Block 2

Corporate Governance
UNIT 5 CONCEPT AND POLICY OF and Corporate Social

Responsibility
ACCOUNTABILITY AND
AUTONOMY
Objectives
After going through this unit you should be able to:

• Explain the concept of accountability of PEs;
• Understand the methods of securing accountability;
• Understand the elements of autonomy;
• Discuss the objectives of accountability.
Structure
5.1 Introduction
5.2 Concept of Accountability
5.3 Methods of Securing Accountability
5.4 Elements of Autonomy
5.5 Objectives of Accountability
5.6 Summary
5.7 Self Assessment Questions
5.8 References and Further Readings
5.1 INTRODUCTION
Accountability means to account for one’s actions and to report on the achievements
(and failures, together with necessary explanations) of the prescribed objectives. In
case of Public Enterprises, the problem of accountability is high. The reason being
that Public Enterprises are regulated by a supreme authority, the Government. In the
private Sector the market forces keep a check but this is not the case with the public
sector.
Since liberalization, the public sector has grown in terms of investments made. The
industrial policy statement of 1948 and 1956 clearly states the role of PEs in the
development of the nation. Taking this into account, the government has since
encouraged the PEs but then also the problem of accountability has been a debatable
issue. In this unit we are going to discuss the major issues pertaining to
accountability.
5.2 CONCEPT OF ACCOUNTABILITY
The concept of accountability has a wide social significance in the present context.
Accountability in short means the governments’ obligation to reveal, explain and
justify its policies and action to the legislature, which represents the profit (Bhatia and
Batra, 1996). In accountability, the legislature should be able to perceive and
scrutinize the activities of the PEs so that the programmes of PEs are implemented
efficiently so as to fulfill the needs and aspirations of the masses.
Three main issues in any discussion of accountability are: Accountability for what, to
whom, and how, that is, methods of procedures of securing accountability.
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Public Enterprise: Accountability for What?
Accountability and
Governance
This apparently simple question is difficult and complex in view of the multiple and
sometimes conflicting objectives of PEs. PE managers often find themselves torn
between conflicting claims of “Commercial Profitability” and “Social Profitability”.
The former is easier to judge in terms of percentage return on the capital invested or
by some other accepted method of measurement. But it is not so with “social
profitability”. Thus, clear, consistent, and well-defined goals are often not available
for holding PEs accountable.
A PE should be judged with reference to its total contribution, only a part of which is
financial. Public policy often demands emphasis on various broader aspects, which
are very likely to conflict with commercial returns. Considerations like employments
of backward communities, development of backward areas, import substitution and
model employer often make an undefinable dent into the profit criterion.
If the accountability is made more definite with reference to cost control, quality
standards, capacity utlisation, and securing other physical standards of performance,
it would be easier to measure it. However, the criteria of measurement of
performance continue to remain vague and varying, making PE accountability difficult
and confused. Further, the various interests would like PEs to be accountable on
many different counts as viewed by them and PEs may emphasise different aspects
of their performance.
Accountability to Whom?
The public at large is too diverse and heterogeneous a group of holding PEs
accountable to itself. The accountability has perforce to be to the elected
representative of the public in the legislature. But the public in general does express
its concern over various matters by invoking the help of the press, through public
meetings, demonstration, seminars and conferences by interested parties, pressure
groups, and in other ways. However, the accountability supposed to be secured in
these ways is mostly informal or based on traditions and conventions. On the other
hand, the responsibility to the legislature is well defined and formal.
5.3 METHODS OF SECURING ACCOUNTABILITY
Formal channels of accountability are specified in parliamentary procedures and in

documents of incorporation of PEs. These generally cover, among others, audit by a
public body and preparation of the annual report, both of which are submitted to the
legislature. Accountability is also secured when PEs on their own answer public
criticism in the press, and keep the public informed through speeches, publications,
and other publicity material. Accountability to the Government is also a part of public
accountability because the Government is responsible to the legislature for
performance of PEs.
The Problem of Balancing Accountability and Autonomy
In the use of their productive resources, PEs are expected to operate with the
efficiency of private enterprise, but with the higher accountability for results. The
legislature and the audit at times want to concern themselves not only with the overall
performance but also with individual decisions. This runs counter to the type of
accountability obtained in private enterprise.
One side of the problem is that individual business decisions should not be scrutinized
and the corporate personality should be respected. The other side is that PE involves
public money, which is a sacred trust with those who handle it.
2
They should be above all suspicions and ready to face any reasonable scrutiny. The Corporate Governance
public also feels a sense of ownership over PEs and insists on seeking the most and Corporate Social
Responsibility
efficacious use of its money. Even for private enterprises, greater oneness, and a
higher degree to public control and scrutiny by external agencies are being insisted
upon and accepted all over the world, including India.
As the public seeks to secure an unusually high level of accountability from PEs, the
problem is of balancing it with the need for autnomy necessary to operate a business
enterprise. Various measures have been suggested to effect a proper balance
between autonomy and accountability, but nothing near a final or satisfactory solution
has been obtained. One serious difficulty in striking the proper balance is that as the
ministers are responsible to Parliament for the performance of their PEs, the
concerned ministers often get too much and too easily involved in the working of their
PEs, resulting in serious dilution of autonomy.
The L.K. Jha commission has rightly observed that it is sometimes assumed that
there is a conflict between autonomy and accountability. That is not so. Indeed, the
two go together and what conflicts with both is control. The more detailed and
extensive a system of control over actions and decisions of management, the less
accountable the management becomes. If all the major decisions and even the minor
ones are taken by a PE with the approval or advice or guidance or concurrence of
the government, the management cannot be held accountable for the results but only
for having complied with the wishes of the government.
5.4 ELEMENTS OF AUTONOMY
Researches all over believe that PEs should have adequate autonomy and should be
free from the influence of government and parliament. Citing the second five years
plan, “the general policy, therefore is to confer upon their managements, the large
measure of financial and administrative autonomy consistent with the overall
responsibility of government and accountability to parliament”.
Elements of Autonomy for Public Enterprises (Shrivastava, 1992):
i) Freedom from annual appropriation process, atleast for operating expenses;
ii) Freedom to receive and retain operating revenues;
iii) Freedom to apply operating revenue to operating expenses;
iv) Freedom from general government restrictions particularly in the field of
expenditure;
v) Freedom from normal government appropriated accounting;
vi) Freedom from normal government audit of operation; and
vii) Other related freedoms like freedom to borrow money, to hire and fire, the pay
salaries at the discreation of the enterprise and to control its long-term planning;
India has two kinds of autonomous PEs viz a viz:

a) statutory or public corporation
b) Government companies
In practice, both the forms are similar as Government of India has not laid down a
well defined set of criteria to differentiate between the two.
Autonomy is important but the judgment of its importance is based on the contribution
it makes to good and efficient management. In PEs the concept of autonomy is
different from those of its private counterparts. Here, the funds come from the pool 3
Public Enterprise: of national financial resources, hence the public is the owner of such enterprises. To
Accountability and assess autonomy, it is important to differentiate between accountability to legislature
Governance
and involvement of the government in the operational decisions in the enterprise. In
PEs, autonomy is effective if the management is highly effective and if not, it is a
disaster. Therefore, it becomes important that more emphasis should be laid on
developing management talent than looking for ‘statutory autonomy’ in PEs. There
are certain factors, which hamper the autonmy of PEs. They are as follows:
i) Continuous dependence of PEs on government for finances;
ii) National Policy;
iii) Dominance of government on the board of directors;
iv) Craze for evolving uniform procedures.
If these factors are minimized, autonomy can be more effective.
5.5 OBJECTIVES OF ACCOUNTABILITY
Accountability is very important for any government irrespective of its form or mode
of articulation. Accountability can be formed as the basis for measurement of the top
management and it should be demonstrable otherwise it will be of no use. The extent
of ministerial responsibility for a public enterprise differs from its form and the degree
of control also varies from organisation to organisation.
The main objectives of accountability can be stated as follows:
i) Promoting efficiency;
ii) Achieving specific ends;
iii) Ensuring financial accountability;
iv) Establishment of co-ordination among various programmes;
v) Fulfillment of generative ends and national importance;
vi) Minimizing concentration of powers;
vii) Ensuring ministerial accountability to parliament.
Activity
What are the main issues in securing Accountability to PEs?
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5.6 SUMMARY and Corporate Social
Responsibility
The public sector, post liberalization has occupied a dominant position in Indian
economy and PEs like ONGC are performing at the global level as well. When we
discuss the concept of accountability, it directly relates to the concept of responsibility,
defining the relationship between various authorities. It is necessary to ensure
accountability so that the policies formulated by government are implemented
consistently in order to conduct the operations with maximum efficiency.
5.7 SELF ASSESSMENT QUESTIONS

1. What is the basic problem of striking the right balance between autonomy and
accountability?
2. Discuss the objectives of accountability.
5.8 REFERENCES AND FURTHER READINGS

Bhatia, B.S. & Batra, G.S. (1996). Accountability of Public Enterprises. Deep and
Deep publication, New Delhi.
Narain, Laxmi & Murly, B.S. (1984). Public Enterprise and Fundamental Rights.
N.M.Tripathi (P) Ltd., Mumbai.
Narain, Laxmi. (1995). Principles and Practice of Public Enterprise Management.

S. Chand, New Delhi.
Shrivastava, M.P.(1992). Parliamentary Accountability and Supervision over PEs.

Deep and Deep Publications, New Delhi
Iyer, R. Ramaswamy. (1991). A Grammar of Public Enterprises. Rawat Publica-

tions, Jaipur.
5
UNIT 6 GOVERNMENT - PUBLIC and Corporate Social
Responsibility
ENTERPRISES : INTERFACE
Objectives
After reading this unit you should be able to :
• Explain the nature of Central Government’s Interface with its enterprises;
• Pin point the factors which affect Government PE relationship;
• Understand the various ways in which the government exercises control over its
enterprises ;
• Recognize the principles which ideally should guide Government PE relationship;
• Have an understanding of the Government machinery which interacts with PEs.
Structure
6.1 Introduction
6.2 Factors Affecting Government – Public Enterprise Interface
6.3 Nature of Interface
6.4 Ways in which Government Control is Exercised
6.5 Need to review Government – Public Enterprise Interface
6.6 Principles of Government – Public Enterprise Interface
6.7 Reasons for Excessive Government Control
6.8 Government Machinery which Interacts with Public Enterprises
6.9 Summary
6.1 INTRODUCTION
The government as owner has a close and continuous relationship with its
enterprises. It also oversees the working of PEs and controls their operations
because they are instruments of its economic and social policies. The problem is to
strike the right balance between government control and the autonomy required for
managing PEs. For example, if the government interferes in the day-to-day decision
making, PEs, cannot show results as commercial entities. Yet, the government
cannot provide full freedom to its enterprises, as it is responsible for their
performance to Parliament.
6.2 FACTORS AFFECTING GOVERNEMENT –

PUBLIC ENTERPRISE INTERFACE
The Government PE relationship is affected by many factors taken together, of

which the personality of the chief executive of the enterprise and his equation with
the concerned minister, and the secretary of his ministry is perhaps the most crucial.
It has been noted again and again that within the same environment some PEs have
been able to secure greater autonomy to operate commercially, mainly based on the
personality of their chief executives.
The second factor affecting the relationship is the profits earned by an enterprise.
The Government somehow gets more concerned with the loss-making enterprise, 1
Public
thoughEnterprise:
the profit or loss may not always be due to the efficiency or inefficiency of
Accountability
the enterprise.and
An enterprise can make profits due to its monopoly position or may
Governance
incur losses because the government may not allow it to increase the price for its
products or charges for its services.
6.3 NATURE OF INTERFACE
i) Formal : The Parameters of formal relationship and the way it would operate
are laid down in the Articles of Association of a Government Company, and in
the Acts of Parliament for the statutory corporations.
ii) Informal : This is exercised through personal communications, through

Government directors on the Board, and through written communications
suggesting a course of action for the consideration of the enterprise. Obviously,
in case of informal influence, the responsibility for the decision and for its
consequence is of the enterprise and not of the Government.
An important aspect of informal relationship, that the Government exercises much

authority over its enterprises without accepting responsibility of its consequences.
For example, the government may suggest to the enterprise to award a contract to a
party, to purchase from a particular source, locate a new unit at a particular location,
or not to increase the price of its products. Now, if the enterprise follows the advice
and suffers a loss, the Government official or the minister could deny his role, or say
that he never ordered the course but had only suggested it for the consideration of the
enterprise.
But the wishes of the senior officials of the Government or of the concerned minister
are in practice or less than orders. It is so because PEs often depend heavily on the
government for all their funds and also for numerous day-to-day approvals,
clearances and other help.
Let us discuss three dimensions of Government - PE Interface, which are as follows :
The Government as Owner : The government interacts with a PE in three
capacities. First, as owner for most PEs, the government supplies the whole or
majority of the capital, and is therefore interested in getting an adequate return on its
investment and also for the safety of its funds.
Government as Government : Secondly as regulator of the economy, the

Government would like PEs to follow various policies, rules and regulations as in case
of private enterprises, for example, policy regarding foreign collaboration, location of
unit, price control, import substitution, etc. similarly, laws of the land including labour
laws are applicable to both the sectors.
Government as Lender of Funds : Thirdly, as lender of funds, the Government

as a banker evaluates capital investment proposals and working capital needs of PEs,
and oversees effective utilization of funds.
In the case of private sector, these three functions are often distributed : the
ownership is widely distributed among the public at large, the regulation is with the
Government and its agencies, and the financier’s role is played by the public financial
institutions, banks and the capital market.
In PEs, the three roles converge into one body, namely, the Government. And this
makes a qualitative difference : the PEs get unduly and excessively regulated,
controlled and overseen by the government. The Government also imposes various
obligations on PEs which may be incompatible with their efficient management as
2
industrial and commercial entities.
6.4 WAYS IN WHICH GOVERNMENT CONTROL IS
and Corporate Social
Responsibility
EXERCISED
The government exercises control over its enterprises in various ways.
Some of the important methods of Government control are discussed below :
Power to Appoint the Board of Directors : The Government as the sole or

majority owner of PEs appoints their Board of Directors. However, the exercise of
this power has often not been in the best interest of PEs.
The main problems have been :
i) Delays in filing Board level vacancies;
ii) Presence of too many officials on the Board who tend to bureaucratize
decision-making;
iii) Inadequate part-time professional experts on the Board.
Prior Approval for Important Matters : The Government as owner has reserved
many matters to itself, on which decisions can be taken only after its approval.
These matters have been listed in the Articles of Association of Government
companies, and in the Acts or the rules made under them in respect of statutory
corporations. Some of the important matters for which prior approval of the
government is generally required are given below :
i) Capital expenditure beyond the limits laid down from time to time. For example,
most of the PE, can take an investment decision upto Rs. 20 crores at a time but
have to get the government’s approval beyond it.
ii) Formation of a subsidiary company by the enterprise.
iii) Making of rules governing the conditions of service of the employees’ provident
funds and to create reserves and special funds.
iv) Giving employees a commission on the profits of the business of the enterprise.
v) The plans of the development and capital budget of the enterprise and also the
revenue , budget, if there is an element of deficit in it, which is proposed to be
met by the government
It may be noted that PEs generally prepare two types of budgets, i) capital
ii) revenue. All budgets involving capital expenditure must be approved by the
Government, but budgets for revenue expenditure like purchase, wages, salaries,
overheads, etc., need Government approval only if they show a deficit, which the
enterprise would like to be met by the Government.
vi) Agreements involving foreign collaboration.
vii) Borrowings, investment and distribution of profits.
In practice, the Government approval is required for many more matters than stated
in the Articles or the Acts of Parliament. The Department of Public enterprises has
issued many circulars containing Government decisions. These refer to matters for
which the enterprises have to secure approval of the Government. Two examples
where prior approval of the Government is required are i) Wage settlement with the
employees beyond the guidelines issued by the Department of Public Enterprises, and
ii) Visit of the chief executive of a PE abroad.
Government’s Power to Issue Directives: The Government has a right to issue
directive to PEs in regard to their affairs, and the enterprises are bound to comply
with them. The directives could be general or specific. Two important examples of
general directives are : i) reservation of posts for Scheduled Castes and Tribes and
3
ii) for ex-servicemen and dependents of those killed in action.
Public Enterprise:
Examples of specific directives are i) The NTPC was once asked not to enforce
Accountability and bonds against seven executive trainees who had abandoned the
service agreement
Governance
service of the corporation to join another Government department, ii) the Indian Oil
Corporation was asked to conduct departmental enquires against Officers of the
Barauni refinery and, iii) the LIC was asked to set up a divisional office at Silchar.
In most cases, the provision in regard to the issue of directives as contained in the
Articles of Association of Government companies is as follows :
“The President may, from time to time, issue such directives of instructions as may be
considered necessary in regard to the finances, conduct of business and affairs of the
company or the direction thereof. The directors shall give immediate effect to the
directives so issued”.
There are many important variations in the language used. For example, in the case
of SAIL and the NTPC, there is a rider which states : “Provided that all directives
issues by the President shall be in writing addressed to the Chairman. The Board
shall, except where the President considers the national security or interest requires
otherwise, incorporate the contents of the directive issued by the President in the
annual report of the company and also indicate its impact on the financial position of
the company”.
The last part of the directive is important. If the directives were published in the
annual report along with financial implications to the enterprise, it would do a lot of
good to the PE system. But the government sometimes managers the situation by not
issuing written directives, and uses office orders, circulars, expression of opinion and
through official directors on the Board of the enterprise.
Circulars and Office Orders Issued by the Government: Government PE
relationship is also regulated through circulars issued by the Department of Public
Enterprises and by some ministries and departments from time to time. These
circulars have no legal sanction. But as they are a formal expression of the wish of
the owner, they are given due weight by PEs. Moreover, Government directors on
the Board often insists on compliance with these circulars.
Hundreds of circulars, demi-official letters, office orders etc., which deal with almost
all the important (and not so important) aspects of PE working have been compiled in
the form of a book by the Bureau of Public Enterprises and published by the Standing
Conference of Public Enterprise (a formal body of chief executives of Central PEs),
New Delhi, under the title “Government Policy for the Management of Public
Enterprise”, A few examples of the matters covered in these circulars are :
i) Avoidance of retrenchment of labour when computers are introduced ;
ii) Policy regarding wage revision;
iii) PEs not to present costly gifts to their Board members at the Annual general
Meeting of the Company ;
iv) Details of voluntary retirement schemes adopted by PEs;
v) Delegation of powers regarding capital expenditure which can be incurred by the
Board of an enterprise;
vi) Instruction to PEs to effect economy in the provision of residential telephones on
the same lines as in the Government;
vii) Details of consideration to be kept in view, while fixing remuneration payable to
consultants;
viii) Advice to PEs to adopt a comprehensive budgetary control system.
As the circulars are not legally binding, many PEs do not follow them, depending
upon their circumstance and courage. The Government also rightly leaves the matter
to the good sense and judgement of PEs, except where important issues like pay and
4benefits to the employees are involved, which may have wide repercussions.
Report and Returns Obtained from PEs: The Government hasCorporate statutoryGovernance
right to
call for such returns and other information in respect of an enterprise. Detailed Social
and Corporate
Responsibility
formats have been prescribed for this purpose.
The following is a summary of main reports which PEs submit to the Government
regarding their operations.
Subject Periodicity Broad Coverage
1) Summary Information Quarterly Production, sales capacity utilization and

imports and exports
2-A-1) Physical Production Monthly Production of major products and

variations between targeted and actual
production
2-A2) Physical Production Monthly Reasons for loss of production and

actoins for rectifying the position
2-B1) Machine utilization Monthly Machine hours targeted and utilized by

shop principal machines.
2- B2) Machine hours Monthly Loss of machine hours, causes thereof

and action taken
3) Sales Monthly With reference to major products –

planned and achieved
4) Profit and Loss Position Quarterly Summary of various figures before

arriving at the Profit/Loss, as compared to
budget and the previous year/quarter.
5) Order book position Half yearly Growth potential and efforts to secure
orders
6) Inventories Half yearly Norms and actual stock of finished

goods, raw materials, spares and stores
(separate figures for imported and
indigenous)
7) Exports Half yearly Growth potential and efforts to secure

orders
8) Employment Half yearly Employees in various categories

showing increase over the previous
period
9) Internal resources Yearly Generation and utilization as compared

to the budget
10) Township and social Yearly Details of expenditure on these items,

overheads compared with the budget and previous
year
11) Management ratios Yearly Eight ratios regarding production (e.g.

value added per man month, and cost of
sales to sales), inventories (4 ratios).
Personnel 3 ratios (average sales per
employee average emolument per
employee, and mandays lost mandays
scheduled), finance (6 ratios), and R & D
expenditure to net sales (22 ratios in all).
5
Public Enterprise:
Accountability and
The government does
Governance not make the best of the report received by it because it lacks
sufficient manpower/and expertise to analyze the data received and to take the
necessary follow-up action. It is sometimes asked whether it should at all be
necessary of the Government to receive numerous reports except for statistical
purposes.
6.5 NEED TO REVIEW GOVERNMENT – PUBLIC

ENTERPRISE INTERFACE
The Economic and Administration Reforms Commission (Chairman L. K. Jha) was

rightly of the view that “there should be a radical re-examination of the nature of the
Government’s relationship with PEs. The concept of ‘administrative control’ should
be thoroughly reconsidered. PEs should be distanced from the Ministries and the
latter confined to periodical reviews of overall objectives. The constant stream of
instructions, questions, requests for information, summons to meetings, telephone calls
etc., should be drastically curtailed. The detailed supervision of operational matters
should be stopped. Determined efforts should be made to get away from the
tendency on the part of administrative Ministries to treat public enterprises as
subordinate offices”.
The above view sum up the situation in regard to Government – PE interface. Most
PEs though meant to operate as autonomous commercial entitles, are not so in actual
practice. One of the ways to meet the situation is the institution of Memorandum of
Understanding (MOU). However, it is yet to be seen how far the MOU would be
able to streamline the Government-PE interface and improve PE performance.
6.6 PRINCIPLES OF GOVERNMENT – PUBLIC

ENTERPRISE INTERFACE
The ideal way in which the Government should interact with its enterprise is difficult
achieve. But it should be attempted with all sincerity and seriousness. This ideal
way is summed up in the following ten principles. These were stated by the Select
Committee on Nationlized Industries (U. K.) nearly four decades back:
1) The Government should be concerned with securing that PEs operate in the
public interest. And for this purpose, it should decide the broad policies to be
pursued including their financial and economic obligations.
2) The Government should seek to ensure the efficiency of PEs by exercising a

broad oversight over them, but should not become involved in their management.
3) The PEs should be left as free as possible to carry out the policies required of
them as efficiently as possible.
4) There should be clear demarcation of responsibilities, both between Government

departments and PEs. An important part of this principle is that if the enterprises
are not able to deliver the goods, the Government would not do the enterprise job
itself.
5) The methods of Government control should be mainly strategic rather than

tactical PEs can have a clearer idea of what the Government requires of them,
if they do not subject to frequent, ad hoc, tactical control.
6
Responsibility
6) The nature of government control need not be wholly formal. Although
informality has its dangers, a close intimate and informal relationship cannot
avoided, and is even beneficial.
7) The Government and PEs should be publicly accountable. It means that

responsibility for actions, successes and failures should be publicly identifiable.
8) The measure of management should not be purely commercial successful or

social achievement, but should be efficient with which the enterprises carry out
the joint commercial/social duties given to them. The efficiency is compounded
of two factors : success in giving customers the goods and services they want
and success in minimizing the cost of doing so.
9) The ultimate sanction for bad management may be dismissal or non-

reappointment in the post, but improvement of management should be the first
objective.
10) Proper and fruitful exercise of Government control depends on the attitudes and
ability of both the minister and his secretariat and the PE Board and its officials.
The principle speaks for itself because “If the men are wrong, nothing will be
right”.
Though the above principles are sound and meaningful, they are generally not
observed in practice. They often get distorted by the troubles of individual
enterprises, and the government’s disinclination for transparency in its relationship
with PEs.
The Parliamentary Committee on Public Undertakings of the eighth Lok Sabha in its
32nd report emphasized streamlining of the Government PE relationship. It is said
that “as against excessive control, the Government should restrict itself to issuing
policy directives, exercising strategic control”. It wanted the areas of power and
authority between PEs and the administrative Ministries to be clearly delineated. The
Committee felt “concerned over the growing tendency on the part of the Ministries
to interfere into the working of the enterprises” and it wanted “the ground rules to
be laid down to restrict the Government directives only to maters of policy without
transgressing into the sphere of detailed administration”. But nothing has come out
so far from these views. The Government continues to exercise a lot of unnecessary,
and undesirable control over its enterprises.
6.7 REASONS FOR EXCESSIVE GOVERNMENT

CONTROL
The main reasons why the government has not been able to maintain the required
distance from its enterprise are :
i) PEs are often centres of large power and authority;
ii) The socio-political content of their operations are high in many cases.
iii) PEs are important and useful instruments of public policy. The Government
therefore finds it difficult to keep away from PEs. PEs however greatly suffer in
the process and get damned when they fail to show result in competition with
private enterprise.
7
Public Enterprise:
Accountability and
Governance
6.8 GOVERNMENT MACHINERY WHICH
INTERACTS WITH PUBLIC ENTERPRISES
In the context of government PE interface, it is necessary to have an appreciation of

the Government machinery which interacts with PEs. Some important organs of this
machinery are discussed below :
Administrative Ministry
Every enterprise is attached to one ministry/department or the other. For example,

the Department of Civil Aviation is the administrative ministry for the Indian Airlines
and Air-India, and the Department of Steel is the administrative ministry for SAIL.
Generally, two nominees of the administrative ministry are on the Board of directors
of the enterprise, in providing finance, in policy formulation, and in overseeing the
performance of the enterprise. This ministry also provides link for the enterprise with
Parliament, with the Comptroller and Auditor General, and with other national and
international agencies. (providing the link means that these bodies, interact with PEs
via the administrative ministry. For example, if there is a question in Parliament, it is
received by the administrative ministry which obtain the reply from the enterprise for
the concerned minister).
All policy and financial matters which need clearance from the Government have to
be routed by the enterprise through the administrative ministry. For example, if the
enterprise wants to raise money in the market by issuing bonds or it wants to enter
into a foreign collaboration, it has to get clearance of its administrative ministry, which
may also send the proposals to the concerned Government departments.
It is the administrative ministry/department which is responsible for the performance

of the enterprise. Therefore, the administrative ministries have a close and
continuous interaction with their enterprises.
There is much confusion about the division of responsibilities between the ministries
and PEs. PEs also often play safe and refer many matters to the Government which
may not be necessary under the rules providing them autonomy. But the PEs do so
because in this way, the Government become a partner in the decision-making and
PEs can pass on some responsibility of their decisions to the Government.
Department of Public Enterprises (DPE)
It is the co-coordinating agency for all Central Government PEs. It was set up in
1965, as a part of the Ministry of Finance. In 1985, it was transferred to the Ministry
of industry.
Some of the important functions of DPE are as follows :
1) To give policy guidelines to PEs in areas like industrial relations, wages and
benefits, organization structure, administrative vigilance, sound management
practices, etc.
2) To assist various ministries in floatation of new government companies.
3) To examine proposals of various ministries in regard to capital structure of PEs,
and creation and upgradation of posts at the Board level. (if a Board level
appointee in a PE is to be given a higher scale, the matter is also examined by
the DPE.)
8
Corporate
4) To organise training programmes for senior PE executive with the helpGovernance
of
training institution in the country. and Corporate Social
Responsibility
5) To examine all cases of policy where decisions of one PE have repercussions on
other PEs.
6) To act as a nodal agency for co-ordinating all activities relating to the
Memorandum of Understanding which various ministries enter into with the PEs.
7) To prepare a comprehensive report on the working of PEs and to submit it
annually to Parliament (this three-volume report is entitled ‘Public Enterprises
Survey’).
8) To conduct in-depth studies to identify weak areas with the object of improving
productivity and performance of PEs.
Ministry of Finance
Whenever PEs have to get funds for meeting their losses or for expansion and
growth, the Ministry of Finance comes into the picture.
All proposals for capital expenditure beyond Rs. 50 crore are cleared by the Public
Investment Board, which is chaired by the Secretary (Expenditure) in the Ministry of
Finance.
PEs have to interact a lot with the Ministry of Finance whenever proposals sent to
the Government have financial implications.
Vigilance Agencies
Both Central Bureau of Investigation (CBI) and the Central Vigilance Commission
(CVC) are in regular contact with PEs were employees have been charged with
corruption. According to a Government decision of October, 1986, the Board of the
enterprise would function as vigilance body for employees below the Board level and
the CVC would launch proceedings only for the Board level appointees. The CBI
however has jurisdiction over all the employees of PEs. We will discuss CVC in
Unit 8.
Other Ministries and Departments
PEs have to interact with the Planning Commission, if their expenditure proposals are
to be included in the plant estimates, and they hold discussion with the Project
Appraisal Division of the Planning Commission, if they submit proposals for clearance
by the Public Investment Board.
The Labour Ministry comes into picture in regard to labour polices, wages and
incentives, and for schemes of employees’ participation in management, and
voluntary retirement. The Home Ministry is concerned with reservations for various
categories, vigilance, and industrial security.
Activity 1
a) Briefly describe two dimensions of government- PE interface.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
9
Public Enterprise:
………………………………………………………………………………………
Accountability and
Governance
………………………………………………………………………………………
b) State two factors which affect government PE relationship.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
Activity 2
State two ways in which Government exercises control over its enterprises.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
6.9 SUMMARY
The Government controls, guides and finances PEs. A complaint often heard from
PEs is that corporate business entities, they do not get adequate autonomy to show
results. The Government has formal powers (i) to appoint the Board of directors (ii)
to give approval for important matters, (iii) to issue directives, if and when the need
arises, (iv) to guide PEs through office orders and circulars on various matters of
policy and day-to-day operations, and (v) to receive the prescribed reports and
returns from the PEs. The Government also has large informal powers over its
enterprises.
There is a need to be clear about the role of the Government in respect of its
enterprises. The ten principles stated above may be a useful guide in this regard.
Most PEs are important centres of power and authority and have important socio-
political implications. This makes it difficult for the Government to distance itself
from PEs. But it is necessary that PEs have adequate managerial autonomy to
operate successfully. How can the requires autonomy can be secured ? It continues
to be a big dilemma of PE management.
10
Corporate
All PEs are under one or the other ministry of the Government called the Governance
and Corporate
administrative ministry. In addition, PEs have to interact with the Department of Social
Responsibility
Public Enterprises, Ministry of Finance, Vigilance Agencies and various other
departments.
Treat each of the objectives listed above as a question and write a few points for
each one so that you may assess whether you can recall the main points discussed in
the Unit.
Narain, Laxmi, (1995). Principles and Practice of Public Enterprise Management

S. Chand & Co. , New Delhi.
United Nations, (1974). Organization, Management and Supervision of Public
Enterprises in Developing Countries, New York.
Iyer, R. Ramaswamy, (1991). A Grammar of Public Enterprises, Rawat
Publications, Jaipur, Chapter IV, The Relationship between the Government and
Public Enterprises.
Economic Administration Reforms Commission, (Chm L. K. Jha), (1984). Report
No. 4 on Government and Public Enterprises : Autonomy and Accountability.
11
UNIT 7 ACCOUNTABILITY TO LEGISLATURE and Corporate Social
Responsibility
Objectives

• Understand the concept of accountability to parliament;
• Discuss the ways and extent to which PEs are held accountable through
parliament;
• Understand the importance of different legislative committees.
Structure
7.1 Introduction
7.2 Accountability to Parliament
7.3 Methods of Parliamentary Control
7.4 Legislative Committees
7.5 Summary
7.1 INTRODUCTION
Public enterprises are created and owned by the state and therefore in a democracy,
parliamentary supervision and control are essential features (Mathur, 1999). With the
growth of PEs in India, the significance of sufficient and effective accountability and
control over these enterprises has increased manifolds. To have a check over PEs,
different agencies are operating so as to ensure public accountability. Out of these
agencies, parliamentary, ministerial, audit-control and control through Bureau of public
enterprises seem to be more effective as compared to the other agencies.
The crux of all this is that government agencies and public enterprises are
accountable to the government, the legislature, in turn becoming accountable to the
people. The existence of PEs, all along depends on the government and legislature
being satisfied with their performance within the objectives set taking into
consideration the public interest.
In this unit we will confine our discussion to accountability to legislature, whereby we

will discuss different aspects like legislative questions, legislative debates and
legislative committees.
7.2 ACCOUNTABILITY TO PARLIAMENT
Legislature enjoys full powers to scrutinise the working of PEs in India (Batra &
Bhatia, 1996). The legislature ensures that the financial and managerial policies
followed by the PEs are sound and effective. Therefore, legislature control becomes
one of the most important and effective method of enforcing accountability,
especially in the Indian context.
The role of Parliament could be that of either a trustee or custodian of the public
money or that of a shareholder. The difference in these two roles is important
because as a trustee, it would be more or less satisfied with seeing that the public
21
Public Enterprise: funds are properly utilised, and from this standpoint, parliament should not be
Accountability and prepared to take any risk with the public money, but prefer safety and security. On
Governance
the other hand, as a shareholder it can exercise all powers and privileges that vest in
a shareholder. In this case, it should also be prepared to take all reasonable risks with
its investments, if necessary even by increasing investment in a losing concern to
enable the enterprise to become economically viable and to turn the corner.
Therefore, it becomes important to understand these two roles of parliament, which
are not necessarily conflicting.
Another point about parliamentary control is that the more social or macro-economic
the role of a public enterprise is, the greater is the need for parliamentary concern
with its operation, and this concern is bound to end in control. Therefore, the question
of parliamentary accountability must be considered with reference to the nature of
the enterprise, and the social and public policy contents which go into the decision-
making. Enterprises like LIC and the Food Corporation of India are likely to have
more policy implications as compared to, say, enterprises like the Indian telephone
Industries Ltd., and the Electronic Corporation of India Ltd. However the social
content of an enterprise may change over a period of time and with the change of
circumstances.
Limitations of Parliamentary Accountability
a) Parliament is very much hard pressed for time and it is often not able to devote
the necessary attention to complex and important issues involved in the
Management of PEs.
b) Parliamentary review is not likely to be sufficiently detailed and thorough-going,

as parliament does not always have the necessary expertise for the purpose.
Need to Distinguish between Policy and Routine Matters
The real problem of parliamentary control as of public accountability is how to strike

a balance between the autonomy necessary for commercial operations and the right
of parliament to discuss the working and performance of PEs. Theoretically,
parliament will concern itself with matters of overall policy and achievement of broad
general objectives, leaving the enterprises free to carry on their day-to-day
operations. This however, does not work in practice because of the difficulty of
distinguishing with any clarity between “matters of policy” and “day-to-day
operations”.
7.3 METHODS OF PARLIAMENTARY CONTROL
By and large, PEs come in for parliamentary control in the following ways :
• Legislative Questions;
• Legislative Debates;
• Legislative Committees.
Legislative Questions
In a democratic set-up, the parliamentary questions is the most immediate and
convenient way to open to MPs to obtain information about public matters. It broadly
serves the following purposes :
i) It enables the MPs to ventilate grievances against the working of PEs or obtain
information which may not be available in the published documents and
reports;
22
ii) It is an effective way to keeping the minister on his toes as regards his formal Corporate Governance
interventions as well as his informal contact with a PE, for which his and Corporate Social
Responsibility
responsibility is not apparent;
iii) It can have a desirable moral influence on PE managers;
iv) It gives the Member of Parliament a quick opportunity to direct the government
in the policy implementation.
Rules Regarding Admissibility of Questions
In accordance with the parliamentary procedure, questions relating to policy, to an act

or omission of an act on the part of the minister or to a matter of public interest are
ordinarily admitted, and questions which clearly relate to day-to-day administration
are normally disallowed. The final admissibility of questions is a matter for the
Speaker to decide, who controls the question desk.
The following principles have been laid down by the Speaker as regards on PEs :
i) Where a question (a) relates to a matter of policy, or (b) raises a matter of public
interest (although seemingly it may pertain to a matter of day-to-day
administration or an individual case), it is ordinarily admitted for oral answer, that
is, as a starred question.
ii) A question which calls for information of statistical or descriptive nature is

general admitted for written reply, that is, as an unstarred question.
iii) Questions which clearly relate to day-to-day administration and tend to throw
work on the ministers and PEs incommensurate with the results to be obtained
there from, are normally disallowed.
iv) Questions seeking statistical information available in the published documents are
normally disallowed.
The Speaker, in his discretion, can admit a question involving a point of principle or
matter of public importance, even if it concerns day-to-day administrative details.
Efficacy of the Question Device
A sample study of 141 question on the policy and overall working of PEs, answered
by the Department of Public Enterprises, during March-September, 1990, found that
the questions did not reflect any in-depth understanding of the problems besetting PE
performance. In answering questions, the government adopted the line of least
resistance. Questions such as number of quest houses hired by PEs and the rent
paid, the amount spent on maintenance and fuel of cars could have been easily
avoided, as they hardly serve any purpose from the stand-point of control and
accountability.
Another study of 151 question on SAIL, asked in the Lok Sabha during 1988, found
that the questions covered most of the important dimensions of the working of SAIL.
The problem however is of the large number of questions which pre-empt much
valuable time of PE top executives. Further, the questions are against the principle of
“level play in field”: for the enterprises in two sectors. It may be rightly asked why
the public sector SAIL, which operates in competition with TISCO and other private
sector firms, alone be subject to question in Parliament about its day-to-day working.
One hopes that in the context of disinvestments of PE equity, the government will not
allow routine questions, day-in day-out, on various aspects of PEs’ working.
23
Public Enterprise: Legislative Debates
Accountability and
Governance Debates cover a wide range of matters including PE policy and performance. The
debates, inter alia, may be on motion of Thanks on the President’s address, at the
time of amendment to an Act relating to a PE, or after the presentation of the budget.
Debates are generally diffused and do not often contain constructive criticism except
case of few members who take pain to study the problem. It is hoped that the
committee system introduced in 1993 will take care for the situation and the problem
afflicting PEs would get better attention.
In addition to debates, matters to PEs are raised in many other ways including the
Zero Hour. An MP may move a resolution relating to a Matter of General Public
Interest involving a PE, PE problems are also discussed under rules which allow the
Calling Attention Motion and Half-an-hour Discussion.
Some occasions on which debates concerning pubic enterprises are held :

• Half-an hour discussion
• Amendment of the statute
• Budgetary Demands
• Discussion on reports of the enquiry committee (if appointed)
• Annual reports
• The President Address
• Adjournment Motion
• Discussion on matters of urgent public importance for short discussion
• Calling attention to matters of urgent public importance.
The efficacy of such debates largely depends on their quality.
The MPs are obviously more interested in issues of topical nature and those affecting
their constituencies or State. Serious matter of policy hardly get attention of
Parliament. The MPs, it seems are more concerned with the survival than long-term
health of PEs. Most PEs have inherent strength to turn the corner provided the
required autonomy and adequate and continuous top management is ensured by the
government. Unfortunately, this dimension has been, more or less, ignored by the MPs.
7.4 LEGISLATIVE COMMITTEES
Legislative committees are one of the weapons to enforce the desired legislative
accountability and control over public enterprises. Here, we are going to discuss the
following three committees in brief :
i) Public Accounts Committee (PAC)
ii) Estimates Committee
iii) Committee on Public Undertakings
i) Public Accounts Committee (PAC)

Public accounts committee as the name suggest plays an important role in enforcing
accountability over PEs. It is the oldest of the three committees and was the first one
to raise the question of exercising parliamentary control over the accounts of PEs.
24
Features of PAC Corporate Governance
• It was first set up in 1921 but was constituted from 1950; Responsibility
• It functions under the direction and control of the speaker of the Lok Sabha;
• The chairman of PAC is monitored by the speaker and the secretarial assistance
is provided by the Lok Sabha Secretariat.
Functions of PAC
The functions of PAC are stated in Rule 308 of the procedure and conduct of
Business in Lok Sabha (Shrivastava, 1992).
The Following are the Main Functions of PAC :

• To examine the appropriation accounts showing the appropriation of the sums
granted by the parliament for the expenditure ;
• To satisfy itself that the money shown in the accounts as having been disbursed
were legally available for, and application, to the service or purpose to which they
have applied or charged;
• To satisfy that the expenditure confirms the authority which governs it;
• To examine the statements of accounts showing the income and expenditure of
public corporations, government companies, trading and manufacturing schemes
and reports of C & AG;
• To examine the statement of accounts showing income the expenditure of
automounous bodies, the audit of which may be conducted by C & AG; to
consider the report of C & AG, the President may have required to conduct and
audit of any report or to examine the accounts of the stores and stocks;
• To examine the money spent on any service during a financial year in excess of
the amount granted by the parliament for that purpose.
The PAC works on the report the controller and Auditor, General, who acts as its
advisor/comptroller and expert guide. The approach and conclusion of the
committee, are therefore not much different.
ii) Estimates Committee
It was constituted on April 10, 1950 for examination of the estimates and the
problems of the government companies. It was the most powerful committee to
review the operations of most of the public enterprises before the establishment of
CPU.
Functions
As mentioned in Rule 310, the function of the Estimates committee are as follows :
• To report what economies, improvements in organisation, efficiency or
administrative reforms, consistent with the policy underlying the estimates, may
be effected;
• To suggest alternative policies in order to bring about efficiency and economy in
administration;
• To examine whether the money is well laid out within the limits of the policy
implied in the estimates;
• To suggest the form in which the estimates shall be presented to parliament.
Though the estimates committee does not enjoy the same authority as the PAC but its
recommendations are the only source of objective and critical information about
public enterprises. 25
Public Enterprise: iii) Committee on Public Undertakings (CPU)
Accountability and
Governance
The most effective and important instrument of parliamentary control is the Standing
committee of Parliament, which comprises 22MPs, 15 from the Lok Sabha and 7
from the Rajya Sabha. Functions To examine the reports of accounts of PEs, To
examine the report of the comptroller and Auditor General of India on PEs , To
examine, in the context of autonomy and efficiency of PEs, whether their affairs are
being managed in accordance with sound business principles and prudent commercial
practices.
The CPU shall not examine (i) matters of major government policy as distinct from
business or commercial functions of PEs and (ii) matters of day-to-day
administration.
Working of the Committee
The term of the Committee does not exceed one year, though the chairman, who is
appointed by the Speaker from amongst the members of the Committee, in practice,
is re-appointed for another term of one year.
The Committee selects from time to time specific PEs or such subjects as it deems
fit. The committee asks the ministry/enterprise to furnish necessary material relating
to the subjects chosen. The Committee often visits the enterprises chosen for
scrutiny. After the study tours, and after receiving memoranda and other information
from concerned parties, witness from the Government and the enterprise are invited
to give evidence at sittings of the Committee held at Parliament house, New Delhi.
The Committee comments upon important aspects for the working of PEs with a
view to making an evaluation of their performance. The reports of the Committee
provide much useful data and analysis of the enterprises studied by it. The
Committee makes recommendations which are replied by the Government. The
replies along with the comments of the committee, if any, are published by the
Committee in what is called “Action taken Reports”. A great advantage of these
reports is that they commit the Government in respect of the action promised to be
undertaken on a particular recommendations.
All Central Government companies and statutory corporations established by Central

Acts, e.g. Airports Authority, Food Corporation and Life Insurance Corporation, are
covered by the Committee.
Since its inception in May, 1964, till the end of the Ninth Lok Sabha, the Committee
produced over 400 reports. Of these about half are “action taken reports:. A new
reports cover some specific aspects with reference to all PEs. These are called
“horizontal reports”. Some examples of these reports are : Materials Management in
PEs (40th Report, 3rd Lok Sabha), Financial Management in PEs (15th report, 4th
Lok Sabha), foreign Collaboration in PEs (89th report, 5th Lok Sabha), Appointment of
Auditors in Government companies (55th Report, 6th Lok Sabha) Productivity in 2Es
(97th Report, 7th Lok Sabha) and Social Responsibilities of PEs (24th Report, 8th
Lok Sabha).
A Review of the Committee Role
The CPU helps the PE system in many ways. It advises the Government to bring
about the necessary changes in its policy. For instance, it recommended against the
appointment of secretaries to the Government on the boards; for providing a minimum
tenure of five years to full-time board members, for a successor for the top posts
being designated well in advance; for avoiding frequent changes in the board
26
membership; and for laying down of PE objectives with clarity. All these are critical Corporate Governance
for PE performance, and coming from a parliamentary Committee are of much value. and Corporate Social
Responsibility
The committee also provides counsel or advice to PEs on any matters including
policies, programmes, and day-to-day operations. All extract from a report is
illustrative : “develop an efficient commercial culture… the proposed incentive
scheme should be introduced without further delay…. Aim at complete customer
satisfaction…. Norms should be evolved for inventory holding and should be strictly
enforced … adopt a system for securing prompt payment of dues by customers and
disincentive for delayed payment … get over the losses by an imaginative market
survey and sales promotion.. avoid building up of inventory … charge interest at the
market rate on outstanding….” In a developing country with a serious shortage of
managerial expertise, many obvious and important managerial issues do not often get
adequate attention from those in charge of PEs and a reminder from a high powered
body like the CPU is of great value.
The CPU has not been able to cover every year more than 5 to 6 PEs, on an
average. Thus, a large number of PEs remain unscrutinised or are covered very
infrequently. This is a shortcoming of the system of accountability through CPU.
It is difficult to say how far the CPU keeps PE managements on their toes or helps in
preventing inefficiency, and whether PE behaviour pattern is influenced by the
existence of the committee, A survey of 92 top and senior executives in 41 PEs
found in 1991 that PEs consider the CPU’s role as positive, and most of the
respondents would like their PEs to be examined by the committee. But the
committee has a long a way to go to achieve the objectives stated by the Krishna
Menon Committee (1959), on whose recommendation it was established, namely, the
committee “should encourage both initiative and long-term planning” in regard to
which” government undertakings are normally backward or very shy” and “it would
take a long-term view rather than concern itself with the minutiae of administration”.
7.5 SUMMARY
No empirical assessment has so far been made of the extent to which the public
accountability affects PE performance. Accountability to Parliament through
questions, debates and discussions provides a feedback to PEs on many matters of
policy and operations. The questions also have a moral influence on PE managers in
as much as any of their actions can be questioned on the floor of the House. But the
serious problem is that much valuable time of the PE management is wasted in
replying to questions which are routine, superficial and fall into the realm of day-to-
day management rather than deal with matter of policy. Sometimes, motivated
questions are also asked, PEs are not happy with the way the ‘question device’ of
public accountability operates at present. So far as the debates and discussions are
concerned PEs are almost neutral to the situation.
The accountability secured through CPU is useful and substantial. Many

improvements have been effected by PEs based on recommendations of the CPU.
But as the CPU is not able to cover more than 5-6 PEs in a year, a very large
number of enterprises are either never covered or are covered only after a long time
gap. To this extent, the accountability gets diluted.
27
Public Enterprise:
Accountability and 7.6 SELF ASSESSMENT QUESTIONS
Governance
1. Comment on the effectiveness of the questions and debates as instruments of

parliamentary control.
2. How is the CPU constituted ? How does it working affects PEs ?
3. Discuss the functions of PAC and Estimates Committees.
United Nations. (1974). Organisation, Management and Supervision of Public

Enterprises in Developing Countries, New York.
Narain, Laxmi and Murthy, B. S. (1984). Public Enterprise and Fundamental

Rights, N. M. Tripathi (P) Ltd., Mumbai.
Iyer, R. Ramaswamy. (1991). A Grammar of Public Enterprises, Rawat

publications, Jaipur.
Standing Conference of Public Enterprises. (1990). Reports/Recommendations of

various Committees on Public Enterprises, New Delhi, Chapter one :
Recommendations of the COPU on Accountability and Autonomy of Public
Undertakings
Shrivastava, M.P. (1992). Parliamentary Accountability and Supervision over PEs.

Deep and Deep Publications, New Delhi.
28
UNIT 8 RELATIONSHIP WITH OTHER and Corporate Social
Responsibility
AGENCIES
Objectives
• Discuss the ways to which PEs are held accountable through Comptroller and
Auditor General of India;
• Understand the concept of accountability through courts;
• Discuss the role of Chief Vigilance Commissioner.
Structure
8.1 Introduction
8.2 Accountability Through Audit
8.3 Accountability Through Courts
8.4 Central Vigilance Commission (CVC)
8.5 Impact of Public Accountability
8.6 Summary
8.1 INTRODUCTION
Accountability when studied in the context of public enterprises have many

parameters. Accountability, thus can be of different forms like parliamentary
accountability, ministerial accountability, audit accountability, social accountability,
judiciary accountability. We have already discussed some of the accountability
concepts. In this we would stress upon audit accountability and the judiciary
accountability.
Audit accountability or accountability through audit is important because it ensures

that the expenditure of the government funds have been made according to the
norms. Henceforth, the role of audit becomes increasingly important as control
mechanism.
Judiciary accountability or accountability through courts is also important as it takes

into account all the legal aspects of the public enterprises. The judiciary may
entertain suits, proceedings and can give remedial measures such as damages and
injunction, under the ordinary laws. In this unit we will also discuss some aspects
related to the Central Vigilance Commission (CVC).
8.2 ACCOUNTABILITY THROUGH AUDIT
PEs being owned by the nation have a much higher degree of accountability. Unlike
private enterprise, they cannot get away just by earning adequate profits and
distributing high dividends. Parliament has to be satisfied with their performance and
the Comptroller and Auditor-General of India (C &AG) assists Parliament in this
regard.
1
Public Enterprise: The PE audit by the C & AG can be considered under the following heads:
Accountability and
Governance
Financial Audit
The law requires the accounts of every corporate body to be certified by an

independent authority. This authority is the C & AG for PEs. Auditors of all
Government companies are appointed by the Government on the advice of the C &
AG. These auditors are chartered accountants as in the case of private sector
companies. But the similarity ends here. The chartered accountant of a Government
company does not owe his continuance to the management as in a private enterprise.
In the private sector, even though the auditor is supposed to be appointed by the
shareholders in the Annual General Meeting of a company, for all practical purposes
he is the nominee of the management. The board of directors of the company can
change the auditor if he is critical of the behaviour of the management. This is not so
for PEs, where continuance of auditors is beyond the control of the board of directors
of the enterprise. This makes all the difference in the role which auditors play in
securing public accountability of PEs.
As a part of his financial audit, the C & AG reviews the report of chartered
accountants which certify that the final accounts of a government company represent
a true and fair view of its affairs for a given period. The government companies are
unhappy about this double audit as this adds to their work and may hinder holding the
Annual General Meeting of the Company in time.
Under the liberalized dispensation, it would be unfair to PEs to have their accounts
certified by the C & AG, which does not happen in case of equivalent private
enterprises. Chartered accountants have been empowered by Parliament to certify
the accounts. A check on their certification is uncalled for and unnecessary.
For statutory corporation, e.g., Airports authority of India, where the certification of
the accounts is done by the C & AG himself, the audit certificate is about the same
as given by chartered accountants under section 277 of the Companies Act.
All audit report along with the accounts to which they relate Parliament are as a part
of the annual reports of the concerned enterprise.
Efficiency Audit
It may be noted that private sector enterprises are not subject to any efficiency
evaluation by an external agency as in the case of PEs. PEs are accountable to
Parliament and the C & AG assists. Parliament in evaluating PE efficiency. His
reports relating to PEs, entitle “Audit Report (Commercial)”, are presented to
Parliament from time to time. On an average, the C & AG presents five to six
reports on various PEs every Year. These reports stand referred to the CPU which
is expected to judge efficiency and performance of PEs with reference to the
information contained in them.
The C & AG evaluate PE efficiency in many ways including effectiveness of : (i)

utilization of man power, (ii) utilization and control over materials, and (iii) utilization of
machines. The C & AG also reviews general management efficiency with reference
to: (a) achievement of targets of physical production, (b) fulfillment of projections of
commencement of production, (c) fixation of targets in terms of designed capacity,
(d) comparison of various project cost estimates with the actual, (e) calculation of
financial ratios showing profitability with reference to sales, gross fixed assets, capital
employed, net worth, etc., over a period of time. The C & AG audit also refers to
achievement of overall objectives for which an enterprise was set up.
An argument against efficiency audit is that evaluation of performance is basically

2 the job of management and an external agency would not generally be able to get
down to the grass roots where ultimately the inefficiencies thrive and where, in the Corporate Governance
last resort, the money is made or lost. However, for a PE, the public and parliament and Corporate Social
Responsibility
will not be satisfied only by the assertions of the management that is its operating
efficiently. As efficiency is always comparative, some independent external public
agency is needed to certify it with reference to inter-firm and intra-firm comparison
of certain acceptable indices.
As regards the point that the C & AG cannot evaluate efficiency because it does not
possess other than the financial skills, it may be pointed out that most of the technical
evaluation eventually gets reflected in financial and other statistical data which can be
interpreted by an accountant with reference to the norms laid down by technical
experts and management of the enterprise. This, to a large extent, is apparently
being done successfully by the C & AG in his reports.
Proprietary Audit
This dimension of the C & AG audit extends beyond the formality of expenditure to
its wisdom, faithfulness, and economy. Here the audit claims to ask every question
that an intelligent tax payer, bent on getting the best value for his money, could ask.
The proprietary audit is based on the assumption that the managers of PEs have no
direct personal interest in the gainfulness or otherwise of their decisions, and either
due to their indifference or inefficiency, the best decisions may not be taken.
This audit raises two issues. One, whether the audit is competent to question, and
also whether it is fair to question managerial decisions after the event, taking
advantage of the hindsight, unless prima facie malafide act is involved.
What is needed is an overall review of performance. Individual decisions should not

be called into questions just because the PE manager has no direct personal financial
stake. It is well known that all the world over, top professional managers do not have
much personal financial stake in the companies they manage. What is at stake is
their public position, respect, and ego. It may be noted that no separate reports
covering propriety audit are prepared. The audit Report (commercial), referred to
above covers both the efficiency and proprietary stand points.
Audit by the C & AG is playing a useful role as an instrument of accountability and

control on behalf of the legislature. However, it would serve a more useful purpose if
the audit shifts its emphasis from methods, procedures or individual decisions to
overall results, and to failures in achieving specified goals.
Evaluation by the audit provides a picture of PE operations to Parliament, essential in

a democracy. But in the process, the audit should not demoralize the PE manager
nor spoil the PE image.
8.3 ACCOUNTABILITY THROUGH COURTS
It has been held by the Supreme Court in many cases that an autonomous PE would
be considered as State and the courts can hold PEs responsible to observe
fundamental rights through an order of the court called the writ. This has greatly
enhanced public accountability of PEs. PEs are now open to scrutiny by the courts
in regard to their routine activities like recruitments, promotions, terminations, etc.
The courts can look into any decision of a PE if it is alleged that it affects
fundamental rights of the employees or any citizen having dealings with a PE. This
new dimension of public accountability of PEs which has come on the scene during
the last 10 years, has affected their operations adversely. Some actual cases of the
court’s intervention are given below to illustrate the ways they affect PEs.
3
Public Enterprise: It is important to note that here the court’s intervention is through a writ petition,
Accountability and resulting in immediate action. This unlike a civil suit, which takes an indefinitely long
Governance
time before the court issues an order.
Recruitment Case
A PE which wanted to recruit stenos, got names from the local employment
exchange and along with a few other internal candidates conducted a written test.
This was to be followed by an interview. But just before the interview, a stay order
based on a writ petition was brought by an individual from the High Court directing
the PE to “give appropriate publicity of number of vacancies and eligibility criteria
and give reasonable time to eligible candidates to apply for the post”. The court felt
that the way PE was filling the post did not give a fair opportunity to every eligible
candidate to compete for the job.
Promotion Case
A writ petition was filed questioning management’s policy of promoting purchase

officers to the next higher post after five years if they were engineering graduates
and after seven years if they were non-engineering graduates. The high court did not
accept the management’s argument that promotions in the enterprise were linked
with qualifications and functions, and the classification to the engineering and non-
engineering graduates was reasonable, and ordered parity of non-engineering
graduates with those of engineering graduates.
Service Conditions Case
A PE manager who was posted abroad, resigned from his job about two years after
his return to India. The company’s regulation, inter-alia, provided that gratuity will be
admitted to a manager posted in a foreign office who resigned during the period of
his posting or within three years of his posting back to India. The High Court upheld
the contention of the manager on a writ petition that the regulation was illegal and the
manager was entitled on gratuity.
Dealings with Supplier Case
A PE suspended dealings with a supplier who tried to cheat the enterprise. The
supplier got a court order stating that the PE could not stop dealings with him because
he was not given an opportunity of being heard and that this violated Article 14 of the
Constitution. Thus, PEs’ dealings with their suppliers, dealers and customers are
open to scrutiny by the courts, which is not the case so far as private sector
companies are concerned.
Superannuation Case
A PE employee went to the High Court a few days before his superannuation stating
that the official record was incorrect and according to his birth horoscope he had five
more years to go. The court granted stay against superannuation. The management
had to fight the case for 5 months for getting the writ vacated and eventually had to
pay salary for five months period to the employee.
It would be seen that the courts put extra obligations on PEs in regard to the rights of
the citizen because they treat PEs as State, against which all fundamental rights can
be enforced. Further, action against PEs for the infringement of fundamental rights is
through writ petitions and not through a civil case. As is well known, the remedy
under a civil suit is expensive as well as very time consuming as compared to the
writ. The courts feel that PEs are instruments of the State and should have all the
obligations which the Government/State has in regard to its employees and citizens.
4
PEs rightly contend that it is discriminating to have two different sets of rules to the Corporate Governance
two corporate sector entities in similar manufacturing or trading activities. The and Corporate Social
Responsibility
freedom in commercial dealings and personnel matters available to private enterprise
should also be available to PEs. Regarding the argument of special obligations for
using the public funds, it may be noted that in most private enterprises, the funds
belong either to the public financial institutions or to the public at large who have
virtually no control over their use.
Sometimes, it is argued that the cases of interference by the courts is sporadic and
peripheral, not seriously affecting PE operations. This ignores the government’s
promise of a ‘Level playing field’ to both the sectors. Further, even a few court
cases are enough to cramp the managerial style, and thus affect the right decisions
due to the fear of a possible writ which may be issued by the court. It is extremely
difficult to make an assessment of the adverse impact on decision-making of this fear
psychosis.
It is therefore necessary that the central government amends article 12 of the

constitution of excluding commercial autonomous corporations and government
companies, from the definition of ‘state’. Alternatively, the Supreme Court may be
approached to review the matter in the context of the liberalized economic policy and
the decision to provide a ‘level playing field’ to both the sectors.
8.4 CENTRAL VIGILANCE COMMISSION (CVC)
CVC as the name suggests, detects corruption and malpractices and decides the
punishments. CVC is not an investigating agency but usually gets the investigation
done through agencies like CBI or through the Departmental Chief Vigilance officers
and orders investigation into cases of officials of Central Government. In case of
PEs, the role of CVC is important as it keeps a check on the officials working in PEs.
The commission is empowered to enquire or cause inquiries to be conducted into
offences alleged to have been committed under the Prevention of corruption Act,
1988 by certain categories of public servants. The following categories of public
servants are within the advisory jurisdiction of the commission (www.cvc.nic.in).
a) Group “A” Officers of the Central Government;
b) Such level of officers of the corporations established by or under any central Act,
Government Companies, societies and other local authorities, owned or controlled
by the Central Government, as that Government may, by notification in the
official Gazette, specify in this behalf.
Chief Vigilance Officers (CVO)
CVC has CVOs as its extended hands and are quite higher level officers who are
appointed in each and every Department/Organisation to assist the Head of the
Department/Organisation in all vigilance matters.
Role and Functions of CVOs
CVOs detect and decide punishment for corruption but also take preventive
measures at the post corruption stage and therefore their role and functions are
bifurcated into two
i) Preventive;
ii) Punitive.
5
Public Enterprise: Preventive Functions include taking preventive measures so as to minimize the
Accountability and scope for corruption or malpractices by maintaining proper surveillance.
Governance
Punitive Functions include ensuring speedy processing of vigilance cases at all
stages. It also ensures that charge-sheet, statement of imputations, list of witness and
documents etc. are carefully prepared, sorted out and sent promptly.
In all, the role of CVC is to detect and punish the guilty but as the saying goes
‘Prevention is better than cure’, the CVC takes pains to detect the corruption-prone
areas and prevent malpractices.
8.5 IMPACT OF PUBLIC ACCOUNTABILITY

PEs accountability through the C & AG audit is useful, in as much as it improves
financial discipline and instills consciousness about the proper use of public funds.
But the adverse impact is not small. The audit discourages initiative and comes in the
way of business like decision-making. The approach in PEs also becomes rule-
oriented rather than result or performance oriented due to audit.
So far as accountability through courts is concerned, it is a comparatively new

phenomenon and its impact has not yet been assessed. The available data however
shows that decisions of the courts to treat PEs as State would come in the way of
their business-like operations. The court decisions infact go against the very purpose
of PEs being established as autonomous commercial enterprises under the
Companies Act or under special statutes.
The impact of Parliament, audit and courts would obviously vary from enterprise to
enterprise depending, among others, upon the personality of the chief executive and
the success with which the enterprise is operating. Some PEs take the public
accountability in their stride, many have learnt to live with it, but a good number of
PEs feel demoralized in various measures due to what they think ‘oppressive’ public
accountability.
Activity
From your experience, give an example of public accountability through courts.
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6
8.6 SUMMARY and Corporate Social
Responsibility
The C & AG audit covers financial, efficiency and proprietary aspects of PE

working. The audit reports provide an in-depth analysis of PE operations. The audit
is serving a useful role as an instrument of accountability and control over PEs. But
it should shift its emphasis from procedures or review of individual decisions to
failures to achieve specified goals. It is necessary to ensure that the C & AG audit
does not demoralize PE mangers.
The court is a new dimension to PE accountability. The courts consider PEs as

extensions of the State, and the fundamental rights can be enforced against PEs
through a writ petition. PEs are open to scrutiny by the courts for all their actions
where infringement of any fundamental right is alleged. CVC also plays an important
role in PEs as it keeps a check on the corruption and malpractices.

1. What is the nature of PEs’ accountability to the courts?
2. Discuss the role of CVOs in PEs.

United Nations. (1974). Organisation, Management and Supervision of Public
Enterprises in Developing Countries, New York, Chapter VII: Parliament and
Public Enterprise and chapter VIII: Audit an Public Enterprise.
Narain, Laxmi and Murthy, B.S. (1984). Public Enterprise and Fundamental
Rights, N.M. Tripathi (P) Ltd., Bombay.
Iyer, R. Ramaswamy. (1991). A Grammar of Pubic Enterprises, Rawat

Publications, Jaipur. Chapter V: Public Enterprise and Article 1 of the Constitution,
Chapter VII: Accountability and Evaluation, the Chapter VIII: Public Enterprise and
the C & AG.
Narain, Laxmi, (1995). Principles and Practice of Public Enterprise Management.

S. Chand, New Delhi, Chapter VIII: Public Accountability.
Standing Conference of Public Enterprises. (1980). Reports/Recommendations of

various Committees on Public Enterprises, New Delhi. Chapter one:
Recommendations of the COPU on Accountability and autonomy of Pubic
Undertakings.
www.cvc.nic.in (2004)
7
Public Enterprise:
Accountability and UNIT 9 CORPORATE GOVERNANCE AND
Governance
CORPORATE SOCIAL
RESPONSIBILITY
Objectives
After reading the unit you should be able to:
• Understand the meaning & scope of Corporate Governance, Social Responsibility

& Scope of Social Audit of PEs;
• Appreciate the need and importance of Corporate Governance of Social
Responsibility in the changes Scenario; and
• Discuss the Social Responsibility in PEs.
Structure
9.1 Corporate Governance: Concept
9.2 Committee Recommendations on Corporate Governance
9.3 Coporate Governance in Public Enterprises
9.4 Social Responsibility Strategies
9.5 Social Audit- Introduction
9.6 What is Social Audit
9.7 Social Audit in India
9.8 Benefits of Social Audit
9.9 Summary
9.11 References
9.12 Further Readings
9.1 CORPORATE GOVERNANCE : CONCEPT
“A code of corporate governance cannot be imported from outside, it has to be

developed based on the country’s experience. There cannot be any compulsion on the
corporate sector to follow a particular code. An equilibrium should be struck so that
corporate governance is not achieved at the cost of the growth of the corporate
sector.” —Sir Adian Cadbury
What is Corporate Governance?
Corporate Governance has succeeded in attracting a good deal of public interest

because of its importance for the economic health of corporation and the welfare of
society, in general. However, the concept of corporate governance is defined in
several ways because it potentially covers the entire gamut of activities having direct
or indirect influence on the financial health of the corporate entities. As a result,
different people have come up with different definition, which basically reflect their
special interests in the field. The best way to define the concept is perhaps to list a
few of the different definitions rather than mentioning just one or two.
36
Definitions Corporate Governance
Responsibility
Adolf Berle has defined social responsibility as “the manager’s responsiveness to
public consensus” (www.bharatpetroleum.com).
Koontz and O’Donnell have given the definition of social responsibility thus: “The
personal obligation of the people as they act in their own interests to assure that the
rights and legitimate interests of others are not infringed”
(Hindu business line, 1998).
Corporate Governance can be defined as a systematic process by which companies

are directed and controlled to enhance their wealth generating capacity. Since large
corporations employ vast quantum of societal resources, we believe that the
governance process should ensure that these companies are managed in a manner
that meets stakeholders aspirations and societal expectations.
(Chartered Secretary, Oct, 1997).
9.2 COMMITTEE RECOMMENDATIONS ON

CORPORATE GOVERNANCE
Cadbury Committee (1991)
The Cadbury Committee, under the chairmanship of Sir Adrian Cadbury, was set up
by the London Stock Exchange in May 1991. The committee, consisting of
representatives drawn from the top levels of British industry, was given the task of
drafting a code of practices to assist public enterprise. In defining and applying
internal controls to limit their exposure to financial loss, from whatever cause.
Birla Committee (2001)
The first formal committee was appointed by Securities and Exchange Board of India
(SEBI), under the Chairmanship of Kumara Managalam Birla (known as Birla
Committee). This was set up after the CII code on corporate governance was
framed; to study the corporate governance from listed companies’ perspective and
culminated when its recommendations were included in the listing agreement.
The recommendations were applicable to listed companies; their directors,

management, employees and professionals associated with such companies and other
bodies corporate.
The major recommendations of Birla Committee on corporate governance were:
• The Board of directors of a company should have an optimum combination of

executive and non-executive directors with not less than 50% of the Board
consisting of non-executive directors. In case the company has a non-executive
chairman, at least one-third of the board should consist of independent directors.
• Board meetings should be held at least four times in a year with a maximum time
gap of four months between any two meetings.
• The Board should set up a remuneration committee to determine the company’s

policy on specific remuneration packages for executive directors.
• The Board should set up a qualified and independent audit committee.
37
Public Enterprise: • Companies should required to give consolidated accounts in respect of all their
Accountability and subsidiaries. A company having multiple lines of business should be segmental
Governance
reporting.
• A management discussion and analysis report should form part of the annual
report to the shareholders covering industry structure, opportunities and threats,
segment wise or product wise performance, outlook, and risks.
• Companies should arrange to obtain certificates from their auditors regarding

compliance of corporate governance provisions and the certificates should be
sent to stock exchanges and all the shareholders.
As mentioned, these recommendations were incorporated in the listing agreement

(Clause 49) and were sought to be implemented within a time frame of three years.
Later, these recommendations got statutory recognition when they were introduced a
provisions in the Companies (Amendment) Act, 2000.
Naresh Chandra Committee (2002)
Following the Enron fiasco and subsequent enactment of Sarbanes-Oxley Act in the
US, Government of India [Department of Company Affairs (DCA)] had set up
another committee to study corporate governance. This committee was formed under
the Chairmanship of Naresh Chandra (known as Naresh Chandra Committee/NC
Committee).
This committee examined various governance issues, such as:

a) Statutory Auditor – company relationship including independence of Audit
functions and restriction on non-audit services.
b) Need for rotation of statutory audit firms.
c) Advantages of setting up an independent regulator.
d) Role of independent directors for their composition in Board.
After discussions with trade associations and professional bodies the committee made
the following recommendations.
• Disqualification for audit assignments like prohibition of non-audit services and
any direct financial interest or any other business relationship with the audit client
by the audit firm.
• Prohibition of service during cooling off period i.e., no partner or member of the
audit team can joint the audit client nor any key officers of the client can join the
audit firm during this cooling off period (two years)
• Prohibition of undue dependence on an audit client; audit fee received from any
one audit client and its subsidiaries should not exceed 25% of the total revenues
of the audit firm.
• A special resolution should be passed in case an auditor is to be replaced, who is
otherwise eligible for re-appointment and an explanatory statement should
disclose management’s reasons for such replacement.
• In case of all listed companies and companies whose paid up capital and free
reserves exceeds Rs. 10 crore or a turnover of Rs. 50 crore, there should be
certification by the CEO and the CFO to the effect that they have reviewed the
financial statements and that these statements reflect a true and fair picture of
the company.
• Independent directors should play a vital role in the board and all the committees
should be constituted of independent directors.
38
• The minimum Board size should be at least seven, of which four should be Corporate Governance
independent directors. and Corporate Social
Responsibility
• To specifically exempt independent directors from certain criminal and civil
liabilities.
• DCA should encourage institutions to have regular training programs for

independent directors and make it mandatory for such directors to attend these
training sessions before assuming responsibilities.
Unlike the Birla committee, this committee focused on corporate governance from
the perspective of companies in general, without bifurcating as listed or unlisted.
Narayan Murthy Committee
After this study, SEBI appointed a second committee under the chairmanship of N.R
Narayana Murthy to analyze the compliances of clause 49. Narayana Murthy
committee focused mainly on the role of the audit committee and the board
composition, particularly independent directors. The objective of this committee was
to examine and recommend amendments to the law in order to maintain high
standards of corporate governance and also to ensure that corporate governance is
looked beyond mere procedures and is implemented by companies to is protect the
interests of shareholders.
The recommendations of the committee, in short, are:

• Audit committees should consist of members who are ‘financially literate’ i.e.,
ability to read and understand basic financial statements.
• Audit committees of listed companies should review the financial statements and
certify that they are true and report any material deviations from prescribed
accounting standards if any.
• A statement of all transactions with related parties should be placed before audit
committee for formal approval.
• Procedures should be in place to inform board members about the risk
assessment and minimization procedures.
• To lay down the code of conduct for all the board members and senior
management.
• Nominee directors, if appointed, shall be only by the shareholders and institutional
directors shall be subject to same liabilities as other directors.
• Non-executive director’s compensation should be fixed by the board and should
be approved by the shareholders.
• Companies to frame policies, where by personnel who observe any unethical or
improper practice are able to approach the audit committee directly. Further,
companies should affirm annually that they have provided protection to such
‘whistleblowers’.
A close look at the amendments proposed in the Companies (Amendment) Bill, 2003
reveals that the changes proposed are based upon the recommendations of Naresh
Chandra Committee and Narayana Murthy Committee.
Hopefully, these recommendations when accepted in true spirit, should raise the
standards of corporate governance in Indian firms and make them attractive for
domestic and global capital and should form as base for further evolution of structure
of corporate governance. 39
Public Enterprise:
Accountability and 9.3 CORPORATE GOVERNANCE IN PUBLIC
Governance
ENTERPRISES
Public sector enterprises are ‘generally autonomous bodies’ which are owned and
managed by the government and which provide goods or services for a price. The
ownership of the government extends to 51 percent, or more, in order to make it a
public enterprise/entity. Public enterprises are considered as important instruments for
self-reliant economic growth. They also help speed up economic growth, provide the
required infrastructure, act as tools to achieve various social objectives like better
distribution of income, expansion of employees’ employment opportunities, removal of
regional imbalances, reducing concentration etc. From a paltry Rs. 29 crore in 1951-
52, with 29 PEs the investment in the central public sector went up to well over
Rs. 6,00,000 crores by 2000 with 240 PEs.
Public enterprises have been organized in many ways as distinct autonomous units,
with varying degrees of legal and operational independence. Where an autonomous
legal entity is established by an Act of Parliament or legislature, it is called ‘public
corporation’ or ‘statutory corporation’. These are the principally chosen as
instruments for the management of nationalized industries. The other popular method
followed is forming government companies under the provisions of the Companies
Act, 1956 (Sec. 617), in which not less than 51 percent of the paid-up share capital
he held by the central or the state governments, or jointly by the central and state
governments. A subsidiary of a government company is also a government
company.
The Board of Directors is the top management organ, and is responsible for
implementing the objectives of an enterprise. The board members are nominated by
the shareholders, i.e., government. Under the normal pattern, it includes the
Chairman-cum-Managing Director, one or more full-time functional directors,
officials representing and administrative ministry of finance, and sometimes one or
two other relate ministries, and lastly, one or two non-officials, selected for their
expertise and business experience. Under the trusteeship and entrepreneurial
functions concept, the board looks after its various categories of functions –
establishment of basic policies including corporate strategies, decisions on major
financial matters, selection of key personnel, receiving working reports and, reviewing
and passing judgment upon them.
The functioning of PE boards has been subjected to criticism on various grounds. The
various practices followed, it is complained, do not facilitate the emergence of an
autonomous enterprise management with initiative and operating effectiveness, and
yet be responsible and responsive to the government guidelines and policies. The 40th
Report of the Committee on Public Undertaking (73-74) regretted that the
performance of public undertakings continues to be judged by a variety of vague
objects and considerations. It recommended government presenting a white paper
which can set out the framework of governments general, economic, financial and
social strategy for public sector undertakings, micro-objects – both financial and
economic – of each public undertaking and their review, and also qualification of their
social objectives and obligations and the issue of government directives in appropriate
cases. The nomination of government officials, according to experience, has also to
be termed as superfluous and non-functional. The enterprises are also facing
problems as the government is not strictly adhering to the policy that all heads of
public enterprises will have a five-year tenure. This was accepted to improve the
efficiency of top management.
40
Obligation to the Public Sector Enterprise Corporate Governance
Responsibility
a) The role of the executives is to assist the PSE to achieve its objectives as spelt
out in the charter constituting the setting up of the enterprise.
b) It is the obligation of every employee of the public sector administrative ministry

to uphold the Rule of Law and respect for human rights solely in the public
interest while making recommendations or exercising administrative authority. He
or she must maintain the highest standards of probity and integrity.
c) In relation to the general public, the employees in the PSE and administrative
ministries should conduct themselves in such a manner that the public feels that
the decisions taken or the recommendations made by them are objective and
transparent and are not calculated to promote improper gains for the political
party in power or for themselves or for any third party. This would be particularly
significant so far as the customers of the public service are concerned. This will
apply also mutatis mutandis to the employee in the administrative ministry
concerned with the PSE.
d) Employees of the PSEs/administrative ministries should not seek to frustrate or

undermine the policies, decisions and action taken in the public interest by the
management decision. Where following the instruction of the superior authority
would appear to conflict with the exercise of impartial professional judgment or
affect the efficient working of the enterprises, he/she should set out points of
disagreement clearly in writing to the superior authority or seek explicit written
instruction. This will apply also mutatis mutandis to the employee in the
administrative ministry concerned with the PSE.
e) Where an employee of the PSE has reasonable ground to believe that he or she
is being required by the superior authority to act in a manner which is illegal or
against the prescribed rules and regulations or if any legal infringement comes to
his or her notice, he or she should decline to implement the instruction, and would
also have a right to bring the facts to the notice of the Chairman / Managing
Director of the enterprise or the Secretary of the Administrative Ministry / the
Cabinet Secretary to examine the issue carefully to concerned employees in the
administrative ministry.
Accountability and Responsiveness to the Public
a) Consistent with accountability to the superior officers and the ministers in

accordance with provisions governing PSE/administrative ministry, the employees
in the public sector should practice accountability to the people in terms of quality
of service, timeliness, courtesy, people orientation on readiness to encourage
participation of and form partnership with citizen groups, for responsive management.
b) Employees in the PSE/administrative ministry should be consistent, equitable and

honest in their treatment of the members of the public, with particular care for
the weaker section of society and should not even be or appear to be unfair or
discriminatory. Decision in pursuit of discretionary powers should be justifiable on
the basis of non arbitrary and objective criteria.
c) Employees in the PSE/administrative ministry should accept the obligation to

recognize and enforce customers right for speedy redressal of grievance and
commit themselves to provide services of declared quality and standard to customers.
d) Employment in the PSE/administrative ministry should respect the right of public

to information on all activities and transactions of the organizations except where
they are debarred in the public interest from releasing information by provisions
of law or by valid instructions. 41
Public Enterprise: Concern for Value of Public Assets and Funds
Accountability and
Governance
The employees in the PSE/administrative ministry should avoid wastage and
extravagance and ensure effective and efficient use of the public money within their
control.
Non Abuse of Official Position
Employees of PSE/administrative ministry have a responsibility to make decisions on

merits. They are in a position of trust. They must not use their official position to
influence any person to enter into financial or arrangements with them or with any
one else. They must not abuse their official position to obtain a benefit for themselves
or for someone else in financial or some other forms. This will apply also mutatis
mutandis to the employee in the administrative ministry concerned with the PSE.
Continuous Improvement through Professionalism and Teamwork
It shall be the duty of every employees of the PSE/administrative ministry to

continuously upgrade his/her skills and knowledge, strive for creativity and innovation
and nurture the values of team working and harmony. He / she should promote and
exhibit public and private conduct in keeping with the appropriate behaviour and
standards of excellence and integrity. He / she should support the junior in the latter’s
efforts to resist wrong or illegal directives and in abiding by the Code of ethics. At the
same time, they should reward good work and publish any dereliction of duty and
obligations based on objectives and transparent criteria.
Public Accountability
For accountability in the case of central government enterprises, the appropriate

legislature is Parliament, and for state-owned enterprises, the respective state
assemblies. The principle followed here is, as Mr Appleby observes: “Parliament
performs quite admirably when it debates the important questions of Policy. The
wisdom of non individual is substitute for the general wisdom of society, and the
general judgment of society is more closely approximated by a representative
legislature than by any other entity”.
PEs come in for parliamentary consideration through debates, short discussion,

questions, Committee on Pubic Undertakings, and also public inquiry
recommendations made by COPU. The feeling is that MPs are mostly interested in
raising issues of topical nature and those effecting their constituency / state and do
not raise critical issues, such as the government’s failure to fulfil promises made in
various policy statements, eg., Policy Statement of July 1991. The COPU examines
the reports and accounts of PEs, examines the Management Review and
Responsibility
Appropriate Governance Model for PEs
In the literature on corporate governance a distinction is drawn between the “insider

model” and the “outsider model” of corporate governance. The insider model is one
in which a compact group of shareholders business families/houses in India and East
Asia exercise full control over the corporate entity in such a way that the professional
managers hardly enjoy any decision making powers. Overwhelming part of the Indian
corporate economy has adopted the insider model of corporate governance. The
board of directors of such companies are often rubber-stamping authorities with the
boards concurring with almost all the proposals made by the controlling families. The
outsider model of corporate governance is characterized by a separation of control
42
from ownership arising separation of control from ownership arising from a widely Corporate Governance
dispersed equity ownership among large number of institutional and innumerable small and Corporate Social
Responsibility
shareholders. Consequently governance such corporate entities vests with
professional managers and their board of directors. Growing importance of the
economies of scale and scope has necessitated birth of the large firm with its
necessitated birth of the large with its distant shareholders and professional managers
who have to handle complex tasks and responsibilities.
In the case of insider model, the debate on good governance is concentrated on

ensuring that the controlling business family does not appropriate most of the gains.
Several studies on the last East Asian Crises have highlighted that the insider model
of corporate governance prevalent in these countries was largely responsible for
aggravating the seriousness of this crisis. In the case of the outsider model, the main
concerns relate to devising mechanisms to tackle what is known as the agency
problem viz., how to ensure that professional managers function in the interests of
shareholders and the stakeholders.
In the case of PEs ascertaining wishes of the ultimate shareholders (Voters) is

difficult since it is not a practical proposition to put board resolutions for voting at the
AGME/EGM in the same manner as in the case of typical listed company. The
common voters elect their representatives who in turn form a government in turn is
supposed to ensure that voters wishes are translated into concentrate actions.
“In reality far more complex problems arise especially because the layered and
hierarchical principal-agent structure that characterizes the public sector ownership.
The ultimate owners of the public sector entities viz., the voters express their
interests / objectives in a diffuse, indirect and cultured up manner. However, when
the governments/ politicians act on behalf of the owners or the voters to crystallize
owners/voters’ interests in terms of specific objectives, they are prone to could these
objectives to the extent that their self interests influence interpretation of voters
objectives. Since governments / politicians act as principals through civil service,
another layer is added to the principal-agent chain. Civil servants too are liable to act
as agents by allowing their own objectives to dominate their own actions during
administration of public entities.
One may argue that already we have eminent bodies like the Public Enterprise
Selection Board (PESB). The PESB recommends personnel for the posts of
Chairman, Managing Director, Chairman & Managing Director (CMD) and
Functional Directors in PEs as well as posts at any other level. PESB is also
expected to advise the government on such matters as (A) the desired structure of
the boards, (b) performance appraisal system for both PEs and their managerial
personnel, (c) build data bank on the performance of the PEs and their key personnel,
(d) formulation and enforcement of code of conduct for PEs managerial personnel
and (e) suitable training and development programmes for management personnel in
PEs. Despite all these lofty goals placed before the PSEB, the matters have not
improved much in regard to the PEs. Complaints about their performance in all the
matters vested with the PESB continue to be voiced, sometimes loudly even in highly
respectable and responsible quarters. Instances of PEs remaining headless for long
periods of their boards not being constituted with adequate number of functional and
independent directors continue to be frequent and numerous. Quite often the
appointment process gets bogged down because of complaints with regard to integrity
of the candidates being considered for the PEs boards. There are also instances of
spurious complaints lodged by competing candidates, thereby necessitating vigilance
inquiries. In many instances it is a hurdle race especially for competent and clean
candidates, who often prefer to remain out of the race if they attack higher value to
enjoying peace of mind.
43
Public Enterprise:
Accountability and 9.3 SOCIAL RESPONSIBILITY OF BUSINESS
Governance
The growth of large corporations with their professional managers has changed the
nature of society through its effect on competitive forces and the ownership of
private property. With their increases power in society, they are forced to concern
themselves with the nature of social responsibilities. Management must take decisions
involving moral issues and must adapt itself to the social forces that affect it. The
idea of social responsibility of business is based upon the concept that business is
something more than a purely economic institution.
Public Enterprises operates within the precincts of the society. While its immediate
society, where it operates, provides its environment, material, manpower, market etc.
the whole global society provides for its global corporate citizenship and ensures its
facilities in terms of environment, market, perspectives, exposure to technology and
integration with priorities in the business scenario. The social responsibility of Public
Enterprises consists of its responsibility to its consumers and customers, its prospects,
its immediate society (community), its human resources (people), its society at large,
ecological environment, the Government, and its business environment. Social
responsibility of business is not new to our country. In the olden days, whenever there
was a famine, the leading businessmen of the area would literally throw open their
godowns and their treasure chests to provide food and other assistance to the needy.
The history of every region of this country is replete with stories of the magnificent
manner in which businessmen rose to the occasion in times of calamity. Even in
ordinary times, it was the businessmen who looked after the welfare of the destitute,
the goshalas, wells and ponds wherever what was difficult to get, the pathashalas and
so on. So to accept social responsibility is no more than rededicating ourselves to the
cherished values in the field of business. Gandhiji reminded of these values when he
propounded the theory of trusteeship. India is a democratic welfare state. She wants
to achieve welfare through democratic means. Business organization, which fit in
with such a specification, would have a better scope to survive and grow here. In
order to make them suitable for such a business environment, they should foster a
corporate objective of maximizing social benefit. This must be considered as the
social responsibility of business. It pertinently means that every business enterprise
has a responsibility to take care of the society’s interest.
Though the fundamental purpose of Public Enterprises is to produce and distribute

goods and services in such a manner that income exceeds costs, society expects that
business is conducted in a socially responsible manner. Social responsibility embraces
multitude of internal and external relationships of the firm. Business enterprises,
conscious of their social responsibility, would seek to comply with the laws concerned
with employment of women, non-discrimination in employment, ecological effects of
production, consumers, and employee welfare, and in general they would think of the
impact their action on the community.
Social and ethical aspects of business impinge upon the choice of strategy. How
societal values and expectations after business and how a firm perceives its social
and ethical obligations are interactive in character and both of these may become
constraints in strategy formation. That how consumerism, occupational health and
safety, product safety, concern for environmental protection, nutritional issues, beliefs
about ethics and morals and other for environmental protection, nutritional issues,
beliefs about ethics and morals and other similar societal based factors impact upon
the strategies have to accommodate these factors. Some instances can be cited.
Most of the Public and Private Enterprises adopted the villages for development.
Most of the Enterprises launched awareness camps about AIDS. Cigarette
manufacturers have reduced the tar and nicotine content of cigarettes. Food
processors have altered the use of preservatives in food products and have begun to
44 promote nutritional content and “natural” flavours.
The lending institutions have given up their overly concern with safety or security of Corporate Governance
money advanced and are now more concentrating on the competence of the and Corporate Social
Responsibility
entrepreneure and commercial viability of the project. All these instances demonstrate
how business has adapted itself to changing social values and expectations.
Running the enterprise in a “socially responsible” manner implies that the activities of
the organizational are in tune with what is generally perceived as in the public
interest. It also implies that the firm responds positively to emerging societal priorities
and balances the interests of its various stakeholders. Further, it realizes the
importance of being “good citizen” in the community and makes social and ethical
obligations an explicit and high priority consideration in conducting its affairs.
Being “socially responsible” has a positive appeal. The organization improves its
standing in the public, which has the effect of enhancing its own performance
opportunities. If the firms ignore the changing priorities and expectations of society,
the result could be greater public criticism and more onerous regulation by government.
Concern for social responsibility has led to the development of (more or less) formal
procedures to monitor corporate compliance with changing demands. One such
procedure is “social audit”. It is also common knowledge these days that business has
attempted through advertising and public relations activity to explain and accentuate
its consistency with various social objectives. Recognition of the need for social
responsibility has also led several large enterprises to make intentional efforts to increase
their sensitivity towards current and future pressures for changes in social expectations.
9.4 SOCIAL RESPONSIBILITY STRATEGIES

In view of the ongoing controversy regarding whether or not a business has social
responsibility, it is not surprising to find a wide range of industry responses to the
issue. Business responses to social responsibility tend to fall within four categories: (i)
Social opposition, (ii) social obligation, (iii) social response, and (iv) social contribution.
As illustrated in Fig. 9.1, these positions fall along a continuum, ranging from low to
high levels of socially responsible behaviour.
Degree of
Social
Responsibility
Social Social So
Contribution Response Oblig
Figure: 9.1: Approaches to Social Responsibility

Source: Gene Burton and Manab Thakur, Management Today 45
Public Enterprise: Social opposition: This view is taken by the business which feel that they have no
Accountability and obligation to society in which they operate. When they are caught for any offense,
Governance
their immediate responses is to try cover it up while denying it.
Table 9.1: Common Characteristics of Socially Responsible Firms
1. Initially founded by far-sighted people who visibly set the firms moral tone.
2. Stuck to the basics and produced only high quality goods and services for specific
market niches.
3. Developed a public image that emphasized that commitment to quality and often used
non-traditional means to promote it.
4. Firmly practiced the dual principles of self-management and decentralization.
5. Brought in outside people to provide needed talent and additional perspectives.
6. Encouraged all employees to become part of the shared mission through full worker
participation in decisions.
7. Paid fairly and usually offered benefit packages exceeding the competition.
8. Emphasized a democratic people orientation and did without executive perks.
9. Constantly solicited feedback from customers on all subjects from product direction
to corporate donations.
10. Top managers possessed an extensive knowledge of current events and took a
wide-ranging interest in affairs outside their business.
11. Offered donations in cash or services to people in need of help.
12. Took an active role in the operations of their local communities.
13. Deal with like minded businesses and encourage their employers to do the same.
14. Constantly look to the future but always pay attention to the past.
Social Responsibility Towards Different Groups
1. In addition to making a fair and adequate return on capital, business must be just
and humane, as well as efficient and dynamic. The modern business has manifold
responsibilities (a) it self, (b) to its customers; (c) employees; (d) owners,
shareholders and partners, (e) community and (f) the state. The task of
management is to reconcile and harmonise these separate and sometimes
conflicting responsibilities.
2. The S.R. of Business can best be assumed in an atmosphere of freedom with the
least possible restraint on healthy competition. Concentration and monopoly have
to be watched and guarded, and wherever necessary, dispersed.
3. Every business has an overriding responsibility to make the fullest possible use of
its resources, both human and capital. Management has the responsibility to
provide security of employment with fair wages and equal opportunity for
personal growth and advancement within the business, which is a requirement of
justice, and means of securing efficient management.
4. It highlights the respective roles of the enterprises, the shareholders, the workers,
the customers, the management and the community. The responsibility of
management is to fulfill the fair first needs of these claimants besides, providing
consumer satisfaction.
46
5. It laid emphasis on the reciprocal duties between business and the community Corporate Governance
through laying down of practical measures like reliable means of communication, and Corporate Social
Responsibility
better education of he citizens about civil responsibilities, local meetings and social
audit.
On the basis of the above seminar report, we may put down the social responsibilities
of Business, in the Indian context in the flow chart given below
We discuss, in the paragraphs that follow, the S.R. of business towards these
different groups. The following flowchart presents business’s social responsibilities
towards different groups.
Business Firm’s Responsibilities
Towards Owners/ Towards Employees Towards Customers

Shareholders
• Fair Dividend • Meaningful Work • Fair price
• Solvent and Efficient • Job Satisfaction • Superior Quality

Business
• Optimum use of • Fairness Salaries • Superior Service

Resources & Benefits
• Planned Growth • Best Quality of • Superior Product Design

Work life
• Effective • Succession Planning • Quick and Complete

Communication and Development Information
Towards Government Towards Society Towards Inter-Business
• Payment of Taxes, • Employment without • Fair Competition

Custom Duties etc Discrimination
• Abide by the Laws • Employment to • Cooperation for Sharing

Disadvantaged Persons of Scarce Resources and
Facilities
• Observe the Policies • Community Welfare • Collaboration for

Services Maximisation of Business
efficiency
• Maintain Law & • Business Morality

Security • Maintaining Pollution free
Environment
• Maintaining Ecological
Balance
47
Public Enterprise: Social Audit, which is a tool for evaluating, verifying and reporting the performance
Accountability and of the firm in the sphere of social responsibility. It will help a “socially conscious
Governance
organization” to bring about greater strategic articulation and desirable modifications
in its social policies and programs. In this unit the term social audit is defined and the
desirability of undertaking social audit by a business enterprise is discussed. The
various frameworks or methodologies for conducting social audit are explained. The
potential difficulties that could be faced by an organization adopting social audit are
discussed and critically evaluated. The status and the state of art of social audit in
relation to India is examined and analysed. Finally, what looks like the future of social
audit is explored.
48
Case Study 1 Corporate Governance
Responsibility
SOCIAL RESPONSIBILITY OF BUSINESS:
BHARAT PETROLUEM
Introduction
Bharat Petroleum Corporation Limited (BPCL) is a downstream oil refining
and marketing company. The company has its network spread over all the four
regions in India and is represented in almost all markets. It caters to different
petroleum sectors – Liquefied Petroleum Gas (LPG) and Kerosene for
domestic consumption, automotive fuels and lubricants for vehicles, and
feedstock and fuels for industrial applications. The company also manufacture
petrochemicals like Benzene, Toluene, Linear Alkyl Benzene feedstock etc.
With a sales turnover of Rs. 25,650 crore and profits of Rs. 701.30 crore in
1999, BPCL is the 5th largest company by sales in India. Its strength lies in an
efficient refinery and strong distribution network, which has given it a 20%
market share in petroleum products in India. BPCL has a tie up with Shell
Petroleum Co. of Netherlands to manufacture and market Shell lubricants in
India. In a major expansion move, BPCL is increasing its refining capacity
through 3 joint ventures and also adding on to its distribution strength by laying
a similar number of pipelines. BPCL is also planning a foray into
petrochemicals through a 1.8 million tonnes (mt) naphtha craker plant in Tamil
Nadu for around Rs. 7,000 crore and this project is scheduled to go on stream
by 2002.
Ecological Concern
BPCL has been continuously striving towards conservation and improvement
of the environment by adopting new technologies. In March 2003, BPCL
introduced low lead MS (with 0.15 gm of lead per liter) in the country. From
April 1996, HSD with a maximum sulphur content of 0.5% by weight, was
introduced in the metro cities and in the Taj Trapezium. From September 1996,
HSD, with a maximum sulphur content of 0.25% by weight, was introduced in
the Taj Trapezium. To meet the requirement of HSD all over the country with
the revised specification of maximum sulphur content of 0.25% by weight,
from April 1999, facilities for Diesel Hydro De-sulphurisation are being put up
in the refinery. Distribution of other low sulphur fuels (which has maximum
sulphur content of 1.8% by weight) was started in the National capital region
from October 1996, which ended the use on High Sulphur FO and RFO. BPCL
conducted two advertising compaigns of behalf of the industry – the first on the
importance of LPG conservation and the second on the introduction of low
leaded petrol. On the pollution control front, BPCL has set up a special
sophisticated plant to meet the stringent standards set by Minimum National
Standards for Effluents from Oil Refineries (MINAS). BPCL’s emission
standards are far more stringent than the limits laid down by the Pollution
Control Board. BPCL had also invested around Rs. 220 crore, in pollution
abatement and energy conservation systems.
Contd....
49
Public Enterprise: Contd....
Accountability and
Governance
Safety and Social Commitments.
Safety continued to be accorded the highest priority in BPCL both in refining

and marketing operations. In 2002-03, its refinery achieved 3 million man-hours
without Lost Time Accident (LTA) on one occasion and one million man-hours
without LTA on two occasions. The microprocessor based control system as
its refinery monitors the operating conditions for safety hazards and the
refinery is divided into three separate areas as high risk, low risk and medium
risk. Each employee, irrespective of levels, is given fire-fighting training and
mock drills are carried out at quarterly intervals for different range fires.
Employees are given training on simulators so that they learn by committing
mistakes on simulators and not in real conditions. BPCL’s Mumbai refinery has
a Mutual Aid agreement along with the neighboring 9 industries for fighting
major fires.
As a result of higher exposure to various safety awareness programs, there

has been a reduction of injuries in BPCL’s refinery by 34% for its own
employees, and 43% for contractors’ employees, in 1996-97. Moreover the
frequency of LTA has come down from 1.5% to 0.6% for its employees and
from 5.6% to 1.7% for contractors employees. To enhance safety
performance, BPCL introduced ‘safety by walk-around’ concept wherein
experienced officers were appointed as safety surveyors and safety sampling
was done by senior management staff. It also organized a safety symposium at
its refinery in which members from the oil industry, government bodies. Oil
awareness on LPG safety, BPCL also screened one-minute films on the safe
handling of LPG, on popular TV channels.
BPCL sponsors many sporting events like Santosh Trophy, National Football
Tournament, and also coaching camps for youngsters. Lifeline Express was
contributed to social welfare – a fully equipped train, which look the latest
medical technology to remote villages of India. The company has also adopted
11 Scheduled caste/Scheduled tribes villages under the Component and Tribal
sub-plan. The facilities provided by the company include community centers,
tube/borewells, educational support medical facilities, vocational guidance and
training to make villagers self-reliant and improve their standard of living.
Achievements
BPCL was adjudged the winner of the ‘Oil Industry Safety Awards’ for its
safety performance being the best among all the “LPG Marketing Organization
in 1995-96” for the fourth year in succession. BPCL’s annual report for 1994-
95 was selected by ICAI as the best presented amongst the public sector/joint
sector companies for the second year in succession. The South Asian
Federation of Accountants also adjudged the same as the second best
presented in the non-financial sector in the SAARC region. BPCL received
ISO-9002 certification from Bureau Veritas Quality International (BVQI) for
15 out of its 22 bottling plants. BPCL has also received ISO-9002 accrediation
for its refinery, aviation service stations at Mumbai, Delhi, Calcutta and
Bangalore depots at Miraj and Mysore and lubricants blending plant at
Wadilube.
50
Case Study 2 Corporate Governance
Responsibility
SOCIAL RESPONSIBILITY
AFFLUENCE FROM EFFLUENTS
The Rashtriya Chemicals and Fertilizer’s Chembur plant is one of Bombay’s

most well known cases of industrial pollution. The company, in the face of
sustained public pressure, is making attempts to reduce environmental damage.
When the World Bank instituted the Industrial Pollution Control Project
(IPCP). RCF was one of the first to approach IDBI. In January 1993, RCF
entered into an agreement with the financial institution for a DM 12.5 million
(approximately, Rs. 45 crore) loan at 15.5 percent.
RCF’s problem was its two ammonia plants. These plants have been score
spot for the company and have been shut down on more than one occasion. At
the time the plants were setup, it was not mandatory, to include cost of pollution
control equipment in the project cost. But as local residents started complaining
about the pollution levels, RCF started looking for alternatives.
There were modifications going on in both plants. RCF had to wait till these
were complete to be able to estimate the volume of pollutants that would
require treatment. Finally a Ministry of Environment notification in the late
1980’s ordering them to clean up forced RCF into action.
In the process of manufacturing ammonia, certain gases are accumulated

which need to be removed by purging. Using cryogenic technology bought
from a German firm, RCF decided to set up a purge gas recovery plant, which
would in the process of treating ane-rich fuel, both of which can be sold
commercially, thereby making pollution control not just pay for itself but also
generate additional resources. And at the end of the process, the plant
produces no effluents.
RCF’s choice of technology is determined by financial considerations. They

had three options. In the first case, they could simply treat the ammonia, which
is all they are required to do under the regulations. Their internal rate of return
(IRR) for just ammonia recovery was an uneconomical 10.7 percent. Their
second option was to choose ammonia and synthetic gas recovery, for which
the IRR was 27 percent. The final option, the one they chose, includes the
recovery of liquid argon and gives them an IRR of 46.3 per cent. Pay back
period is a brisk 26 months.
Whether RCF will actually earn its projected income is doubtful. Since the time
the plant has come up, argon prices have crashed due to excess capacity and
intense competiters are mainly the steel and automobile industry, which use
argon for welding. RCF officials however, say they are safe, because even
recovery to synthetic gas stage gives them an IRR of 27 percent, leaving RCF
a comfortable profit margin.
Social Opposition: This view is taken by the business which feel that they have no
obligation to society in which they operate. When they are caught for any offense,
their immediate response is to try to cover it up while denying it.
51
Public Enterprise:
Accountability and 9.5 SOCIAL AUDIT : INTRODUCTION
Governance
It is generally believed today that it is the duty of the privately owned enterprise to
ensure that it does not adversely affect the life of the community in which it operates.
Though the duty is not clearly defined, it is usually thought that the corporate business
should not cause pollution, should not discriminate in employment, should not make
money from insavoury or immoral activities and should not withhold information from
consumers about their products. It is also expected that they should make positive
contribution to the life of the community.
The corporate business has become an integral part of the functioning of any society.
It is the recipient of the benefits and privileges of the State and society in which it
operates. The society therefore expects the corporate business to assume
responsibility towards it. Earlier it had been assumed that the vast material resources
like water, land and air could absorb the wastes of production and neutralise any
potential harmful effects. Man assumed that the natural environment would always
renew itself. It is abundantly clear now that this is not so. It is common knowledge
that society is being threatened by pollution of land, sea and air. To an increasing
degree, business has been creating conditions that have resulted in many social ills,
though the same may not be by design or choice. There are various social abuses,
some germane to the profit persuit, some to the negligent and unscrupulous behavior
of business leaders. Most would agree that if these conditions are permitted to
continue it must inevitably lead to social suicide. Steps must be taken to correct the
abuses.
With changing social and economic values and with increasing expectations of society
from corporate business, the companies that adjust to the rational changes and help in
pioneering such changes are likely to survive and flourish and those which oppose,
block or restrict the changes may find it difficult to survive in future. Economic goals
or corporate business can no longer be separated from social goals.
Firms have to recognize their due responsibilities and consider these in the planning
and action stages. They must have a social policy which means that they must
include in their accounting the direct costs to society of their operations to the extent
possible. They should communicate their social policy not only to the members of the
organization but also to outside groups. Social audit is a tool for judging how a
corporate entity has implemented its social policy.
The increasing demand for socially oriented programmes of one kind or another and
for measurement and disclosure of environmental effects of organizational behaviour
has created pressure for adopting some kind of social auditing procedure. This unit
attempts to provide a general definition of social audit, discusses the various
approaches or methodologies for conducting social audit and points out the difficulties
encountered in measuring social performance etc.
9.6 WHAT IS SOCIAL AUDIT?
Social audit has been variously defined. As it happens with any new management
technique, there is not yet any definition which has gained acceptance. Bauer and
Fenn define Social audit as “a commitment to systematic assessment of and reporting
of some meaningful definable domain of a company’s activities that have social
impact”. The author’s emphasis is on the assessment and reporting of corporate
social programmes.
52
Dilley defines the social audit as “investigation of an enterprise’s performance as a Corporate Governance
member of the community in which it has its primary impact: such investigations and Corporate Social
Responsibility
consisting of the preparation of an inventory of the socially relevant activities of the
enterprise, qualification (to the extent possible) of the social costs and benefits
resulting from those activities and compilation of the other quantitative information
providing insight into the social performance of the enterprise” (Hindu Business Line,
1997). Dilley’s definition highlights the making of an inventory of the socially relevant
activities and their quantification in terms of costs and benefits.
Caroll and Bailer, describe social auditing “as a form of measurement”. According to
them “Social audit is a natural evolutionary step in the concern for operationalising
corporate social responsibilities and, in its essence, represents a managerial effort to
develop a calculus for gauging the firm’s socially oriented activities. That, it is an
attempt to measure, monitor and evaluate the organizations performance with respect
to its social programmes and social objectives” (Chartered Secretary, Oct, 1997)
Ahmed Belkaoui has attempted to collate the definitions by Bauer and Fenn, and by
Dilley. He states that “Social Audit – much like the financial audit – is an
identification and examination of the activities of the firm in order to assess,
evaluate, measure and report their impact on the immediate social environment”
(Reddy, 1999). The words in bold are important in this definition which require some
elaboration.
1. Identification assures a tracking down and inventory of all the firms activities
having potential impact on the firms environment identification will result in a
definition of the social dimensions of the firms activities in terms of social costs
or social benefits depending on the nature of their impact on the social
environment.
2. Assessment and Evaluation imply the categorisation of the firms impact on its
environment as either positive social benefits or negative social costs.
3. Measurement implies the assignment of a quantitative or qualitative score to

the social costs and benefits identified in assessment and evaluation.
4. Reporting assumes the disclosure of the firms performance as measured.
Features of Social Audit
The nature of social audit can be made more clear if we bring out its salient features.
The areas for social audit include any activity (see Table 9.1) which has a significant
social impact, such as activities affecting environmental quality, consumerism,
opportunities for women and other disadvantaged people in society and similar others.
The second feature about social audit is that it can determine only what an
organization is doing in social areas, not the amount of social good that results from
these activities. It is a process audit rather than an audit for results.
Thirdly, social performance is difficult to audit because most of the results of social
activities occur beyond the company’s gate and the company has no means of
securing data on the results. Even if data are available it is difficult to establish how
many of them have occurred due.
53
Public Enterprise: Table 9.2 Activities Covered by Social Audit
Accountability and
Governance A. Ecology and Environmental Quality:
• Clear-up of existing pollution
• Design of processes to prevent pollution
• Aesthetic improvements
• Noise control
• Dispersion of industry
• Control of land use
• Required recycling
B. Consumerism:
• Truth in labeling, in advertising, and in all business activities
• Product warranty and service
• Control of harmful products
C. Community Needs:
• Use of business expertise to solve community problems
• Reduction of role of business in community power structure
• Aid with health care facilities
• Aid with urban renewal
D. Governmental Relations:
• Restrictions on lobbying
• Control of business in political action
• Extensive new regulation of business
• Restrictions on international operations
E. Business Giving:
• Financial support for artistic activities
• Donations to education
• Financial support for assorted charities
F. Minorities and Disadvantaged Persons:

• Training of hard-core unemployment
• Equal employment opportunities and quotas for minority employment
• Operation of programmes for alcoholics and drug addicts
• Employment of persons with prison records
• Building of plants and offices in minority areas
• Purchasing from minority businessmen
• Retraining of workers displaced by technology
G. Labour Relations:
• Improvement of occupational health and safety
• Prohibition of “export of jobs” through operations in nations with law
labour costs.
• Provision of day-care centres for children of working mothers
• Expansion of employee rights
• Control of pensions, especially vesting of pension rights
• Impatience with authoritarian structures; demand for participation
54 Contd....
Contd.... Corporate Governance
Responsibility
H. Shareholder Relations
• Opening of boards of directors to members of public representing various interest
groups
• Prohibitions of operations in nations with “racist” or “colonial” governments
• Improvement of financial disclosure
• Disclosure of activities affecting the environment and social issues
I. Economic Activities
• Control of conglomerates
• Breakup of giant industry
• Restriction of patent use
Need for Social Audit
Thus, social audit need be adopted by every corporation to apprise its shareholders,
investors customers, government and the community of the social activities and
financial results of its working. Such information should be disclosed, as mentioned by
the National Association of Accountants’ Committee on Accounting for Corporate
Social Performance in Canada, for four major categories as below:
1) Community Involvement: Socially-oriented activities that are primarily of

benefit to the general public. Examples include : general corporate philanthropy,
housing construction, and financing, health, services, volunteer activities among
employees, food programmes and community planning and improvement.
2) Human Resources: Social performance directed to the well-being of

employees. Categories in this area include employment practices, training
programmes, job enrichment, working conditions, promotion policies and
employee benefits.
3) Physical Resources and Environmental Contributions: Activities directed

towards alleviating or preventing environmental deterioration (pollution). This
category includes the adherence to the law and going beyond it in areas such as
air quality, water quality. Also included is the conservation of scare resources
and the disposal of solid waste.
4) Production or Service Contribution: Concerned with the impact of the

company’s product or service on society. This includes consumerism, product
quality, packaging, advertising, warranty provisions and product safety.
In India, the companies in general and the public sector undertakings in particular
should make disclosure of information for the use of people outside the enterprise,
which include:
i) financial institutions and creditors (who are interested in financial position, fund-
flow and debt-paying capacity of the enterprise);
ii) shareholders, academic institutions and consultants (who are interested in
quantitative and qualitative information regarding proper utilization of resources
transferred to the concern);
iii) the government (for knowing about financial and statistical information for
planning and operating of those enterprises and initiating and administering
financial and economic polices and programmes at state and national levels
55
Public Enterprise: iv) trade unions, political leaders (require information for broad labour policy
Accountability and decisions, for etc); and
Governance
v) environments (who need information regarding air and water pollution ecological
imbalances, depletion of resources and conservation of energy).
Disclosure of information should be thus financial and non-financial.
Financial Information
This includes the disclosure of financial position of the firm, the form of balance
sheet, profit and loss accounts, special accounts, audit reports. Such information is
mainly disclosed in quantitative form, such as income and expenditure of the
company, sources and uses of funds, details about assets and liabilities, working
capital, new capital investment, outstanding distribution of earnings, interest taxes
paid, liquidity position and incentives. Financial information reveals the true position of
a company regarding its liquidity and bankruptcy.
Non-Financial Information
This includes information relating to social performance, human resources, marketing

activities, business environment, production etc. Such information may be disclosed in
quantitative and qualitative terms, but the disclosure of information is to influence
profitability in the long run and to build the company’s image.
Information on social performance generally includes various activities regarding

employee welfare, community work and involvement, social cultural programmes,
role of company in solving social problems of the area, programmes dealing with
training and developing human resources etc. Social programmes are specified in
annual reports.
Information on human resources includes expenditure on recruitment, selection,

training and development of employees, facilities for self-development in organization,
special provision for development of hard-core unemployed persons, sponsoring
executives for delivering lectures in universities, educational institutions and for
foreign training. Such information is disclosed in the Directors’ Report and the
Chairman’s speech.
Information on marketing includes sales figures product-wise and plant-wise, cash

and credit sales, pricing and impact of competition on pricing, product innovations and
development, quality of product advertising and promotional efforts for distribution of
the products, selling commission traveling expenditure of marketing personnel, etc.
Such information is disclosed in the Directors report. Chairman’s statement or in
advertisements etc.
Environment information includes information about the political, economic, socio-

cultural and technological environment, especially on such items as inflation,
unemployment, impact of changes on taxes, changes in legal requirements of business
activities, contribution and participation in company in community development,
technological development, pollution control measures, use of indigenous materials
and efforts at conservation of natural and human resources. The disclosure of
information finds place in the annual reports and chairman’s speech.
56
9.7 SOCIAL AUDIT IN INDIA and Corporate Social
Responsibility
In India, the TISCO has been the first company to set up a Social Audit Committee
for conducting social audit of its work under the chairmanship of Justice S.P. Kotwal,
and Prof. Rajini Kothari and Prof. P.G. Mavalankar as members. This committee
was entrusted with the task of “examining and reporting whether, and the extent to
which, the TISCO has fulfilled the objectives contained in Clause 3A of its Articles of
Association regarding its social and moral responsibilities to the consumers,
employees, shareholders, and the local community”. The Committee opined, “On an
examination of all aspects, the company has fulfilled its obligations to all concerned.”
Started with TISCO the social audit has picked up. UTI, the premier financial
institution has also planned for a social audit. In the report for 1993-94, the chairman
of UTI has declared that “to address the question as to what extent this unique
organization has been able to fulfill its responsibilities vis-à-vis its various publics and
society at large. And independent social audit committee of five eminent citizens has
been setup”.
9.8 BENEFITS OF SOCIAL AUDIT
The benefits of social audit are as follows:
1. Social audit enables the company to take close look at itself and understand
how far the company has lived up to its social objectives.
2. Related to the first benefit is the fact that social audit encourages greater
concern for social performance throughout the organization.
3. Social audit provides data for comparing effectiveness of the different types of
programmes.
4. Social audit provides cost data on social programmes so that management can
relate the data to budgets, available resources, company objectives, and
projected benefits of programmes.
5. Social audit provides information for effective response to external claimants

that make demands on the organization. News know what a business is doing
in areas of their special interest, and a business needs to respond as effectively
as possible. The social audit shows a business where it is vulnerable to public
pressure and where its strengths lie.
Activities
a) What activities of the organization in which you are working (or with which you
have been associated) fall, in your view, in the area of social audit?
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57
Public Enterprise: b) Discuss the social reporting done by your organization.
Accountability and
Governance
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9.9 SUMMARY
In recent times corporate governance and corporate social responsibility have

become the talk of the day. In almost all business organizations, this concept is now
being used formally. This has gained a wide recognition as it is important for the
economic health of the organization and the welfare of the society at large. Since
early 90s recommendations of different committees have been taken into
consideration to understand the practical approach to the concept of corporate
governance.
Social responsibility in business or more popularly known as corporate social

responsibility means that the organization has to work in tune with the public interect.
This comprises of areas like social audit. This becomes a monitoring tool for the
public enterprises so as to enhance the efficiency of these enterprises.
9.10 SELFASSESSMENT QUESTIONS
1. Define Corporate Governance?

2. Discuss the obligations of public enterprises?
3. How Corporate Governance is relevant in today’s context? Explain?
4. Why Social Responsibility is important for the business?
5. What are your recommendations of social responsibility?
6. Explore one successful enterprise of your choice, which is society oriented?
7. Bring out the features and benefits of social audits?
58
9.11 REFERENCES and Corporate Social
Responsibility
www.bharatpetroleum.com
The Hindu business line, (1997).
Corporate Governance. (October, 1997). The New Paradigm, Chartered Secretary

October.
The Freedom to be Giants. (July 1997). in Leash, The Economic Times.
Reddy, B. Rathan. (1999). Essentials of Business Environment. Institute of Public

Enterprise.
Mishra, R.K. (2002). Restructuring of State Level Public Enterprise. Institute of

Public Enterprise.
Mishra, R. K. & Reddy, Venugopal. (1995). Public Enterprises towards a White

Paper.
Corporate Governance Putting Investors First: Scott C. Newquist with Max B.

Russel, Jaico books. www.jaicobooks.com
‘Corporate Governance and PSU’. Dec. 19, (1996) The Economic Times..
Committee on Financial Systems. (1998). (Narasimham Committee-part II).
9.12 FURTHER READINGS
Corporate Governance. October, 1997. The New Paradigm, Chartered Secretary.
Reddy B. Rathan. (1999). Essentials of Business Environment,

Institute of Public Enterprise.
Mishra, R. K. (2002). Restructuring of State Level Public Enterprise, 2002

Institute of Public Enterprise.
Mishra, R. K.& Venugopal Y. (1995). Public Enterprises towards a White Paper.
59

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Corporate Governance

UNIT 5 CONCEPT AND POLICY OF and Corporate Social

After going through this unit you should be able to:

5.2 CONCEPT OF ACCOUNTABILITY

5.3 METHODS OF SECURING ACCOUNTABILITY

Formal channels of accountability are specified in parliamentary procedures and in

5.4 ELEMENTS OF AUTONOMY

India has two kinds of autonomous PEs viz a viz:

5.5 OBJECTIVES OF ACCOUNTABILITY

What are the main issues in securing Accountability to PEs?

5.7 SELF ASSESSMENT QUESTIONS

2. Discuss the objectives of accountability.

5.8 REFERENCES AND FURTHER READINGS

Narain, Laxmi. (1995). Principles and Practice of Public Enterprise Management.

Shrivastava, M.P.(1992). Parliamentary Accountability and Supervision over PEs.

Iyer, R. Ramaswamy. (1991). A Grammar of Public Enterprises. Rawat Publica-

6.2 FACTORS AFFECTING GOVERNEMENT –

The Government PE relationship is affected by many factors taken together, of

6.3 NATURE OF INTERFACE

ii) Informal : This is exercised through personal communications, through

An important aspect of informal relationship, that the Government exercises much

Government as Government : Secondly as regulator of the economy, the

Government as Lender of Funds : Thirdly, as lender of funds, the Government

Power to Appoint the Board of Directors : The Government as the sole or

Subject Periodicity Broad Coverage

1) Summary Information Quarterly Production, sales capacity utilization and

2-A-1) Physical Production Monthly Production of major products and

2-A2) Physical Production Monthly Reasons for loss of production and

2-B1) Machine utilization Monthly Machine hours targeted and utilized by

2- B2) Machine hours Monthly Loss of machine hours, causes thereof

3) Sales Monthly With reference to major products –

4) Profit and Loss Position Quarterly Summary of various figures before

6) Inventories Half yearly Norms and actual stock of finished

7) Exports Half yearly Growth potential and efforts to secure

8) Employment Half yearly Employees in various categories

9) Internal resources Yearly Generation and utilization as compared

10) Township and social Yearly Details of expenditure on these items,

11) Management ratios Yearly Eight ratios regarding production (e.g.

6.5 NEED TO REVIEW GOVERNMENT – PUBLIC

The Economic and Administration Reforms Commission (Chairman L. K. Jha) was

6.6 PRINCIPLES OF GOVERNMENT – PUBLIC

2) The Government should seek to ensure the efficiency of PEs by exercising a

4) There should be clear demarcation of responsibilities, both between Government

5) The methods of Government control should be mainly strategic rather than

7) The Government and PEs should be publicly accountable. It means that

8) The measure of management should not be purely commercial successful or

9) The ultimate sanction for bad management may be dismissal or non-

6.7 REASONS FOR EXCESSIVE GOVERNMENT

i) PEs are often centres of large power and authority;

In the context of government PE interface, it is necessary to have an appreciation of

Every enterprise is attached to one ministry/department or the other. For example,

It is the administrative ministry/department which is responsible for the performance

Department of Public Enterprises (DPE)

Some of the important functions of DPE are as follows :

Other Ministries and Departments

a) Briefly describe two dimensions of government- PE interface.

b) State two factors which affect government PE relationship.