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Will the govt's business responsibility norms improve corporate governance?

Business Standard 

The guidelines can ensure sustainable corporate commitment to society but insisting on compulsory compliance is tricky

Rijit SenguptaRijit Sengupta
Director, Consumer Unity & Trust Society (CUTS) International

“The guidelines urge firms to integrate responsible business conduct within its core business model, rather than treating the issue peripherally, as a mere PR function”

Notwithstanding the Satyam scandal, the number of cases of corporate misdemeanours hitting the headlines in recent times has seen an exponential increase. There are manifold reasons for this. Greed coupled with unethical behaviour is one, for which there is no solution other than strong disincentives. Political demands is the other, particularly as we see currently in our growing economy, which leads to higher demands for rents and crony capitalism. Vigorous competition is another major driver for such behaviour. Corporations do everything but follow good business behaviour. However, there are still many business houses in India that are widely respected for their value systems, standards and products. This testifies that conducting business in a responsible manner is possible. Alas, there are many bad fish in the pond.

Issues regarding healthy competition, business ethics, transparency and accountability are beginning to find more space in the public policy discourse in India. Growing public pressure by a burgeoning middle class, improved access to information, splendid court actions, sensational audit exposes and enforcement is leading to greater accountability of market players and the administration. It is quite unlikely that cases involving delinquent firms would escape attention anymore.

The government has also provided a significant fillip to the issue by developing an umbrella instrument: the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, popularly referred to as the NVGs. The NVGs provide a framework comprising nine principles for defining responsible corporate conduct. According to the NVGs, the level of responsibility of a firm is gauged by assessing effectiveness of its business model (and practice) in minimising adverse impacts on related social, environmental and economic aspects. It lays considerable emphasis on compliance with applicable rules and regulations. It urges firms to integrate responsible business conduct within its core business model, rather than treating the issue peripherally, as a mere public relations function.

The unholy alliances of health care providers and pharma companies were recently highlighted by the popular TV programme Satyameva Jayate. It got brickbats from doctors and bouquets from consumers, although pharma companies kept mum. At CUTS, we have been working in this area for long and are currently testing the NVGs in these two critical sectors in India – pharmaceutical and private health care – through empirical research in four states. Our findings would contribute towards greater uptake of the NVGs.

NVGs emphasise business responsibilities and are more than corporate social responsibility (CSR), seeking a long-term and sustainable commitment to society. The issue of CSR has received unprecedented attention since late 2010. The Parliamentary Standing Committee on Finance recommended that private sector companies should mandatorily allocate two per cent of their average net profits for previous three years towards CSR programmes. However, there was an uproar and the recommendation is unlikely to fly. Notably, public sector companies are already mandated to allocate two per cent of their net profit to CSR activities.

The three terms: philanthropy, corporate social responsibility and business responsibility have been used inter-changeably in recent discussions and related analyses on the subject. These are three different delivery systems used by business to meet its societal expectations. At one end, there is philanthropy that stems from the idea of altruistic “giving” to society. Business responsibility is at the other end and involves alignments of a firm’s methods of doing business by committing to abide by all applicable rules and regulations at the workplace and marketplace, and for the community and the environment. It comes with a commitment from the top management. Thus, NVGs need to be incorporated in business strategies of firms, and the government should ensure that the concepts are well understood and applied. Only then can business responsibility norms lead to better corporate governance, and corporate citizenship in our country.

Chandrajit BanerjeeChandrajit Banerjee
Director General, Confederation of India Industry (CII)

“Corporate responsibility and governance need to be principle-based, rather than based on rules and frameworks that become a tick-box exercise and may invite evasion”

The ministry of corporate affairs had released the National Voluntary Guidelines on Social, Economic and Environmental Responsibilities of Business in July last year. Recently, the ministry proposed the Disclosure Framework for the Annual Business Responsibility Report to be provided under the e-governance portal (MCA-21) for information to all stakeholders. The importance of reporting to stakeholders in a transparent and accountable way cannot be undermined.

An effective corporate governance system prevents any illegal action against stakeholders. On the other hand, an effective socially-responsible corporate code would prevent actions that may be within the law but inappropriate because of their consequences for some or all of the stakeholders. Although the relation between the two facets is complementary, governance has a symmetric effect on the discharge of a company’s social responsibility. It is well acknowledged that good governance leads to value creation; at the micro level, good governance can also prevent managers from making poor decisions. Adopting good governance ensures that the company achieves profitability and environmental, social and economic value for society.

The Companies Bill, 2011, proposes to follow spend on CSR activities on a “comply-or-explain” principle, which makes compliance with the guidelines effectively compulsory. These norms seek to move away from the realm of voluntary initiatives, disregarding individualised action plans developed by corporations from lessons they have learned over the years. While corporations are cognisant that resource-efficiency and community investment have a positive impact on business operations, they are still struggling to embed sustainability principles into each business functions.

CII was an active member of the Guidelines Drafting Committee and provided regular feedback. As an institution, CII found the guidelines comprehensive, but they suffer the risk of being utopian at various places and detached from realism in some of the nine principles.

CII also finds the guidelines to venture into prescription, which in our is more than guidance. Prescribing an implementation framework within an organisation, though no different from a typical business process, is welcome but may not be required as part of the guidelines. Further, the medium, small and micro enterprises guidance needs comprehensive review. There is a need to understand the realities of these enterprises in order to suggest any sort of guidance. Moreover, it is misleading to put these industries under one category.

The reporting framework may be well-intended and good to put out in the public domain but it covers topics where setting the measurement parameters may not be plausible. Moreover, the application of one reporting framework for all entities will be difficult since it will differ for each one of those. In addition to consensus, for corporations to observe the norms would require considerable managerial expertise. Since many enterprises now straddle numerous legal, regulatory, cultural and business environments, the challenge of compliance in a prescribed format may be complex.

I feel that since business exposes entities to multiple regulatory regimes, great caution is required while imbibing international practices into the domestic framework since each nation is at a different economic stage. Also, over-regulation is undesirable and can impede growth instead of boosting it. An inclusive approach to governance is welcome; but whether the scales are being tipped too far in empowering stakeholders and preventing boards and managements from managing the company in the long term also needs to be analysed. I feel that an optimal governance regime is a hybrid one, in which entities are encouraged to aspire to adopt best practice guidelines, at the same time ensuring compliance with the stated regulation.

We need to develop tools and incentive structures that are more robust in the face of rapid business innovation, and procedures that leave no doubt as to the stakes involved. Corporate responsibility and governance need to be principle-based, rather than based on rules and frameworks that become a tick-box exercise and may invite evasion.

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First Published: Wed, June 13 2012. 00:36 IST