17 Corporate Governance based on Values

1. Learning Outcome

2. Introduction

3. Concept of corporate governance

4. Values

5. Human Values

6. Importance of human values in business organisations

7. Scope of corporate governance

8. Issues of corporate governance

9. Steps for making corporate governance effective

10. Corporate Social Responsibility

11. Approaches to Corporate Social Responsibility

12. Applicability of Corporate Social Responsibility

13. Summary

1. Learning outcomes

After studying this module, the students shall be able to learn about the following:

Corporate governance Values
Human values
Importance of human values in business organisation Scope of Corporate Governance
Issues of Corporate Governance
Steps for making Corporate Governance Effective Corporate Social Responsibility
Approaches to Corporate Social Responsibility Applicability of Corporate Social Responsibility

2. Introduction

Interest in the corporate governance is worldwide. The underlying issues in governance have fascinated man over the centuries. But today the power is with the principal form of business organisation i.e. company. Corporate governance assumes centre stage when things went seriously wrong with the corporate world in wake of high profile corporate scams, frauds and failures during the past three decades. The business world was shocked beyond belief with both the scale and degree of illegal and unethical corporate practices. Consequently, this triggers for the need for reviews and reforms in the domain of corporate governance. In today’s changing face of global corporate world, a proper balance between people’s aspiration and business demands could be achieved with the implementation of concept of good corporate governance that give presence to the human elements in the organisations mainly focusing on the people centred policies.

3. Concept of Corporate Governance

A corporate means a legal entity that exists independent of the persons who have formed it and vested with many of the rights given to the board of directors and management and governance means a system of control and direction. So corporate governance refers to the ways in which the corporations are controlled and directed. Corporations are fundamentally governed by the board of directors overseeing top management with the consensus of shareholders and stakeholders. The word ‘governance’ has been derived from ‘gubeernare’ which means ‘to rule to steer’. It is the process by which power and authority is exercised. However, when the concept of governance is applied with the corporations, it would be termed as the concept of the ‘corporate governance’.

In corporate governance, governance is the act of framing plans, policies and strategies and monitoring the same to ensure their proper implementation and accepting the accountability for the affairs of the corporation.

According to Corporate Governance Handbook 1996, “Corporate Governance is the relationship between the shareholders and their companies and the way in which shareholders act to encourage best practice e.g., by voting at annual general meetings and by regular meetings with companies’ senior management. Increasingly this includes shareholder activism which involves campaign by a shareholder or group of shareholders to achieve change in companies.”

SEBI (Kumar Mangalam Birla) Committee Report on Corporate Governance 2000, “Fundamental objective of corporate governance is the enhancement of the long term shareholder value which the same time protecting the interests of other stakeholders.”

The subject of corporate governance can be understood from accountability point of view. The narrow definitions are oriented around corporate accountability view point. The narrow definitions are oriented around corporate accountability to shareholders only. The broader definitions of corporate governance emphasises on broader level of accountability to shareholders and other stakeholders. The broadest definition considers the companies are accountable to the whole society, future generation and natural environment.

4. Values

Values are the impressive objectives and goals in the human life which brings peace, progress and prosperity in human life. Values are the basic fundamental beliefs that an individual thinks to be true. Every individual has a set of values through which he looks at all things and also at the world at large. It can be said that most of the people will never deviate from their values. The values can be said to be the guiding principles in one’s life. Values can be defined as a bridge by which an individual makes a decision regarding good and bad, right and wrong, and most important and less important.

5. Human values

Human values are very important. Without human values the people are like flowers without fragrance. Human values are the principles, standards, beliefs and convictions that people adopt as their guidelines in daily activities. Principal human values are the foundations on which the professional ethics are built. They are the set of the consistent measures and behaviours that individuals choose to practice in the pursuit of doing what is right or what is expected of them by the society. Most laws and legislation in society are shaped by basic human values only. Today, human values play a major role in the establishment of peace and protection of the society. Human values are of universal nature. They are shared by all the human beings irrespective of their caste, creed, religion, nationality, culture and personal history. Some of the main human values are as follows:

Civility, respect and consideration
Honesty, fairness, loyalty and sharing
Openness, listening, welcoming, acceptance, recognition and appreciation Brotherhood, friendship, empathy, compassion and love.

6. Importance of human values in business organisation

Human values are very important for all of us especially during the human interactions at the business places. These are the foundations for any viable life within the society with peaceful coexistence. Management is the process of optimum utilisation of human and non-human resources with the intent to accomplish the objectives of the organisation along with the value addition to the world. Thus, the process of management involves the following three things:

Optimum utilisation of resources which leads to the efficiency

Realisation of organisational goals which leads to the effectiveness Value addition to the world which suggests social responsibility

Therefore, the human values and ethical behaviour are the essential elements of a healthy business environment. Abundant access to information and greater business opportunities than ever before makes the human values and ethics an essential requirement in the modern business world. For nay organisation to grow, due preference should be given to the highest priority values contributes to the shared meaning in the organisation and it binds the people together as a community and provides the people with the common language. It tells people how to behave for achieving the organisation’s vision and contribute to the organisation’s vitality and performance.

The main benefits of the values for any organisation are as follows:

Contribute to the organisation’s vitality and performance
Tell people how to behave to achieve the organisation’s vision.
Provides people with a common language Binds people together as a community
Contribute to the shared meaning in the organisation
Enhance the communication and efficiency of the team work
Strong awareness of value culture with good understanding of the business goals Innovation to support organisation competitiveness
Improves the service to partners’ needs
Provide base to management for better decision making

7. Scope of Corporate Governance

Corporate governance specifies the distribution of right and responsibilities among different participants in the corporation such as board, managers, shareholders and other stakeholders and spells out the rules and procedure for making decisions on corporate affairs. The scope of corporate governance is as follows:

Corporate governance can be regarded as being about leadership for efficiency, for probity, and for responsibility. Leadership which is both transparent and accountable.

Corporate governance is concerned with holding the balance between economics and social goals and between individual and communal goals. The aim is to align as nearly as possible the interests of individuals, corporations and society.

Corporate governance means a system through which the corporate entities are governed controlled and directed.

Corporate governance is concerned with the ethics, values and morals of the company and its directors.

The philosophy of corporate social responsibility is also an important aspect of corporate governance.

It is a system of structuring, operating, and controlling of a company with the view of achieving the long term objective to satisfy shareholders and stakeholders which includes the employees, auditors, creditors, customers and suppliers.

8. Issues of Corporate Governance

There are several important issues in corporate governance and they play an important role in the issues which are interrelated, interdependent with each other. Some of these issues are as follows:

Distinguishing the role of board and management: Shareholders elect the directors as their representatives. Board delegates the responsibility for managing the business to chief executive officer who in turn delegates the responsibility to other senior executives. Therefore, the board occupies the key position between the shareholders and a management of the company.

Composition of board and related issues: The composition of board is a major issue in corporate governance as the board acts as link between the shareholders and management and its decision affect the performance of the company. The SEBI appointed the Kumar Mangalam Birla committee’s report defined composition of the board as the board of directors of companies shall have an optimum combination of the executive and non-executive directors with not less than 50 percent of the board of directors to be non-executive directors.

Separation of role of CEO and chairperson: A major theme of on-going discussion in corporate governance literature around the world is concerned with the role of CEO and chairperson. The role of chairperson is to lead the board whereas the role of CEO is to lead the senior management team in managing the company.

Board should have committees: Many committees and authorities on corporate governance have recommended that in one voice the appointment of specials committees such as nomination, remuneration, and audit committees. These committees would lessen the burden of the board and shall enhance their effectiveness.

Board independence: A key feature of a good board is its collective independence, especially in the context of its overarching responsibility of oversight and monitoring of executive management’s performance. This requires an unbiased and objective board.

Directors and executives remuneration: This is one of the most vexed issues in corporate governance that come to the centre stage during the massive corporate scams and failure. The companies’ act 2013 has suggested that the formation of the remuneration committee that shall recommend to the board a policy relating to the remuneration of the directors, key managerial personnel and other employees.

Disclosure and audit: The OECD lays down the number of provisions for the disclosure and communication of the facts about the company to the shareholders.

Dialogue with institutional investors: The Cadbury Committee recommends that the institutional investors should maintain the regular and systematic contact with companies apart from their participation in general meeting of the shareholders.

Value based corporate culture: For any organization to run in an effective way, it needs to have certain ethics and values. Value based corporate cultures is a good practice for corporate culture.

Holistic view: This holistic view is more or less godly and spiritual attitude which helps in running the organizations. It is not easier to adopt it. It needs special efforts and once adopted it leads to developing qualities of nobility, tolerance and empathy.

Compliance with law: Those companies which need progress have ethical values and need to run long run business they abide comply with laws of SEBI, Foreign Exchange Regulations Act, Competition Act 2002, and Cyber laws.

Transparency and accountability: Transparency and accountability are important aspect for good governance. It is needed in order to that the government has faith in corporate bodies and it has reduced the corporate tax to 30 percent as against 97 percent in 1970s.

Necessity of judicial reforms: This is necessity of good economy to have good corporate governance.

Good corporate governance ensures that the companies grow globally: In today’s age of competition and globalization, our several Indian corporate bodies are becoming global giants which have become possible due to good corporate governance.

9. Steps for making Corporate Governance Effective

The various steps that can make the existing corporate governance practice an effective one are as follows:

Commitment of board: The board of directors of a company should be fully committed towards the principle of integrity and it should provide clear transparency in the business operations. So many directors should be included in the board that has high level of sense of value, honesty, skills, experience and education.

Legal and administrative framework: The legal and administrative framework the created by the governance should be improves and changes should be brought which ensure that the system should encourage effective corporate governance, compliance of corporate governance practices should be made compulsory and strict action should be taken against the habitual defaulters.

Transparency in decision making: There should be clear transparency in the decision making by the management and its executive, this will help in the building of the good and trustworthy relations between management and the stakeholders of the company and ensures that effective corporate governance practices are followed.

Proper implementation of codes: The various codes or guidelines are given by committees which are such as Kumar Mangalam Birla Corporate Governance committee, Narayan Murthy Committee, etc., should be implemented in the proper explicit codes should be regarded and followed for effective corporate governance.

Improving the system: The system under which an organization prevails should be made in such a way that it encourages good corporate governance. The Indian system needs some mounting changes to ensure the compliance of Corporate Governances by the Indian corporate sector.

Abolishing sick units act: Abolishment of sick industrialists companies act so that the selfish industrialists cannot take advantage of this act and their corrupt practices can be stopped.

Reviewing banking system: Reviewing the entire banking system and the banking secrecy act so that the malpractices can be stopped which are taking place under the current banking system. Such norms should be made which encourage good corporate governance instead of corrupt practices.

Making law effective: Laws like benami transactions provision act should be implemented in more effective manner so that the businessman and the industrialists cannot use their black money in the business and they are compelled to follow the corporate governance.

Strict compliance: Strict and compulsory compliance of the code of conduct and ethical codes such as Cadbury code of corporate governance. Strict rules and laws should be made to ensure that these codes are followed by the companies to improve the level of corporate governance in Indian companies.

Increasing role of independent directors: Increasing role of independent directors in the management of the organization. Proper reviewing and implementing the recommendations given by various committees to improve corporate governance practices in India.

Highlighting the governance role: Highlighting the importance of good corporate governance in Indian corporate sector. The media should also play a vital role in creating awareness in the public service agencies.

10. Corporate Social Responsibility

“Corporate social responsibility is an organisation’s obligation to benefit society in ways that transcend the primary business objective of maximising profit”.

“Corporate social responsibility refers to the obligation of an organisation to seek actions that protect and improve the welfare of society along with its own interests.”

The nature of Corporate Social Responsibility can be explained as follows:

CSR focus of business firms: Though both business and non-business organisations should be answerable towards society but the focus of the business firms should be more on to look after the interests of other stakeholders, this includes the employees, consumers, creditors, government, society, environment, etc.

CSR deals with moral and other issues: CSR deals with moral issues. The company have their specified policies and programmes to look after the interests of their employees and other stakeholders.

CSR commensurate with profit maximisation: CSR activity commensurate with profit maximisation. The social goals can be discharged by only those organisations which are economically sound. The profit theory states that if other stakeholders are satisfied, then that will automatically be helping the business firms to enhance their profitability and resultantly helpful to contribute more to the CSR activities. So with profit maximisation it becomes mandatory to the businesses to ensure that a specified portion of its profit must be spent on the CSR activities.

CSR is pervasive activity: It is a pervasive activity. Corporate Social Responsibility is not just an obligation of higher level managers rather managers at all levels are involved in discharging the Corporate Social Responsibilities. It is the joint responsibility of all the levels of management to ensure that the CSR obligation is been discharged properly.

CSR is a Continuing activity: Corporate Social Responsibility is not only to focus on to care the interests of society and other stakeholders once or twice rather it is continuing activity. As per Companies Act 2013, the corporate sector has to take this activity on continuous basis under certain conditions. Therefore, sustained efforts are required to make CSR activity successful.

Corporate Social Responsibility is a compulsory obligation: Corporate Social Responsibility obligation is a compulsory one and the companies has to discharge it mandatorily as per Companies act 213. The activities that can be included in the Corporate Social Responsibility policies may be e focus on eradicating extreme hunger and poverty promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health and many more.

11. Approaches to Corporate Social Responsibility

There are four approaches to corporate social responsibility and these are as follows:

Social obstruction: Though few in number, firms that follow the approach to social responsibility they oppose the concept of corporate social responsibility and do not consider the cost of business decisions on social environment.

Social obligation: The socially obliged firms discharge their social responsibility to the extent that avoids Government interference. The business organisation does everything that is legally required of it.

Social response: The firms perform legal, ethical and social obligations only if they are asked to do so. Thus, it is discharging social responsibilities in response to demand should replaced to a organisational culture to do so. Rather it is mandatory as per new Companies Act 213.

Social contribution: Socially responsive firms which favour the concept of corporate social responsibility follow the social contribution approach where they look for opportunities to perform.

12. Applicability of Corporate Social Responsibility

Section 135(1) of the Companies Act 2013, dealing with the applicability criteria for Corporate Social Responsibility requirements, refers to net worth/ turnover/ net profit during any financial year. The financial year refers to completed to completed period and year in respect of which the financial statements of a company are made up. The supporters of this view refer to the following:

The definition of net profit in the Corporate Social Responsibility rules refer to net profit as per the financial statements

A provision to the rule 3(1) dealing with the CSR applicability to foreign companies

refers to net worth/ turnover/ net profit as per the balance sheet and profit and loss.

A company cannot determine with certainty whether a criterion is met till the completion of financial year.

Thus, the company uses its financial statements for the immediately preceding financial year to determine Corporate Social Responsibility applicability.

13. Summary

The concept of corporate governance emerged in the late 1980s when several companies collapsed in UK due to inadequacy of operating control. This led to the setting up of the Cadbury committee on corporate governance in 1991 in London Stock Exchange. The concern was not much on account of collapse of these companies but because these companies were perceived to be very stable companies in their financial statements. The report of the committee along with code of best practices was published in December 1992 which was to be complied with by all the listed companies. Corporate governance envisages the set of systems and checks which ensure that the company is properly managed to the benefit of shareholders, creditors, employees, customers, suppliers, government and the society. A corporate means a legal entity that exists independent of the persons who have formed it and vested with many of the rights given to the board of directors and management and governance means a system of control and direction. So corporate governance refers to the ways in which the corporations are controlled and directed. Corporations are fundamentally governed by the board of directors overseeing top management with the consensus of shareholders and stakeholders. The word ‘governance’ has been derived from ‘gubeernare’ which means ‘to rule to steer’. It is the process by which power and authority is exercised. However, when the concept of governance is applied with the corporations, it would be termed as the concept of the ‘corporate governance’. In corporate governance, governance is the act of framing plans, policies and strategies and monitoring the same to ensure their proper implementation and accepting the accountability for the affairs of the corporation. Values are the impressive objectives and goals in the human life which brings peace, progress and prosperity in human life. Values are the basic fundamental beliefs that an individual thinks to be true. Every individual has a set of values through which he looks at all things and also at the world at large. It can be said that most of the people will never deviate from their values. The values can be said to be the guiding principles in one’s life. Values can be defined as a bridge by which an individual makes a decision regarding good and bad, right and wrong, and most important and less important. Human values are very important for all of us especially during the human interactions at the business places. These are the foundations for any viable life within the society with peaceful coexistence. Management is the process of optimum utilisation of human and non-human resources with the intent to accomplish the objectives of the organisation along with the value addition to the world. Therefore, the human values and ethical behaviour are the essential elements of a healthy business environment. Abundant access to information and greater business opportunities than ever before makes the human values and ethics an essential requirement in the modern business world. For nay organisation to grow, due preference should be given to the highest priority values contributes to the shared meaning in the organisation and it binds the people together as a community and provides the people with the common language. It tells people how to behave for achieving the organisation’s vision and contribute to the organisation’s vitality and performance. Corporate governance specifies the distribution of right and responsibilities among different participants in the corporation such as board, managers, shareholders and other stakeholders and spells out the rules and procedure for making decisions on corporate affairs.

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Suggested readings and references

Pramod Sharma, “Business Ethics and Corporate Values: An Indian Perspective”,Ravintanaya Publications, Shimla
S.K. Bhatia, “Business Ethics and Corporate Governance” Deep & Deep Publications,New Delhi
A.C. Fernando, “Business Ethics and Corporate Governance” Pearson Publications
SB Gogate, “Human Values & Professional Ethics”, Vikas Publishing House, NewDelhi.
Harris & Hartman, “Organizational Behavior” Jaico Publication House, 2002