Corporate Governance (CG) issues

 Issues of Corporate Governance: Stakeholder expectations; Principal-

Agent Relationships; Business
 Ethics and Corporate Social Responsibility (CSR): the ethical stance.

References:
1.Concepts in Strategic Management & Business Policy, Thomas L
Wheelen, J David Hunger & Krish Rangarajan, 9th Ed, Pearson
Education
2. Strategic Management – Concepts & Cases, Fred R David, 12th Ed,
PHI
3. Strategic Management, Colin White, Palgrave Macmillan, 2007
4. Strategic Management – Formulation, Implementation & Control,
John A Pearce, Richard B Robinson, Amita Mital, TMH, 10th Edition.

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What is CG

 The act of oversight and direction is referred to as

governance and when this is done in a corporate,
organization, this is CG.

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Issues of Corporate Governance: Stakeholder expectations

 Profit with conscience, 3 P’s – People, profit & planet, on a sustained basis
 Conflict of Interest, misrepresentation, malpractices (No insider trading, omissions
and / or commissions, cooking the books or some such actions)
 Really Independent Directors, not Old boy, old or new flame / buddies without
accountability (a friend / relative with accountability is ok)
Delhi High Court dismissed recruitment of Mahesh Rangarajan as Director of Nehru
Memorial Museum as his appointment was on ‘personal contact’ (buddy factor) and
not through wide advertisement and selection. (TOI, 25/09/2011)
 A vigilant regulatory and monitoring mechanism, policy of non vindictiveness for
‘Whistleblowers’ Things to do:
Read the caselets on
Whistleblowers,
pg 38, Wheelen, Hunger &
 Third Party assessment Rangarajan.
 Compliant to the law of the land and in some cases, thet of foreign lands
 No phantom / rubber stamp board (refer to the Board of Director Continuum)

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Responsibilities of Business

Ethical Discretionary
Economic Legal
(Should (Could
(Must Do) (Have to do)
Do) do)

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Board of Director Continuum
Rubber Stamp Minimal Nominal Active
Phantom Catalyst
Review Participation Participation

‘Whistle
blower’ Proactive
Conspicuous Bare
Sees the a la scenario
by absence, Glad to Minimum,
other way, Sridharan Builder,
Believes and oblige, to get peripheral
won’t (DMRC) fixes
inculcates ‘Mushroom Intervention
Intervene till in Deccan the problem
‘Ignorance is Treatment’ in times of
asked to do Railways before it’s
Bliss’ crisis
Concerning broke
Satyam

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The Triads of Corporate Governance

Board of Directors

Shareholders
Top Management

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Those who tarnished CG
Class-action legal fraud suits Indian cases
 Enron ($7.16 billion), Satyam,
 Worldcom ($6.16 billion), DLF,
 Tyco ($2.98 billion), Deccan Chronicle,
 Cendant ($3.53 billion),
Fairfax (Harshad Mehta Scam),
 AOL Time Warner ($2.5 billion),
 Nortel Networks ($2.47 billion),
CWG ,
 Royal Ahold ($1.09 billion). 2G,
CG culprits: Adarsh Housing Society,
 Qwest Mining Scam in Andhra –
 Global Crossing Karnataka, Odisha and now
 Martha Stewart Vyapam Recruitment Scam 2015,
 Adelphia MP
 Arthur Anderson
Things to do:
 Rogue Traders of Baring, UBS
Read the caselets on
 Conflict of Interest at Goldman Sach
 Lehman Brothers
Strategy in Action,
pg 59, 80 Pearce,
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Robinson & Mital.
CORPORATE FRAUD IN INDIA DIPS

Corporate and bribery 31

Info theft, loss or attack 27

Internal financial fraud

or theft 23

Vendor, supplier or
procurement fraud 22

Sum is moreFinancial
than 100 because some firms reported more than one type of fraud, 84 %
companies hit, 2 % average revenue 22
mismanagement lost, 50 % companies investing in anti fraud
activities, Source: Kroll, Hindustan Times Business, 20/10/2011

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Management conflict of
Principal-Agent Relationships

 Proposed by Berle & Means, 1932

 Principals are the owners / shareholders, agents are the top
management
 Top managers, are hired hands, are more interested in their self interest
than that of shareholders, playing safe, status quoist.
 Shareholders, on the other hand, want explosive growth, ready to risk,
unrelated expansion, ready to dabble into inorganic growth by M & A,
where in a lot of prevailing order would get dismantled.
 As per Agency theory, Agents (Top Management) are not willing to
take up responsibility unless they own significant amount of
stockholding
 ‘Outside’ directors are preferred to ‘Insider’ (to avoid nepotism,
cronyism) ones

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Business Ethics (BE) and Corporate Social
Responsibility (CSR)

Good ethics is good business

“Trees die from the top.”

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Business Ethics (BE) and Corporate Social
Responsibility (CSR)

What is business ethics?

 The moral principles that reflect Society’s beliefs about the actions of business that
are right or wrong. Etymologically, Ethics is derived from ethos meaning character
or manners, so, Business Ethics is manner of doing a business, some business has
manners and etiquette some don’t (Satyam, Tyco in their earlier avatar, Raju and
Kozoloski’s regime Wordcom, Arthur Andersen and Enron never had real CG
though Satyam and Enron were CG award winner!)
Typical non ethical (not all are necessarily illegal, gambling, liquor and tobacco
advertisements are harmful, unethical but still legal)
 Cutting corners on quality / manufacturing (Passing-off / Managing ‘non-
conformance’ as ‘conformance’
 Covering up incidents / accidents (underreporting, suppression of facts)
 Misrepresentation, untruth, half truth, – be it sick leaves or absenteeism,
fudging figures, ‘cooking the books’, insider trading, sexing up the document –
CV (Curriculum Vitae), report or balance sheet, fake wage bill, fake
declaration, Industrial Espionage / Sabotage, padding expense accounts,
dumping banned or flawed products in foreign markets, not pro- viding equal
opportunities for women and minorities etc.
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BE contd…

Even when something is not outright illegal, something is controversial or

may get passed off having a benefit of doubt, being ethical means
taking a stand and being counted.
Product recall or reverse logistics before or at all being proven guilty or
faulty and some anti competition measures from Microsoft and Intel
(Nokia / Laptop’s defective battery, adulterated Chinese dairy
products Melamine Toxin, unsafe Chinese Toys – Lead and other
heavy metal poisioning, Union Carbide’s Gas Leak and its aftermath,
Soft Drinks having pesticides in India, worms in Cadbury Chocolates,
Defective tyres of Firestone etc) some firms tried to avoid
responsibility living in denial mode and some took corrective steps
before regulators moved in with the sticks
Here are few proactive examples
Maruti effecting product recall of 50,000 cars in Jan-Apr 1997 due to
inferior steel
Levi Strauss refused opening factories in Alabama, then practicing
segregation and in S Africa then having Apartheid as state policy

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BE and CSR contd…

What is CSR?
The idea that business has a duty to serve the society in general,
proactively as well as financial interest of stockholders.
Difficult to measure, still CSR has cost and benefit.CSR is not mere
‘lip service’, it’s ‘walking the talk’
(Anita Roddick’s Body Shop was caught lacking in matching deeds
with words, unlike their claims they were found to be using animal
testing, using non renewable petrochemicals, recycling far less than
claimed, making threats against investigative journalists).
Bill and Melinda Gates Foundation is doing a lot for HIV in India and
other countries, CSR projects of Tata and other corporate, one lesser
known success story from BILT (Ballarpur Industries), farm Forestry
Project in unproductive lands by farmers below poverty line with a
guarantee of buy back at a declared support price or market price with
a supply of good quality plants and of course tailor made bank loan on
long term basis for needy farmers.

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Corporate Social Responsibility: Definition

 The way a corporation achieves a balance among its economic, social, and environmental
responsibilities in its operations so as to address shareholder and other stakeholder
expectations.

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CSR contd…
On the brighter side Bill and Melinda Gates Foundation is doing a lot for HIV in
India and other countries, so are the many genuine CSR projects of Tata and other
corporates, here’s one lesser known success story from BILT, farm Forestry
Project in unproductive lands by farmers below poverty line with a guarantee of
buy back at a declared support price or market price with a supply of good quality
plants and of course tailor made bank loan on long term basis for needy
The Indian ethos of Vasudhaiva kutumbkam (the whole world is in kinship humans as
well as others) has the spirit of welfare to all stakeholders in principle, however,
practice is not matched by the preachings.
In Dantewada, the Naxal infested mining haven in Chattisgarh, NMDC (National
Mineral Development Corporation) is the biggest iron ore firm, made Rs 2600
Crore profit, 2010-11, but contributed Rs 7.21 Crore (0.28 %!!!), in 2009-10, its
profit was Rs 3448 Crores, CSR spend was Rs 85 Crores (2.46%). Among 16
districts of Chattisgarh, Dantewada is 12th in human development index – UNDEP
Report 2005.

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Social Responsibility Strategies

 Reactive Strategy
 Denying responsibility while striving to maintain the status quo by resisting
change
 Proactive Strategy
 Taking the initiative in formulating and putting in place new programs that
serve as role models for industry

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CSR contd…
Proactive CSR firms – Tata, Ben & Jerry (Boutique Ice Cream Maker), IBM’s
Reinventing Education Program, Avon’s Breast Cancer Crusade
Reactive CSR firms – Exxon (Valdez oil slick infame), Vedanta (Banned in Hungary
for questionable environmental compliance) Arcelor Mittal (questionable SHE –
safety, health & environment norms, in Kazakh mines, bought safety tools after a
mining disaster and heavy casualty), De Beers (Dirty / Bloody Diamonds), Wal-
Mart (questionable working environment, Class action suits on gender
discrimination ), Nike (for sourcing from outsourced entites with sweat shop
conditions in East Asian countries)
Some important CSR parameters are
 Philanthropy (donation in cash or kind and beyond)
 Employee Benefit
 Plant Safety
 Ecology
 Community Involvement
 Customer Service

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Stakeholder Approach to Corporate Responsibility

Inside stakeholders:
 Stockholders - Appropriate ROI (“Profit Maximization is the only
objective of a firm”- Milton Friedman, Nobel laureate in Economics, this
is NOT the current thinking)
 Employees – Job satisfaction
 Unions – Benefits for their members
Outside Stakeholders
 Creditors – Timely service of outstanding dues
 Customers - Value for money and more
 Suppliers – Dependable buyers
 Governments – Adherence to legislation
 Competitors – Fair competition
 Local communities – Firm be a responsible citizen
 The General Public – Firms improve the quality of life
 Consumer Activists / NGO’s / Lobbyists – Addressal of the cause they
espouse

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We Are Happy To Help…Aircel

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Sarbane-Oxley Act
After a spate of corporate scandals in US, tough regulations came
into existence
In the form of Sarbane – Oxley Act, 2002.
Every report containing financial statements were made manadatory
to be signed by CEO and CFO, personal loans to executives were
banned.
For all misrepresentations, cooking books, insider trading,
intentional bankruptcies etc punishments, provision for up to 25
years and fine up to $ 5,000,000 were made Things to do:
Read the caselet on
Sarbane-Oxley Act,
pg 65-66 Pearce,
Robinson & Mital.

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Whistleblower Act and Protection
Whistleblowing is making an improper goings on in an organization (intentional or
otherwise) , by typically an insider – employee, former employee known to authorities,
internal first and if need be, to outside, external authorities, government, legal
authorities, police etc .
Whistleblowers need to be protected and not victimised.
In Indian context , many RTI (Right to Information) activists harassed, attacked and
worse, killed due to poor protection and sometimes active connivance of power centres
- bureaucrats, politicians, jurists, police etc.
Sherron Watkins of Enron, Cynthia Cooper at Worldcom, Sanjeev Bhatt vs Gujarat
Govt, Binayak Sen vs Chattisgarh Govt on his so called Naxal Links, Murder of RTI
activists – Satyendra Dubey (NHAI Tender Scam, Shehla Masood, Amit Jethwa vs
sandmine mafia, Satish Setty vs land mafia, Ashok Khemka of Robert Vadhera – DLF
shenanigans are cases in point.
Things to do:
On the other hand whistleblowing can not be excuse for Read the caselet on
mudslinging, settling old scores or blackmail. Whistleblowers, pg 38
Wheelan, Hunger &
Natrajan, 9th Ed, Pearson.
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Stakeholder Approach to Corporate Responsibility

R. Edward Freeman pioneered the concept of stakeholder through his book Strategic
management: a stakeholder approach in 1984.
Inside stakeholders:
 Stockholders - Appropriate ROI (Profit Maximization is the only objective of a
firm as per Milton Friedman, Nobel laureate in Economics, this is NOT the current
thinking)
 Employees – Job satisfaction
 Unions – Benefits for their members
Outside Stakeholders
 Creditors – Timely service of outstanding dues
 Customers - Value for money and more
 Suppliers – Dependable buyers
 Governments – Adherence to legislation
 Competitors – Fair competition
 Local communities – Firm be a responsible citizen
 The General Public – Firms improve the quality of life
 Consumer Activists / NGO’s / Lobbyists – Addressal of the cause they espouse

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Continuum of CSR

Philanthropy / Gift giving Collaborative CSI CSR dominated mission

(Corporate Social Initiative)

Peripheral CSR Balanced CSR Excessive CSR

commitment commitment commitment

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CSR strategy

Ethical and
Honorable
Operation
a r i ta bl e
Wel
co m rt s ch nity
e p p o m u
dive s and su Su s, c o m o L*
e
rse w s
orkf tains a Caus ice & Q
orce serv
Organization’s
CSR strategy * QoL- Quality of Life

s to t
tr i ve bes Go
e s , s n the of od s
l oy e z a t io env tew
E mp rgani work iro ard
Pro the o ce to nm
e nt
a ke pla
m

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Business case for CSR
 A 2 year study of leading companies found that environmental compliance
and developing environmentally friendly products can enhance EPS
(Earning Per Share, Profitability, and likelihood of winning contracts
Roberts, Keeble & Brown, Business Case, Pg 4
Motivation The Virtuous
Willing Unwilling
Behavior Matrix
Additional reading:
C Strategic D Structural
Martin, R L,
The Virtue
Corporate Matrix: calculating
the return on
Behavior
Social responsibility
B Choice A Compliance
HBR, March
2002, 69-75.

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 CSR or CSV?

ISO 26000 is the recognized international standard for CSR (currently a Draft
International Standard). The UN has developed the Principles for Responsible Investment
as guidelines for investing entities.
Approach for CSR
Community-based development approach.
Philanthropy
Philanthropic approach does not help build on the skills of the local people, whereas
community-based development generally leads to more sustainable development
Another approach is Creating Shared Value, or CSV (Harvard Business Review article
Strategy & Society: The Link between Competitive Advantage and Corporate Social
Responsibility by Michael E. Porter, Mark R. Kramer). The shared value model is based
on the idea that corporate success and social welfare are interdependent.
Potential business benefits are in Human resources, Risk management, Brand
differentiation & License to operate
Orlitzky, Schmidt, and Rynes ((2003). (Corporate Social and Financial Performance: A
Meta-analysis) found a correlation between social/environmental performance and
financial performance. However, businesses may not be looking at short-run financial
returns when developing their CSR strategy.
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 Social accounting, auditing, and reporting

Describing the communication of social and environmental effects of a company's

economic actions to particular interest groups within society and to society at large, is
Social accounting.
Reporting guidelines or standards for social accounting, auditing and reporting:
AccountAbility’s AA1000 standard, based on JohnElkington’s triple bottom line
(3BL) reporting
•The Fair Labor Association conducts audits based on its Workplace Code of Conduct
and posts audit results on the FLA website.
•The Fair Wear Foundation takes a unique approach to verifying labour conditions in
companies' supply chains, using interdisciplinary auditing teams.
•The ISO 14000 environmental management standard
•The United Nations Intergovernmental Working Group of Experts on International
Standards of Accounting and Reporting (ISAR) provides voluntary technical guidance
on eco-efficiency indicators, corporate responsibility reporting, and corporate
governance disclosure.
Critics dismiss these reports as lip service, citing examples such as Enron's yearly
"Corporate Responsibility Annual Report" and tobacco corporations' social reports.
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