Unit -4

Corporate Social Responsibility

1. Protection Of Various

Stakeholder

2. Corporate Governance

Practices In Indian Context

Protection Of Stakeholder

Guided by:

Ami madamNikit RajaniJaypal Chavda

Presenter:

Introduction The stakeholder concept was first used in a 1963

internal memorandum at the Stanford Research Institute.

“A person, group, organization, member or system who affects or can be affected by an organization's actions.

Stakeholder, an entity that can be affected by the results of that in which they are said to be stakeholders, i.e., that in which they have a stake”

Stakeholders influence programs, products, and services.

As defined by the U.S. General Accounting Office,

“An individual or group with an interest in the success of an organization in delivering intended results and maintaining the viability of the organization's products and services.”

Stakeholders have some kind of involvement….

Types

People An individual or group Any organization A participant in a community

mobilization effort Market (or Primary) Stakeholders Non-Market (or Secondary)

Stakeholders

Objectives and Focusesof Stakeholders

1. Government and investors

2. Employees

3. Clients and consumers

4. Business partners (contractors and suppliers)

5. Related institutions

6. Communities

Government and investors

 National energy security Stable market supply State assets retention and appreciation Create value for investors Balance economic, environmental and

social responsibilities Develop with technical innovation

Employees

Employment promotion Protection of employees' rights and

interests Career development Personal value realization Health and safety Respect employees and promote the

concord of diversified cultures

Clients and consumers

Provide safe, environmentally friendly, clean, and efficient products

Continuously improve service quality Win their trust and support

Business partners

Observe commercial ethics and laws and regulations

Strictly standardize production and operation system

Strictly carry out licensing system Mutual benefit to achieve win-win

situation Eliminate use of child and forced labor

Related institutions

Participate in the research, discussion and compilation of relevant public policies, industrial standards, etc.

Pay attention to industrial trends and policy changes

Promote sustained development of enterprise and industries

Communities

Protect local environment Promote community development Support public welfare Support and promote the construction of

a harmonious society

Various Protection Methods of

Stakeholders

Government and investors

Participate in the collection of national energy

policy and legislation to contribute corporate

experience.

Guide and influence public policy.

Hold summit talks with host countries.

Enhance information disclosure.

Employees

Establish trade unions at various levels.

Hold workers' congress meetings on

regular basis.

Set up employees' advice box.

Investigate and assist employees in

difficulty.

Listen to opinions of working class

employees.

Clients and consumers

Carry out "caring for consumers" activities.

Publish product quality information.

Conduct "high-quality service competition"

activities.

Ask for opinions of clients and consumers.

Related institutions (including domestic and overseas industrial organizations)

Contribute with corporate concept and

experience.

Daily contact.

Join relevant activities.

Promote international exchanges.

Communities

Safety and environmental protection

education.

Community visit.

Participate in community development.

Discuss with government and people in

poor areas to decide.

Enhance information disclosure.

Business partners (contractors and suppliers)

Daily meeting.

Letters and telecommunication.

Hold multinational business talks and

technological meeting.

Publish management rules for suppliers and

contractors.

Share management experience and technical

standards.

This view is commonly referred to as ‘stakeholders’

model of corporate governance where ‘stakeholders’

may include customers, suppliers, providers of

complementary services and products, distributors, and

employees. Therefore, this theory holds that

corporations ought to be managed for the benefit of all

who have some stake in the firm.

CORPORATE GOVERNANCE PRACTICE IN INDIA

Guided by:

Ami madamJay Raval Vishal Ghoghari

Presenter:

Corporate Governance CORPORATE GOVERNANCE is the system by which companies are directed and controlled by the management in the best interest of the shareholders and others ensuring greater transparency and better and timely financial reporting. The Board of Directors are responsible for governance of their companies.”

“CORPORATE GOVERNANCE is needed to create a corporate culture of consciousness, transparency and openness. It refers to combination of laws, rules, regulations, procedures and voluntary practices to enable the companies to maximize the shareholders long-term value. It should lead to increasing customer satisfaction, shareholder value and wealth.”

SEBI Committee on Corporate Governance defines it is the

"acceptance by management of the basic 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.“

It has been suggested that the Indian approach is drawn from

the Gandhi principle of trusteeship and the Directive

Principles of the Indian Constitution, but this conceptualization

of corporate objectives is also prevalent in Anglo-American.

PRINCIPLES OF CORPORATE GOVERNANCE FOR STAKEHOLDER

Stakeholders and shareholders agree that effective

corporate governance requires the following principles,

Transparency: Full disclosure of financial and non-

financial information.

 

Accountability: Ensuring that management is effectively

overseen (and, where necessary, replaced) by appointing

an independent and competent governing body.  

Fairness: Equitable treatment of investors

 

Responsibility: Ensuring the corporation fulfills its proper role

in society Corporate governance systems vary in how they

achieve these goals, but by focusing on one group --in this

case employees-- we can further develop the notion of how a

stakeholder group can strengthen the corporate governance

system.

On account of dishonest management of the companies in the past that has raised capital from the market at higher valuation and had performed worse than the reported figures and thus had left the investors suffer huge losses.”

“Enough law exists, but corporate governance is considered as one of the important instrument for investors protection and was rated high in the priority on the SEBI’s agenda for investors protection .”

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 century.

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.

Indeed corporate governance and economic

development are essentially 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

obviously positive effect on economic growth and

poverty reduction.

Good corporate governance also lowers of the cost of capital by reducing risk and creates higher firm valuation once again boosting real investments.

Effective corporate governance mechanisms ensure better resource allocation and management raising the return to capital.

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.

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.

The Indian financial sector is marked with a relatively simple equity market weak to manipulation and with basic 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.

Central issues in Corporate Governance

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.

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 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.

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.

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.

The shrinking role of government In the past, governments have relied on

legislation and regulation to deliver social and environmental objectives in the business sector. Shrinking government resources, coupled with a distrust of regulations, has led to the exploration of voluntary and non-regulatory initiatives instead.

Demands for greater disclosure There is a growing demand for

corporate disclosure from stakeholders, including customers, suppliers, employees, communities, investors, and activist organizations.

Increased customer interest

There is evidence that the ethical conduct of companies exerts a growing influence on the purchasing decisions of customers. In a recent survey, it was found that more than one in five consumers reported having either rewarded or punished companies based on their perceived social performance.

Competitive labour markets

Employees are increasingly looking beyond paychecks and benefits, and seeking out employers whose philosophies and operating practices match their own principles. In order to hire and retain skilled employees, companies are being forced to improve working conditions.

Supplier relations

As stakeholders are becoming increasingly interested in business affairs, many companies are taking steps to ensure that their partners conduct themselves in a socially responsible manner. Some are introducing codes of conduct for their suppliers, to ensure that other companies' policies or practices do not tarnish their reputation.

family businesses and corporate groups are common in many countries including India. 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.

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).

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.11 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.

This difference in protection of shareholders’ rights has led to completely different trajectories of financial and economic developments in the different countries.

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.

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.

Recent research has also investigated the nature and extent of “tunneling” of funds within business groups in India.

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

Corporate Governance of Banks No where is proper corporate governance more crucial than for

banks and financial institutions. Given the essential role that banks

play in the financial and economic system of a developing country,

bank failure owing to unethical or incompetent management action

poses a threat not just to the shareholders but to the depositing

public and the economy at large. Two main features set banks

apart from other business – the level of opaqueness in their

functioning and the relatively greater role of government and

regulatory agencies in their activities. The ambiguity in banking

creates considerable information asymmetries between the

“insiders” – management – and “outsiders” – owners and creditors.