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On Corporate Social Responsibility

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Abeera Kohli & Jasmeet Singh, III Year, B.B.A, Ll.B (Hons.) - National Law University, Jodhpur

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Introduction
Corporate management and governance has, as its primary objective, the enhancement of corporate profits and shareholder gain. i.e. the corporate governance is basically rules and practices put in place within a company to manage information and economic incentive problems inherent in the separation of ownership from control in large enterprises and as dealing with how, and to what extent, the interests of various agents involved in the company are reconciled and what checks and incentives are put in place to ensure that managers maximize the value of the investment made by shareholders.

A major approach taken to achieve this objective is to have in place mechanisms that are targeted at keeping abuse and fraud in check. These include the duties imposed on directors, the role played by auditors, the establishment of audit committees, and disclosure requirements to name but a few. Availability of accurate, relevant, and timely information is crucial to establishing and maintaining these mechanisms as well as to ensure their efficacy. Because the availability of information plays such a major role, the increased use of (IT) in information management has made a considerable impact on these corporate governance and management mechanisms.

This paper aims to discuss the new challenges that directors, auditors, investors, and regulators face in adapting and using IT to enhance standards of corporate governance and fulfilling the requirements of Corporate Social Responsibility. The project will deal with providing a brief summary of the basic changes brought about by IT in the areas of data storage and management, the processing of information, and information dissemination. The paper will then go on to discuss and highlight how these changes can impact on the roles of directors, auditors, investors, and regulators in their respective corporate social responsibility functions and point out some specific areas of potential development and change.

The Bases Of Corporate Social Responsibility
Corporate Social Responsibility (CSR) has come to the forefront of Corporate and economic concerns because of the increasingly globalize nature of business and the so-called New Economy, a knowledge-based, technology-driven environment that has, among other things, affected an increase in stakeholders access to information. “The premise of the corporate social responsibility movement is that ‘corporations, because they are the dominant institution of the planet, must squarely face and address the social and environmental problems that afflict humankind”. As a mode of implementing human rights, labor, and environmental standards, CSR has long been discussed as a possible remedy to the inequalities created and exacerbated by globalization. It considers that a corporation is not just a self-centered profit-making entity, but that the company and its actions are also integral to the economy, society, and environment in which they occur. Directors and officers are becoming ever more aware that CSR may provide human rights, labor, and environmental protections to the communities in which they live and to the people they employ. The business case for such social responsibility among corporations is becoming clearer as globalization progresses. It includes:
1. Managing risks.
2. Protecting and enhancing reputation and brand equity
3. Building trust and license to operate
4. Improving resource efficiency and access to capital
5. Responding to or pre-empting regulations.
6. Establishing good stakeholder relationships with current and future employees, customers, business partners, socially responsible investors, regulators, and host communities
7. Encouraging innovation and new ways of thinking
8. Building future market opportunities.

As such, a social responsibility policy can provide value as a strategic part of a firm's daily activities. Under a strategy that integrates socially responsible practices, a company's analysis of profit, return on investment (ROI), or return on equity (ROE) as the bottom-line should be replaced by a "triple bottom-line" approach, encompassing economic, social, and environmental factors. A company that ignores social and environmental concerns in its activities may have substantial profit or returns in its current state and, therefore, be content to continue its operations at the status quo, but its actions nonetheless have the potential to negatively affect society and the environment. Its potential future profit is thereby diminished when the company does not take a holistic approach to the global business environment.

Thus, CSR involves the integration of companies into their local, national, and global settings. At the same time, it recognizes the strong human rights dimension of CSR, particularly with regard to global operations and supply chains.

What CSR comprises will differ from company to company and industry to industry. Company’s approaches in dealing with their responsibilities and relationships with their stakeholders vary according to sectoral and cultural difference. Implementing CSR practices into a corporation's strategy is a holistic process and requires several steps, starting with adopting a mission statement and code of conduct or credo, both of which describe the company's purpose, values, and responsibilities to its stakeholders. After that, the company must translate these ideals into actions within the company's strategy and daily decisions. This requires adding social policy into every aspect of the company's operation and then evaluating the corporate performance in accordance with that policy.

Successful implementation of CSR in a company's strategy therefore requires a paradigm shift at the core of the business. Managers must learn to think in ways other than those they are accustomed to, and employees and other stakeholders have greater incentive to become personally involved in the business.

The Impact Of Information Technology On Corporate Social Responsibility
In examining this concept itself, it is to be understood that CSR is having both internal and external dimensions.
1. As regard the internal dimension the project deals with the socially responsible practices primarily involve employees and relate to issues such as investing in human capital, health and safety, and managing change, while environmentally responsible practices relate mainly to the management of natural resources used in the production within the company. They open a way of managing change and reconciling social development with improved competitiveness.

2. With regard to the external dimension of CSR, the project notes that:
Corporate social responsibility extends beyond the doors of the company into the local community and involves a wide range of stakeholders in addition to employees and shareholders: business partners and suppliers, customers, public authorities and NGOs representing local communities, as well as the environment.

Information Technology

 

The Impact Of I.T. On Internal C.S.R. Can Be Listed In The Following Manner
1. Changes in Information Management
The manner in which information is stored, processed, and disseminated has undergone significant changes over the last decade or so. This has been the direct result of advances made in computer technology. Documents may now be electronically prepared, filed, sorted, stored, and archived without leaving the comfort of one's chair. Furthermore, data can be managed with a precision and efficiency not possible under the previous manual system of data management. Computers are able to sort and group data and perform complex calculations at a rate and with a degree of accuracy never before possible, which means that customer lists and preferences, information about competitors, financial, and performance indicators may be generated in a matter of seconds.

In addition, the advent of e-mail and the internet has made it possible to disseminate this information almost instantaneously. More sophisticated hardware at lower prices, the increased user-friendliness of software, and higher computer literacy in many developed countries have all contributed to an increased use by corporations of computer information systems.

Furthermore, the use of IT to manage information flows and the resulting potential to increase the capacity and efficiency of data storage, processing, and dissemination has altered the significance of information for corporations. In other words, information is not only an invaluable resource for wealth generation but, in many instances, has itself become an asset. As such, it must be protected through a system of internal controls. Care must be taken to select the most effective and efficient methods of storing, managing, and utilising available information. Where the information stored is proprietary in nature (such as client lists, and trade secrets), there is a need to protect it from being stolen or used unlawfully. Steps must also be taken to guard against its destruction. Abuse may also arise where information is utilized in a manner that invades the privacy of clients, trading partners, and employees. These issues were important even prior to the IT revolution. However, they have now taken on an additional perspective because of the increased use of IT in information management. This, in turn, has had a direct impact on the duties of directors, the responsibilities of auditors, the interests of investors, and the role of regulators in establishing and maintaining satisfactory corporate governance practices.

2. Directors Duties
In this day and age, it is difficult to imagine any major corporation that does not rely in one way or another on computers for its information needs and this has forced corporate management to place much emphasis on IT related investments such as computer hardware, software, and personnel. However, expenses of this nature must be justifiable and in the long run must result in revenue generation for the company. To make effective decisions, directors need information to be passed on to them accurately and speedily. Thus, the potential IT offers in terms of efficient and effective information management should not be ignored by the prudent director. Nevertheless, this growing dependence on IT has raised several issues that those self-same directors should consider in the performance of their duties.

3. Duty of Care
While it is extremely tempting to jump onto the bandwagon, directors must first understand the benefits and pitfalls of using IT to store information. One can hardly dispute that it is much easier to compile and generate information stored in a computer. The manual compilation and monitoring of data changes used to take a considerable amount of time and effort for large companies, but may now be accomplished by a few clicks of a mouse. Copying and transporting such information no longer requires reams of paper but may be done using a single floppy disk, and e-mail facilities ensure it is just as easy to disseminate this information to hundreds more people. There are however, corresponding risks and disadvantages associated with managing electronic information.

First, the increased ease of compiling, copying, and transferring information means that information may in turn be easily misused or stolen. Questions of system security for the purpose of maintaining secrecy and confidentiality dominate many discussions in the IT field. Second, aside from being physically destroyed, information stored in computers may be corrupted because of computer viruses, or accidentally deleted, or become irretrievable due to system problems. Finally, computers are increasingly being used to perform more critical functions. From the factory assembly line to the launching and control of satellites, growing dependence is being placed on the information systems installed to discharge a corporation's operations. Consequently, any computer error or system breakdown may prove extremely costly to the company.

It is therefore important for managers to be clear about the risks associated with IT. Indeed, directors have a duty to ensure such risks are minimized by introducing the proper checks and procedures. Back-up systems and safety devices must also be introduced to ensure that, should a system failure occur, the company will not suffer significant losses. While there have been numerous suits against directors for failing to monitor the financial position of companies adequately, a similar focus on directors failure to monitor IT systems and procedures has yet to arise. As companies continue to rely on IT, it is envisaged that the scope of a director's duty of care vis-à-vis the use of IT, its risks and consequences, will soon be a common feature in the courts because just as a director's ability to assess and handle the financial aspects of a company's business has become a matter of immense importance, company directors should attain a correspondingly greater understanding of IT processes and be able to appreciate the risks involved in its use.

4. Monitoring the Affairs of the Company
Changes in the way information is managed will inevitably result in changes in the way that information is collated and presented. Computer systems may be set up to capture information at the point of transaction and transmit it directly to a centralized database for storage and processing. Bar code devices, electronic data interchanges, and internet transactions are increasingly being used by companies in their business processes. In addition, the availability of computer programmes that can automatically generate relevant financial information and compute key ratios instantaneously enables a closer monitoring of a company's financial position. In a properly designed system, directors can access financial information on-line from literally anywhere. Because technology enables directors to achieve a higher standard of care and diligence, it therefore follows that the absence or unavailability of information will become less acceptable excuses for directors who fail to detect discrepancies in financial statements. More specifically, directors are now in a better position to determine the company's degree of solvency to guard against insolvent or wrongful trading. Likewise, rescue operations may be initiated earlier for the benefit of the company .

Another implication of advances in this field is the potential effect on the proposition that directors are not required to give continuous attention to the conduct of the company's affairs. The time taken for a director to collect, digest, collate, and analyze information in 1925 when the proposition was first propounded is vastly different to the time taken to do the same jobs using today's technology: board meetings may be conducted by video conferencing; information can be faxed, e-mailed, or otherwise electronically transmitted. Similarly, the internet may be used to give directors access to relevant information regardless of where they are. Charts may be prepared and altered to simulate changes, and presented almost instantaneously. Because of these increased capabilities, directors may achieve an acceptable degree of continuous supervision without spending an excessive amount of time in the office. It will therefore be much more difficult for directors to justify non-attendance at meetings and a completely hands-off approach to corporate affairs.

5. Reliance on Experts
It is commonly accepted that directors are permitted to base their decisions on expert advice and will be absolved from liability if their reliance is reasonable and justifiable, although thus far, such cases have involved financial advisors, accountants, and auditors rather than company directors. In the same vein, directors should also be permitted to rely on the advice of IT specialists as regards the integrity and efficacy of a company's IT system unless he or she has been put on inquiry.

The law permits directors to rely on others to assist them in managing the company because it recognizes that the exigencies of business require, in certain situations, the intelligent devolution of labour. Directors are entitled to rely on the judgment, information, and advice of officers entrusted with the duty delegated to them in the absence of any manifest circumstances that a prudent person would have taken note of which may have resulted in that person acting otherwise.

6. Changes in Auditing Responsibilities
The role of an auditor in corporate governance is essentially to provide an independent opinion on the integrity of the financial information provided by management to a company's owners. Because information is now being stored differently, auditors must adapt to these changes to properly perform their roles. It is necessary to control and audit the use of computers in capturing and storing information for a variety of reasons. These include the costs associated with data loss, misinformation, and computer error highlighted earlier, and the potentially costly consequences that may follow such errors.

The changes in the storage and use of data have resulted in the need for auditors to perform audits on the computer systems installed for this purpose. It is necessary to ensure that information, as an asset, is properly safeguarded. Data must be properly captured and be complete and accurate. One must also ensure that the computer system employed is both effective and efficient in the management of data. For example, under the International Standards on Auditing (ISA) 15, auditors must consider how a computer information systems (CIS) environment will affect their audit. This is necessary because a CIS environment may have an impact on the procedures that auditors should adopt to obtain a sufficient understanding of the accounting and internal control mechanisms of the company. It will also have implications on the risk assessment considerations that auditors should consider and the design and performance of audit tests.

7. Investor Involvement
Investors also play an important role in corporate governance. Ownership of shares gives them the right to assess the performance of directors through the appointment and remuneration process. They are also in a position to introduce good corporate governance practices in the operating framework of the company themselves. For example, as regards listed companies, investors may express their displeasure by divesting their interest in the company and this will be reflected in the market through a reduction in the price of the company's shares. To enable investors to monitor the company's progress and respond appropriately to corporate performance, investors must be able to obtain relevant information about the company in an efficient and timely manner.

8. Disclosure
One of the key controls associated with good corporate governance and management practice is the prompt and accurate disclosure of information. There has been a growing realization that corporate reporting is likely to shift from being regulation-led to being market and stakeholder led. The availability of new and more efficient methods of managing information has an impact on this too. Improvements in information management brought about by IT make the collecting and collating of information a much speedier process. This has enabled quicker disclosure, thus reducing the time gap between the time management receives the information and the time it is disclosed to the public.

In recent years, there has also been a growing trend for companies to contact and communicate directly with their shareholders instead of going through brokers. The ability to provide up-to date information directly to shareholders through the internet will empower investors to inquire into specific areas of the company's operations. At the same time, it provides the company with the means to explain investment decisions and policies directly to shareholders as and when these take place, potentially leading to improved governance and accountability.

Another profound effect of the IT revolution concerns the breaking down of geographical boundaries. This pushes countries to review national laws and regulations and may even force companies to meet global standards of disclosure and performance. Generally speaking, the effect of these developments will probably be to hasten a review of the disclosure policies and practices of stock exchanges and companies throughout the world.

The use of IT in information management therefore sets the scene for the introduction of higher standards of disclosure. Giving investors access to relevant information as frequently and quickly as possible permits them to make better-informed decisions and allows them to voice their views on corporate performance more effectively. There is nothing, in fact, to stop companies from adopting a disclosure policy that provides financial information other than just their annual reports (such as monthly balance sheets and profit and loss accounts), or any other relevant information, over the internet. The use of real time technology can even provide information on transactions as and when they take place. The argument that the cost of such an exercise would be disproportionate to the benefits no longer holds water. Many companies already have in place computerized accounting systems capable of providing such information which may even be customized to suit the needs of the relevant stakeholder. Reporting may be done on a continuous basis rather than periodically. The potential that IT affords may well change the process and purpose of corporate reporting into a new and ever-evolving creature.

9. Minority Protection
Controlling shareholders have a general duty to act bona fide for the good of the company. By giving equal access to information to all shareholders, minority shareholders would be more protected against abuse as they would be better able to obtain the necessary data and evidence to support any derivative action. Also it is highly likely that controlling shareholders would be less inclined to abuse their position if they knew minority shareholders had access to this information.

10. Impact on Regulatory Bodies
Various bodies are involved in regulating the operating of companies. Such entities usually have a record keeping function and are empowered to investigate the affairs of companies to guard against fraud and to ensure compliance with relevant legislation and regulations. These records are generally available to the public and may be used to monitor corporate activity. These entities are increasingly using IT to facilitate the collection, storage, collation, and provision of information. The Australian Securities Commission's electronic lodgement system (EDGE), its electronic database of corporate information (ASCOT), and its internet-linked electronic search and retrieval network (DOCIMAGE) are examples. Aside from facilitating the keeping and provision of records, such systems can also perform a useful monitoring function and improve corporate governance .

11. Determination of Control
As ownership of corporate wealth becomes increasingly dispersed, control and ownership also diverges. In addition, control of the corporations that generate and distribute this wealth is also beginning to lie in fewer hands. This results in the need to monitor the activities of those in control to ensure that they act, not in their own interests, but for the benefit of the owners of the company (ie the general body of shareholders). In order to do this, one must first be able to determine who controls the company and how this control is achieved. It is also necessary to monitor their interests in other companies to keep an eye on potential conflicts of interests.

It is therefore important to be able to trace and track ownership of interests in corporations. Many individuals and families today maintain control over large conglomerates through pyramiding. This involves the use of multiple layers of companies whereby those on the upper levels hold a majority or controlling stake in companies on the lower levels. Through such devices, parties can legally control companies at the lowest levels while actually owning only a fraction of their shares. Being able to trace ownership is necessary to hold controllers accountable to other interest holders of the company. It is also vital for the purposes of determining shadow directorships and breaches of fiduciary obligations (eg where it is alleged that directors are or have acted in conflict of interest).

Accurate tracking of changes in ownership is also essential because it assists not only in alerting investors to shifts in the balance of power of companies but it also helps to guard against insider trading. In addition, management may use such information to alert themselves to any possible hostile take-over attempts.

Company law provides the mechanisms for tracing and tracking ownership through the maintenance of registers. Companies are required to maintain a register of shareholders and, where listed, are required to maintain a register of substantial shareholders. A register of directors interests is also kept to make available information about the various interests directors may have in the company. While this does assist in pinpointing the major controllers of a company, the task is made doubly difficult when one attempts to trace the ownership of large groups of companies or where there is a high degree of cross share-holdings. These difficulties will be compounded by the fact that one will have to seek such information from a variety of offices thereby making the process tedious and time-consuming.

12. Other Potential Applications
With the increased efficiency with which information may be managed, a similar system of central data management may be implemented as regards other aspects of corporate operations. Thus, information pertaining to transactions involving directors, related party transactions, preferences etc may all be tracked and traced. Likewise, a company's financial performance may also be tracked and made readily available. This would complement the disclosure regime suggested in the earlier part of this paper. Such a system, if implemented, would make the regulatory authority a one-stop shop for all corporate information for investors, financiers, creditors, financial analysts and advisors, as well as the company itself. It would also place the regulators in a better stead to conduct inspections and investigations into the affairs of companies where called for. It is also possible for regulators in different jurisdictions to share information, thus setting the stage for trans-border regulatory systems.

Major Hurdles In Using I.T. For C.S.R.
There are significant hurdles to the implementation of a regulatory system with latest advancement of Information Technology. First, there is the question of cost. The potential beneficiaries of improved corporate governance standards are the companies themselves, those who have an interest in the performance of the company and, at a macro level, the state. One must weigh the economic and social cost of setting up such a network and at the same time, determine how this price tag should be borne by the various interested parties. However, as IT continues to get gradually cheaper and more companies embrace its use, cost will doubtless become less of a concern.

Second, all parties must agree on the appropriate IT protocols and standards to adopt. Over the years, individual companies may have developed their own standards according to their specific internal IT needs.

There is also the issue of exposing companies to security risks whilst participating in an open information network. However, much has been done in terms of the design of tools and systems to minimize the incidence of computer hacking and interference with data. These include computer programs designed to protect web sites and to detect unauthorized interference with or entry into designated computer information systems, and legislation imposing severe penalties for such unlawful action. This concern is also likely to weigh less on the minds of IT users as knowledge of these new technologies becomes more widespread and users understand the extent to which security risks may be controlled.

Finally, an issue attracting much debate relates to fears of loss of privacy. Exactly how much information should be provided? Will the availability of information increase vulnerability to takeovers or unnecessarily expose companies' weaknesses to competitors? How does one achieve a balance between protecting public investors and preserving the privacy of major shareholders and individual directors? While there have been calls for developing markets to move towards a more disclosure based regime, these concerns must be addressed in any attempt to encourage or compel companies to support and adhere to such a regime.

Conclusion
CSR simply means that the business enterprise must meet its basic obligations to the society. As observed, some of the actions under CSR are a part of the daily business activities of companies. In fact, it should be etched in their mission and corporate responsibility statement to reflect their commitment towards it. Hence, the whole deliberation over CSR can be succinctly summarized in terms of the ‘FREEDOM’ we envisage for the society:

                                                            F - Fairness in dealings;
                                                            R - Responsibility towards the environment and the society;
                                                            E - Empowerment of masses to remove un-freedoms
                                                            E - Ethical conduct of financial dealings and corporate governance;
                                                            D - Development of social and economic infrastructure;
                                                            O - Opportunity creation for public welfare and social enlistment;
                                                            M - Moral actions of paying taxes and fair treatment of labour;

The increased dependence on IT for our information needs is leading us down a path of no return. Undoubtedly, new technology has given life to new business opportunities. Increased access to information has placed more power in the hands of those parties responsible for the various corporate governance mechanisms of companies. But with power comes responsibility. High standards of corporate governance can only be achieved if parties are able and willing to actively fulfill their respective roles in achieving such standards. No doubt, advances in IT will continue to alter the significance of information both as a business tool and as an asset. Consequently, corporate governance mechanisms that involve the protection and generation of information must adapt to these changes. As highlighted above, this will have an impact on the role of corporate directors, auditors, investors, and regulators. It is therefore imperative that these parties familiarize themselves with potential IT applications in their respective corporate governance roles as well as the emerging legal issues and problems that are likely to arise.

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The  author can be reached at :
jasmeet_nlu@legalserviceindia.com

 

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ISBN No: 978-93-82417-01-9