- the shareholders
Transparency, i.e. right to information, timeliness and integrity of the information
produced.
Clarity in responsibilities to enhance accountability.
Quality and competence of Directors and their track record.
Checks & balances in the process of governance.
Adherence to the rules, laws and spirit of codes.

An active and involved board consisting of professional and truly independent directors plays an
important role in creating trust between a company and its investors and is the best guarantor of
good corporate governance.

Good corporate governance is integral to the very existence of a company. It is important for the
following reasons:

Corporate governance ensures that a properly structured Board, capable of taking

independent and objective decisions is at the helm of affairs of the company. This lays
down the frame work for creating long term trust between the company and external
providers of the capital.
It improves strategic thinking at the top by inducting independent directors who bring a
wealth of experience and a host of new ideas.
It rationalizes the management and monitoring of risk that a corporation faces globally.
Corporate governance emphasizes the adoption of transparent procedures and practices
by the Board, thereby ensuring integrity in financial reports.
It limits the liability of top management and directors, by carefully articulating the
decision making process.
It inspires and strengthens investors confidence by ensuring that there are adequate
number of non-executive and independent directors on the Board, to look after the
interests and well being of all the stakeholders.
Corporate governance helps provide a degree of confidence that is necessary for the
proper functioning of a market economy, as it contemplates adherence to ethical business
standards.
Finally, globalization of the market place had ushered in an era wherein the quality of
corporate governance has become a crucial determinant of survival of corporate.
Compatibility of corporate governance practices with global standards has also become
an important constituent of corporate success. Thus, good corporate governance is a
necessary pre-requisite for the success of Indian corporate.

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 Principles of corporate governance
For good corporate governance key principles include honesty, trust and integrity, openness,
performance orientation, responsibility and accountability, mutual respect and commitment to the
organization.

However, it is important for directors and management to develop a model of governance that
aligns the value of the corporate participants and periodically evaluate this model for its
effectiveness. The senior executive should at all times conduct themselves honestly and ethically,
especially matters in concerning actual or apparent conflict of interest.

Commonly accepted principles of corporate governance:

1 Rights an equitable treatment of share holders:

Organization should respect the rights of share holders and help the shareholders to
exercise those rights. This can be done by effectively communicating information that is
understandable and which encourages shareholders to participate in general meetings.

2 Interest of other stakeholders:

Organizations should realize that they have legal and other obligations to all bonafied
stakeholders.

3 Role and responsibility of the board:

The board has to deal with various business issues. Hence it will have to possess
necessary skills n understandings and also have the ability to review and critically
analyze management performance

4 Integrity & ethical behavior

Organization should develop a code of conduct for their directors and executives. This
promotes ethical and responsible decision making.

5 Disclosure & transparency

The roles n responsibilities of board and management should be made publicly known by
the organizations. It provides shareholders with a level of accountability. Disclosure of
material matters concerning the organization should timely n also balanced so that all
investors have access to clear n factual information.

Chapter 5: Steps Implemented By Companies Act With Regard To

Corporate Governance
The Ministry of Company Affairs appointed various committees on the subject of corporate
governance which lead to the amendment of the companies Act in 2000. These amendments

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aimed at increasing transparency and accountabilities of the Board of Directors in the
management of the company, thereby ensuring good corporate governance.

Corporate Governance in India-A Background

The history of the development of Indian corporate laws has been marked by interesting
contrasts. At independence, India inherited one of the worlds poorest economies but one which
had a factory sector accounting for a tenth of the national product; four functioning stock
markets (predating the Tokyo Stock Exchange) with clearly defined rules governing listing,
trading and settlements; a well-developed equity culture if only among the urban rich; and a
banking system replete with well-developed lending norms and recovery procedures.24 In terms
of corporate laws and financial system, therefore, India emerged far better endowed than most
other colonies. The 1956 Companies Act as well as other laws governing the functioning of joint-
stock companies and protecting the investors rights built on this foundation.

The beginning of corporate developments in India were marked by the managing agency system
that contributed to the birth of dispersed equity ownership but also gave rise to the practice of
management enjoying control rights disproportionately greater than their stock ownership. The
turn towards socialism in the decades after independence marked by the 1951 Industries
(Development and Regulation) Act as well as the 1956 Industrial Policy Resolution put in place a
regime and culture of licensing, protection and widespread red-tape that bred corruption and
stilted the growth of the corporate sector. The situation grew from bad to worse in the following
decades and corruption, nepotism and inefficiency became the hallmarks of the Indian corporate
sector. Exorbitant tax rates encouraged creative accounting practices and complicated emolument
structures to beat the system.

In the absence of a developed stock market, the three all-India development finance institutions
(DFIs) the Industrial Finance Corporation of India, the Industrial Development Bank of India
and the Industrial Credit and Investment Corporation of India together with the state financial
corporations became the main providers of long-term credit to companies. Along with the
government owned mutual fund, the Unit Trust of India, they also held large blocks of shares in
the companies they lent to and invariably had representations in their boards. In this respect, the
corporate governance system resembled the bank-based German model where these institutions
could have played a big role in keeping their clients on the right track. Unfortunately, they were
themselves evaluated on the quantity rather than quality of their lending and thus had little
incentive for either proper credit appraisal or effective follow-up and monitoring. Their nominee
directors routinely served as rubber-stamps of the management of the day. With their support,
promoters of businesses in India could actually enjoy managerial control with very little equity
investment of their own. Borrowers therefore routinely recouped their investment in a short
period and then had little incentive to either repay the loans or run the business. Frequently they
bled the company with impunity, siphoning off funds with the DFI nominee directors mute
spectators in their boards.

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This sordid but increasingly familiar process usually continued till the companys net worth was
completely eroded. This stage would come after the company has defaulted on its loan
obligations for a while, but this would be the stage where Indias bankruptcy reorganization
system driven by the 1985 Sick Industrial Companies Act (SICA) would consider it sick and
refer it to the Board for Industrial and Financial Reconstruction (BIFR). As soon as a company is
registered with the BIFR it wins immediate protection from the creditors claims for at least four
years. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision,
after which period the delay has roughly doubled. Very few companies have emerged
successfully from the BIFR and even for those that needed to be liquidated, the legal process
takes over 10 years on average, by which time the assets of the company are practically
worthless. Protection of creditors rights has therefore existed only on paper in India. Given this
situation, it is hardly surprising that banks, flush with depositors funds routinely decide to lend
only to blue chip companies and park their funds in government securities.

Financial disclosure norms in India have traditionally been superior to most Asian countries
though fell short of those in the USA and other advanced countries. Noncompliance with
disclosure norms and even the failure of auditors reports to conform to the law attract nominal
fines with hardly any punitive action. The Institute of Chartered Accountants in India has not
been known to take action against erring auditors.

While the Companies Act provides clear instructions for maintaining and updating share
registers, in reality minority shareholders have often suffered from irregularities in share
transfers and registrations deliberate or unintentional. Sometimes non-voting preferential
shares have been used by promoters to channel funds and deprive minority shareholders of their
dues. Minority shareholders have sometimes been defrauded by the management undertaking
clandestine side deals with the acquirers in the relatively scarce event of corporate takeovers and
mergers.

Boards of directors have been largely ineffective in India in monitoring the actions of
management. They are routinely packed with friends and allies of the promoters and managers,
in flagrant violation of the spirit of corporate law. The nominee directors from the DFIs, who
could and should have played a particularly important role, have usually been incompetent or
unwilling to step up to the act. Consequently, the boards of directors have largely functioned as
rubber stamps of the management.

For most of the post-Independence era the Indian equity markets were not liquid or sophisticated
enough to exert effective control over the companies. Listing requirements of exchanges
enforced some transparency, but non-compliance was neither rare nor acted upon. All in all
therefore, minority shareholders and creditors in India remained effectively unprotected in spite
of a plethora of laws in the books.

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 Parties to Corporate Governance
Parties involved in corporate governance include the governing or regulatory body (e.g. the
Securities and Exchange Commission in the United States), the Chief Executive Officer, the
board of directors, management and shareholders. Other stakeholders who take part include
suppliers, employees, creditors, customers and the community at large.

In corporations, the principal (shareholder) delegates decision rights to the agent (manager) to act
in the principal's best interests. This separation of ownership from control implies a loss of
effective control by shareholders over managerial decisions. Partly as a result of this separation
between the main two parties, a system of corporate governance controls is implemented to assist
in aligning the incentives of managers with those of shareholders, in order to limit the self-
satisfying opportunities for managers. With the significant increase in equity holdings of
institutional investors, there has been an opportunity for a reversal of the separation of ownership
and control problems because ownership is not so diffuse.

A board of directors often plays a key role in corporate governance. It is their responsibility to
endorse the organizations strategy, develop directional policy, appoint, supervise and remunerate
senior executives and to ensure accountability of the organization to its owners and authorities.

All parties to corporate governance have an interest, whether direct or indirect, in the effective
performance of the organization. Directors, workers and management receive salaries, benefits
and reputation; whilst shareholders receive capital return. Customers receive goods and services;
suppliers receive compensation for their goods or services. In return these individuals provide
value in the form of natural, human, social and other forms of capital.

A key factor in an individual's decision to participate in an organization (e.g. through providing

financial capital or expertise or labor) is trust that they will receive a fair share of the
organizational returns. If some parties are receiving more than their fair return (e.g. exorbitant
executive remuneration), then participants may choose to not continue participating...potentially
leading to organizational collapse (e.g. shareholders withdrawing their capital). Corporate
governance is the key mechanism through which this trust is maintained across all stakeholders.

Chapter 6: Factors Influencing Corporate Governance

1. The ownership structure

The structure of ownership of a company determines, to a considerable extent, how a

Corporation is managed and controlled. The ownership structure can be dispersed among
individual and institutional shareholders as in the US and UK or can be concentrated in the hands

15
of a few large shareholders as in Germany and Japan. But the pattern of shareholding is not as
simple as the above statement seeks to convey. The pattern varies the across the globe.

Our corporate sector is characterized by the co-existence of state owned, private and
multinational Enterprises. The shares of these enterprises (except those belonging to a public
sector) are held by institutional as well as small investors. Specifically, the shares are held by

The term-lending institutions

Institutional investors, comprising government-owned mutual funds, Unit Trust of India
and the government owned insurance corporations
Corporate bodies
Directors and their relatives and
Foreign investors. Apart from these block holdings, there is a sizable equity holding by
small

2. The structure of company boards

Along with the structure of ownership, the structure of company boards has considerable
influence on the way the companies are managed and controlled. The board of directors is
responsible for establishing corporate objectives, developing broad policies and selecting top-
level executives to carry out those objectives and policies.

3. The financial structure

Along with the notion that the structure of ownership matters in corporate governance is the
notion that the financial structure of the company, that is proportion between debt and equity, has
implications for the quality of governance.

4. The institutional environment

The legal, regulatory, and political environment within which a company operates determines in
large measure the quality of corporate governance. In fact, corporate governance mechanisms are
economic and legal institutions and often the outcome of political decisions. For example, the
extent to which shareholders can control the management depends on their voting right as
defined in the Company Law, the extent to which creditors will be able to exercise financial
claims on a bankrupt unit will depend on bankruptcy laws and procedures etc.

Chapter 7: Recent Corporate Governance Failures

The creation of corporate regulation is often linked to perceived failures of corporations and their
management to behave in the way society expects them to. Corporate governance is not an
exception to this trend, and, as with accounting, different countries may well experience
difficulties at different times. However, the wave of corporate scandals, mostly in the USA, at the

16
turn of the century has been marked not only by the number of cases but also by the effect they
have had on investor confidence and market values worldwide.

The long-term view is something of a rarity in many companies. A critical factor in many
corporate failures was:

Poorly designed rewards package

Including excessive use of share options (that distorted executive behaviour towards the
short term)
The use of stock options, or rewards linked to short-term share price performance (led to
Aggressive earnings management to achieve target share prices)
Trading did not deliver the earnings targets, aggressive or even fraudulent accounting
tended to occur. This was very apparent in the cases of Ahold, Enron, WorldCom and
Xerox (IFAC, 2003).

Some of the better known cases of financial irregularities are summarized in following table.

Company Country What went wrong

Ahold NL earnings overstated

Enron USA inflated earnings, hid debt in SPEs

Parmalat Italy false transactions recorded

Tyco USA looting by CEO, improper share deals, evidence of tampering and
falsifying business records

WorldCom USA expenses booked as capital expenditure

Xerox USA accelerated revenue recognition

In terms of corporate governance issues, Ahold, Enron and WorldCom all suffered from
Questionable ethics
Behaviour at the top
Aggressive earnings management
Weak internal control
Risk management
Shortcomings in accounting and reporting

Corporate governance failure at Wal-Mart

17
It has co-filed a shareholder proposal over concerns that Wal-Mart Stores Inc, the US
supermarket group, is failing to comply with its own governance standards. Karina Litvack, head
of governance and sustainable investment.

Despite strong policies on paper, Wal-Mart has struggled to implement its standards
across its US business.
'Weaknesses in internal controls have eroded the company's reputation as an attractive
employer and are adding fuel to the fires of Wal-Mart's critics.
Its failure to deliver on these policy commitments is inhibiting Wal-Mart's ability to
expand into new domestic markets.
Over 'the past several years', it has become increasingly concerned by signs of failure in
internal controls that have led to government investigations and class action lawsuits by
employees.
Allegations include requiring employees to 'work off the clock' -- during breaks and after
shifts -- systematic discrimination against women, and alleged questionable tactics to
prevent workers from voting for union representation.
It got off to a promising start in 2005 with expectations of a dialogue with the
independent directors on the audit committee. But when this simply withered on the vine,
Wal-mart had little choice but to bring concerns about internal controls, labour violations
and the erosion of the company's reputation to fellow shareholders.
Company was not interested in engaging in a productive discussion about how it builds
and supports a compliance culture and, as a result, they have joined an international
group of large filers led by the New York City Employees' Retirement System to file a
shareholder proposal.

Corporate Governance failure at Satyam

It is one of Corporate India's worst unfolding chapters. What could be the reason behind such a
huge collapse? The top level management failed to estimate the intensity of the gangrene in the
organization. Questions also arise on the role of the auditors, and how such a magnitude of
financial fraud could have gone unnoticed. Corporate governance is a field which constantly
investigates how to secure and motivate efficient management of corporations. It has began as a
corporate governance issue back in December has now turned into a major financial scandal for
the ages in India. The shares of Satyam Computer Services has plummeted more than 90% in
trading at the NYSE today, a stark reminder that investors must always cover their backs or else
get racked even by the big names in the industry. NYSE today halted trading in Satyam
Computer at its bourses in the US as well as in Europe after the Chairman disclosed financial
bungling at the Indian IT major.

A business will always have two sides, its not necessary to gain profits every time, but to sustain
in the market the integrity is vital. Every day in some or the other place there is a merger or an
acquisition happening, but due to the projected image the co-players in the market are dropping
out their plans of taking over Satyam.

18
Undoubtedly there will be intense focus directed at the other Indian IT Services companies as
well. The Satyam corporate governance failure may also make its competitors bolder in terms of
acquiring market share created by its fallout provided the industry can regain the trust of the
same investors that Satyam has deceived.

From this necessarily brief review of the evidence, and particularly of the sources of failure in
financial firms, draw some tentative conclusions. It is important to recognize, however, the
evidence base for firm recommendations on corporate governance in financial institutions is
thinner than one would like, and certainly not robust enough to offer a standardized set of
recommendations valid at all times and in all places.

Principal conclusions are:

First, that people are more important than processes. Many of the failed firms, or near failed
firms which we have encountered, had Boards with the prescribed mix of executives and non-
executives, with socially acceptable levels of diversity, with directors appointed through
impeccably independent processes, yet where the individuals concerned were either not skilled
enough for, or not temperamentally suited to, the challenge role that came to be required when
the business ran into difficulty.

Secondly, and in spite of first conclusion, there are some good practice processes worth having.
Properly constituted audit committees, and Board risk committees can play an important role, as
long as they are prepared to listen carefully to sources of advice from outside the firm.

Third and this is a foundation stone of the FSA's approach, a regulatory regime built on senior
management responsibilities is absolutely essential. In some of the cases we have wrestled with,
senior management did not consider themselves to be responsible for the control environment
and indeed, in the old pre FSA regime, were able successfully to claim that they were not
responsible even if the business failed. So our regulation is built on a carefully articulated set of
responsibilities up and down the business. It is important that they are not unrealistic. We do not
expect the CEO to check in the bottom drawers of each of his traders for un-booked deal tickets.
But we do expect the CEO to ensure that there is a risk management structure and a control
framework throughout the business which ought to identify aberrant behaviour, or at least
prevent it going on unchecked for any length of time.

One consequence of this senior management regime, fourth point, is that regulators must focus
attention on the top level of management in the firm. For the major firms we regulate we insist
that our supervisors have direct access to the Board, and that they present to the Board their own
unvarnished view of the risks the firm is running, and of how good the control systems are by
comparison with the best of breed in their sector. Unfortunately, we find some resistance to this
approach. The management of some of our firms want to negotiate the regulators assessment, so
that when it reaches the Board it is an agreed paper and sufficiently bland to cause no debate.
Well-structured Board, and a confident management, should welcome an independent view, even

19
expressed at the Board level, which they may challenge and contest if they wish. And non-
executive directors should find it helpful to see a knowledgeable view of the institution which
does not come from or through its own senior management.

Fifth and penultimate point may not be a popular one. Boards should take more interest in the
nature of the incentive structure within the organization. I am not talking solely about the pay of
the CEO, important though that is to get right - as some firms in Britain have recently
discovered. Talking about ensuring that the incentives within the firm, and pay is a very powerful
one, are aligned with its risk appetite. A number of our most problematic cases have their roots in
a misalignment of incentives.

Lastly, no corporate governance system will work well unless there is some engagement on the
part of shareholders. Boards are responsible to shareholders. That is the received wisdom in
Anglo-American capitalism, at least. But if those shareholders are not prepared to vote their
shares, and show little interest in business strategy, then that accountability is somewhat notional,
and unlikely to be effective. Certainly regulators cannot hope to substitute for concerned and
challenging shareholders, though in some senses they may complement them.

Corporate governance failure at Enron

EVERY time you turn a stone, another worm creeps out. That seems to be the story of the Enron
debacle. Not a day goes by without a new expose of wrong doing in the company that one begins
to wonder if there is anything in our systems and structure of an enterprise that can prevent such
a catastrophe.

Enron is an excellent example where those at the top allowed a culture to flourish in which
secrecy, rule-breaking and fraudulent behaviour were acceptable. It appears that performance
incentives created a climate where employees sought to generate profit at the expense of the
company's stated standards of ethics and strategic goals (IFAC, 2003). Enron had all the
structures and mechanisms for good corporate governance. In addition, it had a corporate social
responsibility task force and a code of conduct on security, human rights, social investment and
public engagement. Yet no one followed the code. The board of directors allowed the
management openly to violate the code, particularly when it allowed the CFO to serve in the
special purpose entities (SPEs); the audit committee allowed suspect accounting practices and
made no attempt to examine the SPE transactions; the auditors failed to prevent questionable
accounting.

The use of questionable accounting and disclosure practices, their approval by the board and
their verification by the auditors arose from a variety of forces, including:

20
 Pressure to meet quarterly earnings projections and maintain stock prices after the
expansion of the 1990s
Executive compensation practices
Outdated and rules-based accounting standards

Complex corporate financial arrangements designed to minimize taxes and hide the true state of
the companies, and the compromised independence of public accounting firms.

Chapter 8: Introduction to Corporate Social Responsibility

21
When a company acts in a society in a responsible manner, it increases the motivation of its
employees for their work. As a result they stay longer with the company. And that makes a lot of
difference. For Ordina, it is a big problem to attract and retain well qualified staff (Tom
Rodrigues, member of the board of ICT company Ordina)

We produce and sell a first class brand. Society will expect that this brand stands for a
professional and responsible company an outstanding reputation. But it also implies that we have
our eyes on the environmental and social/ethical aspects with which our company is confronted
(Jan Claes, GM, Coca-cola Enterprises Nederland B.V

As a general director of a coffee still one deals continuously with the position of the company in
society. Apart from looking after our employees and keeping up a good relationship with
customers it is the way Peeze gives coffee a responsible place in society. Why this is so
important? Call it idealism: taking care of future generations and looking back at a stone that has
been turned. Hopefully in this way we contribute a bit to a world in which one deals more
carefully with natural resources (Amie Peeze, general director of the Peeze coffee still)

These quotations are chosen at random from three totally different companies that all embrace
corporate social responsibility. Their motto is: looking after people and the environment goes
hand in hand with good financial results. These companies do not wait until the government
imposes particular rules or laws. They look ahead and determine for themselves which
environmental and social measures they are able or willing to take. They choose not only those
measures which fit in with their own vision and business strategy, but they also take account of
what the outside world asks of them. They have developed an identity that is based on finding a
responsible balance between people (social well being), planet (ecological quality) and profit
(economic prosperity).

Profit

People Planet

22
Their attention shifts from gaining financial profit to sustainable profit. Finally they want to
communicate openly about these things. Directly or indirectly they have a stake (the
stakeholders) in their company. That, in a nutshell, is what corporate social responsibility means.

Corporate Social Responsibility- A Historical Review

Since trade ignores national boundaries and manufacturer insists or having the world as a market,
the flag of his nation must follow him, and the doors of the nations which are closed against him
must be battered down. Concessions obtained by financiers must be safeguarded by ministers of
state, even if the sovereignty of unwilling nations be outraged in the process. Colonies must be
obtained or planted, in order that no useful corner of the world is over looked. The seed of war
in the modern world is industrial and commercial rivalry. (Woodrow Wilson, 1907)

As a field of study in management, corporate social responsibility probably emerged in the 1950s
in the United States. Business practices in the 1990s that could be termed socially responsible
took different forms: philanthropic donations to charity, service to the community, enhancing
employee welfare and promoting religious conduct. Early proponents were CEOs and business
leaders from the big oil energy companies, telecommunication corporations and automobile
manufacturers of the 1920s. for instance, in 1951 Frank Abrams, Chairman of board of standard
oil (now Exxon), in an article in the Harvard business review called for top management to
become good citizen, aspire to a higher duty of professional management and contribute to
the solution of the many complex social problems of our time because business firms were
man-made instruments of society (Abrams, 1951). Abrams was not alone in articulating the
social role of corporations: a series of articles appeared in the Harvard business review in the
1950s written by a diverse range of authors including theologians, philosophers, economists,
business leaders and historians all advocating a broader role for business. The titles of these
papers reflected the ideas of the times: managements responsibilities in a complex world,
managements mission in a new society, can businessman apply Christianity?, can
Christianity produce corporate good?, business and religion and has business developed a
conscience? are some examples. A notable exception in this collection of authors was Theodore
Levitt (1958), who described social responsibility as a happy new orthodoxy, a prevailing
vogue, a new tyranny of fad and fancy that could harm business interests. Milton Friedman was
a powerful advocate of this line of thinking when he claimed some years later in his book
capitalism and freedom (1962) that social responsibility was a fundamentally subversive
doctrine in a free society, arguing that profit itself was a social good and that society was best
served when corporations maximized shareholder value.

It is interesting to note that some writers who were strongly advocating a socially responsible
corporation in the 1950s also warned that corporate social responsibility could be used as a
window dressing. For instance, in his article exploring the relationship between religion and

23
business, Johnson (1958) discussed the dualistic nature of man in Christian theology where
man as angel could use business to serve a social purpose whereas man as devil could
misuse corporate power and responsibility. Believing that their corporations served a larger
social purpose could lead managers to assume exaggerated views of their abilities, judgments
and contributions to the enterprise of which they are a part (Johnson, 1958). He described two
hypothetical scenarios:

Company executives may stress that their socially responsible philosophy works to the general
benefit; yet basically such a philosophy may be a subtle device to maintain economic power in
their own hands by extending their influence and decision making power into so many non-
business areas that they become benevolent dictators.

Corporations may give funds to charitable or educational institutions and may argue for them as
great humanitarian deeds, when in fact they are simply trying to buy community goodwill.

Johnson thus anticipated the term green washing which entered the popular lexicon nearly 50
years later. The oxford English dictionary defines green wash as disinformation disseminated
by an organization so as to present an environmentally responsible public image. The non-
governmental organization crop watch has a less charitable definition of green wash: the
phenomenon of socially and environmentally destructive corporations attempting to preserve and
expand their markets by posing as friends of the environment and leaders in the struggle to
eradicate poverty.

The ideology of corporate social responsibility in the 1950s was primarily based on an
assumption of the obligation of business to society. This obligation arose because some scholars
and practitioners saw business to society. This obligation arose because some scholars and
practitioners saw business as an instrument of society and managers as public trustees whose
main job was to balance often competing demands of employees, customers, suppliers,
communities and shareholders (the term stakeholder to define these different groups was coined
30 years later). Most of the academic research over the next few decades took an instrumental
approach to corporate social responsibility by describing the ways and means by which
corporations could meet their social obligations without losing sight of their main shareholder
value maximizing function (Jones, 1995). There was a shift in corporate social responsibility
thinking in the 1990s from fulfilling societal obligations through philanthropy to a more strategic
level that attempted to tie corporate social initiatives to corporate objectives.

One of the earliest books written on corporate social responsibility, the social responsibilities of
the business man, was written by Howard Bowen in 1953. Bowen argued that since social
institutions shaped economic outcomes it was to be expected that business firms as an economic
outcome of societal interests should consider the social impact of business activity. It took less
than 50 years for this argument to come full circle: as we shall see, neoliberal political economy,
which is dominant in most parts of the world, is based on an ideology that economic institutions

24
should shape social outcomes. Enlightened self interest was a key assumption of corporate social
responsibility were responsibility was to be manifested through philanthropic activity,
community service and employee welfare, all of which were supposed to serve the public
interest. Frederick (2006) notes that Bowen took a more skeptical view of corporate social
responsibility in the 1970s when he stated, voluntary social responsibility cannot be relied upon
as a significant form of control over business. The power of business overcomes the weak reed of
voluntary social responsibility. The social responsibility concept is of minimal effectiveness.
However, the effectiveness of lack thereof of corporate social responsibility appears to be
irrelevant going by the hundreds of books and papers written on corporate social responsibilities
since the 1970s. And this attention is not just generated by academics: every fortune 500
company and thousands more across the world have some sort of corporate social responsibility
statement in their annual reports; government leaders, CEOs, policy makers and academic bodies
regularly host corporate social responsibility conferences; and international bodies like the
United Nations, World Bank and International Monetary Fund all publicly affirm their
commitment to social responsibility. However, if we do accept Bowens general argument that
because business is an instrument of society, it must consider societal interests then we need to
understand what social, economic and political forces created the modern corporation.

Corporate social responsibility: theoretical perspective

Did you ever expect a corporation to have a conscience, when it has no soul to be damned and no
body to be kicked? And by God, it ought to have both! (First Baron Thurlow (1731-1806), Lord
Chancellor of England)

The above quote attributed to the First Baron Thrulow was made in the heyday of what was
probably the worlds first multinational corporation- the infamous east India Company. In an era
of British colonial expansion, the company was engaged in conquering markets, eliminating
competition, securing cheap sources of raw material supply and building strategic alliances.
Colonial expansionist practices of the British empire in 1800s involved both capital
appropriation and permanent destruction of manufacturing capacities in the colonies- the
technological superiority of the British textile industry, for example, was established as much
by invention as by a systematic destruction of Indias indigenous industry involving innovative
competitive strategies such as serving of the thumbs of master weavers in Bengal, forced
cultivation of indigo by Bihar peasants and the slave trade from Africa that supplied cotton
plantations in the US with free labour.

The end of direct colonialism shifted the powers of chartering corporations from the British
monarchy to state legislatures. A series of court rulings in the mid nineteenth century succeeded
in freeing corporations from state control and created the legal fiction of a corporation as an
artificial person. The corporate body was now defined as a nexus of contracts between wealth

25
maximizing rational actors. The focus was on identifying institutions, markets and governance
structures that could align incentives of managers with interests of shareholders. The emergence
of corporate social responsibility in the mid twentieth century can be seen as an attempt to create
a soul for the corporate body based on its obligations to society- doing good to do good.
However, these efforts were by no means universally accepted. Some critics saw CSR as an
ideological movement intended to legitimize the power of MNCs. Others saw CSR activity as
theft from a firms key stake holders groups: shareholders, customers and employees. Some
popular definitions of corporate social responsibility are:

A commitment to improve community well being through discretionary business

practices and contribution of corporate resources.
A key element of this definition is the word discretionary. We are not referring here to business
activities that are mandated by law or that are moral or ethical in nature and perhaps therefore
expected. Rather, we are referring to a voluntary commitment a business makes in choosing and
implementing these practices and making these contributions. Such a commitment must be
demonstrated in order for a company to be described as socially responsible and will be fulfilled
through the adoption of new business practices and/or contributions, either monetary or non-
monetary. The term community well-being in this definition includes human conditions as well
as environmental issues.

Others have offered several distinct definitions of corporate social responsibility (CSR). One
from the world business council for sustainable development reflects the councils focus on
economic development in describing CSR as business commitment to contribute to sustainable
economic development, working with employees, their families, the local community, and
society at large to improve their quality of life. The organization business for social
responsibility defines CSR as operating a business in a manner that meets or exceeds the
ethical, legal, commercial, and public expectations that society has of business. This definition
is somewhat broader as it encompasses business decision making related to ethical values, legal
requirements, as well as respect for people, communities, and the environment.

We also use the term corporate social initiatives to describe major efforts under the corporate
social responsibility umbrella and offer the following definition:

Corporate social initiatives are major activities undertaken by a corporation to

support social causes and to fulfill commitments to corporate social responsibility.
Causes most often supported through these initiatives are those that contribute to community
health (i.e. AIDS prevention, early detection for breast cancer, timely immunizations), safety
(designated driver programs, crime prevention, use of car safety restraints), education (literacy,
computers at school, special needs education), and employment (job training, hiring practices,
plant locations); the environment (recycling, elimination of the use of harmful chemicals,

26
reduced packaging); community and economic development (low-interest housing loans); and
other basic human needs and desires (hunger, homelessness, animal rights, voting privileges,
anti-discrimination efforts).

Support from corporations may take many forms, including cash contributions, grants, paid
advertising, publicity, promotional sponsorships, technical expertise, in-kind contributions (i.e.
donations of products such as computer equipment or services such as printing), employee
volunteers and access to distribution channels. Cash contributions may come directly through a
corporation or indirectly through a foundation it has established to focus on corporate giving on
behalf of the corporation.

Corporations may be sponsoring these initiatives on their own (such as the New York Times
Company Foundation support for journalism and journalists) or in partnership with others (as
with ConAgro foods and Americas Second Harvest). They may be conceived of and managed by
one department within the corporation, or by a team representing multiple business units.

27
Chapter 9: Corporate Social Initiatives-Six Options for Doing Good
We defined corporate social initiatives as major activities undertaken by a corporation to support
social causes and to fulfill commitments to corporate social responsibility. We have identified six
major initiatives under which most social responsibility- related activities fall.

The six social initiatives explored are as follows:

1. Cause promotions: a corporation provides funds, in-kind contributions, or other corporate

resource to increase awareness and concern about a social cause or to support fund-
raising, participation, or volunteer recruitment for a cause. The corporation may initiate
and manage the promotion on its own (i.e. the body shop promoting a ban on the use of
animals to test cosmetics); it may be a major partner in an effort (Aleve sponsoring the
arthritis foundations fundraising walk); or it may be one of several sponsors (keep
America beautiful 2003 sponsors for the great American cleanup included Lysol,
PepsiCo and firestone tire and service centers among others).

2. Cause-related marketing: a corporation commits to making a contribution or donating a

percentage of revenues to a specific cause based on product sales. Most commonly this
offer is for an announced period of time, for a specific product, and for a specified
charity. In this scenario, a corporation is most often partnered with a non-profit
organization, creating a mutually beneficial relationship designed to increase sales of a
particular product and to generate financial support for the charity (for example, Comcast
donates $4.95 of installation fees for its high speed internet service to Ronald McDonald
house charities through the end of a given month). Many think of this as a win-win-win,
as it provides consumers an opportunity to contribute for free to their favorite charities as
well.

3. Corporate social marketing: a corporation supports the development and/ or

implementation of a behavior change intended to improve public health, safety, the
environment or community well being. The distinguishing feature is the behavior change
focus, which differentiates it from cause promotions that focus on supporting awareness,
fund-raising and volunteer recruitment for a cause. A corporation may develop and
implement a behaviour change campaign on its own (i.e. Philip Morris encouraging
parents to talk with their kids about tobacco use), but more often it involves partners in
public sector agencies (home depot and a utility promoting water conservation tips)
and/or non-profit organizations (pampers and the SIDS foundation encouraging
caretakers to put infants on their backs to sleep).

4. Corporate philanthropy: a corporation makes a direct contribution to a charity or cause,

make often in the form of cash grants, donations and/ or in-kind services. This initiative is
perhaps the most traditional of all corporate social initiatives and for many decades was

28
 approached in a responsive, even ad hoc manner. More corporations are experiencing
pressures, both internally and externally to move to a more strategic approach, choosing a
focus and trying philanthropic activities to the companys business goals and objectives.

5. Community volunteering: a corporation supports and encourages employees, retail

partners and/or franchise members to volunteer their time to support local community
organizations and causes. This activity may be a stand- alone effort (i.e. employees of a
high tech company tutoring youth in middle schools on computer skills) or it may be
done in partnership with a non-profit organization (shell employees working with the
ocean conservancy on a beach cleanup). Volunteer activities may be organized by the
corporation, or employees may choose their own activities and receive support from the
company through such means as paid time off and volunteer database matching
programs.

6. Socially responsible business practices: a corporation adopts and conducts discretionary

business practices and investments that support social causes to improve community
well-being and protect the environment. Initiatives may be conceived of and implemented
by the organization (i.e. Kraft deciding to eliminate all in school marketing) or they may
be in partnership with others (Starbucks working with conservation international to
support farmers to minimize impact on their local environments).

Chapter 10: Why CSR is Important?

29
CSR is an important business strategy because, wherever possible, consumers want to buy
products from companies they trust; suppliers want to form business partnerships with
companies they can rely on; employees want to work for companies they respect; and NGOs,
increasingly, want to work together with companies seeking feasible solutions and innovations in
areas of common concern. Satisfying each of these stakeholder groups allows companies to
maximize their commitment to another important stakeholder grouptheir investors, who
benefit most when the needs of these other stakeholder groups are being met:

I honestly believe that the winning companies of this century will be those who prove with their
actions that they can be profitable and increase social valuecompanies that both do well and do
good.Increasingly, shareowners, customers, partners and employees are going to vote with
their feet rewarding those companies that fuel social change through business. This is simply
the new reality of business one that we should and must embrace. Carly Fiorina,Chairman
and Chief Executive Officer, Hewlett Packard Company.

The businesses most likely to succeed in the globalizing world will be those best able to combine
the often conflicting interests of its multiple stakeholders, and incorporate a wider spectrum of
opinions and values within the decision-making process and objectives of the organization.
Lifestyle brand firms, in particular, need to live the ideals they convey to their consumers:

The 21st century will be the century of the social sector organization. The more economy,
money, and information become global, the more community will matter. Peter F. Drucker,
Founder of the Drucker Foundation (now the Leader to Leader Institute)

CSR is increasingly crucial to maintaining success in businessby providing a corporate

strategy around which the company can rally, but also by giving meaning and direction to day-
to-day operations.

Chapter 11: What Business Areas Does CSR Cover?

30
CSR is a means of analyzing the inter-dependent relationships that exist between businesses and
economic systems, and the communities within which they are based. CSR is a means of
discussing the extent of any obligations a business has to its immediate society; a way of
proposing policy ideas on how those obligations can be met; as well as a tool by which the
benefits to a business for meeting those obligations can be identified.

CSR covers all aspects of an organizations operations and can be divided into subsections
identified in the figure 1: what is CSR?

31
Examples of issues within the economic sphere that contain a CSR component range from
corporate governance to patriotism; from the issue of fair trade to diversity in the
workplace. All contain, in some form or another, issues connected to the perception of the
company, and therefore its brand, in the eyes of one or more of its stakeholder groups:

1. Corporate governance
Transparency is the key to encouraging trust in the managers selected to run a company
on behalf of the shareholders. It is also vital to maintaining confidence within other
stakeholder groups and the general public. The issues of accurate financial statements,
executive compensation, and independent oversight, have become particularly sensitive
and important for companies to get right.
2. Patriotism
An issue such as patriotism is by definition subjective, but has risen in importance in the
U.S. following the September 11, 2001 terrorist attacks. A good example of an issue that
falls into this category is the trend today of companies attempting to avoid paying
corporation tax, some even going to the lengths of incorporating off-shore (particularly
Bermuda), even though company headquarters and the majority of workers are based in
the U.S:
According to a recent Harvard University study, U.S. companies avoided paying tax on
nearly $300 billion in income in 1998. In 1940, companies and individuals each paid
about half the federal income tax collected; now the companies pay 13.7% and
individuals 86.3%.
3. Diversity
The 2000 Census data has revealed that the ethnic make-up of the U.S. is changing
rapidly. Organizations need to adapt their traditional structures and mind-sets, which
prevent companies from marketing products effectively to significant segments within the
market:
Latinos are now the largest minority in the U.S., making up 13 percent of the overall U.S.
populationa 58 percent increase from 1990. As black, Asian, and Pacific Islander
populations also experience strong growth rates, whites are steadily heading toward
minority status. Already in California, New Mexico, Hawaii and the District of Columbia,
the majority of residents are nonwhite. That is also true in 48 of the nations100 largest
cities.
Literally, CSR (the extent to which an organizations decisions reflect the values and
needs of consumers and other stakeholders) can creep into every decision that a company
makes. One sub-area of the issue of diversity involves the equal treatment of men and
women. There are plenty of examples of both good and bad practice:
Bad The US Masters, women, and the Ku Klux Klan.
In response to Augusta National Golf Clubs failure to invite women to become members
of the club, the National Council of Womens Organizations (NCWO) launched a
campaign aimed at corporations supporting the 2003 U.S. Masters golf tournament and
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 demanding they withdraw their support, with some success. As the club dug-in its heels,
the situation got worse with the KuKlux Klan announcing it would protest at the Masters
tournament in support of the Golf Clubs right to exclude female members. A PR
nightmare! Whatever be the merits of the case, the Club could have avoided a lot of
negative press coverage by adopting a more enlightened stance on this issue at an early
stage.

Good Annika Sorenstam, Bank of America, and the Colonial Golf Tournament.
The Bank of America, in its first year as the title sponsor of the PGA Tour event.The Colonial
(May 22-25, 2003) at Fort Worth Texas, invited Annika Sorenstam, the best player on the
LPGA Tour to compete. No female player had played in a PGA Tour event since 1945. The
move significantly raised the level of interest in the golf tournament nationwide and stood in
stark contrast to the controversy that had surrounded the U.S. Masters the month before.
Many would call the Bank of Americas move opportunistic, whilst highlighting Augusta
Nationals right, as a private club, to associate with whom it wants. From the corporate
perspective, however, it would have been noted that the Bank of America was widely praised
for its progressive approach and received acres of positive press coverage as a result, while
Augusta National was widely denounced for its dogmatic stance and extremely conservative
approach that does not reflect the feelings of the majority of U.S. citizens.
4. Fair trade
Companies in particular industries have felt pressured to pay a fair price for the goods
they purchase, over and above the market-driven price, directly to the producer. This is
particularly the case in many food industries, where world market prices may well have
decreased over time, while costs have either remained the same or increased:
Today, with suppliers at small farmer cooperatives in Peru, Mexico, and Sumatra, Green
Mountain pays Fair Trade prices for coffee beans -- not the market price of 24 to 50 cents
per pound, but a minimum of $1.26 per pound for conventional coffee and $1.41 for
organically grown. In 2002, these Fair Trade purchases represented 8 percent of sales.
Green Mountain also has a farm direct program that cuts out middlemen to deliver
higher prices to farmers. Roughly a quarter of its coffee purchases are farm direct.
5. CSR & corporate brands
Brands today are one of the key focal points of corporate success. Companies try to
establish popular brands in consumer minds because it increases leverage, which is
directly reflected in sales and revenue. All aspects of a companys operations today feed
into helping build the corporate brand. Crucial is how a brand is perceived by all
stakeholders. Three benefits in particular indicate the positive value for a company in
striving to remain in tune with the community within which it is based by implementing a
strong CSR policy:
Positive marketing/brand-building BP
BP, with a $200 million re-branding exercise, has effectively re-positioned itself as the
most environmentally sound and socially responsible of the extraction companies. The
company stands in stark contrast today with Exxon Mobil that faces on-going NGO

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 (Non-Governmental Organization) attacks, consumer boycotts, and activist-led litigation
because of its decision to fight the environmental movement, and its failure to recognize
the wider importance of CSR as a corporate strategy.
Brand insurance NIKE
NIKE has emerged as one of the most progressive global corporations in terms of CSR
because it has learned from its past mistakes and attacks by NGOs. As one of the first
corporations to have a Vice-President for Corporate Responsibility and to publish an
annual CSR Report, the company has done a lot to mitigate public opinion, establish its
brand as representative of a much more committed corporate citizen, and insure itself
against any repeat of the consumer boycotts it faced in the mid-1990s.
Crisis management Johnson & Johnson
Johnson & Johnsons transparent handling of the crisis facing its Tylenol brand in 1982 is
widely heralded as the model case in the area of crisis management. J&J went far and
above what had previously been expected of corporations in such situations, instigating a
$100 million re-call of 31 million bottles of the drug following a suspected
poisoning/product tampering incident. In acting in the way it did, J&J saved the Tylenol
brand, enabling it to remain a strong revenue earner for the company to this day. Given
the large amount of time, money and effort companies invest in their brands; a good CSR
policy is an effective means of protecting that investment and maximizing its impact.

Chapter 12: Arguments Underpinning CSR

Arguments offered in favor of CSR can be broadly split into two camps - moral and economic.

1. A moral argument for CSR

While recognizing that profits are necessary for any business entity to exist, all groups in
society should strive to add value and make life better. Businesses rely on the society

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within which they operate and could not exist or prosper in isolation. They need the
infrastructure that society provides, its source of employees, not to mention its consumer
base. CSR is recognition of that inter-dependence and a means of delivering on that
obligation, to the mutual benefit of businesses and the societies within which they are
based:

CSR broadly represents the relationship between a company and the wider
community within which the company operates. It is recognition on the part of
the business that for profit entities do not exist in a vacuum, and that a large
part of any success they enjoy is as much due to the context in which they
operate as factors internal to the company alone.
Charles Handy makes a convincing and logical argument for the purpose of a business
laying beyond the goals of maximizing profit and satisfying shareholders above all other
stakeholders in an organization:

The purpose of a business.is not to make a profit, full stops. It is to make a profit so
that the business can do something more or better. That something becomes the real
justification for the business.It is a moral issue. To mistake the means for the end is to
be turned in on oneself, which Saint Augustine called one of the greatest sins.It is
salutary to ask about any organization, If it did not exist, would we invent it? Only if it
could do something better or more useful than anyone else would have to be the answer,
and profit would be the means to that larger end.

Advocates of CSR believe that, in general, the goal of any economic system should be to
further the general social welfare. In advanced economies, the purpose of business should
extend beyond the maximization of efficiency and profit. Increasingly, society expects
businesses to have an obligation to the society in which they are located, to the people
they employ, and their customers, beyond their traditional bottom-line and narrow
shareholder concerns.

At a minimum, businesses operating in a community benefit from the infrastructure of

that community (tangible, practical elements such as the roads, other transport
infrastructure, the police, firefighters, etc) as well as more intangible benefits, such as a
safe or clean environment. But, in most cases, businesses also draw their most important
resource, its employees, largely from the local community. Any business will be more
successful if it employs a well-educated workforce that can attend good hospitals if they
become sick, and who have grown up in a positive environment. This is not to mention
consumers, also often members of the local community, without whom no business could
survive.

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 CSR advocates point out that no organization exists in isolation. They believe that
businesses, without exception, have an obligation to contribute as well as draw from the
community, on which they rely so heavily.

2. An Economic Argument For CSR

A favourable economic argument of CSR can also be made. It is an argument of
economic self-interest. Proponents of this argument believe that CSR represents a holistic
approach to business. Therefore, an effective CSR policy will infuse all aspects of
operations. They believe the actions corporations take today to incorporate CSR
throughout the organization represent a real point of differentiation and competitive
market advantage on which future success can hinge:

CSR is an argument of economic self-interest for a business. In todays brand-

driven markets, CSR is a means of matching corporate operations with stakeholder
values and demands, at a time when these parameters can change rapidly. One
example is a companys customers: CSR adds value because it allows companies
to better reflect the values of this important constituent base that the company
aims to serve.
CSR covers all aspects of a business day-to-day operations. Everything an organization does in
some way interacts with one or more of its stakeholder groups, and companies today need to
build a watertight brand with respect to all stakeholders. Whether as an employer, producer,
buyer, supplier, or investment, the attractiveness and success of a company today is directly
linked to the strength of its brand. CSR affects all aspects of all operations within a corporation
because of the need to consider the needs of all constituent groups. Each area builds on all the
others to create a composite of the corporation (its brand) in the eyes of all stakeholder groups.

Chapter 13: Why is CSR Relevant Today?

CSR as a strategy is becoming increasingly important for businesses today because of three
identifiable trends:

Changing social expectations:

Consumers and society in general expect more from the companies whose
products they buy. This sense has increased in the light of recent corporate
scandals, which reduced public trust of corporations, and reduced public

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 confidence in the ability of regulatory bodies and organizations to control
corporate excess.

Increasing affluence:
This is true within developed nations, but also in comparison to developing
nations. Affluent consumers can afford to pick and choose the products they buy.
A society in need of work and inward investment is less likely to enforce strict
regulations and penalize organizations that might take their business and money
elsewhere.

Globalization:
The growing influence of the media sees any mistakes by companies brought
immediately to the attention of the public. In addition, the Internet fuels
communication among like-minded groups and consumersempowering them to
spread their message, while giving them the means to co-ordinate collective
action (i.e. a product boycott).

These three trends combine with the growing importance of brands and brand value to corporate
success (particularly lifestyle brands) to produce a shift in the relationship between corporation
and consumer, in particular, and between corporation and all stakeholder groups, in general.

The result of this mix is that consumers today are better informed and feel more empowered to
put their beliefs into action. From the corporate point of view, the market parameters within
which companies must operate are increasingly being shaped by bottom-up, grassroots
campaigns. NGOs and consumer activists are feeding, and often driving, this changing
relationship between consumer and company.

CSR is particularly important within a globalizing world because of the way brands are builton
perceptions, ideals and concepts that usually appeal to higher values. CSR is a means of
matching corporate operations with stakeholder values and demands, at a time when these values
and demands are constantly evolving.

CSR can therefore best be described as a total approach to business. CSR creeps into all aspects
of operations. Like quality, it is something that you know when you see it. It is something that
businesses today should be genuinely and wholeheartedly committed to. The dangers of ignoring
CSR are too dangerous when it is remembered how important brands are to overall company
value; how difficult it is to build brand strength; yet how easy it can be to lose brand dominance.

CSR is, therefore, also something that a company should try and get right in implementation.

Implementing CSR: Key Steps

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CSR is about common sense policies that represent a means of integrating a complete social
perspective into all aspects of operations. The goal is to maximize true value and benefit for an
organization, while protecting the huge investments corporations make today in their brands.

CSR asks companies to ensure their business operations are clean and equitable, and contribute
positively to the society in which they are based. Otherwise, they leave themselves open to too
much danger from a potential consumer backlash.

CSR is good business sense, and a total approach to doing business, in a globalizing world where
companies are increasingly relying on brand strength (particularly global lifestyle brands) to add
value and product differentiation, and where NGO-driven consumer activism is increasing.

Many believe the issue of how corporations integrate CSR into everyday operations and long-
term strategic planning will define the business marketplace in the near future. It will become a
key point of brand differentiation, both in terms of corporate entities and the products that carry
their brands.

Key steps on the road to integrating CSR within all aspects of operations include:

Ensure the commitment of top management, and particularly the CEO, is communicated
throughout the organization

Appoint a CSR position at the strategic decision-making level to manage the

development of policy and its implementation
Develop relationships with all stakeholder groups and interests (particular relevant
NGOs)
Incorporate a Social or CSR Audit within the companys annual report
Ensure the compensation system within the organization reinforces the CSR policies that
have been created, rather than merely the bottom-line
Any anonymous feedback/whistle-blower process, ideally overseen by an external
ombudsperson, will allow the CSR Officer to operate more effectively

Corporations today are best positioned when they reflect the values of the constantly shifting and
sensitive market environment in which they operate. It is vital that they are capable of meeting
the needs of an increasingly demanding and socially-aware consumer market, especially as
brands move front and center of a firms total value. Global firms with global lifestyle brands
have the most to lose if the public perception of the brand fails to live up to the image portrayed.
Integrating a complete social perspective into all aspects of operations will maximize true value
and benefit for an organization, while protecting the huge investments companies make in
corporate brands.

CSR within the Organization

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In recent years many organizations have established separate departments to document the best
practices of CSR and integrate them into the organizational fabric. They are investing huge
amounts in creating special foundation for the implementation of these practices with a view to
make a difference in the life of people around them. They have also drafted special policies to
ensure better working and promoting family welfare of the work force.

Within the organization CSR cultivates a sense of trust and loyalty amongst the employees. Also
it offers a soothing divergence from the monotonous work place routine and gives them a sense
of satisfaction and fulfillment.

CSR & labour relations, exploitation & harassment

Workers should be treated as human beings and not just a worker & dignity of the worker
should be preserved.
Workers should be treated as first customers.
Safe, friendly and healthy work environment and adequate job security should be offered
It should be equal opportunity employer, equal pay for equal work.
On recruitment, professional ability should be given first priority.
Business should uphold the freedom of association & the effective recognition of the
right to collective bargaining.
It should eliminate all forms of forced and compulsory labour
Effective and abolition of child labour
Elimination in discrimination in respect of employment and occupation.
Encourage whistle blowing
Firing and dismissal should be done for a just cause.
Concerned employees should be given a reasonable and fair chance to explain his case
and plead it.
Harmful effects of dismissal should be mitigated as far as possible.

It is the corporate responsibility to ensure that the following unethical practices are not resorted
to in the organizations:-

Discrimination between genders, due to origin, disabled, pay, promotion etc, while
employing or while in employment.
There should not be any sexual harassment.

Perquisites and remuneration should be just and according to the performance.

They should be able to compensate the rising Cost of Living, and offer them a decent family life.

To build a good relationship workers and their representatives must be heard/listened to

and tackled amiably.
Try to upgrade the skills
Push the practice of ergonomics in practice.

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 Chapter 14: Examples of CSR
The sterling examples of how the corporate sector is contributing in genuine ways to the social
good. Those bridges between the for-profit and nonprofit/social good sectors are becoming
increasingly vital.

Here are two fantastic examples of how large companies have been contributing to the social
good in compelling ways:

Molson Coors & responsible drinking

Over the years, Molson Coors Canada has used CSR to advance its brand and is one of the
few major corporations to take advantage of social media in doing so. (Shel Israel wrote about
Molson in his book Twitterville.)Molson Coors invests more in responsible drinking education
than on alcohol-centered events. Molson reaches out to the community to find ways to spread the
message of responsible drinking, putting money behind the Taxi Guy program (for those whove
had one too many) and covering the cost of free public transit on New Years Eve.

40
during the holiday season of 2008 when the Toronto Transit Authority canceled its New Years
Eve free-ride transportation because of budget cuts. Molson stepped in and launched a campaign
to replace public funding with private sector donations, starting with its own $20,000 donation.

Molson has a small social media team led by Ferg Devins, who is not only responsible for selling
beer but for outreach to communities in need. The team uses Twitter and blogging to initiate
community generosity projects.

Tyson Foods & hunger relief

Tyson foods offers another example of a major company tying its corporate social responsibility
efforts to its core mission. Tyson has committed its brand to efforts to relieve and ultimately end
childhood hunger, and in the past few years been integrating social media into its hunger relief
efforts.

Tyson connected with the Social Media Club and began a string of extraordinarily smart and
effective efforts to enlist the community. For example, it launched a campaign in Austin in which
it agreed to donate 100 pounds of chicken to the Capital Area Food Bank of Texas for every
comment posted on its blog. They received 658 comments in two hours and loaded up two trucks
filled with chicken for the hungry. They repeated the success in Boston and San Francisco,
launched a user-generated video contest in Minnesota and sponsored a day of service for its
social media team.

Chapter 15: CASE STUDY

Infosys technologies ltd. was started in 1981 by seven people with US $250. Today, it is a global
leader in the next generation of IT & consulting with revenues of over US $4 billion.

Infosys defines designs and delivers technology-enabled business solutions that help Global
2000 companies win in a Flat World. Infosys also provides a complete range of services by
leveraging domain and business expertise and strategic alliances with leading technology
providers.

Infosys offers span business and technology consulting, application services, systems integration,
product engineering, custom software development, maintenance, re-engineering, independent
testing and validation services, IT infrastructure services and business process outsourcing.

Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in the
industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking

41
work to the location where the best talent is available, where it makes the best economic sense,
with the least amount of acceptable risk.

Infosys has a global footprint with over 63 offices and development centers in India, China,
Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries
have 114,822 employees as on June 30, 2010.

Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues
come from existing customers.

VISION
To be globally respected corporation that provides best-of-breed business solutions

leveraging technology, delivered by best-in-class people.

MISSION
To achieve its objectives in an environment of fairness, honesty & courtesy

towards their clients, employees, vendors & society at large.

VALUES
They believe that the softest pillow is clear conscience. The values that drive them underscore
their commitment to: customer delight: to surpass customer expectations consistently.

Leadership by example: to set standards in the business & transactions & be an exemplar for the
industry.

Integrity & transparency: to be ethical, sincere & open in all transactions.

Fairness: to be objective & transaction oriented, and thereby earn trust & respect.

Pursuit to excellence: to strive relentlessly, constantly improve its teams, services & products to
become the best.

Code of Conduct
Infosys has always followed the highest standards of corporate governance. They have set new
levels in transparency & integrity. Every action of the company and its employees is the focus of
public attention and Infosys need to reinforce their tradition of values. The challenge is to
continue maintaining this high standard, even when they become a global company and work in
multi-cultural environments.

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To this end, Infosys have adopted this code of business conduct and ethics to guide their
transactions with their colleagues, communities, customers, governments, investors, regulators
and society.

The essence of this code is based on the Infosys core value of C-LIFE viz. customer delight,
leadership by example, integrity and transparency, fairness and pursuit of excellence.

This code of business conduct and ethics helps ensure compliance with legal requirements and
their standards of business conduct. All company employees and trainees are expected to
understand this code of business conduct and ethics, in order to uphold the standards in day to
day activities, comply with all applicable policies and procedures, and ensure that all agents
and contractors are aware of, understand and adhere to these standards.

Since the principles described in this code of business conduct and ethics are general in nature,
one should also review all applicable company policies and procedures and the employee
handbook, when adopted for more specific instruction. Nothing in this code of business conduct
and ethics, in any company policies and procedures or in other related communications (verbal
or written) shall constitute and shall not be construed to constitute a contract of employment for a
definite term or a guarantee of confirmed employment.

Infosys is committed to continuously reviewing and updating their policies and procedures.
Hence this code of business conduct and ethics is subject to modification. This code of business
conduct and ethics super cedes all other such codes, policies, procedures, instructions, practices,
rules or written or verbal representations to the extent they are inconsistent. Hence the company
has to update the code from time to time.

Compliance is Everyones Business

Ethical business conduct is vey essential to Infosys. As an employee, each of the employees has
responsibility to respect and adhere to these practices. Many of these practices reflect legal or
regulatory requirements. Violations of these laws and regulations can attract penalty for
employees, the company, its directors and its officers.

Part of their job and ethical responsibility is to help enforce this code of business conduct and
ethics. They have to be alert to possible violations and report possible violations to the human
resource department or the legal department. Reprisal, threats, retribution or retaliation against
any person who has in good faith reported a violation or a suspected violation of law, this code of
business conduct or other company policies, or against any person who is assisting in any
investigation or process with respect to such a violation, is prohibited.

43
If the employees find or have concerns related to questionable accounting, accounting controls,
auditing matters, or reporting of fraudulent financial information to the companys shareholders,
government or financial markets, or of grave misconduct i.e. conduct which results in the
violation of law by the company or in a substantial mismanagement of company resources and if
proven constitutes a criminal offence or reasonable grounds for dismissal of the person engaging
in such conduct, or conduct which is otherwise in violation of any law or the companys policies,
they should promptly contact any of the following, in accordance with the companys
whistleblower policy:

Corporate counsel
Their immediate supervisor

Violations of law, this code of business conduct and ethics or other company policies or
procedures by company employees can lead to disciplinary action up to and including
termination.

In all cases, if you are unsure about the appropriateness of an event or action, please seek
assistance in interpreting the requirements of these practices by contacting the human resource
department or legal department.

Employees responsibilities to the company and its stockholders

1 General standards of conduct
The company expects all employees, agents and contractors to exercise good judgment to
ensure the safety and welfare of employees, agents and contractors and to maintain a
cooperative, efficient, positive, harmonious and productive work environment and
business organization. These standards apply on working on premises, at offsite locations
where business is being conducted, at company sponsored business and social events, or
at any other place where the employee is a representative of the company.
2 Applicable laws
All company employees, agents and contractors must comply with all applicable laws,
regulations, rules and regulatory orders. Each employee, agent and contractor must
acquire appropriate knowledge of the requirements relating to his or her duties sufficient
to enable him or her to recognize potential dangers and to know when to seek advice
from the legal department on specific company policies and procedures. Violations of
laws, regulations, rules and orders may subject the employee, agent or contractor to
individual criminal or civil liability, as well as to discipline by the company. Such
individual violations may also subject the company to civil or criminal liability or the loss
of business.
3 Conflict of interest
Every employee has a responsibility to the company, its stockholders and other
employees. Althosugh this duty does not prevent employees in personal transactions and

44
 investments, it does demand to avoid situations where a conflict of interest might occur
or appear to occur. Infosys strive to avoid the appearance of impropriety.

All employees must avoid situations involving actual or potential conflict of interest.
Personal or romantic involvement with a competitor, supplier, or subordinate employee of
the company, which impairs an employees ability to exercise good judgment on behalf of
the company, creates an actual or potential conflict of interest. Supervisor-subordinate
romantic or personal relationships also can lead to supervisory problems, possible claims
of sexual harassment, and morale problems.

An employee involved in any type of relationship or situation described in the policy

should immediately and fully disclose the relevant circumstances to his or her immediate
supervisor, for determination about whether a potential or actual conflict exists. If an
actual or potential conflict is determined, the company may take whatever corrective
action appears appropriate according to the circumstances. Failure to disclose facts shall
constitute grounds for disciplinary action.
4 Corporate opportunities
Employees, officers and directors may not exploit for their own personal gain
opportunities that are discovered through the use of corporate property, information or
position unless the opportunity is disclosed fully in writing to the companys board of
directors and the board of directors declines to pursue such opportunity.
5 Protecting the companys confidential information
The companys confidential information is a valuable asset. The companys confidential
information includes product architectures; source codes; product plans and road maps;
names and list of customers; dealers, employees and financial information. This
information is the property of the company and may be protected by patent, trademark,
copyright and trade secret laws. All confidential information must be used for company
business purposes only. Every employee, agent and contractor must safeguard it. This
responsibility includes not disclosing the company confidential information such as
information regarding the companys services or business over the internet. It also
includes safeguarding, securing and proper disposal of confidential information in
accordance with the companys policy on maintaining and managing records.
6 Obligations under securities laws-insider trading
Obligations under the Indian and U.S. securities laws apply to everyone as the company
is listed both on the Indian and U.S. stock exchanges. In normal course of business
officers, consultants, contractors, directors, employees, agents of the company may come
into possession of significant, sensitive information. This information is the property of
the company- employee has been entrusted with it. Employee may not profit from it by
selling or buying securities themselves

45
 Insider trading is a crime, penalized by fines and imprisonment for individuals. Insider
traders must also disgorge any profits made, and are often subjected to an injunction
against future violations.

Employees, agents and contractors of the company who violate this policy will also be
subject to disciplinary action by the company, which may include termination of
employment or of business relationship.
7 Prohibition against short selling of company stock
No company director, officer or other employee, agent or contractor may, directly or
indirectly, sell any equity security, including derivatives, of the company if he or she
Does not own the security sold, or
If he or she owns the security,

does not deliver it against such sale within the applicable settlement cycle. No
company director, officer or other employee, agent or contractor may engage in short
sales. While employees who are not executive officers or directors are not prohibited
by law from engaging in short sales of companys securities, the company has
extended this prohibition to all employees even though such wider application is not
required by the law.
8 Managing and maintaining records
The purposes of this policy is set forth and convey the companys business and legal
requirements in managing records, including all recorded information regardless of
medium or characteristics. Records include paper documents, CDs, computer hard disks,
email, floppy disks, microfiche, microfilm or all other media. The company is required by
local, state, federal, foreign and other applicable laws, rules and regulations to retain
certain records and to follow specific guidelines in managing its records. Civil and
criminal penalties for failure to comply with such guidelines can be severe for employees,
agents, contractors and the company, and failure to comply with such guidelines may
subject the employee, agent or contractor to disciplinary action, up to and including
termination of employment or business relationship.
9 Records on legal hold
A legal hold suspends all documents destruction procedures in order to preserve
appropriate records under special circumstances, such as litigation or government
investigations. The companys legal department determines and identifies what types of
company records or documents are required to be placed under a legal hold. Every
company employee, agent and contractor must comply with this policy.
The companys legal department will notify employees if a legal hold is placed on
records for which they are responsible. Employees then must preserve and protect the
necessary records in accordance with instructions from the companys legal department.
Records or supporting documents that have been placed under a legal hold must not be
destroyed, altered or modified under any circumstances. A legal hold remains effective
until it is officially released in writing by the companys legal department.
10 Export controls

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 A number of countries maintain controls on the destinations to which products or
software may be exported. Some of the strictest export controls are maintained by the
United States. The U.S. regulations are complex & apply both to exports from the United
States & to exports of products from other countries, when those products contain U.S.
origin components or technology. Software created in the United States is subject to these
regulations even if duplicated and packaged aboard. In some circumstances, an oral
presentation containing technical data made to foreign nationals in United States may
constitute a controlled export. When working with U.S. based customers, U.S. export
control compliance is responsibility of the customer. All employees should exercise
diligence while working with U.S. based clients to clearly determine this responsibility
early on.
11 Foreign corrupt practices act.
The company requires full compliance with the U.S. foreign corrupt practices act (FCPA)
by all of its employees, agents & contractors, even though the company is incorporated in
India.

The anti bribery & corrupt payment provisions of the FCPA make illegal any corrupt
offer, payment, promise to pay, or authorization to pay any money, gift or anything of
value to any foreign official, or any foreign political party, candidate or official, for the
purpose of influencing any act or failure to act, in official the capacity of that foreign
official or party; or inducing the foreign official or party to use influence to affect a
decision of a foreign government or a agency, in order to obtain or retain business for
anyone, or direct business to anyone.

All company employees, agents and contractors whether located in the United States or
abroad, are responsible for the FCPA compliance and the procedures to ensure FCPA
compliance. All managers and supervisory personnel expected to monitor continued
compliance with the FCPA to ensure compliance with the highest moral, ethical and
professional standards of the company.

Responsibilities to companys customers and suppliers

1 Customer relationships
If the job puts an employee in contact with any company customers or potential
customers, it is critical for the employees to remember that they represent the company to
the people with whom they are dealing. Act in a manner that creates value for customers
and help to build relationship based upon trust. The company and its employees have
provided services for many years and have built up significant goodwill over that time.
This goodwill is one of the most important assets, and the company employees, agents
and contractors must act to preserve and enhance companys reputation.

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2 Payments or gifts from others
Under no circumstances employees, agents or contractors accept any offer, payment,
promise to pay, or authorization to pay any money, gift, or anything of value from
customers, vendors, consultants, etc. that is perceived as intended, directly or indirectly,
to influence any business decision, any act or failure to act, any commitment of fraud, or
opportunity for the commission of any fraud. Inexpensive gifts, infrequent business
meals, celebratory events and entertainment, provided that they are not excessive or
create an appearance of impropriety, do not violate this policy.

Gifts given by the company to suppliers or customers or received from suppliers or

customers should always be appropriate to the circumstances and should never be of a
kind that could create an appearance of impropriety, the nature and cost must always be
accurately recorded in the companys books and records.
3 Publications of others
The company subscribes to many publications that help employees do their job better.
These include newsletters, reference works, online reference services, magazines, books
and other digital and printed works. Copyright law generally protects these works and
their unauthorized copying and distribution constitute copyright infringement.
4 Handling the confidential information of others
The company has many kinds of business relationships with many companies and
individuals. Sometimes, they will volunteer confidential information about their products
or business plans to induce the company to enter into a business relationship. At other
times company request that a third party provide confidential information to the company
to evaluate a potential business relationship with that party. Whatever the situation, the
company must take special care to handle the confidential information of others
responsibly.
5 Selecting suppliers
The companys suppliers make significant contribution towards its success. To create an
environment where suppliers have an incentive to work with the company, they must be
confident that they will be treated lawfully and in an ethical manner. The companys
policy is to purchase supplies on need, quality. Service, price and terms and conditions.
The companys policy is to select significant suppliers or enter into significant supplier
agreements through a competitive bid process where possible. Under no circumstances
should any company employee, agent or contractor attempt to coerce suppliers in any
way.
6 Government relations
It is companys policy to comply fully with all applicable laws and regulations governing
contact and dealings with government employees and public officials, and to adhere to
high ethical, moral and legal standards of business conduct. This policy includes strict
compliance with all local, state, federal, foreign and other applicable laws, rules and
regulations.
7 Government contracts

48
 It is companys policy to comply fully with all applicable laws and regulations that apply
to government contracting. It is also necessary to strictly adhere to all terms and
conditions of any contract with local, state, federal, foreign or other applicable
governments.
8 Lobbying
Employees, agents or contractors whose work requires lobbying communication with any
member or employee of a legislative body or with any government official or employee
in the formulation of legislation must have prior written approval of such activity from
the companys corporate counsel. Activity covered by this policy includes meetings with
legislators or members of their staffs or with senior government officials. Preparation,
research, and other background activities that are done in support of lobbying
communication are also covered by this policy even if the communication ultimately is
not made.
9 Free and fair competition
These laws often regulate the companys relationships with its distributors, resellers,
dealers and customers. Competition laws generally address the following areas pricing
practices, discounting. Terms of sale, credit terms, promotional allowances, secret
rebates, exclusive dealerships or distributorships, product bundling, restrictions on
carrying competing products, termination and many other practices.

Competition laws also govern, usually quite strictly, relationships between the company
and its competitors. As a general rule, contacts with competitors should always avoid
subjects such as prices or other terms and conditions of sale, customers and suppliers.
Employees, agents or contractors of the company may not knowingly make false or
misleading statements regarding its competitors or the product of its competitors,
customers or suppliers.
10 Industrial espionage
It is companys policy to lawfully compete in the marketplace. This commitment to
fairness includes respecting the rights of the companys competitors and abiding by all
applicable laws in the course of competing. The company expects its competitors to
respect their rights to compete lawfully in the marketplace, and also respect competitors
rights equally. The purpose of this policy is to maintain the companys reputation as a
lawful competitor and to help ensure the integrity of the competitive marketplace.

Corporate Governance & Infosys

The primary purpose of corporate leadership is to create wealth legally and ethically. This
translates to bringing a high level of satisfaction to five constituencies - customers, employees,
investors, vendors and the society-at-large. The raison d'tre of every corporate body is to ensure
predictability, sustainability and profitability of revenues year after year.

49
-N. R. Narayana Murthy, Chairman of the Board and Chief Mentor

Analyst felt that Infosys became one of the most respected companies in India, through its
corporate governance practices, which were better than those of many other companies in India.
Narayana Murthys move to adhere to the best global practices was driven by his vision to
become a global player. Infosys adopted the stringent US generally accepted accounting
practices (GAAP) many years before other companies in India did. Infosys corporate
governance practices conformed to the recommendations of the confederation of Indian
industries (CII) committee and the Cadbury committee on corporate governance with a few
exceptions. To maintain transparency, Infosys provided details on high and low monthly averages
of share prices in all the stock exchanges on which the companys shares were listed. It is one of
the few companies in India to provide segment wise break up of revenues.

Narayana Murthy believed in commitment to values, and ethical conduct of business. He said,
Investors, customers, employees and vendors have all become more discerning, and are
demanding greater transparency and fairness in all dealings. He also made a clear distinction
between personal and corporate funds. Founding members took only salaries and dividends and
did not have other benefits from the company.

Infosys received was the recipient of awards for its good governance practices. In 2001, Infosys
was rated Indias most respected company by business world. Infosys was also ranked second in
corporate governance among 495 emerging companies, in a survey conducted by credit Lyonnais
securities Asia (CLSA) emerging markets. In 2000, Infosys was awarded the national award for
excellence in corporate governance by the government of India.

Corporate Governance Philosophy

Infosys corporate governance philosophy is based on the following principles:

Satisfy the spirit of the law and not just the letter of the law. Corporate governance
standard should go beyond the law.
Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose.
Make clear distinction between personal conveniences and corporate resources.
Communicate externally, in a truthful manner, about how the Company is run internally.
Comply with the laws in all the countries in which the Company operates
Have a simple and transparent corporate structure driven solely by business needs.
Management is the trustee of the shareholders' capital and not the owner.

Corporate Social Responsibility at Infosys

If wealth creation for the benefit of shareholders is an objective of corporate governance, social
concern to protect the interests of all stakeholders and the society at large are also to be given

50
due prominence. Infosys balances wealth and welfare strategically. Infosys has used its wealth
and stands to contribute to improvements in the community. A core value of Infosys is a strong
sense of social responsibility and commitment to help people and community. It is actively
involved in various community development programmes.

Infosys estabilished the Infosys foundation, a trust founded to further the companys
commitment to social causes, to aid destitute and disadvantaged people. One percent of Infosys
profit after tax is donated to the foundation every year. The foundation focuses on enhancing the
living conditions of the rural population, healthcare for the poor, education and promotion of
Indian arts and culture. In the year 2003-04, Infosys initiated three social programmes to improve
computer literacy of rural people as well as the teachers in rural areas. Along with Microsoft,
Infosys launched a programme, computers @ classrooms, as part of which old computers were
given away to educational institutions.

It is better to light a candle than to remain in darkness. The Infosys foundation starts with this
humble, but thought- provoking philosophy. The foundation aims at improving the health,
education and basic facilities, benefiting a large number of individuals and institutions.

Infosys is committed to contributing to the society and has established the Infosys Foundation in
1996 as a not-for-profit trust to support social initiatives. Its Grants to the Foundation aggregated
Rs.19 crore during the fiscal year 2007, as compared to Rs.13 crore in the previous year.

Infosys Foundation, the philanthropic arm of Infosys Technologies Ltd., fulfils the social
responsibility of the company. The Foundation has undertaken various initiatives in providing
medical facilities to remote rural areas, organizing novel pension schemes, etc. Promoted by
Infosys Technologies Limited, the Foundation began its work in Karnataka, India, gradually
extending its activities to the states of Tamil Nadu, Andhra Pradesh, Maharashtra, Orissa and
Punjab. The foundation primarily aims at improving the health, education and basic facilities,
benefiting a large number of individuals and institutions.

In a short span of time, the foundation has successfully implemented projects in following areas:

Healthcare

Rural development and social rehabilitation

Learning and education

Art and culture

Over the years, its proved to be a

catalyst, improving lives and helping
thousands realize their potential.

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Health care
Making high-quality healthcare the norm is an ongoing challenge. Since its inception, the
Foundation has initiated several activities that benefit the rural and urban poor. Apart from
constructing hospital wards, donating hi-tech equipment and organizing health camps, the
Foundation also distributes medicines to economically-weaker sections in remote areas.

The Foundation constructed the Infosys Super-specialty Hospital on the Sassoon Hospital
premises in Pune. This hospital caters to poor patients
It has spread its donations for medicines to aged and poor patients suffering from cancer,
leprosy, and defects of the heart/kidney, mental illnesses and other major disorders. It
helps this section meet substantial medical expenses and assures them of a steady source
of income for their treatment.
The Foundation installed office management software at the KEM Hospital in Mumbai.
This enables the hospital to manage store requirements, keep accounts as well as publish
hospital papers and other information on the Web.
Additional blocks have been built at the Swami Sivananda Centenary Charitable Hospital
at Tirunelveli in Tamil Nadu
Additional blocks have also been built at the Bangalore Diabetic Hospital
A dharmashala was constructed at the Kidwai Cancer Institute in Bangalore
The Foundation constructed a pediatric hospital at the Capitol Hospital in Bhubaneswar,
which caters to poor patients. A CT-scan machine was also donated to the hospital
Additional wards were built at the Swami Shivananda Memorial Charitable Hospital in
Pattumadai, Tamil Nadu
The annex to a cancer hospital in Kancheepuram, Tamil Nadu was added
A hospital was built for tribals at H.D. Kote, Mysore.
In Bellary, a hospital was constructed to treat patients with brain fever
The Foundation air-conditioned the burns ward of the Victoria Hospital, Bangalore.
A high-energy linear accelerator unit was purchased for the treatment of cancer patients at
the Chennai Cancer Institute in Tamil Nadu
The Foundation has donated ambulances to medical centers and hospitals in
Kanchipuram, Tamil Nadu, Gadag, B.R. Hills and South Canara in Karnataka and
Kalahandi, Chandrashekarpur and Bhubaneswar in Orissa
It has also donated high-tech surgical equipment to hospitals located at Mysore, Bijapur,
Bellary and Hubli in Karnataka
Incubators, air conditioner units, neonatal resuscitation equipment and refrigerators have
been given to the Bowring Hospital, Bangalore, while ultrasound scanners have been
donated to the Ramakrishna Ashram, Coorg and the Bangalore Government Hospital
The Foundation has made donations to the Drug Foundation for Nuclear Medicine at the
cancer hospital in Miraj and the Kidwai Hospital in Bangalore
A leprosy camp was conducted, and relief work was carried out at the Leprosy Colony in
Gulbarga

Rural development and social rehabilitation

52
Whether it is organizing an annual mela that empowers destitute women or building orphanages
that give children a better life, the Foundation's activities address the needs of society's most
neglected.

The Foundation has organized unique annual melas in different parts of the country,
including Bangalore and Sedam in Karnataka, and Chennai in Tamil Nadu, to distribute
sewing machines to destitute women and help them earn a livelihood. Prior to the mela,
the Foundation even holds tailoring classes and provides materials for the same at some
centers.The Foundation has conducted relief work after natural disasters. Apart from
monetary contributions, it believes in assessing the real needs of those affected and
contributing accordingly. It has worked in the tsunami-affected areas of Tamil Nadu and
the Andaman Islands, earthquake-affected areas of Kutch, cyclone-devastated areas of
Orissa, tribal areas of Kalahandi in Orissa and drought-hit areas of Andhra Pradesh
The Foundation made a donation towards the mid-day meal program of the Akshaya
Patra Foundation, Bangalore, for poor children in North Karnataka.
It established counseling centers to rehabilitate marginalized devadasis in North
Karnataka
The Foundation has offered compensation to families whose bread-winners have served
in our Defence Forces and died fighting for the country.
The Foundation worked with the Red Cross Society to supply aid equipment to the
physically challenged in rural areas and economically weaker sections of Karnataka
The Foundation offers monetary aid to the Divine Life Society, which is based in the
Himalayas. The Society helps senior citizens and destitutes, often picking them up from
the street and looking after them with the help of volunteers, some of whom are foreign
tourists in the region
The Foundation improved a rehabilitation center in Chennai for mentally retarded women
The Foundation has improved the lives of children with leprosy and those living on the
streets, and in slums

The Foundation has constructed:

Hostel buildings for under-privileged students at Ramakrishna Mission centers in Tamil

Nadu, Orissa, Maharashtra and Andhra Pradesh
Orphanages in rural areas of these states, to provide shelter to children of local
communities.
A free girls' hostel at Maharshi Karve Sthree Shikshana Samsthe, Hingne, Pune
A girls' hostel for the blind in Banapur, Orissa, Jagruthi Blind School in Pune, Sri
Ramana Maharshi Academy for the Blind in Bangalore and Sri Sharada Andhara Vikasa
Kendra in Shimoga,
Relief shelters in several parts of Orissa
The Sri Ramakrishna Students' Home in Chennai, Tamil Nadu
The Shakthidhama Destitute Center for Women in Mysore, Karnataka
A hall for people with physical disabilities in Belgaum, Karnataka

53
Learning and education
"Basic education links the children, whether of the cities or villages, to all that is best and lasting
in India," said Mahatma Gandhi. At no time have his words been more prophetic, than now. In a
world where education has become the biggest differentiating factor, the Foundation offers an
edge to deprived and rural students, through its activities

In what is one of the largest rural education programs in the country, the foundation has
donated 10,200 sets of books in Karnataka alone, and in Andhra Pradesh, Karnataka,
Orissa and Kerala, under its Library for Every Rural School project. Through this
program, the Foundation has set up more than 10,150 libraries in rural government
schools. A minimum of 200 books, depending on the strength of the school, is provided.
Each set has around 200 to 250 books. The cost of each set ranges between Rs.2,000 and
Rs.3,000. Books on various subjects, including science, history, mathematics, general
knowledge, grammar, literature, geography, vocational training and fiction have been
donated to cater to the interests of students in all age groups
To simplify the standard of computer education for students in rural areas, a separate
book has been written and is being distributed under the library project. This book has
also been translated into Hindi, Tamil and Telugu
In another innovative project that facilitates higher learning, the Foundation has set up
libraries in Hubli and Bangalore, that can be accessed by under-privileged students.
These well-equipped libraries have the latest books prescribed in hi-tech streams like
medicine and engineering. All a student has to do is pay a deposit of Rs 800 for unlimited
use of the library through his or her education
To identify and help students in dire need, the Foundation works with Prerna, an NGO in
Raichur and Bangalore, and Vidya Poshak in Dharwad, to distribute scholarships to poor
students. With the help of these organizations, the Foundation reaches out to deserving
students across Karnataka
The Foundation has also made donations towards the reconstruction of old school
buildings. For instance, 14 government schools in slum areas of Hyderabad were
reconstructed
The Foundation has also renovated the Gandhinagar, Kottara St. Peter's School and
Kapikad Zilla Panchayat schools in Mangalore, Karnataka
It also contributes towards the construction of additional classrooms, school funds/corpus
funds, school furniture, equipment and so on, especially in backward areas
The Foundation recently purchased an index Braille printer for the Sharada Devi Andhara
Vikasa Kendra in Shimoga, Karnataka
The Foundation donated study material, including science kits, to 20 schools in rural
Karnataka
Donations have also been made towards computer centers in rural areas of Karnataka
The Foundation works with various organizations in Maharastra, Tamil Nadu and Orissa,
to facilitate the education of slum children in these states

54
 The Foundation collaborated with the Center for Environment Education (CEE),
Bangalore, for the orientation of teachers specializing in science and the environment.
The Center developed training material on water. During the program, it linked the
Science and Social Studies curriculum with the environmental perspective. Around 15
camps were held in various parts of Karnataka over the last 3 years. Totally, around 1,000
teachers were trained
It helps the Bangalore Association for Science towards the development and maintenance
of the planetarium in Bangalore, including funding of the sky-theater program at the
planetarium
The Foundation constructed a science center at a rural school in the Kolar District of
Karnataka, a one-of-its-kind center in the entire district. It caters to the students of the
school, as well as schools in the neighboring villages
It made a contribution to fund new self-employment courses at post graduation and post
matriculation levels at the Nrupathunga Educational Institute in Hyderabad

Arts
Preserving our rich heritage and honoring our artisans are some of the ways the Infosys
Foundation contributes to this space

The Foundation has helped revive the art of the weavers of Pochampalli village in
Andhra Pradesh
It helps organize cultural programs to promote artists in rural areas of Karnataka and
Andhra Pradesh
It traces and honors artistes from different parts of India
Today, the scope of the foundations activities has widened to identifying under-
privileged artists from different walks of life; be it writers, painters, poets or musicians,
who dont have access to contacts or help. It assists them on a need basis, offering
financial assistance, promoting their art, or helping them receive much-deserved
recognition
It organizes programs like puppet shows and other cultural events to encourage artistes
and performers in rural areas of Karnataka and Andhra Pradesh, and offers them financial
assistance to carry forward their art
In Karnataka, the Gamaka form of music was fast disappearing. A few years ago, The
Foundation coordinated a project to donate more than 200 sets - comprising a Gamaka
cassette and record player - to 100 rural schools in Karnataka, to bring the dying art form
back to life
It has sponsored art exhibitions and performing arts programs in Dharwad and Bangalore
in Karnataka

Environment

55
Globalization continues to unleash far-reaching changes. The biggest benefit of globalization has
been the rise of companies and economies and the consequent creation of jobs. However, the
most telling consequence of development has been the deterioration of the environment. As a
responsible corporate citizen, Infosys believes that the environment can be a participant and a
beneficiary of progress. Infosys is reducing their carbon footprint even as they expand their
global presence.
Further, Infosys wishes to be recognized by all stakeholders, including customers, employees,
vendors, share owners and community at large, as a company committed to high standards of
environmental management and to providing its employees, consultants and contractors with a
safe and healthy environment, free of occupational injury and illness.
To achieve this, Infosys strive toward:
Conservation of resources
Prevention of pollution
Adherence to all applicable legislations
Eliminating accidents, occupational illnesses and injuries at work

The Health, Safety and Environmental Management System (HSEMS) at Infosys is called the
'Ozone Initiative'. It is the Infosys' endeavor to have and operate a HSEMS at various locations
that will conform to the ISO 14001 standards and OHSAS 18001 requirements. Infosys has been
certified compliant to OHSAS 18001 and re-certified compliant to ISO 14001 standards during
May 2007, in eight of its development centers across India.
Infosys seek to change attitudes and influence actions toward the environment at the grassroots
level. Their 'Project Ozone' campaign spreads environmental awareness and implements eco-
friendly practices across development centers worldwide. Further, this vision is supported by
voluntary groups of employees organized into eco-clubs.
Infosys' vision is to become "carbon and water neutral". They undertake several initiatives to
neutralize their environmental impact:
Water Management
Potable water is a depleting resource. Infosys harvest rainwater and consistently reduce the use
of fresh water. In addition, they recycle waste water to be reused for primary and secondary
purposes.
Energy Conservation
Infosys uses energy responsibly. It measures our utilization of energy through energy audits. The
data collected is used to achieve increasing levels of energy conservation.
Waste Management
Waste is recycled scientifically. They reduce waste, segregate it at the source and dispose it at
dedicated waste segregation and processing plants at each development center.

56
Infosys technologies contributed Rs 5 crore to the prime ministers national relief fund to assist
the victims of the giant Tsunami that ravaged South and South-East Asia in the last week of
December 2004. The company also actively supported its employees efforts across group
companies globally, to make monetary and material contributions towards aid operations.
Infosys also instituted in 1999 the Infosys Fellowship Programme to foster excellence in
education and offered funds at the five IITs and three IIMs for Ph.D. programmes in computer
science, management, law and accounting. Under this programme, the company grants Rs 9
lakhs per fellowship for the entire duration of Ph.D. programme.

The Phaneesh Murthy Case

For a company so revered by the entire Indian and Foreign business community for having set
the highest ethical standards, it seemed to be only a matter of time before someone tried to pull it
down. But to their credit, the company honorably resolved the issue and came back much
stronger and surer of its values than ever before. Infosys became entangled in a scandal, between
October 1999 and December 2000, that deneted its reputation as a company that had the best
corporate governance as well as corporate social responsibility in the country. The Hindu
Business Line reported on 7th august 2002, since its inception, this is probably the first piece of
negative news about Infosys.
The case examines the controversy surrounding the charges of sexual harassment and unlawful
termination made by an employee against Infosys, leading Indian software company, during
2001-03. Phaneesh Murthy, a top level executive and a director on the company board, was
accused of sexually harassing and unlawfully firing his subordinate, Reka Maximovitch.
This is a story of blackmail, sex, stalking, threats, oppression, hurt feelings and revenge.
Interestingly, all this happened in and around the US offices of Infosys, one of India's most well-
known and respected software companies, between October 1999 and December 2000.
The events that took place during October 1999 and December 2000 became public knowledge
in India only when Phaneesh Murthy (Phaneesh), the head of the sales and marketing, and
communication and product services division of Infosys (and a director on the board), resigned
from his post in June 2002. Phaneesh said that he had resigned to "devote time and attention to
pursue a successful defence of the suit". The lawsuit, filed by his former secretary, Reka
Maximovitch (Reka) alleged that Phaneesh had sexually harassed her and unlawfully terminated
her employment. The company's share price declined by 6.6% soon after Phaneesh left.
The case created ripples in business circles, in the eyes of the public and attracted a lot of media
coverage since a sexual harassment lawsuit implicating such a senior official had never been
heard of in the Indian corporate world. It was also being seen as an event that could make Indian
companies stop ignoring the sensitive issue of sexual harassment at the workplace.

57
Phaneesh was an integral part of Infosys' success story. While Chairman and Chief Mentor
Narayana Murthy and a few others established Infosys in India back in 1981, Phaneesh
successfully set up the company's overseas businesses.
He was often called the 'other Murthy' of Infosys and had many admirers within and outside the
company. Not surprisingly, he was the highest paid executive in the company with a take home
package of Rs 20 million. Belonging to a middle-class South Indian family, Phaneesh graduated
from one of India's premier business schools. Before joining Infosys, Phaneesh was working
with another software company, Sonata Software as a regional manager. He was said to be one of
the main reasons for the company's good performance. In 1992, Phaneesh joined Infosys, then a
$ 2 million company with a negligible presence in the US. Within three years, Phaneesh became
the head of sales at the company, and in 1996, he was made the head of worldwide sales...
Initially, Phaneesh Murthy refused to participate in the settlement initiated by Infosys on the
terms specified by it. however, later on. he voluntarily signed the settlement and agreed to every
condition that Infosys had set. as the company retained its right to sue phaneesh for his actions
and lack of contributions, it went ahead with the settlement without any contribution from
phaneesh.
The stance adopted by Infosys in this case seemed to go against its image of a company
considered to be a model of good corporate governance. Analysts claimed that the company had
kept the issue under wraps for a long time. Media reports blamed Infosys for neglecting to
formulate/implement a structured policy regarding sexual harassment and for compromising on
moral values for an 'economically-valuable' person like Phaneesh.
Analysts wondered how a company that Forbes had once described as "a model of transparency,
not just for the rest of corporate India but for companies everywhere," do such things! The saga
of Phaneesh, Reka and Infosys and the issue of sexual harassment at the workplace (in India as
well as abroad) were debated heatedly in corporate and media circles, as many more shocking
events unfolded over the next one year.
Infosys technologies maintained a studied silence on the episode on the ground that the matter
was subjudice. on 11th may 2003, Infosys finally announced the amicable settlement with
Maximovitch by agreeing to pay $3million as compensation. the company contributed US
$1.5million and the balance US $1.5million was contributed by the insurers under the company's
Directors and Officiers Liability Insurance Cover. Infosys refused to give more details about the
manner in which the settlement was arrived at, and whether Infosys conducted any internal
enquiry before Phaneesh Murthy submitted his resignation.
A crisis brings out the best and worst in any organization oi in any person. It is also true that a
crisis provided a learning opportunity for them. Infosys also leant its lesson and put in place
principles of work ethics to be followed by its employees and a whistle blower policy.

58
Infosys chairman and chief mentor, Narayana Murthy said, "The litigation is behind us. We have
taken further steps to strengthen our internal processes and improve the checks and balances to
handle similar situations." Mohandas Pai added, "We have conducted several training programs,
widened the dissemination of information and met employees on this issue." Infosys conducted
a course for all its officers and members (in India as well as abroad) on sexual harassment and
the importance of being sensitized about the issue. The code of conduct provided in the
employee manual was modified in line with the above decisions.

Conclusion
The founder and chief architect of Infosys, N.R. Narayana Murthy is a visionary who exhibits a
leading model of innovation and excellence in an industry that is rapidly evolving. He is
capitalizing on growing oppurtunities in a world that is increasing its reliance on e-commerce
and technology to form a vital part of business infrastructure. Narayana murthys vision is to
harness technology and the free market to create success and build prosperity among the poverty
prevalent in india. Infosys technologies is a company that the entire world looks up to, in terms
of sticking to ones sound ethical judgement and doing business the right way.
It continues to set standards in everything that it does, and the people who make the company
never think twice when they have to make a tough decision involving ethics. To them dharma is
above everything.

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