Lecture – Six

EMBA-402 Corporate Governance, Values

and Ethics

CA. (Dr.) Ruchi Kansil

 Why pay so much attention to
stakeholders?

Is there a fundamental moral requirement to

adopt this style of management?
Answered by Normative Theory.
What is right and what is wrong? (moral values, ethics – what
firms ought to do or should do)

• managers should make corporate decisions respecting

stakeholders’ well being rather than treating them as means to
a corporate end.
• an ethics of care emphasizes the primacy of the network of
relationships that create the business enterprise. This approach
advocates the use of a stakeholder approach because of the
need to formulate strategy in the context of the relationships
that surround it, rather than with the firm as a lone actor.
Donaldson and Preston (1995) summarize the normative
viewpoint as involving acceptance of the following:

(a) Stakeholders are persons or groups with legitimate interests

in procedural and/or substantive aspects of corporate activity.
Stakeholders are identified by their interests in the
corporation, whether the corporation has any corresponding
functional interest in them.
(b) The interests of all stakeholders are of intrinsic value. That is,
each group of stakeholders merits consideration for its own
sake and not merely because of its ability to further the
interests of some other group, such as the shareowners.
Other considerations - why pay so much attention
to stakeholder's?
1. Many studies conclude that it is instrumentally valuable.
Enhanced financial performance - adherence to
stakeholder principles and practices tended to achieve
conventional corporate performance objectives (i.e.,
profitability, stability, growth) as well.
2. Favorable social performance is a requirement for
business legitimacy and that social and financial
performance tend to be positively associated over the
long term.
 Managing stakeholders
Buffering is the traditional
approach for most external
stakeholder groups and it is
aimed at containing the
effects of stakeholders on
the firm. It includes activities
such as market research,
public relations, and
planning. Buffering raises
the barriers between the
firm and its external
stakeholders.
Bridging involves forming
strategic partnership. This
approach requires recognizing
common goals and lowering
the barriers around the
organization. Partnering is
proactive and builds on
interdependence. It is about
creating and enlarging
common goals rather than
just adapting to stakeholder
initiatives.
Evolution of Corporate Law and Governance

• Indian Company Law is based on the company law in England.

• Joint Stock Companies Act, 1850; 1857; Companies Act 1866;
Indian Companies Act, 1913; Companies Act 1956, 2013.
Companies Act 2013
1. promote self regulation
2. eradicate unwarranted regulatory approvals
3. vest shareholders with greater powers
4. encourage greater transparency in the disclosures.
 CSR – Section 135 of Companies Act 2013

• Provisions applicable to every company having: – net worth of ` 5 billion or more; or –

turnover of ` 10 billion or more; or – net profit of ` 50 million or more during the immediately
preceding FY (wef April 1, 2014.)
• BOD of such companies is mandated to spend minimum 2% of the average net profits of the
company made during the 3 immediately preceding FYs, in pursuance of its the CSR Policy.
‘Net Profit’ means net profit before tax as per books of accounts, computed as per Section 198
of the Companies Act, 2013 and shall not include profits arising from branches outside India.
• Such companies are required to constitute CSR committee of its BOD which is responsible for
formulating and recommending to the BOD, the CSR Policy of the company.
• BOD is required to approve the CSR policy and disclose its content in the Director’s Report
and also place the same on the company’s website.
• The company is required to give preference to local area and areas where it operates for
spending the amount earmarked for CSR.
• If the company fails to spend such amount, BOD is required to specify the reasons for not
spending the amount in the Director’s report.
 Schedule VII of the Companies Act, 2013 - Activities
which may be included by companies in their CSR
Policies relating to
1. Eradicating hunger, poverty and malnutrition, promoting preventive healthcare,
2. Promoting education and promoting gender equality,
3. Setting up homes for women, orphans and the senior citizens, measures for reducing
inequalities faced by socially and economically backward groups,
4. Ensuring environmental sustainability and ecological balance, animal welfare,
5. Protection of national heritage and art and culture,
6. Measures for the benefit of armed forces veterans, war widows and their
dependents,
7. Training to promote rural, nationally recognized, Paralympic or Olympic sports,
8. Contribution to the prime minister’s national relief fund or any other fund set up by
the Central Government  for socio economic development and relief and welfare of 
SC, ST, OBCs, minorities and women,
9. Contributions or funds provided to technology incubators located within academic
institutions approved by the Central Government,
10.Rural development projects.
 Is mandating CSR a good idea?
Arguments against include:
• CSR should be voluntary (some might say, by definition).
• CSR should be “strategic” (exploiting a business case, creating shared value, etc.)
• This is CSR as philanthropy (“old school” CSR)
• If CSR is basically just another tax, companies will do the minimum but no more.

Arguments in favour include:

• Without the law, many companies would do (and did) nothing
• Potential impact is greater if all large companies are “forced” to do CSR
• Voluntary CSR is not precluded by the legislation (indeed government guidelines
exist for voluntary CSR that are broader in scope).
• Corporate expertise is applied to social problems
•  Pressing needs of the “have-nots”
 WHY CSR
First, Strengthening legitimacy and Reputation - firms may have altruistic intentions
(selfless acts) : they simply believe their CSR efforts are part and parcel of being a
good global citizen.
Second, organizations may engage in CSR activities as ‘‘window dressing’’ to appease
various stakeholder groups, such as nongovernmental organizations (NGOs).
Third – Creating win-win situations - there are potential contracting benefits: firms
believe that CSR helps recruit, motivate, and retain employees.
Fourth – Building Competitive advantage - there are customer-related motivations:
CSR may entice consumers to buy a company’s products or services. As such, firms
may reap price premiums or garner increases in market share.
Fifth – Reducing Costs - companies’ focus on environmental concerns can lead to
reductions in production costs.
Finally – Reducing Risks - CSR can be viewed as an integral part of a company’s risk
management efforts (legal risk, operational risk, reputational risk etc).
 CSR
• Why CSR? /Controversy of CSR
1. Work of government
2. Paying taxes
3. Should be voluntary – who opt for “social investment vehicles”
4. reputation, brand, extra revenue, idealistic work force – lower pay, lower
costs, subsidies, tax credits, investors satisfied with more modest returns
5. No empirical evidence – no side has proved its case
Masulis and Reza ( 2013) found that the choice and level of corporate giving is
positively associated with
• CEO personal ties to charities and
• negatively associated with the strength of corporate governance;
• donations may be used to support CEOs’ preferred charities or those of
independent directors (thereby strengthening social ties with them).
• It is perhaps not surprising then that they also find a negative price reaction to
charity donation disclosures where executives/directors have personal ties.
• Mandatory for public sector also
• Self reporting/self disclosure
• Comply or explain approach
• Corporate social responsibility (CSR) is now becoming much
more a part of mainstream corporate governance
• as there is a recognition that a company cannot – in the
long-term – operate in isolation from the wider society in
which it operates
• The broadest way of defining social responsibility is to say
that the continued existence of companies is based on an
implied agreement between business and society’ and that
‘the essence of the contract between society and business
is that companies shall not pursue their immediate profit
objectives at the expense of the longer-term interests of
the community’ (Sir Adrian Cadbury, 2002).
CSR actions/activities and their
related costs and benefits
Costs of CSR
The costs associated with cash companies frequently reap ‘‘free’’ ad-
contributions include the raw cash flows vertising as a result of CSR
less the reduction in taxes.
For product contributions, the outflow CSR frequently is a means for attracting,
would equal product cost (materials + labor motivating, and retaining talent.
+ overhead) less–—again–—any tax
benefits.
Firms also must consider the opportunity CSR efforts may lead to efficiencies and cost
costs associated with cash and product savings in the value chain. In addition to
donations. employ- ee motivational benefits (reduction
in labor costs), there are other
development, production, and after- sales
benefits to consider.
For contributions of employees’ time, there
really are not any tax benefits vis-`a-vis the
wages paid to employees; wages are
deductible for tax purposes regardless of
whether employees volunteer their time.
Costs associated with CSR environmental
activities can be estimated by comparing
the cost of ‘‘green’’ approaches to those of
‘‘traditional’’ approaches.
 Models of Corporate Responsibility
Model Focus

Ethical Model Voluntary /philanthropic contributions by corporates

to public welfare

Statist Model Large public sector and state owned firms operate in
socialist and mixed economy – state ownership and
legal requirements determine corporate
responsibilities
Liberal Model Shareholder model - corporate responsibility limited to
private owners

Stakeholder Model Loyal relationships with all - corporate responsibility

towards all stakeholders
 Three generation CSR activities
Generation Activities

First Generation philanthropic activities by corporates

Second Generation Corporate mitigate the direct negative impact (pollution)

of their activities. CSR is an integral part of long term
business strategy , working for improving society which
ultimately benefits the business

Third Generation Sustainability – significant contribution to addressing

poverty, exclusion, environmental degradation. Social and
environment concerns as the core business strategy
placed at the starting point and not at the end.
Archie Carroll’s CSR Pyramid
 Archie Carroll’s CSR Pyramid
• The infrastructure of CSR is built upon the premise of an economically
sound and sustainable business
• The pyramid is a unified and integrated whole, built in a fashion that
reflects the fundamental roles played and expected from business in
society - Expectations of society from businesses at a given point in time
• Structured in layers which build on each other from a broader base to a
narrower upper level stratum
• Responsibilities divided into four components to single out one from
each other but the focus is on the whole not different parts
• Distinct and useful four responsibilities to be simultaneously fulfilled
• No sequence or hierarchy is suggested. Pyramid is an integrated unified
whole.
 Economic responsibilities
• the condition of existence – deliver goods and
services that society wants at a price that
offers viability and sustainability of business
and fulfils commitments to and incentivize
stockholders.
• Businesses create profits when they add value
• Profits needed for business growth (retained
earnings)
 Legal responsibilities
• Law is society’s codification of right and wrong. Play the rules
of the game. Legal compliance is vital to avoid punishments,
penalties and/or legal actions.
• Expectations from businesses include:
1. Performing in a manner consistent with expectations of
government and law
2. Complying with various federal, state, and local regulations
3. Conducting themselves as law-abiding corporate citizens
4. Fulfilling all their legal obligations to societal stakeholders
5. Providing goods and services that atleast meet minimal legal
requirements.
 Ethical responsibilities
• Normative - Obligation to do what is right, just and fair. Avoid harm. Morally right
practices that go beyond minimum legal obligation (good working conditions,
treatment of employees).
• Even if not coded by law, are expected nonetheless.
• Expectations from businesses include:
1. Performing in a manner consistent with expectations of societal mores (customs,
conventions, practices) and ethical norms
2. Recognizing and respecting new or evolving ethical/moral norms adopted by
society
3. Preventing ethical norms from being compromised in order to achieve business
goals
4. Being good corporate citizens by doing what is expected morally or ethically
5. Recognizing that business integrity and ethical behavior go beyond mere
compliance with laws and regulations (Carroll 1991)
• Besides this, universal principles of moral philosophy such as rights, justice, and
utilitarianism that also should inform and guide company decisions and practices.
 Philanthropic responsibilities
• Contribute resources to the community,
improve quality of life to enhance reputation.
• Actions by a business as per its value system
which are considered “desirable by society”
but not called unethical if not performed
(companies not labeled unethical, if not give
gifts) .
• Called good “corporate citizenship”
 Ethics permeates the pyramid (ethics are spread
throughout the four components)

• It is believed that
1. Ethically appropriate to get a return on
investment
2. Laws build up on ethical issues, also called
‘codified ethics”
3. Ethics are beyond minimum required by law
4. Companies ethically motivated for philanthropic
activities, or pursue them as a utilitarian (useful,
practical) decision.
 Tensions and tradeoffs

• How to balance between all four?

• When short term profits might be
sacrificed for long term advantages ?
 Pyramid is a sustainable stakeholder framework

• Each component may largely addresses

different stakeholders (in terms of varying
priorities)
• Focusses not only present but also future
generations so as to represent long term
obligations.