Corporate Social Responsibility, A Burning Global Issue – It’s Scope And Direction

Research Paper by Sujoy Kumar Dhar.

Faculty Member,
Icfai Business School, Kolkata.
Published in Prism India , Vol VI, Issue V in April,2009.

‘If businessmen do have a social responsibility other than making maximum profits for
stockholders, how they know what it is. Few trends could so thoroughly undermine the
very foundations of our free society as the acceptance by corporate officials of a social
responsibility other than to make as much money for their stakeholders as possible.’
Milton Friedman, Economist 1970.

“We are the drivers of the prosperity that is the only long term answer to social
problems.” David Varney, Chairman, Business in the Community, 2003.

Introduction: Corporate social responsibility is a powerful way of making sustainable

competitive profit and achieving lasting value for the shareholder as well as for
stakeholders. CSR and reporting thereof is a win win opportunity not just for financial
investors but for society at large. CSR activities can be viewed as source of competitive
advantage. Benefits such as cost reduction, human capital, reduced regulations, access to
capital, consumer demand, improved business condition and new business opportunities
are frequently reported which can be considered as the direct and indirect fruits of CSR
activities followed by the organization. Business can and indeed ought to contribute to
equitable development of society and thereby impacting social welfare maximization
processes both in their domain of operation and generally in society. Beneficiaries of
CSR range from employees to suppliers to customers to the community as a whole.
Compliance of such law is the basic minimum to legitimately stay in business. CSR is
going beyond that and beyond discharging of contractual obligations such as those to
employees, shareholders etc to focus also on the need of the most disadvantaged in
society. Essence of the philanthropy is doing something without expecting anything. CSR
includes this notion but with added diversion that it legitimizes the seeking of a business
benefit while fulfilling a corporate responsibility to the society for which it springs and
within which it functions and perhaps flourishes.

Concept of Externality: It is an established fact that production and consumption

function of the organizations are interdependent rather than independent. Therefore
concept of externality or spill over effect or third party effect has become a major issue
which has to address in this crucial juncture. As the society is the stakeholder of all
corporate houses in a broad sense, therefore commitment to corporate social
responsibility should be given major emphasis in the mission and vision statement of the
organization. Scope and direction of the organization should be determined in such a way
so that social benefit derived from the organization should be greater than the private
benefit or in other words social cost should be less than the private cost. Company should
not produce goods and services in such a way for which negative consumption
externality, negative technological externality or negative pecuniary externality arises.

Role of Government in CSR: Prior to globalization, Government has to intervene if

there is divergence between societal goal and profitability objective of a company. The
expression socialist was intentionally added to the Preamble by the constitution (Forty
Second Amendment) Act, 1976. The principal aim of socialist nation is to eliminate
inequality in income, status and standards of life. The basic framework of socialism is to
provide a decent standard of life to the working people and especially to provide security
from cradle to grave. This amongst others on economic side envisaged equality and
equitable distribution of income. This is a blend of Marxism and Gandhism leaning
heavily-towards-Gandhian-Socialism.

The constitution (Forty Fifth Amendment) bill, attempted to define the term socialism to
mean free from all forms of exploitation –social, economic and political.
After addition of the word socialist in the Preamble, the courts in their interpretation of
the constitution could expectedly lean more in favour of nationalization and state
ownership of private property, industry etc and the right to equal pay for equal work.
The capitalist countries in recent years found an opportunity to capitalize on the near total
failure of the socialist experiment in the erstwhile Soviet Union and in countries of
Eastern Europe. They sought to project it as the victory of the superior free market
economy. In India also, the new economic policy of the government was widely hailed
and considered by the articulate sections of the people to be the best thing to have
happened to India in along time. It represented a total about turn of the so called socialist
practices and of the values of socio economic justice etc enshrined in the constitution did
not seem to bother them. This change in economic policy of India is felt by the comment
of Mr. Arun Souri, Minister of Disinvestment Portfolio in Atal Behari Vajpayee
Government during NDA regime. “Government is here for governance, not for business.”
Therefore, corporate houses have to come forward under these circumstances to provide
social services apart from their profit maximization goal.

Social Audit: Social audit is a tool for evaluating how satisfactorily a company has
discharged its social responsibilities and it enables public as well as company to evaluate
the social performance of the company. Dr. Clerk C. Abt in his book Audit for
Management , suggests that a social audit should as far as possible be approximated to
an ordinary commercial audit; that this should be based on a social balance sheet with a
credit side and debit side. He called them inputs and outputs or costs and benefits so far
as the social balance sheet is concerned. After suggesting that every input and output
must be measured in monetary terms, he pointed out that the basic purpose of a concern
is to maximize the financial return, earned on its financial investment plus the amount of
social return on its social investment. Although the idea of social audit originated in the
United States about a half century ago, it is only recently that it received serious attention
of corporation in the developing nations also. The first corporate social audit in India was
conducted by the TISCO in 1980. It was conducted by the social audit committee
appointed by the board of directors of the company to examine and report whether and
the extent to which, the company has fulfilled the objectives contained in its Article of

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Association regarding its social and moral responsibilities to the customers, employees,
shareholders, society and the local community.

New era of CSR: The traditional outlook is being changed over the period of time. The
old paradigm believes the statement that ultimate and sole function, goal and
responsibility of business is to make financial profit. New paradigm brief statement states
that service to society and the earth is core purpose, goal and responsibility of the
business.
Previously it is argued that competition is the law of the market and promotes effective
and efficient business preference. Today’s slogan is co- operation and reciprocity are the
guiding principles by which business can create synergies within the greater living
system.
According to traditional concept business is a rational undertaking and should rely
exclusively on faculties of reasons and analyses to support all its process. Modern theory
emphasizes that business is human institution and should strive to be more holistic,
reflecting a balance between symbolically masculine and famine qualities.
Ethical investment is also coming into limelight in the current scenario such as
shareholder activism and screened investment. Shareholder activism is where groups of
shareholders campaigns for changes to what they perceive as the unethical practices of
the corporate of the companies they have a technical stake in. Screened investment
typically includes avoidance of investment in areas such as animal exploitation, tobacco,
gambling and alcohol production. The converse might conclude deliberate support of
investment in companies with a good rapport of environmental awareness and employee
welfare.
Indices for CSR: The ethical Investment index has been constructed to motivate the
organizations to be more ethical.

Business in Environment (BIE) Index of corporate environmental engagement is used to

measure company’s awareness of environmental issues relevant to their business and
need to have appropriate management process. BIE measures or ranks how well
companies are doing on ten key environmental management parameters including policy,
board members, targets, objectives, environmental management systems, audits,
stakeholder communications, employees training and development, supplier focused
initiatives and environmental stewardship.

Dow Jones Sustainability Group Index family includes one global index, three regional
indexes covering North America, Europe, Asia Pacific and one country index covering
United States. Companies are selected and scored for DJSGI using eight economic
criteria ( including risk and crisis management, strategic planning and corporate
governance), seven environmental criteria (including environmental performance,
environmental charters, environmental policy and environmental health and safety
reporting) and eleven social criteria (including stakeholder involvement, social policy,
standards for suppliers and remuneration). In addition, there are industry specific criteria
such as research and development, eco-design, hazardous substances and continuity
programs.

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Tomorrow Index has teamed up with Credit Suisse to rank the 30 companies which
appear more frequently in the portfolios of 200 of the world’s funds which call
themselves socially or environmentally responsible.

London Group Benchmarking Model: LBG model seeks to develop and expand the
reporting of company activities in the community so that they are more transparent and
can be judged by the impact they achieve. The group, which consists of some of leading
companies working in the UK, has devised a model to classify what companies do in the
community by their motivation. This is illustrated below
Philanthropy: Intermittent support; wide range of causes; in response to needs and
appeals of charitable and community organizations; in partnership between companies,
employees, customers and suppliers.
Social Investment: Long term and strategic involvement in community partnerships;
limited range of social issues chosen by the company; to protect long term corporate
interest and to enhance its reputation.
The Commercial Initiative in the community: Activities in the community led by
commercial departments; directly support company success, brands and other policies in
partnership with NGOs and CBOs.
Business Basics: Core business activities meeting society’s needs for cost effective
goods and services; in a manner that is ethically, socially and environmentally
responsible.

The philanthropic component is typically when all companies including Indian ones, do
and what characterizes this component is that companies rarely expect a return other than
a reputation of being caring company. This is response to a need and manifests itself as a
responsible corporate citizen.
The social investment component looks at companies becoming more systematic and
strategic with its community involvement while looking at business benefits in the
medium term. Such activities are typically aimed at communities but employee and their
families too are beneficiary.
In commercial initiatives, the company is focusing more on the commercial benefits of
the involvement, while addressing social issues. Cause related marketing or event
sponsorships are typical examples of this type of engagement.
The business basics part of the model relates to how the company does its business and
whether it is sensitive about the impact of its business on society and the planet that is
social and environmental returns apart from financial return- the so called triple bottom
lie reporting.

It is nothing but a hierarchical model where company’s business basics activities are
expected to impact the society more than its philanthropic activity. The relative sizes of
the components are meant to reflect the company’s impact on society.

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 Philanthropic

Social Investment

Commercial Initiative

Business Basics

LONDON GROUP BENCHMARKING MODEL

Transition from Accounting to Accountably: To survive in this sustainability era,

companies have to move beyond their aggressive competitive tendencies. They need to
learn to be not only sociable but also genuinely concerned about the perspectives and
wellbeing of all their stakeholders.
The only viable option is to transform from accounting to accountability accompanied by
transparency. Modern companies have grown accustomed to speaking to stakeholders
only on a ‘need to know’ basis-telling whom they want, what they want, when they want.
Usually this communication coincides with a time when the company needs something
from its stakeholders such as support (or the absence of visible protest) to proceed with a
new development. Just as Lion does not communicate much except to roar to intimidate
others or to purr with self satisfaction. There are no shortages of lion companies who
mistake ‘telling’ for dialogue and get backchat from angry shareholders as a result.
Fortunately next generation of elephant wannabes can choose easier route of the
following footstep of the elephant pioneers that have gone before them.

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Comparison of lion versus elephant companies offer a glimpse of the alternative
landscapes for business that may emerge over the coming decades. These are
encapsulated in two contrasting scenarios: Oasis in the Desert and Plains of the
Serengeti.

Oasis in the companies is where corporate lions continue to rule but their kingdoms are
increasingly restricted by their own destructive behavior and popular discontent. Plains
in the Serengeti on the other hand is where companies shape shift into elephants which
strive for a proper balance between co-operation and integration and a continuing
diversity of species, large and small, strong and weak.
Social Responsibility Models
There are two basic approaches to the concept of corporate social responsibility. Some
theorists, focusing on the micro level of analysis try to show individual companies how
they can be more socially responsive. Other researchers concern themselves with the
macro level of analysis, assuming that the Government, not individual companies should
establish a country’s social goal. Needless to say that it is micro level of analysis which
is significant.
Ackerman’s Model: Micro level theorist Robert Ackerman was among the earliest
people to suggest that responsiveness should be the goal of corporate social endeavor.
Ackerman described three phases through which companies commonly tend to pass in
developing a response to a social issue.
In Phase 1, A corporation’s top managers learn of an existing social problem. At this
stage, no one asks the company to deal with it. The chief executive officer merely
acknowledges the problem by making a written or oral statement of the company’s policy
towards it.
In phase 2, The Company hires staff specialists or engages external consultants to study
the problem and to suggest ways of dealing with it. Up to the point, the company has
limited itself to declaring its intentions and formulating its plans.
Phase3 is the implementation. The company now integrates the policy into its ongoing
operations. Unfortunately, implementation often comes slowly and often not until the
Government or public opinion forces the company to act. By that time Company has lost
the initiative. Ackerman thus advises that managers should “ act early in the life cycle of
any social issue in order to enjoy the largest amount of managerial discretion over the
outcome.”
Carroll’s Four Part Model: Archie B Carroll has promulgated the four part model
while discussing the nature of social responsibility. Total Social responsibilities can be
decomposed into four broader groups as mentioned above- Economic responsibilities,
Legal responsibilities, Ethical responsibilities and Discretionary responsibilities The
model suggests that because a business firm is basically an economic entity, its primary
responsibility is economic. It must produce the goods and services that society wants and
must sell them at a profit. Legal responsibility is also basic as firms should operate within
the law. Ethical responsibilities refer to the behavior by the firm that is expected by
society and not confined by law. Discretionary responsibilities are purely voluntary
obligations that an organization assumes such as philanthropic contributions, training
hardcore unemployed. The main difference between ethical and discretionary

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responsibilities is that few people expect organizations to fulfill discretionary
responsibilities, but all expect a firm to satisfy its ethical obligation.
CSR Practices in some Indian Organisations: CSR practices of some organizations are
explained here.
CSR practice in Infosys: According to N.R. Narayana Murthy, Chairman and Chief
Mentor of Infosys-“our core corporate assets walk out every evening. It is our duty to
make sure that these assets return the next morning, mentally and physically enthusiastic
and energetic”. In the annual report 2007-08 Of Infosys, it is mentioned that
“sustainability to us means measuring success by how much wealth we create responsibly
for our customers, employees, the society in which we operate and all our other
stakeholders.”
According to Infosys, a good workplace balances their commitment to the health and
safety of employees while educing the environmental impact. Their Commitment to
health, safety and environment (HSE) is deployed through project Ozone, a
comprehensive HSE management system initiated in 2003. Organisation’s goal in the
medium term is to reduce the consumption of water, power and paper by 25% and carbon
emission by 10%. It plans to become carbon neutral in the next two years by managing
and reducing carbon emissions, reducing carbon intensity by purchasing green energy
and creating carbon sinks. Infosys has taken Health Assessment and Lifecycle
Enrichment ( HALE) initiative on enhancing the emotional value add of the employee by
optimizing their health, quality of life and work environment. The company has created
world class gymnasiums, swimming pools, aerobic centers, tennis courts etc. All
employees are covered by insurance while contractual employees benefit from subsidized
annual check ups.
Infosys has five key CSR themes such as education, healthcare, art & culture, upliftment
of rural people inclusive growth. Infosys is the key sponsor of the Akshya Patra
Foundation which provides unlimited free meals for economically backward school
students where 80000 children across the India are assisted through the scheme. The
company has set up 15000 libraries and it is also actively involved in constructing
classrooms, renovating old school buildings, donating school equipments, conducting
career counseling and providing scholarship to the students. Computers@classrooms
initiative donated 1803 computers to schools and NGOs to promote computer awareness.
Project genesis is aimed aligning the teaching methodology and course curriculum at
graduate schools to the BPO industry’s needs, especially in smaller towns to improve
students’ employability. Infosys’s global internship program attracts students from the
best academic institutions around the world to work on live and organizationally relevant
projects. Infosys fellowship program instituted at 12 premier academic institutions in
India, supports research leading to a Ph.D. Infosys has recruited 239 disable people for
Infosys BPO operations which had made them biggest employer of the disabled in Indian
IT industry.
CSR Practices in Reliance Industries Limited: Reliance Industries Limited in its annual
report of 2007-08 mentioned that Health, Safety, Environment is a high priority issue at
Reliance. Management’s vision put safety of the personnel above all is evident from the
policy statement, “Safety of persons overrides all production targets”. Reliance’s state of
the art occupational health centers (OHC) at its manufacturing divisions offer healthcare
services to their employees. The company endeavours to move towards the concept of

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wellness as it recognizes that a healthy worker is productive worker. Under the guidance
of Health, Safety and Environment (HSE) committee of directors, Reliance entered into a
strategic partnership with Dupont Safety resources. The engagement is focused on
behavioral as well as process safety aspects and aims at bringing in excellence in safety
management. A management system approach consisting of gap analysis, planning,
implementation and review has percolated to all business plans through ISO 14001:2004
at all manufacturing location. Reliance is statutory compliant in the area of environment.
During 2007-08, Reliance registered two Clean Development Mechanism (CDM)
projects, one each from Patalganga and Allahabad with United Nations Framework
Convention on Climate Change.( UNFCCC) for CO2 reduction. Reliance as a
responsible corporate has accorded top priority to water conservation and reuse to
preserve fresh water, one of the precious natural resources. Social welfare and
community development is at the core of Reliance’s CSR philosophy and continues to be
top priority for the company. “Teach them young” is the very motto of Reliance as the
company believes that the quality of input received by an individual at an early age
contributes to his or her growth as a capable human being. To ensure high quality of
teaching, reliance has made significant efforts towards value enhancement of teachers
through professional and institutionalized training. Dahej manufacturing division
conducted educational and excursion tours of students and teachers from the primary
school of neighbouring villages and also organized Balmela and Science and
Mathematics fair. Reliance has launched the “sky is the limit” program at Hazira to
address the problem of school drop outs in the local community.
Health awareness program covering diverse topics such as noise pollutions, hazards
substance abuse, prevention of HIV/AIDS and first aid were conducted for students of
schools at the neighbouring towns and villages of patalganga. Reliance also operates
Dhiruvai Ambani Hospital, at Lodhivali and renders quality medical services to the rural
population and highway accident victims.
CSR Practices in Bajaj Auto Limited:Indian Auto Anciliary company Bajaj auto Limited
continues to place emphasis on inclusive growth and has put in place certain processes
for delivering the intended social outcome in mesureable terms.Under the Government of
India, Ministry of Health and Family Welfare, National aids Control Organisation
(NACO) at the initiative of CII has come forward for Public Private Partnership(PPP) in
order to provide better health care to aids parients. The company has signed a MoU with
NACO to set up an Anti Retrovrial Treatment Center (ART center) with the co–operation
of Yeswantrao Chavan Municipal Hospital, pimpri for the benefit of affected people in
the surrounding areas. This will be the first such center in Pimpri Chinchwad Municipal
Corporation area. The company will fully equip the center and provide necessary medical
and paramedical staff at a capital expediture of around Rs 35 lakh and an anuual outgo of
Rs 15 lakh. This initiative will bring solace to the 3000 affected poor families in PCMC
area, besides containing the spread of this dreaded disease and helping humanity.
2 SC-ST students were offered the course fee of Rs 35000 per head to train them for IIT
Joint Entrance Examination and financial aid will be extended to cover their full coure
duration of 4 years on their secure admission to IIT.
For employees who opted for voluntary retirement, the company took a number of steps
to develop and implement a new initiative that is Guidance and Future Planning Program.

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The company continued its rural development activities in Pune and aurangabad districs
of Maharastra through Janakidevi Bajaj Gram Vikas Sanstha(JBGVS). JBGVS aims at
integrated development of 44 seleceted villages to be carried out by the villagers under
their own leadership and through unified efforts forged by local organisations with
JBGVS acting as catalyst.

CSR Pracitce for Global MNC: World coca foundation is oneof the brnaded and
reputed MNC and they are practicing CSR with significant success. The World Cocoa
Foundation and its nearly 70 member companies are committed to helping farmers grow
cocoa sustainably, productively and profitably. Formed in 2000, the Foundation promotes
social and economic development as well as environmental stewardship at the farm level
through a range of programs and partnerships focused on:

• Training farm families to grow cocoa more productively and profitably,

emphasizing sustainable, responsible farming practices
• Helping farm families produce and market quality cocoa through stronger, more
effective cooperatives and associations
• Reducing crop loss and improving productivity through applied research
• Promoting responsible, safe farming practices
• Expanding access to quality education and vocational training for young people

(Sustainability Report of Established Multinational Corporation, World Cola foundation

in January, 2009.)
Source- www.corporateregister.com

Consequences of Poor Governace: Bad governance results the corporate dislocation.

Corporate Governance failure leads violation of corporate social responsibility
commitment of the company. There are gradual stages by which an organization
destabilizes due to governance failure.
First stage is known as Reputational Damage which as characterized by Negative press,
Reputation questions, Temporary stock price decline. Second stage is described as Early
financial problem which includes Negative press, Reputation questions, Changing
supplier or credit terms, Rising borrowing costs, Tightening of liquidity, More Significant
stock price decline. Third Stage is denoted as Growing financial distress which
characterizes Negative market perception, Reputation questions
Credit downgrades, Reducing solvency, severe liquidity squeeze, Cancellation of credit
facilities, exorbitant borrowing cost, and depressed stock price. Fourth stage is the stage
of Bankruptcy which leads Reorganization or liquidation.
Different Act and Committee report on Corporate Governance: To stop the dilution
on corporate governance mechanism of the organization, several committees have been
formed and they have offered their valuable recommendations for this purpose. One of
the most important legislation was Sarbanes Oxley Act affecting US public companies
and accounting oversight which had signed by the USA President on July30, 2002 where
provision of this act are applicable to domestic as well as foreign issuers who seek to
access US capital market. The Securities Exchange Commission has been empowered by

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this act to direct the National Security Exchanges to prohibit the listing of securities by a
company including the foreign companies unless each member of company’s Audit
Committee is a director who is also independent and the audit committee has the
responsibility of approving all audit and non audit services. CEO and CFO of the
company must certify in each annual quarterly report that he has reviewed the report and
based on officer’s knowledge the report does not contain any material false statement and
financial statements are a fair representation of financial condition of a company. If a
company is required to prepare an accounting restatement because of material non
compliance with any financial reporting requirement under the securities law, the CEO
and CFO must reimburse the company any bonus or incentive pay received during the
twelve months period following the first public issuance or filing with SEC of the
document containing any violation of any profits realized from the sale of securities
during the twelve month period. Sarbanes Oxley (SOX) act recommended stringent
criminal penalties to prevent the corporate fraud. According to SOX, anyone who
knowingly tampers or falsifies in any way any record, document or object with intent to
obstruct or influence an investigation by any federal agency may be fined or imprisoned
up to 20 years or both. An Auditor who fails to maintain all audits or work review paper
for a period of five years from the end of the Fiscal Period in which the audit or review
was conducted may be fined or imprisoned for up to 10 years or both. Certification of
false statement knowingly by CEO or CFO of the company shall entail a fine of $10 lakh
and or imprisonment up to 10 years. Similarly SOX has devised new civil cause of action
that no company can retaliate against any employee who cooperates in the investigation
of possible securities fraud .Such an employee shall have the right to be reinstated, to
recover the pay with interest and to receive the compensation for special damages. SEC
has been authorized to obtain a temporary injunction against company prohibiting them
from making extraordinary payments to insiders during the period of an investigation.

Kumara Mangalam Birla headed the Committee appointed by the SEBI on May 7,1999
to promote and raised the standards of corporate governance. According to that board
should have an optimum number of executive and non executive directors with not less
than 50 percent of the board consisting non executive directors .Further in case of non
executive chairman, at least one third of the board should consist of independent directors
and in case of executive chairman at least half of the board should consist of independent
directors. Mandatory requirement for the company is that it should have Audit
committee. Simultaneously there should be Remuneration committee to determine on its
behalf and on behalf of the shareholders with agreed terms of reference, the company’s
policy on specific remuneration package for executive directors including pension right
and employee stock option plan. Board should set up shareholder’s grievance committee
to specifically look into shareholder issues including share transfers and redressing of
shareholders’ complaints. There is also necessity to form a nomination committee to
determine size and composition of the board and specific board needs like diversity of
age, experience, gender, race and business background of members.
CLAUSE 49 BY SEBI incorporates the recommendations of Kumar Mangalam Birla
committee. According to this clause listed companies has to comply with various
corporate governance forms and there is a specific instruction on format of quarterly
compliance report on corporate governance. There are seven sections of the clause of

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listing agreement which companies has to comply for their registration stock exchanges
as mentioned by SEBI. Section I focuses on Board composition, Compensation of Non
Executive Directors, Provision of Board, Code of conduct. Section II indicates
independent and qualified Audit Committee, Audit Committee Meeting, Role of Audit
Committee, Power of Audit Committee, and Review of information by Audit Committee.
Section III imposes the regulation that at least one independent director should be on the
board of directors of the holding company shall be the director on the board of directors
of a material non listed Indian subsidiary company and audit committee of the listed
holding company shall also review the financial statements in particular the investments
made by the unlisted subsidiary company. Section IV calls for necessary disclosure
which includes necessary disclosure regarding related party transaction, Disclosure of
Board, disclosure of proceed from equity/preference/debenture, disclosure of
remuneration of directors, Management disclosure, Shareholder disclosure. Section V is
demanding for CEO/CFO certification, Section VI is for Corporate Governance Report
and Section VII mainly aims for compliance certificate from auditors.

Naresh Chandra Committee had been appointed by the department (now Ministry) of
Company Affairs on 21st August 2002 to analyse and recommending the changes in
statutory Auditor Company relationship so as to further strengthen the professional nature
of the interface. Naresh Chandra Committee has referred to various types of threats to the
independence of Auditors such as Self-Interest Threats, Self- Review Threats, Advocacy
threats, Familiarity threats and Intimidation threats. According to Naresh Chandra
committee recommendations the following should be the disqualification for auditing
assignments such as prohibition of any direct financial interest in the audit client,
prohibition on receiving loans or guarantees from the audit client, Prohibition on personal
relationships with audit clients, Prohibition of service or cooling off period, Prohibition
of undue dependence on audit clients.

Corporate governance is very much essential as a preventive measurement against

corporate fraud and scam so that hard earned money of common investor can be
protected. Corporate Governance mechanism should be such that there should not be any
scope of insider trading and circular trading where market can be manipulated by some
unscrupulous group of persons for their narrow personal gain. Insider trading implies
trading on price sensitive information by the executives or insider directors of the
organization which is directly violating the law of equality of opportunity. Price sensitive
information includes quarterly financial reports of the company, information of proposed
merger and acquisition of the company, dividend declaration, right issue, bonus issue and
stock split etc. Circular trading implies certain brokers target a particular stock for
creating a misperception among commoner that stock is fundamentally strong. It can be
done in such a preplanned way that when one broker gives sell order, another broker will
be ready to take that stock exactly at that same price and at the same volume at which the
former broker has preferred to offload it. It is a predetermined strategy not to allow the
stock price to fall. Retail investor considers it as the sign of the outstanding performance
of the company and prefers to invest in it in order to enjoy a lucrative capital gain.
Market price of the stock jacked up to a significant level. Suddenly brokers offload their
entire holdings and booked the profit where layman investor has to kiss the dust.

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Similarly the company must establish a mechanism for employees to report to the
management the concerns about unethical behavior, actual or suspected fraud or violation
of company’s code of conduct or ethics policy. The mechanism could also provide for
adequate safeguards against victimization of employees who avail of the mechanism and
also provide for direct access to the chairman of the audit committee in exceptional cases.
This is known as whistle blowing mechanism of the organization.

Relationship between CSR and Corporate Governance Mechanism: Now the

question arises to which extent corporate governance mechanism of an organization is
related with its corporate social commitment. Corporate governance is a necessary but
not sufficient condition to ensure that company is promoting its corporate social
responsibility to the best possible extent. Corporate governance is needed to protect the
shareholder’s interest in the organization by introducing transparency in the company’s
operation. On the other hand CSR involves a commitment by a company to manage its
role in society as producer, employer, marketer, customer and citizen in a responsible and
sustainable manner. A sound corporate governance mechanism ensures that both the
board and management of the company are accountable to the shareholder but a proper
CSR practice make the entire organization accountable to its stakeholders.

Current Global Melt Down Scenario: The entire globe has been caught in the trap of
recession which phenomena is described as global meltdown in the current scenario. All
major financial institutions such as Merrill lynch, Lehman brothers, Washington Mutual
etc had gone for bankruptcy which was a great jolt to the backbone of Western economy.
The origin of the trouble is sub prime crisis where excess credit had been generated from
limited capital with the help of Collateral Debt Securities (CDS). The devastating
consequence was experienced by the entire world when price of real estate has gone to its
bare minimum due to huge selling pressure. The impact of credit crunch is so severe that
the entire Western economy is suffering from liquidity crisis. This has created a major
threat to the purchasing power of consumer where inevitable consequence is deficiency
of demand. All the sectors of the economy are forecasting a steep reduction of demand
for the financial year 2009-10 as a result all corporate bodies are reducing their
production and simultaneously demand for factors of production is also going down. All
crucial macro economic variables such as income, output, employment, demand, price
level, interest rate are facing an adverse downward trend. This has created a downward
spiral of vicious circle of economic slump which is not easy to break in the immediate
short run.

Indian economy and capital market has experienced a knee jerking reaction as a
consequence there is a free fall of Sensex from 21000 to 8000 points within 9 months
from January 2008 to October 2008.Various factors are responsible for such setback
including adverse capital account shock, continuous depreciation of rupee against dollar,
huge redemption pressure faced by domestic mutual fund institutions, weak market
sentiment etc. Several recognized branded blue chip organizations such as Reliance
Industries Limited (RIL), ICICI Bank, Tata Steel (TISCO), Steel Authority of India

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(SAIL), Tata Motors (TELCO), Unitech, DLF, Oil and Natural Gas Corporation(ONGC),
Power Grid, Tata Consultancy Service(TCS), Infosys, Wipro etc are performing
miserably. Simultaneous Expansionary Fiscal and Monetary Stimulus provided by
Government have also failed to make the scenario better off.

Honorable prime Minister of India, Dr. Manmohan Singh made a comment in Asia-
Europe Summit which was conducted on 24th, 25th October 2008 in Beijing which is very
much relevant to understand the current status of Indian Economy. In devising a reform
agenda, one must bear in mind the wise saying of John Maynard Keynes regarding the
economically damaging role of excessive speculative or innovative activity. To quote
Keynes- "Speculators may do no harm as bubbles on a steady stream of enterprise. But
the position is serious when enterprise becomes the bubble on a whirlpool of
speculation. When the capital development of a country becomes a byproduct of the
activities of a casino, the job is likely to be ill-done."

Recent Satyam fraud was a big jolt which has raised serious question about ethical issues
and corporate governance mechanism of Indian Companies. So long Economists are
emphasizing in maximization of utility of the consumer, financial experts are focusing for
maximization of shareholder’s wealth, and Marketing people are in favour of
maximization of customer satisfaction. Now time has come when everybody has to prefer
for maximization of moral and ethical value of the organization to ensure long term
sustainability of the organization and maximization of stakeholders satisfaction.

Impact of Meltdown on CSR: A dangerous trend has been experienced in this economic
slow down phase where majority of companies are trying to consolidate their position
and in order to do so, they are using this economic depression as scapegoat. They are
desperately cutting their budget for CSR. They have started to freeze their recruitment as
well as they are sending regret letter to the candidates whom they have already recruited
thorough campus placement process. Simultaneously several drastic actions are taken
such as retrenchment, lay off and salary cut in the name of cost cutting. The most
disappointing fact is that Cabinet Ministers of Government of India are giving press
release on a regular basis where they are suggesting the CEO of the companies for salary
cut of their employees rather than retrenchment. A circumstance has been created where
it has become regular practice of the companies to reduce the compensation package of
their employees and employees have nothing to say as because employees are offered
almost on take it or leave it basis. Companies are trying to create an image that
companies are obliging their workforce by retaining them instead of showing them the
exit door. The companies are defending their position by concluding that no other option
is left for them to stop the erosion of their profit margin as the objective of the
organization is to maximize the shareholder’s wealth.

If the situation can be analysed properly, it can be seen that there is no rational logic to
accept the fact that fundamental of Indian companies are very weak. Neither any Indian
company has faced huge exposure to sub prime crisis nor has gone for bankruptcy. One
of the major safeguard for India in this volatile situation is that India has not allowed
100% capital account convertibility. Indian Subsidiaries of large multinational companies

13
have emerged as a crucial profit generator. Barring a few exceptions, the locally listed
units of the companies such as ABB, Glaxo, Siemens, Cummins, Oracle, Suzuki,
Whirlpool, Nestle have increased their contribution to the global consolidated earning as
growth remains robust in many of the Indian Industry and this has happened despite a
sharp rupee depreciation against major global currencies. Obviously no body can discard
the fact that due to constant rupee depreciation, India has to incur huge loss in their
import bill. Similarly India’s export prospect has also suffered in this credit crunch
scenario as the target market USA and UK has reduced their demand for exportable to a
significant level. Exports from tea, rice, marine products, gems & jewelry, cotton yarn,
fabrics, handicrafts, fabrics have been suffered extensively. But it can not be considered
as sufficient reason for Indian corporate houses to abandon the concept of CSR and
committing injustice to their stakeholders. Corporate should understand that violating the
CSR is not the correct policy to combat against this global recession. Company should
think about alternative way of cost cutting by reducing the unnecessary expenses & non
productive asset of the company and they have to restructure their business and modify
their marketing strategy so that they can be able to meet the customer need and want
much more efficiently and effectively. In stead of retrenchment, company can redeploy
the existing workforces in another strategic business unit of the organization as job
relocation is unequivocally better than job cut.

CSR and Ethical Issues: Lay off and job cut may be ethical from self egoism concept as
it is beneficial to the management of the organisaton as it is one way of cutting cost and
profit maximization of the shareholder of the company. According to the proponents of
Ethical utilitarianism, offering pink slip to the employees or cutting their compensation
package are immoral and unethical practices because this step is not favorable for
everyone of the community. The concept of egalitarian justice implies each person should
be given exactly equal shares of benefits and burdens of a group or society. According to
this concept, company’s stand to penalize their employee when there is chance of
incurring loss can be justified if they had rewarded their staffs proportionately when
organizations are earning lucrative profit. Otherwise it will be a just violation of
egalitarian justice. Simple law of economics says that when income falls, consumption
falls less than proportionately as because it is very difficult for a person to reduce his
standard of living all on a sudden. Similarly Micro economic theory is offering the
concept that price effect can be decomposed into income effect and substitution effect.
Wage is nothing but price for labour that employer has to pay. According to simple logic,
wage effect also can be divided into income and substitution effect. Income effect of
wage change shows if there is fall in wage, then worker’s ability to purchase of any
commodity will become lower. Leisure is also a commodity which provides utility or
satisfaction to the worker as work gives disutility. Labour will not be in a position to
consume more leisure due to wage fall. So income effect of wage fall will increase work
effort. Substitution effect of a wage fall shows, people has to sacrifice less money in
order to get leisure than before. So substitution effect of wage fall reduces work effort.
The ultimate effect of wage fall on work effort of employee depends on collective
strength of the two effects. But usually it has been experienced that for a wage fall,
substitution effect tends to exceed the income effect, reduces the work effort of worker

14
further. Productivity of employee is bound to fall if they are suffering from feelings on
insecurity and uncertainty. Many companies are not hiring replacement to fill vacancies
created by the departure of the executives instead handing the responsibilities to existing
executives in order to reduce the cost of company. When a company acquires another
company, usually Acquirer Company offers its share to the target company at a particular
swap ratio just to protect the interest of shareholder of the target company. No assurance
is provided to the customer, creditor, supplier and employee of the target company by the
acquirer company that it will look their interest. Therefore, in case of merger stakeholder
of the target company always passes through a phase of uncertainty and volatility. It is
also one form of violations of CSR.

CSR must be underpinned by a strong business case that links social and environmental
responsibility with financial success. Business benefit includes operational cost savings
through environmental efficiency measures; enhanced reputation through positive
responses to stakeholder concerns; increased ability to recruit and retain staff; sharper
anticipation of management of risk; and improved capacity to learn and innovate. CSR
needs to be integrated in core business strategies if it is to survive global recession,
depression or insecurity. CSR has gained prominence against a backdrop of relative
stability and economic growth. The trend of global economic cycles means that this
pattern of growth will at some point slow down and possibly go into recession. Where
CSR is integrated with core business strategy, it is likely to remain strong where as CSR
as a philanthropic add-on is vulnerable to cost cutting. Ultimately long term success of
CSR will be based on its ability to be positioned within the core business strategy and
development, thereby coming part of business as usual.

From the above said discussion it has been almost clear that formulating and
implementing certain act, law or committee recommendation will be inadequate to ensure
flawless corporate governance in the company. Similarly preaching the theory and
concept of ethics, justice, right, and morality will not guarantee that company is fully
committed to its corporate social responsibility. There should not be any controversy over
the fact that profit making is the main motto of the company but organization should have
a human face. Organisation should follow the parental approach towards their employee
so that employee can feel that employer is their true well wisher. It can create a huge
motivation in the mind of worker and their commitment to the job will be enhanced
automatically which leads to increase in productivity.

There should be change in the mental set up of the executives and mangers and they have
to focus on self actualization need rather than esteem need. Bringing about mental
revolution or changing the traditional outlook is no doubt a challenging task.

Management Institute and Their Scopes: A common curiosity is peeping in

everybody’s mind about the possible impact of this economic downturn on academics
related field. From historical data analysis it is the common finding that number of
applicants for the professional course such as Management usually goes up during the

15
recession time. Probability of being unemployed and underemployed is quite high in
recession phase; therefore individual prefers to increase their professional qualification
during this volatile situation, so that it will be treated as an additional feather to their cap.
When economy will bounce back from recession trap, those people will be able to
become the most beneficiary group of the society.

It is high time for all Management institute for restructuring, redesigning and
reformulating the candidate selection process so that more emphasis can be given on
quality rather than quantity. In other words, it is the appropriate time for the Management
institute to consolidate their position. Restriction on quantity and focus on quality will
enhance the placement opportunity for the institute even if in this gloom and doom
economic situation. As it is a universally known fact that demand for quality product will
never face retardation independent of economic circumstance of the nation.

Usually almost all Management institutes follow traditional criteria of student selection
by conducting aptitude test, test of basic knowledge of English and numerical ability. The
selected candidate of written test has to undergo a Presentation/Group discussion/
Extempore where their communication skill is to be judged. In this process of selection
Intelligence Quotient (IQ) level of the student can be judged. No body can deny the
rationality of the process because sharpness, intelligence are the basic and essential
criteria for a good manager. But this will neither suffice the purpose of the selection nor
guarantee about the potential strength of the candidates. Therefore a serious need has
been felt to change the idea of entire selection procedure.

Apart from Intelligence Quotient (IQ), a potential manager should possess a satisfactory
level of Intellectual Quotient, Spiritual Quotient (SQ), and Moral Quotient (MQ).
Intelligence Quotient is defined as the following way,
IQ=mental age/ chronological age. Above average IQ level indicates quick catching
power, ability to understand and analyze any matter in a perfect and precise method.

Intellectual Quotient is related with the ability to generate intellectual capital. Intellectual
capital implies creativity, writing skill which may include writing an article/paper/case
study/report etc. Initially it may create confusion whether these are really needed for a
tight scheduled manager who is working in a branded organization or a reputed MNC.
Role of a manger is planning, organizing, controlling, directing, motivating, and staffing
their workforce to get their jobs done. An ideal manger should know how to swim against
the tide. Constantly he has to scan the external and internal environment to identify the
potential opportunity and threat and to locate internal strength and weakness and
therefore they have to formulate suitable strategy under different circumstances.
Innovative capacity, fertile imagination, constant value addition as well as restructuring
the unique selling proposition are the main challenge that a manger has to face. In order
to discharge their duties in a proper way, above average Intellectual quotient is required.
One alarming trend has been experienced for the last few years candidates are joining to
the professional academic courses just to purchase a diploma or degree to ensure a job of
lucrative pay package. The tenacity of learning or making some positive value addition is
completely missing in most of the cases. The consequence is that even if after scoring a

16
good percentage of marks, thanks to the relative grading system, they are unable to
qualify the interview or fail to retain their job in the long run after getting the placement
from the campus. This mindset of opportunism has to be changed as we all know:-

Learning gives creativity, Creativity leads to thinking, Thinking provides knowledge and
Knowledge makes you great.

Nothing can be achieved without dedication and hard effort. Effective utilization of
existing knowledge can create a comprehensive wealth for the nation and also improve
the quality of life in the form of better health, education, infrastructure and other social
indicators. Intellectual quotient provides the necessary impetus for learning appetite by
which a person can fulfill his self actualization need.

Apart from conducting the aptitude test by multiple choice questions, there should be
some provision of descriptive question such as essay writing, report writing etc. where
examiner will get enough scope to judge the writing skill of the candidate. This is the best
way to judge whether the candidate has enriched with intellectual capital or not. Without
intellectual capital, a person can not be able to correlate his learning with real life
decision making problem which is essential for a good manager.

Privatisation, free capital movement, market integration are creating a greater equity
investment culture around the world. In the current scenario, when a significant number
of global financial institutions such as Merrill Lynch, Layman Brothers, Washington
Mutual, American International Group (AIG) etc have gone for bankruptcy situation, the
fire has gained further fuel when CEO of Indian fourth largest IT company, Satyam, Mr.
Ramalinga Raju admitted about the fraud that he has committed for the last few year by
showing the fake cash balance and manipulating the balance sheet. Security Exchange
Board of India (SEBI) has suddenly become very cautious and started to adopt some
stricter regulation such as promoter of the company has to declare the value and volume
of the shares that they have pledged in any financial institutions and interrogation will be
there to identify whether the fund raised through Initial Public Offer (IPO), further Public
Offer (FPO), right issue has been utilized in proper direction as per the promises were
made to the shareholder. If the funds are remaining utilize as because company is waiting
for appropriate opportunity it is permissible but if that fund is invested in any other sector
such as real estate sector without the consent of shareholder, the board of the company
will be found as guilty and penal action will be taken against them. The central
Government plans to cap the salaries drawn by the executives working for institutions
such as credit rating agencies, stock exchanges and clearing corporations as it looks to
prevent unhealthy competition among the gatekeepers of the financial system. The idea is
to remove the unrealistic target linked incentives that may put pressure on such
executives to maximize profits through unethical means. The Institute of Chartered
Accountants of India (ICAI), the country’s accounting and auditing rule maker is
considering a proposal to make it mandatory for the companies to get their books audited
by more than one auditor so that each of the audit firm could observe the practices

17
followed by the other. Such a move will ensure that auditors do not enter into a got up
arrangement with the company management. All the efforts are directed to ensure a
transparent corporate governance system in the company so that hard earned money of
shareholder can be protected and trust and belief of investor to Indian Capital market
should remain sound.

A good manager should expect to have a moral quotient so that he should not sacrifice
long term value for getting some short term benefit. Sometimes it is important to know
how to concede the defeat in the battle in order to win the war. Managers should be
reminded of an essential aspect of Indian ethos. While much of the western thought is
based on the objectives of producing wealth or of economic growth and scientific
advancement etc and even human beings have been considered for development only as a
resource or as a means, emphasis in the Indian Vision has been the mere economic
progress is not development, and the goal of endeavor has to be the growth of the human
being with everything else being only human resource.

Spiritual quotient is also one important ingredient of a good manager’s character so that
he can strive for ultimate long term gain rather than exploiting the short term materialistic
opportunity. Spiritualism need not have any connection with any religion or ritual. The
end of economy and of polity is social good and improvement in the quality of human
life. Service to the organization should be treated as service to the god so that there will
be 100% dedication to the job and to the company. The watchword for Asoka was
Yogakshema or public welfare. To attain Yogakshema, he said it was more important to
have popular relationship between fellow beings.

Conclusion: Today’s management student is tomorrow’s potential manager. So, from the
selection time, if focus can be given on intelligence, intellectual, moral and spiritual
quotient of the candidates, then the base work will be done for ensuring CSR in the
companies in the coming days. Course curriculum should be generated in the B schools
according to predetermined basis of learning objective and learning outcome so that
concept of ethical leadership gets much more focuses in it. Delivery in the classroom
should be based on real life case studies, case lets, role plays, group discussion where
sessions will be much more participative in nature. Evaluation component of the student
must include various components such as real life project, presentation, rubrics where
there will be a chance on 3600 performance evaluation. Performance of the student will
be judged by himself/herself, by their peer group and by the faculty. Similarly, students
have to understand their perceived expectation of learning from the institute, from the
program, from the subject, from the course module and from the faculty. It is an
excellent learning from where students will be able to learn how to evaluate their own
performances as well as others. Simultaneously, there must be a provision of faculty
evaluation by student on the basic of faculty’s subject knowledge, extent of course
coverage, ability to discuss the concept with the help of suitable real life examples,
evaluation objectivity, ability of mentoring the students which will facilitate the entire
stakeholder groups such as students, the faculties as well as the Management Institute.
Simultaneously, students will get a basic idea about the performance appraisal as this
skill will be needed when they will join as a manger in the corporate sector. Similarly

18
there must be compulsory paper on business ethics and morality, corporate governance
and social responsibility in the curriculum so that there will be the maximum possible
inculcation of MQ, SQ, and IQ. This is a practical and pragmatic solution of the CSR
problem where ethical erosion of the future managers can be prevented at source as
prevention is always better than cure.

Bibliography
1) Financial and Capital Market
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Social Responsibility, Sustainability and Economic Justice
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A guide to Best Practice Business Planning and UK Based companies
Consultant Editor-John Honcock

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Subhas C. Kashyap Publications Division, Ministry of Information and
Broadcasting
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C V Baxi, Ajit Prasad.

6) Corporate Governance. Law Practice and Procedures with Case Studies

Dr. C.L.Bansal

With SEBI press release dated 30.12.2005

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Francis Cherunilam

Himalaya Publishing Houses, Seventeenth Revised Edition,2006.

8) www.corporateregister.com
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