CG&CSR Project

CONTENTS
PART-I
Corporate Governance 1. Executive Summary.....3 2. Corporate Governance Introduction....5 3. Corporate Governance- History: United States..6 4. Corporate Governance- History: India9 5. Corporate Governance in India..10 6. Changes Since Liberalization9 7. Parties to Corporate Governance..16 8. Principles of Corporate Governance...19 9. Mechanisms and Controls Corporate Governance21
Internal Corporate Governance Controls External Corporate Governance Controls
10. Corporate Governance Models Around the World...23 11. Corporate Governance and Firm Performance...24 12. CG Practices followed by India & Other Foreign Countries .27 13. Systematic Problems of Corporate Governance....30 14. Corporate Governance at Large Companies....39 15. Corporate Governance at Small Companies..51
1 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
PART-II
Corporate Social Responsibility 16. What Ratan Tata Did..66 17. Corporate Social Responsibility Introduction....66 18. Corporate Social Responsibility- History..68 19. Indian Scenario..69 20. Principles of Corporate Social Responsibility....73 21. Corporate Social Responsibility Priorities.75 22. Sustainable Growth Through Corporate Social Responsibility 75 23. Corporate Social Responsibility with Key Stakeholders888 24. Corporate Social Responsibility Challenges.89 25. Corporate Social Responsibility Initiative & Examples..900 26. Conclusion..96 27. Bibliography99 28. Appendices 99
Annexure 1 Annexure 2 Annexure 3
Executive Summary
Corporate Governance (CG) is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Corporate Social Responsibility (CSR) is a commitment to behave ethically and contribute to economic development while improving the quality of life of workforce and their families as well as the local community at large. It is a voluntary approach that a business enterprise takes to meet or exceed stakeholder expectations by integrating social, ethical, and environmental concerns together with the usual measures of revenue, profit, and legal obligation. It is also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its adherence to law, ethical standards, and international norms. Objective of the Project on Corporate Governance & Corporate Social Responsibility is:
to study the Regulatory Disclosures under different laws and its actual
implementation by Companies,
to understand the impact of CG & CSR in Socio- Economic Development, to understand the significance of CG & CSR on the Shareholders interests and to find out newer approach of CG & CSR for protecting the Stakeholders
interest. Findings / To Summarize, the corporate governance and the corporate social responsibility are both extremely important to a company. If you have a well formed corporate governance programme in place, that would probably take care of most CSR issues.
Good corporate governance is basically about making better decisions for the long term health of the company, where the company is likely to be benefited from fewer disruptions to its business from strikes, boycotts and regulation. To implement CG & CSR, there must be an active internal conversation between the board, executives and staff. Emphasis should be placed on increased transparency and disclosure of companys policies and strategies, which lead to good brand value of the company. The compliance requirements for CG & CSR are different for different types of companies. The CG & CSR requirements for large listed Public limited companies are much more than the unlisted Public limited companies and even lesser for small Private limited companies, where risk of the stack holders is limited. Though, a company is a separate legal entity different from its owners, but is difficult to observe the separation of ownership and the management in case of small to medium Companies, whether private or public.
CORPORATE GOVERNANCE
INTRODUCTION Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.
Definition Corporate Governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture, which safeguards
policies and processes'.
Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world.
Corporate Governance
as defined by SEBI committee (India) is the
acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as business ethics and a moral duty. See also Corporate Social Entrepreneurship regarding employees who are driven by their sense of integrity (moral conscience) and duty to society. This notion stems from traditional philosophical ideas of virtue (or self governance) and represents a "bottom-up" approach to corporate governance (agency) which supports the more obvious "top-down" (systems and processes, i.e. structural) perspective.
Good Corporate Governance: Reduces risk Stimulates performance Improves access to capital markets Enhances the marketability of goods and services Improves leadership Demonstrates transparency and social accountability.
HISTORY - UNITED STATES In the 19th century, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US's wealth has been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become increasingly derivative and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms.
In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society. Berle and Means' monograph "The Modern Corporation and Private Property" (1932, Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today. Since the late 1970s, corporate governance has been the subject of significant debate in the U.S. and around the globe. Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners. In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The California Public Employees' Retirement System led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated). In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South Korea, Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and WorldCom, as well as lesser corporate debacles, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, led to increased shareholder and governmental interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002.
Recent Developments in USA: History continues to tick and Sarbanes-Oxley Act of the US was a serious wakeup call. It has been much debated and there are very mild protests in some quarters. Nevertheless, it is a call to get back to fundamentals and it identifies 58 separate provisions that affect internal auditing and the question of Directors of Boards looking the other way is unacceptable and must change. This message is applicable to the public and private companies alike. important extracts from the BIS review 2003. I am tempted to quote some of the
The message for boards of directors is: Uphold your responsibility for ensuring the effectiveness of the companys overall governance process.
The message for audit committees is: Uphold your responsibility for ensuring that the companys internal and external audit processes are rigorous and effective.
The message for CEOs, CFOs, and the senior management is: Uphold your responsibility to maintain effective financial reporting and disclosure controls and adhere to high ethical standards. This requires meaningful certifications, codes of ethics, and conduct of insiders that, if violated, will result in fines and criminal penalties, including imprisonment.
The message for external auditors is: Focus your efforts solely on auditing financial statements and leave the add-on services to other consultants.
The message for internal auditors is: You are uniquely positioned within the company to ensure that its corporate governance, financial reporting and disclosure controls, and risk management practices are functioning effectively. Although internal auditors are not specifically mentioned in the Sarbanes-Oxley Act, they have within their purview of internal control the responsibility to examine and evaluate all of an entitys systems, processes, operations, functions and activities.
Thus, the role of the internal auditor has substantially got escalated and the external auditor perhaps took a back seat. However, a specific section of Sarbanes-Oxley Act requires senior management to assess and report on the effectiveness of disclosure controls and procedures as well as on internal controls for financial reporting. All of these have to be in the public disclosure domain of the reports but outside the financial statements. There is one risk to merely lean heavily on the certification, which after a while become ritualistic. It would be good to be associated with the framing of the robust audit programme and the companys disclosure control framework. Further an internal auditor must have the highest ethics and be willing to sacrifice everything (consultation assignments) to maintain their independence within the auditing company. If there are different sections of companies, which offer turn-key management consultation, at least those who are involved in the audit exercise should disassociate themselves from being a part of consulting side of the companys work. Some of the provisions in the Act are quite draconian particularly one would be the internal auditor of publicly traded financial services company, as there are threats of fines and imprisonment, the internal auditors voice is heard loud and clear by the Board and as such all those Boards who choose to ignore this valuable advice would in my opinion be consigned to the dust bin of history. Complex collapses, misfeasance and malfeasance of staggering proportions, Auditors failing in their duties, call for tough Regulatory responses like the above Act and related rules introduced and interpreted by Securities and Exchange Commission in USA. HISTORY - INDIA: Next, we would like to turn to Indian situation. By and large we have followed the Cadbury model. It is true that Audit Committees, Managing Committees and Remuneration Committees have all come into existence. In most Indian companies and the CIIs studies of 1999 chaired by Mr. Kumar Mangalam Birla was a landmark document with 25 recommendations. 19 of them are mandatory. The role of a company with a combination of Executive and Non-Executive Directors with at least 50% comprising non-executive directors is important. Likewise, the audit committee is chaired by qualified independent Director preferably a Chartered Accountant and the members of the Audit Committee are invariably non-executive independent Directors. We all know that the independent Directors apart from receiving Directors remuneration do not have any pecuniary relationship or
transactions with the company.
The Audit Committee has wide powers and also
looks into the compliance with Accounting Standards and all of the other regular compliances like the stock exchange, legal requirements and it also looks into several internal control systems. There is sub-committee of the Board, which also looks at the shareholders grievances and files its compliances to the stock exchange. Publication of quarterly or half yearly results of the companies after What being vetted by the Audit Committee is now a well established practice.
perhaps is missing in the Indian situation at the present moment is the equivalent legislation, inline with the Sarbanes-Oxley Act although, the dust has not settled down on the subject. The Institute of Chartered Accountants of India have set up quite rigid Accounting Standards to be followed which have progressively tightened compliances. This assumes importance as many mid-sized and small companies are family controlled and at times pyramidical structures are developed so that layered investments and crossholdings go unnoticed. There is urgency to ensure against controlling of companies in the group by a group of people who are not direct investors. Corporate Governance in India The history of the development of Indian corporate laws has been marked by interesting contrasts. At independence, India inherited one of the worlds poorest economies but one which had a factory sector accounting for a tenth of the national product; four functioning stock markets (predating the Tokyo Stock Exchange) with clearly defined rules governing listing, trading and settlements; a well-developed equity culture if only among the urban rich; and a banking system replete with welldeveloped lending norms and recovery procedures. In terms of corporate laws and financial system, therefore, India emerged far better endowed than most other colonies. The 1956 Companies Act as well as other laws governing the functioning of joint-stock companies and protecting the investors rights built on this foundation. The beginning of corporate developments in India were marked by the managing agency system that contributed to the birth of dispersed equity ownership but also gave rise to the practice of management enjoying control rights disproportionately greater than their stock ownership. The turn towards socialism in the decades after independence marked by the 1951 Industries (Development and Regulation) Act as well as the 1956 Industrial Policy Resolution put in place a regime and culture of
licensing, protection and widespread red-tape that bred corruption and stilted the growth of the corporate sector. The situation grew from bad to worse in the following decades and corruption, nepotism and inefficiency became the hallmarks of the Indian corporate sector. Exorbitant tax rates encouraged creative accounting practices and complicated emolument structures to beat the system. In the absence of a developed stock market, the three all-India development finance institutions (DFIs) the Industrial Finance Corporation of India, the Industrial Development Bank of India and the Industrial Credit and Investment Corporation of India together with the state financial corporations became the main providers of long-term credit to companies. Along with the government owned mutual fund, the Unit Trust of India, they also held large blocks of shares in the companies they lent to and invariably had representations in their boards. In this respect, the corporate governance system resembled the bank-based German model where these institutions could have played a big role in keeping their clients on the right track. Unfortunately, they were themselves evaluated on the quantity rather than quality of their lending and thus had little incentive for either proper credit appraisal or effective follow-up and monitoring. Their nominee directors routinely served as rubber-stamps of the management of the day. With their support, promoters of businesses in India could actually enjoy managerial control with very little equity investment of their own. Borrowers therefore routinely recouped their investment in a short period and then had little incentive to either repay the loans or run the business. Frequently they bled the company with impunity, siphoning off funds with the DFI nominee directors mute spectators in their boards. This sordid but increasingly familiar process usually continued till the companys net worth was completely eroded. This stage would come after the company has defaulted on its loan obligations for a while, but this would be the stage where Indias bankruptcy reorganization system driven by the 1985 Sick Industrial Companies Act (SICA) would consider it sick and refer it to the Board for Industrial and Financial Reconstruction (BIFR). As soon as a company is registered with the BIFR it wins immediate protection from the creditors claims for at least four years. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision, after which period the delay has roughly doubled. Very few companies have emerged successfully from the BIFR and even for those that
needed to be liquidated, the legal process takes over 10 years on average, by which time the assets of the company are practically worthless. Protection of creditors rights has therefore existed only on paper in India. Given this situation, it is hardly surprising that banks, flush with depositors funds routinely decide to lend only to blue chip companies and park their funds in government securities. Financial disclosure norms in India have traditionally been superior to most Asian countries though fell short of those in the USA and other advanced countries. Noncompliance with disclosure norms and even the failure of auditors reports to conform to the law attract nominal fines with hardly any punitive action. The Institute of Chartered Accountants in India has not been known to take action against erring auditors. While the Companies Act provides clear instructions for maintaining and updating share registers, in reality minority shareholders have often suffered from irregularities in share transfers and registrations deliberate or unintentional. Sometimes non-voting preferential shares have been used by promoters to channel funds and deprive minority shareholders of their dues. Minority shareholders have sometimes been defrauded by the management undertaking clandestine side deals with the acquirers in the relatively scarce event of corporate takeovers and mergers. Boards of directors have been largely ineffective in India in monitoring the actions of management. They are routinely packed with friends and allies of the promoters and managers, in flagrant violation of the spirit of corporate law. The nominee directors from the DFIs, who could and should have played a particularly important role, have usually been incompetent or unwilling to step up to the act. Consequently, the boards of directors have largely functioned as rubber stamps of the management. For most of the post-Independence era the Indian equity markets were not liquid or sophisticated enough to exert effective control over the companies. Listing requirements of exchanges enforced some transparency, but non-compliance was neither rare nor acted upon. All in all therefore, minority shareholders and creditors in India remained effectively unprotected in spite of a plethora of laws in the books. Changes since liberalization
The years since liberalization have witnessed wide-ranging changes in both laws and regulations driving corporate governance as well as general consciousness about it. Perhaps the single most important development in the field of corporate governance and investor protection in India has been the establishment of the Securities and Exchange Board of India (SEBI) in 1992 and its gradual empowerment since then. Established primarily to regulate and monitor stock trading, it has played a crucial role in establishing the basic minimum ground rules of corporate conduct in the country. Concerns about corporate governance in India were, however, largely triggered by a spate of crises in the early 90s the Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting preferential shares to their promoters at deeply discounted prices as well as those of companies simply disappearing with investors money. These concerns about corporate governance stemming from the corporate scandals as well as opening up to the forces of competition and globalization gave rise to several investigations into the ways to fix the corporate governance situation in India. One of the first among such endeavors was the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two committees to look into the issue of corporate governance the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three years later. Table 1 provides a comparative view of the recommendations of these important efforts at improving corporate governance in India. The SEBI committee recommendations have had the maximum impact on changing the corporate governance situation in India. The Advisory Group on Corporate Governance of RBIs Standing Committee on International Financial Standards and Codes also submitted its own recommendations in 2001.
Independent directors defined separately within each code. The Narayana Murthy committees definition is stricter.
A comparison of the three sets of recommendations in Annexure-1 reveal the progress in the thinking on the subject of corporate governance in India over the years. An outline provided by the CII was given concrete shape in the Birla Committee report of SEBI. SEBI implemented the recommendations of
the Birla Committee through the enactment of Clause 49 of the Listing Agreements. They were applied to companies in the BSE 200 and S&P C&X Nifty indices, and all newly listed companies, on March 31, 2001; to companies with a paid up capital of Rs. 10 crore or with a net worth of Rs. 25 crore at any time in the past five years, as of March 31, 2002; to other listed companies with a paid up capital of over Rs. 3 crore on March 31, 2003. The Narayana Murthy committee worked on further refining the rules. The recommendations also show that much of the thrust in Indian corporate governance reform has been on the role and composition of the board of directors and the disclosure laws. The Birla Committee, however, paid much-needed attention to the subject of share transfers which is the Achilles heel of shareholders right in India.
60
50
% of Companies to which Applicable
C olumn 1
40
30
20
10
Remuneration Committee
Report on Corporate Governance
Management
Audit Committee
Shareholder's Greivance Committee
Board of Directors
Board Procedure
Areas of Companies
14
Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
No Response
Shareholders
Fig shows the frequency of compliance of companies to the different aspects of the corporate governance regulation. Clearly much more needs to be accomplished in the area of compliance. Besides in the area of corporate governance, the spirit of the laws and principles is much more important than the letter. Consequently, developing a positive culture and atmosphere of corporate governance is essential in obtaining the desired goals. Corporate governance norms should not become just another legal item to be checked off by managers at the time of filing regulatory papers.
PARTIES TO CORPORATE GOVERNANCE Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management, shareholders and Auditors). Other stakeholders who take part include financial institutions, suppliers, employees, creditors, customers and the community at large. In corporations, the shareholder delegates decision rights to the manager to act in the principal's best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organizations strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. The Company Secretary, known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators (ICSA), is a high ranking professional who is trained to uphold the highest standards of corporate governance, effective operations, compliance and administration. All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital. A key factor is an individual's decision to participate in an organization e.g. through providing financial capital and trust that they will receive a fair share of the
organizational returns. If some parties are receiving more than their fair return then participants may choose not to continue participating leading to organizational collapse. Role Of Institutional Investors Many years ago, worldwide, buyers and sellers of corporation stocks were individual investors, such as wealthy businessmen or families, who often had a vested, personal and emotional interest in the corporations whose shares they owned. Over time, markets have become largely institutionalized: buyers and sellers are largely institutions (e.g., pension funds, mutual funds, hedge funds, exchange-traded funds, other investor groups; insurance companies, banks, brokers, and other financial institutions). The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improve regulation of the stock market (but not necessarily in the interest of the small investor or even of the nave institutions, of which there are many). Note that this process occurred simultaneously with the direct growth of individuals investing indirectly in the market (for example individuals have twice as much money in mutual funds as they do in bank accounts). However this growth occurred primarily by way of individuals turning over their funds to 'professionals' to manage, such as in mutual funds In this way, the majority of investment now is described as "institutional investment" even though the vast majority of the funds are for the benefit of individual investors. Unfortunately, there has been a concurrent lapse in the oversight of large corporations, which are now almost all owned by large institutions. The Board of Directors of large corporations used to be chosen by the principal shareholders, who usually had an emotional as well as monetary investment in the company (think Ford), and the Board diligently kept an eye on the company and its principal executives (they usually hired and fired the President, or Chief Executive Officer CEO). Nowadays, if the owning institutions don't like what the President/CEO is doing and they feel that firing them will likely be costly (think "golden handshake") and/or time consuming, they will simply sell out their interest. The Board is now mostly chosen
by the President/CEO, and may be made up primarily of their friends and associates, such as officers of the corporation or business colleagues. Since the (institutional) shareholders rarely object, the President/CEO generally takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). Occasionally, but rarely, institutional investors support shareholder resolutions on such matters as executive pay and anti-takeover, aka, "poison pill" measures. Finally, the largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for corporations, State Street Corp.) are designed simply to invest in a very large number of different companies with sufficient liquidity, based on the idea that this strategy will largely eliminate individual companys financial or other risk and, therefore, these investors have even less interest in a particular company's governance. Since the marked rise in the use of Internet transactions from the 1990s, both individual and professional stock investors around the world have emerged as a potential new kind of major (short term) force in the direct or indirect ownership of corporations and in the markets. Even as the purchase of individual shares in any one corporation by individual investors diminishes, the sale of derivatives (e.g., exchange-traded funds (ETFs), Stock market index options , etc.) has soared. So, the interests of most investors are now increasingly rarely tied to the fortunes of individual corporations. But, the ownership of stocks in markets around the world varies; for example, the majority of the shares in the Japanese market are held by financial companies and industrial corporations (there is a large and deliberate amount of cross-holding among Japanese keiretsu corporations and within S. Korean chaebol 'groups') , whereas stock in the USA or the UK and Europe are much more broadly owned, often still by large individual investors.
PRINCIPLES OF CORPORATE GOVERNANCE Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports. Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders: Organizations should
respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
Interests of other stakeholders: Organizations should recognize that they
have legal and other obligations to all legitimate stakeholders.
Role and responsibilities of the board: The board needs a range of skills
and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.
Integrity and ethical behavior: Ethical and responsible decision making is
not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure.
Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
Disclosure and transparency: Organizations should clarify and make
publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. The Ministry of Corporate Affairs has issued Corporate Governance Guidelines (Annexed as Annexure-II). Issues involving corporate governance principles include: internal controls and internal auditors the independence of the entity's external auditors and the quality of their oversight and management of risk oversight of the preparation of the entity's financial statements review of the compensation arrangements for the chief executive officer and the resources made available to directors in carrying out their duties the way in which individuals are nominated for positions on the board dividend policy
audits
other senior executives
Nevertheless "corporate governance," despite some feeble attempts from various quarters, remains an ambiguous and often misunderstood phrase. For quite some time it was confined only to corporate management. That is not so. It is something much broader, for it must include a fair, efficient and transparent administration and strive to meet certain well defined, written objectives. Corporate governance must go well beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment), and the commitment to run a transparent organization- these should be constantly evolving due to
interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector. John G. Smale, a former member of the General Motors board of directors, wrote: "The Board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management." However it should be noted that a corporation should cease to exist if that is in the best interests of its stakeholders. Perpetuation for its own sake may be counterproductive. MECHANISMS AND CONTROLS Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability. Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Examples include:
Monitoring by the board of directors: The board of directors, with
its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[7] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
Internal control procedures and internal auditors: Internal control
procedures are policies implemented by an entity's board of directors, audit

committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting
Balance of power: The simplest balance of power is very common;
require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.
Remuneration: Performance-based remuneration is designed to relate
some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour. External corporate governance controls External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include: competition debt covenants demand and assessment of performance information (esp. financial government regulations managerial labour market media pressure takeovers
statements)
CORPORATE GOVERNANCE MODELS AROUND THE WORLD
Although the US model of corporate governance is the most notorious, there is a considerable variation in corporate governance models around the world. The intricated shareholding structures of keiretsus in Japan, the heavy presence of banks in the equity of German firms, the chaebols in South Korea and many others are examples of arrangements, which try to respond to the same corporate governance challenges as in the US. In the United States, the main problem is the conflict of interest between widelydispersed shareholders and powerful managers. In Europe, the main problem is that the voting ownership is tightly-held by families through pyramidal ownership and dual shares (voting and nonvoting). This can lead to "self-dealing", where the controlling families favor subsidiaries for which they have higher cash flow rights. Table showing different Models around the World
Features Corporate Objectives Focus Measuring of Success Decision Making Control of Corporates ORIENTATION Long term investment Capital Market Primary Capital Market Secondary Investor commitments Major Investors Board Composition Goal of the Board Board Indepence over Management Executive Compensation Dividend Strength Anglo American Shareholders Value Capital Market Return On Financial Capital Check And Balance Separate From Ownership Physical capital R&D human capital Liquid German Long Term Corporate Body Return On Human capital Within Network Of Stakeholders Linked To Ownership Plant Equipment Employee Training Less Important Due To Close Ties With Banks Rare Hostile Takeovers High Banks Two Tier Board Upper : Supervisory Lower : Management Organizational Health High Moderate Moderate Long Term Industrial Strategy Stable Capital Strong Oversea Investment Japanese Long Term Keiretsu Business Network Return On Social Capital Within Network Bankers Linked To Ownership Physical capital R&D human capital Less Important Due To Close Ties With Banks Rare Hostile Takeovers High Business Networks Executive And Non Ex Directors Organizational Health Low Low Low Long Term Industrial Strategy Stable Capital Indian Shareholders Value Maximize Surplus Return On Financial Capital Management Outside Stakeholders Linked To Ownership Physical Capital Less Important Due To institutional Funding Rare Hostile Takeovers Low Directors And Relatives Executive And Non Ex Directors Short Term Gains Moderate Subject To Govt. Approvals Moderate Subject To Govt. Approvals Low Uncertain Recent Govt. And Organ. Activism Cii
Frequent Hostile Takeovers Low Institutional Executive And Non Ex Directors Shareholder Wealth Little High High Dynamic Market Based Liquid Capital Internalization Non Problematic
Weakness
Instability
Governance Procedures Vulnerable To Global Capitals Market
Secretive Corrupt Financial Speculation
Secretive Corrupt Financial Speculation. Lack Of Proper Disclosure
CORPORATE GOVERNANCE AND FIRM PERFORMANCE In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for information on governance issues. The size of the premium varied by market, from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco, Egypt and Russia) Other studies have linked broad perceptions of the quality of companies to superior share price performance. In a study of five year cumulative returns of Fortune Magazine's survey of 'most admired firms', Antunovich et al. found that those "most admired" had an average return of 125%, whilst the 'least admired' firms returned 80%. In a separate study Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns. On the other hand, research into the relationship between specific corporate governance controls and some definitions of firm performance has been mixed and often weak. The following examples are illustrative. Board composition Some researchers have found support for the relationship between frequency of meetings and profitability. Others have found a negative relationship between the proportion of external directors and profitability, while others found no relationship between external board membership and profitability. In a recent paper Bhagat and Black found that companies with more independent boards are not more profitable than other companies. It is unlikely that board composition has a direct impact on profitability, one measure of firm performance. Remuneration/Compensation
The results of previous research on the relationship between firm performance and executive compensation have failed to find consistent and significant relationships between executives' remuneration and firm performance. Low average levels of pay-performance alignment do not necessarily imply that this form of governance control is inefficient. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others. Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders. Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of option grants as documented by University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of the Wall Street Journal. Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006.
A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a share repurchase plan.
CORPORATE GOVERNANCE PRACTICES FOLLOWED BY INDIA AND OTHER FOREIGN COUNTRIES Corporate Governance Evolution and Challenges While recent high-profile corporate governance failures in developed countries have brought the subject to media attention, the issue has always been central to finance and economics. The issue is particularly important for developing countries since it is central to financial and economic development. Recent research has established that financial development is largely dependent on investor protection in a country de jure and de facto. With the legacy of the English legal system, India has one of the best corporate governance laws but poor implementation together with socialistic policies of the pre-reform era has affected corporate governance. Concentrated ownership of shares, pyramiding and tunneling of funds among group companies mark the Indian corporate landscape. Boards of directors have frequently been silent spectators with the DFI nominee directors unable or unwilling to carry out their monitoring functions. Since liberalization, however, serious efforts have been directed at overhauling the system with the SEBI instituting the Clause 49 of the Listing Agreements dealing with corporate governance. Corporate governance of Indian banks is also undergoing a process of change with a move towards more market-based governance. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant, and WorldCom, the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. Worse, they seemed to indicate only the tip of a dangerous iceberg. While corporate practices in the US companies came under attack, it appeared that the problem was far more widespread. Large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc., revealed significant and deep-rooted
problems in their corporate governance. Even the prestigious New York Stock Exchange had to remove its director, Dick Grasso, amidst public outcry over excessive compensation. It was clear that something was amiss in the area of corporate governance all over the world. Corporate governance has, of course, been an important field of query within the finance discipline for decades. Researchers in finance have actively investigated the topic for at least a quarter century1 and the father of modern economics, Adam Smith, himself had recognized the problem over two centuries ago. There have been debates about whether the Anglo-Saxon market-model of corporate governance is better than the bank-based models of Germany and Japan. However, the differences in the quality of corporate governance in these developed countries fade in comparison to the chasm that exists between corporate governance standards and practices in these countries as a group and those in the developing world. Corporate governance has been a central issue in developing countries long before the recent spate of corporate scandals in advanced economies made headlines. Indeed corporate governance and economic development are intrinsically linked. Effective corporate governance systems promote the development of strong financial systems irrespective of whether they are largely bank-based or market-based which, in turn, have an unmistakably positive effect on economic growth and poverty reduction. There are several channels through which the causality works. Effective corporate governance enhances access to external financing by firms, leading to greater investment, as well as higher growth and employment. The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than double that in the countries in the lowest quartile. As for equity financing, the ratio of stock market capitalization to GDP in the countries in the highest quartile of shareholder right enactment and enforcement is about four times as large as that for countries in the lowest quartile. Poor corporate governance also hinders the creation and development of new firms. Good corporate governance also lowers the cost of capital by reducing risk and creates higher firm valuation once again boosting real investments. There is a
variation of a factor of in the control premium (transaction price of shares in block transfers signifying control transfer less the ordinary share price) between countries with the highest level of equity rights protection and those with the lowest. Effective corporate governance mechanisms ensure better resource
allocation and management raising the return to capital. The return on assets (ROA) is about twice as high in the countries with the highest level of equity rights protection as in countries with the lowest protection. Good corporate governance can significantly reduce the risk of nation-wide financial crises. There is a strong inverse relationship between the quality of corporate governance and currency depreciation. Indeed poor transparency and corporate governance norms are believed to be the key reasons behind the Asian Crisis of 1997. Such financial crises have massive economic and social costs and can set a country several years back in its path to development. Finally, good corporate governance can remove mistrust between different stakeholders, reduce legal costs and improve social and labor relationships and external economies like environmental protection. Making sure that the managers actually act on behalf of the owners of the company the stockholders and pass on the profits to them are the key issues in corporate governance. Limited liability and dispersed ownership essential features that the joint-stock company form of organization thrives on inevitably lead to a distance and inefficient monitoring of management by the actual owners of the business. Managers enjoy actual control of business and may not serve in the best interests of the shareholders. These potential problems of corporate governance are universal. In addition, the Indian financial sector is marked with a relatively unsophisticated equity market vulnerable to manipulation and with rudimentary analyst activity; a dominance of family firms; a history of managing agency system; and a generally high level of corruption. All these features make corporate governance a particularly important issue in India.
SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE
Demand
for
information:
In
order to influence
the
directors,
the
shareholders must combine with others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.
Monitoring costs: A barrier to shareholders using good information is the
cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgements of larger professional investors.
Supply of accounting information: Financial accounts form a crucial link in
enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.
Role of the Accountant & Auditors: Financial reporting is a crucial
element necessary for the corporate governance system to function effectively. Accountants and auditors are the primary providers of information to capital market participants. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations, and rely on auditors' competence. Current accounting practice allows a degree of choice of method in determining the method of measurement, criteria for recognition, and even the definition of the accounting entity. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. In the extreme, it can involve non-disclosure of information. One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to
client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act (in response to the Enron situation as noted below) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of SEBI Act in India. The Enron collapse is an example of misleading financial reporting. Enron concealed huge losses by creating illusions that a third party was contractually obliged to pay the amount of any losses. However, the third party was an entity in which Enron had a substantial economic stake. In discussions of accounting practices with Arthur Andersen, the partner in charge of auditing, views inevitably led to the client prevailing. However, good financial reporting is not a sufficient condition for the effectiveness of corporate governance if users don't process it, or if the informed user is unable to exercise a monitoring role due to high costs (see Systemic problems of corporate governance above). CENTRAL ISSUES IN CORPORATE GOVERNANCE The basic power structure of the joint-stock company form of business, in principle, is as follows. The numerous shareholders who contribute to the capital of the company are the actual owners of business. They elect a Board of Directors to monitor the running of the company on their behalf. The Board, in turn, appoints a team of managers who actually handle the day-to-day functioning of the company and report periodically to the Board. Thus mangers are the agents of shareholders and function with the objective of maximizing shareholders wealth. Even if this power pattern held in reality, it would still be a challenge for the Board to effectively monitor management. The central issue is the nature of the contract between shareholder representatives and managers telling the latter what to do with the funds contributed by the former. The main challenge comes from the fact that such contracts are necessarily incomplete. It is not possible for the Board to fully instruct management on the desired course of action under every possible
business situation. The list of possible situations is infinitely long. Consequently, no contract can be written between representatives of shareholders and the management that specifies the right course of action in every situation, so that the management can be held for violation of such a contract in the event it does something else under the circumstances. Because of this incomplete contracts situation, some residual powers over the funds of the company must be vested with either the financiers or the management. Clearly the former does not have the expertise or the inclination to run the business in the situations unspecified in the contract, so these residual powers must go to management. The efficient limits to these powers constitute much of the subject of corporate governance. The reality is even more complicated and biased in favor of management. In real life, managers wield an enormous amount of power in joint-stock companies and the common shareholder has very little say in the way his or her money is used in the company. In companies with highly dispersed ownership, the manager (the CEO in the American setting, the Managing Director in British-style organizations) functions with negligible accountability. Most shareholders do not care to attend the General Meetings to elect or change the Board of Directors and often grant their proxies to the management. Even those that attend the meeting find it difficult to have a say in the selection of directors as only the management gets to propose a slate of directors for voting. On his part the CEO frequently packs the board with his friends and allies who rarely differ with him. Often the CEO himself is the Chairman of the Board of Directors as well. Consequently the supervisory role of the Board is often severely compromised and the management, who really has the keys to the business, can potentially use corporate resources to further their own self-interests rather than the interests of the shareholders. The inefficacy of the Board of Directors in monitoring the activities of management is particularly marked in the Anglo-Saxon corporate structure where real monitoring is expected to come from financial markets. The underlying premise is that shareholders dissatisfied with a particular management would simply dispose of their shares in the company. As this would drive down the share price, the company would become a takeover target. If and when the acquisition actually happens, the acquiring company would get rid of the existing management. It is thus the fear of a takeover rather than shareholder action that is supposed to keep the management honest and on its toes.
This mechanism, however, presupposes the existence of a deep and liquid stock market with considerable informational efficiency as well as a legal and financial system conducive to M&A activity. More often than not, these features do not exist in developing countries like India. An alternative corporate governance model is that provided by the bank-based economies like Germany where the main bank (Hausbank in Germany) lending to the company exerts considerable influence and carries out continuous project-level supervision of the management and the supervisory board has representatives of multiple stakeholders of the firm. Box 1 gives a brief comparison of the two systems. Common areas of management action that may be sub-optimal or contrary to shareholders interests (other than outright stealing) involve excessive executive compensation; transfer pricing, that is transacting with privately owned companies at other-than-market rates to siphon off funds; managerial entrenchment (i.e. managers resisting replacement by a superior management) and sub-optimal use of free cash flows. This last refers to the use that managers put the retained earnings of the company. In the absence of profitable investment opportunities, these funds are frequently squandered on questionable empire-building investments and acquisitions when their best use is to be returned to the shareholders. Keeping a professional management in line is only one, though perhaps the most important, of the issues in corporate governance. Essentially corporate governance deals with effective safeguarding of the investors and creditors rights and these rights can be threatened in several other ways. For instance, family businesses and corporate groups are common in many countries including India. These range from Keiretsus in Japan and Chaebols in Korea to the several family business groups in India like Birlas and Ambanis. Inter-locking and pyramiding of corporate control within these groups make it difficult for outsiders to track the business realities of individual companies in these behemoths. In addition, managerial control of these businesses are often in the hands of a small group of people, commonly a family, who either own the majority stake, or maintain control through the aid of other block holders like financial institutions. Their own interests, even when they are the majority shareholders, need not coincide with those of the other minority shareholders. This often leads to expropriation of minority shareholder value through actions like tunneling of corporate gains or funds to other corporate
entities within the group. Such violations of minority shareholders rights also comprise an important issue for corporate governance. One way to solve the corporate governance problem is to align the interests of the managers with that of the shareholders. The recent rise in stock and option related compensation for top managers in companies around the world is a reflection of this effort. A more traditional manifestation of this idea is the fact that family business empires are usually headed by a family member. Managerial ownership of corporate equity, however, has interesting implications for firm value. As managerial ownership (as a percentage of total shares) keeps on rising, firm value is seen to increase for a while (till ownership reaches about 5% for Fortune 500 companies), then falling for a while (when the ownership is in the 5%-25% range, again for Fortune 500 companies) till it begins to rise again.10 The rationale for the decline in the intermediate range is that in that range, managers own enough to ensure that they keep their jobs come what may and can also find ways to make more money through uses of corporate funds that are sub-optimal for shareholders. Legal environment, ownership patterns and Corporate Governance The legal system of a country plays a crucial role in creating an effective corporate governance mechanism in a country and protecting the rights of investors and creditors. The legal environment encompasses two important aspects the protection offered in the laws (de jure protection) and to what extent the laws are enforced in real life (de facto protection). Both these aspects play important roles in determining the nature of corporate governance in the country in question Recent research has forcefully connected the origins of the legal system of a country to the very structure of its financial and economic architecture arguing that the connection works through the protection given to external financiers of companies creditors and shareholders. Legal systems in most countries have their roots in one of the four distinct legal systems the English common law, French civil law, German civil law and Scandinavian civil law. The Indian legal system is obviously built on the English common law system. Researchers have used two indices for all these countries a shareholder rights index ranging from 0 (lowest) to 6 (highest) and a rule of law index ranging 0 (lowest) to 10 (highest) to measure the effective protection of shareholder rights provided in the different countries studied. The first index captures the extent to which the written law
protected shareholders while the latter reflects to what extent the law is enforced in reality. The English common law countries lead the four systems in the shareholder rights index with an average of 4 (out of a maximum possible 6) followed by Scandinavianorigin countries with an average score of 3 with the French-origin and German-origin countries coming last with average scores of 2.33 each. Thus, English-origin legal systems provide the best protection to shareholder rights. India, for instance has a shareholder rights index of 5, highest in the sample examined equal to that of the USA, UK, Canada, Hong Kong, Pakistan and South Africa (all English-origin-law countries) and better than all the other 42 countries in the study including countries like France, Germany, Japan and Switzerland. The Rule of law index is another story. Here the Scandinavian-origin countries have an average score of 10 the maximum possible followed by the German-origin countries (8.68), English-origin countries (6.46) and French-origin countries (6.05). Most advanced countries have very high scores on this index while developing countries typically have low scores. India, for instance has a score of 4.17 on this index ranking 41st out of 49 countries studied ahead only of Nigeria, Sri Lanka, Pakistan, Zimbabwe, Colombia, Indonesia, Peru and Philippines. Thus it appears that Indian laws provide great protection of shareholders rights on paper while the application and enforcement of those laws are lamentable. This difference in protection of shareholders rights has led to completely different trajectories of financial and economic developments in the different countries. The English-origin systems spawn the highest number of firms per capita (on average 35.45 companies per million citizens as compared to 27.26 for Scandinavian-origin countries and 16.79 and 10.00 for German and French-origin countries respectively). They are also the best performers in mobilizing external finance. The ratio of the stock market capitalization held by minority shareholders (i.e. shareholders other than the three largest shareholders in each company) to the GNP of a country averages a remarkable 0.60 for the English-origin countries, substantially higher than the average ratio for German, Scandinavian and French-origin countries of 0.46, 0.30 and 0.21 respectively. India has 7.79 companies per million citizens, one of the lowest for English-origin countries but higher than many French-origin
countries and Germany. As for the ratio of external capital to GNP, India has a score of 0.31 which puts it in the upper half of the sample. The primary difference between the legal systems in advanced countries and those in developing countries lies in enforcement rather than in the nature of laws-in books. Enforcement of laws play a much more important role than the quality of the laws on books in determining events like CEO turnover and developing security markets by eliminating insider trading. In an environment marked by weak enforcement of property rights and contracts, entrepreneurs and managers find it difficult to signal their commitment to the potential investors, leading to limited external financing and ownership concentration. This particularly hurts the development of new firms and the small and medium enterprises (SMEs). In such a situation many of the standard methods of corporate governance market for corporate controls, board activity, proxy fights and executive compensation lose their effectiveness. Large block-holding emerges as the most important corporate governance mechanism with some potential roles for bank monitoring, shareholder activism, employee monitoring and social control. Apart from the universal features of corporate governance, Asian economies as a group share certain common features that affect the nature of corporate governance in the region. In spite of their substantial variation in economic conditions and politico-legal backgrounds, most Asian countries are marked with concentrated stock ownership and a preponderance of family-controlled businesses while state-controlled enterprises form an important segment of the corporate sector in many of these countries. Corporate governance issues have been of critical importance in Asian countries particularly since the Asian crisis which is believed to have been partly caused by lack of transparency and poor corporate governance in East Asian countries. Research has established the evidence of pyramiding and family control of businesses in Asian countries, particularly East Asia, though this feature is prevalent in India as well. Even in 2002, the average shareholding of promoters in all Indian companies was as high as 48.1% it is believed that this is a result of the ineffectiveness of the legal system in protecting property rights. Concentrated ownership and family control are important in countries where legal protection of property rights is relatively weak. Weak property rights are also behind the
prevalence of
family-owned businesses
organizational forms
that reduce
transaction costs and asymmetric information problems. Poor development of external financial markets also contributes to these ownership patterns. The effect of this concentrated ownership by management in Asian countries is not straightforward. Similar to the effects for US companies, in several East Asian countries, firm value rises with largest owners stake but declines as the excess of the largest owners management control over his equity stake increases. In Taiwan, family-run companies with lower control by the family perform better than those with higher control. Recent research has also investigated the nature and extent of tunneling of funds within business groups in India. During the 90s Indian business groups evidently tunneled considerable amount of funds up the ownership pyramid thereby depriving the minority shareholders of companies at lower levels of the pyramid of their rightful gains. Empirical analyses of the effects of ownership by other (non-family) groups in Asia are relatively scarce. The state is an important party in some countries in Asia, notably India and China. The corporate governance mechanism and efficiency in state-controlled companies are generally deemed to inferior. Several studies show that accounting performance is lower for state-owned enterprises in China. The non-linear effects of entrenchment are also present with state ownership. Institutional investors fulfill an important certification role in emerging markets, but there is little evidence of their effectiveness in corporate governance in Asia. Equity ownership by institutional investors like mutual funds has limited impact of performance in India. Ownership by other groups like directors, foreigners and lending institutions, on the other hand, appear to improve performance. In post-liberalization India, foreign ownership helps performance only if the foreigners constitute the majority shareholders. Hostile takeovers are all but absent in Asian countries. The premium for control is significant in most Asian countries and as high as 10% of the share price in Korea. External and minority representation in boards as well as participation by professionals are rare though increasing in Asian companies. Nevertheless, corporate governance is not entirely ineffective in Asia. In many Asian countries, including India, CEOs are more likely to lose their jobs when corporate performance is poorer. In India, enforcement of corporate laws remains the soft underbelly of the legal and corporate governance system. The World Banks Reports on the Observance of
Standards and Codes (ROSC) publishes a country-by-country analysis of the observance of OECDs corporate governance codes. In its 2004 report on India, the ROSC found that while India observed or largely observed most of the principles, it could do better in certain areas. The contribution of nominee directors from financial institutions to monitoring and supervising management is one such area. Improvements are also necessary in the enforcement of certain laws and regulations like those pertaining to stock listing in major exchanges and insider trading as well as in dealing with violations of the Companies Act the backbone of corporate governance system in India. Some of the problems arise because of unsettled questions about jurisdiction issues and powers of the SEBI. As an extreme example, there have been cases of outright theft of investors funds with companies vanishing overnight. The joint efforts of the Department of Company Affairs and SEBI to nail down the culprits have proved to be largely ineffective. As for complaints about transfer of shares and non-receipt of dividends while the redress rate has been an impressive 95%, there were still over 135,000 complaints pending with the SEBI. Thus there is considerable room for improvement on the enforcement side of the Indian legal system to help develop the corporate governance mechanism in the country.
CORPORATE GOVERNANCE IN LARGE COMPANIES: CASE STUDY 1 OF 3: TATA STEEL LIMITED, A very Large, Listed Company
Good Corporate Governance should be an integral part of all processes. Tata Steel has ensured corporate governance at all stages of the business process. Every year the company aims to exceed its targets on Employee and customer Satisfaction Indexes and the corporate citizenship index. In order to improve its internal management system it has also adopted the following two systems of evaluation:
Tata Code of conduct Follows guidelines established by the UN Global Compact. A Company signing to the Tata Code of Conduct entitles that company to use the brand name. It prescribes principles by which all employees are expected to act.
Audit committee.
CORPORATE GOVERNANCE REPORT OF TATA STEEL FOR THE YEAR 2008-09

(As required under Clause 49 of the Listing Agreements entered into with the Stock Exchanges)
1.
The Companys Corporate Governance Philosophy:
The Company has set itself the objective of expanding its capacities and becoming globally competitive in its business. As a part of its growth strategy, the Company believes in adopting the best practices that are followed in the area of Corporate Governance across various geographies. The Company emphasises the need for full transparency and accountability in all its transactions, in order to protect the interests of its stakeholders. The Board considers itself as a Trustee of its Shareholders and acknowledges its responsibilities towards them for creation and safeguarding their wealth. In accordance with the Tata Steel Group Vision, Tata Steel Group (the Group) aspires to be the global steel industry benchmark for value creation and corporate citizenship. The Group expects to realise its Vision by taking such actions as may be
necessary in order to achieve its goals of value creation, safety, environment and people.
2.
Board of Directors:
The Company has a non-executive Chairman and the number of Independent Directors is more than one-third of the total number of Directors. As on 31st March, 2009, the Company has 14 Directors on its Board, of which 8 Directors are independent. The number of Non-Executive Directors (NEDs) is more than 50% of the total number of Directors. The Company is in compliance with clause 49 of the Listing Agreement pertaining to compositions of directors. None of the Directors on the Board is a Member on more than 10 Committees and Chairman of more than 5 Committees (as specified in Clause 49), across all the companies in which he is a Director. The necessary disclosures regarding Committee positions have been made by the Directors. The names and categories of the Directors on the Board, their attendance at Board Meetings during the year and at the last Annual General Meeting, as also the number of Directorships and Committee Memberships held by them in other companies are given below:
Name Categor y No. of Board Meetin gs Attende d during 200809 9 6 8 9 5 9 10 9 5 1 7 7 7 10 Whethe r attende d AGM held on 28th August, 2008 Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No. of directorships in other public companies* as on 31.03.2009 Chairma n 9 3 4 2 3 2 1 Membe r 1 4 6 4 11 6 9 1 3 No. of committee positions held in other public companies** as on 31.03.09 Chairma n 3 2 3 3 Membe r 3 2 4 2 5 1
Mr. R. N. Tata (Chairman) Mr. James Leng Mr. Nusli N. Wadia Mr. S. M. Palia Mr. Suresh Krishna Mr. Ishaat Hussain Dr. J. J. Irani Mr. Subodh Bhargava Mr. Jacobus Schraven Dr. Anthony Hayward Mr. Andrew Roob Dr. T. Mukherjee Mr. Philippe Varin Mr. B. Muthyraman
NINE INE INE INE INE NINE NINE INE INE INE INE NINE NINE NI EX
NINE: Non-Independent Non-Executive, INE: Independent Non-Executive, NIEX: Non-Independent Executive
Ten Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. The dates on which the Board Meetings were held were as follows: 8th April 2008, 26th June 2008, 31st July 2008, 28th August 2008, 24th October 2008, 2nd December 2008, 18th December 2008, 8th January 2009, 28th January 2009 and 27th February 2009. Dates for the Board Meetings in the ensuing year are decided well in advance and communicated to the Directors. Board Meetings are held at the Registered Office of the Company. The Agenda along with the explanatory notes are sent in advance to the Directors. Additional meetings of the Board are held when deemed necessary by the Board. The information as required under Annexure IA to Clause 49 is being made available to the Board. The Board periodically reviews compliance reports of all laws applicable to the Company. Steps are taken by the Company to rectify instances of non-compliance, if any. During 2008-09, the Company did not have any material pecuniary relationship or transactions with Non-Executive Directors, other than Dr. J. J. Irani and Dr. T. Mukherjee, to whom the Company paid retiring benefits aggregating to Rs.35.68 lakhs and Rs.28.86 lakhs respectively. The Company has adopted the Tata Code of Conduct for Executive Directors, Senior Management Personnel and other Executives of the Company. The Company has received confirmations from the Executive Director as well as Senior Management Personnel regarding compliance of the Code during the year under review. It has also adopted the Tata Code of Conduct for Non-Executive Directors of the Company. The Company has received confirmations from the Non-Executive Directors regarding compliance of the Code for the year under review. Both the Codes are posted on the website of the Company.
3. Audit Committee
The Company had constituted an Audit Committee in the year 1986. The scope of the activities of the Audit Committee is as set out in Clause 49 of the Listing Agreements with the Stock Exchanges read with Section 292A of the Companies Act, 1956. The terms of reference of the Audit Committee are broadly as follows: a. b. c. To review compliance with internal control systems; To review the findings of the Internal Auditor relating to various To hold periodic discussions with the Statutory Auditors and Internal
functions of the Company; Auditors of the Company concerning the accounts of the Company, internal control systems, scope of audit and observations of the Auditors/Internal Auditors; d. e. To review the quarterly, half-yearly and annual financial results of the To make recommendations to the Board on any matter relating to the Company before submission to the Board; financial management of the Company, including Statutory & Internal Audit Reports; f. Recommending the appointment of statutory auditors and branch auditors and fixation of their remuneration. The composition of the Audit Committee and the details of meetings attended by the Directors are given below:
Names of Members Category No. of meetings attended during the Mr. Subhodh Bhargava, Chairman Mr. S. M. Palia, Member Mr. Ishaat Hussain Member, Chartered Accountant Mr. Andrew Robb, Member Independent, Non Executive 6 Independent, Non Executive -doNon Independent, Non Executive year 2008-09 8 8 9
Audit Committee meetings are attended by the Group Chief Financial Officer, Chief (Corporate Audit) and Chief Financial Controller (Corporate) and Representatives of Statutory Auditors. The Company Secretary acts as the Secretary of the Audit Committee. Nine Audit Committee Meetings were held during 2008-09. The dates on which the said meetings were held were as follows:
8th April, 2008, 23rd June 2008, 30th July, 2008, 27th August, 2008, 24th October, 2008, 2nd December, 2008, 28th January, 2009, 29th January 2009 and 26th February 2009.
Whistle Blower Policy The Audit Committee at its meeting held on 25th October, 2005, approved framing of a Whistle Blower Policy that provides a formal mechanism for all employees of the Company to approach the Ethics Counsellor/Chairman of the Audit Committee of the Company and make protective disclosures about the unethical behaviour, actual or suspected fraud or violation of the Companys Code of Conduct. The Whistle Blower Policy is an extension of the Tata Code of Conduct, which requires every employee to promptly report to the Management any actual or possible violation of the Code or an event he becomes aware of that could affect the business or reputation of the Company. The disclosures reported are addressed in the manner and within the time frames prescribed in the Policy. Under the Policy, each employee of the Company has an assured access to the Ethics Counsellor/ Chairman of the Audit Committee. 4. Remuneration Committee The Company had constituted a Remuneration Committee in the year 1993. The broad terms of reference of the Remuneration Committee are as follows: a. Review the performance of the Managing Director and the Whole-time Directors, after considering the Companys performance. b. Recommend to the Board remuneration including salary, perquisites and commission to be paid to the Companys Managing Director and Whole-time Directors. c. Finalise the perquisites package of the Managing Director and Whole-time Directors within the overall ceiling fixed by the Board. d. Recommend to the Board, retirement benefits to be paid to the Managing Director and Whole-time Directors under the Retirement Benefit Guidelines adopted by the Board. The Remuneration Committee also functions as the Compensation Committee as per SEBI guidelines on the Employees Stock Option Scheme. The Company, however, has not yet introduced the Employees Stock Option Scheme. The composition of the Remuneration Committee and the details of meetings attended by the Directors are given below:
Names of Members Category 43 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal No of Meetings attended
Mr. Suresh Krishna, Chairman Mr. R. N. Tata, Member Mr. S.M. Palia, Member
Independent, Non executive Non Independent, Non executive
during the year 2008-09 1 1
Independent, Non Executive One meeting of the Remuneration Committee was held on 26th June, 2008. The Company has complied with the non-mandatory requirement of Clause 49 regarding the Remuneration Committee.
Remuneration Policy The Company while deciding the remuneration package of the senior management members takes into consideration the following items: a. employment scenario b. remuneration package of the industry and c. remuneration package of the managerial talent of other industries The annual variable pay of senior managers is linked to the performance of the Company in general and their individual performance for the relevant year measured against specific Key Result Areas, which are aligned to the Companys objectives. The Non-Executive Directors (NEDs) are paid remuneration by way of Commission and Sitting Fees. In terms of the shareholders approval obtained at the AGM held on 5th July, 2006, the Commission is paid at a rate not exceeding 1% per annum of the profits of the Company (computed in accordance with Section 309(5) of the Companies Act, 1956). The distribution of Commission amongst the NEDs is placed before the Board. The Commission is distributed on the basis of their attendance and contribution at the Board and certain Committee Meetings as well as time spent on operational matters other than at the meetings. The Company pays sitting fees of Rs.20,000 per meeting to the NEDs for attending the meetings of the Board, Executive Committee of the Board, Remuneration Committee, Audit Committee and Committees constituted by the Board from time to time. For other meetings, viz. Investor Grievance Committee and Ethics Committee, the Company pays to the NEDs sitting fees of Rs.5,000 per meeting. The Company pays remuneration by way of salary, perquisites and allowances (fixed component) and commission (variable component) to Managing and Whole-time Directors. Salary is paid within the range approved by the Shareholders. Annual
increments effective 1st April each year, as recommended by the Remuneration Committee, are approved by the Board. The ceiling on perquisites and allowances as a percentage of salary is fixed by the Board. Within the prescribed ceiling, the perquisites package is approved by the Remuneration Committee. Commission is calculated with reference to net profits of the Company in a particular financial year and is determined by the Board of Directors at the end of the financial year based on the recommendations of the Remuneration Committee, subject to overall ceilings stipulated in Sections 198 and 309 of the Companies Act, 1956. Specific amount payable to such directors is based on the performance criteria laid down by the Board which broadly takes into account the profits earned by the Company for the year. 5. Shareholders Committee An Investors Grievance Committee was constituted on 23rd March, 2000 to specifically look into the redressal of Investors complaints like transfer of shares, non-receipt of balance sheet and non-receipt of declared dividend, etc. The composition of the Investors Grievance Committee is given below:
Names of Members Mr. Ishaat Hussain, Chairman Category Not Independent, Non Executive No. of meetings attended during 2008-09 1
Mr. Suresh Krishna, Member Independent, Non-Executive 1 One meeting of the Investors Grievance Committee was held on 31st March, 2009.
Committees In addition to the above Committees, the Board has constituted 4 more Committees, viz. Executive Committee of the Board, the Nomination Committee, Committee of Directors and the Ethics and Compliance Committee. The terms of reference of the Executive Committee of the Board (ECB) are to approve capital expenditure schemes and donations within the stipulated limits and to recommend to the Board, capital budgets and other major capital schemes, to consider new businesses, acquisitions, divestments, changes in organizational structure and also to periodically review the Companys business plans and future strategies. The Nomination Committee has been constituted on 18th May, 2006 with the objective of identifying Independent Directors to be inducted to the Board from time to time and to take steps to refresh the constitution of the Board from time to time.
The Committee of Directors has been constituted to approve of certain routine matters such as Opening and Closing of Bank Accounts of the Company, to grant limited Powers of Attorney to the Officers of the Company, to appoint proxies to attend general meetings on behalf of the Company etc. Ethics and Compliance Committee In accordance with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, as amended (the Regulations), the Board of Directors of the Company adopted the revised Tata Code of Conduct for Prevention of Insider Trading and the Code of Corporate Disclosure Practices (the Code) to be followed by Directors, Officers and other Employees. The Code is based on the principle that Directors, Officers and Employees of a Tata Company owe a fiduciary duty to, among others, the shareholders of the Company to place the interest of the shareholders above their own and conduct their personal securities transactions in a manner that does not create any conflict of interest situation. The Code also seeks to ensure timely and adequate disclosure of Price Sensitive Information to the investor community by the Company to enable them to take informed investment decisions with regard to the Companys securities. 6. General Body Meetings a) Location and time, where last three Annual General Meetings (AGMs)
Details of Location Birla Matushri Sabhagar, 19, Sir Vithaldas Thackersey Marg, Mumbai 400 020. Date & Time 28th August, 2008 at 3.30 p.m. 29th August, 2007 at 3.30 p.m. 5th July, 2006 at 11.00 a.m.
were held:
Financial Year 2007-08 2006-07 2005-06
b) c) Ballot. d)
No Extra-Ordinary General Meeting of the shareholders was held during No Postal Ballot was conducted during the year. None of the resolutions
the year. proposed for the ensuing Annual General Meeting need to be passed by Postal Special Resolutions passed in previous 3 Annual General Meetings:
7. Disclosures
i) The Board has received disclosures from key managerial personnel relating
to material, financial and commercial transactions where they and / or their relatives have personal interest. There are no materially significant related party transactions which have potential conflict with the interest of the Company at large. ii) The Company has complied with the requirements of the Stock Exchanges, SEBI and other statutory authorities on all matters relating to capital markets during the last three years. No penalties or strictures have been imposed on the Company by the Stock Exchanges, SEBI or other statutory authorities relating to the above. iii) The Company has adopted a Whistle Blower Policy and has established the necessary mechanism in line with clause 7 of the Annexure 1D to Clause 49 of the Listing Agreement with the Stock Exchanges, for employees to report concerns about unethical behaviour. No personnel has been denied access to the Ethics Counsellor/Chairman of the Audit Committee. iv) The Company has fulfilled the following non-mandatory requirements as prescribed in Annexure 1D to Clause49 of the Listing Agreement with the Stock Exchanges : The Company has set up a Remuneration Committee. The Company has moved towards a regime of unqualified financial statements. Secretarial Audit A qualified practicing Company Secretary carried out a secretarial audit to reconcile the total admitted capital with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) and the total issued and listed capital. The audit confirms that the total issued/paid up capital is in agreement with the total number of shares in physical form and the total number of dematerialized shares held with NSDL and CDSL. 8. Means of Communication
Half-yearly report: The half-yearly results of the Company are published in the newspapers and posted on the website of the Company. Results: The quarterly and annual results along with the Segmental Report are generally published in The Times of India, The Indian Express, Nav Shakti, Free Press Journal, Loksatta and also displayed on the website of the Company www.tatasteel.com shortly after its submission to the Stock Exchanges. Presentation to Institutional Investors or to analysts Official news releases and presentations made to Institutional Investors and analysts are posted on the Companys website. Management Discussion & Analysis Report The MD&A Report forms a part of the Directors Report. All matters pertaining to industry structure and developments, opportunities and threats, segment/product wise performance, outlook, risks and concerns, internal control and systems, etc. are discussed in the said report. Companys Corporate Website The Companys website is a comprehensive reference on Tata Steels management, vision, mission, policies, corporate governance, corporate sustainability, investor relations, sales network, updates and news. The section on Investor Relations serves to inform the shareholders, by giving complete financial details, shareholding patterns, corporate benefits, information relating to stock exchanges, registrars, share transfer agents and frequently asked questions. Investors can also submit their queries and get feedback through online interactive forms. 9. General Shareholder Information AGM: Date, time & venue: 27.08.2009 at 3.30 p.m. Birla Matushri Sabhagar, 19, Sir Vithaldas Thackersey Marg, Mumbai 400 020
As required under Clause 49 IV(G)(i), particulars of Directors seeking reappointment are given in the Explanatory Statement to the Notice of the Annual General Meeting to be held on 27th August, 2009. Financial Calendar Year ending AGM Dividend Payment
March 31 August Generally in August
Date of Book Closure Wednesday, July 8, 2009 to Tuesday, July 14, 2009 (both days inclusive) Dividend Payment Date The dividend warrants will be posted on or after 28.08.2009 Unclaimed Dividend All unclaimed/unpaid dividend amounts upto the FY ended 31.03.1995 have been transferred to the General Revenue Account of the Central Government. Shareholders, who have not yet encashed their dividend warrant(s) for the said period, are requested to forward their claims in prescribed Form No. II to the Companies Unpaid Dividend (Transfer to General Revenue Account of the Central Government) Rules, 1978 to:Office of Registrar of Companies Central Government Office Bldg., A Wing, 2nd Floor, Next to Reserve Bank of India CBD, Belapur 400 614
All unclaimed/unpaid dividend amounts for the FY 1995-96 to 2000-01 have been transferred to Investor Education & Protection Fund and no claims will lie against the Company or the Fund in respect of the unclaimed amounts so transferred.
The unclaimed dividend declared in respect of the FY 2001-02 is in the process of being transferred to IEPF.
Listing on Stock Exchanges The Companys Ordinary shares and CCPS are listed on the following 2 Stock Exchanges in India: Bombay Stock Exchange Limited Ltd Phiroze Jeejeebhoy Towers, Dalal Street, Mumbai 400 001 National Stock Exchange of India Exchange Plaza, Bandra-Kurla Complex, Bandra East, Mumbai 400 051
Global Depository Receipts (GDRs) issued by the Company in the International Market have been listed on the Luxembourg Stock Exchange and the Stock Code is USY8547N1139. The Company has paid annual listing fees to each of the above Stock Exchanges for the financial year 2008-09. Stock Codes/Symbols Ordinary Shares (demat form) CCPS Market Information BSE 500470 710049 NSE TATASTEEL TATASTEEL Q1
Market Price Data: High, Low (based on the closing prices) and volume during each month in last financial year.
Month Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Bombay Stock Exchange High Low Volume (Rs.) (Rs.) (No. of Shares) 817.60 645.95 1,92,02,856 922.25 797.00 2,42,12,679 868.05 711.25 2,62,51,840 741.20 584.30 3,83,22,828 691.75 571.80 3,27,40,944 589.20 425.60 3,86,83,765 438.65 168.50 5,61,32,806 239.85 150.80 7,23,94,978 228.85 148.65 8,98,14,549 246.75 166.35 6,76,40,787 199.55 160.55 5,09,38,279 223.50 152.10 8,53,63,195 National Stock Exchange High Low Volume (Rs.) (Rs.) (No. of Shares) 818.25 648.85 3,95,04,788 922.00 797.35 4,80,01,813 869.00 711.10 5,18,73,013 740.80 584.45 7,58,12,943 691.55 571.95 7,23,27,379 589.25 427.15 6,22,98,522 438.35 168.30 11,97,59,425 239.70 150.70 16,41,82,883 229.10 148.80 19,65,13,165 247.05 166.30 15,85,95,110 199.65 160.75 12,63,45,109 223.20 151.80 21,42,02,762
Registrar and Transfer Agents: TSR Darashaw Limited are the Registrar and Share Transfer Agents of the Company. Distribution of Shareholding Ordinary Shares
Number of Ordinary shares held 1 to 100 101 to 500 501 to 1000 1001 to 10000 10001 and above Total 64.19 28.38 4.03 3.20 0.20 100.00 Number of Shareholders 31.03.2009 (%) 31.03.2008 (%) 60.41 31.06 4.53 3.76 0.24 100.00
Categories of Shareholders Ordinary Shares

Category No. of Shareholders 31-0331-03-08 09 848,619 679,760 1 1 1 1 19 16 16 16 7,500 6,969 509 376 376 425 Voting strength % 31-0309 23.99 0.01 11.68 4.44 33.95 6.90 .83 13.20 31-03-08 21.49 0.01 10.15 4.41 33.94 4.56 5.96 19.48 No. of Ordinary Shares held 31-0331-03-2008 2009 175,312,0 156,958,45 80 8 47,986 43,818 85,334,59 74,166,549 5 32,186,415 32,412,12 247,993,09 4 6 248,065,8 33,348,515 57 43,539,500 50,417,84 142,347,96 8 9 42,588,76 2 96,413,21 9 730,592,4 730,584,32 71 0
Individuals Unit Trust of India LIC of India Govt. & Other PFI Tata Group Companies Companies (Others) Banks, Mutual Funds & Trusts Foreign Institutional Investors
Total
857,041
687,564
100.00
100.00
10. Other information to the shareholders Dividend History for the Last 10 years
Financial Year 2007-08 2006-07 2005-06 Dividend Date 29.08.08 30.08.07 06.07.06 50 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal Rate 160% 155% 130%
2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99
28.07.05 23.07.04 24.07.03 12.06.02 20.07.01 23.05.00 30.07.99
130% 100% 80% 40% 50% 40% 40%
CORPORATE GOVERNANCE IN SMALL COMPANIES:

CASE STUDY 2 of 3: CORPORATE GOVERNANCE IN ABC LTD. for F/Y 20082009
Governance Structure ABC Ltd. (Name changed) is an Unlisted Public Limited Company on which compliance of the Provisions of the Corporate Governance, where possible, is advisable. Corporate Governance Report as required under Clause 49 of the Listing Agreements is not applicable, since the company is an Unlisted Company. The Company does not follow any Corporate Governance Philosophy. Board of Directors The Board of Directors of the Company comprises of minimum number of Directors required for the public limited Company as per the Companies Act, 1956, i.e. three in numbers. Mr. VKS is the Chairman & Managing Director of the Company. Mr. AKC and Mr. BP are the other members of the Board. None of the Directors is disqualified under Section 274. Five Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. The dates on which the Board Meetings were held were as follows:
30th May, 2008; 16th June, 2008; 9th September, 2008; 23rd December, 2008; 30th March, 2009.
The names and designations of the Directors on the Board and their attendance at Board Meetings during the year are given below:
S. No. 1 2 3 Membe r Mr. VKS Mr. AKC Mr. BP Designation CMD Director Director 52 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal No of Meetings Held During the Year 5 5 5 Meetings Attended 5 5 5
Dates for the Board Meetings in the ensuing year are decided as per the requirement of the company, sometimes even after closing of relevant year and are never communicated to the Directors. Board Meetings are shown to be held at the Registered Office of the Company in Delhi. While all the Directors are stationed at different locations other than Delhi. The Director, Mr. BP, located at Bangalore, is shown present in all the Board Meetings, despite of the fact that there is no proof of his presence in Delhi on the Board Meeting Dates. The Agenda of the Board Meetings are never being sent to the Directors. The Corporate Governance practices are not at all followed to the mark as most of the decision in Board Meeting is influenced/ depends upon the Consent of the Managing Director. Audit Committee Depending upon the size of the company, the company is not required to have an Audit Committee. Whistle Blower Policy No Whistle Blower Policy is being observed in the company. Remuneration Committee There is a requirement of Remuneration Committee in the company. However, no Remuneration Committee is formed by the company. Remuneration Policy The company does not follow any Remuneration Policy. The remuneration of key managerial personnel is decided by CMD of the company, solely at his discretion. Shareholders Committee The company is not required to have Shareholders Committee, since the company is a closely held Unlisted Public Limited Company.
Shareholding Pattern
There are seven member of the Company. Major portion of capital is held by Mr. VKS, the Chairman & Managing Director of the Company & Mrs. JT, wife of Mr. VKS. The other share holders have small share in the shareholding of the Company. Table showing the Shareholding pattern of the Company
S. No 1 2 3 4 5 6 7 Members Name Mr. VKS Ms. JT Mr. SP Mr. BP Mr. AKC Mr. RC Ms. SS Total No of Shares 6,41,200 7,600 800 100 100 100 100 65,00,000 Amount 64,12,000 76,000 8,000 1,000 1,000 1,000 1,000 Percentage 98.65% 1.16% 0.11% 0.02% 0.02% 0.02% 0.02%
Working of the Company CMD is solely managing all the day to day working of the Company. The Company is experiencing a One Man Show where all the major decisions of the Company are being taken by CMD of the Company. The funds of the company are being transferred to other group companies, solely managed by CMD of the Company. Moreover, salaries of employees of other group companies are paid from this company. While statutory liabilities of the company, like Service Tax & TDS for F/y 2008-09 are still not fully paid till date. Due to which, enquiries under different legislations have been initiated against the company. Therefore, there is a clear conflict between the Companys interest and the personal interest of the Managing Director, which leads to default in Corporate Governance. The Company also lacks independent & professional Directors who can manage the Company in a professional way & can control the dictatorship of CMD of the company. The Board of the Company should contain a proper balance between Independent & Non Independent Directors.
General Body Meeting Annual General Meeting for the Year ending 31st March, 2009 was shown to be held on 30th September, 2009 at 12.00 Hours at the registered office of the Company. The Agenda of the AGM along with Annual Report was never sent to the shareholders. No AGM was actually conducted. No Ordinary Businesses were
discussed at the meeting. None of the Special Business is passed in this Annual General Meeting. Statutory Compliance Corporate governance also focuses on statutory compliance under different laws. The Company under review have faced litigation proceedings for F/y 2008-2009 because of non compliance of statutory laws and non-payment of statutory liabilities. Enquiries under different legislations were initiated against the company. Due to which, the normal working of the company was disrupted. The Company also incurred expenses towards penalty and interest charges for delay in paying taxes & late filings under Income tax, TDS, Service Tax & Addition fees towards Companies Act. The Company needs to improve its Compliance under different laws & to follow Corporate Governance principles to sustain the normal working of the company & to safeguard interest of all the stakeholders of the company. Discloser and Transparency The Company lacks on the ground of Discloser & transparency as the Company does not have well defined accountability & authority structure. The Company should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all stakeholders have access to clear, factual information.
Secretarial Audit Based on the size of the Company, the company is not required to have Secretarial Audit. However, the company obtains a Compliance Certificate under Section 383 A of the Companies Act, 1956 from a practising Company Secretary.
Means of Communication
Half-yearly report: Since the company is an Unlisted Public Limited Company, the Company is not required to publish its half-yearly results in the newspapers, which is a requirement of Listing Agreement.
Presentation to Institutional Investors or to analysts Since the company is closely held Public Limited Company, the company is not required to make any presentation to Institutional Investors.
Management Discussion & Analysis Report The MD&A Report does not form part of the Directors Report. All matters pertaining to industry structure and developments, opportunities and threats, segment / product wise performance, outlook, risks and concerns, internal control and systems, etc. are not discussed in the said report.
Companys
Corporate
Website
The
Companys
website
is
comprehensive reference on the companys management, vision, mission, policies and sales network. The website is not updated regularly and lack on information on corporate governance, corporate sustainability, etc. General Shareholder Information Since the company is a closely held company, no information under this clause is mandatory.
CASE STUDY 3 OF 3: CORPORATE GOVERNANCE AT XYZ PRIVATE LIMITED for F/Y 2008-2009
Governance Structure XYZ Private Limited (Name changed) is a Private Limited Company on which compliance of the Provisions of the Corporate Governance, where possible, is advisable. The Company under review is a real estate company. Corporate Governance Report as required under Clause 49 of the Listing Agreements is not applicable, since the company is an Unlisted Company. The Company does not follow any Corporate Governance Philosophy. Board of Directors The Board of Directors of the Company comprises of three directors, more than the minimum number of Directors required for the private limited Company as per the Companies Act, 1956. Therefore, the Board of Directors of the company is duly constituted. Mr. MKA is the Chairman of the Company. Mr. JS and Mrs. URA, the mother of the Director, Mr. MKA, are the other members of the Board. None of the Director is disqualified under Section 274. Nine Board Meetings were held during the year 2008-09 and the gap between two meetings did not exceed four months. The dates on which the Board Meetings were held were as follows:
31st May, 2008; 2nd June, 2008; 29th August, 2008; 31st October, 2008; 10th November, 2008; 20th November, 2008; 8th January, 2009; 10th January, 2009; 9th March, 2009.
The names and designations of the Directors on the Board and their attendance at Board Meetings during the year are given below:
S. No. 1 2 3 Member Mr. MKA Mr. JS Mrs. URA Designation Chairman & Director Director Director No of Meetings Held During the Year 9 9 9 Meetings Attended 9 9 9
Dates for the Board Meetings in the ensuing year are decided according to the statutory requirement for compliance of provisions under different Acts. Actual Board Meetings are never conducted. Board Meetings are shown to be held randomly at the Registered Office or at corporate office of the Company. Mrs. URA, the mother of a Director Mr. MKA, who is a house wife & is not involved in business affairs of the company at all, is shown to be present in all the Board Meetings. The Board Meeting dates are never decided in advance . Therefore, agenda of the Board meetings are also never communicated to the Directors. Audit Committee Depending upon the size of the company, the company is not required to have an Audit Committee. Whistle Blower Policy No Whistle Blower Policy is being observed in the company. Remuneration Committee Since the company is a Private Limited Company, the company is not required to have a Remuneration Committee. Remuneration Policy The company does not follow any Remuneration Policy. The remuneration of key managerial personnel is decided by the Management of the company. Shareholders Committee The company is not required to have Shareholders Committee, since the company is a Private Limited Company. Shareholding Pattern The Authorized Share Capital of the Company as on 31st March, 2009 is Rupees Five Crores and Paid up Share capital is Rupees Four Crores and seventy Three Lac. There are eleven member of the Company. The Major Shareholders of the Company are Mr. MKA, Mr. JS, Mr. MS, M/s RSSIL. Table showing the Shareholding pattern of the Company
S. No 1 2 3 4 5 6 7 8 9 10 11
Members Name Mr. MKA Mr. MS Mr. JS M/s RSSIL Mrs. JS Mrs. URA Mr. RBA Mrs. MA Mrs. KK Mr. DS M/s PI Total
No of Shares 12,05,000 11,00,000 10,75,000 8,00,000 1,50,000 1,30,000 60,000 60,000 55,000 50,000 45,000 47,30,000
Amount 1,20,50,000 1,10,00,000 1,07,50,000 80,00,000 15,00,000 13,00,000 6,00,000 6,00,000 5,50,000 5,00,000 4,50,000 4,73,00,00 0
Percentage 25.48% 23.25% 22.73% 16.91% 3.17% 2.75% 1.27% 1.27% 1.16% 1.06% 0.95%
Working of the Company The company is engaged in real estate activities since 2004. The two Directors Mr. MKA & Mr. JS are managing the day to day affairs of the company. The existing projects of the company are in completion stage. The Company has commenced a new very prestigious project in Uttaranchal. The project cost is approx. 500 crores. For the new project, the Company has a huge requirement of funds. One of the major Shareholder Mr. MS is an Architect. The management is planning to offer a position on the Board of the company in order to have professional competence in the Board. In spite of above facts the Company lacks independent Directors on Board to provide a fair view & can improve the working of the company. All the Directors of the company have their own monetary interest in the company as all of them are the major shareholders of the company. The company is regular in paying its statutory liabilities. However. The funds of the company are being regularly transferred to other group companies, in which Mr. MKA & Mr. JS are directors. The funds are transferred without deciding terms & conditions for repayment and are interest-free, which is prejudicial to the interests of the company. General Body Meeting
Annual General Meeting for the Year ending 31st March, 2009 was shown to be held on July 31, 2009 at 11.00 A.M. at the registered office of the Company. The Agenda of the AGM along with Annual Report was never sent to the shareholders. No AGM was actually conducted. Ordinary & Special Businesses were passed in this Annual General Meeting without discussion. Statutory Compliance Corporate governance also focuses on statutory compliance under different laws. The company tries to comply with all the statutory laws applicable to the company. However, no periodical reviews are conducted to have a check and to meet the statutory compliances. The Company needs to upgrade & improve the Compliance under different laws & to follow Corporate Governance principles to improve and sustain the normal working of the company & to safeguard the interest of all the stakeholders of the company. Discloser and Transparency The Company is not up to mark on the ground of Discloser & transparency as the Company does not have well defined accountability & authority structure. The Company should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all stakeholders have access to clear, factual information. Secretarial Audit Based on the size of the Company, the company is not required to have Secretarial Audit. However, the company obtains a Compliance Certificate under Section 383 A of the Companies Act, 1956 from a practising Company Secretary.
Means of Communication
Half-yearly report: Since the company is an Private Limited Company, the Company is not required to publish its half-yearly results in the newspapers, which is a requirement of Listing Agreement. Presentation to Institutional Investors or to analysts Since the company is a Private Limited Company, the company is not required to make any presentation to Institutional Investors. Management Discussion & Analysis Report The MD&A Report does not form part of the Directors Report. All matters pertaining to industry structure and developments, opportunities and threats, segment/product wise performance, outlook, risks and concerns, internal control and systems, etc. are not discussed in the said report. Companys Corporate Website The Companys website is a comprehensive reference on the companys management, vision, mission, policies and sales network. The website lack any information on corporate governance, corporate sustainability, etc. General Shareholder Information Since the company is a closely held company, no information under this clause is mandatory.
CORPORATE SOCIAL RESPONSIBILITY
What Ratan Tata did for the Mumbai victims.....
Salute To Shri Ratan Tata

Shri Ratan Tata, the chairman of Indian Hotels, owns the Taj Mahal Hotel Mumbai, which was the target of the terrorists on 26/11/2008. Hotel President, a 5 star property also belongs to Indian Hotels.
A. The Tata Gesture 1. All category of employees including those who had completed even 1 day as casuals were treated on duty during the time the hotel was closed.
2. Relief and assistance to all those who were injured and killed. 3. The relief and assistance was extended to all those who died at the railway
station, surroundings including the Pav-Bhaji vendor and the pan shop owners. 4. During the time the hotel was closed, the salaries were sent by money order. 5. A psychiatric cell was established in collaboration with Tata Institute of Social Sciences to counsel those who needed such help. 6. The thoughts and anxieties going on peoples mind was constantly tracked and where needed psychological help provided. 7. Employee outreach centers were opened where all help, food, water, sanitation, first aid and counseling was provided. 1600 employees were covered by this facility. 8. Every employee was assigned to one mentor and it was that persons responsibility to act as a single window clearance for any help that the person required. 9. Ratan Tata personally visited the families of all the 80 employees who in
some manner either through injury or getting killed were affected. 10.The dependents of the employees were flown from outside Mumbai to Mumbai and taken care off in terms of ensuring mental assurance and peace. They were all accommodated in Hotel President for 3 weeks.
11.Ratan Tata himself asked the families and dependents as to what they wanted him to do. 12.In a record time of 20 days, a new trust was created by the Tatas for the purpose of relief of employees. 13.Whatg is unique is that even the other people, the railway employees, the police staff, the pedestrians who had nothing to do with Tatas were covered by compensation. Each one of them was provided subsistence allowance of Rs. 10K per month for all these people for 6 months. 14.A 4 year old granddaughter of a vendor got 4 bullets in her and only one was removed in the Government hospital. She was taken to Bombay hospital and several lacs were spent by the Tatas on her to fully recover her. 15.New hand carts were provided to several vendors who lost their carts. Tata will take responsibility of life education of 46 children of the victims of the terror.
16.
This was the most trying period in the life of the organisation. Senior managers including Ratan Tata were visiting funeral to funeral over the 3 days that were most horrible.
17.The settlement for every deceased member ranged from Rs. 36 to 85 lacs [One lakh rupees tranlates to approx 2200 US $ ] in addition to the following benefits: a. Full last salary for life for the family and dependents; b. Complete responsibility of education of children and dependents anywhere in the world. c. Full Medical facility for the whole family and dependents for rest of their life. d. All loans and advances were waived off irrespective of the amount. e. Counselor for life for each person
B. Epilogue 1. How was such passion created among the employees? How
and why did they behave the way they did?
2.
The organisation is clear that it is not something that someone
can take credit for. It is not some training and development that created such behaviour. If someone suggests that everyone laughs.
3.
It has to do with the DNA of the organisation, with the way
Tata culture exists and above all with the situation that prevailed that time. The organisation has always been telling that customers and guests are #1 priority 4. The hotel business was started by Jamshedji Tata when he was
insulted in one of the British hotels and not allowed to stay there. 5. He created several institutions which later became icons of
progress, culture and modernity. IISc is one such institute. He was told by the rulers that time that he can acquire land for IISc to the extent he could fence the same. He could afford fencing only 400 acres. 6. When the HR function hesitatingly made a very rich proposal to
Ratan he said do you think we are doing enough? 7. The whole approach was that the organisation would spend
several hundred crore in re-building the property why not spend equally on the employees who gave their life?
INTRODUCTION Corporate social responsibility (CSR), also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance, is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure its support to law, ethical standards, and international norms. Consequently, business would embrace responsibility for the impact of its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, CSR-focused businesses would proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honoring of a triple bottom line: People, Planet, Profit.
A growing body of evidence asserts that corporations can do well by doing good. Well-known companies have already proven that they can differentiate their brands and reputations as well as their products and services if they take responsibility for the wellbeing of the societies and environments in which they operate. These companies are practicing Corporate Social Responsibility (CSR) in a manner that generates significant returns to their businesses.
The practice of CSR is subject to much debate and criticism. Proponents argue that there is a strong business case for CSR, in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate, short-term profits. Critics argue that CSR distracts from the fundamental economic role of businesses; others argue that it is nothing more than superficial windowdressing; others yet argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations. Corporate Social Responsibility has been redefined throughout the years. However, it essentially is
titled to aid to an organization's mission as well as a guide to what the company stands for and will uphold to its consumers. Development Business ethics is one of the forms of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment. In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical business processes and actions (known as ethicism) is increasing. Simultaneously, pressure is applied on industry to improve business ethics through new public initiatives and laws (e.g. higher UK road tax for higheremission vehicles). Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia, descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with noneconomic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have re-branded their core values in the light of business ethical considerations (e.g. BP's "beyond petroleum" environmental tilt). The term CSR came in to common use in the early 1970s, after many multinational corporations formed, although it was seldom abbreviated. The term stakeholder, meaning those on whom an organization's activities have an impact, was used to describe corporate owners beyond shareholders as a result of an influential book by R Freeman in 1984. ISO 26000 is the recognized international standard for CSR (currently a Draft International Standard). Public sector organizations (the United Nations for example) adhere to the Triple Bottom Line (TBL). It is widely accepted that CSR adheres to similar principles but with no formal act of legislation. The UN has developed the Principles for Responsible Investment as guidelines for investing entities.
Corporate Social Responsibility is the way companies manage their businesses to produce an overall positive impact on society through economic, environmental and social actions.
HISTORY The nature and scope of corporate social responsibility has changed over time. The concept of CSR is a relatively new onethe phrase has only been in wide use since the 1960s. But, while the economic, legal, ethical, and discretionary expectations placed on organizations may differ, it is probably accurate to say that all societies at all points in time have had some degree of expectation that organizations would act responsibly, by some definition. In the eighteenth century the great economist and philosopher Adam Smith expressed the traditional or classical economic model of business. In essence, this model suggested that the needs and desires of society could best be met by the unfettered interaction of individuals and organizations in the marketplace. By acting in a self-interested manner, individuals would produce and deliver the goods and services that would earn them a profit, but also meet the needs of others. The viewpoint expressed by Adam Smith over 200 years ago still forms the basis for free-market economies in the twenty-first century. However, even Smith recognized that the free market did not always perform perfectly and he stated that marketplace participants must act honestly and justly toward each other if the ideals of the free market are to be achieved. In the century after Adam Smith, the Industrial Revolution contributed to radical change, especially in Europe and the United States. Many of the principles espoused by Smith were borne out as the introduction of new technologies allowed for more efficient production of goods and services. Millions of people obtained jobs that paid more than they had ever made before and the standard of living greatly improved. Large organizations developed and acquired great power, and their founders and owners became some of the richest and most powerful men in the world. In the late nineteenth century many of these individuals believed in and practiced a philosophy that came to be called "Social Darwinism," which, in simple form, is the idea that the principles of natural selection and survival of the fittest are applicable to business
and social policy. This type of philosophy justified cutthroat, even brutal, competitive strategies and did not allow for much concern about the impact of the successful corporation on employees, the community, or the larger society. Thus, although many of the great tycoons of the late nineteenth century were among the greatest philanthropists of all time, their giving was done as individuals, not as representatives of their companies. Indeed, at the same time that many of them were giving away millions of dollars of their own money, the companies that made them rich were practicing business methods that, by today's standards at least, were exploitative of workers. Around the beginning of the twentieth century a backlash against the large corporations began to gain momentum. Big business was criticized as being too powerful and for practicing antisocial and anticompetitive practices. Laws and regulations, such as the Sherman Antitrust Act, were enacted to rein in the large corporations and to protect employees, consumers, and society at large. An associated movement, sometimes called the "social gospel," advocated greater attention to the working class and the poor. The labor movement also called for greater social responsiveness on the part of business. Between 1900 and 1960 the business world gradually began to accept additional responsibilities other than making a profit and obeying the law. In the 1960s and 1970s the civil rights movement, consumerism, and
environmentalism affected society's expectations of business. Based on the general idea that those with great power have great responsibility, many called for the business world to be more proactive in (1) ceasing to cause societal problems and (2) starting to participate in solving societal problems. Many legal mandates were placed on business related to equal employment opportunity, product safety, worker safety, and the environment. Furthermore, society began to expect business to voluntarily participate in solving societal problems whether they had caused the problems or not. This was based on the view that corporations should go beyond their economic and legal responsibilities and accept responsibilities related to the betterment of society. This view of corporate social responsibility is the prevailing view in much of the world today.
INDIAN SCENARIO
Even much before the issue became a global concern, India was aware of corporate social responsibility (CSR), due to the efforts of organizations such as the Tata Group. (Around 66 per cent of Tata Sons, the holding group of the Tata Group is today owned by a trust). Corporate companies like ITC have made farmer development a vital part of its business strategy, and made major efforts to improve the livelihood standards of rural communities. Unilever is using micro enterprises to strategically augment the penetration of consumer products in rural markets. IT companies like TCS and Wipro have developed software to help teachers and children in schools across India to further the cause of education. The adult literacy software has been a significant factor in reducing illiteracy in remote communities. Banks and insurance companies are targeting migrant laborers and street vendors to help them through microcredits and related schemes. Ministry of Corporate Affairs has issued Corporate Social responsibility Guidelines (Annexed as Annexure-III) In June 2008, a survey was carried out by TNS India (a research organization) and the Times Foundation with the aim of providing an understanding of the role of corporations in CSR. The findings revealed that over 90 per cent of all major Indian organizations surveyed were involved in CSR initiatives. In fact, the private sector was more involved in CSR activities than the public and government sectors. The leading areas that corporations were involved in were livelihood promotion, education, health, environment, and women's empowerment. Most of CSR ventures were done as internal projects while a small proportion were as direct financial support to voluntary organizations or communities. In a survey carried out by the Asian Governance Association, which ranks the top 10 Asian countries on corporate governance parameters, India has consistently ranked among the top three along with Singapore and Hong Kong, for the last eight years. In another study undertaken by automotive research company, TNS Automotive, India has been ranked second in global corporate social responsibility. State-owned Bharat Petroleum and Maruti Udyog were ranked as the best companies in India. Bharat Petroleum and Maruti Udyog came on top with 134 points each, followed by Tata Motors (133) and Hero Honda (131). The study was based on a public goodwill
index and India received 119 points in the index against a global average of 100. Thailand was at the top slot with 124 points. Several foundations run by corporate houses plan to devise a common strategy to ensure transparency in their social and community development operations, such as tracking spending in and progress of such projects in their annual reports. The effort is significant because it brings together a wide range of Indian companies to share ideas on innovating sustainable programmes. Among them are Multi Commodity Exchange of India Ltd, Anil Dhirubhai Ambani Group and media company Bennett, Coleman and Co. Ltd, Audit firm KPMG will partner with them to offer guidance on evaluating corporate social responsibility or CSR programmesa trend companies are slowly embracing as India's expanding economy contrasts sharply with growing local protests over land for future industrial projects. The network alliance stems from the first sustainability summit that was organized in January by the Associated Chambers of Commerce and Industry of India. CSR could prove to be a valuable asset in an age of mergers and acquisitions, especially as it helps companies spread their brand name, The new network will also serve as a common ground to lobby with the government for tax exemptions and safeguard other interests in the future. Indian companies have made little progress in reporting development projects. And only 48 companies have so far given their commitment to support the United Nations Global Compact, a charter for improving the global business environment through standards, such as labour rights and fighting corruption. Addressing business leaders in May last year, Prime Minister Manmohan Singh said "Corporate social responsibility must not be defined by tax planning strategies alone. Rather, it should be defined within the framework of a corporate philosophy, which factors the needs of the community and the regions in which a corporate entity functions."
Some say companies have an inherent "mental block" in reporting development programmes. A recent KPMG study among 27 Indian companies showed that a mere 8% mentioned their social expenditures in their annual reports, and only 25% filed CSR reports at all. But a quarter of them are also signatories of the Global Reporting Initiative, a 10-year-old movement started by an NGO called Coalition for Environmentally Responsible Economies (CERES) and the United Nations Environment Programme. This encourages companies to make voluntary disclosures and lays down framework on improving reporting principles. "Most companies tend to give to charities than make long-term development commitments. When a company voluntarily opens up for self-evaluation, it creates value for shareholders when competing with other companies," said Parul Soni, associate director of KPMG's Aid and Development Services. An estimated 100 corporate foundations and 25 foreign firms are involved in CSR activities in India, but statistics on input and output are elusive. According to Times' Pandey, the Indian corporate sector spent Rs30,000 crore on social expenditure during the last financial year, up from Rs17,500 crore the previous year. Quoting from a government report, he said, companies drew a total exemptions of Rs5,500 crore under income-tax laws last year. These figures, an analyst said, sound improbable as Indian companies still do not distinguish between philanthropy and internal practices to benefit stakeholders such as employees and community. Companies, too, continue to rely on different models to earmark its social expenditure, making it difficult to measure the overall impact. For instance, the Steel Authority of India Ltd (SAIL), the country's largest steel company, spent Rs100 crore on CSR last year; this was 2% of its profit after tax, exclusive of dividend tax, according to SAIL spokesperson N.K. Singhal. Yet others, such as Tata Steel Ltd, which runs a 850-bed hospital and rural projects in 800 villages around Jamshedpur, spends an average of Rs150 crore as part of its annual revenue expenditure.
What eventually makes up for CSR of a company ultimately depends on leadership; as part of company decision, about 66% of Tata Sons, the holding group of the Tata group, is today owned by a trust. Pharmaceuticals company Jubilant Organosys Ltd, already runs an anti-tuberculosis programme with the government of Uttar Pradesh. Apart from schools and hospitals that are run by trusts and societies, the government, too, is exploring to widen the scope of public-private partnerships to build and maintain schools and hospitals in return for a fixed annuity payment.
PRINCIPLES OF CORPORATE SOCIAL RESPONSIBILITY Corporate social responsibility is a philosophy of conduct and a concept of doing business applied by the business community, companies and individual businessmen for sustainable development and preservation of resources for future generations, based on the following principles: Providing quality products and services to consumers; Creating decent jobs, investing in development of production and human resources; Strict compliance with laws, whether tax, labour, environmental or otherwise; Integrity and reciprocity in relationships with all stakeholders; Doing business efficiently to create economic value added and improve national competitiveness for the benefit of shareholders and the society; Integrating public expectations and generally accepted ethics into business practice; Contributing to the evolution of civil society through partnerships and social developmental projects. BUSINESS AND PUBLIC DEVELOPMENT We are convinced that sustainable development of business is closely linked to public welfare and sustainable development of the society. In the modern world, output is no longer the only public concern over business and the society has its expectations as to how business is run, i.e. how natural resources are consumed, how labour is employed, how business impacts local development and so on. Being
essential for public welfare, business faces ever more requirements of the society, whether formal or not, as to doing business in a socially acceptable way. Seeing that the business community engages substantial forces and resources, the top managers' approach towards general humanitarian development issues is critical for the society to evolve. The community of top managers acknowledges the importance of its resources and is up to responsible contribution to societal development. We believe the impact that businesses of any size and origin has locally, is essential for public development. We do business in a market-driven way, with its pursuit of profit, utility maximization, rational choice, networking and ongoing development. Yet we are not irresponsive to the society that lets us do our business. That is why we seek to address the interests and expectations of all concerned stakeholders in our development strategies, and this is one of the ways our CSR shows itself. We understand that neglect of the society's expectations is fraught with serious risks. Issues left unsolved are likely to cause extra costs and conflicts about the ways of settling them. The top managers' community commits to address social issues under the principles of equity and integrity. The community of top managers feels certain that business has the overall humanitarian interests of the society as a higher priority than those of any specific group. That said, we trust public institutions to perform the duty of formulating proposals that would be of value for the society at large. We seek to integrate such consolidated stances into our daily activities following the principles of transparency and expanding the dialogue with a wider range of stakeholders. In our daily activities, we pursue long-term objectives and sustainability correlated with our business development strategies. We believe promotion of corporate social responsibility principles to result in better mutual understanding and trust within the society and also in clearer outline of common humanitarian values, and, in the bottom line, to facilitate well-balanced public development.
CORPORATE SOCIAL RESPONSIBILITY PRIORITIES The top managers' community has identified the following corporate social responsibility priorities:
Sound business practice: developing business for the sake of the society's welfare; mitigating social costs of business expansion; improving labour efficiency locally;
Personnel development: offering competitive compensation and benefits; investing in human capital;
Health and safety: introducing and maintaining health and safety standards in addition to those required by laws;
Environmental management and resource saving: implementing relevant programs to mitigate any adverse environmental impact;
Socially responsible restructuring: doing business and restructuring in a way acceptable to the local community;
Supporting local communities: assisting local communities to enhance their managerial and developmental efficiency;
Encouraging charity and voluntary work: introducing an effective operating framework for charity projects, encouraging personal involvement, supporting voluntary work.
ATTAINING SUSTAINABLE RESPONSIBILITY
GROWTH
THROUGH
CORPORATE
SOCIAL
Impact for business: From cost to growth Governments have historically arbitrated much of the relationship between society and business, and in its most rudimentary form, CSR can be viewed as compliance with the laws and regulations set by the public sector. Although regulation can have
significant social value, companies look at compliance as a cost of doing business and as a source of potentially costly hits in terms of litigation and reputation. As companies have gone global either by entering new markets to sell their products and services or by working with new overseas suppliers the costs of compliance have risen rapidly. Failure to abide by local and global regulations can destroy business reputations and brands, but compliance alone wont build brands. Nor will compliance offer the growth opportunities that strong brands and reputations bring with them. Many companies have clung to this narrow compliance-based view of CSR for decades. Quite recently, however, companies have started shifting their thinking about what it means to be socially and environmentally responsible. Today, a surprising number of companies already regard corporate social responsibility as a platform for growth and differentiation. Over two-thirds (68 percent) of the business leaders are focusing on CSR
activities to create new revenue streams. Over half (54 percent) believe that their companies CSR activities are already
giving them an advantage over their top competitors.
32%
Activities have recently begin in this Area
49%
Activities are matured in this area No activities in this Area
19%
Figure: Focusing CSR to create new revenue streams
When aligned with business objectives, companies are beginning to see that CSR can bring competitive differentiation, permission to enter new markets, and favorable positioning in the talent wars. How do you develop a CSR strategy? Our approach is to view a companys current activities and objectives against the CSR Value Curve (see Figure below), which captures the shift in thinking from CSR as a cost or risk mitigation effort to CSR as a strategic goal that brings in new revenues. When businesses do start to move beyond compliance, they start their journey along a continuum described in this curve. Our survey results showed that surprisingly few companies are engaged in what appears to be a very fundamental area for reputation building. That area is strategic philanthropy, which is a way to align charitable giving with business strategy, company skills and market needs. These efforts reinforce a companys social commitment with ongoing returns, often in the form of goodwill and indirectly from a financial perspective. For example, IBM works with public and not-for-profit organizations to make the World Community Grid available to a volunteer force of more than 210,000 people who donate the idle processing power of their computers to create a virtual supercomputer devoted solely to humanitarian research. The program is strategic
to IBM because it demonstrates how leading-edge technologies the company is developing can meet major global challenges, and it gives the company feedback on the performance of those technologies in real world applications. Because the positive financial impact of traditional philanthropy is often indirect, efforts arent always sustained. But in order to have a lasting impact on society and on the business, they must be maintained and leveraged. So the closer you align philanthropy to the core strategy of the business the easier it is to consistently support the efforts. Demonstrating cost savings is another means to engender sustained support. Companies are finding that many CSR initiatives, including those that reduce energy consumption or benefit the environment, help reduce overall cost structures or increase productivity. For example, Catalyst Paper Corporation, a Canadian pulp and paper company, uses its own by-products (biomass) to power its operations. It also regains heat from effluence to warm process water and thereby further reduces its carbon emissions.
CSR Value Curve
Growth platfor m
Valuesbased self Regulation Strategic Philanthro py Legal and Complianc e Alignment of charitable activities with social issues that support business objectives Adherence to law in the countries of production, operation and distribution
Efficienc y Access to new markets, new partnerships or product/service innovations that generate revenue
Incorporates the companys value system and/or code of conduct to guide business behavior
Measurable cost saving through efficient or winwin scenarios
As Companies move from left to right on the value curve, greater returns are realized as CSR becomes more integrated into core business strategy
Figure
Together with efficiency gains and a switch to natural gas, the company has lowered its greenhouse gas emissions by 70 percent and its energy use by 21 percent since 1990. In 2005 and 2006 alone, the company saved US$4.4 million through a 2 percent reduction in fuel consumption. The maximum benefit from the CSR opportunity takes place when all activities on the CSR Value Curve become integrated into a single strategy, with leadership from the top managers and full engagement by employees, business partners and customers. As Figure shows, business leaders in our survey are already focusing their CSR activities to develop capabilities in many areas across the CSR Value Curve. Interestingly, more than half their activities have only broadened quite recently, an indication of gathering momentum and continued opportunity.
CSR gains momentum
(Percent responses) Companies that have focused their CSR activities in the following areas
Figure
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
67%
30%
44%
38%
Activities are mature in this area
19%
48% 28%
Compliance Strategic w ith regulations philanthrophy and standards
44%
47%
49%
Formal company values system
Cost saving
Creating new revenue streams
Activities have been started recently in this area
Figure
The CSR profile of outperforming companies Companies that report they are substantially outperforming their peers already grasp the benefits that result from a CSR strategy integrated into the core of their business. Our survey found that these companies are more than twice as likely to: Collaborate Understand their customers CSR expectations well Have increased the amount of information they provide about the sourcing, composition and impact of their products, services and operations Collaborate with consumers and business partners on their CSR initiatives Engage their full base of employees in their CSR objectives (i.e. not top down) Place critical importance on, and consider themselves very effective at, CSR supply chain processes Consider themselves very effective at developing products and services with a positive societal or environmental impact
Integrate
Place critical importance on, and consider themselves very effective at, aligning philanthropy with business priorities
Information: From visibility to transparency Companies are more visible, more exposed, than ever before, especially as they expand their sphere of operations and their markets. Watchdog organizations are working hard to keep people aware of what businesses are doing. Since 1990 the Web has spurred the growth of more than 100,000 new citizen groups devoted to social and political issues. And the torrid pace of information traveling the Internet is transforming consumer expectations as customers gain continuous access to special-interest action plans and third-party scorecards that rate companies on environmental practices and ethical concerns. In fact, companies can easily lose control of their own brands and reputations. Customers are joining with activist NGOs and advocacy groups, who no longer depend on door-to-door canvassing and street demonstrations to bring environmental and fair trade issues to worldwide attention. They use blogs, podcasts, text messaging, Myspace and YouTube to proliferate their messages.
The traditional adage, buyer beware, has now become seller beware. Customers want to know more Compared to their predecessors a generation ago, consumers today are information omnivores. Some keep abreast of the nutrition and health issues of the products they consume by scouring Web sites as frequently as they read ingredient labels. Others research the environmental impact of the materials used to create the products they consider. This quest for information is intensifying. In the UK 57 percent and in the US 59 percent of consumers say their knowledge about the contents of the food they buy has increased over the last two years. Heightened visibility into business is not restricted to the more mature economies. Citizens in China and India are making the transition from producers to consumers and profoundly believe in the social responsibilities of business. Chinas CSR expectations are rising rapidly to levels of western countries; Indias are already there and Brazils far exceed them. Moreover, in many emerging economies, opinions about global companies are being formed for the first time, making todays reputation a key factor in future growth. Visibility extends beyond products to business practices as well. Consumers are scrutinizing procurement and sourcing policies. Theyre checking on trading practices product composition and lifecycle management. Theyre looking at the global impact of their choices across the entire supply chain labor conditions in contract factories, and the lending policies of the financial institutions they deal with. Exposure is crossing into business relationships as well. Companies are digging deeper into their partners operations, asking about carbon dioxide emissions and the impact of hazardous components in the supply chain (see Figure).
Given the extraordinary quest for information on the part of customers, its all the more surprising that businesses seem to know so little: Three-quarters of businesses admit they dont understand their customers CSR expectations well. Required by Business Partners to adopt environment standards
120% 100% 80%
10% 39%
9%
13%
12%
Don't Know No
47%
60% 40% 20% 0% Waste Management Water Management
43%
52%
Yes 52% 45% 44% 36%
Product Composition and lifecycle
Figure
Carbon Management
Transparency meets visibility The best response to all this exposure? In todays open environment, companies are finding it necessary to take the wraps off information they once considered private or proprietary. With relentless pressure from watchdog groups, need to know restrictions tend to fall away. So, visibility is best met with a continuous exchange of information or transparency. Our survey results chart a marked increase in both information requested by advocacy groups and information provided by business, indicating that transparency is in fact tracking to visibility (see Figure). 75 percent said the number of advocacy groups collecting information on their business has increased in the past 3 years.
75 percent have also increased the amount of information they provide about the sourcing as well as social and environmental impact of their products and services and operations in the past 3 years.
A full 63 percent believe they have sufficient information about the sources and composition of their products and services to satisfy customer concerns. Yet, two-thirds of those same leaders admit they dont understand their customers CSR concerns well.
This disconnect suggests that most companies are either simply confident of their ability to meet regulatory requirements or, at best, guessing at what customers expect.
Information explosion over the last 3 years
80% 70% 60% 50% 40% 30% 20% 10%
75% 75%
17% 13% 6% 1% 0% 3%
0%
Increased No Change
Decreased
Don't Know
The num ber of advocacy groups collecting and reporting information on your industry, enterprise and/or productts Inform ation com panies provide on the am ount of sourcing, composition and im pact of its products, service and operations.
Figure
Relationships: From containment to engagement When CSR strategies are effective, transparency, as discussed in the previous section, goes hand-in-hand with stakeholder engagement with two important caveats. First, you cant call it transparency if you simply spew information out into the marketplace, or unleash what is effectively a data dump on your customers. It could even backfire. True communication requires not just context, but interaction among the parties giving and receiving information. Second, trying to engage stakeholders without full transparency is disingenuous at best.
Impact of customer intimacy
Companies that understand their customers CSR concerns

Yet, well: companies have limited the ways in which they directly interact with most customers and other constituents on CSR issues. Typically, engagement begins and ends with sales, marketing, customer care, or public relations functions.
Report more success than their peers in increasing strategy.
revenue and reducing costs as a result of their CSR Are more likely to focus on and believe they are effective at differentiating their products and services. Believe they are more effective at improving labor
84 practices; adopting ethical and green procurement,
manufacturing Analysis of Corporate Governance & Corporate Social Responsibility and logistics processes; aligning philanthropy with business priorities; and adopting a formal company value system than their peers.
By CA Ajay Singhal
Driving
transparency,
however,
requires
significantly
more
interaction
with
customers from senior managers to shop assistants. And at all these touch points, business will need to both practice openness and ensure that its full employee base is prepared to enter into a dialogue with customers. Businesses have a long way to go. Only 17 percent of our survey respondents said they really engage and collaborate with customers regarding CSR activities. And the numbers arent much better for business partners and communities 23 percent and 20 percent respectively (see Figure). The only way to get a better handle on stakeholder expectations and forge mutual objectives is to foster a relationship based on continuous engagement. Companies that mainly collaborate with stakeholders on CSR initiatives
Employees Business partners Investors Community Consumers Government
27% 23% 21% 20% 17% 15% 0% 10%

All Companies
41% 37% 35%
30% 28% 25% 30% 40% 50%
20%
Understand customers' CSR concerns welll
85
Figure
Engagement starts from within What happens when a customer walks into a store, a bank, a showroom, or even a factory floor and asks if the products they see are fair trade or sourced sustain ably? Do employees have the information at hand? Can they answer questions about the companys labor practices and energy consumption as well as product disposal? Not usually. Are they prepared to have a real dialogue, one in which they learn about the customers needs? Not frequently enough, according to the respondents of the survey. All too often in corporate life, the in CSRannounces aand initiatives average Company engagement CEO objectives vision and the employee is mystified or indifferent. With CSR, it can be different. Research at Marks
70% & Spencer, for example, shows that employees rate higher on every measure of CSR 62% commitment than customers. 60% 58% 50% 46% Developing and implementing a CSR strategy is a unique opportunity to rally the 40% 30%
company. However, as our survey results show, only 31 percent of businesses engage their employees on the companies, CSR objectives and initiatives. This is a
20% significant opportunity lost (see Figure). 10% 0%
Board of directors Corp/Business unit leaders Front-line Managers % response Em ployees Families
31%
19%
86
Figure
Some companies engage employees by posing grand challenges, in which groups collaborate around a common goal to develop a product or service with societal or environmental benefits. Other companies provide incentives for individual actions that make a significant difference. 3Ms Pollution Prevention Pays (3P) rewards employees who have breakthrough ideas for eliminating pollution at its source. Since its inception, nearly 6,000 3P projects have prevented the creation of more than 2.2 billion pounds of pollutants and generated savings of nearly $1 billion, counting only first year savings from the projects. Every business will find its own way to engage employees, customers, partners and NGOs. The success of all these programs, however, will hinge on the depth and vitality of the interactions they support. Those that consistently combine clear transparency with deep interaction will best be able to advance sustainability in businesses and society. Employee engagement on CSR initiatives can have another positive affect; it can be a powerful recruitment and retention tool in an environment where the war for talent is shaking up whole industries. A recent study found that 44 percent of young professionals say they would discount an employer with a bad reputation. Moreover, there are plenty of studies and surveys that suggest the more socially and environmentally aware generation now leaving school doesnt just want to join a
company with a good CSR reputation; they want to be a part of a movement to create a better world and to do that from inside business. That means getting involved in identifying CSR-based growth platforms, getting creative in applying innovative solutions, and getting closer to customers.
CSR RELATIONSHIP WITH KEY STAKEHOLDERS Currently, we see business community dialoguing with the following key
stakeholders (the list is not exhaustive; it is composed of the most important stakeholders).
1. Shareholders and investors, to the extent they are keen for the financial
returns and expansion of their business, are also keen for their business to be sustainable and its non-financial risks managed and mitigated. We advocate shareholders and investors to be treated under the principles of straightforward and constructive dialogue in line with corporate governance requirements, which guide business conduct, with companies ensuring proper information openness and transparency.
2. State and local authorities are to express the society's consolidated

standpoint in their current plans and development strategies. The top managers' community shares the common goals of the national social and economic policy and supports any economic, social or cultural developmental initiatives evolving wherever business plants are located.
3. Personnel and unions. We endorse that employers must consistently

comply with national legislation labour-wise and fully perform their obligations under any labour contracts, whether collective or individual. It is our assumption that employers work on making their relationships with employees mutually beneficial, respect and promote social partnerships built at their enterprises and within the society in general.
4. Business partners. The community of top managers maintains that

business partners are to be treated under the principles of transparency, equity and impartiality, all in compliance with the ethics of business conduct.
We are working towards introduction of legal and generally recognized standards of business conduct to be observed by the entire business community. The community initiates and maintains ongoing exchange of information and knowledge between businesses of various scales. The top managers' community ensures consistent CSR policy locally, regionally, nationally and internationally.
5. Consumers. We share the opinion that consumers are to be offered only

quality products and services. To this end, we adopt modern production technologies and do our best for being conformant to international quality standards and responsive to the society's expectations when developing new products or services. We find it indispensable to comply with consumer protection laws without fail.
6. Non-government organizations. We insist that business engage in

relationships with non-government organizations under the principle of good will and with focus on the advantages reachable thereby.
CORPORATE SOCIAL RESPONSIBILITY CHALLENGES The current stage of corporate social responsibility development challenges business community in the ways we identify below. 1. As seen by the top managers' community, corporate social responsibility needs to go on in a self-regulated mode led by professional business associations or, if forced under any extraneous standards or regulations, its practical development risks being hindered. 2. CSR should be clearly distinguished from charity, a point we insist on. Charity does not cover all CSR issues, but rather represents only one component of it. We advocate legal incentives for personal involvement in charity and also encourage voluntary engagement in it which is a way of showing leadership and improving reputation.
3. A CSR policy can only be considered good, from our perspective, if it provides a tool to augment investment attractiveness and capitalization of the business. 4. There is a case, upheld by the top managers' community, to amplify CSR interpretation from merely risk management considerations to discovery of new business opportunities. 5. The vast societal impact of business compels CSR-concerned companies, as seen across our community, to be ready for an open and goal-oriented dialogue with all stakeholders, without giving up their interests and with due regard to the feedback, thus revealing CSR as a dynamic system of relations. 6. True, those who declare and publicly demonstrate their corporate social responsibility are to be commanded for that. Yet, there is still much to be done in promoting and disseminating best CSR practices. It is therefore essential for CSR practice to be diverse and innovative, which we welcome, rather than confined to any single methodology.
CORPORATE SOCIAL RESPONSIBILITY: INITIATIVES AND EXAMPLES Infosys Technologies Limited Infosys is actively involved in various community development programs. Infosys promoted, in 1996, the Infosys Foundation as a not-for-profit trust to which it contributes up to 1%PAT every year. Additionally, the Education and Research Department (E&R) at Infosys also works with employee volunteers on community development projects. Infosys leadership has set examples in the area of corporate citizenship and has involved itself actively in key national bodies. They have taken initiatives to work in the areas of Research and Education, Community Service, Rural Reach Programme, Employment, Welfare activities undertaken by the Infosys Foundation, Healthcare for the poor, Education and Arts & Culture. ITC Limited
ITC partnered the Indian farmer for close to a century. ITC is now engaged in elevating this partnership to a new paradigm by leveraging information technology through its trailblazing 'e-Choupal' initiative. ITC is significantly widening its farmer partnerships to embrace a host of value-adding activities: creating livelihoods by helping poor tribals make their wastelands productive; investing in rainwater harvesting to bring much-needed irrigation to parched dry lands; empowering rural women by helping them evolve into entrepreneurs; and providing infrastructural support to make schools exciting for village children. Through these rural partnerships, ITC touches the lives of nearly 3 million villagers across India. Mahindra & Mahindra The K. C. Mahindra Education Trust was established in 1953 by late Mr. K. C. Mahindra with an objective to promote education. Its vision is to transform the lives of people in India through education, financial assistance and recognition to them, across age groups and across income strata. The K. C. Mahindra Education Trust undertakes a number of education initiatives, which make a difference to the lives of deserving students. The Trust has provided more than Rs. 7.5 Crore in the form of grants, scholarships and loans. It promotes education mainly by the way of scholarships. The Nanhi Kali project has over 3,300 children under it. We aim to increase the number of Nanhi Kalis (children) to 10,000 in the next 2 years, by reaching out to the underprivileged children especially in rural areas. Satyam Computer Services Limited Alambana (support) is the corporate social responsibility arm of Satyam Computer Services Limited, formed to support and strengthen the vulnerable and underprivileged sections in urban India. Registered as Satyam Alambana Trust in 2000, Alambana aims at transforming the quality of life among urban population. Alambana's services are directed primarily at the disadvantaged sections in all the cities that Satyam has offices in. Volunteers from among Satyam associates and their family members lead the services and perform the required tasks. Tata Consultancy Services The Adult Literacy Program (ALP) was conceived and set up by Dr. F C Kohli along with Prof. P N Murthy and Prof. Kesav Nori of Tata Consultancy Services in May 2000 to address the problem of illiteracy. ALP believes illiteracy is a major social concern
affecting a third of the Indian population comprising old and young adults. To accelerate the rate of learning, it uses a TCS-designed ComputerBased Functional Literacy Method (CBFL), an innovative teaching strategy that uses multimedia software to teach adults to read within about 40 learning hours. ICICI Bank Ltd The Social Initiatives Group (SIG) of ICICI Bank Ltd works with a mission to build the capacities of the poorest of the poor to participate in the larger economy. The group identifies and supports initiatives designed to break the intergenerational cycle of poor health and nutrition, ensure essential early childhood education and schooling as well as access to basic financial services. Thus, by promoting early child health, catalyzing universal elementary education and maximizing access to micro financial services, ICICI Bank believes that it can build the capacities of Indias poor to participate in larger socio-economic processes and thereby spur the overall development of the country. The SIG works by understanding the status of existing systems of service delivery and identifying critical knowledge and practice gaps in their functioning It locates cost effective and scalable initiatives and approaches that have the potential to address these gaps and supports research to understand their impact. This is undertaken in collaboration with research agencies, nongovernmental organizations (NGOs), companies, government departments, local stakeholders and international organizations. Aptech Limited Aptech Limited, a leading education player with a global presence, has played an extensive and sustained role in encouraging and fostering education throughout the country since inception. As a global player with complete solutions-providing capability, Aptech has a long history of participating in community activities. It has, in association with leading NGOs, provided computers at schools, education to the underprivileged and conducted training and awareness-camps. Aptech students donated part of the proceeds from the sale of their art work to NGOs. To propagate education among all sections of the society throughout the country, especially the underprivileged, Aptech fosters tie-ups with leading NGOs throughout the country, including the Barrackpur-based NGO, Udayan, a residential school for children of leprosy patients in Barrackpur, established in 1970.The
company strongly believes that education is an integral part of the countrys social fabric and works towards supporting basic education and basic computer literacy amongst the underprivileged children in India. Goodearth Education Foundation (GEF) Work of GEF was initiated in 1996 with a project in the Rai Bareilly district in Uttar Pradesh. The four-year project covered 63 government schools and benefited 15,000 children. GEF is currently implementing projects in Thane district, Maharashtra (in 56 schools & balwadis), Alwar District, Rajasthan (this Project is being implemented in partnership with the NGO Bodh Shiksha Samiti, covering 71 schools & balwadis) and Solan district, Himachal Pradesh (10 Balwadis). GEF Objectives include providing equal opportunities in pre-primary& primary education to all children, and quality of education by ensuring that it is relevant, effective and activity based. Hindustan Construction Company (HCC) HCC plays an active role in CSR initiatives in the fields of Health, Education, Disaster Management, and Environment. Disaster Resource Network DRN is a worldwide initiative, promoted by the World Economic Forum (WEF).Trained volunteers and equipment resources from Engineering Construction & Logistics companies will complement the existing efforts of Government, NGO's and International Organizations in disaster management. It was during the WEF annual meet that the massive earthquake struck Gujarat in January 2001. The need for a trained and effective participation from industry was first felt there. The members of Engineering and Logistics segment of WEF came together to establish this network. The idea was further strengthened during the 9/11 incident where again the industry participated in the relief operations. DRN Worldwide was formally launched in New York in January 2002. And shortly thereafter, DRN - India Initiative was launched. India Aluminium Company Limited The Women's Empowerment project was initiated by Indal-Muri in Jharkhand where the Company operates an alumina refining plant. It was implemented in collaboration with an NGO, CARE-Jharkhand. The central problem this project has attempted to address is the very low socio-economic condition of the rural and tribal
population of Silli block caused by low agricultural productivity, lack of or low cash income, unresponsive health/ Integrated Child Development Services (ICDS) schemes. The Project has helped set up around 100 Self Help Groups so far, which are running successfully with members trained in various vocational income generating skills, agricultural methods for better yields and health care initiatives. About 2000 women have been brought into the fold of this activity helping to improve not just their own lives but the quality of life of their children and families as well. JCB India Ltd. JCB India adopted a Government school, in the vicinity of the company premises as its social responsibility. They strongly believe that children are the foundation of our nation and they could be helped, we could build a better community and society tomorrow. The reason for adopting this particular school was the poor management of the school in terms of infrastructure, resources and quality of education. The companys commitment to the school goes much beyond just providing monetary support towards infrastructure and maintenance of school building. Larsen & Toubro (L & T) Limited Considering that construction industry is the second largest employer in India after agriculture, employing about 32 million-strong workforce, L&T set out to regulate and promote Construction Vocational Training (CVT) in India by establishing a Construction Skills Training Institute (CSTI) on a 5.5 acre land, close to its Construction Division Headquarters at Manapakkam, Chennai. CSTI imparts, totally free of cost, basic training in formwork, carpentry, masonry, bar-bending, plumbing and sanitary, scaffolder and electrical wireman trades to a wide spectrum of the rural poor. As a result of the good response it received in Chennai, CSTI set up a branch at Panvel, Mumbai, initially offering training in formwork, carpentry and masonry trades. The Manapakkam and Panvel facilities together provide training to about 300 candidates annually who are inducted after a process of selection, the minimum qualification being tenth standard. Since inception, these two units have produced about 2,000 skilled workmen in various trades, with about sixty percent of them
being deployed to L&Ts jobsites spread across the country. The success of this training-initiative demonstrates that adoption of systematic training techniques are bound to yield efficient and skilled personnel in the shortest possible time, and in the power to convert the potential of the Rural Youth in Construction and upgrading Rura Economy in a small way. CISCO System Inc. Philanthropy at Cisco is about building strong and productive global communities communities in which every individual has the means to live, the opportunity to learn, and the chance to give back. The company pursues a strong triple bottom line which is described as profits, people and presence. The company promotes a culture of charitable giving and connects employees to nonprofit organizations serving the communities where they live. Cisco invests its best-in-class networking equipment to those nonprofit organizations that best put it to work for their communities, eventuating in positive global impact. It takes its responsibility seriously as a global citizen. Education is a top corporate priority for Cisco, as it is the key to prosperity and opportunity.
CONCLUSION A fine line between corporate governance and corporate social responsibility Companies worldwide are increasingly worried about the impact of their business activities on society. Many have created so-called corporate social responsibility (CSR) programs that aim to balance their operations with the concerns of external stakeholders such as customers, unions, local communities, NGOs and governments. Social and environmental consequences are weighed against economic gains. But whilst many agree that CSR is the right thing for companies to do, proponents often grow uncomfortable when explaining the business case for doing good. The costs associated with these programmes are clear but the correlation with better financial performance is hard to prove. In any case, they argue, the objectives of CSR go beyond short-term economic gains. Erik Belfrage* of Swedens SEB Bank believes that this debate misses a fundamental point: doing good is not separate from being good. Corporate governance and corporate social responsibility are both extremely important to a company. But it is not a natural thing to separate them. If you have a well formed corporate governance programme in place, that would probably take care of most CSR issues. Enhanced brand value is the pay-off for getting this right, Good corporate governance is basically about making better decisions for the long term health of the company. I think it is risk management, where the risk is the value of your brand. The company is also likely to benefit from fewer disruptions to its business from strikes, boycotts and regulation. But he concedes that this involves a long-term payback: You must look at it over five years, at least. Erasing the distinction between corporate governance and corporate social responsibility also reveals the true difficulty of developing a well-rooted programme. Charitable giving or a well-managed publicity campaign might seem a quick fix but they will not yield long-term rewards.
This requires some soul searching. A company must do a lot of homework when deciding its values. We did that at SEB and it took us nearly three years. But now everyone in the bank can say Yes, I share those values. We are living them. This process begins with an active internal conversation: This requires involving everyone. There must be a lot of back and forth between the board, executives and staff. Where it is a pet project of one executive, it doesn't work. Similarly, when there is no real response from employees, its not anchored. This in turn helps the company communicate with its external stakeholders. If openness becomes a natural part of business life, then communicating becomes more natural. Once a company is confident in its dialogue with the public, it will also find that building its brand value is easier and faster. You only have a split second to get the attention of a large group of people. It is a matter of efficiency. But how should a company report on its commitment to governance and CSR? Some countries are considering compulsory triple bottom line reporting that adds environmental and social impact to required financial reporting. There should be reporting, but I don't know if it should be a separate report or integrated into existing communications Something he would like to see added to annual reports are the oral statements made by the companys chairman and management at the companys annual general meeting. It is the only time that shareholders and stakeholders get together. Its an important occasion to communicate governance and brand value. The media and organizations such as the International Chamber of Commerce also play an important role in communicating good and bad examples of governance. Nonetheless, there should be limits to transparency. Sometimes companies going too far in giving information away to competitors there is pressure from both regulators and markets as well from within the companies themselves, but the reaction is often excessive.
The compliance requirements for CG & CSR are different for different types of companies. The CG & CSR requirements for large listed Public limited companies are much more than the unlisted Public limited companies and even lesser for small Private limited companies, where risk of the stack holders is limited. Though, a company is a separate legal entity different from its owners, but is difficult to observe the separation of ownership and the management in case of small to medium Companies, whether private or public.
Bibliography www.wikipedia.org www.cipe.org www.tatasteel.com www.scribd.com www.sebi.gov.in www.mca.gov.in www.nseindia.com www.bseindia.com www.waynevisser.com www.google.com www.unpan1.un.org
APPENDICES
Annexure-I Recommendations of various committees on Corporate Governance in India
CII Code recommendations (1997) Birla Committee (SEBI) recommendations (2000) Board of Directors a) No need for German a) At least 50% non-executive members b) For a company with an a) Training of board members Narayana Murthy committee (SEBI) recommendations (2003)
style two tiered board. b) For a listed company
suggested. b) There shall be no nominee All by directors to be with and shareholders
with turnover exceeding Rs. 100 crores, if the Chairman is also the MD, at least half of the board should be Independent directors, else at least 30% . c) No single person should hold more directorships than 10 in listed
executive Chairman, at least half of the board should be independent directors, else at least one-third.
directors. elected same
responsibilities
accountabilities.
c) Non-executive paid for job
Chairman related
c)
Non-executive
director
should have an office and be expenses.
compensation to be fixed by board and ratified by shareholders and reported. Stock options should be vested at least a year after should their be retirement. Independent directors treated the same way as non-executive directors.
companies.
d) Maximum of 10 directorships and d) Non-executive directors should and clearly responsibilities be competent and have in defined like active 5 chairmanships per d) The board every risk should quarter and be of risk person. informed business
management strategies.
the Audit Committee. e) Directors should be paid a net commission profits for not a exceeding 1% (3%) of
e)
Audit Committee: A board must have a qualified and independent audit committee, of minimum 3 members, all non-executive, majority and 100 chair
e)
Audit
Committee:
Should
comprise entirely of financially literate non-executive members with at least one member having accounting or related financial management expertise. It should
company with (out) an MD over and fees. may above Stock be sitting options
independent with at least one having financial knowledge. and Its accounting to
review
mandatory
list
of
documents including information relating to subsidiary companies. Whistle blowers should have direct policy affirmed management). party The access (and to this All it and all be by related must should be be of employees be informed of such should annually transactions committee and
chairman should attend AGM answer The confer company shareholder committee with key queries. should the the
considered too.
executives as necessary and secretary The should be he seceretary of committee. committee should meet at least thrice a year -- one before finalization of annual accounts and one necessarily every six months with the quorum being the higher of two members or one-third of members with at least two It independent should and have can directors. any
approved by audit committee. responsible for the appointment, removal remuneration chief internal auditor.
access to information from employee any investigate outside attendance experts between statutory f) Attendance directors made Those record should at of be the f) Remuneration The committee Committee: remuneration should decide g) The Board report of a parent company should have access to minutes of board meeting in its subsidiaries and should affirm affairs. reviewing than ranging in matter
within its TOR, can seek legal/professional of outside It f) Boards as of subsidiaries parent and least one should follow similar composition rules should that of have at service as well as secure meetings. the auditors powers
should act as the bridge board, and and
internal auditors with farresponsibilities.
independent director s of the parent company.
explicit with
time of re-appointment. less 50% attendance should not be reappointed.
remuneration packages for executive directors. It should have at least 3 directors, all
g) Key
information
that
non-executive 101
and
be
must be presented to
chaired by an independent
the board is listed in the code.
director. h) g) The board should decide on the remuneration directors of and nonall executive Performance evaluation of non-executive directors by all his fellow Board members should inform decision. a re -appointment
h) Audit Committee: Listed companies with turnover over Rs.100 crores or paid-up capital of Rs.20 crores should have an audit committee of at least three members, all non-executive, competent and willing to work more than other non-executive directors, with clear terms of reference and access to all financial information in the company with and in and should interact auditors board periodically statutory internal corporate and
remuneration information should be disclosed in annual report h) At least 4 board meetings a year with a maximum gap of 4 months between any 2 meetings. information boards stipulated. Minimum available to
i)
While independent and non-executive should enjoy directors some
protection from civil and criminal litigation, they may be held responsible of the legal compliance in the companys affairs. j) Code of conduct for Board and and senior annual
auditors and assist the accounting reporting. i) Reduction in number of nominee should companies individual directors. FIs withdraw with FI
members management
affirmation of compliance to it.
nominee directors from
shareholding below 5% or total FI holding below 10%.
Disclosure and Transparency
a) Companies inform
should their
a) Companies provide where
should consolidated
a)
Management should explain
and justify any deviation from accounting standards in financial statements.
shareholders about the high and low monthly averages of their share prices and about share, performance prospects business (exceeding turnover). b) Consolidation of group accounts should be optional and subject to FIs and IT departments assessment norms. If a company no need consolidates, to annex of 10% and major of segments
accounts for subsidiaries they have majority shareholding.
b) b) Disclosure list pertaining to related till party ICAIs transactions provided by committee norm is established.
Companies
should
move
towards a regime of unqualified financial statements.
subsidiary accounts but the definition of group should include parent c) A mandatory and subsidiaries. c) Stock exchanges should require certificate accounts compliance from CEOs Management Discussion & Analysis segment of annual includes industry report discussion structure that of and
c)
Management should provide comments, of each
a clear description, followed by auditors its risks. material contingent liability and
and CFOs on company
development, opportunities, outlook, well and front. as risks threats, etc. as and d) CEO/CFO certification veracity and proper of and knowledge, statements reports and maintaining should
financial
operational performance managerial developments in HR/IR d) For companies with capital norms for d) Management inform board of all potential conflict of interest situations.
comprehensiveness of financial directors of internal affirmation
control as well as appropriate disclosure to auditors and audit committee. e) Security analysts with the must client
paid-up disclosure
exceeding Rs. 20 crore, domestic issues should be same as those for GDR issues.
disclose the relationship of their employers company as well as their actual or intended shareholding in the 103 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
client company. e) On informed expertise, companies directors. (re)appointment of their of directors, shareholders must be resume, of are they and where names
Other issues
Creditors Rights a) FIs should rewrite loan covenants nominee and eliminating directors debt Shareholders Rights a) Quarterly etc. should results, be to presentation to analysts communicated the Internet. Special Disclosure for IPOs a) Companies making Initial Public Offering (IPO) should inform the Audit Committee of categorywise uses of funds every quarter. It should get uses The for non-pre-specified an annual the basis. Board
except in case of serious systematic default or provision of insufficient information.
investors, possibly over
approved by auditors on audit committee should advise b) In case of multiple credit ratings, they should all be reported in a format showing relative position of the company c) Same disclosure norms for foreign and domestic creditors. b) Half-yearly results and financial significant action in this matter.
events reports be mailed to shareholders
c)
A board committee headed
by a non-executive director look into shareholder complaints / grievances
d) Companies defaulting on d) Company should delegate fixed deposits should share transfer power to an not and be permitted make loans until to officer/committee/registrar/shar e transfer agents. The delegated authority should attend to share transfer formalities at least once in a fortnight. accept further deposits interor the corporate dividends
investments or declare default is made good.
Annexure-II CORPORATE GOVERNANCE VOLUNTARY GUIDELINES ISSUED BY MINISTRY OF CORPORATE AFFAIRS

BOARD OF DIRECTORS A. APPOINTMENT OF DIRECTORS A.1 Appointments to the Board i. Companies should issue formal letters of appointment to Non-Executive Directors (NEDs) and Independent Directors - as is done by them The letter should specify: The term of the appointment; The expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks; The fiduciary duties that come with such an appointment alongwith accompanying liabilities; Provision for Directors and Officers (D&O) insurance, if any,; The Code of Business Ethics that the company expects its directors and employees to follow; The list of actions that a director should not do while functioning as such in the company; and The remuneration, including sitting fees and stock options etc, if any. while appointing employees and Executive Directors.
ii.
Such formal letter should form a part of the disclosure to shareholders at the time of the ratification of his/her appointment or re-appointment to the Board. This letter should also be placed by the company on its website, if any, and in case the company is a listed company, also on the website of the stock exchange where the securities of the company are listed. A.2 Separation of Offices of Chairman & Chief Executive Officer To prevent unfettered decision making power with a single individual, there should be a clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/Chief Executive Officer (CEO). The roles and offices of Chairman and CEO should be separated, as far as possible, to promote balance of power. A.3 Nomination Committee
i.
The companies may have a Nomination Committee comprising of majority of Independent Directors, including its Chairman. This Committee should consider: proposals for searching, evaluating, and recommending appropriate Independent Directors and Non-Executive Directors [NEDs], based on an objective and transparent set of guidelines which should be disclosed and should, inter-alia, include the criteria for determining qualifications, positive attributes, independence of a director and availability of time with him or her to devote to the job; 106 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
determining processes for evaluating the skill, knowledge, experience and effectiveness of individual directors as well as the Board as a whole.
ii.
With a view to enable Board to take proper and reasoned decisions, Nomination Committee should ensure that the Board comprises of a balanced combination of Executive Directors and NonExecutive Directors.
iii.
The Nomination Committee should also evaluate and recommend the appointment of Executive Directors.
iv.
A separate section in the Annual Report should outline the guidelines being followed by the Nomination Committee and the role and work done by it during the year under consideration. A.4. Number of Companies in which an Individual may become a Director i. For reckoning the maximum limit of directorships, the following categories of companies should be included: ii. public limited companies, private companies that are either holding or subsidiary companies of public companies.
In case an individual is a Managing Director or Whole-time Director in a public company the maximum number of companies in which such an individual can serve as a Non-Executive Director or Independent Director should be restricted to seven.
B. INDEPENDENT DIRECTORS B.1 Attributes for Independent Directors i. The Board should put in place a policy for specifying positive attributes of Independent Directors such as integrity, experience and expertise, foresight, managerial qualities and ability to read and understand financial statements. Disclosure about such policy should be made by the Board in its report to the shareholders. Such a policy may be subject to approval by shareholders.
ii. All Independent Directors should provide a detailed Certificate of Independence at the time of
their appointment, and thereafter annually. This certificate should be placed by the company on its website, if any, and in case the company is a listed company, also on the website of the stock exchange where the securities of the company are listed. B.2 Tenure for Independent Director i. ii. An Individual may not remain as an Independent Director in a company for more than six years. A period of three years should elapse before such an individual is inducted in the same company in any capacity. iii. No individual may be allowed to have more than three tenures as independent Director in the manner suggested in 'i' and 'ii' above.
iv.
The maximum number of public companies in which an individual may serve as an Independent Director should be restricted to seven.
B.3 Independent Directors to have the Option and Freedom to meet Company Management periodically i. In order to enable Independent Directors to perform their functions effectively, they should have the option and freedom to interact with the company management periodically. ii. Independent Directors should be provided with adequate independent office space and other resources and support by the companies including the power to have access to additional information to enable them to study and analyze various information and data provided by the company management. C. REMUNERATION OF DIRECTORS C.1 Remuneration C.1.1 Guiding Principles-Linking Corporate and Individual Performance i. The companies should ensure that the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully. It should also be ensured that relationship of remuneration to performance is clear. Incentive schemes should be designed around appropriate performance benchmarks and provide rewards for materially improved company performance. Benchmarks for performance laid down by the company should be disclosed to the members annually. ii. Remuneration Policy for the members of the Board and Key Executives should be clearly laid down and disclosed. Remuneration packages should involve a balance between fixed and incentive pay, reflecting short and long term performance objectives appropriate to the company's circumstances and goal. iii. The performance-related elements of remuneration should form a significant proportion of the total remuneration package of Executive Directors and should be designed to align their interests with those of shareholders and to give these Directors keen incentives to perform at the highest levels. C.1.2 Remuneration of Non-Executive Directors (NEDs): i. The companies should have the option of giving a fixed contractual remuneration, not linked to profits, to NEDs. The companies should have the option to: (a) Pay a fixed contractual remuneration to its NEDs, subject to an appropriate ceiling depending on the size of the company; or (b) Pay upto an appropriate percent of the net profits of the company. ii. The choice should be uniform for all NEDs, i.e. some should not be paid a commission on profits while others are paid a fixed amount. 108 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
iii.
If the option chosen is 'i(a)' above, then the NEDs should not be eligible for any commission on profits.
iv.
If stock options are granted as a form of payment to NEDs, then these should be held by the concerned director until three years of his exit from the Board.
C.1.3 Structure of Compensation to NEDs i. The companies may use the following manner in structuring remuneration to NEDs:
Fixed component: This should be relatively low, so as to align NEDs to a greater
share of variable pay. These should not be more than one-third of the total remuneration package.
Variable component: Based on attendance of Board and Committee meetings (at least 75% of all meetings should be an eligibility pre-condition) Additional variable payment(s) for being: o o o the Chairman of the Board, especially if he/she is a nonexecutive chairman the Chairman of the Audit Committee and/or other committees members of Board committees.
ii.
If such a structure (or any similar structure) of remuneration is adopted by the Board, it should be disclosed to the shareholders in the Annual Report of the company.
C.1.4. Remuneration of Independent Directors (IDs) i. In order to attract, retain and motivate Independent Directors of quality to contribute to the company, they should be paid adequate sitting fees which may depend upon the twin criteria of Net Worth and Turnover of companies. ii. The IDs may not be allowed to be paid stock options or profit based commissions, so that their independence is not compromised. C.2 Remuneration Committee i. Companies should have Remuneration Committee of the Board. This Committee should comprise of at least three members, majority of whom should be non executive directors with at least one being an Independent Director. ii. This Committee should have responsibility for determining the remuneration for all executive directors and the executive chairman, including any compensation payments, such as retirement benefits or stock options. It should be ensured that no director is involved in deciding his or her own remuneration. iii. This Committee should also determine principles, criteria and the basis of remuneration policy of the company which should be disclosed to shareholders and their comments, if any, considered suitably. Whenever, there is any deviation from such policy, the justification/reasons should also be indicated/ disclosed adequately. iv. This Committee should also recommend and monitor the level and structure of pay for senior management, i.e. one level below the Board. 109 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
v.
This Committee should make available its terms of reference, its role, the authority delegated to it by the Board, and what it has done for the year under review to the shareholders in the Annual Report.
II. RESPONSIBILITIES OF THE BOARD5 A. Training of Directors i. The companies should ensure that directors are inducted through a suitable familiarization process covering, inter-alia, their roles, responsibilities and liabilities. Efforts should be made to ensure that every director has the ability to understand basic financial statements and information and related documents/papers. There should be a statement to this effect by the Board in the Annual Report. ii. Besides this, the Board should also adopt suitable methods to enrich the skills of directors from time to time. B. Enabling Quality Decision making The Board should ensure that there are systems, procedures and resources available to ensure that every Director is supplied, in a timely manner, with precise and concise information in a form and of a quality appropriate to effectively enable/ discharge his duties. The Directors should be given substantial time to study the data and contribute effectively to Board discussions. C. Risk Management i. The Board, its Audit Committee and its executive management should collectively identify the risks impacting the company's business and document their process of risk identification, risk minimization, risk optimization as a part of a risk management policy or strategy. ii. The Board should also affirm and disclose in its report to members that it has put in place critical risk management framework across the company, which is overseen once every six months by the Board. The disclosure should also include a statement of those elements of risk, that the Board feels, may threaten the existence of the company. D. Evaluation of Performance of Board of Directors, Committees thereof and of Individual Directors The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. The Board should state in the Annual Report how performance evaluation of the Board, its committees and its individual directors has been conducted. E. Board to place Systems to ensure Compliance with Laws i. In order to safeguard shareholders' investment and the company's assets, the Board should, at least annually, conduct a review of the effectiveness of the company's system of internal controls and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems.
ii.
The Directors' Responsibility Statement should also include a statement that proper systems are in place to ensure compliance of all laws applicable to the company. It should follow the comply or explain principle.
iii.
For every agenda item at the Board meeting, there should be attached an Impact Analysis on Minority Shareholders proactively stating if the agenda item has any impact on the rights of minority shareholders. The Independent Directors should discuss such Impact Analysis and offer their comments which should be suitably recorded. III. AUDIT COMMITTEE OF BOARD A. Audit Committee Constitution The companies should have at least a three-member Audit Committee, with Independent Directors constituting the majority. The Chairman of such Committee should be an Independent Director. All the members of audit committee should have knowledge of financial management, audit or accounts. B. Audit Committee Enabling Powers: i. The Audit Committee should have the power to ii. have independent back office support and other resources from the company; have obtain professional advice from external sources. access to information contained in the records of the company; and
The Audit Committee should also have the facility of separate discussions with both internal and external auditors as well as the management. C. Audit Committee - Role and Responsibilities
i.
The Audit Committee should have the responsibility to monitor the integrity of the financial statements of the company; review the company's internal financial controls, internal audit function and risk make recommendations in relation to the appointment, reappointment and removal of
management systems; the external auditor and to approve the remuneration and terms of engagement of the external auditor; review and monitor the external auditor's independence and objectivity and the effectiveness of the audit process. ii. The Audit Committee should also monitor and approve all Related Party Transactions including any modification/amendment in any such transaction. iii. A statement in a prescribed/structured format giving details about all related party transactions taken place in a particular year should be included in the Board's report for that year for disclosure to various stake holders.
IV. AUDITORS 111 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
A. Appointment of Auditors i. The Audit Committee of the Board should be the first point of reference regarding the appointment of auditors. ii. The Audit Committee should have regard to the profile of the audit firm, qualifications and experience of audit partners, strengths and weaknesses, if any, of the audit firm and other related aspects. iii. To discharge its duty, the Audit Committee should: discuss the annual work programme and the depth and detailing of the audit plan to be examine and review the documentation and the certificate for proof of independence of recommend to the Board, with reasons, either the appointment/re-appointment or undertaken by the auditor, with the auditor; the audit firm, and removal of the statutory auditor, along with the annual audit remuneration. B. Certificate of Independence i. Every company should obtain a certificate from the auditor certifying his/its independence and arm's length relationship with the client company. ii. The Certificate of Independence should certify that the auditor together with its consulting and specialized services affiliates, subsidiaries and associated companies or network or group entities has not/have not undertaken any prohibited non-audit assignments for the company and are independent vis--vis the client company. C. Rotation of Audit Partners and Firms i. In order to maintain independence of auditors with a view to look at an issue (financial or nonfinancial) from a different perspective and to carry out the audit exercise with a fresh outlook, the company may adopt a policy of rotation of auditors which may be as under: ii. Audit partner - to be rotated once every three years Audit firm - to be rotated once every five years.
A cooling off period of three years should elapse before a partner can resume the same audit assignment. This period should be five years for the firm.
D. Need for clarity on information to be sought by auditor and/or provided by the company to him/it i. With a view to ensure proper and accountable audit, there should be clarity between company management and auditors on the nature and amount of information/documents/ records etc and periodicity/frequency for supply/obtaining such information/ documents/ records etc. ii. In any case the auditor concerned should be under an obligation to certify whether he had obtained all the information he sought from the company or not. In the latter case, he should specifically indicate the effect of such non receipt of information on the financial statements. E. Appointment of Internal Auditor 112 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
In order to ensure the independence and credibility of the internal audit process, the Board may appoint an internal auditor and such auditor, where appointed, should not be an employee of the company. V. SECRETARIAL AUDIT Since the Board has the overarching responsibility of ensuring transparent, ethical and responsible governance of the company, it is important that the Board processes and compliance mechanisms of the company are robust. To ensure this, the companies may get the Secretarial Audit conducted by a competent professional. The Board should give its comments on the Secretarial Audit in its report to the shareholders. VI. INSTITUTION OF MECHANISM FOR WHISTLE BLOWING i. The companies should ensure the institution of a mechanism for employees to report concerns about unethical behavior, actual or suspected fraud, or violation of the company's code of conduct or ethics policy. ii. The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Chairperson of the Audit Committee in exceptional cases.
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Annexure-III CORPORATE SOCIAL RESPONISIBILITY VOLUNTARY GUIDELINES ISSUED BY MINISTRY OF CORPORATE AFFAIRS
Fundamental Principle Core Elements: Each business entity should formulate a CSR policy to guide its strategic planning and provide a roadmap for its CSR initiatives, which should be an integral part of overall business policy and aligned with its business goals. The policy should be framed with the participation of various level executives and should be approved by the Board. The CSR Policy should normally cover following core elements: 1. Care for all Stakeholders: The companies should respect the interests of, and be responsive towards all stakeholders, including shareholders, employees, customers, suppliers, project affected people, society at large etc. and create value for all of them. They should develop mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them where they occur. 2. Ethical functioning: Their governance systems should be underpinned by Ethics, Transparency and Accountability. They should not engage in business practices that are abusive, unfair, corrupt or anti-competitive. 3. Respect for Workers' Rights and Welfare: Companies should provide a workplace environment that is safe, hygienic and humane and which upholds the dignity of employees. They should provide all employees with access to training and development of necessary skills for career advancement, on an equal and non-discriminatory basis. They should uphold the freedom of association and the effective recognition of the right to collective bargaining of labour, have an effective grievance redressal system, should not employ child or forced labour and provide and maintain equality of opportunities without any discrimination on any grounds in recruitment and during employment. 4. Respect for Human Rights: Companies should respect human rights for all and avoid complicity with human rights abuses by them or by third party. 5. Respect for Environment: Companies should take measures to check and prevent pollution; recycle, manage and reduce waste, should manage natural resources in a sustainable manner and ensure optimal use of resources like land and water, should proactively respond to the challenges of climate change by adopting cleaner production methods, promoting efficient use of energy and environment friendly technologies. 6. Activities for Social and Inclusive Development: 114 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal
Depending upon their core competency and business interest, companies should undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations. These could include: education, skill building for livelihood of people, health, cultural and social welfare etc., particularly targeting at disadvantaged sections of society. Implementation Guidance: 1. The CSR policy of the business entity should provide for an implementation strategy which should include identification of projects/activities, setting measurable physical targets with timeframe, organizational mechanism and responsibilities, time schedules and monitoring. Companies may partner with local authorities, business associations and civil society/nongovernment organizations. They may influence the supply chain for CSR initiative and motivate employees for voluntary effort for social development. They may evolve a system of need assessment and impact assessment while undertaking CSR activities in a particular area. Independent evaluation may also be undertaken for selected projects/activities from time to time. 2. parameter. 3. To share experiences and network with other organizations the company should Companies should allocate specific amount in their budgets for CSR activities. This
amount may be related to profits after tax, cost of planned CSR activities or any other suitable
engage with well established and recognized programmes / platforms which encourage responsible business practices and CSR activities. This would help companies to improve on their CSR strategies and effectively project the image of being socially responsible. 4. The companies should disseminate information on CSR policy, activities and progress in
a structured manner to all their stakeholders and the public at large through their website, annual reports, and other communication media.
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CONTENTS

1 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

2 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

3 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

4 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

policies and processes'.

5 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

as defined by SEBI committee (India) is the

8 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

transactions with the company.

The Audit Committee has wide powers and also

% of Companies to which Applicable

Report on Corporate Governance

Shareholder's Greivance Committee

Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

15 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

18 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

Rights and equitable treatment of shareholders: Organizations should

Interests of other stakeholders: Organizations should recognize that they

have legal and other obligations to all legitimate stakeholders.

Integrity and ethical behavior: Ethical and responsible decision making is

Disclosure and transparency: Organizations should clarify and make

other senior executives

Monitoring by the board of directors: The board of directors, with

Internal control procedures and internal auditors: Internal control

procedures are policies implemented by an entity's board of directors, audit

Balance of power: The simplest balance of power is very common;

Remuneration: Performance-based remuneration is designed to relate

CORPORATE GOVERNANCE MODELS AROUND THE WORLD

23 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

Governance Procedures Vulnerable To Global Capitals Market

Secretive Corrupt Financial Speculation

Secretive Corrupt Financial Speculation. Lack Of Proper Disclosure

24 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

26 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

29 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE

Monitoring costs: A barrier to shareholders using good information is the

Supply of accounting information: Financial accounts form a crucial link in

Role of the Accountant & Auditors: Financial reporting is a crucial

38 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

CORPORATE GOVERNANCE REPORT OF TATA STEEL FOR THE YEAR 2008-09

The Companys Corporate Governance Philosophy:

NINE: Non-Independent Non-Executive, INE: Independent Non-Executive, NIEX: Non-Independent Executive

40 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

Independent, Non executive Non Independent, Non executive

during the year 2008-09 1 1

46 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

47 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

March 31 August Generally in August

49 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

Categories of Shareholders Ordinary Shares

2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99

28.07.05 23.07.04 24.07.03 12.06.02 20.07.01 23.05.00 30.07.99

130% 100% 80% 40% 50% 40% 40%

51 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

CORPORATE GOVERNANCE IN SMALL COMPANIES:

55 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

56 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

57 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

59 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

60 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

61 Analysis of Corporate Governance & Corporate Social Responsibility By CA Ajay Singhal

CG&CSR Project

CG&CSR Project