Global business ethics lesson 04

29 Corporate Social Responsibility LESSON 4 CORPORATE SOCIAL RESPONSIBILITY CONTENTS 4.0 Aims and Objectives 4.1 Introduction 4.2 Concept of Corporate Social Responsibility CSR 4.2.1

29 Corporate Social Responsibility

LESSON

4

CORPORATE SOCIAL RESPONSIBILITY

CONTENTS

4.0 Aims and Objectives

4.1 Introduction

4.2 Concept of Corporate Social Responsibility (CSR)

4.2.1 A Socially Responsible Organisation – Basic Understanding

4.2.2 Ethics Postulate Responsibility

4.2.3 Language of Business Responsibility

4.3 Social Responsibility of a Business Enterprise

4.4 Ethical Issues in Corporate Governance

4.5 Corporate Governance

4.5.1 Objectives

4.5.2 Context

4.5.3 Socio-economic Character of Business

4.5.4 Core Values

4.6 Business Purpose

4.7 Structural and Organisational Aspects

4.7.1 Nominee Directors

4.7.2 Need for Strong Boards

4.8 Factors Constituting Good Governance

4.9 Right Composition of Boards

4.10 Let us Sum up

4.11 Lessons End Activity

4.12 Keywords

4.13 Questions for Discussion

4.14 Suggested Readings

4.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to understand:

z Corporate Social Responsibility

z Concepts of Corporate Social Responsibility (CSR)

z A Socially Responsible Organisation – Basic Understanding

z Ethics postulate responsibility

z Corporate Governance

z The Context

z Socio-economic Character of Business

30

Global Business Ethics 4.1 INTRODUCTION

Ethics and social responsibility are important concerns in making decisions in all aspects of our life The special responsibility of a business is defined as a concern of business about both its profits seeking and its non profit seeking activities and their intended unintended impact on groups and individuals other than management or the owners of the corporation

4.2 CONCEPT OF CORPORATE SOCIAL RESPONSIBILITY (CSR)

The concept of CSR originated in the 1950’s in USA and the concept came into prominence in public debate during late 1960’s US had lots of pressing social problems like poverty pollution urban blight, race and unemployment Corporate social responsibility became a matter of at most importance for diverse group demanding change in the business

4.2.1 A Socially Responsible Organisation – Basic Understanding

The society is a nexus of individual perceptions In recent years, socially responsible businesses have become a pervasive buzzword lending its mystique to demands for sustainable business practices, calls for greater respect for the needs of staff, customers, local communities and the environment for fair pricing of imported goods from 'third world' countries, policies covering the recruitment of racial and ethnic minorities The paradigm now is one of global competition where business competes against the best in the world and therefore, customers have a choice

4.2.2 Ethics Postulate Responsibility

The Oxford dictionary's definition of 'responsible' is 'liable to be called to account, answerable morally, accountable for actions' and its definition of 'responsibility' is charge for which one is responsible' Thus, corporate social responsibility is either misleading because it suggests that there is an impersonal collective focus for the accountability of commercial behaviour or because it allows for decision making without involving the people Therefore, it is necessary and desirable to establish an agreeable terminology for our study

4.2.3 Language of Business Responsibility

Business

The term business is used to describe any type of industrial or commercial enterprise including both manufacturing and service activities, private or public companies, nationalized or government subsidized utilities, profit making and non-profit organisations and international and multinational firms

Society

Society is not an element in the system but it is the system itself We, therefore, define society as a total of all those individuals, irrespective of their membership in particular interest, who are bound together through their membership in a common political and economic unit, protected by its laws

Responsibility

Responsibility requires a focus and does not exist in vacuum One cannot be responsible if there is nobody to hold you accountable

31 Corporate Social Responsibility

Ethics and Morality

Ethics is the study of individual and collective moral awareness, judgement, character

and conduct Morality is customarily socio-legal practice and activities and the values

that are fostered or pursued by the conventional, socio-legal activities and other

activities

Individual

No social entity, particularly a business organisation, can exist purely as an

abstraction and that society derives only from the individuals who comprise it

Attitudes, patterns, customs, behavioral experiences distinguish an individual from the

rest of the group

Authority

Without authority, there is anarchy and without individual freedom of conscience,

there is tyranny Unlike power in the armed forces, where authority derives from the

State, power in business is vested in individuals through ownership or the financial

interest of the shareholders

An innovation fostering culture would prosper in the firms, which would sincerely

demonstrate belief in building human capital (investing in employees' skills), a strong

ethical culture and carry an ambiance, which would promote experimentation

Ethical Duality

A recurring topic in any discussion on social responsibility is the conflict between the

law and individual conscience, or, in the more specific context of business, between

company policy and the ethical values of the employee Everyone needs some

framework of values to guide the personal behaviour The dual source of ethical,

social and political standards is both natural and necessary

Check Your Progress 1

Define the following:

1 Responsibility

………

………

2 Business

………

………

4.3 SOCIAL RESPONSIBILITY OF A BUSINESS

ENTERPRISE

There are some questions which come to mind when we talk of social responsibility in

business enterprise in the context of corporate governance such as:

z What underlies behind the growth of concern for socially responsible business?

z What are the theoretical underpinnings of this new perspective on enterprise?

z How can the theory lead to measurable accountability?

z What is the status of social and ethical assessment?

z How are such accounting methods being applied in practice?

32

Global Business Ethics Corporate social responsibility is either misleading because it suggests that there is an

impersonal collective focus for the accountability of commercial behaviour or because

it allows for decision making without involving the people More and more enterprises today are becoming socially responsible for the following reasons:

z There is interpretation and analysis of the rights and privileges granted to business activities and the inter-relationships between these activities and the well-being of society

z There is a growing minority of concerned and sensitive manager who are honestly seeking to promote a ‘new ethics’ for business based on a sense of responsibility that spans a broad spectrum of social and environmental issues

z Social, ethical and environmental responsibilities are growing because of transparency in the behaviour Employees are emphasizing the need for harmony between their personal values and those of the firm Consumer interest groups are keeping a sharply focused watch on product quality, environmental hazards and discriminatory hiring policies

4.4 ETHICAL ISSUES IN CORPORATE GOVERNANCE

Ethical issues have been brought to the forefront in Australia as the result of growing public concern This concern is reflected in business management education at the advanced level in particular It is also exhibited in the reports of illegal, scandalous, or other questionable behaviour and practices across a wide spectrum of commercial and government activities Economic times in Australia are poor The vast number of personal, business, and corporate insolvencies in recent times has triggered public demand for an explanation It has become apparent that illegal and other questionable business practices have contributed significantly to Australia's present economic troubles, and people are asking how such behaviour can be prevented in the future Some believe that the problem can be solved by maintaining higher ethical standards Codes of professional conduct or ethics both interact with complement the law The law reflects the standards, expectations, and values of a society as a whole and is enforced through the properly constituted courts of that society Members of these groups believe that they maintain higher expectations and values than those of society

as a whole, if ethical codes are enforced at all, it is usually by each specific group Possible exclusion from a particular association is an incentive to follow these standards

Peregrine W F Whalley, of Northern Territory University, suggests, however, that it is naive to expect people to adhere to rules or principles that are not, and cannot be, clearly formulated He believes that the business community is too diverse a group to follow standards above and beyond the law itself The best way to ensure high ethical standards in business is to make legislators aware of and responsive to changing social values and conditions Common interest groups must become active as lobbyists

In Australia, certain large retail organisations are taking steps to develop international common interest groups while awaiting changes in legislation They have had limited success in establishing clear standards for conduct and effective procedures for securing compliance

4.5 CORPORATE GOVERNANCE

Corporate governance can be defined as a set of systems and processes which ensured that a company is managed in the best interests of all the stakeholders When one talks

of the stakeholders it does not mean any shareholders: a company will typically have five stakeholders, namely, the employees, the shareholders, the customers, the creditors and the community The set of systems that help in the task of corporate

33 Corporate Social Responsibility

governance includes certain structural and organisational aspects The processes that

help corporate governance should embrace how things are done within such structures

and organisational systems

4.5.1 Objectives

z To understand the context of corporate governance in present scenario

z To know the socio-economic character of modern business

z To learn the need of core values for any organisation

z To understand the structural and organisational aspects relating to corporate

governance

4.5.2 Context

Any discussion on corporate governance beliefs of an understanding of the context in

which businesses operate would be futile as the paradigm has shifted towards global

competition where businesses compete against the best in the world and customers

have choices The operational word to businesses is now innovation, which means the

capability of bringing out newer products, and providing superior service most often

at a lower price Innovation prospers in the firms, which exhibit the following

characteristics:

z Environmental sensitivity especially in relating and responding to change in the

technology dimension of industry structure

z Customer focus: relating to serving and delighting the customer with appropriate

products, often in a proactive manner

z Quick response time wherein bringing out new products rapidly, especially in

relation to competitors

z Employee's empowerment by acknowledging that front-line employees are often

the best judges of appropriate responses and thereby allowing them to take

decisions at the 'local' level

For firms to be competitive and innovative, flexibility in approach towards decision

making necessarily gains special importance An innovation-fostering culture would

prosper in the firms which would sincerely demonstrate belief in building human

capital (investing in employees' skills), a strong ethical culture, and carry an ambience

which would promote experimentation At the same time, to prevent organisational

drift, manipulative behaviour, and a misalignment in organisational employee goals,

firms need to be strong on core values

4.5.3 Socio-economic Character of Business

Since corporations are constituted legal bodies they assume concomitant social and

legal responsibilities Milton Friedman may insist that the only social responsibility of

business is to make profits However, a larger stakeholder view of the corporation has

to be necessarily adopted rather that just adopting to a financial shareholder

perspective Business enterprises (especially private ones) at their inception are

economic entities, but as they grow, the emphasis shifts towards a more social

character Socially responsible tasks such as pollution control, maintaining ecological

equilibrium, community development, etc later become integral part of organisational

commitments The integration between business policy, business ethics, social

responsibility and public policy has been shown in the figure below:

34

Global Business Ethics

Business Ethics Business Policy

Public

Social Responsibility

Figure 4.1: Public-Business-Policy Interface

The socio-economic and competitive character of a corporation entails that it has to make a fine choice of its competitive strategy within the ambit of legal, social and ethical boundaries Corporate actions should be justifiable in terms of its letter and spirit in which the society allows it to function Timely collection and deposit of taxes and duties, payment of minimum wages, adherence to laws such as MRTP, Labour Act, etc are examples of legal commitments Corporations cannot become profitable

by not adhering to the existing laws of the land If some of the laws are anachronistic (such as the Official Secrets Act, or certain clauses in the Exit Policy), effort should

be made to bring about a change in them, instead of breaking them

While corporations have to perforce function within the legal framework, it becomes imperative for them to identify and make explicit a code of ethical behaviour to honour its commitments to the customers, employees, and other societal stakeholders The grey area is what constitutes ethical dimensions of corporate behaviour and who

is to oversee this aspect of social responsibility of business

4.5.4 Core Values

The process of laying down the ethical character of a business can be facilitated with a clear articulation of corporate core purpose (the raison d'etre) and a concomitant set of core values Formulation and implementation of any strategy occurs under the context

of core values of the organisation's fey decision makers Values govern behavioural choices For achieving growth should a company diversify its business, expand its current capacities, or acquire other units? Should it go for opening up of schools and community hospitals for the poor and needy? Should it divest a product? Should the company pay bribes to win a lucrative tender? What should the stakeholders do when the chief executive becomes a tyrant and starts treating company employees as his personal servants? It is alleged that Henry Ford could introduce newer models because

of a childhood mental trauma Many chief executives find it extremely difficult to relinquish office, often using ingenious means to delay retirement In a country where 99.9 per cent of all business and 70 per cent of the hundred largest corporations are family-owned, should the progeny automatically become heirs to the corporate throne? What happens to other stakeholders when two or three feuding sons carve up businesses leading to inefficiency of scales and thereby losses In a capital-intensive industry such as tyres, where economies of scale in manufacturing and distribution are crucial, three sons of a business house divided three tyre manufacturing units amongst themselves leading to severe losses in what was once a profitable business The other side of the argument is that family-owned units have large pools of intrinsic strengths-and investors inherently assume a larger risk in such companies in the hope of making larger profits

4.6 BUSINESS PURPOSE

At this point, a discussion on the concept of 'organisational purpose' mentioned earlier becomes important It means that an organisation (just like individuals) must have a

35 Corporate Social Responsibility

holistic super ordinate substance to its existence defined by the core values that it

holds Therefore, ends and means are identified within which core values cannot be

dictated and are difficult to change A vegetarian cannot be made to change his habits,

or a philanthropist cannot be asked to quantify his time-value If Levi-Strauss insists

on its subcontractors not to use child labour, it is one of their core values The

organisational values have to be in consonance with country-specific legal values A

core value transcends mundane existence and provides the organisation with a sense

of well-being, pride and confidence Existence of such values in explicit form enables

the managers to take complex value decisions Thus Motorola's local executives in an

African country could take a decision of not paying a bribe of one million dollars and

thereby losing a lucrative contract worth several million dollars in profits, knowing of

the backing from the corporate head office

4.7 STRUCTURAL AND ORGANISATIONAL ASPECTS

The word 'systems' includes structural and organisational aspects that facilitate better

corporate governance It is well known that a company being an artificial and juristic

entity cannot function by itself The person of a company is manifested through the

board of directors In fact, the most important body in the corporate sector is its board

of directors It is often said that the cause of corporate governance is served depending

on how well the board of directors of a company is organized and structured The

Companies Act, 1956 does not exhaustively describe the powers and duties of the

board It can be said that some of the shareholders' agreements talk more extensively

about the power and duties of company boards than the Companies Act, 1956

While dealing with the issues connected with the board of directors in the context of

corporate governance, the following aspects have to be borne in mind:

a) optimum size of the board;

b) optimum composition of the board in terms of both whole-time and part-time

directors;

c) whether the Chairman of the board should be different from the CEO of the

company;

d) the role of nominee directors;

e) personal competencies and qualifications of individual directors;

f) the frequency with which the composition of the board should be changed; and

g) the different committees of the board and the optimum size of the board

Various studies have been undertaken both in the US and the UK on what should be

the optimum size of a board One conclusion of these studies is that a board should

ideally have about twelve directors This, of course, does not take into account the

peculiarities that the company may have, warranting a variation from this number

The Companies Act, 1956, one may note, also talks of a maximum number of twelve

directors Regarding the optimum composition of the board; studies have revealed that

out of the twelve directors only three or four should be whole-time directors and the

remaining part-time directors The ratios of whole-time directors to part-time directors

should be heavily in favor of part-time directors so as to ensure maximum

independence of company boards Whether the Chairman should be different from the

CEO of the company: The Cadbury Committee which went into the financial aspects

of corporate governance in the U.K had come out with a definitive recommendation

that the Chairman of the board should be a person different from the CEO of the

company It was felt that this would ensure the right accountability of the CEO to the

board and that the independence of the board to a large extent would be whittled down

if the chairman and the CEO were one and the same person It is of the considered

view that in the Indian context it will be advisable to have as Chairman, a person of

36

Global Business Ethics great stature and eminence, who is not in the executive management of the company

This will ensure greater independence and credibility in board proceedings

4.7.1 Nominee Directors

Role of nominee directors: Although it is to a large extent that professionalisation of company boards in India got accelerated with the induction of nominee directors by Financial Institutions (FIs), in many cases, these nominees have remained content with safeguarding the interests of the FIs vis-a-vis the company

There is a general impression that whenever a conflict arises between the interests of the term lenders (FIs) and that of the company, the nominees invariably safeguard only the interests of the term lenders This impression is wholly erroneous As a matter of fact what is good for the company should be good for the FIs too If the nominee directors ensure that things happen in the best interests of the company, rarely will the interests of the financial institutions and term lenders be jeopardized After all, in the ultimate analysis, only if the company does well, the investments of the public financial institutions will be protected Hence, there is no question of a conflict of interest between the term lenders and the company

Personal competencies and qualities of individual directors: To be an effective member on the board of a large company, besides stature and eminence, one also requires certain other competencies A company's director, apart from having an independent mind, should have a close insight into how companies operate It is also important that the company's director should know the rudiments of the company 4iw Besides a general appreciation of commercial matters, a company's directors should

be able to think in a' top of the line' manner He should be well informed about the macroeconomic trends as well as the specific trends in the business in which the company is engaged Personal attributes like ability to listen, open-mindedness and sound articulation will go a long way in making a company's director effective

4.7.2 Need for Strong Boards

The importance of strong boards in laying down the driving values of the corporation cannot be overemphasized Directional leadership and control has to be exercised by a representative board of directors constituted of financial institution nominees, business executives and professional non-executive members These must be people

of character and proven integrity and experience Organisations are also cradles of power games and political behaviour and only a strong board would be able to separate organisational interest from personal empire building Common situational conflicts are chief executive succession, intercorporate-funds transfer, senior executive recruitment, financial or other improprieties, continued poor managerial, market performance, etc A body must exist which could think strategically and if necessary bridle the executive Boards in USA regularly set strongly to check executive's performance Some of the prominent companies, which have had new CEOs in the last few years at the instance of governing board, are General Motors, IBM, Chrysler, and Apple Computers In case of the last mentioned company it was the founder- CEO that had to resign for non-performance

4.8 FACTORS CONSTITUTING GOOD GOVERNANCE

z Independent directors have a major role play in promoting good corporate governance, and if certain practical steps are taken to ensure the right composition

of the Board, adherence to standards and best practices, and accurate disclosures and reviews of audit plans, then there is a greater chance of good governance, said speakers at a recent seminar organized by the Bombay Chamber of Commerce and Industry (BCCI)

37 Corporate Social Responsibility

z Global governance standards are driven by a system of accountability, checks and

balances, and the role of the management, the board and shareholders in achieving

greater shareholder value, according to Mr Philip Pillai, Joint Managing Director,

Shook Lin & Bok, a Singapore law firm

z Adherence to governance standards is important to regulators and exchanges

because of competition for foreign portfolio investment,' Mr Pillai said, 'And

there is also evidence to suggest that investor behaviour is influenced by superior

governance, resulting in better prices.' Speaking on the role of the director in

following international best practices, he said that the UK model stresses the role

of directors, the directors' remuneration, relations with shareholders,

accountability and audit, and institutional investors

z Accordingly, there must be an effective board to lead and control the company, a

separation of the Chairman and CEO posts, and a system of formal and

transparent appointment/re-election, as well as a supply of timely and appropriate

information Given that there has been much shareholder anxiety over CEO pay,

the director's remuneration must also be 'sufficient and attractive - and not

excessive', and linked to corporate and individual performance, Mr Pillai said

z 'The practical steps to good governance are really appropriate board composition -

it must be made up of industry, financial, legal and other competencies,' Mrrillai

said There must also be documentation of existing practices against governance

principles, standards and best practices; compliance checklists and an accurate

disclosure of existing governance, besides an annual review of market best

practices

z Still, corporate governance is usually a delicate balance between statutory

compliance and the concept of fiduciary duties, said Mr Rohan Shah, Managing

Partner, Economic Laws Practice 'Who is the director the guardian angel of the

company, the shareholders or the creditors?' he said the perception is that directors

will conveniently favour the director that enhances their position, but a director

has the onus to act in the best interest of the shareholders So we must create an

environment where independent directors feel empowered, and not paranoid, to do

what is best.'

z Finally, there must also be a mindset for obeying the law, because if legislation

alone were enough, then India would be among the most reformed societies, said

Mr Subodh Bhargawa, Chairman, Audit Committee, VSNL 'There is a

machinery to enforce the law, but the fundamentals are not being looked at closely

- we're just introducing laws on top of laws,' he said

Check Your Progress 2

Fill in the blanks:

1 _ became a matter of at most importance for diverse group

demanding change in the business

2 _ is not an element in the system but it is the system itself

3 _ can be defined as a set of systems and processes which

ensured that a company is managed in the best interests of all the

stakeholders

4.9 RIGHT COMPOSITION OF BOARDS

a) A person drawn from the field of economics;

b) A person drawn from academics, preferably from a business administration or

management school;

38

Global Business Ethics c) Two specialists drawn from the industry to which the company belongs;

d) A corporate lawyer;

e) A former bureaucrat;

f) Two persons drawn from the financial services sector; and g) An eminent person as the Chairman; and of the remaining three, one should be the CEO and the other two functional directors

Like it is important to hone competencies and skills in an ever-changing environment for different functionaries in a company; it is also important that the directors undergo training The Institute of Directors, London, has come up with certain models for training of the company directors It will be useful to learn from their experience The other important aspect, which should be borne in mind, is the retirement age of company directors The earlier law in India had stipulated that the directors should retire at the age of 65 With the general life expectancy going up, it has been found that a person will be active and agile even at the age of 70 Hence, it will be advisable for company boards to lay down a rule that directors should retire at the age of 70 or

at the latest at 75 Although the Companies Act, 1956, clearly lays down that one third

of the directors should retire every year, the spirit behind this law has not been understood at all Year after year, company directors retire and are re-elected While here is a need for continuity in the board, it is also important that the members are changed at least every five years This is to ensure that fresh blood and new thinking

is infused into company boards, which in a way also ensures their independence

Different Committees of Directors

While the main board of a company should only deal with major policy decisions and the strategic directions for the company, it is important to have different committees

of the board to have focused attention on various aspects of the company's working The need for different committees would depend on the size and complexity of the operations of the company Typically a large company should have committee of directors; management committee of directors; shares and securities transfer committee of directors; executive nomination and compensation committee of directors; investment committee of directors and audit committee

The Cadbury committee dealing with the financial aspects of corporate governance had recognized the importance of the audit function as an effective tool In the Indian context, the public financial institutions also insist on the constitution of an audit committee of directors of a certain size A part-time director is usually the chairman of the audit committee and normally the other members also are part- time directors The CEO is usually a permanent invitee to its meetings and the finance director is called upon to assist this committee for detection and correction of systems- failure and lack

of adequate internal controls Also, statutory financial statements are vetted by the audit committee before being submitted for the board's approval

Typically, the CEO heads the management committee of directors with other functional directors as members For ensuring independence of the management decisions, the part-time directors are also inducted in equal number The investment committee should have nominee directors of financial institutions and banks as its member and the chairman of the committee should be a part-time director The committee deals only with investments of the company, other than for projects and acquisition of other companies This set of directorial structure should facilitate better corporate governance of companies