Corporate Social Responsibility &

Sustainability

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 Table of Contents

Module No Module Name Page No

Module 1 Corporate Social Responsibility 6

Module 2 Corporate Governance 38

Module 3 Corporate Sustainability 75

Module 4 Corporate Sustainability Reporting Frameworks 92

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 (Source: Nielson NV Report)

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 Module 1
Corporate Social Responsibility

CSR is a concept with many definitions and practices. The way it is understood and
implemented differs greatly for each company and country. Moreover, CSR is a very broad
concept that addresses many and various topics such as human rights, corporate governance,
health and safety, environmental effects, working conditions and contribution to economic
development. Whatever the definition is, the purpose of CSR is to drive change towards
sustainability.

Meaning of CSR
CSR is referred as different terms such as responsible business conducts, corporate
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 citizenship, sustainable programs etc. CSR is a company’s sense of responsibility towards the
community and environment (both ecological and social) in which it operates.

Corporate social responsibility is a gesture of showing the company’s concern & commitment
towards society’s sustainability & development. CSR is the ethical behavior of a company
towards society.

Definition:

According to WBCSD (World Business Council for Sustainable Development) “The continuing
commitment by business to behave ethically and contribute to sustainable economic
development while improving the quality of life of the workforce and their families as well as
of the local community and society.”

Concept of Social Responsibility

The concept of social responsibility has emerged due to several economic, social, political and
legal influences. These forces, which have obliged, persuaded and helped businessmen to
become aware of their responsibility to society, are as follows:
Public opinion: Public interference with the help of the government has instilled a fear in
the heart of businessmen. The threat of public regulation and public ownership has compelled
them to acknowledge the fact that responsible behavior is essential on their part for survival in
the private sector.

Trade union movement: The recent development of socialism that boosted the strength of
labor unions has forced businessmen to give a fair share to workers. Human relations and
labor legislation have facilitated trade unions to increase their influence.
Consumerism: Consumer organizations have encouraged awareness about consumer rights.
Consequently, businesses have become more responsive to consumer needs and stress the
dictum of ‘consumer is the king’. Businessmen can no longer adopt the approach of ‘let the
buyer beware’.
Education: Extensive education has made businessmen conscious about the quality of life,
moral values and social standards. Liberal business leaders have been pressing the business
community to acknowledge its social obligations.
Public relations: Modern businessmen are aware that a good public image contributes to
their growth. There is a greater alertness in their hearts that business is a construction of

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 society and hence, it should consider and react positively to the expectations of society.
Managerial revolution: Separation of ownership from control in large corporations has
resulted in professionalism in management. A professional manager is fairly aware of the
society’s expectations and attempts to meet the demands of all social components, like
customers, employees, shareholders and the government, in a well adjusted manner.

Benefits of CSR:

• Better brand recognition

• Positive business reputation
• Increased sales and customer loyalty
• Operational costs savings
• Better financial performance
• Greater ability to attract talent and retain staff
• Satisfied Employees
• Organizational growth
• Easier access to capital
• Reduce regulatory burden
• Identify new business opportunities
• Long term future for business
• Differentiate the business from the competitors

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 Responsibilities of a Business towards various Interest Groups

Interest groups consist of the various persons connected with a business, such as consumers,
shareholders and the community. The responsibilities of a business towards various interest
groups are as follows:

Responsibilities towards consumers: A consumer is a person who determines what goods

shall be produced and whether they should be sold in the market or not. Consumers not only
determine the income of the business but also affect the success and survival of the business.
Therefore, a business has some basic responsibilities towards the consumers and these are
as follows:
(i) To produce those goods that meet the needs of consumers of different tastes, classes and

purchasing power
(ii) To establish the lowest possible price with efficiency and reasonable profit to the business

(iii)To ensure fair distribution of products among all sections of the consumers and (iv)To
make the products more satisfactory to consumers through the study of consumer needs
(v)To handle the complaints of consumers more carefully and to analyze them properly (vi)To
answer consumers’ enquiries related to the company, its products and services.

Responsibilities towards shareholders: The basic responsibility of a business is to ensure

the safety of investment and higher rate of return on the investment. Owners of a business
may be proprietors, partners or shareholders. The interest of shareholders lies in participating
in the management and getting regular dividends at appropriate rates. It is, therefore, the
responsibility of the management to improve communication between the company and its
shareholders. This can be done by providing maximum information to the shareholders
through newsletters, annual reports or by holding the annual general meeting of the company
at an appropriate time and place so that the maximum number of members can come and
participate in the discussions.

Responsibilities towards community: The management has the responsibility of informing

the community about the organizational policies, activities and contribution towards the
betterment of society. The various other responsibilities towards the community are as
follows:
(i) Financial help to the municipal and district boards for the improvement of housing
conditions

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 (ii) To help the community by aiding hospitals, schools, colleges, religious institutions, and so

on
(iii) To organize community forums and group discussions to promote better understanding of

national and local affairs

(iv) To encourage sports and provide recreational facilities.

Responsibility towards Government

(i)Obey rules & regulations.
(ii)Regular payment of taxes.
(iii)Cooperating with the Govt. to promote social values.
(iv)Not to take advantage of loopholes in business laws.
(v)Cooperating with the Govt. for economic growth & development

Responsibility towards Employee

(i)To provide a healthy working environment.
(ii)To grant regular & fair wages.
(iii) To provide welfare services.

(iv) To provide training & promotion facilities.

(v) To provide reasonable working standard &norms.

(vi) To provide efficient mechanism to redress worker’s grievances.

(vii)Proper recognition of efficiency & hard work.

History and Evolution of Corporate Social Responsibility in India

In India, the concept of corporate social responsibility has developed in phases. In the 19th
century, business families like Tata, Birla, Godrej and others were inclined towards social
causes and they continue to do the same now that too in a larger scale. Between 1960-80,
when the Indian companies were facing high taxes, licensing and restrictions, private
companies got involved in corporate malpractices. This is the time when legislations on
corporate governance, labour and environment issues were enacted. CSR was also given a
try to be implemented. Post-1980, when licensing was reduced to a certain extent, companies
became more willing to contribute towards the social causes as corporate social responsibility.
The Companies Act, 1956 had clear provision for CSR but the new Companies Act, 2013 makes
CSR mandatory for companies which fall within the ambit of section 135(1). The said section
is to be read with the Schedule VII and Companies (Corporate Social Responsibility) Rules,
2014.

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 CSR in India has evolved through different phases, like community engagement, socially
responsible production and socially responsible employee relations. Its history and evolution
can be divided into four major phases.

Phase 1 (1850 To 1914): The first phase of CSR is known for its charity and philanthropic
nature. CSR was influenced by family values, traditions, culture and religion, as also
industrialization. The wealth of businessmen was spent on the welfare of society, by setting
up temples and religious institutions. In times of drought and famine these businessmen
opened up their granaries for the poor and hungry. With the start of the colonial era, this
approach to CSR underwent a significant change. In pre-Independence times, the pioneers of
industrialization, names like Tata, Birla, Godrej, Bajaj, promoted the concept of CSR by setting
up charitable foundations, educational and healthcare institutions, and trusts for community
development. During this period social benefits were driven by political motives..

Phase 2 (1910 To 1960): The second phase was during the Independence movement.
Mahatma Gandhi urged rich industrialists to share their wealth and benefit the poor and
marginalized in society. His concept of trusteeship helped socio-economic growth. According
to Gandhi, companies and industries were the ‘temples of modern India’. He influenced
industrialists to set up trusts for colleges, and research and training institutions. These trusts
were also involved in social reform, like rural development, education and empowerment of
women.

Phase 3 (1950 To 1990): This phase was characterized by the emergence of PSUs (Public
Sector Undertakings) to ensure better distribution of wealth in society. The policy on industrial
licensing and taxes, and restrictions on the private sector resulted in corporate malpractices
which finally triggered suitable legislation on corporate governance, labor and environmental
issues. Since the success rate of PSUs was not significant there was a natural shift in
expectations from public to private sector, with the latter getting actively involved in socio-
economic development. In 1965, academicians, politicians and businessmen conducted a
nationwide workshop on CSR where major emphasis was given to social accountability and
transparency.

Phase 4 (1980 Onwards): In this last phase CSR became characterized as a sustainable
business strategy. The wave of liberalization, privatization and globalization (LPG), together
with a comparatively relaxed licensing system, led to a boom in the country’s economic

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 growth. This further led to an increased momentum in industrial growth, making it possible
for companies to contribute more towards social responsibility. What started as charity is now
understood and accepted as responsibility.

Argument in favor of Social responsibility

The main points that support the assumption of social responsibility by business enterprise
are as follows:

(i) Long-term self-interest of business: As stated earlier, a good public image is bound to

give better returns to a business enterprise. Businessmen can benefit in the long run by
providing for the welfare of the society through education and better living conditions. This
will result in better employees in business and enlightened customers in society who will
benefit through their increased purchasing power.
(ii) Ascertainment of law and order: Social responsibility on the part of business can avoid

unrest in society. If the society feels that it is not getting its appropriate share in business, it
is bound to create disorder by adopting anti-social and illegal activities and rebellions.
Pursuing the doctrine of social responsibility can help business organizations prevent social
chaos.
(iii) Maintenance of free enterprise: Government or public regulation can hinder the
development of business by decreasing the flexibility of decision-making and the freedom of
choice and action. Therefore, the voluntary assumption of social responsibilities is essential
for the growth of a business organization.
(iv) Creation of society: Business is a part of society and survives on the demands of the

society. Therefore, it should be responsive to social expectations and welfare. The right of the
business to grow goes hand in hand with its awareness of social responsibility and welfare. It
is the duty of the business enterprise to contribute in some way to the well-being of its society.
(v)Moral justification: Enlightened businessmen have now become more aware about their
moral duty to serve the society. Business has the resources and power to solve social
problems. Therefore, its power should be balanced with social responsibility.
(iv)Profitable environment: To ensure a profitable environment in the society in which it
operates, business needs to meet the challenges of social evils. Active interference on the
part of businessmen in solving these challenges can convert them to opportunities, which in
turn will ascertain not just the existence, but also the benefits of the organization.

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 (vii)System interdependence: Business system and social dependence are interrelated and
thus affect each other.

Arguments against Social responsibility

The arguments against social responsibility on the part of business enterprise are as follows:
(i)Dilution of profit maximization: Economic value is the main criterion by which the
success of a business should be estimated. According to Milton Friedman, ‘Few trends could
so thoroughly undermine the very foundation of our free society as the acceptance by
corporate officials of a social responsibility other than to make as much money for
shareholders as possible. This is a fundamentally subversive doctrine. Management’s
spending for society is hypocrisy. Only people can have
responsibilities not corporations.’
(ii) Loss of incentive: The motivation to utilize resources effectively is decreased when social

responsibility is considered important. It is the profit motive principally that encourages

optimum use of resources and manpower to run the business with enthusiasm.
(iii) Lack of standard: Besides the effort motive, profit serves as a standard to measure the

performance of business. A business organization goes off course as it loses the guiding
measure that depicts the efficiency of its performance and thus hinders decision-making.
(iv)Business is an objective venture: The emotional insights and experience essential to
tackle social problems are lacking in the temperament of businessmen. They cannot
determine what is in public interest. The solutions to social problems should be expected from
specialized social agencies and not from businessmen.
(v) Undue use of power: If business organizations are involved in social institutions they

are likely to dominate the decisions of these institutions for their own interests. They can use
their financial power to take decisions concerning the functioning of these institutions. This
may further lead to increased social detriment.
(vi) Market mechanism gets distorted: The principle of social responsibility is based on

the assumption that market mechanism is not the appropriate way to allocate scarce
resources to alternative uses and so it should be replaced by political mechanism. If the
market price of a product contains the cost of social actions, it does not actually represent
the relative cost of producing it and thus the market mechanism gets distorted.

Corporate Social Responsibility in India: Features under Companies Act, 2013

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 For decades, companies in India has been regulated and governed by the outdated Companies
Act, 1956. After years of debate and contemplation, The Indian Parliament passed the New
Companies Act, 2013. It is divided into 7 schedules, 29 chapters and 470 sections.

It has brought various new features to corporate legislation which include but are not limited
to mandatory spending on Corporate Social Responsibility of at least of 2% of net profit,
curbing corporate delinquency by introducing punishment for falsely including a person to
enter into an agreement with a bank or a financial institution to obtain credit facilities,
introduction of new entity called ‘one person company’, simplified the procedure for mergers
and acquisitions, limitation on the number of companies in which the same auditor may be
appointed, strengthening the role of women by stipulating appointment of at least one women
director in the board room, limit in the number of maximum partners etc.

The Companies Act, 2013 came into force on 12th September 2013. But the provisions of
section 135 relating to CSR came into effect on 1st April 2014. The features of Section 135
read with Schedule VII and (Corporate Social Responsibility Policy) Rules, 2014 are described
as below:

Applicability Of The CSR

The applicability of the CSR provisions on the certain class of Companies having:

(a) Net worth of the company rupees Five hundred crore or more; OR

(b) Turnover of the company rupees One thousand crore or more; OR

(c) Net profit of the company rupees five crore or more.

during any financial year to constitute a Corporate Social Responsibility (CSR) Committee of
the Board. Any financial year has been clarified as to imply any of the three preceding financial
years.

Note: the provisions of CSR are not only applicable to Indian companies, but also applicable
to branch and project offices of a foreign company in India.

Calculation Of Contribution Under CSR:

The company spends, in every financial year, at least 2% of the *average net profits of the
company made during the three immediately preceding financial years, in pursuance of its
Corporate Social Responsibility Policy:

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 Activities of the company shall give preference to the local area and areas around it where
it operates, for spending the amount earmarked for Corporate Social Responsibility activities
defined under the Schedule VII of the Companies Act 2013.

If the company fails to spend such amount, the Board shall, in its report made under clause
(o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

* “average net profits” shall be calculated in accordance with the provisions of Section 198
of the Companies Act 2013.

A new concept of fund transfer on non-utilization of CSR:

• if a company fails to spend CSR amount, then the company shall transfer the unspent
amount to a fund under Schedule VII
• or if a company holds amount for ongoing projects, then such amount be transferred
to Unspent Corporate Social Responsibility A/c within a period of 30 days from the end
of financial year and spend the same within 3 years for the project.
• If a company fails to spend for ongoing project within a period of 3 years of transfer
to unspend CSR A/c, the same be transferred to fund under schedule VII mentioned
under the Companies Act, within 30 days of closure of Financial Year.
• if a company fails to spend CSR amount, then the company shall transfer the unspent
amount to a fund under Schedule VII
• or if a company holds amount for ongoing projects, then such amount be transferred
to Unspent Corporate Social Responsibility A/c within a period of 30 days from the end
of financial year and spend the same within 3 years for the project.
• If a company fails to spend for ongoing project within a period of 3 years of transfer
to unspend CSR A/c, the same be transferred to fund under schedule VII mentioned
under the Companies Act, within 30 days of closure of Financial Year.

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 Illustration for CSR unspent amount:

If a company fails to spend CSR amount Then the company shall transfer on or
for FY 2019-20 as on 31st March 2020 before 30th April 2020 to the Funds as
mentioned in Schedule VII.

If a company is holding the unspent Then open an account Unspent Corporate

amount for ongoing project for FY 2019-20 Social Responsibility A/c and transfer the
as on 31st March 2020 unspent amount of CSR before 30th April
2020.

Such amount shall be spend within 3

years from the date of transfer i,e., on or
before 30th April 2023.

If a company fails to spend amount in Then the company shall transfer on or

unspent CSR A/c – for a period of 3 years before 30th April 2023 to the Funds as
mentioned in Schedule VII.

IF company fails to fulfill the CSR provisions:

• the company shall be punishable with fine which shall not be less than fifty thousand
rupees but which may extend to twenty-five lakh rupees
• and every officer of such company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not
be less than fifty thousand rupees but which may extend to five lakh rupees, or with
both.

CSR Reporting:

• The Board’s Report referring to any financial year initiating on or after the 1st day of
April 2014 shall include an annual report on CSR.

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 • In case of a foreign company, the balance sheet filed shall contain an annexure
regarding report on CSR.

CONSTITUTION OF THE CSR COMMITTEE:

The CSR committee shall be constituted with 3 or more directors, out of which at least one
director shall be an Independent Director.

Types of the Company Board of CSR Committee

Listed Companies 3 or More Directors including at least one

Independent Director

Public Company 3 or More Directors including at least one

Independent Director

Private Company 2 Directors

Branch and Project Offices of a
Foreign Company
At least 2 persons, one person resident in India
authorised to accept on behalf of the company
service of process any notices or other documents
served on the company and another person shall be
nominated by the foreign company

The composition of the Corporate Social Responsibility Committee is required to be disclosed

in the Board’s report prepared under the Act.

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 CSR COMMITTEES FUNCTIONS:

In accordance with section 135 the functions of the CSR committee include:

(a) Formulating and recommending to the Board, a CSR Policy which shall indicate the
activities to be undertaken by the company as specified in Schedule VII;

(b) Recommending the amount of expenditure to be incurred on the CSR activities.

(c) Monitoring the Corporate Social Responsibility Policy of the company from time to time.

(d) Further the rules provide that the CSR Committee shall institute a transparent monitoring
mechanism for implementation of the CSR projects or programs or activities undertaken by
the company.

The CSR Committee shall formulate and recommend to the Board, a policy which shall indicate
the activities to be undertaken (CSR Policy); recommend the amount of expenditure to be
incurred on the activities referred and monitor the CSR Policy of the company. The Board shall
take into account the recommendations made by the CSR Committee and approve the CSR
Policy of the company.

DISPLAY OF CSR ACTIVITIES ON THE COMPANY’S WEBSITE:

The Board of Directors of the company shall, after taking into account the recommendations
of CSR Committee, approve the CSR Policy for the company and disclose contents of such
policy in its report and the same shall be displayed on the company’s website, if any, as per
the particulars specified in the Annexure.

Activities That Can Be Undertaken As CSR Initiatives

The Policy recognizes that corporate social responsibility is not merely compliance; it is a
commitment to support initiatives that measurably improve the lives of underprivileged by
one or more of the following focus areas as notified under Section 135 of the Companies Act
2013 and Companies (Corporate Social Responsibility Policy) Rules 2014:

i. Eradicating hunger, poverty & malnutrition, promoting preventive health care & sanitation
& making available safe drinking water;

ii. Promoting education, including special education & employment enhancing vocation skills

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 especially among children, women, elderly & the differently unable & livelihood enhancement
projects;

iii. Promoting gender equality, empowering women, setting up homes & hostels for women &
orphans, setting up old age homes, day care centers & such other facilities for senior citizens
& measures for reducing inequalities faced by socially & economically backward groups;

iv. Reducing child mortality and improving maternal health by providing good hospital facilities
and low cost medicines;

v. Providing with hospital and dispensary facilities with more focus on clean and good
sanitation so as to combat human immunodeficiency virus, acquired immune deficiency
syndrome, malaria and other diseases;

vi. Ensuring environmental sustainability, ecological balance, protection of flora & fauna,
animal welfare, agro forestry, conservation of natural resources & maintaining quality of soil,
air & water;

vii. Employment enhancing vocational skills

viii. Protection of national heritage, art & culture including restoration of buildings & sites of
historical importance & works of art; setting up public libraries; promotion & development of
traditional arts & handicrafts;

ix. Measures for the benefit of armed forces veterans, war widows & their dependents;

x. Training to promote rural sports, nationally recognized sports, sports & Olympic sports;
xi. Contribution to the Prime Minister‘s National Relief Fund or any other fund set up by the
Central Government for socio-economic development & relief & welfare of the Scheduled
Castes, the Scheduled Tribes, other backward classes, minorities & women;

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 xii. Contributions or funds provided to technology incubators located within academic
institutions, which are approved by the Central Government;

xiii. Rural development projects, etc.

xiv. Slum area development

Benefits a Corporate House Gets From Corporate Social Responsibility

(i) Improves Public Image: Positive social responsibility improves a company’s public image

and relationship with consumers. Companies that demonstrate their commitment to various
causes are perceived as more philanthropic than companies whose corporate social
responsibility endeavors are nonexistent. A corporation’s public image is at the mercy of its
social responsibility programs and how aware consumers are of these programs. Remember,
consumers feel good shopping at institutions that help the community. Clean up your public
image (and broadcast it to the world!). Corporations can improve their public image by
supporting nonprofits through monetary donations, volunteerism, in-kind donations of
products and services, and strong partnerships. By publicizing their efforts and letting the
general public know about their philanthropy, companies increase their chances of becoming
favorable in the eyes of consumers.

(ii) Increases Media Coverage: Having a strong CSR program can increase the chances

that your company gets news coverage. It doesn’t matter how much a company is doing to
save the environment if nobody knows about it. Companies need to form relationships with
local media outlets so they’ll be more likely to cover the stories that particular company has
to offer them. On the other hand, if a corporation participates in production or activities that
bring upon negative community impacts, the media will also pick this up. Unfortunately, bad
news spreads quicker than good news. Media visibility is only so useful in that it sheds a
positive light on your organization.

(iii) Boosts Employee Engagement: Corporate social responsibility helps attract and retain

engaged and productive employees. Employees like working for a company that has a good
public image and is constantly in the media for positive reasons. Happy employees almost
always equal better output. Nearly 60% of employees who are proud of their company’s social

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 responsibility are engaged at their jobs. When companies show that they are dedicated to
improving their communities through corporate giving programs (like matching gifts and
volunteer grants!), they are more likely to attract and retain valuable, hardworking, and
engaged employees. If a corporation is philanthropically minded, job-hunting individuals are
more likely to apply and interview for available positions. Once hired, employees who are
engaged will stay with a company longer, be more productive on a daily basis, and will be
more creative than disengaged workers.

(iv) Attracts & Retains Investors: Investors care about corporate social responsibility and

so should companies. Investors who are pouring money into companies want to know that
their funds are being used properly. Not only does this mean that corporations must have
sound business plans and budgets, but it also means that they should have a strong sense of
corporate social responsibility. When companies donate money to nonprofit organizations and
encourage their employees to volunteer their time, they demonstrate to investors that they
don’t just care about profits. Instead, they show that they have an interest in the local and
global community. Investors are more likely to be attracted to and continue to support
companies that demonstrate a commitment not only to employees and customers, but also
to causes and organizations that impact the lives of others.

Benefits A Non-Profit Corporate House Gets from Corporate Social Responsibility

(i) Funding Via Matching Gift Programs: Matching gift programs have the potential to

double, and sometimes even triple, an organization’s fundraising revenue. Corporations that
offer matching gift programs essentially double the donations that their employees are giving
to eligible nonprofits. What more could an organization want? Truthfully, matching gifts are a
bit more complicated than that. Each company has a different set of guidelines, deadlines,
and requirements that must be met before they’ll match an employee’s contribution to a
nonprofit. However, the opportunity to receive twice as many donations still hangs in the air
for organizations looking to benefit from corporate social responsibility programs.

(ii) More Volunteer Participation: Matching gift programs have the potential to
double, and sometimes even triple, an organization’s fundraising revenue. Corporations that
offer volunteer grants are outsourcing helping hands to eligible nonprofit organizations. A
corporation with this kind of program might offer (for example) $250 to a nonprofit once an
employee has volunteered at least 10 hours with the organization. There are also pay-per-
hour grants that many corporations offer that pay a certain amount per hour volunteered.
This kind of socially responsible program is a win-win for every party involved. Employees of

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 corporations are seen volunteering and donating their time to important causes in the
community, and nonprofits are receiving free time and volunteer work, which are essential
for the success of so many nonprofits.

(iii) Forging Corporate Partnerships: CSR brings nonprofits and companies together,
creating strong partnerships between the two. Yet another positive impact corporate social
responsibility has on nonprofit organizations is the possibility of corporate partnerships. These
partnerships are vital to the work a corporation can do in the local community and important
to a nonprofit that may not have the resources for major marketing campaigns. For a nonprofit
organization, a partnership with a local or national corporation puts its name on tons of
marketing materials that otherwise could not have been afforded on tight budgets. A key
benefit is that the partnership brings additional awareness to the nonprofit’s cause.

(iv) Varied Sources of Revenue: Corporate social responsibility programs can be

another source of revenue for nonprofits. Nonprofits cannot solely rely on individual donations
for support. Granted, individuals make up roughly three-fourths of an organization’s total
monetary contributions, but this doesn’t mean that nonprofits should discount corporations
and businesses as viable sources of revenue. In fact, companies with strong corporate social
responsibility programs are looking for nonprofits to be the recipient of grants, matching gift
programs, and volunteer grant programs. CSR initiatives can help nonprofits make up that
left over 25% after they’ve looked to individual donors.

CSR Initiatives Taken by Companies and Impact of Section 135

Tata Power: A subsidiary of Tata Power Company, Coastal Gujarat Private Limited (CGPL),
has their 4000MW Ultra Mega Power Plant in Kutch and the company, being highly involved
in Corporate Social Responsibility, set out to discover the crux of the issue and go about fixing
it. In 2012, in partnership with Aga Khan Rural Support Programme, India, CGPL launched a
community-based sustainable livelihood programme. This initiative, called Sagarbandhu, was
focused in the villages of Modhva and Trigadi in Mandvi Taluka which are the major areas
where the fisher folk live and return to when the fishing season ends, and do their alternative
jobs, which are highly seasonal.

The Sagarbandhu programme went beyond just looking for way of providing the fisher folk
alternative employment for the rest of the year, but also inspired to help develop the
community and a sense of ownership and independence within the villagers. Activities
undertaken include VDAC formation, value chain analysis, revolving fund at the start of the

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 season, roof rain water harvesting, exposure visits, regular meetings, SHG formation, drinking
water and sanitation facilities, school-level interventions, and distribution of boat lights,
fishing nets and marketing equipment. Local institutions designed to help with the
development of the community were set up. These included Self Help Groups (SHGs) and a
Village Development and Advisory Council (VDAC). Through these, the fisher folk and villagers
are offered training on new and different fishing techniques. There has also been
improvements made to the infrastructure in the villages to provide easier access to local
markets.

The communities have been greatly encouraged by the initiative of CGPL and Aga Khan Rural
Support Programme and have responded with great enthusiasm. They then decided to launch
a second phase of Sagarbhandu in 2013 to help widen the scope of the programme and reach
more villages in the area. Once again, they were successful in their endeavors garnering
praise and enthusiasm from the fisher folk.

Generic Models of CSR

STAKEHOLDER THEORY:

Stakeholder Theory is a view of capitalism that stresses the interconnected relationships

between a business and its customers, suppliers, employees, investors, communities and
others who have a stake in the organization. The theory argues that a firm should create
value for all stakeholders, not just shareholders.

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 In 1984, R. Edward Freeman originally detailed the Stakeholder Theory of organizational
management and business ethics that addresses morals and values in managing an
organization. His award-winning book Strategic Management: A Stakeholder Approach
identifies and models the groups which are stakeholders of a corporation, and both describes
and recommends methods by which management can give due regard to the interests of
those groups.

The theory has become a key consideration in the study of business ethics and has served as
a platform for further study and development in the research and published work of many
scholars.

It lists and describes those individuals and groups who will be affected by (or affect) the
company’s actions and asks, “What are their legitimate claims on the business?” “What rights
do they have with respect to the company’s actions?” and “What kind of responsibilities and
obligations can they justifiably impose on a particular business?” In a single sentence,
stakeholder theory affirms that those whose lives are touched by a corporation hold a right
and obligation to participate in directing it.

Corporate Social Responsibility and Stakeholders theory:

As a simple example, when a factory produces industrial waste, a CSR perspective attaches
a responsibility directly to factory owners to dispose of the waste safely. By contrast, a
stakeholder theorist begins with those living in the surrounding community whose
environment might be poisoned and begins to talk about business ethics by insisting that they
have a right to clean air and water. In other words, the community members are stakeholders
in the company and their voices must contribute to corporate decisions. It’s true that they
may own no stock, but they have a moral claim to being involved in the decision-making
process.

Once a discrete set of stakeholders surrounding an enterprise has been located, stakeholder
ethics may begin. The purpose of the firm, underneath this theory, is to maximize profit on a
collective bottom line, with profit defined not as money but as human welfare. The collective
bottom line is the total effect of a company’s actions on all stakeholders. Company managers,
that means, are primarily charged not with representing the interests of shareholders (the
owners of the company) but with the more social task of coordinating the interests of
all stakeholders, balancing them in the case of conflict, and maximizing the sum of benefits
over the medium and long term. Corporate directors, in other words, spend part of the day

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 just as directors always have: explaining to board members and shareholders how it is that
the current plans will boost profits. They spend other parts of the day, however, talking with
other stakeholders about their interests: they ask for input from local environmentalists about
how pollution could be limited, they seek advice from consumers about how product safety
could be improved, and so on. At every turn, stakeholders are treated (to some extent) like
shareholders, as people whose interests need to be served and whose voices have real power.

In many cases transparency is an important value for those promoting stakeholder ethics.
The reasoning is simple: if you’re going to let every stakeholder actively participate in a
corporation’s decision making, then those stakeholders need to have a good idea about what’s
going on.

What’s certain is that stakeholder theory obligates corporate directors to appeal to all sides
and balance everyone’s interests and welfare in the name of maximizing benefits across the
spectrum of those whose lives are touched by the business.

Stockholders & stakeholders model: - The model talks about two types of social orientations
of a firm towards its economic stockholders and social stakeholders. Also, there are two types
of motives under these two orientations i.e. self-interest and moral duty.

Productivism and philanthropy are two orientations of stockholders. Productivists believe

that the only mission of a corporation is to maximize the self-interest i.e. profit. Philanthropists
believe that helping the poor and the needy can be justified in terms of morality. However, their
motive towards CSR is dominated by moral obligations and not self-interest. But they believe
that the primary social duty of a corporation is to obtain profits.

Progressivism and Ethical Idealism are the two orientations of stakeholder’s model.
Progressivists are of the view that although corporate behavior is basically motivated by self-
interest, yet there should be some scope for a social change that can transform the society
towards becoming more humanistic. Progressivists are in favor of enlightened self-interest
where, in spite of self-interest, socially good works can be undertaken. To ethical idealists, the
line of demarcation between business and society is rather thin, and they believe in sharing the
corporate profits for humanitarian activities. According to them, CSR is justified when business
corporations support stakeholders.

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 Shareholder Value Theory

Shareholder value theory is the dominant economic theory in use by business. Maximizing
shareholder wealth as the purpose of the firm is established in our laws, economic and
financial theory, management practices, and language. Nobel Laureate Milton Friedman
(1970) introduced the theory in favor of maximizing financial return for shareholders. His
capitalistic perspective clearly considers the firm owned by and operated for the benefit of the
shareholders. He says ‘there is one and only one social responsibility of business - to use its
resources and engage in activities designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open and free competition without deception
or fraud. …’

Friedman’s statements reflect three fundamental assumptions that lend support to the
shareholder view of the firm. The first is that the human, social, and environmental costs of
doing business should be internalized only to the extent required by law. All other costs should
be externalized. The second is that self-interest as the prime human motivator. As such,
people and organizations should and will act rationally in their own self-interest to maximize
efficiency and value for society. The third is that the firm is fundamentally a nexus of contracts
with primacy going to those contracts that have the greatest impact on the profitability of the
firm.

1. Externalization of Costs According to this perspective, maximizing shareholder value as the

goal of the firm is the means to most efficiently achieve the best outcome for society. Taken
literally, however, this theory holds that management should run the business to maximize
cash flow to shareholders—maximizing revenue, minimizing cost, and reducing risk. One way
to reduce cost is by externalizing it through such means as polluting the environment.

2. Self-Interest as the Prime Human Motivator The fundamental assumption of modern

economic theory is a view of the individual self, acting rationally in self-interest "The first
principle of Economics is that every agent is actuated only by self-interest”. The view of
Friedman (1970) is traceable back to Adam Smith (1776)—every person acting rationally in
their own self-interest maximizes efficiency and value for society. Building on “individual
motivated by self-interest” model, agency theory predicts a conflict between shareholders
(principals) and managers (agents) in a publicly owned corporation.

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 In sum, dominant views on corporate governance and curricula of most business schools
support the perspective that the sole purpose of business in our community is business.
Business acting beyond its economic concerns is at best misguided and is misallocating and/or
misappropriating societal resources. Business adds value to the economy through the efficient
delivery of goods and services. Social and environmental concerns are related to business
through the marketplace and governmental regulations.

Shareholder theory V/S Stakeholder Theory

Shareholders theory is introduced by Milton Friedman. In 1970, Friedman wrote in NY Times

that “there is one and only one social responsibility of business: to use its resources to engage
in activities designed to increase its profits so long as it stays within the rules of the game,
which is to say, engages in open and free competition, without deception or fraud.” The idea
of the shareholder theory is that managers primarily have a duty to maximize shareholders’
interests in the way that is still permitted by law or social values. On the other hand,
shareholder theory asserts that shareholders give capital to a company’s managers, who are
supposed to spend corporate funds only in ways which have been authorized by the
shareholders. In words of Milton Friedman, “There is one and only one social responsibility of
business — to use its resources and engage in activities designed to increase its profits so
long as it engages in open and free competition, without deception or fraud.”

Stakeholder theory is introduced by Edward Freeman in 1988. Stakeholders is a group that is broader
than shareholders. They are individuals or groups that provide critical support to business firm, such
as shareholders, employees, suppliers, customers, local community, environment, even the world
community. Therefore, they get benefits and risks regarding their involvement with the company.
According to stakeholder theory, business leaders’ duty is to balance the shareholders’ interests with
other stakeholders’ interests. In other word, stakeholder theory demands that interests of all
stakeholders should be considered. It also shows the importance of social contracts, not just a
business contracts. According to the Stakeholder theory, managers are agents of stakeholders who
must ensure that the ethical rights of stakeholders are not violated and their legitimate interests are
balanced while making decisions

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Common Misconceptions of Both Theories

Stockholder theory is often misunderstood to mean that business managers must do anything
necessary to maximize a business’s profits. While maximizing profits is at the root of the theory,
managers are encouraged to increase profits legally and through non- deceptive practices. Additionally,
many understand the stockholder theory to prohibit charitable giving altogether. While social
responsibilities are structured as stakeholder initiatives, proponents of stockholder theory will say that
charitable projects are supported within the theory, as long as these projects either benefit the
corporation’s bottom line or are the best capital investment available at the time.

Misconceptions also surround the stakeholder theory. Some believe that profit must be completely
disregarded when adhering to this theory. In reality, profit is a piece of the larger ethical puzzle that
should be considered when determining what impact the company has on the stakeholders in question.

The debate between both theories supporters. With “maximizing shareholders’ interests”
jargon, shareholder theory is frequently misunderstood as it allows executives and managers
to do anything that can make profit. It should be remembered that shareholder theory
obligates managers to increase profits only through legal, non-deceptive means. Therefore,
this theory puts laws and ethics as control mechanism how company conducts business.

On the other hand, the stakeholder theory is also criticized by its opponents. They claim that
the stakeholder theory does not put focus on profitability. Even though the ultimate objective
of stakeholder theory is the concern’s continued existence, it must be achieved by balancing
the interests of all stakeholders, including the shareholders, whose interests are in profits.

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Both theories can be applied in daily business activities. Executives and managers should be
clear about the choice of theory applied in internal and external corporate communications.
If employees are confused about the corporation’s objectives, they will likely make
inconsistent decisions which, at the end, will backfire to company itself. The clear choice will
provide same ground to decide in daily business.

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 (i) Carroll's CSR Pyramid

Carroll's CSR Pyramid is a simple framework that helps argue how and why organizations
should meet their social responsibilities.

The key features of Carroll's CSR Pyramid are that:

(i)CSR is built on the foundation of profit – profit must come first

(ii) Then comes the need for a business to ensure it complies with all laws & regulations

(iii) Before a business considers its philanthropic options, it also needs to meet its ethical
duties

According to Carroll, to be socially responsible means that profitability and obedience to the
law are foremost conditions when discussing the firm’s ethics and the extent to which it
supports the society in which it exists with contributions of money, time and talent”. And the
different layers in the pyramid help managers see the different types of obligations that
society expects of businesses.

The four responsibilities displayed on the pyramid are:

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 Economic responsibility in Carroll’s CSR Pyramid : It concerns the responsibility of
business of producing goods and services needed by society and selling them making a profit.
Novak (1996) has contributed to this are by defining seven responsibilities of companies.
Companies have shareholders who demand a reasonable return on their investments, they
have employees who want safe and fairly paid jobs, and they have customers who demand
good quality products at a fair price. So, here comes the first responsibility of the business as
it is to be a properly functioning economic unit and stay in business. And this is the base of
the pyramid, where all the other layers rest on.

Legal responsibility in Carroll’s CSR Pyramid : the legal responsibility of corporations

demands that businesses abide by the law and play by the rules of the game. Should
companies choose to “bend” or even ignore their legal responsibilities the price can be very
high for the business. And US software giant Microsoft has faced a long running anti-trust
case in Europe for abusing its monopolistic position to disadvantage its competitors which
resulted in tough settlements against the company.

Ethical Responsibility in Carroll’s CSR Pyramid : the main concept of ethical responsibility
as defined and expressed by Carroll (1991) is that the ethical responsibility consists of what
is generally expected by society over and above economic and legal expectations. Ethical
responsibilities of companies cover its wide range of responsibilities. Ethical responsibilities
are not necessarily imposed by law, but they are expected from ethical companies by the
public and governments And this case was seen in the example of Shell, where the decision
of the government was reversed for disposing of oil platform after a campaign and
disagreement by the society and public.

Philanthropic responsibility in Carroll’s CSR Pyramid: as it is in the top of the pyramid,

it focuses on more luxurious things such as improving the quality of life of employees, local
communities and ultimately society in general. Some points of the philanthropic
responsibilities of the businesses can be controversial and requires separate studies aimed to
it. For example, who should decide on what cause to spend the money, how much, and on
what basis these decisions should be made.

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 (ii) Ackerman’s Model

Even before the concept of modelling CSR initiatives according to priorities or liabilities or
even responsibilities came into the picture, Ackerman proposed his model that was laid down
in three phases (Ackerman & Bauer, 1976). More than a model, it was a strategy that guided
the implementation of CSR activities, but not their formulation. The first phase was about the
top managers recognizing a social problem, the second phase was an intensive study of the
problem and finding out solutions by hiring experts and the last phase was implementation of
the proposed solutions. It is obvious that this model, rather a plan, merely provides strategies
to deal with problems having social implications. Other parameters and constraints of CSR
activities did not come under the purview of this model

(iii) Corporate Citizenship

What Is Corporate Citizenship?

Corporate citizenship involves the social responsibility of businesses and the extent to which
they meet legal, ethical and economic responsibilities, as established by shareholders.
Corporate citizenship is growing increasingly important as both individual and institutional
investors begin to seek out companies that have socially responsible orientations such as their
environmental, social and governance (ESG) practices.

The Basics of Corporate Citizenship

Corporate citizenship refers to a company’s responsibilities toward society. The goal is to
produce higher standards of living and quality of life for the communities that surround them
and still maintain profitability for stakeholders. The demand for socially responsible
corporations continues to grow, encouraging investors, consumers and employees to use their
individual power to negatively affect companies that do not share their values.

All businesses have basic ethical and legal responsibilities, however, the most successful
businesses establish a strong foundation of corporate citizenship, showing a commitment to
ethical behavior by creating a balance between the needs of shareholders and the needs of
the community and environment in the surrounding area. These practices help bring in
consumers and establish brand and company loyalty.

Companies go through different stages during the process of developing corporate citizenship.
Companies rise to the higher stages of corporate citizenship based on their capacity and
credibility when supporting community activities, a strong understanding of community

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 needs, and their dedication to incorporate citizenship within the culture and structure of their
company.

Development of Corporate Citizenship

The five stages of corporate citizenship are defined as:

1. elementary;
2. engaged;
3. innovative;
4. integrated; and
5. transforming.

In the elementary stage, a company’s citizenship activities are basic and undefined because
there is scant corporate awareness and little to no senior management involvement. Small
businesses, in particular, tend to linger in this stage. They are able to comply with the
standard health, safety, and environmental laws, but they do not have the time nor the
resources to fully develop greater community involvement.

In the engagement stage, companies will often develop policies that promote the involvement
of employees and managers in activities that exceed rudimentary compliance to basic laws.
Citizenship policies become more comprehensive in the innovative stage, with increased
meetings and consultations with shareholders and through participation in forums and other
outlets that promote innovative corporate citizenship policies. In the integrated stage,
citizenship activities are formalized and blend in fluidly with the company’s regular operations.
Performance in community activities is monitored, and these activities are driven into the
lines of a business. Once companies reach the transforming stage, they understand that
corporate citizenship plays a strategic part in fueling sales growth and expansion to new
markets. Economic and social involvement is a regular part of a company’s daily operations
in this stage.

Corporate Social Responsibility (CSR)

Corporate social responsibility (CSR) is a broad concept of corporate citizenship that can take
various forms depending on the company and industry. Through CSR programs, philanthropy,
and volunteer efforts, businesses can benefit society while boosting their own brands. As
important as CSR is for the community, it is equally valuable for a company. CSR activities
can help forge a stronger bond between employee and corporation; they can boost morale and
can help both employees and employers feel more connected with the world around them.

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 In order for a company to be socially responsible, it first needs to be responsible for itself and
its shareholders. Often, companies that adopt CSR programs have grown their business to
the point where they can give back to society. Thus, CSR is primarily a strategy of large
corporations. Also, the more visible and successful a corporation is, the more responsibility it
has to set standards of ethical behavior for its peers, competition, and industry.

Example of Corporate Citizenship: Starbucks

Long before its initial public offering (IPO) in 1992, Starbucks was known for its keen sense
of corporate social responsibility, and commitment to sustainability and community welfare.
Starbucks has achieved corporate citizenship milestones such as reaching 99% ethically
sourced coffee; creating a global network of farmers; pioneering green building throughout
its stores; contributing millions of hours of community service; and creating a groundbreaking
college program for its partner/employees. Going forward, Starbucks’ goals include hiring
10,000 refugees across 75 countries; reducing the environmental impact of its cups; and
engaging its employees in environmental leadership.

Issues and Challenges of CSR in India

There are number of issues and challenges to the successful implementation of corporate
social responsibility in India. They are enumerated as follows:-

1. Lack of Awareness of General Public: In CSR Activities there is a lack of interest of the
general public in participating and contributing to CSR activities of companies. This is because
of the fact that there exists little or no knowledge about CSR. The situation is further
aggravated by a lack of communication between the companies involved in CSR and the
general public at the grassroots.

2. Need to Build Local Capacities: There is a need for capacity building of the local
nongovernmental organizations as there is serious dearth of trained and efficient
organizations that can effectively contribute to the ongoing CSR activities initiated by
companies. This seriously compromises scaling up of CSR initiatives and subsequently limits
the scope of such activities.

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 3. Issues of Transparency: Lack of transparency is one of the key challenge for the corporate
as there exists lack of transparency on the part of the small companies as they do not make
adequate efforts to disclose information on their programmes, audit issues, impact
assessment and utilization of funds. This negatively impacts the process of trust building
among the companies which is a key to the success of any CSR initiative.

4. Non-Availability of Well Organized Non-Governmental Organizations: There is non-

availability of well-organized nongovernmental organizations in remote and rural areas that
can assess and identify real needs of the community and work along with companies to ensure
successful implementation of CSR activities.

5. Visibility Factor: The role of media in highlighting good cases of successful CSR initiatives
is welcomed as it spreads good stories and sensitizes the population about various ongoing
CSR initiatives of companies. This apparent influence of gaining visibility and branding
exercise often leads many non-governmental organizations to involve themselves in event
based programmes, in the process, they often miss out on meaningful grassroots
interventions.

6. Narrow Perception towards CSR Initiatives: Non-governmental organizations and

Government agencies usually possess a narrow outlook towards the CSR initiatives of
companies, often defining CSR initiatives more as donor-driven. As a result, corporates find
it hard to decide whether they should participate in such activities at all in medium and long
run.

7. Lack of Consensus on Implementing CSR Issues: There is a lack of consensus amongst

implementing agencies regarding CSR projects. This lack of consensus often results in
duplication of activities by corporate houses in areas of their intervention. This results in a
competitive spirit between implementing agencies rather than building collaborative
approaches on issues. This factor limits company’s abilities to undertake impact assessment
of their initiatives from time to time.

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 Recommendations
The following recommendations are listed for serious consideration by all concerned
stakeholders for their effective operationalization to deepen CSR in the company’s core
business and to build collaborative relationships and effective networks with all involved.

1. It is found that there is a need for creation of awareness about CSR amongst the general
public to make CSR initiatives more effective. This awareness generation can be taken up by
various stakeholders including the media to highlight the good work done by corporate houses
in this area. This will bring about effective change in the approach and attitude of the public
towards CSR initiatives undertaken by corporate houses.

2. It is noted that partnerships between all stakeholders including the private sector,
employees, local communities, the Government and society in general are either not effective
or not effectively operational at the grassroots level in the CSR domain. This scenario often
creates barriers in implementing CSR initiatives. It is recommended that appropriate steps be
undertaken to address the issue of building effective bridges amongst all important
stakeholders for the successful implementation of CSR initiatives. As a result, a long term and
sustainable perspective on CSR activities should be built into the existing and future strategies
of all stakeholders involved in CSR initiatives.

3. It is found that corporate houses and non-governmental organizations should actively

consider pooling their resources and building synergies to implement best CSR practices to
scale up projects and innovate new ones to reach out to more beneficiaries. This will increase
the impact of their initiatives on the lives of the common people. After all, both corporate
houses and non-governmental organizations stand to serve the people through their
respective projects and initiatives. It is recommended that the projectisation, scaling up and
sustainability of CSR projects need to be safeguarded at all costs for their efficiency and
efficacy.

4. It is found that many CSR initiatives and programs are taken up in urban areas and
localities. As a result, the impact of such projects does not reach the needy and the poor in
the rural areas. This does not mean that there are no poor and needy in urban India; they
too equally suffer from want of basic facilities and services. While focusing on urban areas, it
is recommended that companies should also actively consider their interventions in rural areas

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 on education, health, girl child and child labor as this will directly benefit rural people. After
all, more than 70 per cent people still reside in rural India.

5. It is noted that the Government should consider rewarding and recognizing corporate
houses and their partner non-governmental organizations implementing projects that
effectively cover the poor and the underprivileged.

6. It is noted that CSR as a subject or discipline should be made compulsory at business

schools and in colleges and universities to sensitize students about social and development
issues and the role of CSR in helping corporate houses strike a judicious balance between
their business and societal concerns. Such an approach will encourage and motivate young
minds, prepare them face future development challenges and help them work towards finding
more innovative solutions to the concerns of the needy and the poor. It is recommended that
involvement of professionals from the corporate sector, non-governmental organizations and
business schools would be key in ensuring youth participation in civic issues.

Conclusion
Society’s expectations are increasing towards the social development by the companies. So,
it has become necessary for the companies to practice social responsibilities to enhance their
image in the society. Even though companies are taking serious efforts for the sustained
development, some critics still are questioning the concept of CSR. There are people who
claim that Corporate Social Responsibility underlies some ulterior motives while others
consider it as a myth. The reality is that CSR is not a tactic for brand building; however, it
creates an internal brand among its employees. Indulging into activities that help society in
one way or the other only adds to the goodwill of a company. Corporate Social Responsibility
is the duty of everyone i.e. business corporations, governments, individuals because of the
reasons: the income is earned only from the society and therefore it should be given back;
thus wealth is meant for use by self and the public; the basic motive behind all types of
business is to quench the hunger of the mankind as a whole; the fundamental objective of all
business is only to help people. CSR cannot be an additional extra - it must run into the core
of every business ethics, and its treatment of employees and customers. Thus, CSR is
becoming a fast-developing and increasingly competitive field. Being a good corporate citizen
is increasingly crucial for commercial success and the key lies in matching public expectations
and priorities, and in communicating involvement and achievements widely and effectively.

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 After the enactment of the Companies Act-2013, it is estimated that approximately 2,500
companies have come in the ambit of mandated CSR; the budget could touch approximately
INR 15,000 – 20,000 crores. It is very likely that the new legislation will be a game-changer,
infusing new investments, strategic efforts and accountability in the way CSR is being
conceived and managed in India. It has opened new opportunities for all stakeholders
(including the corporate sector, government, not-for-profit organizations and the community
at large) to devise innovative ways to contribute to equitable social and economic
development. Currently, CSR in India is headed in a positive direction as there already exists
a multitude of enabling organizations and regulatory bodies such as the Department of Public
Enterprises (DPE), Ministry of Corporate Affairs (MCA), and Indian Institute of Corporate
Affairs (IICA). These institutions have already set the wheels in motion and are playing an
important role in making CSR a widespread practice and in ensuring success in reducing
inequalities without risking business growth

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 Module II

Corporate Governance

The root of the word Governance is from 'gubernate', which means to steer. Corporate
governance would mean to steer an organization in the desired direction. The responsibility
to steer lies with the board of directors/ governing board. Corporate or a Corporation is
derived from Latin term "corpus" which means a "body". Governance means administering
the processes and systems placed for satisfying stakeholder expectation. When combined
Corporate Governance means a set of systems procedures, policies, practices, standards put
in place by a corporate to ensure that relationship with various stakeholders is maintained in
transparent and honest manner.

Definitions of Corporate Governance:

"Corporate Governance is concerned with the way corporate entities are governed, as distinct
from the way business within those companies is managed. Corporate governance addresses

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 the issues facing Board of Directors, such as the interaction with top management and
relationships with the owners and others interested in the affairs of the company" Robert Ian
(Bob) Tricker (who introduced the words corporate governance for the first time in his book
in 1984)

Cadbury Committee, U.K

"It is the system by which companies are directed and controlled"

Corporate Governance is a system of structuring, operating and controlling a company with

the following specific aims:
(i) Fulfilling long-term strategic goals of owners;
(ii) Taking care of the interests of employees;
(iii) A consideration for the environment and local community;
(iv) Maintaining excellent relations with customers and suppliers;
(v) Proper compliance with all the applicable legal and regulatory requirements.

Corporate governance deals with laws, procedures, practices and implicit rules that determine
a company's ability to take informed managerial decisions vis-à-vis its claimants - in
particular, its shareholders, creditors, customers, the State and employees. There is a global
consensus about the objective of 'good' corporate governance: maximizing long-term
shareholder value."
Evolution of Corporate Governance in India

Corporate administration is to a huge degree, a lot of components through which outcast

financial specialists shield themselves from confiscation by insiders (La Porta et al. 2000). The
theme of corporate governance has attained prominence particularly since the 1980s and all
the more so after the code of corporate administration issued by the Cadbury advisory group.
The well-known Cadbury Committee characterised “corporate governance” in its report
(Financial Aspects of Corporate Governance, distributed in 1992) as “the framework by which
organisations are coordinated and controlled”.

In accordance with the Cadbury Council, the Kumar Mangalam Birla Committee additionally
issued a code of corporate administration for organisations in India. As part of the corporate
culture prevalent worldwide, directors are in charge of the administration of their
organisations. The investors’ job in administration is to choose the director and the
administrators and to fulfill themselves that a fitting administration structure is set up.

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 I. Evolution of Legal Framework of Corporate Governance in India
1. Prior to Independence and Four Decades into Independence
Indian associations/corporate entities were bound by colonial guidelines and a large portion
of the principles and guidelines took into account the impulses and likes of the British
employers. The Companies Act was enacted in 1866 and was amended in 1882, 1913 and
1932. Partnership Act was enacted in 1932. These enactments had a managing organisation
model as a focus as people/business firms went into a legitimate contract with business
entities to manage the latter. This period was an era of misuse/abuse of resources and
shunning of obligations by managing specialists because of scattered and unprofessional
proprietorship.

Soon after independence, there was interest among industrialists for production of a lot of
essential items for which the Government directed and dictated fair prices. This was the point
at which the Tariff Commission and the Bureau of Industrial Costs and Prices were set up by
the Government. Industries (Development and Regulation) Act and Companies Act were

introduced into the legal system in 1950s. 1960s was a time of setting up of heavy industries
in addition to the routine affairs. The period between 1970s to mid-1980s was a time of cost,
volume and profit examination, as a vital piece of the cost accounting activities.

2. Coming of Age
India has been distinctly looked upon by the associations/organizations worldwide with the
objective of making inroads into untapped new markets. Dynamic firms in India made an
endeavor to put the frameworks of good corporate administration in place from the word go,
whether or not any regulations were in place. However, the scenario was not too encouraging,
being too promoter-centric and good governance norms given a go by for the sake of
convenience or comfort of the promoters.

Realizing the need for governing the corporates more effectively and professionally to make
them globally competitive, there have been a number of discourses and occasions prompting
the advancement of corporate governance. The fundamental code for corporate
administration was proposed by the Chamber of Indian Industries (CII) in 1998. The definition
proposed by CII was—corporate governance manages laws, methods, practices and
understood principles that decide an organization’s capacity to take administrative choices—
specifically its investors, banks, clients, the State and the representatives.

II. Reformation in Corporate Governance

1. The First Phase of India’s Corporate Governance Reforms: 1996-2008
The primary or the first phase of India’s corporate governance reforms were focused at

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 making Audit Committees and Boards more independent, focused and powerful supervisor of
management and also of aiding shareholders, including institutional and foreign
shareholders/investors, in supervising management. These reform efforts were channeled
through a number of different paths with both the Ministry of Corporate Affairs (MCA) and the
Securities and Exchange Board of India (SEBI) playing important roles.

(a) CII—1996
In 1996, CII taking up the first institutional initiative in the Indian industry took a special step
on corporate governance. The aim was to promote and develop a code for companies, be in
the public sectors or private sectors, financial institutions or banks, all the corporate entities.
The steps taken by CII addressed public concerns regarding the security of the interest and
concern of investors, especially the small investors; the promotion and encouragement of
transparency within industry and business, the necessity to proceed towards international
standards of disclosure of information by corporate bodies, and through all of this to build a
high level of people’s confidence in business and industry. The final draft of this Code was
introduced in April 1998

(b) Report of the Committee (Kumar Mangalam Birla) on Corporate Governance

Noted industrialist, Mr Kumar Mangalam Birla was appointed by SEBI—as Chairman to provide
a comprehensive vista of the concern related to insider trading to secure the rights of several
investors. The suggestions insisted on the listed companies for initial and continuing
disclosures in a phased manner within specified dates, through the listing agreement. The
companies were made to disclose separately in their annual reports, a report on corporate
governance delineating the steps they have taken to comply with the recommendations of
the Committee. The objective was to enable the shareholders to know, where the companies,
in which they have invested, stand with respect to specific initiatives taken to ensure robust
corporate governance.

(c) Clause 49
The Committee also realised the importance of auditing body and made many specific
suggestions related to the constitution and function of Board Audit Committees. At that time,
SEBI reviewed it’s listing contract to include the recommendations. These rules and
regulations were listed in Clause 49, a new section of the listing agreement which came into
force in phases of 2000 and 2003.

(d) Report of the Advisory Group on Corporate Governance: Standing Committee on

International Financial Standards and Code—March 2001
The advisory group tried to compare the potion of corporate governance in India vis-à-vis the
international best standards and advised to improve corporate governance standards in India.

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 (e) Report of the Consultative Group of Directors of Banks—April 2001
The corporate governance of directors of banks and financial institutions was constituted by
Reserve Bank to review the supervisory role of boards of banks and financial institutions and
to get feedback on the activities of the boards vis-à-vis compliance, transparency, disclosures,
audit committees, etc. and provide suggestions for making the role of Board of Directors more
effective with a perspective to mitigate or reduce the risks.

(f) Report of the Committee (Naresh Chandra) on Corporate Audit and Governance
Committee—December 2002
The Committee took the charge of the task to analyse, and suggest changes in different areas
like—the statutory auditor and company relationship, procedure for appointment of Auditors
and determination of audit fee, restrictions if required on non-auditory fee, measures to
ensure that management and companies put forth a true and fair statement of financial affairs
of the company.

(g) SEBI Report on Corporate Governance (N.R. Narayan Murthy)—February 2003

So as to improve the governance standards, SEBI constituted a committee to study the role
of independent directors, related parties, risk management, directorship and director
compensation, codes of conduct and financial disclosures.

(h) (Naresh Chandra Committee II) Report of the Committee on Regulation of

Private Companies and Partnerships
As large number of private sector companies were coming into the picture there was a need
to revisit the law again. In order to build upon this framework, the Government constituted a
committee in January 2003, to ensure a scientific and rational regulatory environment. The
main focus of this report was on (a) the Companies Act, 1956; and (b) the Partnership Act,
1932. The final report was submitted on 23-7-2003.

(i) Clause 49 Amendment—Murthy Committee

In 2004, SEBI further brought about changes in Clause 49 in accordance with the Murthy
Committee’s recommendations. However, implementation of these changes was postponed
till 1-1-2006 because of lack of preparedness and industry resistance to accept such wide-
ranging reforms. While there were many changes to Clause 49 as a result of the Murthy
Report, governance requirements with respect to corporate boards, audit committees,
shareholder disclosure, and CEO/CFO certification of internal controls constituted the largest
transformation of the governance and disclosure standards of Indian companies.
2. Second Stage of Corporate Governance—After Satyam Scam
India’s corporate community experienced a significant shock in January 2009 with damaging

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 revelations about board failure and colossal fraud in the financials of Satyam. The Satyam
scandal also served as a catalyst for the Indian Government to rethink the corporate
governance, disclosure, accountability and enforcement mechanisms in place. Industry
response shortly after news of the scandal broke, the CII began examining the corporate
governance issues arising out of the Satyam scandal. Other industry groups also formed
corporate governance and Ethics Committees to study the impact and lessons of the scandal.
In late 2009, a CII task force put forth corporate governance reform recommendations.

In its report the CII emphasised the unique nature of the Satyam scandal, noting that—
Satyam is a one-off incident. The overwhelming majority of corporate India is well run, well
regulated and does business in a sound and legal manner. In addition to the CII, the National
Association of Software and Services Companies (Nasscom, self-described as—the premier
trade body and the Chamber of Commerce of the IT-BPO industries in India) also formed a
Corporate Governance and Ethics Committee, chaired by N.R. Narayana Murthy, one of the
founders of Infosys and a leading figure in Indian corporate governance reforms. The
Committee issued its recommendations in mid-2010.

III. Legal Framework on Corporate Governance

The Companies Act, 2013.— consists of law provisions concerning the constitution of the
board, board processes, board meetings, independent directors, audit committees, general
meetings, party transactions, disclosure requirements in the financial statements and etc.
1. SEBI Guidelines.—SEBI is a governing authority having jurisdiction and power over
listed companies and which issues regulations, rules and guidelines to companies to
ensure the protection of investors.
2. Standard Listing Agreement of Stock Exchanges.—is for those companies whose
shares are listed on the stock exchanges.
3. Accounting Standards Issued by the Institute of Chartered Accountants of
India (ICAI).— ICAI is an independent body, which issues accounting standards
providing guidelines for disclosures of financial information. In the new Companies
Act, 2013 Section 129 provides that the financial statements would give a fair view of
the state of affairs of the companies, following the accounting standards given under
Section 133 of the Companies Act, 2013. It is further given that the things contained
in such financial statements should be in compliance with the accounting standards.
4. Secretarial Standards issued by the Institute of Company Secretaries of India
(ICSI).—ICSI is an independent body, which has secretarial standards in terms of
the provisions of the new Companies Act. ICSI has issued secretarial standards on
“Meetings of the Board of Directors” (SS-1) and secretarial standards on “General
Meetings” (SS-2). Given secretarial standards have come into force from 1-7-2015.
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 Companies Act, 2013, Section 118(10) provides that every company (other than one
person company) shall observe secretarial standards specified as such by the ICSI
with respect to general and Board meetings.
IV. Landmark Cases of failure of Corporate Governance
1. Satyam Case
Satyam Computer Services scandal was a corporate scandal affecting India-based company
Satyam Computer Services in 2009, in which Chairman Ramalinga Raju admitted that the
company’s accounts had been manipulated. The Satyam scandal was a Rs 7000 crore
corporate scandal in which accounts had been manipulated. On 7-1-2009, Ramalinga Raju
sent an e-mail to SEBI, wherein he confessed to falsify the cash and bank balances of the
company. Weeks before the scam began to unravel with his popular statement that he was
riding a tiger and did not know how to get down without being killed. Raju had said in an
interview that Satyam, the fourth largest IT company, had a cash balance of Rs 4000 crore
and could leverage it further to raise another Rs 15,000-20,000 crore.

Ramalinga Raju was convicted with 10 other members on 9-4-2015. Ramalinga Raju and
three others were given six months jail term by Serious Fraud Investigation Office (SFIO) on
8-12-2014[6]. Even auditors Price Waterhouse Coopers (PWC) had to face a hard time.
2. Ricoh Case
The saga at Ricoh India demonstrates that the radiance of good governance that is
automatically ascribed to MNCs is not ensured the result. In spite of administrative
interference after the Satyam scam and legislative amendments to tighten the governance
framework [Companies Act, 2013, SEBI (Listing Obligations and Disclosure Requirements)
Regulations, etc.] the Ricoh scene was almost a replica of the Satyam episode in terms of
accounting fraud and resultant fraud of stock prices interestingly without any promoter being
in the saddle. Just a few corrupt managers were sufficient to obliterate the system with the
usual failure of the main regulating institutions such as the auditors, credit rating agencies,
independent directors of repute, committees of directors including the powerful audit
committees manned by independent directors, etc.

3. ICICI Bank Scam Case

It was the role of the Board in hurriedly giving a clean chit to its CEO without the results of
an independent investigation released in the public domain in an apparent case of alleged
nepotism, and its refusal to take any questions on the matter.

4. Kingfisher Airlines and United Spirits Case

Mainly regarding illegal internal corporate funding to parties, falsifying accounts. It was
entirely evident that assets had been transferred from United Spirits Ltd. (USL) to subsidise
Kingfisher, that United Breweries (UB) Holdings was utilised as a channel for raising loans and
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 giving them to his group, that intercorporate credits were given to related groups without the
Board’s approval, accounts were inappropriately expressed, reviews were stage overseen,
etc. during the period Mr Vijay Mallya was responsible for USL.

NEED FOR CORPORATE GOVERNANCE

Corporate Governance is integral to the existence of the company: Corporate

Governance is needed to create a corporate culture of Transparency, accountability and
disclosure. It refers to compliance with all the moral & ethical values, legal framework and
voluntarily adopted practices.

Corporate Performance: Improved governance structures and processes help ensure

quality decision making, encourage effective succession planning for senior management and
enhance the long-term prosperity of companies, independent of the type of company and its
sources of finance. This can be linked with improved corporate performance- either in terms
of share price or profitability.

Enhanced Investor Trust: Investors consider corporate Governance as important as

financial performance when evaluating companies for investment. Investors who are provided
with high levels of disclosure & transparency are likely to invest openly in those companies.
The consulting firm McKinsey surveyed and determined that global institutional investors are
prepared to pay a premium of up to 40 percent for shares in companies with superior
corporate governance practices.

Better Access to Global Market: Good corporate governance systems attract investment
from global investors, which subsequently leads to greater efficiencies in the financial sector.

Combating Corruption: Companies that are transparent, and have sound system that
provide full disclosure of accounting and auditing procedures, allow transparency in all
business transactions, provide environment where corruption will certainly fade out.
Corporate Governance enables a corporation to compete more efficiently and prevent fraud
and malpractices within the organization.

Easy Finance from Institutions: Several structural changes like increased role of financial
intermediaries and institutional investors, size of the enterprises, investment choices available
to

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 investors, increased competition, and increased risk exposure have made monitoring the use
of capital more complex thereby increasing the need of Good Corporate Governance. Evidence
indicates that well-governed companies receive higher market valuations. The credit
worthiness of a company can be trusted on the basis of corporate governance practiced in the
company.

Enhancing Enterprise Valuation: Improved management accountability and operational

transparency fulfill investors' expectations and confidence on management and corporations,
and return, increase the value of corporations.

Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures
efficient risk mitigation system in place. The transparent and accountable system that
Corporate Governance makes the Board of a company aware of all the risks involved in
particular strategy, thereby, placing various control systems to monitor the related issues.

Accountability: Investor relations' is essential part of good corporate governance. Investors

have directly/ indirectly entrusted management of the company for the creating enhanced
value for their investment. The company is hence obliged to make timely disclosures on
regular basis to all its shareholders in order to maintain good investor‘s relation. Good
Corporate Governance practices create the environment where Boards cannot ignore their
accountability to these stakeholders.

Corporate Governance Theories

The following theories elucidate the basis of corporate governance:
(a) Agency Theory
(b) Shareholder Theory
(c) Stake Holder Theory
(d) Stewardship Theory

Agency Theory
According to this theory, managers act as 'Agents' of the corporation. The owners or directors
set the central objectives of the corporation. Managers are responsible for carrying out these
objectives in day-to-day work of the company. Corporate Governance is control of
management through designing the structures and processes. In agency theory, the owners
are the principals. But principals may not have knowledge or skill for getting the objectives
executed. The principal authorises the mangers to act as 'Agents' and a contract between

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 principal and agent is made. Under the contract of agency, the agent should act in good faith.
He should protect the interest of the principal and should remain faithful to the goals.

In modern corporations, the shareholdings are widely spread. The management (the agent)
directly or indirectly selected by the shareholders (the Principals), pursue the objectives set
out by the shareholders. The main thrust of the Agency Theory is that the actions of the
management differ from those required by the shareholders to maximize their return. The
principals who are widely scattered may not be able to counter this in the absence of proper

systems in place as regards timely disclosures, monitoring and oversight. Corporate

Governance puts in place such systems of oversight.

Stockholder/shareholder Theory
According to this theory, it is the corporation which is considered as the property of
shareholders/ stockholders. They can dispose of this property, as they like. They want to get
maximum return from this property.

The owners seek a return on their investment and that is why they invest in a corporation.But
this narrow role has been expanded into overseeing the operations of the corporations and
its mangers to ensure that the corporation is in compliance with ethical and legal standards
set by the government. So the directors are responsible for any damage or harm done to their
property i.e., the corporation. The role of managers is to maximize the wealth of the
shareholders. They, therefore should exercise due diligence, care and avoid conflict of interest
and should not violate the confidence reposed in them. The agents must be faithful to
shareholders.

Stakeholder Theory
According to this theory, the company is seen as an input-output model and all the interest
groups which include creditors, employees, customers, suppliers, local-community and the
government are to be considered. From their point of view, a corporation exists for them and
not the shareholders alone.

The different stakeholders also have a self interest. The interest of these different
stakeholders is at times conflicting. The managers and the corporation are responsible to
mediate between these different stakeholders interest. The stake holders have solidarity with
each other. This theory assumes that stakeholders are capable and willing to negotiate and

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 bargain with one another. This results in long term self interest. The role of shareholders is
reduced in the corporation. But they should also work to make their interest compatible with
the other stake holders. This requires integrity and managers play an important role here.
They are faithful agents but of all stakeholders, not just stockholders.

Stewardship Theory
The word 'steward' means a person who manages another's property or estate. Here, the
word is used in the sense of guardian in relation to a corporation, this theory is value based.
The managers and employees are to safeguard the resources of corporation and its property
and interest when the owner is absent. They are like a caretaker. They have to take utmost
care of the corporation. They should not use the property for their selfish ends. This theory
thus makes use of the social approach to human nature.

The managers should manage the corporation as if it is their own corporation. They are not
agents as such but occupy a position of stewards. The managers are motivated by the
principal's objective and the behavior pattern is collective, pro-organizational and trustworthy.
Thus, under this theory, first of all values as standards are identified and formulated. Second
step is to develop training programmes that help to achieve excellence. Thirdly, moral support
is important to fill any gaps in values

Good Corporate Governance – Corporate solutions

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

1. Corporate governance lays down the foundation of a properly structured Board and
strives to a healthy balance between management and ownership which is capable
of taking independent decisions for creating long-term trust between the company
and external stakeholders of the company.
2. It strengthens strategic thinking at the top management by taking independent
directors on the board who bring intellectual experience to the company and
unbiased approach to deal with matters related to companies welfare.
3. It instils transparent and fair practices in the board management which results in
financial transparency and integrity of the audit reports.
4. It sets the benchmark for the company’s management to comply with laws in true
letter and spirit while adhering to ethical standards of the company for bringing out
effective management solutions in order to discharge its responsibility for smooth
functioning of the company.

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 5. It instils loyalty among investors as their interest is looked after in the best manner
by a company who adopts good management practices

Scope of Corporate Governance

Corporate governance instils ethical standards in the company. It creates space for open
dialogue by incorporating transparency and fair play in strategic operations of the corporate
management. The significance of corporate governance lies in :

1. Accountability of Management to shareholders and other stakeholders

2. Transparency in basic operations of the company and integrity in financial reports
produced by the company
3. Component Board comprising of Executive and Independent Directors
4. Checks & balances is an integral part of good corporate governance.
5. Adherence to the rules of company in law and spirit
6. Code of responsibility for Directors and Employees of the company
7. Open Dialogue between management and stakeholders of the company.
8. Investor Loyalty is a guarantor of good corporate governance practices

Importance and Consequences of corporate Governance failure:

Importance
• Level of confidence in investors
• One of the criteria for investing
• Positive influence on the share price
• Can source capital at reasonable cost
• Reduce risk of corporate fraud and scams

Consequences Financial scandals and crisis

• Loss of trust of investors
• Loss due to Lack of Controls
• Loss due to Lapses in the way IT and other Risks are managed
• Loss of Reputation due to incidents being report
• Loss of money to the banks

Example: Satyam/ Enron/ ICICI scam

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 Four Pillars of Corporate Governance

Four Pillars of Corporate Governance: The value of corporate governance may well lie on
its four pillars, on which the OECD Principles of corporate Governance are based.
▪ Transparency
“Sunlight is the best disinfectant“
The corporate governance framework should ensure that timely and accurate disclosure is
made on all matters regarding the company, including its financial situation, performance,
ownership, and governance structure.

▪ Accountability
“You can’t manage what you can not measure“
The corporate governance framework should provide for the strategic guidance of the
company, the effective monitoring of management by the board, and the board’s
accountability to the company and shareholders.

▪ Fairness
“The fairness of markets is closely linked to investor protection and, in particular, to
prevention of improper trading practices, which leads to confidence in the markets“
The corporate governance framework should protect shareholder rights and ensure the
equitable treatment of all stakeholders, including minority and foreign shareholders.

▪ Responsibility
An effective system of corporate governance must strive to channel the self-interests of
managers, directors, and the advisers upon whom they rely, into alignment with corporate,
shareholder and public interests.

Key features of corporate governance in Companies Act, 2013

There has been a sea change in companies Act, 2013 which has waved its way from principle
of corporate governance practices as the new key change in the act. The Companies Act, 2013
has taken a foot forward from SEBI’s Clause 49 of listing agreement by introducing provisions
in the companies act 2013 which promotes corporate governorship code in such a manner
that it will no longer be restricted to only listed public companies but also unlisted public
companies. The new (Companies Act), 2013 has introduced various key provisions which have

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 changed the corporate regime in such a way to run the corporate machinery in alignment with
the globalised corporate world by mandatory disclosure requirements for:

COMPANIES ACT, 2013

I. BOARD COMPOSITION

CA 2013 has introduced significant changes in the composition of the board of directors of a
company. The key changes introduced are set out below:

NUMBER OF DIRECTORS: The following key changes have been introduced regarding
composition of the board:

• A one person company shall have a minimum of 1 (one) director;

• CA 1956 permitted a company to determine the maximum number of directors on its board
by way of its articles of association. CA 2013, however, specifically provides that a company
may have a maximum of 15 (fifteen) directors.

• CA 1956 required public companies to obtain Central Government’s approval for increasing
the number of its directors above the limit prescribed in its articles or if such increase would
lead to the total number of directors on the board exceeding 12 (twelve) directors. CA 2013
however, permits every company to appoint directors above the prescribed limit of 15 (fifteen)
by authorizing such increase through a special resolution.

Key takeaway: Allowing companies to increase the maximum number of directors on their
boards by way of a special resolution would ensure greater flexibility to companies.

CA 2013 requires companies to have the following classes of directors:

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 RESIDENT DIRECTOR: CA 2013 introduces the requirement of appointing a resident
director, i.e., a person who has stayed in India for a total period of not less than 182 (one
hundred and eighty two) days in the previous calendar year.

Key Takeaway: The requirement to have a resident director on the board of companies
has been viewed as a move to ensure that boards of Indian companies do not comprise
entirely of non-resident directors. This provision has caused significant difficulties to
companies, since it has been brought into force with immediate effect, requiring
companies to restructure their boards immediately to ensure compliance with CA 2013.

INDEPENDENT DIRECTORS

CA 1956 did not require companies to appoint an independent director on its board. Provisions
related to independent directors were set out in Clause 49 of the Listing Agreement (“Listing
Agreement”).

a) Number of independent directors: As per the Listing Agreement, only listed companies
were required to appoint independent directors. The number of independent directors on the
board of a listed company was required to be equal to (i) one third of the board, where the
chairman of the board is a non-executive director; or (ii) one half of the board, where the
chairman is an executive director. However, under CA 2013, the following companies are
required to appoint independent directors:

(i) Public listed company: Atleast one third of the board to be comprised of independent
directors; and

(ii) Certain specified companies that meet the criteria listed below are required to have atleast
2 (two) independent directors:

• Public companies which have paid up share capital of INR 100,000,000 (Rupees one hundred
million only);

• Public companies which have a turnover of 1,000,000,000 (Rupees one billion only); and

• Public companies which have, in the aggregate, outstanding loans, debentures and deposits
exceeding INR 500,000,000 (Rupees five hundred million only)

b) Qualification criteria:

(i) CA 2013 prescribes detailed qualifications for the appointment of an independent director
on the board of a company. Some important qualifications include:

• he / she should be a person of integrity, relevant expertise and experience;

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 • he / she is not or was not a promoter of, or related to the promoter or director of the company
or its holding, subsidiary or associate company;

• he / she has or had no pecuniary relationship with the company, its holding, subsidiary or
associate company, or their promoters, or directors during the 2 (two) immediately preceding
financial years or during the current financial year;

• a person, none of whose relatives have or had pecuniary relationship or transaction with the
company, its holding, subsidiary or associate company, or their promoters, or directors
amounting to 2 (two) percent or more of its gross turnover or total income or INR 5,000,000
(Rupees five million only), whichever is lower, during the 2 (two) immediately preceding
financial years or during the current financial year.

(ii) CA 2013 also sets forth stringent provisions with respect to the relatives of the
independent director.

Key Takeaways: It is evident from provisions of CA 2013 that much emphasis has been placed
on ensuring greater independence of independent directors. The overall intent behind these
provisions is to ensure that an independent director has no pecuniary relationship with, nor is
he provided any incentives (other than the sitting fee for board meetings) by it in any manner,
which may compromise his / her independence. In view of the additional criteria prescribed in
CA 2013, many listed companies may need to revisit the criteria used in appointing their
independent directors.

Observations: CA 2013 proposes to significantly escalate the independence requirements of

independent directors, when compared to the Listing Agreement:

• The CA 2013 requires an independent director to be a person of integrity, relevant expertise

and experience; it fails to elaborate on the requisite standards for determining whether a
person meets such criteria. Companies (acting through their respective nomination and
remuneration committees) would be able to exercise their own judgment in the appointment
of independent directors, diluting the “independence” criteria.

• While the Listing Agreement provided that an independent director must not have any
material pecuniary relationship or transaction with the company, CA 2013 states that an
independent director must not have had any pecuniary relationship with the company.
Further, the Listing Agreement stipulated earlier that an independent director should not have
had such transactions with the company, its holding company etc., at the time of appointment
as an independent director, while CA 2013 extends this restriction to the current financial
year or the immediately preceding two financial years. However, this provision in the Listing

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 Agreement has been aligned with the CA 2013 by means of the circular issued by the
Securities and Exchange Board of India (“SEBI”) dated April 17, 2014 titled Corporate
Governance in Listed Entities- Amendments to Clauses 35B and 49 of the Equity Listing
Agreement (“SEBI Circular”)1. The SEBI Circular has brought the provisions of the Listing
Agreement in line with the provisions of CA 2013, and would be applicable from October 01,
2014. Further, the disqualification arising from any pecuniary relationship in the previous 2
(two) financial years under CA 2013 may be unreasonably restrictive, as there may be
situations where a pecuniary transaction of the proposed independent director may safely be
considered to be of a nature which does not affect the director’s independence, for instance,
a person proposed to be appointed as an independent director may be the promoter or director
of a supplier (or a counter-party to an arm’s length transaction) which has in the past (either
during or for a period prior to the two immediately preceding financial years) been selected
by the company through an independent tender process.

c) Duties of independent directors: Neither the Listing Agreement nor the CA 1956
prescribed the scope of duties of independent directors. CA 2013 includes a guide to
professional conduct for independent directors, which crystallizes the role of independent
directors by prescribing facilitative roles, such as offering independent judgment on issues of
strategy, performance and key appointments, and taking an objective view on performance
evaluation of the board. Independent directors are additionally required to satisfy themselves
on the integrity of financial information, to balance the conflicting interests of all stakeholders
and, in particular, to protect the rights of the minority shareholders. The SEBI Circular
however, states that the board is required to lay down a code of conduct which would
incorporate the duties of independent directors as set out in CA 2013.

Key Takeaways: CA 2013 imposes significantly onerous duties on independent directors,

with a view to ensuring enhanced management and administration. While a list of specific
duties has been introduced under CA 2013, it should by no means be considered to be
exhaustive. Independent directors are unlikely to be exempt from liability merely because they
have fulfilled the duties specified in CA 2013, and should be prudent and carry out all duties
required for effective functioning of the company.

d) Liability of independent directors

Under CA 1956, independent directors were not considered to be “officers in default” and
consequently were not liable for the actions of the board. CA 2013 however, provides that the
liability of independent directors would be limited to acts of omission or commission by a

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 company which occurred with their knowledge, attributable through board processes, and
with their consent and connivance or where they have not acted diligently.

Key Takeaways: CA 2013 proposes to empower independent directors with a view to increase
accountability and transparency. Further, it seeks to hold independent directors liable for acts
or omissions or commission by a company that occurred with their knowledge and attributable
through board processes. While CA 2013 introduces these provisions with a view of increase
accountability in the board this may discourage a lot of persons who could potentially have been
appointed as independent directors from accepting such a position as they would be exposed to
greater liabilities while having very limited control over the board.

e) Position of Nominee Directors

• While the Listing Agreement stated that the nominee directors appointed by an institution
that has invested in or lent to the company are deemed to be independent directors, CA 2013
states that a nominee director cannot be an independent director. However, the SEBI Circular
in line with the provisions of CA 2013 has excluded nominee directors from being considered
as independent directors.

• CA 2013 defines nominee director as a director nominated by any financial institution in

pursuance of the provisions of any law for the time being in force, or of any agreement, or
appointed by the Government or any other person to represent its interests.

Key Takeaways: The concept of independent director was introduced as part of the CA 2013
with a view to bring in independent judgement on the board. A director, once appointed, has
to serve the interest of the shareholders as a whole. Directors appointed by private equity
investors shall also be covered under the definition of nominee directors, and would no longer
be eligible for appointment as independent directors.

WOMAN DIRECTOR

• Listed companies and certain other public companies shall be required to appoint atleast 1
(one) woman director on its board.

• Companies incorporated under CA 2013 shall be required to comply with this provision within
6 (six) months from date of incorporation. In case of companies incorporated under CA 1956,
companies are required to comply with the provision within a period of 1 (one) year from the
commencement of the act.

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 Key Takeaway: While the mandatory requirement for appointment of women directors is
expected to bring diversity on to the boards, companies may find it difficult to be in compliance
with CA 2013 unless they have already identified or internally groomed women candidates that
are qualified to be appointed to the board.

Duties of directors

CA 1956 did not contain any provisions that specifically identified the duties of directors. CA
2013 has set out the following duties of directors:

• To act in accordance with company’s articles;

• To act in good faith to promote the objects of the company for benefit of the members as a
whole, and the best interest of the company, its employees, shareholders, community and for
protection of the environment;

• Exercise duties with reasonable care, skill and diligence, and exercise of independent
judgment;

The director is not permitted to:

• Be involved in a situation in which he may have direct or indirect interest that conflicts, or
may conflict, with the interest of the company;

• Achieve or attempt to achieve any undue gain or advantage, either to himself or his relatives,
partners or associates.

Key Takeaways: CA 2013 seeks to bring about greater standards of corporate governance,
by imposing higher duties and liabilities for directors. While the act sets out specific duties, it
does not clarify whether the duties of directors listed therein are exhaustive. Therefore, it
would be prudent for directors to comply with all duties required for the effective functioning
of the company and not be merely be directed by the specified duties which are at best very
broadly phrased principles that should guide their behavior.

Further, every director should take care to ensure that it acts in the best interested of all the
shareholders as a whole. These provisions become particularly significant in case of nominee
directors appointed by private equity investors, who have been known to represent the
interests of the investors appointing them in direct contravention of their duties to the
shareholders as a whole.

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 Quorum for meetings of Board
• The quorum for a meeting of the Board of Directors of a company shall be one third of
its total strength or 3 directors, whichever is higher
• The continuing directors may act notwithstanding any vacancy in the Board;
• The number of directors who are not interested directors and present at the meeting,
being not less than two, shall be the quorum during such time.
• Where a meeting of the Board could not be held for want of quorum, then, shall
automatically stand adjourned to the same day at the same time and place in the next
week or if that day is a national holiday, till the next succeeding day.
Explanation. —For the purposes of this section, —
(i) any fraction of a number shall be rounded off as one;
(ii) “total strength” shall not include directors whose places are vacant.
• Note: 1st April 2019, top 1000 companies and from 1st April 2020, top 2000 companies
should have one Independent Director (can be through video-conference as well).

Voting at the Board Meeting:

• An affirmative vote of the majority of members present shall be necessary for the
passage of any motion, except in such instances as the law, or other policies of this
Board, may require a larger vote.
• All voting shall be by voice or by show of hands;
• In an instance when a member is compelled to "recuse" himself from voting because
of a personal interest in the proposition or for some other valid reason he shall state
that he intends to "recuse" himself from voting
• There shall be no representation by proxy of any member of the Board at any time.
• All members present are authorized to speak on issues, offer and second motions, and
vote.
• However, the President of the Board shall not cast a vote for the appointment to fill a
vacancy on the Board except in the case of a tie vote, in which case the President shall
cast a vote to break the tie.

Number of Board Meetings:

• Frequency of Meeting:

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 1. First Meeting: First Meeting of Board of Directors within 30 (Thirty) days from the
date of Incorporation of company.

2. Subsequent Meetings:

(a) One-person Company, Small company and Dormant company:

• At least one meeting of Board of directors in each half of calendar year

• Minimum Gap B/W two meetings at least 90 days.

(b) Other than Companies mentioned above:

• Minimum No. of 4 meetings of Board of Director in a calendar year

• Maximum Gap B/W two meetings should not be more the 120 days.

II. COMMITTEES OF THE BOARD

CA 2013 envisages 4 (four) types of committees to be constituted by the board:

a) AUDIT COMMITTEE: Under CA 1956, public companies with a paid up capital in excess
of INR 50,000,000 (Rupees fifty million only) were required to set up an audit committee
comprising of not less than 3 (three) directors. Atleast one third had to be comprised of
directors other than Managing Directors or Whole Time Directors. CA 2013 however, requires
the board of every listed company and certain other public companies to constitute the audit
committee consisting of a minimum of 3 (three) directors, with the independent directors
forming a majority. It prescribes that a majority of members, including its Chairman, have to
be persons with the ability to read and understand financial statements. The audit committee
has been entrusted with the task of providing recommendations for appointment and
remuneration of auditors, review of independence of auditors, providing approval of related
party transactions and scrutiny over other financial mechanisms of the company.

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 b) NOMINATION AND REMUNERATION COMMITTEE: While CA 1956 did not require
companies to set up nomination and remuneration committee, the Listing Agreement provided
companies with the option to constitute a remuneration committee. However, CA 2013
requires the board of every listed company to constitute the Nomination and Remuneration
Committee consisting of 3 (three) or more non-executive directors out of which not less than
one half are required to be independent directors. The committee has the task of identifying
persons who are qualified to become directors and provide recommendations to the board
regarding their appointment and removal, as well as carry out their performance evaluation.

c) STAKEHOLDERS RELATIONSHIP COMMITTEE: CA 1956 did not require a company to

set up a stakeholder’s relationship committee. The Listing Agreement required listed
companies to set up a shareholders / investors grievance committee to examine complaints
and issues of shareholders. CA 2013 requires every company having more than 1000 (one
thousand) shareholders, debenture holders, deposit holders and any other security holders at
any time during a financial year to constitute a stakeholders relationship committee to resolve
the grievances of security holders of the company.

d) CORPORATE SOCIAL RESPONSIBILITY COMMITTEE (“CSR Committee”): CA 1956

did not impose any requirement on companies relating to corporate social responsibility
(“CSR”). CA 2013 however, requires certain companies to constitute a CSR Committee, which
would be responsible to devise, recommend and monitor CSR initiatives of the company. The
committee is also required to prepare a report detailing the CSR activities undertaken and if
not, the reasons for failure to comply.

Key Takeaways: CA 2013 sets out an advanced framework for board functioning by division
of core board functions and their delegation to committees of the board. While the audit
committee and the nomination and remuneration committee provide the back end
infrastructure for boards, the stakeholder’s relationship committee and CSR Committee have
been entrusted with the task of interaction with key stakeholders. Irrespective of their function,
each of the committees would act as a “check and balance” on the powers of the board, by
ensuring greater transparency and accountability in its functioning.

III. BOARD MEETINGS AND PROCESSES

The key changes introduced by CA 2013 with respect to board meetings and processes are
as under:

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 • First board meeting of a company to be held within 30 (thirty) days of incorporation;

• Notice of minimum 7 (seven) days must be given for each board meeting. Notice for board
meetings may be given by electronic means. However, board meetings may be called at
shorter notice to transact “urgent business” provided such meetings are either attended by
at least 1 (one) independent director or decisions taken at such meetings on subsequent
circulation are ratified by at least 1 (one) independent director.

• CA 2013 has permitted directors to participate in board meetings through video conferencing
or other audio visual means which are capable of recording and recognising the participation
of directors. Participation of directors by audio visual means would also be counted towards
quorum.

• Requirement for holding board meeting every quarter has been discontinued. Now at least 4
(four) meetings have to be held each year, with a gap of not more than 120 (one hundred
and twenty) days between 2 (two) board meetings.

• Certain new actions have been identified, that require approval by directors in a board
meeting. These include issuance of securities, grant of loans, guarantee or security, approval
of financial statement and board’s report, diversification of business etc.

• Approval of circular resolution will be by a majority of directors or members who are entitled
to vote on the resolution, irrespective of whether they are present in India or otherwise.

Key Takeaways: In the backdrop of global corporate transactions, the changes

relating to participation of directors by audio visual and electronic means are a
welcome step, aimed at keeping pace with technological advancements.

Other provisions as to Board and Committees

1. The board to meet at least 4 times a year, with a maximum time gap of 120
days between any two meetings. The minimum information to be made
available to the board is given in Annexure X to clause 49.
2. A director not to be a member in more than 10 committees or act as
Chairman of more than 5 committees across all public companies in which
he is a director – committee membership / chairmanship of private
companies, section 8 companies and foreign companies excluded. Audit
Committee and the Stakeholders' Relationship Committee alone to be
considered for the purpose of this limit.

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 3. Every director to inform the company about the committee positions he
occupies in other companies and notify changes as and when they take place.
4. The Board to periodically review compliance reports of all laws applicable to
the company, prepared by the company as well as steps taken by the
company to rectify instances of non-compliances.
5. An independent director who resigns or is removed from the Board of the
Company to be replaced by a new independent director at earliest but not
later than the immediate next Board meeting or 3 months from the date of
vacancy, whichever is later. However, where the company fulfils the
requirement of independent directors in its Board even without filling the
vacancy, the requirement of replacement by a new independent director does
not apply.
6. The Board is required to satisfy itself that plans are in place for orderly
succession for appointments to the Board and to senior management.

Code of Conduct

1. The Board is required to lay down a code of conduct for all Board members
and senior management of the company and post the same on the website
of the company.
2. All Board members and senior management personnel are required to affirm
compliance with the code on an annual basis. The Annual Report of the
company to contain a declaration to this effect signed by the CEO.
3. The Code of Conduct is required to suitably incorporate the duties of
independent directors as laid down in the Companies Act, 2013.
4. An independent director will be held liable, only in respect of such acts of
omission or commission by a company which had occurred with his
knowledge, attributable through Board processes, and with his consent or
connivance or where he had not acted diligently with respect of the provisions
contained in the Listing Agreement.

Whistle Blower Policy

1. The company is required to establish a vigil mechanism for directors and

employees to report concerns about unethical behaviour, actual or suspected
fraud or violation of the company’s code of conduct or ethics policy.

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 2. This mechanism should also provide for adequate safeguards against
victimisation of director(s)/ employee(s) who avail of the mechanism and
also provide for direct access to the Chairman of the Audit Committee in
exceptional cases.
3. The details of establishment of such mechanism are required to be disclosed
by the company on its website and in the Board’s report

Audit Committee

Qualified and Independent Audit Committee

1. Minimum 3 directors to be members with – being independent directors.

2. All members to be financially literate and at least 1 member having
accounting or related financial management expertise.
3. The Chairman of the Audit Committee to be an independent director and to
remain present at the AGM to answer share holders’ queries.
4. The Audit Committee may invite such of the executives, as it considers
appropriate (and particularly the head of the finance function) to be present
at the meetings of the committee, but on occasions it may also meet without
the presence of any executives of the company.
5. The Company Secretary to act as the secretary to the committee.

Meeting of Audit Committee

The Audit Committee to meet at least 4 times in a year with a gap of not more than
4 months between two meetings. The quorum is higher of 2 members or with
minimum of 2 independent members present.

Powers of Audit Committee

The powers of the Audit Committee to include:

1. To investigate any activity within its terms of reference

2. To seek information from any employee
3. To obtain outside legal or other professional advice
4. To secure attendance of outsiders with relevant expertise, if necessary

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 Role of Audit Committee

A very elaborate role is prescribed for the Audit Committee in clause 49. The role of
the Audit Committee to include the following:

1. Oversight of the company’s financial reporting process and the disclosure of

its financial information to ensure that the financial statement is correct,
sufficient and credible.
2. Recommending to the Board, the appointment, remuneration and terms of
appointment of the auditors of the company.
3. Approval of payment to statutory auditors for any other services rendered
by the statutory auditors.
4. Reviewing, with the management, the annual financial statements and
auditor’s report thereon before submission to the board for approval, with
particular reference specified particulars.
5. Reviewing, with the management, the quarterly financial statements before
submission to the board for approval.
6. Reviewing, with the management, the statement of uses/application of funds
raised through an issue (public issue, rights issue, preferential issue, etc.),
the statement of funds utilised for purposes other than those stated in the
offer document/prospectus/ notice and the report submitted by the
monitoring agency monitoring the utilisation of proceeds of a public or rights
issue, and making appropriate recommendations to the Board to take up
steps in this matter.
7. Review and monitor the auditor’s independence and performance, and
effectiveness of audit process.
8. Approval or any subsequent modification of transactions of the company with
related parties
9. Scrutiny of inter-corporate loans and investments.
10. Valuation of undertakings or assets of the company, wherever it is necessary.
11. Evaluation of internal financial controls and risk management systems.
12. Reviewing, with the management, performance of statutory and internal
auditors, adequacy of the internal control systems.
13. Reviewing the adequacy of internal audit function, if any, including the
structure of the internal audit department, staffing and seniority of the official

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 heading the department, reporting structure coverage and frequency of
internal audit.
14. Discussion with internal auditors, any significant findings and follow-up
thereon.
15. Reviewing the findings of any internal investigations by the internal auditors
into matters where there is suspected fraud or irregularity or a failure of
internal control systems of a material nature and reporting the matter to the
board.
16. Discussion with statutory auditors before the audit commences, about the
nature and scope of audit as well as post-audit discussion to ascertain any
area of concern.
17. To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, share holders (in case of non-payment of
declared dividends) and creditors.
18. To review the functioning of the Whistle Blower mechanism.
19. Approval of appointment of CFO (i.e., the whole-time Finance Director or any
other person heading the finance function or discharging that function) after
assessing the qualifications, experience and background, etc. of the
candidate.
20. Carrying out any other function as is mentioned in the terms of reference of
the Audit Committee.

Review of information by Audit Committee

The Audit Committee to mandatorily review the following information:

1. Management discussion and analysis of financial condition and results of

operations;
2. Statement of significant related party transactions (as defined by the Audit
Committee), submitted by management;
3. Management letters/letters of internal control weaknesses issued by the
statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal
auditor.

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 Nomination and Remuneration Committee

1. The Nomination and Remuneration Committee is required to be set up

comprising at least 3 directors, all of whom shall be non-executive directors
and at least ½ being independent including the Chairman.
2. The role of the committee, inter alia, includes the following:

a. Formulation of the criteria for determining qualifications, positive

attributes and independence of a director and recommend to the
Board a policy relating to the remuneration of the directors, key
managerial personnel and other employees;
b. Formulation of criteria for evaluation of Independent Directors and
the Board;
c. Devising a policy on Board diversity;
d. Identifying persons who are qualified to become directors and who
may be appointed in senior management in accordance with the
criteria laid down, and recommend to the Board their appointment
and removal. The company shall disclose the remuneration policy and
the evaluation criteria in its Annual Report.

3. The Chairman of the Nomination and Remuneration Committee could be

present at the Annual General Meeting, to answer the share holders' queries.
However, it would be up to the Chairman to decide who should answer the
queries.

Subsidiary Companies

1. At least 1 independent director of the holding company is required to be

director on the Board of a material non-listed Indian subsidiary company
[unlisted subsidiary incorporated in India whose income or networth (paid-
up capital and free reserves) > 20% consolidated income or networth
respectively of the listed holding company and its subsidiaries in the
immediately preceding accounting year].
2. The Audit Committee of the listed holding company is also required to review
the financial statements, in particular, the investments made by the unlisted
subsidiary company.

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 3. The minutes of the Board meetings of the unlisted subsidiary company and
periodically, a statement of all significant transactions and arrangements
[single transaction or arrangement exceeding / likely to exceed 10% of total
revenues / expenses / assets / liabilities as the case may be, of the material
unlisted subsidiary for the immediately preceding accounting year] entered
into by the unlisted subsidiary company are required to be placed at the
Board meeting of the listed holding company.
4. The company is required to formulate a policy for determining ‘material’
subsidiaries and such policy shall be disclosed to Stock Exchanges and in the
Annual Report. A subsidiary is considered as material if the investment of the
company in the subsidiary exceeds 20% of its consolidated net worth as per
the audited balance sheet of the previous financial year or if the subsidiary
has generated 20% of the consolidated income of the company during the
previous financial year.
5. No company can dispose of shares in its material subsidiary which would
reduce its shareholding (either on its own or together with other subsidiaries)
to less than 50% or cease the exercise of control over the subsidiary without
passing a special resolution in its General Meeting.
6. Selling, disposing and leasing of assets amounting to more than 20% of the
assets of the material subsidiary requires prior approval of share holders by
way of special resolution.

Where a listed holding company has a listed subsidiary which is itself a holding
company, the above provisions to be complied with by the listed subsidiary insofar
as its subsidiaries are concerned.

Risk Management

1. The company is required to lay down procedures to inform Board members

about the risk assessment and minimisation procedures.
2. The Board is responsible for framing, implementing and monitoring the risk
management plan for the company.
3. The company through its Board is required to also constitute a Risk
Management Committee and define the roles and responsibilities of the Risk
Management Committee and may delegate monitoring and reviewing of the

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 risk management plan to the committee and such other functions as it may
deem fit.
4. Majority of this committee to consist of the Board members.
5. Senior executives of the company may be the members of this committee;
chairman of this committee to be a Board member.

Related Party Transactions

1. An entity to be considered as related party it is a related party under section

2(76) of the Companies Act 2013 or a related party under applicable
Accounting Standard.
2. The company is required to formulate a policy on materiality of related party
transactions and also on dealing with Related Party Transactions. A
transaction with a related party is considered material if the
transaction/transactions to be entered into individually or taken together
with previous transactions during a financial year, > 10% of the annual
consolidated turnover of the company as per the last audited financial
statements of the company.
3. All Related Party Transactions require prior approval of the Audit Committee.
However Audit Committee may grant omnibus approval for Related Party
Transactions proposed to be entered into by the Company subject to
specified conditions.
4. All material Related Party Transactions require approval of the shareholders
through special resolution and all the entities falling within the definition of
related parties shall abstain from voting on such resolutions, whether the
entity is a party to the particular transaction or not.
5. The provision mentioned at 3 and 4 above are not applicable to the following:

• Transaction entered into between 2 government companies;

• Transactions entered into between a holding company and its wholly
owned subsidiary whose accounts are consolidated with such holding
company and placed before the share holders at the general meeting
for approval.

Disclosures

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 The following disclosure requirements are specified:

1. Related Party Transactions (RPT)

• Details of all material RPT to be disclosed quarterly along with the

compliance report on corporate governance
• Policy on dealing with RPT on its website and a web link thereto in the
Annual Report

2. Disclosure of Accounting Treatment

3. Remuneration of Directors
4. Management

• Management Discussion and Analysis report

• Senior management to make disclosures to the board relating to all
material financial and commercial transactions, where they have
personal interest, that may have a potential conflict with the interest
of the company at large (for example dealing in company shares,
commercial dealings with bodies, which have shareholding of
management and their relatives etc.)
• Code of Conduct for the Board of Directors and the senior
management to be disclosed on the website of the company.

5. Share holders

• Brief resume of the Director and other specified particulars at the time
of his appointment or reappointment of a director
• Disclosure of relationships between directors inter se
• Quarterly results and presentations to analysts to be put on
company’s website

6. Proceeds from public issues, rights issues, preferential issues, etc.

CEO/CFO Certification

The CEO, i.e. the Managing Director or Manager (in their absence, a whole time
director) appointed in terms of the Companies Act, 2013, and the CFO, i.e. the

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 whole-time Finance Director or any other person heading the finance function
discharging that function, to certify to the Board specified particulars.

Report on Corporate Governance

1. A separate section on Corporate Governance is to be included in the Annual

Reports of company, with a detailed compliance report on Corporate
Governance. Non-compliance of any mandatory requirement of this clause
with reasons thereof and the extent to which the non-mandatory
requirements have been adopted to be specifically highlighted. The
suggested list of items to be included in this report is given in Annexure XII
and list of non-mandatory requirements is given in Annexure XIII to the
listing agreement.
2. The companies are required to submit a quarterly compliance report to the
stock exchanges within 15 days from the close of quarter as per the format
given in Annexure XI. The report to be signed either by the Compliance
Officer or the Chief Executive Officer of the company.

Compliance

(1) The companies are required to obtain a certificate from either the auditors or
practicing company secretaries regarding compliance of conditions of corporate
governance as stipulated and annex the certificate with the directors’ report sent
annually to all the share holders of the company and filed with the Stock Exchanges.

Non-mandatory requirements

1. The non-mandatory requirements given in Annexure XII may be

implemented as per the discretion of the company. However, the disclosures
of the compliance with mandatory requirements and adoption (and
compliance)/non-adoption of the non-mandatory requirements to be made
in the section on corporate governance of the Annual Report.
2. The non-mandatory requirements as specified in Annexure XII to the listing
agreement are:

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 • A non-executive Chairman may be entitled to maintain a Chairman’s
office at the company’s expense and also allowed reimbursement of
expenses incurred in performance of his duties.
• A half-yearly declaration of financial performance including summary
of the significant events in last 6 months, may be sent to each
household of share holders.
• Company may move towards a regime of unqualified financial
statements.
• The company may appoint separate persons to the post of Chairman
and Managing Director/CEO.
• The Internal auditor may report directly to the Audit Committee.

Boards Report:

1) Extract of the Annual Return;

2) Number of meetings of the Board;
3) Directors’ Responsibility Statement;
4) A statement on declaration by the independent directors;
5) Company’s Policy on directors’ appointment and remuneration including
criteria for determining qualifications, positive attributes, independence of a
director
6) Explanations or comments by the Board on every qualification, reservation
or adverse remark or disclaimer made in Statutory Auditors Report and
Secretarial Audit Report;
7) Particulars of loans, guarantees or investments;
8) Particulars of Contracts or arrangements with related parties
9) The state of the Company’s Affairs;
10) The amounts, if any, which it proposes to carry to any reserves; )
11) Dividend details
12) Material Changes and commitments, if any, affecting the financial position of
the company.

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 13) The Conservation of Energy, technology absorption, foreign exchange
earnings and outgo;
14) Development and implementation of risk management policy for the
company;
15) CSR Policy and initiatives taken during the year;
16) The details of directors/ key managerial personnel who were appointed or
have resigned during the year;
17) The names of companies which have become ceased to be its Subsidiaries,
Joint Ventures or associate companies during the year.
18) The details of deposits, covered/ are not in compliance with Chapter V of the
Act.
19) The details in respect of adequacy of internal financial controls with reference
to financial statements.
20) The details of significant and material orders passed by the regulators or
courts or tribunals impacting the going concern status and company’s
operations future.

A signed copy of financial statements including consolidated financial

statements shall be issued, circulated or published along with a copy each of
Notes to financial Statements, Auditor’s Report and Board’s Report.

CONCLUSION

CA 2013 has introduced significant changes regarding the board composition and has a
renewed focus on board processes. Whilst certain of these changes may seem overly
prescriptive, a closer analysis leads to a compelling conclusion that the emphasis is on board
processes, which over a period of time would institutionalize good corporate governance and
not make governance over-dependent on the presence of certain individuals on the board.

Corporate Governance Rating

Corporate Governance Rating - The system by which corporations are directed and controlled
is corporate governance and the valuation of those systems done by several organizations
are corporate governance rating.

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 Characteristics:
1. CG Ratings are set by different independent rating agencies
2. CG Ratings are evaluated by investors when taking investment decisions

Importance of CGR:

• The rising importance of good governance

• The recent corporate scandals
• Higher concern regarding CG quality.
• There will be a positive impact on the share price.
• It provides proper inducement to the owners as well as managers to achieve objectives
that are in interests of the shareholders and the organization.
• minimizes wastages, corruption, risks and mismanagement.
• It helps in brand formation and development.
• It ensures organization in managed in a manner that fits the best interests of all

Potential users of CGR:

• Governance consulting firms

• Small investors
• Executive search firms
• Accounting firms
• Institutional investor

Corporate Governance Score card- Background

• Listed companies in India are required to comply with the Corporate Governance
requirements as specified in the Companies Act, 2013
• and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.
• While most of the companies are compliant with the Law and the Regulations to a
significant extent
• some companies have taken extra efforts to go beyond what is required in the statute
and have been more than compliant on the Corporate Governance Requirements.

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 • However, there is no comprehensive tool for measuring the Corporate Governance
status of the companies
• Due to lack of a comprehensive tool, companies are not in a position to self-assess
their Corporate Governance status and benchmark themselves against other
companies nor do the investors have an easy-to-understand measure that provides
the Corporate Governance status of a company.
Corporate Governance Scorecard:

• BSE has collaborated with the International Finance Corporation (IFC)

Washington, a member of the World Bank Group for developing a "CG
Scorecard" for Indian corporates.
• The CG Scorecard will help companies to benchmark themselves on their Corporate
Governance status
• as well as provide investors a standardized measure of the Corporate Governance
status of any company
• For this purpose, it was decided to avail the expertise of Institutional Investors
Advisory Services (IiAS), a leading proxy advisory firm in India to devise a
questionnaire under the guidance of IFC and BSE.
• On February 4, 2016, BSE and IFC had organized an event to announce their
collaboration for development of the CG Scorecard for India. Since then IFC, BSE
and IiAS have been working on creating a questionnaire for the CG Scorecard that
would help companies determine their CG Scores.

The CG Scorecard is developed on the basis of four OECD principles for Corporate
Governance namely:

• Enforcing rights and Equitable treatment of shareholders

• Role of Stakeholders
• Disclosures and Transparency
• Responsibilities of the Board

The Indian Corporate Governance Scorecard Methodology is a set of 70 questions that

are based on the G20/OECD Principles of Corporate Governance.
• In creating the scorecard, there were several steps, and feedback from market
participants was taken at every step of the way.

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 • To aid companies in improving their corporate governance practices, the scorecard
methodology also carried examples that other companies could emulate.
• After giving corporate India a year to self-evaluate, the report was presented.

Evaluation method:

The quality of Corporate Governance practices referred to in each question shall be recognized
on three levels, viz.:
• 2 points: If the company follows global best practices for that element of Corporate
Governance
• 1 point: If the company follows reasonable practices or meets the Indian standard for
that element of Corporate Governance
• 0 point: If the company needs to improve in that element of Corporate Governance

The assessment of corporate governance is based upon information provided by

• the company rated,
• as well as upon other information the agency has at its disposal and is deemed reliable.
• The rating agency does not conduct audits, neither the independent assessment of
information with regard to the qualifying of a rating

Corporate governance rating may vary from

• 'A' (the highest rating) to 'E' (the lowest rating).
• Ratings of 'B', 'C' and 'D' may have intermediate categories (modified by '+' or '-')
• The Outlook for a corporate governance rating (Positive, Stable, Negative and
Developing) indicates further development trends (possible but not compulsory).

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 MODULE 3
CORPORATE SUSTAINABILITY

Corporate sustainability is an approach aiming to create long-term stakeholder value through the
implementation of a business strategy that focuses on the ethical, social, environmental, cultural, and
economic dimensions of doing business.

Corporate sustainability can be viewed as a new and evolving corporate management paradigm. The
term ‘paradigm’ is used deliberately, in that corporate sustainability is an alternative to the traditional
growth and profit-maximization model. While corporate sustainability recognizes that corporate
growth and profitability are important, it also requires the corporation to pursue societal goals,
specifically those relating to sustainable development — environmental protection, social justice and
equity, and economic development

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Evolution of Corporate Sustainability

Sustainability:
We get everything from planet earth what we need, but if we keep on consuming without preserving
and replenishing the resources for future, one day we will face the problem of sustainability.
Sustainability is the ability to sustain.
Meaning:
Sustainability focuses on meeting the needs of the present without compromising the ability of future
generations to meet their needs. The concept of sustainability is composed of three pillars: economic,
environmental and social - also known informally as profits, planet and people.
The capacity to keep up or keep going

Sustainability is a possible way of living or being in which individuals, firms, governments and other
institutions act responsibly in taking care of future as if it belonged to them today, in equitably sharing
the ecological resources on which the survival of human and other species depends, and in assuring
that all who live today and in future will be able to flourish, that is, to satisfy their needs and human
aspirations” (John Ehrenfeld, 2000)

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Sustainable Development
“Developments that meet the needs of the present without compromising the ability of future
generations to meet their needs”
By Report of the world commission on Environment and Development (1987)

The term “sustainable development” first came to prominence in the World Conservation Strategy
(WCS) in 1980.
It achieved a new status with the publication of two significant reports by Brundtaland on: North and
South: a programme for survival and common crisis (1985) and
Our Common Future (1983) and has gained even greater attention since the United Nations
Conference on Environment and Development (UNCED) held in Rio de Jenerio in June 1992

Objectives of Sustainability
World Commission on Environment and Development (WCED)
• Reviving the growth
• Changing the quality of growth
• Meet essential needs of jobs, food, water, energy and sanitation
• Ensuring a sustainable level of population
• Conserving and enhancing the resource base
• Re-orienting the technology and managing risk
• Merging environment and economic relations
• Making development more participatory

Principles of Sustainability:
• Orientation towards benefit and need
• Efficient use of resources
• Use of renewable resources
• Multiple use and recycling
• Flexibility and adaptability
• Fault tolerance and risk precaution
• Securing employment, income and quality of life

Benefits of Sustainability:
• Financial – Reduced operating cost, increased revenue and stock market premiums

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 • Customer- increased customer satisfaction, product innovation, market share increases,
improved reputation and new market opportunities
• Operational- process innovation, productivity gains, improved resource yields and waste
minimization
• Organizational- improved employee satisfaction, improved stakeholder relationship, reduced
risk and increased learning
• Improved brand image and competitive advantage- Most of the consumers consider a
company’s impact on the environment in considering where to purchase goods and services
and are more likely to purchase from companies that practice sustainable habits. Eg- Colgate
ad on save water
• Increase productivity and reduce costs-Energy conservation strategies that can be as simple
as turning off unnecessary lights and insulating walls to more sophisticated efforts such as
installation of geothermal heating and cooling systems
• Reduce waste. This is likely the simplest and most obvious way to engage in sustainable
practices.
• Beginning in the 1990s with offices collecting empty cans for recycling,
• the effort has grown to encompass waste mitigation in paper (conserving trees and forest
habitats),
• value engineering of products (reworking or developing new processes that use less raw
materials, waste less material in production of goods),
• to changing out incandescent lights for LED lights (greater efficiency combined with fewer
bulbs used).

Goals of sustainable development:

Three primary goals of sustainable development:
• To minimize the depletion of natural resources when creating new developments.
• To create development that can be maintained and sustained without causing further harm to
the environment.
• To provide methods for retrofitting existing developments to make them into environmentally
friendly facilities and projects.
Scope of sustainability:
1. Environment
2. Social Equity
3. Economic Growth

ELEMENTS / DIMENSIONS OF SUSTAINABLE DEVELOPMENT:

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 1. Political
2. Economic
3. Institutional
4. Technological
5. Socio-cultural
6. Ecological

Environmental Problems
1. Global warming
2. Landfill Problems
3. E-Waste
4. Deforestation
5. Climate change
6. Land degradation
7. Water pollution
Solutions
1. Plant more trees
2. Reject Plastics
3. Shift to renewable energy
4. Proper waste management
5. Recycling

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 Triple Bottom Line “TBL“or "3BL"

The triple bottom line (TBL) is a framework or theory that recommends that companies commit to
focus on social and environmental concerns just as they do on profits. The TBL posits that instead of
one bottom line, there should be three: profit, people, and the planet

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Measuring Your Organization's Wider Impact

Imagine going to work every day for a company that you are truly excited about, and proud to be a
part of. Sure, the pay is decent and there's a company crèche, but those aren't the only reasons why
you love working there. You're proud to be a part of this company because they're honorable.
They stand out from the typical "cut-throat" business world by the way they treat suppliers, their
commitment to environmental sustainability, their ethical investments, and their desire to empower
and promote their team members instead of dragging them down. There is a constant air of excitement
and possibility at the office, and you love coming to work each day. One approach to building a
company like this, and monitoring what it does, is to use "the triple bottom line."

The triple bottom line was first fully explained by John Elkington in his 1999 book, "Cannibals With
Forks: The Triple Bottom Line of 21st Century Business." It's a bottom line that continues to measure
profits, but also measures the organization's impact on people and on the planet. The triple bottom
line is a way of expressing a company's impact and sustainability on both a local and a global scale.
The concept behind the triple bottom line is that companies are responsible first and foremost to all
their stakeholders, and these include everyone that is involved with the company whether directly or
indirectly, as well as the planet we're all living on. This approach sees shareholders as part of the
stakeholder group, but only as part of it.

• The Triple Bottom Line is made up of "Social, Economic and Environmental"

• "People, Planet, Profit “
• The Triple Bottom Line is a concept that encourages the assessment of overall business
performance based on three important areas: Profit, People and Planet.
• The ‘Triple Bottom Line’ was first described in The Economist in 1994 by John Elkington, a
sustainability consultant, and encapsulates the idea that a business’s success should be
assessed not only in terms of its financial profitability but also its impact on society and the
environment (people, planet, profit).

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The Traditional Bottom Line

The traditional bottom line is concerned with the effect of a company’s activities on share value. It
does this by costing all company activity and calculating whether the company is making a financial
profit or a loss.

The “People” Bottom Line

This is sometimes called the social equity or human capital bottom line and is concerned with a
company’s stakeholders other than shareholders. They include employees’ contractors, customers
suppliers, and the wider community in which the business operates. This bottom line is interested in
the welfare of these stakeholders. That includes whether employees, contractors and other suppliers
receive fair payment for their work and/or goods and whether their working conditions are good. This
bottom line is also concerned with the company’s impact, directly and indirectly, on the general public.

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The Environment Bottom Line

This is also called the planet bottom line or natural capital and is concerned with the size of a company’s
ecological footprint and how to keep it as small as possible. This is done by controlling energy
consumption, reducing manufacturing waste (especially the toxic kind) and disposing of It safely. In
addition, It means managing the life cycle of a company’s products from start to finish. That Includes
lessening the environmental Impact from the raw material sourcing stage, to the end-of-life disposal
stage. Sometimes aspects of the environment and “people” bottom lines overlap.

The Future-Impact Bottom Line

This is about sustainability and is concerned with predicting how a company’s other three bottom lines
will perform in the future. It’s based on the idea that ‘flings may be fine now, but for how long will that
last?” By adopting it, a company tries to ensure that its current decisions won’t compromise the well-
being of future generations. It’s a strategic long-term planning exercise and, as such, the most
imprecise and aspiration of all. Some companies address these non-standard bottom lines as essential
parts of their strategic plans and employ personnel specifically to manage and Implement company
policy n those areas. Others operate In a more ad-hoc way, occasionally carrying out audits of these
other bottom lines. Some companies pay little or no attention to them, focusing solely on the financial
profit and loss figures.

Economic:
• Personal income
• Cost of underemployment
• Establishment sizes
• Job growth
• Employment distribution by sector
• Percentage of firms in each sector
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 • Revenue by sector contributing to gross state product

Environment:
• Sulfur dioxide concentration
• Concentration of nitrogen oxides
• Selected priority pollutants
• Excessive nutrients
• Electricity consumption
• Fossil fuel consumption
• Solid waste management
• Hazardous waste management
• Change in land use/land cover

Social:
• Unemployment rate
• Female labor force participation rate
• Median household income
• Relative poverty
• Percentage of population with a post- secondary degree or certificate
• Average commute time
• Violent crimes per capita
• Health-adjusted life expectancy

Example of TBL programme adapted by the Companies:

Example 1: Sustainability at Siemens in India
Environmental Sustainability (Planet)
In India, Siemens has put in place various initiatives for creating a sustainable environment. This
includes not only making employees, suppliers, business partners and customers environmentally-
conscious but also encouraging all stakeholders to choose approaches that support sustainable
environment.
A few initiatives in the area of Sustainability are:
• Green building initiative under the Energy Efficiency Program
• Corporate citizenship program that promotes social development by creating a viable
economic future
• Rain water harvesting at factories
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 • Sewage Treatment Plants
• Environment Portfolio with energy efficient (green products)
• Recycling and Reuse

Economic Sustainability (Profit):

• As part of its strategy to conduct business in a sustainable manner, Siemens focuses on
profitable business growth while ensuring that it adheres to ethical standards of doing business.
• The company's focus continues to be on improving operational efficiencies through process and
cost optimization measures. To meet this objective, it concentrates on the professional
management of the multiple projects that it implements and the risks that are associated with
these projects using the latest project management tools available globally.

Social Sustainability (people)

• Sustainability at Siemens includes corporate citizenship as well as occupational health and
safety.
• Siemens’s corporate citizenship initiative promotes social development by creating a viable
economic future and thus strives to be an integral part of society.
• Siemens has worked toward improving awareness of occupational health and safety at all
its locations in India. Efforts include constantly improving and integrating its occupational
health and safety methods, processes and systems on a continual basis.

Example :2
Wipro Programme on TBL
Workplace Sustainability (people) at Wipro
• Employee Engagement and Empowerment
o Sustained use of Yammer as the enterprise social networking platform; Over 1,09,000
+ users with 9,400+ groups
o Employee Perception Survey (EPS) Engagement scores increased by 12.5 % compare
to EPS 2015

• Employee Well-being and Safety

o 18 locations in India certified for OHSAS 18001
o 1,80,000 employees, contractors and service providers attended trainings on Health &
Safety, Safe Transportation, Hospitality, Security, Emergency Response Drills
• Diversity and Inclusion
o 33% of workforce constitute women
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 o Employees from 100+ nationalities in 50+ countries
o 334 employees with disabilities

• Capacity Building and Career Development

o Over 60,000 technical employees trained on Digital skills.
o Over 21,000 employees acquired additional skills in up to 4 technology areas
Social Responsibility:
• Wipro Education: Started Wipro Seeding Programme which supports the creation and
development of new educational organizations that can contribute meaningfully to Indian
school education Continued support to 23 organizations through programmatic grants, one-
time grants, fellowships and publications Wipro Science Education Fellowship Program:
Launched in Chicago, New York and Boston to improve Science and Math education in schools
primarily serving disadvantaged communities in US cities Collaboration with UMass, Boston,
Michigan State University, Mercy College and University of North Texas Works with 250-300
teachers across 20 school districts

• Wipro earthian: Increased reach to 2000 schools, 1500 colleges and 2200 teachers in 45
districts across 21 states Wipro-earthian Sustainability quiz was successfully launched at the
IIMA Confluence festival and the IIMB Exemius festival where 227 teams and 681 students
participated Round table discussion on sustainability education attended by 60 regional colleges
in Orissa was organized

• Wipro Cares: Nearly 70,000 children of migrant laborers working in construction sites in the
city benefitted from 20 education projects in 8 states ‘Children with Disability’ program
supports the educational and rehabilitative needs of 4,200 underprivileged children through 12
projects in 6 states Through 3 projects, an aggregate of over 40,000 people get access to
primary healthcare Project in urban solid waste management in Bangalore provides social,
nutritional and health security to nearly 2,700 workers in the informal sector of waste. About
60,000 people benefitted from livelihoods projects as part of disaster rehabilitation work in
Cuddalore, Tamil Nadu and Utharkashi, Uttatrakand Projects on water include setting up or
reviving rainwater harvesting systems in schools, maintenance of a lake, and a study of
groundwater resources

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Ecological Sustainability (Planet) at Wipro
Energy and Emissions
o GHG emissions reduction of 11,000 tons of CO eq.
o 2 Energy savings due to server virtualization increased by 35%
o Air travel footprint reduction (distance as well as emissions) of over 19%
o Global emissions intensity decreased by more than 10% to 1.58 tons per person per annum
o Absolute GHG emissions reduction of 1.8% from India office operations
o Renewable energy - 96.6 Mn. units. 26% of our total office space energy consumption
Water:
o Fresh water savings of 152 Mn. Litres
o 13.5% reduction in per employee water consumption - 1.119 m3 per month as compared to
1.295 in 2015-16
o 38% of water recycled in 2016-17 compared to 32% in 2015-16
o Community Programs
o Curated the Karnataka state water network (KSWN) in partnership with CII
o Three-year Participative Ground Water Mapping program completed

Waste:
o 93.3% of total waste from IT India operations recycled or reused
o Mixed Solid Waste intensity reduction by half in 2017 from 2013 – from 3.26 Kg to 1.55 Kg
per employee per annum
o Landfill intensity by half in 2017 from 2013, from 3.12 to 1.55 Kg per employee per annum

Campus Biodiversity:
o Butterfly Park at Electronic city campus completed in 2013.
o Second project in Pune completed which includes five thematic gardens – aesthetic and palm
garden, spring garden, Ficus garden, spice and fruit garden.
o Increased native species by 59 to 240

Supply Chain Sustainability (profit)

• Purchased more than 12,000 EPEAT registered electronic products
• Received EPEAT Purchaser Award from Green Electronic Council (US)
• Diverse supplier spends contributed to 3% of total central procurement tracked spend for
India operations

Bruntland Report:
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Introduction:
Brundtland Report, also called Our Common Future, publication released in 1987 by the World
Commission on Environment and Development (WCED) that introduced the concept of sustainable
development and described how it could be achieved. Sponsored by the United Nations (UN) and
chaired by Norwegian Prime Minister Gro Harlem Brundtland, the WCED explored the causes of
environmental degradation, attempted to understand the interconnections between
social equity, economic growth, and environmental problems, and developed policy solutions
that integrated all three areas.

In response to mounting concern surrounding ozone depletion, global warming, and other
environmental problems associated with raising the standard of living of the world’s population, the
UN General Assembly convened the WCED, an international group of environmental experts,
politicians, and civil servants, in 1983. The WCED (also called the Brundtland Commission) was
charged with proposing long-term solutions for bringing about sustainable development and
continuing it into the 21st century. It was also tasked with finding ways in which the concern for
the environment might be translated into greater cooperation between countries regarding issues of
development and resource use and creating processes in which all countries could address their own
environmental concerns and those of the world over the long term.
Gro Harlem Brundtland
• is a Norwegian politician,
• who served three terms as Prime Minister of Norway
• and as Director-General of the World Health Organization from 1998 to 2003.

The Brundtland Commission's mandate was to:

• 1.“ re-examine the critical issues of environment and development and to formulate
innovative concrete, and realistic action proposals to deal with them
• 2.Strengthen international cooperation on environment and development
• 3.Raise the level of understanding and commitment to action on the part of individuals,
voluntary organizations, businesses, institutes, and governments”
The Commission focused its attention in the areas of:
• Population
• Food security
• The loss of species and genetic resources,
• Energy
• Industry and human settlements
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Realizing that all of these are connected and cannot be treated in isolation one from another”

Common Future: Contents

Part I. Common Concerns

1. A Threatened Future
a) Symptoms and Causes
b) New Approaches to Environment and Development
c) Towards Sustainable Development
2. The Role of the International Economy
a. The Concept of Sustainable Development
b. Equity and the Common Interest
c. Strategic Imperatives
d. Conclusion

3. The Role of the International Economy

a. The International Economy, the Environment, and Development
b. Decline in the 1980s
c. Enabling Sustainable Development
d. A Sustainable World Economy

Part II. Common Challenges

4. Population and Human Resources
a. The Links with Environment and Development
b. The Population Perspective
c. A Policy Framework

5. Food Security: Sustaining the Potential

a. Achievements
b. Signs of Crisis
c. The Challenge
d. Strategies for Sustainable Food Security
e. Food for the Future

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 6. Species and Ecosystems: Resources for Development
a. The Problem: Character and Extent
b. Extinction Patterns and Trends
c. Some Causes of Extinction
d. Economic Values at Stake
e. New Approach: Anticipate and Prevent
f. International Action for National Species
g. Scope for National Action
h. The Need for Action
i.
7. Energy: Choices for Environment and Development
a. Energy, Economy, and Environment
b. Fossil Fuels: The Continuing Dilemma
c. Nuclear Energy: Unsolved Problems
d. IV. Wood Fuels: The Vanishing Resource
e. Renewable Energy: The Untapped Potential
f. Energy Efficiency: Maintaining the Momentum
g. Energy Conservation Measures
h. Conclusion
i.
8. Industry: Producing More with Less
a. Industrial Growth and its Impact
b. Sustainable Industrial Development in a Global Context
c. Strategies for Sustainable Industrial Development

9. The Urban Challenge

a. The Growth of Cities
b. The Urban Challenge in Developing Countries
c. International Cooperation

Part III. Common Endeavors

10. Managing The Commons
a. Oceans: The Balance of Life
b. Space: A Key to Planetary Management
c. Antarctica: Towards Global Cooperation

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 11. Peace, Security, Development, and the Environment
a. The Challenge for Institutional and Legal Change
b. Proposals for Institutional and Legal Change
c. A Call for Action
12. Towards Common Action: Proposals for Institutional and Legal Change
a. The Challenge for Institutional and Legal Change
b. Proposals for Institutional and Legal Change
c. IA Call for Action
13.
a. The International Economy, the Environment, and Development
b. Decline in the 1980s
c. Enabling Sustainable Development
d. A Sustainable World Economy

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 MODULE 4:

Corporate Sustainability Reporting

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A sustainability report is a report published by a company or organization about the economic,
environmental and social impacts caused by its everyday activities. A sustainability report also
presents the organization's values and governance model, and demonstrates the link between its
strategy and its commitment to a sustainable global economy.
Sustainability reporting can help organizations to measure, understand and communicate their
economic, environmental, social and governance performance, and then set goals, and manage
change more effectively. A sustainability report is the key platform for communicating sustainability
performance and impacts – whether positive or negative.

Sustainability reporting can be considered as synonymous with other terms for non-financial reporting;
triple bottom line reporting, corporate social responsibility (CSR) reporting, and more. It is also an
intrinsic element of integrated reporting; a more recent development that combines the analysis of
financial and non-financial performance

Who Should Report?

Sustainability reports are released by companies and organizations of all types, sizes and sectors,
from every corner of the world.

Thousands of companies across all sectors have published reports that reference the GRI Standards.
Public authorities and non-profits are also big reporters.

Major providers of sustainability reporting guidance include:

• GRI (GRI's Sustainability Reporting Standards)
• The Organization for Economic Co-operation and Development (OECD Guidelines for
Multinational Enterprises)
• The United Nations Global Compact (the Communication on Progress)
• The International Organization for Standardization (ISO 26000, International Standard for
social responsibility)

Sustainability Reporting:
• A sustainability report is a report published by a company or organization about the
economic, environmental and social impacts caused by its everyday activities.
Or
• Sustainability reporting is an organization’s practice of reporting publicly on its economic,
environmental, and social impacts
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 • A sustainability report also presents the organization's values and governance model, and
demonstrates the link between its strategy and its commitment to a sustainable global
economy.

How sustainability reporting helps organizations:

• Sustainability reporting can help organizations to measure, understand and communicate
their economic, environmental, social and governance performance, and then set goals, and
manage change more effectively.
• Sustainability reporting enables organizations to consider their impacts of wide range of
sustainability issues, enabling them to be more transparent about the risks and opportunities
they face.
•
Other names used:
Sustainability reporting can be considered as synonymous with other terms for:
• Non-financial Reporting;
• Triple Bottom Line Reporting;
Corporate Social Responsibility (CSR) Reporting, And More

Importance:
• Corporate companies that focus on Sustainable Reporting outperform their peers over the
longer run, which in turn results into a stronger market position and increased profitability.
• There is a reliable co-relation between business integrity and above average financial
performance.
• SR helps to acquire national and international listings and provide access to otherwise
restricted markets.
• SR will provide a sound understanding of the organization's customer needs, especially
foreign international customers.
• Other benefits include attracting finance through transparent relationships with credit
providers, improving management systems and improving employee motivation and
customer satisfaction

Benefits of Reporting:
An effective sustainability reporting cycle, which includes a regular program of data collection,
communication, and responses, should benefit all reporting organizations, both internally and
externally
Internal Benefits:
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 • Increased understanding of risks and opportunities
• Emphasizing the link between financial and non-financial performance
• Influencing long term management strategy and policy, and business plans
• Streamlining processes, reducing costs and improving efficiency
• Benchmarking and assessing sustainability performance with respect to laws, norms, codes,
performance standards, and voluntary initiatives
• Avoiding being implicated in publicized environmental, social and governance failures
• Comparing performance internally, and between organizations and sectors

External Benefits of Reporting:

• Mitigating – or reversing – negative environmental, social and governance impacts
• Improving reputation and brand loyalty
• Enabling external stakeholders to understand the organization’s true value, and tangible and
intangible assets
• Demonstrating how the organization influences, and is influenced by, expectations about
sustainable development

In short:
• Improved financial performance
• Improved stakeholder relationships
• Improved risk management
• Improved investor relationships
• Identification of new markets and/or business opportunities

Major providers of sustainability reporting guidance include:

• GRI (GRI's Sustainability Reporting Standards)
• The Organization for Economic Co-operation and Development (OECD Guidelines for
Multinational Enterprises)
• The United Nations Global Compact
• The International Organization for Standardization (ISO 26000, International Standard for
social responsibility)

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Global Reporting Initiative (GRI)
• The Global Reporting Initiative (known as GRI) is an international independent standards
organization that helps businesses, governments and other organizations understand and
communicate their impacts on issues such as climate change, human rights and corruption.
• GRI has pioneered sustainability reporting since the late 1990s, transforming it from a niche
practice into one now adopted by a growing majority of organizations. The GRI reporting
framework is the most trusted and widely used in the world.
GRI
• Sustainability reports based on the GRI Reporting Framework disclose outcomes and results
that occurred within the reporting period in the context of the organization’s commitments,
strategy, and management approach.
• Reports can be used for the following purposes, among others: Benchmarking,
Demonstrating and Comparing
• A sustainability report conveys disclosures on an organization’s most critical impacts – be
they positive or negative – on the environment, society and the economy.
GRI’s Sustainability Reporting Standards:
• Distinctive elements of the GRI Standards
• Multi-stakeholder input:
• A record of use and endorsement
• Governmental references and activities
• Independence
• Full transparency

Background on GRI
• 1997- GRI Founded in Boston by CERES (a United States non-profit organisation) and the
United Nations Environment Program (UNEP)
• 2000-G1 –First ever Guidelines released
• 2002- G2 Guidelines
• 2006- G3 Guidelines
• 2011- G3.1
• 2013-G4 Guidelines
• 2015 -GRI establishes separate standards Board (GSSB)
• 2016- GRI Standards

GRI Standards for Sustainability reporting:

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 • 101- Foundation
• 102- General Disclosers
• 103- Management Approach
• 200-Economic
• 300-Environment
• 400- Social
NOTE: FOR DETAILS CHECK PPT

GRI in India
• GRI also has regional 'Focal Points' in Australia, Brazil, China, India and the USA.
• The Focal Point India was established in January 2010, and is hosted by BSI Group India
• The Focal Point has an important strategic collaboration with the Indian Institute of Corporate
Affairs (IICA), an independent think tank under the Ministry of Corporate Affairs

Drivers of Sustainability Reporting:

• Stakeholder exert pressure for SR because of their organization’s participation in global
supply chain.
• Brand and reputation of corporate sector in India and at international level is the another
significant driver behind SR by corporates.
• Role of Governments/Regulators in pushing SR to make corporates more responsible.
• Facing competition worldwide is also the reason to accept the SR

Benefits:
The GRI Standards will deliver
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 • A more flexible and future-proof structure: ensuring the GRI Standards remain up-to-
date and relevant
• Greater suitability for referencing in policy initiatives: to enable further integration into
government and market legislation around the world
• A global common language for non-financial information: providing one universal
framework and set of disclosures to meet all sustainability reporting needs –from
comprehensive reports to issue-specific disclosures

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NVG (National voluntary guidelines)
The importance of businesses in improving the quality of life is well recognized. However, there is
growing awareness that in an increasingly complex world, businesses also have significant and long-
lasting impacts on people, our planet and our ability to sustain the levels of holistic development that
we all aspire to. This realization has also brought an increasing concern amongst all stakeholders, who
are demanding that businesses of all types and sizes need to function with fairness and responsibility.
Specifically, this calls for businesses being thoroughly aware and conscious of their social,
environmental and economic responsibilities, and balance these different considerations in an ethical
manner
When businesses are supported by appropriate Government policy regime that encourages systematic
movement towards responsible thinking, decision-making, and a progressive movement towards
sustainability, the trajectory of overall growth and development takes a positive turn. Such a
responsible approach on part of the business duly supported by the Government alone would secure
our future and ensure that wholesome benefits accrue to people, and our planet; even as businesses
continue to make surpluses that can be re-invested for the growth of the economy
The Ministry of Corporate Affairs had released Voluntary Guidelines on CSR in 2009 as the first step
towards mainstreaming the concept of Business Responsibilities.
The Guidelines emphasize that businesses have to endeavour to become responsible actors in society,
so that their every action leads to sustainable growth and economic development. Accordingly, the
Guidelines use the terms 'Responsible Business' instead of Corporate Social Responsibility (CSR) as
the term 'Responsible Business' encompasses the limited scope and understanding of the term CSR.

Applicability
• Guidelines are designed to be used by all businesses, irrespective of their ownership, size,
sector, or location.
• It is expected that all businesses investing or operating in India, including foreign multi-national
corporations (MNCs) will make efforts to follow the Guidelines.
• The Guidelines also provide a useful framework for guiding Indian MNCs in their overseas
operations.
• Guidelines reiterate the need to encourage Businesses to ensure that not only do they follow
the Guidelines in business contexts directly within their control or influence, but that they also
encourage and support their suppliers, vendors, distributors, partners and other collaborators
to follow the Guidelines.
• A separate chapter of guidance has been included for use by MSMEs (Micro, Small & Medium
Enterprises).
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 • All Principles of the Guidelines are equally important, inter-related, inter-dependent and non-
divisible, and Businesses should adopt them to demonstrate its commitment to being a
responsible business, and accrue the full benefits of sustainable business strategies.

Principles
Principle 1: Businesses should conduct and govern themselves with integrity in a manner that is
Ethical*, Transparent* and Accountable*.
ethical* behavior in all its functions and processes
disclosures* to all stakeholders
accountable* for the effective adoption, implementation and the making of
disclosures* on their performance
Principle 2: Businesses should provide goods and services in a manner that is safe and
sustainable*
• sustainable* production and consumption interrelated and contribute to enhancing the quality
of life.
• make consumers * aware of and empower them to practice responsible consumption.
• businesses should design their products* in a manner that creates value while minimizing its
adverse impacts on the environment and society through all stages of its life cycle, from
design to final disposal.
Principle 3: Businesses should respect and promote the well-being of all employees*, including
those in the value chain*.
• all policies and practices relating to the equity*, dignity and wellbeing of employees* engaged
within a business or in its value chain* without any discrimination.
• timely payment of fair living wages, workplace* environment that is safe, hygienic, and which
upholds the dignity of the employees*, train employees, work-life balance, should not use child
labor, ensure continuous skill and competence upgrading of all employees, humane and
harassment free workplace*
Principle 4: Businesses should respect the interests of and be responsive to all its stakeholders*
• understand their expectations and concerns, define the purpose and scope of the
engagement, consult with them in developing policies and processes that impact them
Principle 5: Businesses should respect and promote human rights.
• means to treat others with dignity and respect.
• create structures, policies and procedures that respect the human rights of all stakeholders*
impacted by its business.
• have access to effective grievance redressal mechanisms
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Principle 6: Businesses should respect and make efforts to protect and restore the environment.
• to address issues like pollution, biodiversity conservation and climate change
• should have internal policies, procedures and structures to address the adverse impacts of
the business on the environment
• develop appropriate strategies for sustainable* and efficient use of natural resources
• best practices for promoting reduction, reuse, recycling of resources
Principle 7: Businesses, when engaging in influencing public and regulatory policy, should do so in
a manner that is responsible and transparent*.
• The Principle emphasizes that policy advocacy must expand public good, and eliminate
exploitation rather than diminish it
Principle 8: Businesses should promote inclusive growth and equitable development.
• innovate and contribute to the overall development of the country with a specific focus on
disadvantaged, vulnerable and marginalized* communities
• need for collaboration amongst businesses, government agencies and civil society in
furthering this development agenda.
Principle 9: Businesses should engage with and provide value to their consumers* in a responsible
manner
• The Principle acknowledges that no business entity can exist or survive in the absence of its
consumers* .
• The Principle recognizes that consumers* have the freedom of choice in the selection and
usage of goods and services, and that the enterprises will strive to make available products*
that are safe, competitively priced, easy to use and safe to dispose of, for the benefit of their
consumers
Adopting the Guidelines: An Approach

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Adopting the Guidelines for MSME Sector

Widely regarded as the backbone of the Indian economy, the MSME sector1 is highly diverse and
heterogeneous in its structure. The enterprises range from an entity having just a single self-employed
person to the one employing hundreds of people; and from the one supplying goods to a next door
neighbor, to the one producing high-tech goods for global supply chains. The framework of these
Guidelines and the extent to which they are applicable to such a sector needs to be understood in the
context of the realities of these enterprises.

A major part of the Indian MSME sector is 'local' in its operations and outlook. Yet it impacts the
environment and society in its own way, despite the small numbers of its employees, the localized
buyers and the confined surroundings of its place of business.

Due to the increasing integration of the Indian economy with the global economy, especially during
the last decade, enterprises of all sizes have been gradually exposed to global competition. Global
buyers are basing their sourcing decisions not only on traditional commercial considerations such as
price, quality and delivery commitments, but also on compliance with social and environmental norms
in the workplace, covering, for instance, health and safety, social equity in employment and
production, and ecological compatibility of products and processes. Many Indian buyers too are
beginning to incorporate these requirements into their purchasing decisions. MSMEs not sensitive to
these expectations run a serious risk of isolation and rejection by buyers as well as consumers,
whereas those that are responsive to these expectations might find new business opportunities
opening up for them. The need for responding to rising social and environmental concerns is being
realized increasingly by the MSME sector but the multiplicity of prevailing codes is an impediment.
The present Guidelines aim to provide coherence in expectations and obviate the need for multiple
codes on social and environmental concerns. The principles and core elements of these Guidelines are
size neutral and are equally applicable to the MSME sector.

The Guidelines Drafting Committee has been sensitive to the fact that to be effective and have wider
acceptance among MSMEs, the Responsible Business practices need to be grounded in the context
within which MSMEs operate in India. Many MSMEs, particularly the micro enterprises, may genuinely
lack resources and capacity to adopt and integrate the Guidelines. Their business environment may
also be discouraging a responsible enterprise. Hence, promoting Responsible Business practices
among MSMEs may necessitate a multipronged approach which should include:
• Facilitating MSMEs to recognize the business case for adopting Responsible Business practices
• Preference by public agencies and large players in value chains to MSME suppliers that follow
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 BR practices
• Handholding MSMEs during the adoption of the Guidelines

Principles of Responsible Investment

• The UNO supported Principles for Responsible Investment (PRI) is an international network of
investors working together to put the six principles into practice.
• Investors (Signatories) contribute to the development of a more sustainable Global Financial
System
• As of August 2017, more than 1,750 signatories from over 50 countries representing
approximately US$70 trillion have signed up to the Principles.
1. We will incorporate ESG issues into investment analysis and decision-making
processes.
2. We will be active owners and incorporate ESG issues into our ownership policies
and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we
invest.
4. We will promote acceptance and implementation of the Principles within the
investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will report on our activities and progress towards implementing the Principles.

Challenges of sustainability Reporting:

Competing frameworks
Competing frameworks and standards designed for different audiences create challenges for investors
and companies; for example, the GRI reporting framework focuses on a broad audience, whereas
SASB focuses on industries. The majority of companies have been using the GRI framework, making
it the traditional standard for sustainability reporting; however, companies that use the GRI framework
were not consistent about the specific version of the guidelines
Multiple reporting framework
Standards and frameworks play an essential and positive role by substantially increasing the quality
and decision-usefulness of reports. However, while each reporting framework has its own purpose and
rationale, multiple reporting frameworks can appear confusing and conflicting. This proliferation can
complicate the reporting field, especially given their varying or conflicting metrics, definitions, and
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priorities.

Volume of rating and rakings

Companies receive many requests for information from individual ratings and rankings
organizations.
This poses four main difficulties for sustainability reporting practitioners:
1. Practitioners receive and respond to requests for information that may not be material to
investors or the company’s impact on sustainability.
2. Practitioners fear that material information may be selectively disclosed to some investors and
not others.
3. The volume of time spent responding to requests limits practitioner’s capacity to implement and
advance their company’s sustainability strategy
4.Practitioners are challenged to assess the credibility, significance, and value of disclosing to
various ratings and rankings organizations.
Different measures of materiality
• Materiality within the sustainability reporting context is not necessarily the same concept as
materiality as defined by U.S. securities laws.
Multiple target audience
Sustainability reports cater to multiple target audiences with varying expectations for what a
company should report. Practitioners are increasingly aware of a need to tailor sustainability reports
to their target audiences, but remain challenged to develop reports that provide their diverse set of
stakeholders with the “right” disclosures to inform the “right” decisions.

Increasing depth of expertise

• The strengthening of expertise on a wide range of sustainability topics—everything from
climate change to human rights, and privacy to labor standards—has significantly increased
expectations for the level of detail and sophistication provided by companies in their
communications. Reporting practitioners are challenged to balance this demand for depth
with a competing interest in simplifying their reports.
Demands a lot of organizational effort to gather and monitor data. This can make it a
challenging, time-consuming and costly exercise

Overall performance of Indian Corporate Reporting is not satisfactory when compared with
companies from European Union, China and Japan According to their findings, although Indian
companies are proactive towards sustainable issues, there are still many issues – inclusive
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employment, education, employment creation, health, corporate/government collaboration, land and
displacement, natural resource management, climate change, corporate governance, solid waste
and water – to be addressed by them

Sustainability Indices:
• United Nations Commission on Sustainable Development (UNCSD) indicators
• 14 themes
1. Poverty
1. Proportion of population living below national poverty line*
2. Ratio of share in national income of highest to lowest quintile
3. Proportion of population using improved sanitation facilities*
4. Proportion of population using an improved water source
5. Share of households without electricity or other modern energy services
6. Proportion of urban population living in slum

2. Governance
1. Percentage of population having paid bribes
2. Number of intentional homicides per 100,000 population

3. Health
1. Under-five mortality rate*
2. Life expectancy at birth
3. Percent of population with access to primary health care facilities
4. Immunization against infectious childhood diseases
5. Nutritional status of children
6. Morbidity of major diseases such as HIV/AIDS, malaria, tuberculosis
4. Education
1. Gross intake ratio to last grade of primary education
2. Net enrolment rate in primary education
3. Adult secondary (tertiary) schooling attainment level
4. Adult literacy rate

5. Demographics
1. Population growth rate
2. Dependency ratio
6. Natural Hazards
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 1. Percentage of population living in hazard prone areas

7. Atmosphere
1. Carbon dioxide emissions
2. Consumption of ozone depleting substances
3. Ambient concentration of air pollutants in urban areas

8. Land
1. Arable and permanent cropland area
2. Proportion of land area covered by forests*
9. Oceans, seas and coasts
1. Percentage of total population living coastal areas
2. Proportion of fish stocks within safe biological limits
3. Proportion of marine area protected

10.Freshwater
1. Proportion of total water resources used
2. Water use intensity by economic activity, Presence of faecal coliforms in fresh water
11.Biodiversity
1. 1.Proportion of terrestrial area protected, total and by ecological region
2. 2.Change in threat status of species
12.Economic development
1. 1.GDP per capita
2. 2.Investment share in GDP
3. 3.Debt to GNI ratio
4. 4.Employment-population ratio
5. 5.Labor productivity and unit labor costs
6. 6.Share of women in wage employment in the non-agricultural sector*
7. 7.Internet users per 100,000 population*
8. 8.Tourism contribution to GDP

13.Global Economic Partnership

1. 1.Current account deficit as percentage of GDP
2. 2.Net Official Development Assistance (ODA) given or received as a percentage of GNI
14.Consumption and Production Patterns
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 1. 1.Material intensity of the economy 2.Annual energy consumption, total and by main
user category 3.Intensity of energy use, total and by economic activity 4.Generation
of hazardous waste 5.Waste treatment and disposal 6.Modal split of passenger
transportation

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 Principles of Responsible Investment

In early 2005 the then UN Secretary-General, Kofi Annan, invited a group of the world’s
largest institutional investors to join a process to develop the Principles for Responsible
Investment (PRI). Individuals representing 20 institutional investors from 12 countries
agreed to participate in the Investor Group. They were supported by a 70-person multi-
stakeholder group of experts from the investment industry, intergovernmental and
governmental organizations, civil society and academia. The process was coordinated by the
United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global
Compact

Benefits of signing
There are many benefits to signing the PRI. These include:
A common framework for integrating ESG issues n access to examples of good practice from a
global network of peers (including many of the world's largest institutional investors)
Opportunities to collaborate and network with other signatories, reducing research and
implementation costs
Reputational benefits from publicly demonstrating top-level commitment to integrating ESG
issues
Participation in the annual PRI signatory event n access to a standard reporting and assessment
tool
Commitment and Pledge by the Investors
As institutional investors, we have a duty to act in the best long-term interests of our
beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate
governance (ESG) issues can affect the performance of investment portfolios (to varying
degrees across companies, sectors, regions, asset classes and through time). We also
recognize that applying these Principles may better align investors with broader objectives of
society. Therefore, where consistent with our fiduciary responsibilities, we commit to the
following:

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 The Principles
1. We will incorporate ESG issues into investment analysis and decision-making
processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and
practices
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the
investment industry
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles

The Principles for Responsible Investment were developed by an international group of institutional
investors reflecting the increasing relevance of environmental, social and corporate governance
issues to investment practices. The process was convened by the United Nations Secretary-General.

In signing the Principles, we as investors publicly commit to adopt and implement them, where
consistent with our fiduciary responsibilities. We also commit to evaluate the effectiveness and
improve the content of the Principles over time. We believe this will improve our ability to meet
commitments to beneficiaries as well as better align our investment activities with the broader
interests of society

What is the overall goal of the Principles for Responsible Investment (PRI) Initiative?
The PRI aim to help investors integrate consideration of environmental, social and governance (ESG)
issues into investment decision-making and ownership practices, and thereby improve long-term
returns to beneficiaries
How will implementing the Principles influence investment returns?
Implementing the Principles will lead to a more complete understanding of a range of material
issues, and this should ultimately result in increased returns and lower risk. There is increasing
evidence that ESG issues can be material to performance of portfolios, particularly over the long
term. PRI signatories are also part of a network, with opportunities to pool resources and influence,
lowering the costs and increasing the effectiveness of research and active ownership practices. The
Initiative also supports investors in working together to address systemic problems that, if
remedied, may then lead to more stable, accountable and profitable market conditions overall.

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What are the implications for fiduciary duty?
The Principles are based on the premise that ESG issues can affect investment performance and that
the appropriate consideration of these issues is part of delivering superior risk-adjusted returns and
is therefore firmly within the bounds of investors’ fiduciary duties. The Principles clearly state they
are to be applied only in ways that are consistent with those duties.

Sources (partial):
• United Nations (UN), ‘Guiding Principles on Business and Human Rights, Implementing the
United Nations “Protect, Respect and Remedy” Framework’, 2011
• Organization for Economic Co-operation and Development (OECD) Principles, ‘Principles of
Corporate Governance’, 2004.
• https://www.oecd.org/dac/OECD-action-plan-on-the-sustainable-development-goals-
2016.pdf
• Brander et al., 2015. The benefits to people of expanding Marine Protected Areas. IVM Institute
for Environmental Studies. Report R-15/05
• FAO, 2017. FAO’s input to the Secretary- General’s background note for the preparatory
meeting of the UN conference in support of the SDG 14 to be held in New York in February
2017. Rome: FAO
• Maaroof, A., 2015. Big Data and the 2030 Agenda for Sustainable Development: Final draft
report. UNESCAP meeting (session 4), 14th -15th December, Bangkok, Thailand
• www.FAO.ORG/CFS/RAI CFS SECRETARIAT: CFS@FAO.OR
• OECD, “The UN Global Compact and the OECD Guidelines for Multinational Enterprises:
Complementarities and Distinctive Contributions,” available at
www.oecd.org/dataoecd/23/2/34873731.pdf

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