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Interplay Between Corporate Governance And Corporate Social Responsibility

Both Corporate Governance and Corporate Social Responsibility ("CSR") are western concepts and a rising and a recent topic in India. With the rise of Brazil, China and India as leaders in the global economy and with globalization, the need for companies to adapt to practices being followed by global companies in the USA and UK is the need of the hour.

The concept has been present for decades in these countries but has evolved since, making it of utmost importance for the Indian companies to also follow in on the trend in order to be in par with the global trends and eventually attract foreign investments. Both corporate governance and CSR make companies more responsible and accountable to the society that they operate in alongwith increasing transparency of their transactions.

Corporate Governance

The concept of corporate governance was introduced in India in the 90's by Securities and Exchange Board of India ("SEBI") when it formed a committee under the chairmanship of Kumar Mangalam Birla. The committee laid down the guidelines making it mandatory for companies to have corporate governance in order to get listed on the stock exchange. Corporate Governance increases the transparency of the transactions of the organization and ensures that the investors get a fair return on their investments. In an organization, there are the Board of Directors consisting of the managers, executive level heads and the owners of the company i.e. shareholders.

In other terms, Corporate Governance lays down the responsibilities, rights and the distribution of power among them. Corporate Governance can be referred to as the process of making the Board of Directors responsible and answerable to the stakeholders- shareholders, employees, investors, customers and to the society. It refers to a set of guidelines, principles and a code of conduct which the Board of Directors shall abide with so as to maintain the best interest of all who they are liable and answerable to. These are the ethical practices and policies that are adopted by the organization while dealing with the stakeholders.

Some famous Definitions:
"Corporate governance is the system by which companies are directed and controlled." - The Cadbury Committee (U.K.)

"Corporate governance means that company managers its business in a manner that is accountable and responsible to the shareholders. In a wider interpretation, corporate governance includes company's accountability to shareholders and other stakeholders such as employees, suppliers, customers and local community." - Catherwood.

Principles of Corporate Governance

Corporate Governance is carried out on the basis of the Corporate Governance Code of the company and the guiding principles for it are:
  1. Transparency:
    Transparency is the foundation of corporate governance. A company shall publish the relevant data about the company through newspapers or its annual reports released quarterly, half yearly or annually in order to promote transparency. Transparency refers to the accurate, timely and concise disclosure of relevant data about the financial position, structure, administration, performance and governance of the company.
     
  2. Accountability
    The Board of Directors and Key Managerial Personnel are accountable as they are answerable to the stakeholders about the usage of the resources/funds of the company and the results fetched thereafter.
    They are to disclose all the transactions and take all decisions in the best interest of the company and its stakeholders.
     
  3. Fairness:
    The shareholders interest is to be protected by the company and the shareholders also have a right to receive an explanation and resolve their grievance in case their interests are at risk.
     
  4. Independence:
    In order to yield benefits of good corporate governance, the top management shall have full independence in taking decisions on behalf of the company.

Importance of Corporate Governance

Corporate Governance is important because it enables the two important functions:
  1. Attract capital
  2. Perform efficiently

Investors in India suffered a lot because of bad management of the company and the non-disclosure of the same to the shareholders which was due to lack of adequate standards of financial reporting and accountability. Furthermore, the grievances of the shareholders were not answered. In order to increase the investments in Indian companies and boost the economy, it was important to resolve the grievances and establish accountability. The introduction of corporate governance provided the investors with a means to examine the company before investing and keep a check on it even after investing. Corporate Governance became increasingly important as the foreign investors usually showed interest in well- managed companies. Infact, Foreign Institutional Investors engaged in joint ventures with Indian companies only if they were convinced of an adequate implementation of principles of corporate governance.

Thus, good corporate governance is considered essential to attract foreign investments and for FDI inflow.

Corporate Social Responsibility

The concept of CSR was initially started by a few wealthy businessmen but it has now developed as a key term in the corporate sector owing to the growing expectations that a company must be much more than just a mere economic profit earning unit and shall instead be a good corporate citizen contributing to the welfare of the society and its social issues. Even the companies have realized that in order to be successful, they not only need to be responsible for their business activities but also act be able to bring about a change in the society which is the key idea behind the model of CSR. CSR is therefore a self-regulating model whereby companies are conscious of the impact they are having on the environment, the social and economic aspects of the society and being accountable to its stakeholders and the public in general.

Definition
According to the World Bank, "Corporate social responsibility is the commitment of business to contribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their lives in ways that are good for business and for development"

Categories of CSR Model

There is no exact definition of CSR as it is a broad term and can take various forms depending upon the company and the industry. Therefore, the root idea behind the CSR policy of each firm varies and affects different sectors of the society in a sustainable manner.

Following are the broad categories in which the CSR initiatives can be categorized:
  1. Environment Responsibility
    Companies irrespective of their size have large carbon footprint. Environment is always the primary concern of the society and therefore all efforts of the company aimed at reducing pollution, greenhouse effect, sustainable use of natural resources, etc. are a big step towards the sustainability of the environment.
     
  2. Philanthropic Responsibility
    Businesses fulfill this by making donations usually in the form of money but sometimes even in the form of goods and services to charities and other not for profit organizations in support of a social cause.
     
  3. Ethical Human Rights Responsibility
    By supporting causes like equal pay for all workers, fair trade practices, advocating against child labor, etc. related causes, businesses demonstrate their ethical human rights responsibility which basically refers to the ethical, equal and fair treatment of the employees. This is the most famous category for businesses in the USA.
     
  4. Economical Responsibility
    By engaging in production of sustainable goods or replacing the use of harmful products with environment-friendly products, the companies demonstrate and fulfill their economic responsibility of a company.
     
  5. Volunteering
    An upcoming field is of volunteering which also increases the trust of people in the company. Participating in the local causes, community events, etc. have even lead to increase in returns to the country as this is the most active form of CSR.

Benefits for the Company

As per section 135 of the Company Act, 2013[i], a company with
Net worth of Rs.500 Crore or more, or
Turnover of Rs.1000 Crore or more, or
Net Profit of Rs.5Crore or more
during the immediately preceding financial year has to form a CSR Committee and contribute a minimum of 2% of its average net profits made during the last 3 years towards CSR.

However, CSR has a number of benefits for the company as well. They are listed below:

  1. Strong brand image:
    A well implemented CSR activity leads to a positive response to the brand image, reputation. It also leads to an increase in sales and customer loyalty.
     
  2. Ease to raise capital
    As a result of an improvement in the brand image of the company, the share price is bound to increase which makes it easier for the firm to raise capital not only from the stock market but also through sources.
     
  3. Less Regulatory burden
    A strong and a trustworthy relation t=with the regulatory bodies often leads to reduction of the regulatory compliances making the work of the company easier and less time consuming.
     
  4. Cost saving
    With a base of loyal customers, investors and suppliers are also happy and thus investing in operational efficiencies can result in operational cost saving.
     
  5. Retained employees
    Employees often prefer to stay in a company with a good brand image.

Relationship Between Corporate Governance And CSR

To be a good corporate citizen, a company has to be internally well governed and externally responsible. The concept of CSR was initially just a philanthropic and for charity. However, there has been a shift been from a charity-based model to a stakeholder-participation based model and it is now gradually being fused into corporate governance. The first step to CSR is the practice of corporate governance as unless a company observes corporate governance, it is unlikely to develop a social conscience and social awareness.

CSR and corporate governance to some extent can be considered as the two sides of a coin since they are interlinked but are also different in some aspects. Both CSR and corporate governance focus on the ethical practices of the firm and its awareness and the actions taken by it regarding both the internal and external environment.

Where CSR refers to the self-governing activities of the company towards the society in which it functions, corporate governance is a form of internal regulations imposed by the managerial department on the whole company for a smooth internal functioning. Apart from this, both CSR and corporate governance contribute to building the brand image of the company, having a direct impact on its efficient performance.

In this, the role of Board of the directors and the management is especially critical as they are the ones who have to consciously analyse their actions and keep in mind the image that they want to present to the world as they not only represent the company but also run it and hence have to take in comsoderation the social and environmental concerns of the society. Companies like Infosys, Hindustan Unilever, Cipla and Tata hold a good image in the society and rank amongst the top companies in terms of corporate governance whereas companies like Café Coffee Day, Yes Bank, Jet Airways, etc. are collapsing and have been in the news lately for all the wrong reasons like corruption, bankruptcy, etc. and one of the reasons is the failure of corporate governance in such companies. Investors and the companies have realised it the hard way that the companies can either choose to follow the social and ethical norms of the society and maintain a good image while functioning in it or undertake the risk of making profits with a bad reputation in the society.

Next, is the role of stakeholders, shareholders and the employees. Because of their involvement, concepts like shareholder activism and stakeholders' involvement has evolved. As CSR and corporate governance go hand in hand, stakeholders have a duty to persuade the management to abide by and follow ethical and social norms. Shareholders activism and stakeholders involvement basically refers to the indirect control that they exercise over the actions of the board as well as the management of the company to guide them towards observing good corporate governance and undertake CSR.

With the mass awakening in the society, the consumers and the pressure groups also contribute towards interlinking of corporate governance and CSR. In this regard, the final customers usually prefer to buy from the companies who are focusing and working towards the betterment of the society, which is encouraging more and more companies to undertake activities of social cause, starting with manifesting a good internal conduct and management.

Though CSR and corporate management are interlinked and similar in many a sense, they also contradict each other in some aspects. Where corporate governance is focused on achieving profit maximization and increased returns for its investors, CSR is focused on taking actions for the benefits of its external stakeholders which may at times be at the cost of profits and not desirable by the shareholders. Thus, raising external stakeholders interest can be at the cost of profit maximization of the shareholders. Also, it is highly likely that the managers hired to increase the value of the firm may indulge in unethical behaviour and be socially irresponsible.

Conclusion
CSR is based on the concept of self-governance related to the external stakeholders and external regulatory mechanism whereas corporate governance is the widest control mechanism which the company undertakes in relation to its management decisions. Both CSR and corporate governance are the two sides of the coin which relate to the same broader topic while having a bit of differences at the same time.

Both CSR and corporate governance are related to the ethical practices of the business and responsiveness of the company to both its internal and external environment while keeping in mind the social issues or of the society and the internal management issues at the same time. CSR and corporate governance both result into a better image of the organization and help in increasing its efficiency and its performance.

End-Notes:

  1. Section 135 of Companies Act, 2013 http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17518

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