7. Discuss the impact of ESG policy implementation on Corporate Governance. 8. Explain the Provisions stipulated under SEBI (Prohibition of Insider Trading) Regulation. 9. Explain the Kinds of Charges. 10. Write a brief note on separation of Role of Chairman and CEO. B. Multiple Choice Questions 1 Shareholders have the right to know all except: a. Information on the management of the corporation b. Trade Secrets c. Financial Position of the company d. Company’s prospective plans 2 The lien created on the assets of the company in order to secure a debt is known as: a. Mortgage b. Pledge c. Charges d. Hypothecation 3 The action of suppressing the rights of Minority Shareholders knows as: a. Mismanagement b. Oppression c. Nomination d. Insider Trading 4 Shareholder legally authorizing another person to attend the meeting on his behalf: a. Nominee b. Alternate Shareholder c. Proxy d. None of these 5 The active involvement of stockholders in their organization is known as: 101 a. Shareholders Engagement CU IDOL SELF LEARNING MATERIAL (SLM)
b. Shareholder Activism c. Investor Relation d. None of these Answers 1-b, 2-c, 3-b, 4-c, 5-b 7.10 REFERENCES References book Geeta D., and R.K. Mishra, Corporate Governance-Theory and Practice, Excel Books, New Delhi. G. N. Bajpai, The essential Book of Corporate Governance, Sage Publications India Private Limited. Dr. S. N. Gosh, Law of Corporate Governance, Thomson Reuters. Textbook references Bob Tricker, Corporate Governance-Principles, Policies, and Practice (Indian Edition),Oxford University Press, New Delhi A Handbook on Corporate Governance, Institute of Directors India. Website http://www.sebi.gov.in/commreport/corpgov http://www.ecgi.org/codes http://www.nfcgindia.org 102 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 8:GRIEVANCE REDRESSAL PROCESS STRUCTURE 8.0 Learning Objectives 8.1 Introduction 8.2 Responsibilities of an Investor 8.3 Investor Grievance Redressal Mechanism at SEBI. 8.4 Complaints against Stock brokers / Depository participants 8.5 Legal framework for Investor Protection in India. 8.6 Investor Education and Protection Fund 8.7 Summary 8.8 Keywords 8.9 Learning Activity 8.10 Unit End Questions 8.11 References 8.0LEARNING OBJECTIVES After studying this unit, you will be able to: Outline the Concept and need for Investor Protection and Education. Know the Rights and Responsibilities of an Investor. Explore legal framework for Investor Protection in India. 8.1 INTRODUCTION The securities market operations promote the economic growth of the country. Efficient securities market leads to greater promotion effect on economic growth. Hence, it is required to keep such transactions transparent and secured. Investors need protection from various unfair practices made by the corporate and intermediaries. As the individual investors’ community and the investment avenues are ever increasing, it will be interesting to know 103 CU IDOL SELF LEARNING MATERIAL (SLM)
how investors are protected through various enactments. After various scandals, a series of systematic measures are required to build investors’ confidence in the system and processes. 8.2 RESPONSIBILITIES OF INVESTORS The role of investors’ fraternity is inevitable in terms of ensuring governance. The responsibilities are listed hereunder: To be specific about their requirements and details. To remain informed about all the essential information in connection with the transaction. To be vigilant. To participate and vote in general meetings. To exercise own rights or collectively rights, where ever required. 8.3 INVESTOR GRIEVANCE REDRESSAL MECHANISM AT SEBI There are circumstances when an investor has a complaint against, a listed company or an intermediary registered with SEBI. In such circumstances, the investor should first approach the concerned company / intermediary against whom there is a complaint. Sometimes response received may not be satisfactory. Therefore, investors should be aware of the authorities they should approach, to get their complaints resolved. SCORES (SEBI Complaints Redressal System): It is a web based centralized grievance redress system of SEBI. SCORES enable investors to file and follow up their complaints and track the status of redressal of such complaints online from the above website from anywhere. This enables the market intermediaries and listed companies to receive the complaints online from investors, redress such complaints and report redressal online. All the activities starting from lodging of a complaint till its closure by SEBI would be online in an automated environment and the complainant can view the status of his complaint online. An investor, who is not familiar with SCORES or does not have access to SCORES, can lodge complaints in physical form at any of the offices of SEBI. The features of SCORES are as follows: It provides online access 24 X 7. Complaints and reminders can be lodged online at the above website at anytime from anywhere. 104 CU IDOL SELF LEARNING MATERIAL (SLM)
An email is generated instantaneously acknowledging the receipt of complaint and allotting a Unique Complaint registration number to the complainant for future reference and tracking. The complaints forwarded online to the concerned entity for redressal. The concerned entity shall upload an Action Taken Report on the Complaint. If the ATR is satisfied, then the complaint is considered as redressed. The entity and complainant can seek and provide clarification on their complaint online to each other. All the companies are saved in a central database which generates relevant Management Information System reports to enable SEBI to take appropriate policy decisions / remedial actions. Limitations in dealing Complaints: To make the system efficient, SEBI mandated to all stock brokers and Depository Participants that they shall redress the complaints within 15 days from the date of receipt of complaint. In case of additional information required from the complainant, then it should be redressed within 7 days from the date of receipt of complaint. The period of 15 days shall be counted from the receipt of additional information. Sometimes, a company denies wrongdoing and it remains unclear as to who is wrong or whether any wrongdoing occurred at all. If this happens, SEBI cannot act as a judge or an arbitrator. In such cases, investors seek to resolve their complaint through the courts / Arbitration. 8.4 COMPLAINTS AGAINST STOCKBROKERS OR DP Investors who are not satisfied with the response to their grievance received from the brokers / Depository participants / listed companies, can lodge their grievances with the Stock exchanges or Depositories. The grievance can be lodged at any office of the BSE / NSE located in Chennai, Mumbai. Kolkata and New Delhi. In case of unsatisfactory redressal, 105 CU IDOL SELF LEARNING MATERIAL (SLM)
BSE / NSE has designated Investor Grievance Redressal Committees or Regional Investor Complaints Resolution Committees, this forum will act as a mediator to resolve the claims, disputes. Stock exchange provides a standard format to the complainant for referring the matter to IGRC. Investor Service Cell - If not satisfied, then If not resolved within SCORES Investor Grievance 15 days Redressal Committee Arbitration Appellate Arbitrator Courts Panel Figure 8.1 Investor Grievance Redressal Arbitration is a quasi-judicial process of settlement of disputes between investors and trading members / sub-brokers. It aims at quicker legal resolution of disputes for all the transactions done on the exchange. The arbitration framework is governed by rules, byelaws, Circulars and regulations issued by the exchanges / SEBI from time to time. The complaint in the other systems shall be treated as closed, once arbitration proceeding is initiated. No deposit fee is required for the claims up to Rs. 10 Lakhs. Parties aggrieved with the order of the Arbitrator may file an appeal within 30 days to Appellate Arbitrators Panel. 8.5 LEGAL FRAMEWORK FOR INVESTOR PROTECTION IN INDIA In order to afford adequate protection to the investors, provisions have been incorporated in different legislations such as the Companies Act, Securities Contracts (Regulation) Act, Consumer Protection Act, Depositories Act and Listing Agreement of the Stock Exchanges 106 CU IDOL SELF LEARNING MATERIAL (SLM)
supplemented by many guidelines, Circulars and Press notes issued by Ministry of Finance, Ministry of Corporate Affairs and SEBI from time to time. a) Companies Act 2013: Acceptance of Deposits – Section 73(1) provides that no company shall accept or review deposit under the act from public except in a manner provided under Chapter V of Companies Act 2013 and rules made thereunder. Where a company defaults in repaying deposit or any interest thereon, the depositor may apply to the tribunal for an order directing the company to pay the sum due for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may think fit. Companies (Acceptance of Deposit) Rules, 2014 stipulates that if any eligible company inviting deposits contravenes any rules, the company and every officer who is in default shall be punishable with fine which may extend up to Rs. 5,000 and where the contravention is a continuing one, with a further fine which may extend to Rs.5000 every day after the first day during which the contraventions continue. Mis-Statement in Prospectus –Where a prospectus issued, circulated or distributed, includes any statement which is untrue or misleading in form of context in which it is included or where any inclusion or omission of any matter is likely to be misled, every person who authorises the issue of such prospectus shall be liable for action under section 447 (Punishment for Fraud). Fraudulently inducing persons to invest money – Any person either knowingly or recklessly makes any statement, Promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter in to, or to offer to enter in to any agreement with a view to acquire, dispose, subscribe, underwrite securities (or) any agreement with a view to obtain credit facilities from any bank or financial institution, shall be liable to prosecute under section 447. Non – Payment of Dividend –Company declared dividend for any financial year should deposit the amount in a scheduled bank in a separate account within 5 days from the date of declaration of such dividend. The dividend which is not claimed within 30 days from the date of such declaration, the company shall within 7 days of expiry of the said period of 30 days transfer the total amount of dividend which 107 CU IDOL SELF LEARNING MATERIAL (SLM)
remains unpaid to a special account to be opened by a company in this behalf in any scheduled bank called Unpaid Dividend account. If the provisions are not complied, then the interest at the rate of 12% p.a. is payable to the said account. Failure to send Financial Statements – Each member is having a right to obtain copies of balance sheet and auditor’s report. In case of any default, the company shall be liable for a penalty of Rs.25000 and every officer in default shall be liable to a penalty of Rs.5000. Transfer and Transmission of securities - Listed companies should comply with the clauses of the listing agreement for prompt issue of share certificates after effecting transfers. In case of default, Parties can approach tribunal in order to direct the company to register such transfer / transmission. b) SEBI Act, 1992: The securities market enables capital formation in the economy and enhances wealth of investors who make the right choices. The investor confidence is the key pre- requisites for the emergence of a vibrant and deep capital market. The role of regulator in creating and enhancing investors’ confidence is therefore paramount. Hence, it is required to protect the interest of investors, promote the development and regulate the securities market. In case of listed companies, investors are entitled to forward their complaints to the company and SEBI, the latter takes up the issue with the companies. SEBI has the power to take-action including criminal proceeding where necessary against persons responsible for delay. If any person contravenes provisions of SEBI Act, will be imposed with the punishment of imprisonment up to 10 years or with fine which may extend to Rs.25 Crores or both. c) Securities Contracts (Regulation) Act, 1956: Section 23A to 23H provide for penalty in respect of failure to furnish information, return, etc. failure by any person to enter into an agreement with clients, failure to redress investor grievances, failure to segregate securities or money of clients, failure to comply with provisions of listing conditions, excess dematerialization or delivery 108 CU IDOL SELF LEARNING MATERIAL (SLM)
of unlisted securities, failure to furnish periodical returns. The penalty can be extended up to Rs. 25 Crores. 8.6 INVESTOR EDUCATION AND PROTECTION FUND Companies Act 2013 stipulated that the amount remained unpaid in the unclaimed dividend account for the continuous period of 7 financial years, should be transferred to Investor Education and protection Fund. IEPF has been established under section 125 of companies act for promotion of investors’ awareness and protection of the interests of investors. Ministry of corporate affairs has also notified the IEPF Authority to manage funds. The following amount is required to be credited to the fund: The amount given by central government by way of grants after due appropriation made by parliament by law in this behalf utilized for the purpose of the fund. Donations given to the fund by the Central Government, State Government, Companies or any other institution for the purposes of the Fund. The amount in the unpaid dividend account for 7 years. The interest or other income received out of investments made from the Fund. Matured debentures with companies. Sales proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for 7 or more years. Redemption amount of preference shares remaining unpaid for seven or more years. Utilization of Funds: The fund maintained under IEPF shall be utilized for the following purpose: The refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon. Promotion of Investors’ education, awareness and protection. Educational activities like seminar, training, research and publications, aimed at investors. Funding investor education and awareness activities of Investors’ association recognized by SEBI. For Awareness programmes including Media – print, electronic aimed at investors. 109 CU IDOL SELF LEARNING MATERIAL (SLM)
Expenses on travel of members of the Committee, who are not officials of Board, and special invitees to the meetings of the Committee, in connection with the work of the Committee. Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which had ordered disgorgement. Reimbursement of legal expenses incurred in pursuing class action suits by members, debenture-holders or depositors as may be approved by the Tribunal. The accounts of the fund shall be audited by the Comptroller and Auditor General of India at such intervals as may be specified by him and such audited accounts together with the audit report thereon shall be forwarded annually by the authority to the Central Government. 8.7 SUMMARY OECD Principles on Corporate Governance states that the corporate governance framework should ensure the equitable treatment of all shareholders, including Minority and foreign shareholders. Investor Education and Protection Fund has been established for promotion of investors’ awareness and protection of the interests of investors. The company shall disclose in its Governance report, about the whistle blower policy and affirmation that no personnel has been denied access to the audit committee. Efficient securities market leads to greater promotion effect on economic growth. Hence, it is required to keep such transactions transparent and secured. Investor needs protection from various unfair practices made by the corporate and intermediaries. The securities market enables capital formation in the economy and enhances wealth of investors who make the right choices. The investor confidence is the key pre- requisites for the emergence of a vibrant and deep capital market. The role of regulator in creating and enhancing investors’ confidence is therefore paramount. Company declared dividend for any financial year should deposit the amount in a scheduled bank in a separate account within 5 days from the date of declaration of such dividend. The dividend which is not claimed within 30 days from the date of such declaration, the company shall within 7 days of expiry of the said period of 30 110 CU IDOL SELF LEARNING MATERIAL (SLM)
days transfer the total amount of dividend which remains unpaid to a special account called Unpaid Dividend Account. SEBI mandated to all stock brokers and Depository Participants that they shall redress the complaints within 15 days from the date of receipt of complaint. 8.8 KEYWORDS SCORES–SEBI Complaints Redressal System – When Investors have complaints against a listed company / Intermediary registered with SEBI, first it is required to communicate the same to the concerned company. If satisfactory response has not received, then an investor can lodge complaint through this platform. SEBI takes up complaints related to issue and transfer of securities and non-payment of dividend with listed companies. SCORES facilitate to lodge complaint online with SEBI. IEPF –Investors Education and Protection Fund –It is for the promotion of Investors’ awareness and protection of the interests of investors. For administration of IEPF, Government of India established Investor Education and Protection Fund Authority on 7th September 2016. (section 125 of Companies Act 2013) DP – Depository Participant – A Depository is an institution or organization which holds the securities of an investor through Depository Participant and also provides services in relation to the securities. In India, there are two depositories – NSDL (National Securities Depositories Limited) and CDSL (Central Depository Services Limited). Depository Participant is the agent or the registered stockbroker of a depository. ATR – Action taken Report –It states various actions based on the discussions in the meeting. It is compiled after few days from the date of the meeting. It is usually submitted after 5-7 days after the meeting, in order to ensure that there is adequate time to act on the matters discussed in the meeting / report. IGRC – Integrated Governance, Risk and Compliance Framework – The purpose is to reliably ensure that the strategic objectives are met, and yet organizations have built their GRC initiatives on ineffective organizations. The goal is to get an organization’s people not to see GRC as a compliance activity or a 111 CU IDOL SELF LEARNING MATERIAL (SLM)
hindrance but a way of generating value that equips the business to more ethically and sustainable achieve its objectives. Transmission Of Securities – The process of transferring the shares through operation of law (Without executing a Transfer Deed). A transmission of interest in shares of a company, of a deceased member of the company, made by the legal representative of a deceased member shall be considered as transmission of shares by operation of law. Transposition – In case of Joint holders of securities, the person named first in the register of members will be entitled to receive notices and also having an obligation towards the company. The process of re-arranging the name of the joint-holders in the register of Members is known as Transposition. The title has not passed from one to another; hence, the need for transfer deed shall not arise. 8.9 LEARNING ACTIVITY 1. Discuss the Consequence of Mis-Statement in the Prospectus ___________________________________________________________________________ ___________________________________________________________________________ 2. Describe the limits on accepting deposits from the public prescribed under Companies Act 2013. ___________________________________________________________________________ ___________________________________________________________________________ 8.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What do you mean by SCORES? 2. Define Prospectus. 3. What are all considered as Financial Statements? 4. Define IGRC. 5. What do you mean by Arbitration? Long Questions 112 CU IDOL SELF LEARNING MATERIAL (SLM)
1. Explain the legal framework for Investor Protection in India. 2. Distinguish between Transfer and Transmission of Securities. 3. Explain the Features of SCORES. 4. Describe the Consequences of Fraudulently inducing persons to invest money. 5. Explain the purposes for which the IEPF can be expended. 6. Explain the Steps to file Complaints against Stockbrokers or Depository Participant. 7. Discuss the Consequences of Failure to file Financial Statements. 8. List out the amounts / grants eligible to be credited to IEPF. 9. Explain the Scope of Clause 49 of the Listing Agreement. 10. Describe the Limitations in dealing complaints with SCORES. B. Multiple Choice Questions 1 The Dividend once declared shall be deposited in a separate Account within: a. 3 days b. 5 days c. 7 days d. 14 days 2 The amount remained unpaid for _______ in the unpaid Dividend Account will be transferred to IEPF. a. 3 years b. 5 years c. 7 years d. 10 years 3 Stock brokers and Depository Participants should redress the complaint received within: a. 7 Days b. 14 Days c. 21 Days d. 30 Days 4 Deposit Fee is not required under Arbitration for the claims up to: 113 a. Rs. 1,00,000 CU IDOL SELF LEARNING MATERIAL (SLM)
b. Rs. 5,00,000 c. Rs. 10,00,000 d. None of these 5 The transfer of shares from one person to another through operation of law called as: a. Transfer b. Transmission c. Transposition d. Illegal Transfer Answers 1-b, 2-c, 3-d, 4-c, 5-b. 8.11 REFERENCES References book P.K. Gosh, Corporate Governance, CBS publishers and Distributors Private limited, New Delhi. Geeta D., and R.K. Mishra, Corporate Governance-Theory and Practice, Excel Books, New Delhi. Sharma, J.P., Corporate Governance, Business Ethics, and CSR, Anne Books Pvt. Ltd., New Delhi. Textbook references Bob Tricker, Corporate Governance-Principles, Policies, and Practice (Indian Edition),Oxford University Press, New Delhi A Handbook on Corporate Governance, Institute of Directors India. Website http://www.iepf.gov.in http://www.sebi.gov.in http://scores.gov.in 114 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 9:BOARD OF DIRECTORS STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 Types of Board 9.3 Governance Functionaries 9.4 Challenges for effective management 9.5 Summary 9.6 Keywords 9.7 Learning Activity 9.8 Unit End Questions 9.9 References 9.0LEARNING OBJECTIVES After studying this unit, you will be able to: State the Board Effectiveness and its role. Know the Responsibilities of Board and Leadership skills. Emphasize the importance of proper Training to the board. 9.1 INTRODUCTION The institution of board of directors was based on the premise that a group of trustworthy and respectable people should look after the interests of the large number of shareholders who are not directly involved in the management of the company. The position of the board of directors is that of trust as the board is entrusted with the responsibility to act in the best interest of the company. The contribution of directors on the board of companies is critical for ensuring appropriate directions with regard to leadership, vision, strategy, policies, monitoring, supervision, accountability to shareholders and other stakeholders, and to achieving greater levels of performance on a sustained basis as well as adherence to the best practices of corporate governance. 115 CU IDOL SELF LEARNING MATERIAL (SLM)
9.2 TYPES OF BOARD a) Governing Board – where the owner of the organization does not take part in the management, rather they staffed by people to provide directions to the owner in order to achieve organization’s best interests and future goals. b) Working Board – This is common in Small or new companies, where there is not much gap between work and management. As both the activities taken by the same personnel. c) Advisory Board – It is similar to Governance board, as the board work in a purely advisory role. This kind of boards is essential in handling delicate situations. The expertise of such board is required to overcome such unfavourable situation. d) Co-operative Board – Where all the members of the board work and engaged in the activities of the company equally. This board will be appropriate when the company is striving for common / Singular goal, where comprehensive collective effort is required from the management side. e) Executive Board - Where the members make decisions on the organizations day-to- day operations together without having a chief executive officer. In order to do this effectively, they will typically function as a group of subcommittees were each committee handles a different area of the organization. f) Cortex Board – This board will emphasize on the value of the organization to the community. The board will prioritize Social values and sustainability in order to give back to the society. 116 CU IDOL SELF LEARNING MATERIAL (SLM)
9.3 GOVERNANCE FUNCTIONARIES Executive Director Non-Executive Shadow Director Woman Director Director Independent Resident Director Nominee Director Lead Independent Director Director Chairman CEO Company Secretary Figure 9.1 Governance Functionaries Executive Director: It describes a person who is a member of the board and alsorendersday to day responsibilities in respect to the affairs of the company. Executive directors perform operational and strategic business functions such as managing people, looking after assets, hiring and firing, entering into contracts. Executive directors include Managing director / Finance Director / whole time director. Non-Executive Director: They are the members of the board but not in the employment, who normally do not take part in the day-to-day implementation of the company policy. They are generally appointed to provide the company with the benefits of professional expertise and outside perspective to the board. Shadow Director: A person who is not formally appointed as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act. This is a concept adopted from English Law. However, a person is not a shadow director merely because the directors act on advice given by him in a professional capacity. Woman Director: 117 CU IDOL SELF LEARNING MATERIAL (SLM)
Companies Rules, 2014 prescribes the following class of companies shall appoint at least One-Woman Director in their board: i) Every Listed Company ii) Every other Public Company having Paid up share capital of Rs. 100 Crores or more (Or) iii) Turnover of Rs. 300 Crores or more. The intermittent vacancy of a woman director shall be filled up by the board at the earliest but not later than immediate next Board Meeting or 3 months from the date of such vacancy whichever is later. Independent Director: An independent director in relation to a company means a director other than a managing director or a Whole-time director or a Nominee Director: i) Who in the opinion of the board, is a person of integrity and possesses relevant expertise and experience; ii) Who is not a promoter of the company or its holding, subsidiary or associate company; iii) Who is not related to promoters or directors in the company, its holding, subsidiary or associate company; iv) Who has no pecuniary relationship with the company, its holding, subsidiary or associate company or their promoters, or directors, during the two immediately preceding financial years or during the current financial year? v) None of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or Rs. 50 Lakhs or such higher amount as may be prescribed, whichever is lower, during the 2 immediately preceding financial years or during the current financial year; vi) Who possess such other qualifications as may be prescribed. Every listed company shall have at least 1/3rd of the total number of directors and the following class of companies except section 8 companies shall have at least 2 directors as independent directors: a) The Public Companies having paid up share capital of Rs. 10 Crores or more; or 118 CU IDOL SELF LEARNING MATERIAL (SLM)
b) The Public Companies Turnover of Rs. 100 Crores or more; or c) The Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 Crores. Such independent director shall hold office for a term up to 5 consecutive years on the board of a company and shall be eligible for reappointment for another term of up to 5 consecutive years on passing of a Special resolution by the company. No Independent director shall hold office for more than two consecutive terms but shall be eligible for appointment as independent director after the expiration of 3 years of cooling-off period. Resident Director: Companies act 2013 prescribed that every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year. Companies incorporated after 30-09-2014 should have a resident director from the date of incorporation itself. Nominee Director: A nominee director belongs to the category of Non-executive director and is appointed on behalf of an interested party. It is pertinent to mention here that there is a divergent view as to whether a nominee director can be considered independent or not. Naresh Chandra committee in its report stated that nominee director will be excluded from the pool of directors in the determination of the number of independent directors. In other words, such a director will not feature either in the numerator or the denominator. Lead Independent Director: It is a good practice to designate an independent director as a Lead Independent Director or senior independent director. He co-ordinates the activities of other non- employee directors and advises the chairman on issues ranging from the schedule of board meetings to recommending retention of advisors and consultants to the management. Lead Independent Director acts as the principal liaison between the independent directors of the board and the chairman of the board. Develop the agenda for and preside at executive sessions of the board’s independent directors. Such director advises the chairman of the board as to an appropriate schedule for Board meetings, seeking to ensure that the independent directors can perform their duties 119 CU IDOL SELF LEARNING MATERIAL (SLM)
responsibly while not interfering with the flow of company operations. Also advises the quality, quantity and timeliness of the information. Lead Independent director recommends to the board the retention of advisors and consultants who report directly to the board. Lead Independent director assists the board and company officers in better ensuring compliance with and implementation of the governance guidelines. They serve as chairman of the board when chairman is not present. Other roles of Lead Independent Director should include chairing meetings of non- management directors and of independent directors, presiding over board meetings in the absence of the chair, serving as the principle liaison between the independent directors and the chair, and leading the board / director evaluation process. Chairman: Chairman have no legal position, they are whoever the bard elects to take the chair at a particular meeting. Boards are not bound to continue with the same chairman for successive meetings. In law, all directors have broadly equal responsibilities and chairmen are no more equal than any other board members. Chairmen are an administrative convenience and a means of ensuring that board meetings are properly conducted. The role of chairman includes: i) Setting the board agenda, ensuring that Directors receive accurate, timely and clear information to enable them to take sound decisions, ensuring that sufficient time is allowed for complex or contentious issues and encouraging active engagement by all members of the board; ii) Evaluating annually the performance of each board member in his / her role as a Director and ensuring that the performance of the board as a whole and its committees is evaluated annually. Holding meetings with the non-executive directors without the executives being present. iii) Taking steps in providing a comprehensive, formal and tailored induction programme for new directors, and in addressing the development needs of individual directors to ensure that they have the skills and knowledge to fulfil their role on the board and on-board committees. iv) Ensuring effective communication with shareholders and in particular that the company maintains contact with its principal shareholders on matters relating to strategy, governance and Director’s remuneration. Ensuring that the views of shareholders are communicated to the board as a whole. 120 CU IDOL SELF LEARNING MATERIAL (SLM)
Chief Executive Officer: The board appoints the CEO based on the criterion of his capability and competence to manage the company effectively. The main responsibility includes developing and implementing high-level strategies, making major corporate decisions, managing the overall operations and resources of a company, and acting as the main point of communication between the board of directors and the corporate operations. The CEO is supported and advised by a skilled board and CEO is ultimately accountable to the board for his actions. The role includes developing implementation plan of action to meet the competition and keeping in mind the long-term existence of the company and devising adequate control systems, Monitoring the operating and financial outcomes against the set plan, Formulating Remedial action. Company Secretary: Company Secretary acts as a vital link between the company and its board of directors, shareholders and other stakeholders and regulatory authorities. Their role is also to ensure that the board procedures are followed and regularly reviewed. They provide the board with guidance as to its duties, responsibilities and powers under various laws, rules and regulations. Company Secretary acts as a Compliance Officer as well as an in-house legal counsel to advise the board and the functional departments of the company on various corporate, business, economic and tax laws. Every listed Company and other public companies having paid up capital of Rs.10 Crores or more shall have a Whole time Key Managerial Personnel. Rule 8A stipulates that the company other than mentioned above, which has paid up capital of Rs. 5 Crores or more shall have a Whole time Company Secretary. 9.4 CHALLENGES FOR EFFECTIVE MANAGEMENT Lack of Time Management – Poor Time management inattending meeting, reading materials and maintaining contact with each other in between meetings. The board members need to organize themselves for maximum effectiveness and avoid wasting time on matters which are less important. Lack of Strategic Management – Strategic planning offers boards an opportunity to think about changes and trends that will have considerable effect and develop strategies to respond market challenges. Some boards are not involved in strategic 121 CU IDOL SELF LEARNING MATERIAL (SLM)
planning at all; others are involved in a superficial way. Therefore, the boards lose an important opportunity to exercise visionary leadership skill. Resistance of Risk Taking – In order to be innovative and creative in its decision- making, boards should take chances, to try new things, to take risks. Success in new ventures is never to be taken for granted. Board need to acknowledge the risk exposure and discuss them with owners and other key stakeholders. Complexity – Board members frequently lack an in depth understanding of critical changes, trends and developments that challenge fundamental assumptions about how it defines its work and what success looks like. This lack of knowledge results in a lack of confidence on the part of the board to act convincingly and authoritatively. Micro Management – It is necessary that the board focuses its attention on items of critical importance to the organization. If the board is tempted to micro management, then the importance of visionary leadership will be lost. Old practices – Time was when clients, members and consumers would just walk in through the door on their own. Viewing things in this way, board did not consider market place pressures, or for that matter a competitive marketplace. All that has changed, yet for many boards their leadership style has not kept pace with this new awareness. 9.5 SUMMARY Board of Directors plays a pivotal role in ensuring Good Governance. The Contribution of Directors on the Board is critical to the way a corporate conduct itself. Board Composition is one of the most important determinants of board effectiveness. A board should have a mix of inside / Independent Directors with a variety of experience and core competence if it is to be effective in setting policies and strategies and for judging the management’s performance objectively. The effectiveness of Board depends largely on the leadership skills, capabilities and commitment to corporate governance practices of each individual director. Responsibilities of Board – to establish an organizational vision and mission, giving strategic direction and advice, overseeing strategy implementation and performance, developing and evaluating the CEO, to ensure the organization has sufficient and appropriate human resources, ensuring effective stakeholder relations, risk mitigation, procuring resources. 122 CU IDOL SELF LEARNING MATERIAL (SLM)
Non-Executive Directors do not get involved in the day-to-day running of the business. Independent Directors are known to bring an objective view in board deliberations. They also ensure that there is no dominance of one individual or special interest group or the stifling of healthy debate. They act as the guardians of the interest of all shareholders and stakeholders, especially in the areas of potential conflict of interest. A board provide counsel to management and should not get involved in the day-to- day affairs of the organization. Clear expectations for the board and the director need to be established and maintained, because a board that is overly active in management can inhibit the organization’s effectiveness. Board and Executive leadership need to work together based on mutual respect, trust and commitment. 9.6 KEYWORDS Lead Independent Director –Means an Independent Director who has been designated by the board to serve as the Lead Independent Director of the company. Role of Lead Independent Director is to identify the critical issues, assist the board in achieving consensus on important issues, play the role of a facilitator outside the board room especially on contentious issues, and provide Feedback to CEO, CFO. Shadow Director - A person who is not formally appointed as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act. Cortex Board – These boards will emphasize on the value of the organization to the community. The board will prioritize Social values and sustainability in order to give back to the society. Nominee director – It belongs to the category of Non-executive director and is appointed on behalf of an interested party. Co-operative Board – Where all the members of the board work and engaged in the activities of the company equally. This board will be appropriate when the company is striving for common / Singular goal, where comprehensive collective effort is required from the management side. 123 CU IDOL SELF LEARNING MATERIAL (SLM)
Strategic Management –It is the management of an organization’s resources to achieve its goals and objectives. It involves setting objectives, analysing the competitive environment, analysing the internal organization, evaluating strategies, and ensuring that management rolls out the strategies across the organization. 9.7 LEARNING ACTIVITY 1. Discuss the Role of Executive Board. ___________________________________________________________________________ ___________________________________________________________________________ 2. Define Strategic Management. ___________________________________________________________________________ ___________________________________________________________________________ 9.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Write a short note on Shadow Director. 2. Discuss the role of Advisory Board. 3. What do you mean by Micro Management? 4. Who is a Resident Director? 5. What are all the Classes of Companies in which appointment of Woman Director is mandatory? Long Questions 1. Explain the Challenges for an Effective Management. 2. Describe the Various Types of Board. 3. Explain the Roles of Key Managerial Personnel. 4. Explain the Various Governance Functionaries and their impact on effective governance. 5. Enumerate the Role of a Chairman. 124 CU IDOL SELF LEARNING MATERIAL (SLM)
B. Multiple Choice Questions 1 Section 8 Companies shall have at least ____ Independent Director. a. One b. Two c. Three d. Five 2 Independent Directors shall hold office up to _____ Consecutive years in one particular term. a. 3 b. 5 c. 7 d. 10 3 The director who is resident in India for _____ days or more shall be called as Resident Director. a. 150 b. 182 c. 192 d. 240 4 The Kind of Board in which, there is not much gap between work and management known as: a. Governing Board b. Working Board c. Cortex Board d. Executive Board 5 Company which have more than Paid-Up Capital of ______ should appoint Whole-Time Company Secretary. a. Rs. 1 Crore b. Rs. 3 Crores c. Rs. 5 Crores 125 CU IDOL SELF LEARNING MATERIAL (SLM)
d. Rs. 10 Crores Answers 1-b, 2-b, 3-b, 4-b, 5-c. 9.9 REFERENCES References book Geeta D., and R.K. Mishra, Corporate Governance-Theory and Practice, Excel Books, New Delhi. Sharma, J.P., Corporate Governance, Business Ethics, and CSR, Anne Books Pvt. Ltd., New Delhi. Textbook references Bob Tricker, Corporate Governance-Principles, Policies, and Practice (Indian Edition),Oxford University Press, New Delhi A Handbook on Corporate Governance, Institute of Directors India. Website http://www.iod.com http://www.sebi.gov.in http://www.ecgi.org/codes http://www.nfcgindia.org 126 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 10:DIRECTORS STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 Role of Directors and their powers. 10.3 Responsibilities of the Board 10.4 Impact of Independent Director 10.5 Director’s Remuneration and its limits 10.6 Training of Directors 10.7 Summary 10.8 Keywords 10.9 Learning Activity 10.10 Unit End Questions 10.11 References 10.0LEARNING OBJECTIVES After studying this unit, you will be able to: Explain the diversified role of Directors Describe the Responsibilities of Board. Know the Role of Independent Director and impact on the board. 10.1 INTRODUCTION The contribution of directors on the board of companies is critical for providing proper directions and guidance with regard to leadership, Vision, Strategy, Policies, Monitoring, Supervision, Accountability to Shareholders and other Stakeholders, in order to achieve effective level of performance that can be sustained only if comply with the best practices of Corporate Governance. It is equally important to understand the diversified role of Directors to ensure appropriate guidance which leads to effective performance. 127 CU IDOL SELF LEARNING MATERIAL (SLM)
10.2 ROLE OF DIRECTORS AND THEIR POWERS ROLE Establish Policy Strategic Direction Appointment of CEO Stakeholders relation Managing Risks Figure 10.1 Role of directors i) Establishing Policy: Approval of Company’s ideology, Vision and Mission statement is carried by the Board of Directors. While doing so, it must be discerned that the company’s activities are consistent with its stated purpose. The board ensures that the company effectively and efficiently works towards achieving its mission and is committed to continual quality improvement. Based on the quality, transparency, honesty, responsibility and accountability, board members and employees should act in the best interest of the company in order to accomplish its mission at all times. ii) Strategic Direction: Board should review and approve management’s Strategy, Plans and Decisions, financial objectives and extra-ordinary business transactions. Boards are in a conducive position to provide input and advice to the chief officer and other top managerial personnel regarding the company’s strategic direction. As the directors are not involved in day-to-day development of strategy, they are in a position to provide an objective and detached view of its potential effectiveness. Board also plays crucial role in advising, evaluating and monitoring the process in order to achieve effective implementation 128 CU IDOL SELF LEARNING MATERIAL (SLM)
iii) Appointing and Evaluation of CEO and senior management: It is an obligation of the board to appoint chief executive office and other managerial personnel who are specialist in order to proactively evaluating the performance of such officers. The board has to be involved in planning the development of senior management. Board will direct such authorities and orient the prevailing work culture and ethics for better adaptation. iv) Stakeholders’ Relation: Board acts as a communication link between members and other stakeholders of an organization. It is the duty of the board to inform people regarding upcoming events, promoting items of interest and providing topical information. Board will generally promote the organization’s purpose, goals and objectives, programmes and activities before the public to create awareness, accomplishments and opportunities for involvement. v) Managing Risk: Directors are expected to identify potential threats and plan to manage such obstacles that may prevent the organization from reach its objectives. The entire board must be involved in risk management, particularly around financial matters and legal compliance. Directors have a responsibility to inform owners in order to forecast the adverse events and plans to overcome it. This will minimize the impact of events or changes that will have a negative impact. Each company will have a different risk profile and risk bearing capacity. Each board will identify the key risks affecting their own sector and then take steps to manage those risks. Powers of the Board: Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do. According to Section 179(3) and Rule 8 of Companies (Meetings of Board and its Powers) Rules 2014, the board of directors of a company shall exercise the following powers on behalf of the company by passing resolutions at the meeting of the board, they are as follows: To invest the funds of the company. 129 To borrow monies To diversify the business of the company. To make calls on shareholders in respect of money unpaid on their shares CU IDOL SELF LEARNING MATERIAL (SLM)
To authorize Buy-back of securities. To issue securities, including debentures. To approve Financial Statements and board’s report. To appoint or remove Key Managerial Personnel. To approve Amalgamation, Merger or Reconstruction. To invite or accept or renew public deposits and related matters. To review and change the terms and conditions of Public deposit. To buy, sell investments held by the company. To provide loans or give guarantee or provide security in respect of loans. To make Political Contributions. To take note of the disclosure of director’s interest and shareholding. The board can exercise following powers only with the consent of the company by passing Special Resolution: To sell / Lease or otherwise dispose of, the whole or considerably the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or considerably whole of any of such undertakings; To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation; To borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business; To remit or give time for the repayment of, any debt due from a director. 10.3 RESPONSIBILITIES OF THE BOARD Directors are in a fiduciary position and must exercise their powers for the benefit of the company. Board is responsible for direction, control, conduct management and supervision of the company’s affairs. A single director cannot take a decision. This is one of the purposes of forming a board. If the power of decision making is given to a single director he might take biased decisions. He may take decisions which benefit him in his personal capacity. The scope of bias, partiality and favoritism is eliminated with the concept of the board. 130 CU IDOL SELF LEARNING MATERIAL (SLM)
Responsibilities: • Towards the comany • Towards Management • Towards Stakeholders • Towards Government • Towards society A) Towards Company: The board should ensure that: The decision it takes do not serve the personal interests of its members Board acts in the best interest of the company. It helps the company in increasing its profits and turnover by following principles of equity, ethics and values. It helps the company in building Goodwill. That the company has systems and means to best utilize the resources of the company and especially its intangible resources. It shares with the management the decision taken by them and the reasons thereof. B) Towards Management: The board should ensure that: It acts a leader to inspire and motivate the management to perform their duties. It formulates policies and helps the management to define the corporate culture. It gives its guidance, support and direction to the management in every decision. It encourages compliance and Disclosures. It trusts the management and gives it the freedom to act in order to explore alternatives. It takes objective decisions rather dictating terms to the management. It follows Company’s Code of Conduct and the other rules and regulations of the company. C) Towards Stakeholders: The board must ensure that: 131 CU IDOL SELF LEARNING MATERIAL (SLM)
Their motive is to increase the value for the stakeholders. They should ensure that one stakeholder should not be benefited at the cost of other. It must discourage restrictive or monopolistic activities for the undue benefit of the company. Proper system is established and followed which helps in resolving the grievances of the stakeholders. The company discloses its policies to all the stakeholders. The company has policies for different class of stakeholders which are equally applicable. Such policies should be based on the principles of equity and justice. The stakeholders are able to establish long term relationships based on trust and confidence. D) Towards Government: The board should ensure that: The company complies with all applicable laws, whether they are central or state laws. There are systems and checks to ensure that the above is properly complied. All the dues towards the government in the form of taxes, rates, etc. are paid on time. It supports the initiatives taken by the government for the promotion of welfare and security of our Country. E) Towards Society: The board must ensure that: The company has policies which encourage social activities on purely non- profitable basis. Such policies are followed ethically and resources are provided to give effect to these policies. The actual benefit is actually passed on to the society by doing such activities. That the company’s products are eco-friendly and comply with all the related norms. That the company is socially responsible and thinks towards sustainability. The policies cover activities such as upliftment of society, providing education to the needy, promoting employment, preservation of environment, etc. True and full disclosure of all the transactions, where there is an interest, is made to all the beneficiaries. 132 CU IDOL SELF LEARNING MATERIAL (SLM)
10.4 IMPACT OF INDEPENDENT DIRECTOR The expression ‘independent director’ shall mean a non-executive director, other than a nominee director of the listed entity, who in the opinion of the board, is a person of integrity and possesses relevant expertise and experience. Who is not a promoter of the listed entity or its holding, subsidiary or associate company; Who is not related to promoters or directors in the listed entity or its holding, subsidiary or associate company; Who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the 2 immediately preceding financial years or during the current financial year; Who, neither himself nor any of his relatives – holds or has held the position of a KMP or has been employee of the listed entity or its holding, subsidiary or associate company in any of the 3 financial years immediately preceding the financial year in which he is proposed to be appointed. Who has not holding together with his relative, 2% or more of the total voting power of the listed entity or who is not a material supplier, service provider or customer or a lessor or lessee of the company; Who is not less than 21 years of age? Independent directors may be selected from a data bank of eligible and willing persons maintained by the agency. Such agency shall put data bank of independent directors on the website of Ministry of Corporate Affairs or any other notified website. Company must exercise due diligence before selecting a person from the data bank, as an independent director. The Institute of Chartered Accountants of India, The Institute of Company Secretaries of India and The Institute of Cost Accountants of India has developed Independent Directory Repository due to the active encouragement of Ministry of Corporate Affairs. The Independent Director of the Company shall hold at least one meeting in a year, without the attendance of Non-independent directors and members of management. All the independent directors of the company shall strive to be present at such meeting. The independent director in the meeting shall, review the performance of non-independent 133 CU IDOL SELF LEARNING MATERIAL (SLM)
directors and the board as a whole and assess the quality, quantity and timeliness of flow of information between the company management and the board that is necessary for the board to effectively and reasonably perform their duties. Hence, the role of Independent director is inevitable for effective performance of the company. 10.5 REMUNERATION FOR DIRECTORS Companies Act 2013, stipulates total managerial remuneration payable by a public company, to its directors, managing director and whole-time director and its manager in respect of any financial year, if: Company with one managing director / Whole—time director / Manager – Remuneration is restricted to 5% of the net profits of the company. Company with more than one Managing director / Whole time director / Manager – Remuneration restricted to 10% of the Net profits of the company However, the overall limit on Managerial Remuneration is restricted to 11% of Net Profits of the company. Directors other than Managing director / whole time directors are eligible to receive remuneration up to 1% of Net profits of the company (If there is a managing director / Whole time director) and 3% of the Net profits of the company (If there is no Managing Director / Whole time director) Remuneration in excess of the aforementioned limits may be paid only if a special resolution is passed by the shareholders. Any person who contravenes these provisions shall be punishable with a minimum fine of Rs. 1, 00,000 and can be extended up to Rs. 5, 00,000. 10.6 TRAINING OF DIRECTORS An important aspect of board effectiveness would be appropriate attention to development and training of directors on the lines of management development and training. Director Induction should be seen as the first step of the board’s continuous improvement. Investing in board development strengthens the board and individual directors. As the board is primarily responsible for good governance practices, which is quite different from management, it calls for new areas of knowledge and different skills. Directors should be oriented in order to adapt to the roles and requirements of the company. As the driving force, they should know the current practices in order to find out the direction of the further improvement. The activities 134 CU IDOL SELF LEARNING MATERIAL (SLM)
are categorized under three stages i.e., Induction, training and evaluation. The categories paves way for continuous improvement and bring out the best from the directors. Induction Development Performance Review Programme Figure 10.2 Training of Directors An Induction programme should be available to enable new directors to gain an understanding of the company’s financial, strategic, operational and risk management position. And also, the directors will come to know their rights, duties, responsibilities and diversified roles. Professional development should not be treated as merely another training schedule rather it must be more structured so as to sharpen the existing skills and knowledge of directors. It is a good practice for boards to arrange for training to their members in order to orient / update the changes with governance, technologies, markets, products, and so on, through site visits, seminars and offering various short-term courses. A formal evaluation of the board and of the individual directors is one potentially effective way to respond to the demand for greater board accountability and effectiveness. Feedback about the performance of individual board members can help them enhance their skill as directors and can motivate them to be better board members. Evaluations will assess their performance and appraisals if conducted properly, produce a number of positive outcomes. Normally companies use self - appraisal i.e., peer review method (every director’s performance is reviewed by the other director) which is done under the direction of a lead independent director or chairman. 135 CU IDOL SELF LEARNING MATERIAL (SLM)
10.7 SUMMARY The board functions on the principle of Majority or unanimity. A decision is taken on record if it is accepted by the majority or all of the directors. A single director cannot take a decision. An important aspect of board effectiveness would be giving proper attention to development and training of directors on the lines of management development and training. Director Induction should be seen as the preliminary step of the board’s continuous improvement. The overall limit on Managerial Remuneration is restricted to 11% of Net Profits of the company. Directors other than Managing director / whole time directors are eligible to receive remuneration up to 1% of Net profits of the company (If there is a managing director / Whole time director) and 3% of the Net profits of the company (If there is no Managing Director / Whole time director) Independent directors may be selected from a data bank of eligible and willing persons maintained by the agency. Such agency shall update data bank of independent directors on the website of Ministry of Corporate Affairs or any other notified website by the Central Government. Boards are in a position which is conducive to provide input and advice to the chief officer and other top managerial personnel regarding the company’s strategic direction. 10.8 KEYWORDS Vision–It describes the desired future position of the company. Such statement gives direction to the company. It also stimulates growth, both internally and externally. A strong vision helps the teams to focus on the matters which are integral for their company. It also promotes Innovation. A Purpose-driven company visualize the success as a whole. Mission – It is the core of the business and objectives were derived from such statements. Such statements focus on today and what an organization does to achieve its objectives. Lease– It is a transfer of Right to enjoy a property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised. At the time 136 CU IDOL SELF LEARNING MATERIAL (SLM)
of expiry of lease period, the possession of the property reverts back to the actual owner who has title over the property. Buyback of Securities–It means the company buying back its own shares that was issued earlier. It is a corporate action or event wherein a company makes a public announcement for the buyback offer to acquire the shares from existing shareholders within a concerned timeline. The company announces an offer price for the buy-back that is generally higher than the current market price. 10.9 LEARNING ACTIVITY 1. Define Key Managerial Personnel. ___________________________________________________________________________ ___________________________________________________________________________ 2. Discuss the Importance of providing Training to Directors. ___________________________________________________________________________ ___________________________________________________________________________ 10.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Director Induction Programme? 2. Define Vision and Mission. 3. What do you mean by Special Resolution? 4. Define Buy-Back of Securities. 5. Why performance review of Board of Directors is required? Long Questions 1. Describe the Eligibility of Independent Director. 2. Explain the Responsibilities of the Board. 3. Discuss the Impact of an Independent Director. 4. Explain the Powers of the Board declared under Companies Act and other rules. 5. Describe various training opportunities for Directors and its impact in Corporate Governance. 137 CU IDOL SELF LEARNING MATERIAL (SLM)
B. Multiple Choice Questions 1 Managerial Remuneration limited to _____ of Net profits of the company. a. 2% b. 5% c. 7% d. 11% 2 The person eligible to be appointed as Independent Director who is not less than ___ of age. a. 18 Years b. 21 Years c. 25 Years d. 35 Years 3 Independent Director shall hold at least _______ meeting(s) in a year. a. One b. Two c. Four d. Six 4 Resolution supported by the 3/4th majority of members present known as: a. Ordinary Resolution b. Special Resolution c. Resolution requiring Special Notice d. None of these 5 Any person who contravenes the provision of remuneration of directors shall be punishable with a fine up to: a. Rs. 1,00,000 b. Rs. 5,00,000 c. Rs. 7,00,000 d. Rs. 10,00,000 138 CU IDOL SELF LEARNING MATERIAL (SLM)
Answers 1-d, 2-b, 3-a, 4-b, 5-b 10.11 REFERENCES References book Geeta D., and R.K. Mishra, Corporate Governance-Theory and Practice, Excel Books, New Delhi. G. N. Bajpai, The essential Book of Corporate Governance, Sage Publications India Private Limited. Dr. S. N. Gosh, Law of Corporate Governance, Thomson Reuters. Textbook references Bob Tricker, Corporate Governance-Principles, Policies, and Practice (Indian Edition),Oxford University Press, New Delhi A Handbook on Corporate Governance, Institute of Directors India. Website http://www.sebi.gov.in/commreport/corpgov http://www.ecgi.org/codes http://www.nfcgindia.org 139 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 11: CORPORATE SOCIAL RESPONSIBILITY STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Evolution of CSR 11.3 CSR under Companies Act 2013 11.4 Function of CSR Committee 11.5 Recognized CSR activities 11.6 Guidelines suggested by global forums 11.7 CSR Audit 11.8 Summary 11.9 Keywords 11.10 Learning Activity 11.11 Unit End Questions 11.12 References 11.0LEARNING OBJECTIVES After studying this unit, you will be able to: Explain the evolution of CSR in India Describe the importance of CSR Analyse the impact of CSR on Corporate governance, Ethics and Sustainability. 11.1 INTRODUCTION The historic scriptures speak about “Sarva LokaHitam” i.e. the well-being of all stakeholders, has regained importance in the current business environment. Its importance was recognized by all the stakeholders after the disaster like Bhopal Gas Leak and many other incidents happened worldwide. Corporate social responsibility is a concept whereby companies apart from their profitability and growth motive, it is also required to show interests towardssociety 140 CU IDOL SELF LEARNING MATERIAL (SLM)
and the environment by taking responsibility for the impact of their activities on stakeholders includes environment, consumers, employees, communities and all other members of the public sphere. The basic premise is that when the corporations get bigger in size, apart from the financial motive of earning profits, there are many other responsibilities attached to them which are more of social in nature. These are the expectations of the society from these corporate to give something in return to the society with whose explicit or implicit help these entities stand where they are. 11.2 EVOLUTION OF CSR The 1950s saw the start of the modern era of CSR when it was more commonly known as social responsibility. In 1953, Howard Bowen published his book, “Social Responsibilities of the Businessman” and is largely credited with coining the phrase ‘Corporate Social Responsibility’ and is perhaps the Father of Modern CSR. Bowen asked, “What responsibilities to society can business people are reasonably expected to assume?” Bowen also provided a preliminary definition of CSR: “It refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society”. Indian entrepreneurs and business enterprises have a long tradition of working within the values that have defined our nation’s character for millennia. These sound and comprehensive values are even more relevant in current times, as organizations grapple with the challenges of modern-day enterprise, the aspirations of stakeholders and of citizens eager to be active participants in economic growth and development. Many social security and welfare legislations like ESI Act 1948, Employees’ Compensation Act 1923, Factories Act 1948, etc. were enacted. In 1972, the Department of Science and Technology set up a National Committee on Environmental Planning and Co-ordination to identify and investigate problems of preserving or improving the human environment and also to propose solutions for environmental problems. In 1986, the Government enacted the Environment Protection Act to provide for the protection and improvement of environment and the prevention of hazards to human beings, other living creatures, plants and property. 141 CU IDOL SELF LEARNING MATERIAL (SLM)
Corporate social responsibility Voluntary Guidelines 2009, provided that each business entity should formulate a CSR policy to guide its strategic Planning and provide a roadmap for its CSR initiatives, which should be an integral part of overall business policy and aligned with its business goals. These guidelines strive for Inclusive development by stressing more on Ethical functioning and care for all stakeholders. National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business 2011, were formulated keeping in view the diverse sectors within which businesses operate, as well as the wide variety of business organizations that exist in India today, from the small and medium enterprises to large corporate giants. The guidelines highlight nine important principles with regard to human rights, equitable development, Product lifecycle, etc. National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011: The guideline issued by the Ministry of Corporate Affairs was the first towards mainstreaming the concept of Business Responsibilities. The ministry focused business sector to update the principles contained in the Guidelines for responsible business practices. The guidelines were formulated keeping in view the diverse sectors within which businesses operate, as well as the wide variety of business organizations that exist in India today – from small scale to large scale corporate organizations. The principles recommended under these guidelines are summarized below: Principle 1 – Business should conduct and govern themselves with Ethics, Transparency and Accountability. Businesses should not engage in practices that are abusive, corrupt or anti- competitive. Business should develop governance structures, procedures and practices that ensure ethical conduct at all levels and promote the adoption of this principle across its value chain. Business should communicate transparently and assure access to information about their decisions that impact relevant stakeholders. Principle 2 – Business should provide goods and services that are non-hazardous and contribute to sustainability throughout their life cycle. Businesses should raise the consumer’s awareness of their rights and ensure the manufacturing processes, technologies required to produce it are resource efficient and sustainable. Businesses should regularly review and 142 CU IDOL SELF LEARNING MATERIAL (SLM)
improve upon the process of new technology development, deployment and commercialization, incorporating social, ethical and environmental considerations. Principle 3 - Businesses should promote the well-being of all employees and ensure timely payment of fair wages. Businesses should ensure continuous skill and competence upgrading of all employees by providing access to necessary learning opportunities, on an equal and non-discriminatory basis. They should promote employee morale and career development through enlightened human resource interventions. Principle 4 – Businesses should respect the interest of and be responsive towards all stakeholders. Businesses should acknowledge, assume responsibility and be transparent about the impact of their policies, decisions, product and services &associated operations on the stakeholders. They should also resolve the differences raised with stakeholders in a just, fair and equitable manner. Principle 5 – Business should respect and promote human rights and abide by the constitutional provisions in true letter and spirit. Businesses should recognize and respect the human rights of all relevant stakeholders and groups within and beyond the workplace, including that of communities, consumers and vulnerable marginalized groups. Businesses should understand national laws and policies and the content of International Bill of Human rights. Principle 6- Business should respect, Protect and make efforts to restore the environment. They should take measures to check and prevent pollution, after assessing the environmental damage and bear the cost of pollution with due regard to public interest. Businesses should develop Environment Management Systems and contingency plans and processes that help them in preventing, mitigating and controlling environmental damages and disasters, which may be caused due to their operations or that of a member of its value chain. Principle 7 – Business, when engaged in influencing public and regulatory policy. While pursuing policy support, must ensure that their advocacy positions are consistent with the principles and core elements contained in these guidelines. Businesses should utilize the Trade and industrial chambers, association in order to undertake policy advocacy. Principle 8 – Businesses should support inclusive growth and equitable development. They should understand their impact on social and economic development, and respond through appropriate action to minimize the negative impacts. Businesses should make efforts to complement and support the development priorities at local and national levels, and assure 143 CU IDOL SELF LEARNING MATERIAL (SLM)
appropriate resettlement and rehabilitation of communities who have been displaced owing to their business operations. Principle 9 – Business should engage with and provide value to their customers and consumers in a responsible manner. They should avoid misleading advertisements which exploits consumers and exercise due care while providing goods and services that result in over exploitation of natural resources or lead to excessive conspicuous consumption. Businesses should disclose all information truthfully and factually, through labelling and other means, including the risks to the individual, to society and to the planet from the use of the products, so that the customers can exercise their freedom to consumer in a responsible manner. Factors influencing CSR: Globalization with focus on cross-border trade, multinational enterprises and global supply chains raising concerns in CSR related to human resource management practices, environmental protection, and health and safety, among other things. Consumers and investors showing increased interest in supporting responsible business practices and are demanding more information on how companies are addressing risks and opportunities related to social and environmental issues. Serious and high-profile breaches of corporate ethics in recent past have contributed to elevated public mistrust of corporations and highlighted the need for improved corporate governance, transparency, accountability and ethical standards. International standards setting bodies / forums have developed compact, declarations, guidelines, principles and other instruments that outline social norms for acceptable conduct. Increased awareness of the limits of government legislative and regulatory initiatives to effectively capture all the issues that corporate social responsibility addresses. Citizens in many countries are making it clear that corporations should meet standards of social and environmental care, no matter where they operate. 144 CU IDOL SELF LEARNING MATERIAL (SLM)
11.3 CSR UNDER COMPANIES ACT 2013 As per Section 135 of the Companies Act 2013, the CSR provision will be applicable companies which fulfill any of the following criteria during any of the three preceding financial years: Companies having Net worth of Rs. 500 Crores or more, OR Companies having Turnover of Rs, 1000 Crores or more, OR Companies having a Net Profit or Rs. 5 Crores or more. The applicable companies should constitute CSR committee and have to spend in every financial year, at least 2% of Average Net Profit made during the 3 immediately preceding Financial Years. Such CSR committee should consist of at least 3 directors, including at least 1 Independent Director. Company should give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities. If the company fails to spend such amount, the Board should specify the reasons for not spending such amount in its report. 11.4 FUNCTIONS OF CSR COMMITTEE CSR committee shall formulate and recommend to the board, a CSR policy which shall indicate the activities to be undertaken by the company as specified in schedule VII. The committee shall recommend the amount of expenditure to be incurred on the activities to be undertaken by the company. Further, committee is under an obligation to monitor the implementation of the CSR policy from time to time. Committee shall also institute a transparent monitoring mechanism for implementation of the CSR projects / activities undertaken by the Government. 11.5 RECOGNISED CSR ACTIVITIES Schedule VII of Companies Act 2013, clearly listed the following activities as eligible CSR activities related to: i) Eradicating Hunger, Poverty and Malnutrition, Promoting Health Care including Preventive Healthcare and Sanitation, contribution towards providing safe drinking water. 145 CU IDOL SELF LEARNING MATERIAL (SLM)
ii) Promoting Education, including Special education and employment enhancing vocation skills especially among Children, Women, elderly and the differently abled and livelihood enhancement projects. iii) Promoting Gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups; iv) Ensuring Environment sustainability, ecological balance, protection of flora and fauna, Animal welfare, Agro-Forestry, Conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set up by the Central Government; v) Protection of National Heritage, Art and Culture including restoration of buildings and sites of historical importance and works of art; setting up Public Libraries, promotion and development of traditional arts and handicrafts; vi) Measures for the benefit of armed forces veteran, War Widows and their dependents; vii) Training to promote rural sports nationally recognized sports and Olympic sports; viii) Contribution to the Prime Minister’s National Relief Fund or any other fund notified by the central government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; ix) Rural Development Projects, x) Slum Area Development Projects. (Slum area means any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force. 11.6 GUIDELINES SUGGESTED BY GLOBAL FORUMS A collective guidance for companies in connection with CSR is available in the form of several globally recognized guidelines, frameworks, principles and tools, some of which are discussed below. It must be noted that most of these guidelines relate to the larger concept of sustainability or business responsibility, in keeping the fact that these concepts are closely aligned globally with the notion of CSR. i) UN Guiding principles on Business and Human rights. 146 CU IDOL SELF LEARNING MATERIAL (SLM)
ii) OECD Guidelines iii) Social Accountability International. iv) International Organization for Standardization. UN Guiding Principles on Business and Human rights: The guidance principles aid to businesses in order to fulfill their existing obligations towards respecting and protecting the interest of the stakeholder’s especially human rights and freedom, also to comply with the existing laws. These principles act as global standards for addressing the risk of human rights violation related to business activity. When these guidelines are breached, suitable remedial actions are also suggested. The preliminary focus is on the protection of human rights by both, the state and the business enterprises, and the principles broadly outline the manner in which the framework can be implemented. OECD Guidelines: The organization for Economic Co-operation and Development is an international organization that works to build better policies for better lives and facilitate International trade. OECD guidelines for multinational enterprises elaborate on the principles and standards for responsible business conduct for multinational corporations. The principles cover areas such as employment, human rights, environment, information disclosure, combating bribery, consumer interests, science and technology, competition and taxation. They contain defined standards for socially and environmentally responsible corporate behaviour, and also provide procedures for resolving disputes between corporations and communities or individuals adversely impacted by business activities. SA 8000 Standard – Social Accountability International: Standard is based on the conventions suggested by International Labour Organization and UN, which adopts a management system approach in order to ensure that companies that adopt this approach. This standard ensures the protection of basic human rights of workers. Some of the basic element of this standard includes child labour, forced and compulsory labour, working hours, remuneration, etc. International organization for Standardization – ISO 26000: It is the international standard giving guidance on social responsibility and is intended for use by organizations of all types both public and private sectors, in developed and 147 CU IDOL SELF LEARNING MATERIAL (SLM)
developing countries. It provides guidance on principles of social responsibility, the core subjects and issues pertaining to social responsibility and on ways to integrate socially responsible behaviour into existing organizational strategies, systems, practices and processes. It is encouraged to go beyond legal compliance, recognizing that compliance with law is a fundamental duty of any organization and an essential part of their social responsibility. It will promote common understanding in the field of social responsibility and to complement other instruments and initiatives for social responsibility, not to replace them. 11.7 CSR AUDIT The objective of such audit is to identify environment, societal or governance risks faced by the organization and measuring managerial performance. The audit is about managing and taking into consideration organization’s operational, processes and behavioral impact on society and stakeholders from a broad perspective. This audit requires the strategic shift from traditional lines of finance and information technology to widen the scope of operational practices that enables to respond client and handle professional pressures effectively, in the practice of risk management. CSR audit aims to provide an independent opinion on the extent of alignment of CSR objectives with the business objectives and level of managerial commitment and performance with regard to attainment of social responsibility objectives defined by the company’s board. CSR audit should examine the following details: Whether the CSR policy and its objectives are exhaustive. Whether the CSR goals are aligned with the business objectives. Otherwise, CSR activity will not be effective, as there is a deviation from the objective. Check whether the roles and powers of the management are well defined in order to accomplish the objectives of CSR. Identify the procedure for implementation, time frames, and risk and performance management tools for fulfilment of CSR objectives. Check whether the appropriate funds have been allocated and sufficient manpower and infrastructure are in place. Reliability of Internal Control Systems to monitor the adequacy of mechanisms in relation to accomplish CSR objective. It is equally important to assess the impact of already rendered CSR activities in various areas and the standards maintained thereon. 148 CU IDOL SELF LEARNING MATERIAL (SLM)
Identify the area of weakness and suggest changes in order to strengthen the CSR policy. Few CSR Initiatives by Indian Companies: a) Maruti Suzuki India: conducting employee volunteering programme, ‘e-parivartan’, with NGO literacy India, for teaching poor or needy People. b) Dabur India: In Uttar Pradesh and Uttarakhand started an initiative which aims for the overall socio-economic development for poor – ‘Sundesh’. c) NASSCOM foundation – It promotes development through use of information and communication technology, provides tech donations to NGOs. d) Reliance Meritorious Scholarship scheme – It is started in the year 1996, in order to reward the meritorious students in class XII, from the districts of Maharashtra. In 1998, scheme was extended physically-challenged category as well. e) Tata Motors – Initiative centred on health, primary education, skill training, woman empowerment and support services for differently-abled. f) Wipro – It makes its contribution to education and upliftment through Wipro Care. Not just education, Wipro addresses disaster relief and restoring and health and wellness programmes for the poor as well. They have also launched Wipro Eye that encourages ecological sustainability in its operations. 11.8 SUMMARY Corporate Social Responsibility is a concept whereby companies not only consider their profitability and growth, but also the interests of society and the environment by taking responsibility for the impact of their activities on stakeholders, environment, consumers, employees, communities and all other members of the public sphere. A CSR initiative of a corporate is not a selfless act of giving; companies derive long- term benefits from the CSR initiatives and it is this enlightened self-interest which is driving the CSR initiatives in companies. The Companies Act 2013 has introduced the concept of Corporate Social Responsibility in India to the forefront. The CSR provision will be applicable companies which fulfils any of the following criteria during any of the 3 preceding financial years: Companies having Net worth of Rs. 500 Crores or more (Or) Turn- Over of Rs.1000 Crores or more (Or) Net Profit of Rs. 5 Crores or more. 149 CU IDOL SELF LEARNING MATERIAL (SLM)
CSR committee shall consist of 3 directors, including at least one independent director. The committee shall formulate and recommend to the board, a CSR Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII. The board of every company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy. The Board’s Report should also need to include an Annual report on CSR activities of the company in a format prescribed. CSR Audit aims at identifying environmental, social or governance risks faced by the organization and evaluating managerial performance in respect of those. 11.9 KEYWORDS CSR –Corporate Social Responsibility– It is a self-regulating business model that helps a company be socially accountable – to itself, its stakeholders, and the public. As important as CSR is for the community, it is equally valuable for a company. CSR activities can help forge a stronger bond between employees and corporations, boost morale and help both employees and employers feel more connected with the world around them. Social Accountability International – It is an international certification standard setting body that encourages organizations to develop, maintain and apply socially acceptable practices in the workplace. ISO – International organization for Standardization - It is the international standard giving guidance on social responsibility and is intended for use by organizations of all types both public and private sectors, in developed and developing countries. 11.10 LEARNING ACTIVITY 1. Define Responsible Business. ___________________________________________________________________________ ___________________________________________________________________________ 2. List out some of the CSR initiatives taken by Indian Companies. 150 CU IDOL SELF LEARNING MATERIAL (SLM)
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