[Opinion] Corporate Governance and Corporate Social Responsibility in Indian Corporate Sectors | A Review

Eshti Kapoor – [2024] 162 taxmann.com 854 (Article)

1. Introduction

1.1 Meaning of Corporate Governance

In the 1990s, the SEBI established a committee with Kumar Mangalam Birla as its chairman, and it was this group that first brought the idea of CG to India. The committee established the regulations requiring Corporate Governance for businesses to be listed on the stock exchange. It guarantees that investors receive a fair return on their investments and promotes the openness of the organization’s transactions. In a firm, there is a BOD made up of managers, executives, and shareholders who are the company’s owners.

As such, CG defines who does what, who gets what, and how much authority each party has. It’s the method by which the BOD becomes answerable and responsible to the company’s various constituencies, including its shareholders, employees, investors, consumers, and the general public. It suggests a set of norms and expectations for conduct that the BOD must respect to safeguard the interests of all those to whom they are responsible and answerable. These are the ethical norms and practises that the company employs while dealing with its many constituencies.

Corporation owners only have ownership rights; the Board of Directors has administrative authority. Owners do not oversee or run the business. They manage the company while considering the interests of shareholders and other stakeholders. Corporate governance ties the social and economic goals together. It involves promoting conformity to both the letter and the spirit of ethical conduct.

For those who run corporations, CG is a handy reference to the various statutes and regulations that govern their work. They agree to be held accountable to stockholders. There can be no long-term success for a corporation in the business sector without proper corporate governance. Companies of all sizes are putting a premium on CG research and development right now. In some companies, the rules, laws, and procedures pertaining to corporate governance are laid out in a distinct budget, making them transparent to all involved parties. In this era of globalisation, Indian businesses are beginning to understand the importance of instituting solid corporate governance practises in order to develop a sustainable competitive advantage. In spite of this, India continually achieves high marks for its corporate governance laws. Unfortunately, we haven’t arrived yet and still have a way to go.

“Corporate Governance” refers to the structure that serves as the basis for managerial and leadership decisions in commercial enterprises. BOD is accountable for the overall corporate governance of their respective organisations. Directors and auditors, as well as a competent governance framework, are shareholder responsibilities in corporate governance.

In the current climate of globalisation and liberalisation, the corporate sector at the national and international level has no alternative but to aggressively pursue “Excellence in Corporate Governance” to the utmost extent possible.

1.2 Principles of Corporate Governance

Corporate Governance is conducted in accordance with the company’s Corporate Governance Code, and its guiding principles are as follows:

• Transparency: The core of CG is transparency. In order to enhance openness, a corporation is required to publish pertinent information about itself in newspapers or its quarterly, semi-annual, or annual reports. Transparency is defined as the accurate, prompt, and concise disclosure of material facts pertaining to a company’s financial situation, organisational structure, management, operations, and governance.
• Accountability: The use of the company’s resources and cash, as well as the results that followed, fall under the purview of the BOD and key managerial personnel, who are therefore held liable by stakeholders. Every transaction must be made public, and every choice must be in the organization’s and its stakeholders’ best interests.
• Fairness: The corporation must preserve the shareholders’ interests, and shareholders have the right to obtain an explanation and have their grievances resolved if their interests are threatened.
• Independence: The senior management must have complete independence when making choices for the entire company in order to benefit from good corporate governance.

1.3 Meaning of CSR

The term “CSR” was first coined by a small group of wealthy businessmen, but it has since gained prominence in the corporate sector as a result of rising demands for businesses to be more than just profit-making machines but also to play a positive role in society by addressing its social problems. Even businesses have realised that in order to succeed, they must be able to affect social change, which is the main idea of the CSR model, in addition to being accountable for their economic operations. CSR is a paradigm that allows businesses to self-regulate by being conscious of their effects on the environment, the social and economic facets of society, and of their responsibility to their stakeholders and the general public.

CSR encourages businesses to incorporate social and environmental considerations into their operations and connections with stakeholders. In general, “corporate social responsibility” refers to an organization’s efforts to combine meeting stakeholder and shareholder expectations with its economic, environmental, and social aims (sometimes known as the “Triple-Bottom-Line Approach”). In this context, it must be distinguished from philanthropy, sponsorships, and charity donations. CSR is a strategic management idea for businesses.

The phrase “CSR” is widely used. One of the most important difficulties that businesses face in the contemporary, globalised world is the integration of CSR into business. Organizations must provide far more to stakeholders than just the pursuit of growth and profitability. CSR has come a long way in India and other developing nations. Through responsive actions and sustainable initiatives, corporations have amply shown that they can have a large positive impact on society and raise the level of living. In India, CSR is not a brand-new concept. It happened during the ‘Vedic period,’ a time when India lacked a written record of its past. At that time, Kings had a duty to the community, and businesspeople showed their own CSR by erecting temples, schools, inns, and wells. The word “CSR” refers to self-regulation practises that companies employ to improve particular business areas. These behaviours may be related to labour, the environment, or human rights issues.

Corporate social responsibility refers to businesses having commitments and undertaking actions above and beyond their statutory duties and commercial objectives. These broader obligations include a variety of domains, but they are typically summed up as social and environmental, where social here refers to society more generally than just social policy concerns.

The following are the broad categories that can be used to classify CSR initiatives:

• Environment Responsibility: Businesses, regardless of size, have a big carbon impact. The company’s efforts to limit pollution, greenhouse gas emissions, unsustainable use of natural resources, etc., are a substantial contribution to environmental sustainability because the environment is always society’s top priority.
• Charity Responsibilities: Companies achieve this by providing charities and other non-profit organisations that support a social cause with funds, goods or services.
• Economic Responsibility: Businesses uphold their economic commitments by creating sustainable goods or switching out hazardous products for environmentally beneficial ones.
• Volunteering: A new trend that increases people’s trust in the organisation is volunteering. As the most active form of CSR, participation in local causes, community activities, etc. has even increased returns to the nation.

1.4 Relationship between CG and CSR

• Enterprises are rapidly incorporating CSR into their CG processes.
• CG and CSR emphasise a company’s responsiveness to its stakeholders and the environment in which it operates.
• CG and CSR improve an organization’s reputation and affect how well it performs.

1.5 Contradiction between CG and CSR

• CG is associated with profit maximisation and capital provider protection.
• CSR appears to be in divergence to profit maximisation, as it offers a set of actions that benefit external stakeholders but may not be favourable for shareholders.
• Managers employed to maximise the firm’s value may increase the worth of external stakeholders at the price of shareholder wealth maximisation if they are socially responsible.

2. Literature Review

• A researcher investigated the regulatory aspects of corporate governance and discovered that the laws’ loopholes needed to be closed. Businesses shouldn’t be allowed to use the restrictions of clause 49 of the listing agreement in order to get away with it. To foster adherence to the principles of good corporate governance, the audit committee’s role has been broadened to include oversight of risk management control systems.
• Another researcher used several statistical tests to assess the effect of corporate governance on a corporation’s financial performance in an Indian setting and concluded that a company’s governance rating has a significantly beneficial impact on its financial success.
• According to another said researcher, India has seen several enactments that have greatly strengthened governance standards and raised accountability through disclosures. Yet, regulatory measures must be established based on Indian norms and the economic environment to achieve the desired results in India.

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