8

Corporate Governance and

Corporate Social Responsibility

Introduction
Question 1
What is meant by corporate governance? Explain the benefits of good corporate governance.
Answer
Meaning: According to J. Wolfensohn, President of the World bank, Corporate governance
is about promoting corporate fairness, transparency and accountability. It is concerned with
structures and processes for decision-making, accountability, control and behavior at the top
level of organizations. It influences how the objectives of an organisation are set and
achieved, how risk is monitored and assessed and how performance is optimized.
Corporate Governance can also be defined as the formal system of accountability and control
for ethical and socially responsible organizational decisions and use of resources.
Benefits of goods Corporate Governance:
1.

Protection of investor interests and strong capital markets,

2.

Studies show clear evidence that good governance is rewarded with a higher market valuation.

3.

Ensure commitment of the board in managing the company in a transparent manner.

Stakeholders
Question 2
Answer whether the statement is correct or incorrect with brief reasons:
Company management has responsibility only towards its shareholders.
Answer
Incorrect: Company management is responsible not only to the shareholders, but also to other
stakeholders i.e. people who have an interest in the conduct of the business of the company.
These include employees, customers, vendors, the local community and even society as a whole.
These stakeholders have certain rights with regard to how the business operates.
Question 3
Answer whether the statement is correct or incorrect with brief reason:
The Governance Model positions management as accountable solely to investors.

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Business Law, Ethics and Communication

OR

The responsibility of the corporate management lies towards shareholders only.

Answer
Incorrect: The traditional governance model positions management as accountable not to
investors only but a growing number of corporations in the late part of the 20th century accept
that constituents like employees, trade unions, customers, suppliers along with the investors
are affected by corporate activity and therefore the corporate must be answerable to them
also. Such constituents of an organization are also called the stakeholders.
Question 4
What is meant by Stakeholders? Describe those stakeholders who are affected by or can
affect the organization?
OR
What is meant by 'Stakeholders'? Give the list of such stakeholders.
Answer
Meaning of Stakeholders: The traditional governance model positions management as
accountable solely to investors or shareholders. But an increasing number of corporations
accept that constituents other than shareholders are affected by corporate activity, and that
the corporation must therefore be answerable and accountable to them. The word
stakeholders describes such constituents of an organization the individuals, groups or other
organization(s) which are affected by, or can affect the organization in pursuit of its goals. A
typical list of stakeholders of a company would be employees, trade unions, customers,
shareholders and investors, suppliers, local communities, government and competitors.

Corporate Developments Abroad

Question 5
What is meant by 'Corporate Governance'? State the major 'characteristics' of good corporate
governance.
Answer
Corporate Governance: Simply stated, 'Governance' means the process of decision making
and the process by which decisions are implemented. The term corporate governance' is
understood and defined in various ways. Corporate governance can be defined as the formal
system of accountability and control for ethical and socially responsible organisational
decisions and use of resources and accountability relates to how well the content of workplace
decisions is aligned with the organisations strategic direction. Control involves the process of
auditing and improving organisation decisions and actions. Good corporate governance has
the following major characteristics:

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Corporate Governance and Corporate Social Responsibility

(i)

Participatory

(ii)

Consensus oriented

8.3

(iii) Accountable
(iv) Transparent
(v) Responsive
(vi) Effective and efficient
(vii) Equitable and inclusive and
(viii) Follows the rule of law.

Corporate Social Responsibility

Question 6
What is Corporate Social Responsibility? Why it is needed in Indian Business environment?
Answer
The concept of Corporate Social Responsibility (CSR) focuses on the idea that beyond making
profit, a business has social obligations. It is the responsibility of the companies to produce an
overall positive impact on the society. CSR is pursued by business to balance their economic,
environmental and social objectives while at the same time addressing stakeholders expectations
and enhancing shareholders values. Stakeholders, including shareholders, analysts, regulators,
labour unions, employees, community organisations and mass media expect companies to be
accountable not only for their own performance but for the performance of their entire supply chain.
Issues such as peace, sustainable development, security, poverty alleviation, environmental quality
and human rights have a profound effect on business and its environment.
Corporate Social Responsibility is the continuing commitment by businesses to behave
ethically and contribute to economic development while improving the quality of life of the
workforce and their families as well as of the local community and society at large.
Need for social responsibility:
1.
2.
3.
4.
5.
6.
7.

The iron law of responsibility

To fulfil long term self-interest
To establish a better public image
To avoid government regulation and control
To avoid misuse of National Resources and Economic Power
To convert Resistances into Resources
To minimise Environmental damage.

Question 7
State with reasons whether the following statement is correct or incorrect:

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Business Law, Ethics and Communication

Corporate Social Responsibility is closely linked with the principles of sustainable development.
Answer
Corporate Social Responsibility (CSR) is a concept that organizations, have an obligation to
consider the interests of customers, employees, shareholders, communities and ecological
considerations in all aspects of their operations. This obligation is seen to extend beyond their
statutory obligation to comply with legislation. CSR is closely linked with the principles of
Sustainable Development, which argues that enterprises should make decisions based not only on
financial factors such as profits or dividends, but also based on the immediate and long-term social
and environmental consequences of their activities. It is an integrated combination of policies,
programs, education, and practices that extend throughout a corporations operations and into the
communities in which they operate, about how companies voluntarily manage the business
processes to produce on overall positive impact on society.
Question 8
State the Common Corporate Social responsibility (CSR) policies for business organizations.
Answer
Common Policies under CSR are as under:

Commitment to diversity in hiring employees and barring discrimination;

Adoption of internal controls reform in the wake of Enron and other accounting scandals;
Management teams that view employees as assets rather than costs;
High performance workplaces that integrate the views of line employees into decisionmaking processes;
Adoption of operating policies that exceed compliance with social and environmental laws;
Advanced resource productivity, focused on the use of natural resources in a more productive,
efficient and profitable fashion (such as recycled content and product recycling); and
Taking responsibility for conditions under which goods are produced directly or by
contract employees domestically or abroad.
Management teams that view employees as assets rather than costs;
High performance workplaces that integrate the views of line employees into decisionmaking processes;
Adoption of operating policies that exceed compliance with social and environmental laws;
Advanced resource productivity, focused on the use of natural resources in a more productive,
efficient and profitable fashion (such as recycled content and product recycling); and
Taking responsibility for conditions under which goods are produced directly or by
contract employees domestically or abroad.

Question 9
Write a note on Social Accountability-8000.

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Corporate Governance and Corporate Social Responsibility

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Answer
Social Accountability 8000: SA 8000 is a comprehensive, global, verifiable performance
standard for auditing and certifying compliance with corporate responsibility. The heart of the
standard is the belief that all workplaces should be managed in such a manner that basic
human rights are supported and that management is prepared to accept accountability for this.
SA8000 is an international standard for improving working conditions. This standard is based
on the principles of the international human rights norms as described in International Labour
Organization conventions, the United Nations Convention on the Rights of the Child and the
Universal Declaration of Human Rights. The requirements of this standard apply regardless of
geographic location, industry sector, or company size.

Benefits of Corporate Social Responsibility

Question 10
Explain the role played by different committees in regulating the Corporate Governance.
Answer
Role of different committees in regulating corporate governance: The core roles of the
various committees in regulation of corporate governance are as follows:
1.

Board of Directors: The Boards role is that of trusteeship to protect and enhance
shareholders value through strategic supervision. The strategy should aim at
accountability and fulfillment of goals.

2.

Audit Committee: They have to provide assurance to Board on adequacy of internal

control systems and financial disclosures.

3.

Compensation Committee: The committee has to recommend to the Board

compensation terms for executive Directors and the senior most level of management
below the Executive Directors.

4.

Nomination Committee: It is to recommend to the Board nominations for membership of

the Corporate Management Committee and the Board, and oversee succession to the
senior most level of management below the Executive Directors.

5.

Investor Services Committee: It is to look into redressal of Shareholders and Investors

grievances, approval of transmissions, sub-division of shares, issue of duplicate shares etc.

6.

Corporate Management Committee: Its primary role is strategic management of

companys businesses within Boards approved direction/framework.

7.

Divisional Management Committee: It is to realize tactical and strategic objectives in

accordance with Corporate Management Committee/Board approved plan.

Question 11
State the benefits of socially responsible corporate performance.

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Answer
Socially Responsible Corporate Performance: The benefits arising out of socially
responsible corporate performance include the following:
1.

Enhanced brand image and reputation.

2.

Reduced Government regulations and controls.

3.

Helps to minimize ecological damage.

4.

Improved financial performance.

5.

Reduced operating costs.

6.

Increased sales and customer loyalty.

7.

Increased productivity and quality of work life.

8.

Increased ability to attract and retain employees.

9.

Achievement of certain other objectives like easier access to capital including

international capital.

Question 12
Explain how corporate social responsibility minimises the ecological damage and helps in
achieving long-term objectives, so that the business may gain long-term profit maximization.
Answer
Corporate social responsibility and ecological damage: The business institution exists and
flourishes only because it performs invaluable services to society. Society gives business its
license to exist which may be revoked and amended at any time if they do not fulfill the
societys expectations. Therefore, if a business intends to retain its existing social role and
power, it must serve societys needs constructively.
A business organization acts in its own self interest and uses natural resources also. The
effluents of many businesses damage the surrounding environment. By their own socially
responsible behaviour, they can prevent government intervention if they are proactive in
recognizing their ecological responsibility towards society. Companies must recognize that a
strategy for corporate responsibility can play a valuable role not only in meeting the
challenges of globalization by mitigating risks domestically and internationally, but also in
providing benefits beyond risk management.
Question 13
Explain the meaning of the ''Iron Law of Responsibility". State the resulting benefits which
may be acquired by achieving the long-term objectives through the business activities.

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Answer
The Iron Law of Responsibility: The institution of business exists only because it performs
invaluable services for society. Society gives business its license to exist and this can be
amended or revoked at any time if it fails to live up to societys expectations. Therefore, if a
business intends to retain its existing social role and power, it must respond to societys needs
constructively. This is known as the Iron Law of Responsibility. In the long-term those who
do not use power in a manner that society considers responsible, will tend to lose it.
Businesses have been delegated economic power and have access to productive resources of
a community. They are obliged to use these resources for the common good of society so that
more wealth for its betterment may be generated. Technical and creative resources are also
helpful to it. A business organisation sensitive to community needs would in its own self
interest like to have a better community within which the business may be conducted. This
way, the resulting benefits would be:
(a) Decrease in crime
(b) Easier labour recruitment
(c) Reduced employee absenteeism.
(d) Easier access to international capital, better conditions for loans on international money
markets.
(e) Dependable and preferred as supplier, exporter, importer and retailer of responsibly
manufactured components and products.
This way a better society would produce a better environment in which the business may gain
long term profit maximization.
Question 14
State with reasons whether the following statements are correct or incorrect:
The phrase Iron Law of Responsibility means that the institution of business exists
only because it performs invaluable services towards its promoters.
Answer
Incorrect: The phrase Iron Law of Responsibility means the institution of business
exists only because it performs invaluable services for society. Society gives business
its license to exist and this can be amended or revoked at any time if it fails to live upto
societys expectations. Therefore, if a business intends to retain its existing social role
and power, it must respond to societys needs constructively rather than it performs
invaluable services towards its promoters.
Question 15
State with reasons whether the following statements are correct or incorrect:
The institution of business exists only if it fulfils the society's expectations

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Answer
The given statement is Correct. It is the society which bestows upon businesses the authority
to own and use land and natural resources. In return, society has the right to expect the
productive organizations, enhancing the general interest of consumers, employees and
community. Society may also expect that organizations to honour existing rights and limit their
activities within the bounds of justice. So, under this social contract between society and
business, Business ethics provide the guidance as to regulation of the behavior of business
enterprises and the minimal duties of the business professionals, including the consequences
and complications of their actions. Thus, business ethics is that set of principles or reasons
which should govern the conduct of business whether at the individual or collective level by
the application of ethical reasoning to specific business situations and activities. Thus, it can
be said that the institution of business exists only if it fulfills the societys expectations.
Question 16
Explain briefly the key strategies which can be used at the time of implementation of
Corporate Social Responsibility policies and practices in a company.
Answer
Each company differs in how it implements Corporate Social Responsibility (CSR). The
distinction depends on such factors as the company's size, sector, culture and the
commitment of its leadership. Below are some key strategies that companies can use when
implementing CSR policies and practices in a company.
(i)

Mission, Vision and Value Statements

(ii)

Cultural Values

(iii) Management Structures

(iv) Strategic Planning
(v) General Accountability
(vi) Employee Recognition and Rewards
(vii) Communications, Education and Training
(viii) CSR Reporting
Question 17
Examine the concept of Corporate Social Responsibility (CSR) and also explain in brief
some of the key strategies which can be used by companies while implementing CSR
policies and practices.
Answer
CSR Concept- Some companies have established committees that are specifically
responsible for identifying and addressing social or environmental issues, or have

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8.9

broadened the scope of more traditional standing committees to include responsibility

for CSR; while others have strategically appointed directors on the board based on the
unique expertise and experience they bring on specific issues, who then serve as
advisors to others on the board. Moreover, companies are finding that a board that is
diverse in terms of gender, ethnicity and professional experience is better equipped to
grapple with emerging and complex challenges.
Companies implement CSR by putting in place internal management systems that
generally promote:
i.

Adherence to labour standards by them as well their business patterns;

ii.

Respect for human rights;

iii

Protection of the local and global environment;

iv.

Reducing the negative impacts of operating in conflict zones;

v.

Avoiding bribery and corruption and;

vi.

Consumer protection.

key strategies which can be used by companies while implementing CSR policies and
practice-Some of the key strategies which can be used by companies when
implementing CSR policies and practices are as follows:
(a) Mission, vision and values statements
(b) Cultural values
(c) Management structures
(d) Strategic planning
(e) General accountability
(f)

Employee recognition and rewards

(g) Communication, education and training

(h) CSR reporting
Question 18
What corporate governance measures are required to be implemented by the Indian
Companies as per clause 49 of the listing agreement? Explain in brief.
Answer
Corporate Governance measures- In general, corporate governance measures include
appointing non- executive directors, placing constraints on management power and
ownership concentration as well as ensuring proper disclosure of financial information
and executive compensation. Many companies have established ethics and/or social
responsibility committees on their boards to review strategic plans, assess progress
and offer guidance on social responsibilities of their business. In addition to having

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committees and boards, some companies have adopted guidelines governing their own
policies and practices around such issues like board diversity, independence and
compensation.
Indian companies are required to comply with clause 49 of the listing agreement
primarily focusing on following areas:
i.

Board composition and procedure

ii.

Audit committee responsibilities

iii.

Subsidiary companies

iv.

Risk management

v.

CEO/CFO certification of financial statements and internal controls

vi.

Legal compliance

vii.

Other disclosures

Exercise
1.

Write short notes on:

(i)

Code of Conduct on Insider Trading

(ii)

(APEC) Business Code of Conduct

[Hints:

2.

(i)

In pursuance of the Securities and Exchange Board of India ((Prohibition of Insider Trading)
Regulations, 1992 (duly amended), the Board has approved the Code of Conduct for Prevention
of Insider Trading. The objective of the Code is to prevent purchase and/or sale of shares of the
Company by an Insider on the basis of unpublished price sensitive information.]

(ii)

APEC is known as the primary international organization for promoting open trade and economic
cooperation among 21 member countries. The Code, issued as a draft in 1999, is a standard that
draws significantly on a variety of other internationally recognized codes and standards. The
drafting of the Code was initiated by business leaders from companies operating in APEC
countries and is designed to supplement and support companies existing codes of conduct]

Explain the meaning of Corporate citizenship.

[Hints: The term corporate citizenship denotes the extent to which businesses meet the legal,
ethical, economic and voluntary responsibilities placed on them by their stakeholders.
Companies can best benefit their stakeholders by fulfilling their economic, legal, ethical, and
discretionary responsibilities. The benefits of good corporate citizenship, include:

A stable socio-political-legal environment for business as well as enhanced competitive

advantage through better corporate reputation and brand image.

improved employee recruitment, retention and motivation, improved stakeholder relations

and a more secure environment in which to operate]

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