Model Answer
0 min readIntroduction
Corporate Governance (CG) and Corporate Social Responsibility (CSR) are two sides of the same coin in modern business ethics. While CG focuses on the systems and processes for directing and controlling a company, ensuring accountability and transparency to stakeholders, CSR encompasses a company’s commitment to operating in an economically, socially, and environmentally sustainable manner. The Satyam scandal of 2009 highlighted the critical need for robust CG in India, prompting significant regulatory reforms. Increasingly, investors and consumers are demanding that companies not only be profitable but also responsible corporate citizens, making the relationship between CG and CSR paramount.
Defining Corporate Governance and Corporate Social Responsibility
Corporate Governance (CG) refers to the set of rules, practices, and processes by which a firm is directed and controlled. It involves balancing the interests of a company’s many stakeholders, including shareholders, management, customers, suppliers, financiers, government, and the community. Key principles include transparency, accountability, fairness, and independence.
Corporate Social Responsibility (CSR), on the other hand, is a self-regulatory business model that helps a company be socially accountable to itself, its stakeholders, and the public. It involves integrating social and environmental concerns into business operations and interactions with stakeholders on a voluntary basis. CSR goes beyond legal compliance and aims to contribute to societal well-being.
The Relationship Between Corporate Governance and Corporate Social Responsibility
The relationship between CG and CSR is symbiotic. Effective CG provides the foundation for successful CSR implementation. Here’s a breakdown:
- CG as an Enabler of CSR: Strong CG structures – like independent boards, audit committees, and robust risk management systems – ensure that CSR initiatives are not merely superficial ‘window dressing’ but are genuinely integrated into the company’s strategy and operations.
- CSR as an Outcome of Good CG: A company committed to good CG is more likely to consider the interests of all stakeholders, not just shareholders, leading to a greater emphasis on CSR.
- Reputational Risk Management: Good CG helps companies identify and manage reputational risks associated with unethical or unsustainable practices, driving them towards greater CSR.
- Long-Term Value Creation: Both CG and CSR contribute to long-term value creation by building trust with stakeholders, enhancing brand reputation, and fostering innovation.
Governmental Steps to Improve Corporate Governance in India
The Indian government has taken several steps to improve CG, particularly in the wake of corporate scandals. These include:
- The Companies Act, 2013: This Act significantly strengthened CG norms in India. Key provisions include:
- Mandatory CSR: Section 135 mandates companies with a net worth of ₹500 crore or more, or turnover of ₹1000 crore or more, or net profit of ₹5 crore or more, to spend 2% of their average net profit of the preceding three years on CSR activities.
- Independent Directors: Increased the number of independent directors on boards and strengthened their role in overseeing management.
- Audit Committees: Enhanced the role and responsibilities of audit committees.
- Related Party Transactions: Introduced stricter regulations on related party transactions to prevent conflicts of interest.
- SEBI Regulations: The Securities and Exchange Board of India (SEBI) has played a crucial role in improving CG for listed companies.
- Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015: These regulations mandate enhanced disclosures by listed companies, including information on board composition, related party transactions, and CSR activities.
- Corporate Governance Code: SEBI has issued a Corporate Governance Code outlining best practices for listed companies.
- The Narayana Murthy Committee (2003): This committee was formed in the aftermath of the Satyam scandal and recommended several measures to improve CG, including strengthening the role of independent directors and audit committees.
- The Kotak Committee on Corporate Governance (2017): This committee made further recommendations to enhance CG norms, including increasing the minimum number of independent directors, strengthening the role of the audit committee, and improving disclosures.
- National Guidelines on Responsible Business Conduct (NGRBC): Developed by the Ministry of Corporate Affairs, these guidelines provide a framework for companies to conduct their business responsibly and sustainably.
| Legislation/Committee | Key Provisions/Recommendations | Year |
|---|---|---|
| Companies Act, 2013 | Mandatory CSR, Independent Directors, Audit Committees, Related Party Transactions | 2013 |
| SEBI (LODR) Regulations | Enhanced disclosures, Corporate Governance Code | 2015 |
| Narayana Murthy Committee | Strengthening independent directors & audit committees | 2003 |
| Kotak Committee | Increased independent directors, improved disclosures | 2017 |
Conclusion
In conclusion, Corporate Governance and Corporate Social Responsibility are inextricably linked. Good CG provides the structural framework for effective CSR, while CSR reflects a company’s commitment to ethical and sustainable practices. The Indian government has made significant strides in strengthening CG through legislation and regulatory reforms, particularly since the Satyam scandal. However, continued vigilance, stricter enforcement, and a shift towards a more stakeholder-centric approach are crucial to ensure that Indian companies embrace both CG and CSR as integral components of their long-term success and contribute to a more equitable and sustainable future.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.