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.
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