BUSSINESS

ENVIRONMENT AND
CORPORATE ETHICS MODULE 6

2020-21
S1 MBA TOURISM
IMK KARIAVATTOM
THIRUVANANTHAPURAM
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SL NO: TOPIC PAGE NO:

6.1 CORPORATE GOVERNANCE, 2-5

MEANING ,DEFENITION , NEED
AND IMPORTANCE

6.2 CORPORATE GOVERNANCE

ISSUES , 6-8
6.3 ROLE OF AUDITORS

6.4 CORPORATE SOCIAL AUDIT 9-10

6.5 CORPORATE BOARD,

ATTRIBUTES, 10-12
RESPONSIBILITIES AND DUTIES

6.6 CSR- MEANING , DEFENITION

TRANSPERANCY AND 13-16
DISCLOSURE

6.7 CORPORATE SCAM, 16-17

6.8 FAIR TRADE PRACTISES 18-19

6.9 EMERGING TRENDS IN

CORPORATE GOVERANANCE 19-20
AND
RELEVENT INDIAN CASES 21-22

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SL NO: TOPIC DONE BY
1 CORPORATE GOVERNANCE,
MEANING ,DEFENITION , NEED RESHMA M S
AND IMPORTANCE

2 CORPORATE GOVERNANCE AJEESH U

ISSUES ,
ROLE OF AUDITORS

3 CORPORATE SOCIAL AUDIT RAHUL S.S

CORPORATE BOARD,
ATTRIBUTES

4 RESPONSIBILITIES AND DUTIES ADHITHYA SURESH

BABU.P

5 CSR- MEANING , DEFENITION SACHIN.T.G

TRANSPERANCY AND
DISCLOSURE

6 CORPORATE SCAM, APARNA S

AND FAIR TRADE PRACTISES

7 EMERGING TRENDS IN VIDHYA U S

CORPORATE GOVERANANCE
AND
RELEVENT INDIAN CASES

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 CORPORATE GOVERNANCE

MEANING
Corporate governance means the application of best management practices, fulfillment of law and
ethical standards for effective management and distribution of wealth and discharge of social
responsibility for sustainable development of all stakeholders. It also means the way in which
corporate bodies are governed or manage. Business ethics or ethical practices of the professionals
and the corporate social responsibility, accountability to stakeholders, transparency and full
disclosure are required for better governance. All these considerations within which a company is
managed in order to increase the value of shareholders and protect the interest of stakeholders is
called Corporate Governance.

 Father of Corporate Governance – Bob Tricker

His book – Corporate Governance (1984)

DEFINITIONS
Different views are expressed by experts on corporate governance, some of the important
definitions are:

 According to Milton Friedman, Corporate Governance is “the conduct of business in

accordance with shareholder’s desire, which generally is to make as much money as
possible, while conforming to the basic rules of the society embodied in law and local
customs”.

 According to James D. Wolfensohn, president of the World Bank, “Corporate Governance

is about promoting Corporate Fairness, Transparency and Accountability”.

 According to Tricku, “Corporate Governance is concerned with the way corporate entities
are governed, as distinct from the way business within those companies are managed.
Corporate Governance addresses the issues faced by Board of Directors, such as interaction
with top management and relationships with the owners and the others interested in the
affairs of the company”.

 Organization for Economic Co-operations and Development (OECD) has defined

Corporate Governance to mean “a system by which business corporations are directed and
controlled”.

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NEED AND IMPORTANCE OF CORPORATE GOVERNANCE

Corporate Governance is needed to create a corporate culture of

consciousness, transparency and openness. It refers to a combination of laws, rules, regulations,
procedures and voluntary practices to enable companies to maximize shareholder’s long term
value.
Corporate Governance is concerned with direction and control of corporate bodies. It is important
for avoiding malpractices and scams and also for survival and existence of the business corporation
in the present Globalized Era.

Some of the important needs of Corporate Governance are:

 Safeguard the money of investors.
 Ensure success of the corporate.
 Give ease of access to cheap funds.
 Foundation for good corporate citizenship.
 Attach global perspective.

The importances of Corporate Governance are:

 Corporate Governance is concerned with direction and control of corporate bodies. Better
direction and control is inevitable.
 The Corporate Governance lay the foundation for future progress of business.
 It is the framework that ensures accountability.
 In less developed countries, it is a prerequisite of capital market development.
 For attracting new investors, it is necessary to have credible Corporate Governance
practices.
 It is an alternative to competitive markets.
 Good Governance develops retail investors, banks, mutual funds and other institutional
investors.
 It is necessary for attracting international capital.
 It is needed to broaden and deepen local markets by attracting local investors.
 There exists growing needs to access all types of financial resources to harness the power
of private sector for economic and social progress. This has brought Corporate
Governance in prominence the world over.
 It is needed to avoid fraud and company failures, to create accountability and to facilitate
further progress of corporate economy.
 To have accountability and autonomy.
 To enhance the valuation of an enterprise
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  It provide position to shareholders and ensure compliance of laws and regulations

Corporate Governance Issues

Corporate governance is complex and sometimes a little tricky, and as the world moves forward,
changing more and more rapidly, it only grows more elaborate. According to reports the key
corporate governance issues can range from highly strategic topics like corporate strategy, IT,
oversight and innovation, board composition and risk oversight to more real-time topics like crisis
management and shareholder activism. The major issues all over the world included are duties of
Directors, composition and Balance of the Board, Remuneration and Reward of Directors,
Reliability of Financial Reporting and External Auditors, Board’s Responsibility for Risk
Management and Internal Control, Shareholders’ Rights and Responsibilities and Corporate Social
Responsibility and Business Ethics.

The general scene with regard to the Indian corporate sector may be noted, as below:

1. Companies are often run as if they were the managing directors or CEO’s personal freedom.

2. Those at the helm are only about the principal shareholders’ interests, any benefit to other
shareholders is only consequential

3. Majority of directors are unaware that they are agents of shareholders and their position is one
of trust and faith.

4. Participation of non-executive directors in meetings whether of the board or any committee

thereof is inversely proportional to the health of the bottom line -better the bottom line lesser the
participation.

5. Most directors do not consider it necessary to update themselves on changes in laws,

regulations.

6. Non-executive directors do not see themselves as watchdog of the owners.

7. Boardrooms are invariably filled up by ‘yes’ men who do not raise relevant questions.

8. Except in a crisis even nominee directors tend to play a passive role at board meetings and do
not oppose the proposals of the management.

To sum up, no amount of regulation can enforce the true spirit of good corporate governance
practices in a company unless it comes from within the organization.

Corporate governance is a complex concept comprising a number of dimensions including finance,

Risk management Economics, Ethics and law. Since, corporate governance is based upon various
disciplines; it must be able to deal the problems arising in any of its dimension. Indian organization

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became aware about corporate governance around the year 1883. During this time, Indian
corporate environment also witnessed various scandals. The lack of Trust ship, Transparency and
Disclosure, Empowerment and Accountability, and Control led to ultimate corruption in the
management and mismanagement in the affairs of many companies. There are many conceptual
challenges before the organizations concerning corporate governance. Among them there are few
which are of paramount importance and have tremendous influence in the governing process of the
organization.

1. Differentiating the Roles of Board and Management.

2. Deciding the Board composition.

3. Separating the Role of CEO and Chairperson.

4. Re-electing the Board of Directors.

5. Directors and Executives’ Remuneration.

6. Protecting Shareholders Rights.

7. Social Responsibility of the organization.

Whatever the systems of corporate governance adopted, one thing is common that the boards of
directors have been recognized as the heart of the systems of corporate governance and the board
practices have been accepted as the most important practices of governance. It has also been
recognized that along with the Board of directors, the other participants and stakeholders do have
significant roles in the governance systems and their commitment in the process of corporate
governance.

CORPORATE GOVERNANCE – ROLE OF AUDITORS

There are two types of auditors; internal auditors and external auditors. While internal auditors are
included in the employee list of the organization, external auditors are independent. Operations of
the entity are carried out with the oversight of these auditors. However this is not their main
responsibility within the organization. They are required to carry out an examination of financial
statements and accounts to identify whether there is any misstatement in them.

Though the auditor is not engaged in the work of management, but still he has the oversight of
management. Also at times he is the one who supports management on different tasks. These roles
together also lend the auditor a corporate governance role. Among the major corporate governance
roles that an auditor may presume are included the following –

Incorporation in the audit plan –Method by which the auditor can presume corporate governance
role is by incorporating the same into their audit plan. Auditors get an insight of several acts being
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carried out in the organization; this exposes them to several direction and control issues being
handled by entity. This allows flow of information from auditor’s side to the entities in relation to
different stakeholders whose interests might have been overlooked by management. This
information sharing can led to better level of corporate governance by management.

Accountability – The auditors while identifying material misstatements may encourage the
management to determine accountability of issues. It may result in the management, recognizing
the importance of accountability and including it in their controlling process. It can be reasonably
considered to be substantially acceptable, because the board of directors at their own level for
management also need to identify people behind every activity being carried out. An example of it
is Volkswagen where due to lack of accountability establishment, corporate governance was
defeated through a scam which negatively impacted several entities. Therefore the inclusion would
not only benefit the other stakeholders but also allow the main authority, board of director to get
benefitted in their task of management.

Check on corporate governance aspects – Broadly presents that in any case the auditor doesn’t
owns a responsibility to ensure existence of efficient corporate governance. However, he can put a
check on different aspects on corporate governance. The reason is auditor hold a social
responsibility. An audit is carried out to ensure that the public, who is stakeholder in different
names in the entity, gets a true and fair view about the operations of the organization through
financial statements. Until the organization is considerate towards its stakeholders, it would be
indifferent towards their interest and the employees or management would value their interests
more. This can lead to inefficient corporate governance as well as chances of misstatements.
Though the auditor merely has the responsibility to keep a check on misstatement, since non
effective corporate governance can also lead to misstatement, they can keep a check of the same.
However to be successful it is needed that there be a free open dialogue between management and
auditor on the same.

Internal Auditors contribution – Though external auditors can help the entities in ensuring
effective corporate governance, the support that the internal auditors can provide is highly
effective. Internal auditors have a grip over several issues within management. This earns them a
respectful position which they can utilize in relation to corporate governance. They can identify the
different interests of different stakeholders. Once they have recognized the same, they can help the
management identify the same and also determine the possible steps in relation to corporate
governance which can be effective when the interests contradict.

Risk management – Risk management is one of the necessities to ensure effective corporate
governance. The auditors can include a risk assessment procedure within their audit procedure.
Such a procedure would require the management to keep a check on issues which can result in
increase in risk assessment made by auditor. The fear of being caught with any risk factor kept
open due to the check kept by auditor can encourage the management to ensure risk management.
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And this fear to keep the risk under check can result in management taking up risk management
procedures in their governance procedures. Therewith it would result in management being able to
carry out one necessary corporate governance process.

If an analysis be made of the role of auditor in terms of corporate governance, it presents that the
major role is related to the management fear in relation to audit reports. However in case the same
is effective, it can lead to considerable achievement of entity in terms of effective corporate
governance while giving the auditor a credit for the same.

CORPORATE SOCIAL AUDIT

A corporate social audit is an assessment of your company’s performance on corporate social
responsibility objectives. It evaluates measurable goals intended to help your business meet the
expectations your stakeholder groups have regarding your social and environmental
responsibilities. A social audit serves as a way for a business to see if the actions being taken are
being positively or negatively received and relates that information to the company’s overall public
image.

ATTRIBUTES OF CORPORATE SOCIAL AUDIT

Social audit includes any activity which has significant social impact, such as;

 Activities affecting environmental quality

 Equal employment opportunity

 Consumerism

 Community needs

 Labour relations

 Shareholder relations

 Economic activities

 Fixing responsibility within the firm for social performance

CORPORATE BOARD
Corporate board is also known as board of directors, and it means a body elected to govern a
corporation on behalf of shareholders. Generally chosen to represent both management and
shareholder interests, it establishes general policies for the organization, including dividend
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policies, and hires/fires major executives. It is answerable to shareholders for its decisions. A
publicly traded company must have a board of directors. The board of directors includes chairman,
classified board, inside director, interlocking directorates, outside director, staggered terms.

ATTRIBUTES OF CORPORATE BOARD

Researchers have recently begun to integrate the literature on corporate boards and team
effectiveness in an effort to better understand how boards function and impact company
performance. This study identifies five attributes of high performing teams;

 Knowledge

 Information

 Power

 Incentives and opportunity/ time

Corporate Social Audit: -

A social audit is an internal examination of how a particular business is affecting society. The audit
helps companies to determine if they’re meeting their objectives, which may include measurable
goals and benchmarks. A social audit serves as a way for a business to see if the actions being
taken are being positively or negatively received and relates that information to the company’s
overall public image.

Responsibilities: -
1. Shareholders or owner’s
2. Employees
3. Customers
4. Creditors, suppliers and others
5. Society
6. Government

1. Towards Shareholders or owner’s: -

 To provide a fair and adequate rate of return on capital employed.
 To make sure steady capital appreciation to the shareholders.
 To ensure the solvency of the business.
 Assuring security to their fund.
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  Providing correct information about the company.
 To ensure optimum utilisation of the scare resources of the company.
 Protect the environment.
 Avoid all kinds of pollution.

2. Towards Employees: -
 Fair wage, bonus & incentives to its employees.
 Retirement benefits should be provided.
 Provide social security to its employees.
 The business has to ensure the job security to its employees.
 Proper training.
 Provide better working conditions.
 Creating opportunities for creative and talent employees.

3. Towards customer: -
 Avoid misleading advertisements.
 Avoid misleading name of the product.
 Avoid authorized dealer name for misleading customer.
 Avoid wrong information.
 Avoid exploiting customers.
 Avoid collusive agreement with other firms to exploit customer.
 Provide after sales service.
 Regular supply of high-quality goods and service.

4. Towards Creditors suppliers &others: -

 Maintenance of cordial relationship.
 Timely payment & obligation.
 Providing true & correct picture of financial position.
 Avoid litigations.
 Supply information regarding the business towards the community is given by suppliers.

5. Towards Society: -
 Preventing monopoly.
 Disposal of waste & effluents.
 Creating employment opportunities.
 Balanced regional rural development.
 Optimizing the use of resources.
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  Respect human rights.
 Respect the community and citizen of the country.

6.Towards Government: -
 Business must be honest tax payer.
 The business activities should be law abiding.
 Abiding by pollution controls.
 Extending full support to the government in its efforts to solve national problems
such as unemployment, food, inflation, regional imbalance in economic
development, etc….
 Use properly the scare resources of the nation.

Duties: -

1. Duties of the Board: -

 The board shall after taking into account the recommendations made by the CSR
committee, approved the CSR policy for the company.
 The board shall ensure that the activities as are include in CSR policy are undertaken by the
company.
 The board shall ensure that the company spends in every financial year 2% of the average
net profit of the company made during the 3 immediately preceding F.Y in pursuance of its
CSR policy.

2. Duties of CSR committee: -

 The CSR committee shall formulate and recommend to the board a CSR policy shall
indicate the activities to be undertaken by the company as specified.
 CSR committee shall recommend the amount of expenditure to be incurred on the CSR
activities to be undertaken by the company.
 CSR committee shall monitor the CSR policy of the company from time to time.
 CSR committee shall institute a transparent monitoring mechanism for implementation of
the CSR projects or programs or activities undertaken by the company.

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 1. Corporate Social Responsibility
Social responsibility of business refers to the obligations of business to make decisions and
follow in line of action which are desirable in term of objectives and values of society.

Definitions:

Bowen (1953)

Social Responsibility of business refers to the obligations of business to pursue those policies, to
make those decisions, or to follow those line of action which are desirable in terms of the
objectives and values of our society.

Mallen Baker (2003)

A way companies manage the business processes to produce an overall positive impact on
society.

2. Characteristics of Corporate Social Responsibility

Following are the characteristics of social responsibility:

 It applies to all business organizations both in private and public sectors which have
been established for earning profits.
 Social responsibility of a business is continuous process as business is a regular and an on
– going activity.
 The concept of social responsibility of business lays emphasis on the all-
round development of all the sectors of the business.
 The concept of social responsibility of business is the basis of the success of
business. Today, the business cannot survive without the active support of society.

3. Categories of CSR

Although corporate social responsibility is a very a broad concept that is understood and
implement differently by each firm, the underlying idea of CSR is to operate in an
economically sustainable manner.

a. Environmental responsibility
Environmental responsibility initiatives aim at reducing pollution and greenhouse gas
emissions, and the sustainable use of natural resources.

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b. Human rights responsibility
Human rights responsibility initiatives involves providing fair labor practices (e.g.
equal pay for equal work) and fair trade practices, and disavowing child labor.

c. Philanthropic responsibility
Philanthropic responsibility can include things such as funding educational programs,
supporting health initiatives, donating to causes, and supporting community
beautification projects.

d. Economic responsibility
Economic responsibility initiatives involve improving the firm’s business operation
while participating in sustainable practices-for example, using a new manufacturing
process to minimize wastage.

4. Business Benefits of CSR

In a way corporate social responsibility can be seen as a public relations effort

However, it goes beyond that, as corporate social responsibility can also boost a firms
competitiveness.. The business benefits of corporate social responsibility include the
following:

a. Stronger brand image, recognition, and reputation

CSR adds value to firms by establishing and maintaining good corporate reputation
and or brand equity.

b. Increased customer loyalty and sales

Customers of a firm that practices CSR feel that they are helping the firm support
good causes.

c. Operational cost savings

Investing in operational efficiencies results results in operational cost savings as
well as reduced environmental impact.

d. Retaining key and talented employees

Employees often stay longer and are more committed to their firm knowing that
they are working for a business that practices CSR

e. Easier access to funding

Many investors are more willing to support a business that practices CSR.

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 f. Reduced regulatory burden
Strong relationships with regulatory bodies can help to reduce a firm’s regulatory
burden.

5. Outcomes of Social Responsibility

Following are the outcomes of social responsibility:

 Their environment concerns may enable to charge premium prices and gain
brand loyalty.
 Their trustworthiness may help them generate enduring relationships
with suppliers and Distributors.
 They are more likely to be welcomed into foreign country
 They can utilize the goodwill to take advantage of government support
when needed.
 They can get capital more easily from the investors.
 Optimum utilizations of resources
 Producing goods and services efficiently and contributing economic wellbeing
of society.
 Providing public amenities and avoiding conditions of slums and congestion
 Maintain environmental ecology and adopting anti-pollution measure
 Helping the weaker section of the society by providing them an opportunity
for growth.

6. Examples for CSR Activity

a. 1000 SCHOOLS PROJECT- TATA GROUP

The project is based on the right to Education model and its core objectives include ensuring that
every child gets primary education, improving the quality to education in Government schools
and improving governance of schools through School Management Committees and gram
panchayats.

b. BIO MASS COOK STOVE PROJECT-INFOSYS

Infosys has consistently directed its efforts to reduce environmental pollution. To achieve
its objectives the company provided biomass cook stoves to 37,200 families in the
Gangam district in odisha a project that contributes to out of the 7 united Nations

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 Sustainable Development Goals. These cook stoves uses 50% less firewood and
burn smoke free.
c. SOCIAL FORESTRY-ITC LIMITED

The ‘greening of wastelands’ initiative of ITC that it seeks to achieve through Social
Forestry Program me has covered 2,95 lakh acres of land in about 4,900 villages and
impacted over 1,09,000 poor households. This is a part of social and farm Forestry
initiative that has planted trees in 6.8lakhacres to date and employment for 120
million people.

7. TRANSPERANCY AND DISCLOSURE

Transparency is the ease with which an outsider is able to make meaningful analysis of a
company’s actions, its economic fundamentals and the non-financial aspects pertinent to that
business. This is a measure of how good management is at making necessary information
available in a candid, accurate and timely manner- not only the audit data but also general
reports and press releases. It reflects whether or not investors obtain a true picture of what
happening inside the company.

Disclosure can be defined as the information that a company discloses about its environments
impact and its relationship with its stakeholders by means of relevant communication
channels..

CORPORATE SCAM

SCAM

 A fraudulent activity performed by a dishonest individual, group or a company in an attempt

obtain money or something else or value.

DEFENITION OF CORPORATE SCAM

 Activities undertaken by an individual or a company that are done in a dishonest or illegal manner
and are designed to give an advantage to the perpetrating individual or company .
 By creating effective policies, a system of checks and balances are physical security, a company
may limit the extent to which fraud can take place. It is considered a white collar crime.
CORPORATE SCAM THAT SHOOK THE NATION
1. Satyam Scam (2009)

Culprit -B Ramalinga Raju

Amount - 7,200 Crores

This is one of the biggest corporate scams ever to be happened in India. It’s about an accounting scandal
where the culprit admitted to having cooked up accounts of Satyam Computers and inflated bank
balances. He, along with his family members also had been accused of laundering money from a group of
companies. Raju walked out of jail in late November 2011 on bail after spending 32 months behind bars,
not only him all others were also out of jail on bail. CBI is nearing the completion of the case which
includes 37 others apart from the 10 prime accused and 166 companies.

2. Ketan Parekh Securities Scam (2001)

Culprit - Ketan Parekh

Amount - 1,250 Crores

Involved in Circular trading and stock manipulation, Ketan Parekh like his mentor Harshad Mehta
borrowed from banks like Global Trust Bank and Madhavapura Mercantile Co-Operative bank and
manipulated a group of stocks known as K-10 stocks. Although, he spent one year in jail and he was
banned from trading in Indian market till 2017. An IB (Intelligent Bureau) reported last year that he and
his group are still engaged in insider trading through front entities because of huge benami transactions,
hence it was very difficult to establish his complicity.

3. Saradha Chit Fund Scam (2013)

Culprit - Sudipta Sen

Amount - 2,060 - 2,400 Crores

A consortium of over 200 private companies, Saradha Group caused this financial scams with the collapse
of a Ponzi Scheme which was run by them. Rajya Sabha MP, Kunal Ghosh was in jail since November
2013 for interrogations. Investors were promised of high returns including some fancy attractive holidays.
The State Government set up a fund of 500 Crores for compensating poor depositors. ED and SFIO,
some of the agencies are probing the misappropriation of funds.

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Fair trade
Fair Trade is a set of business practices voluntarily adopted by the producers and buyers of agricultural
commodities and hand-made crafts that are designed to advance many economic, social and
environmental goals, including: Promoting safe and sustainable farming methods and working conditions.

Ten Principles of Fair Trade

1 : Creating Opportunities for Economically Disadvantaged Producers

. It seeks to enable them to move from income insecurity and poverty to economic self-sufficiency and
ownership.

2 : Transparency and Accountability

. The organization finds appropriate, participatory ways to involve employees, members and producers in
its decision-making processes.

3 : Fair Trading Practices

The organization trades with concern for the social, economic and environmental well-being of
marginalized small producers and does not maximize profit at their expense. It is responsible and
professional in meeting its commitments in a timely manner. Suppliers respect contracts and deliver
products on time and to the desired quality and specifications. Fair Trade buyers, recognizing the
financial disadvantages producers and suppliers face, ensure orders are paid on receipt of documents and
according to the attached guidelines. A pre payment of at least 50% is made if requested. Where southern
Fair Trade suppliers receive a pre payment from buyers, they ensure that this payment is passed on to the
producers or farmers who make or grow their Fair Trade products. Organizations which produce Fair
Trade products maximize the use of raw materials from sustainably managed sources in their ranges,
buying locally when possible Buyers consult with suppliers before canceling or rejecting orders. Where
orders are cancelled through no fault of producers or suppliers, adequate compensation is guaranteed for
work already done. Suppliers and producers consult with buyers if there is a problem with delivery, and
ensure compensation is provided when delivered quantities and qualities do not match those invoiced.
The organization maintains long term relationships based on solidarity, trust and mutual respect that
contribute to the promotion and growth of Fair Trade. It maintains effective communication with its
trading partners. Parties involved in a trading relationship seek to increase the volume of the trade
between them and the value and diversity of their product offer as a means of growing Fair Trade for the
producers in order to increase their incomes. The organization works cooperatively with the other Fair
Trade Organizations in country and avoids unfair competition. It avoids duplicating the designs of
patterns of other organizations without permission. Fair Trade recognizes, promotes and protects the
cultural identity and traditional skills of small producers as reflected in their craft designs, food products
and other related services.

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4 : Payment of a Fair Price

Fair Trade marketing and importing organizations support capacity building as required to producers, to
enable them to set a fair price.

5 : Ensuring no Child Labour and Forced Labour

The organization adheres to the UN Convention on the Rights of the Child, and national / local law on the
employment of children.

6 : Commitment to Non Discrimination, Gender Equity and Freedom of Association

. The organization provides opportunities for women and men to develop their skills and actively

Promotes applications from women for job vacancies and for leadership positions in the organization.

7 : Ensuring Good Working Conditions

It complies, at a minimum, with national and local laws and ILO conventions on health and safety.

8 : Providing Capacity Building

The organization develops the skills and capabilities of its own employees or members.

9 : Promoting Fair Trade

Honest advertising and marketing techniques are always used

10 : Respect for the Environment

They use production technologies that seek to reduce energy consumption and where possible use
renewable energy technologies that minimize greenhouse gas emissions.

2020 GLOBAL AND REGIONAL CORPORATE GOVERNANCE TRENDS

(1) Greater focus on the E&S of ESG:-

Beyond the global emphasis on good governance, environmental and social issues
appear to be taking the greatest precedence for investors, moving from being a national or
regional focus to being a truly global phenomenon. Boards and management alike are
mostly playing catch-up on how best to define, integrate and oversee the E&S issues that
are material to their business. In 2020, boards will be expected to strengthen their
oversight and knowledge of material E&S matters and disclose their connection to the
business in the form of risks and opportunities. We expect to see a consensus emerge

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 around reporting frameworks such as the Task Force on Climate-related Financial
Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) to help
guide companies when reporting on E&S criteria.

(2) Increasing importance of corporate purpose:-

Corporate purpose and stakeholder considerations have been business norms in
various parts of the world for decades. In August 2019 181 out of 188 member CEOs of
the US Business Roundtable signed on to an amended Statement on the Purpose of a
Corporation, putting aside the traditional view that maximizing shareholder returns is
priority one. This was followed by a December announcement from the World Economic
Forum updating their 2020 Davos Manifesto (last published in 1973) to centre on
principles that guide companies into the Fourth Industrial Revolution. The manifesto-like
the Business Roundtable’s statement-challenges companies to put stakeholders at the
heart of a company’s purpose. There remains a great deal of skepticism concerning the
practical application of these documents, but public opinion in many countries appears to
be shifting against shareholder primacy.

(3) Better board oversight of corporate culture and HCM:-

Investors are asking what the board is doing to ensure the culture is robust and can
withstand transformation and change. Investors would like more transparency on board
involvement in culture and HCM to determine whether boards are providing adequate
oversight. Data and analysis on corporate culture will play a key part in this oversight by
boards. Directors in 2020 should appreciate the impact of culture on hiring, retention and
productivity. Management will need to satisfy the board that the company has the culture
and talent needed to successfully execute on strategy.

(4) More expensive view of board diversity that includes ethnicity and race:-
Considerable strides have been made globally around board gender diversity. As
institutional investor voting power grew dramatically, did demand for gender diversity. In
2020, boards will begin to experience additional pressure to consider ethnic and racial
diversity. This phenomenon will vary by country. In the United States, it will be driven
by investors such as Vanguard. In the UK, it will be as a consequence of the Parker
Review. In Japan, the push to add more international directors will also broaden board
diversity. In Canada, it will be the Business Corporations Act legislation that will require
federally incorporated companies to disclose detailed information on the diversity of
board directors and senior management. There will continue to be jurisdictions around
the world where it will be harder for this trend to gain traction because the collection of
data on ethnicity and race is illegal or highly regulated.

(5) Companies facing wider forms of activism:-

Globally, investor activism continues to evolve and grow, creating a kaleidoscope of
styles and approaches that change year to year. What remains constant is that directors
must maintain a degree of vigilance, ready to respond to activists or assuage the concerns

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of investors. In 2020, we expect to see increased activism success rates and greater
influence from both the traditional “activist” investors in this space as well as larger non-
governmental organisations (NGOs). In some countries, employee shareholder activism
around “#me too” or climate risk has been successful at garnering public attention and
impacting management decision-making. To prepare for these situations, boards are
improving their effectiveness through more robust board evaluation processes. Boards are
also engaged with management in scenario planning to ensure role clarity in crisis
situations.

BIGGEST CORPORATE GOVERNANCE FAILURE IN INDIA

(1) The corporate governance failure of YES Bank:-

In the absence of a credible revival plan, and in the interest of YES Bank’s
depositors, the RBI (Reserve Bank of India) took control of YES Bank in March
2020. The story of YES Bank is nothing short of a John Grisham novel. It was
founded as an NBFC (non-bank financial company) in 1999, and became a full-
fledged bank in 2003. Its board members battled constantly for the top spot, with
former Managing Director and CEO Rana Kapoor being popular for propping up the
market by agreeing to disburse loans to corporate borrowers rejected by other banks.
The bank would charge a huge upfront fee and most borrowers were defaulters at
will.
The financial position of YES Bank has undergone a steady decline largely due to
inability of the bank to raise capital to address potential loan losses and resultant
downgrades triggering invocation of bond covenants by investors, and withdrawal of
deposits. The bank has also experienced serious governance issues and practices in
recent years which have led to its steady decline. The RBI was in constant
engagement with the bank’s management to find ways to strengthen its balance sheet
and liquidity. The bank management had indicated to the RBI that it was in talks with
various investor’s and they were likely to be successful.
RBI was also engaged with a few private equity firms for exploring opportunities to
infuse capital as per the filing in filing in stock exchange dated February 12,2020.
These investors did hold discussions with senior officials of RBI but for various
reasons eventually did not infuse any capital. Since a bank and market-led revival is a
preferred option over a regulatory restructuring, the RBI made all efforts to facilitate
such a process and gave adequate opportunity to YES Bank’s management to draw up
a credible revival plan, which did not materialise. In the meantime, the bank was
facing regular outflow of liquidity. It wasn’t long before the bank collapsed and RBI
was forced to apply to the Central Government for imposing a moratorium on YES
Bank.
(2) Café Coffee Day:-
The coffee chain Café Coffee Day (which loyalists called CCD) had over 1750
outlets across the nation at one point in time. It was India’s biggest coffee chain in the
2000s. Proprietor V Siddhartha came from a prestigious family with a 140-year

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 history of growing coffee beans. A chat with a German coffee maker inspired him to
launch Café Coffee Day as a rival to Starbucks right when the café culture had begun
to brew among young people. The chain went public in 2015 and it looked like things
could only get better, what with rumours of ‘Coca Cola' planning to invest a
whopping 2500 crores into the company.

However, things took a turn in September 2017 when the Income Tax (I-T)
department conducted raids at over 20 locations linked to Siddhartha. He was
reportedly heavily in debt. His Coffee Day Enterprises Ltd had seen net loss widening
to INR 67.71 crore in the fiscal year ended March 31,2018 from INR 22.28 crore loss
in the previous year. This despite revenues climbing to 122.32 crores. He disappeared
suddenly one evening in 2019.

A letter by him to the CCD Board claimed that he was being pressured by “one of
the private equity partners” forcing him to buy back shares, a transaction he had
partially completed six months ago by borrowing a large sum of money from “a
friend”. His dead body was found 36 hours after he went missing in Mangalore. It
was apparently a case of suicide.

Evidence points to Siddhartha having taken on debt in his private capacity to buy
land and invest in long gestation projects, and angry lenders hounding him for quick
returns. While the 2000s decade saw the raise of Café Coffee Day, the period also
saw debt piling up. The company needed funds for both operations and capex. In
2010, Standard Chartered Private Equity (Mauritius) II Ltd, KKR (Mauritius) PE
Investments II Ltd, and Arduino Holdings Ltd (later transferred the debentures to
NLS Mauritius LLC) invested close to $149 million. Compulsorily convertible
preference shares held by Standard Chartered Private Equity (Mauritius) II Ltd and
the compulsory convertible debenture held by KKR Mauritius PE Investments II Ltd
and NLS Mauritius LLC was converted into equity shares at the time of listing. By
June 2015, the consolidated debt was a whopping INR 2700 crore, a knot the board
couldn’t wriggle out of.

(3) Jet Airways:-

Jet Airways was India’s second largest airline until the year 2018 with 13.8%
market share. It saw its last flight on 18th April 2019 after running out of funds to
carry out operations and left more than 15000 employees in the lurch. The company’s
dues to banks are around INR 8500 crores. Jet Airways owes another INR 25000 in
arrears to lessors, employees and other firms. Corporate Governance failures by its
Chairman NareshGoyal are the culprits. The downfall of Jet Airways follows a string
of other failed airlines including Kingfisher, Sahara and Deccan, pointing to bad
corporate governance in the airline sector.

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 The Goyal family owned the majority share in the airline and NareshGoyal was the chairman
of the board. A promoter-led board is often at the danger of creating a spineless board, often
serving at the wish and command of the promoter-chairman. Two independent directors, Vikram
Mehta Singh and Ranjan Mathai resigned from the Board in November 2018. The decision by
the broad to not an investment offer by the Tata Group was financially imprudent as a deal
would have infused capital and saved airline. It also looks as though the decision was made with
the sole interest

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