Responsible companies - board's role

Many believe that most Indian companies are reluctant to adopt any voluntary guideline and therefore, such guidelines remain on paper. Many companies even fail to comply with mandatory requirements in true spirit, for example clause 49 of the Listing Agreement. Although this is true, it is not a practical proposition to make it mandatory for companies to comply with Guidelines responsibilities of Business issued by the government in July 2011. The range of the issues covered in the guidelines is so wide that it is difficult to monitor implementation of the same by the government. Moreover, the government has no wherewithal to monitor the implementation. Even, the ‘comply or explain’ model, which is adopted by the UK Corporate Governance Code, may not work effectively, as different perspective might be developed on the principles stipulated in the guidelines.

 

We may examine one of the principles to understand the level of difficulty in implementation of the guidelines. One of the principles is that ‘businesses should promote the well being of all employees’. The principle extends to all categories of employees engaged in activities contributing to the business, within or outside of its boundaries and covers work performed by individuals, including sub-contracted and home based work. Application of this principle in conjunction with the overriding principle, which is, ‘businesses should conduct and govern themselves with ethics, transparency and accountability’, is not straightforward. Companies operating in the auto industry appoint 50 percent of the total work force as contract workers, who to do the same jobs, which are carried out by permanent workers, at a much lower pay and perquisites than what are offered to permanent workers. Is this practice unethical and violates the principles of ‘well being of all employe’? Strictly speaking, the practice is unethical because it violates the principle of ‘equal pay for equal work’. However the argument that it is not unethical because contract workers are paid equal or more than the minimum wage fixed by the appropriate authority for the nature of work being carried out by them cannot be negated fully.

Engagement of contract workers reduces labour cost and provides flexibility in adjusting available labour hours in a volatile market, as it is easy to lay off contract workers. Therefore, if a company operating in the auto industry employs only permanent workers, it might lose its competitive advantage. Consequently, it will have temptation to bypass the principle. If, all the companies in the auto industry decide to operate with permanent workers only, the cost of production will go up. This might affect the overall demand for automobiles. Therefore, companies will not be able to pass on the whole of the increased cost to customers. This might bring down return on investment. From shareholder’s perspective, this is an undesirable outcome of implementing the guidelines. Different perspectives make monitoring of implementation by an outside agency difficult.

The board of directors should take the responsibility for the implementation of the guidelines and monitoring. It should take a balanced view taking into account the short-term impact of the implementation of the guidelines.

Issuance of the guidelines by the government is just the first step in making companies sensitive to important responsibilities beyond creating shareholder value. Implementation of the principles in their true spirit will take time. Companies will be motivated to implement the guidelines only if the capital markets and product markets pay a premium for securities and products of responsible companies. Enormous efforts and perseverance are required to educate investors and consumers about the importance of implementation of the guidelines.

Initiatives should come from respected companies, which boast for its economic performance and its good corporate governance practices. They should endeavour to implement the practices in the whole value chain. For example, a company, which decides to implement the guidelines, should work with only those vendors who have taken initiatives to implement the guidelines. The company should provide managerial support to the vendors in implementing the guidelines and should be ready to pay a premium over the market price of inputs. The managerial support should be similar to the technical support that companies often provide to vendors to ensure quality of inputs.

Government should encourage companies and should have structured plan to educate investors and customers. We should not expect that all companies would behave responsibly in a short period. Change is a painful process.

Email: asish.bhattacharyya@gmail.com

Affiliation: The Director, International Management Institute - Kolkata