CORPORATE GOVERNANCE AND CORPORATE CITIZENSHIP

This article is written by Dadhirao Prerana of B.A.LL.B. of PRRLC, Osmania University, Hyderabad, an intern under Legal Vidhiya.

ABSTRACT

Imagine a democratic country like India with improper government and obstruction in public duty. It is flabbergasting to even visualize it.

Have you ever wondered the reason behind ‘once upon a time’s top companies’ like Enron Corporation now being categorized into impecunious corporations? In recent years many leading corporations dwindled over the years. Companies that appeared in the Forbes 500 List have vanished in the last 20 years. The CI platform’s research also found that 72% of the original FTSE 100 companies from 1984 have also disappeared. Meanwhile, the Bureau of Labor and Statistics (BLS) reports that 65% of companies fall away in the first 10 years of existence.^[1]

Corporate governance is the structure of rules, regulations, practices, and processes used to govern the management of a company. Bad corporate governance can destroy operations and ultimate profitability of a company. Corporate responsibility characterizes professional disciplines which help a corporation stay competitive by maintaining accountability in the management.

KEYWORDS

Corporate Governance, Corporate Citizenship, Business Ethics, Board of Directors, Shareholders, SEBI, OECD

INTRODUCTION

This article revolves around the corporate scenario. This article focuses on the corporate world. It comprehends the exposure of organizational management comprising stakeholders, board of directors, audit committee and many other groups of people in board governance. Furthermore, it encompasses corporate citizenship. Additionally, delves into business ethics. Eventually, it discusses the meaning, origin, principles, assessment, objectives, importance, framework, legal implementation and pragmatic illustration. It demonstrates the impact of unprofessionalism in the world of corporations. Bob Tricker is considered to introduce the term ‘Corporate governance’ in 1984 and wrote a book which had with the same title. He is, usually, regarded as the Father of Corporate governance.^[2]On the whole, to formulate in the words of Robert C. Pozen, “Corporate governance is the compass that guides a company through the ever-changing business landscape, ensuring it stays on course toward its goals.” Every type of government follows some set of rules and regulations for smooth functioning of the country. Every country follows their written or unwritten constitution, legal statutes, legal principles, bare acts and many more authentic sources by jurists. Similarly, for the smooth functioning in a company or corporate field, the management has to follow certain decorum, carry out the legacy and create a benchmark in the society with their work and contribute to the business world. This article aims to throw limelight on corporate governance. It also revolves around some of the theories and framework as well. This article also contain definition, impact and importance of corporate citizenship. Just like citizens of the country have duties towards the state, even business tycoons, corporate heads and corporate management have the duty towards betterment of the society. This article contains some of the major differences that can be drawn between corporate governance and corporate citizenship. The readers can differentiate between the two important concepts in the world of corporation.

MEANING

Corporate Governance is the compass that means  set of rules and regulations, policies and strategies that are useful to regulate the behaviour of a system, an authority or a large number of people. It is the system of rules, practices and processes by which a company is directed and controlled. It is one such aspect where it guides the company as to how it should be governed and strive for the common goal in a company.^[3]The corporate governance fosters  in balancing the interest of a company’s stakeholders, senior management, shareholders, suppliers, customers, lenders, the community and the government. In the world of corporate governance, the set of rules is treated as the manual that controls the company with their established policies and aims for better resolutions in the company. Proper corporate governance is the key factor for the successful company. For instance, Apple Inc.’s investors maintain good relations and maintain site profiles with corporate leadership that provides information on its committee charters through bylaws, stocks, ownership guidelines etc.

OBJECTIVES

1. Responsiveness: If there is any problem in the company, it is the duty of the management to respond to the problem and try to solve the problem as soon as possible. The problem must be addressed within the reasonable time frame so that the problem does not create much tension in the management.
2. Efficiency: The management of a company must take the initiative in taking efficient and effective steps for this smooth functioning in the company. The audit committee must work with  efficiency and diligence so that the assessment in the company will be accurate.
3. Business Ethics: Every company must different from the ethical conundrums to avoid the chaos and problems in the company. The resolution of conflicts of interest among the stakeholders, senior management, suppliers, lenders, government, communities, shareholders must be the top priority. Every company must try to allure their customers with good and ethical conduct.
4. Sustainability and long-term orientation: Long term strategy and needs of future generations must be taken into consideration. The management must thrive for long term success. The Vision-Mission-Strategy approach is the foundation for a strong long-term relationship between the management and owners of the firm which reduces the entry cases and reconciles  any issues from the basic level.
5. Social Cohesion: The sense of solidarity among the management must be encouraged. A cordial environment must be created so that the employees can feel safe in the company.

ORIGIN

It is important to know the history and the origin of corporate governance because it has shaped the business world of the present era. In 1970s,the corporate governance began to come into limelight through official reforms relating to Securities and Exchange Commission [SEC] were introduced. As the years passed by, it promoted New York Stock Exchange [NYSE] comprising of Audit Committee, Board of Directors , Nomination Committee. The ‘Deal Decade’ refers to the 1980s has managed to grab the control over shares of institutional shareholders. The Institutional Shareholder Services (ISS) came into existence during this period. The Dodd-Frank Wall Street Reform and Consumer Act in 2010 serves as a milestone in shaping the corporate governance in United States. From 2010s till the pandemic it demonstrated corporate citizenship leading to environmental awareness and better ethical behaviour in the business scenarios. Post pandemic, the companies all over the world aims for better enterprising management. The companies all over the world  endeavour to spread their horizons, in every possible way for the betterment of their respective corporations.^[4]

PRINCIPLES^[5]

1. Fairness: It is the basic principle in the corporation that the board of directors must treat the shareholders, vendors, communities, employees, stakeholders, customers, suppliers, government and lenders fairly with equal consideration.
2. Transparency: Transparency is one such principle where the corporate governance fosters company to be transparent in nature. It helps the company to be performed with accuracy and have clear information so that the information can be circulated among the members in the company and refrain from any chaos and confusion.
3. Risk Management: Every businessman desires to run a successful business and aims to manage the business effectively. The science of management plays a vital  role in the business society. It is managing the potential losses within the financial markets. The management must try to mitigate every possible liquidity risk.
4. Responsibility: Responsibility is one of the primary components in corporate governance. The company must be well versed with the obligation and the responsibilities of the company. The board and executive management much take the initiative in taking the responsibility of the company.
5. Accountability: Accountability is another aspect in the corporation where the company must take effective steps to refrain  from any maladministration. The company must always try  making  initiative and effective steps so that they don’t infringe any rights of anyone.

THEORIES^[6]

1. Stewardship Theory: The audit committee and other executive officers come into the force for the betterment of shareholders. The shareholders are interested in the profits of the company whereas, the executive plan how to maximize the profits of the company. The executive and management must plan for the maximization of revenue in the market.
2. Agency Theory: Shareholders invest in a company. They elect the  board of directors. The board of directors must opt for systematic approach and work at the discretion according to the interest of the shareholder. It is like having the principal and agent relationship. The shareholders can give suggestions on how to perform with ethics and good conduct to the executive management.
3. Stakeholders Theory: This theory must aim to view with the purpose of laissez faire approach. The government must make less contravention in the rules and regulations in the management. It focuses on interest of stakeholders. The shareholders invest fund so that they can get dividends in return.
4. Transaction Cost Theory: When the company is formed the primary motive is to make profits. The company must try to minimize the expenses so that their real income contributes to the profits of the company. This theory is based on outsourcing the cost of production like contracting costs and coordination costs.
5. Resource Dependency Theory: It bridges the gap between external and internal environment. It delves into intricate web of board of directors, shareholders, vendors and customers. It aims to enhance the concept of people, process, performance and purpose.

IMPORTANCE

Proper corporate governance address is the issues of breakdown of a company scandal and bankruptcy. Proper role of board of directors and shows the key responsibilities being performed such as recruiting top executives, establishing executive compensation, monitoring and dismissing executives, approving issuance of stock, paying dividends, managing internal controls, establishing other company policies . Furthermore, corporate governance is an important aspect and serves as a testimony in many tasks such as protection of shareholders interest enhancers business performance, better access to capital legal and regulatory compliance, innovation and versatility. The shareholders elect the board of directors where they appoint Corporate Governance Committee, Management Resource Committee, Risk committee and Audit Committee. All the committees must work efficiently in advisory matters, transactional matters, litigation matters, audit matters and executive management. Proper role of board of director can help in meeting the objectives of having the trust and confidence in the company by the shareholders.

FRAMEWORK

The corporate governance helps the board of directors to have a vision on performing the legal and regulatory framework so that they can have strategical planning on organizational hierarchy with objective of monetary and internal control. It aims for the accomplishment of policies and procedures with the accurate financial statement. Proper business plan, performance management and business advisory helps the management of the company to address the issues. The internal control helps a comprehensive understanding of corporate structure.

For example, Narayana Murthy Committee (2003) by SEBI, provided recommendations on issues such as audit committee’s responsibilities, audit reports, role of board of directors, risk management, codes of ethical conduct and financial disclosures.^[7]

Another example is worldwide famous Pepsi Company. In dynamic world, the Pepsi Company attempted for a transformation journey. The products of the above-mentioned company focused on consumer’s health. It took major steps on factors like reduction of sugar, carbon footprint, additives and plastic waste. Their primary focus became environmental sustainability. Another brand that opted innovation and constant change for making their product better is Quaker. For non-failure of the corporation, the Quaker Company took measures which transform into Quaker Oats. It transformed into super and regular breakfast from licuado [fruit-based blends with milk, refers to smoothie].It was a cereal which included chia and other ancient grains for pancake mixes as well.^[8]

Corporate governance helps in maintaining transparent rules, guide leadership, align interest of shareholders, management, board of directors and employees. The rise in share prices gets benefitted when the management has clarity on companies direction and business integrity.

CORPORATE CITIZENSHIP

Just like citizens in the democratic country like India have some obligations towards their nation, even the corporation have some duties towards the society. The corporate citizenship refers to company’s responsibility towards the society. It is the responsibility of company to have responsibility legally, ethically and economically. It promotes to maintain highest standard of living and quality of life for the communities. It strikes the balance between socially responsible orientation and corporate social responsibility.

DEFINITION

According to World Business Council for Sustainable Development, “Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”.

IMPACT

1. Employment Engagement: It instills the sense of responsibility in contributing towards their working environment. The employees acquire required skills so that they can work in the company with efficiency. This increases job satisfaction and results in better morale.
2. Philanthropic Responsibility: The corporation aims at making the society better. The corporation can donate money in any renowned Non-governmental Organisations[NGOs].The corporation can form trust or foundation. For example, Hindustan Unilever Foundation aims at better health facilities, sanitation ,basic nutrition, enhance self-esteem etc.
3. Customer Loyalty: It fosters better relations with the customers by winning their trust and create better bond with customers. It demonstrates commitment towards the customer. Engagement loyalty, behavioral loyalty, transactional loyalty are some of the ways to maintain better relations with the customers.
4. Humanitarianism: It promotes the employee’s motivation. For example, the company provides health insurance to the employees working in a particular company. For instance, Starbucks proved their commitment towards community welfare by creating global network of farmers, effective community service etc.^[9]

IMPORTANCE

The corporate citizenship helps in improving public image in the society. It helps in better standard of work to the employees. In the Elementary Stage, focuses on especially small businesses for health and safety requirements. In Engagement Stage, the company focuses on policy making participation of the employees for better community and beneficial endeavours. In Innovation Stage, strives for developing strategies for corporate social responsibility. In Integrated Stage, the performance is monitor and also companies regular operations is regulated with high security and confidentiality. In Transformation Stage, focuses on amendment of norms and procedures according to the circumstances and scenarios of the company. The Business Ethics is developed so that insider trading, bribery discrimination, fiduciary responsibilities are checked and take proper steps in development of trust among the customers. The Companies Act,2013, Corporate Social Responsibility^[10],Securities and Exchange Board of India[SEBI] with amended Clause 49, ^[11]The Ministry of Corporate Affairs, Department of Public Enterprise, Organization for Economic Cooperation and Development [OECD] are some of the statues, organisation, legal platforms that aim to enhance and serve as guidelines for the functioning of corporate governance and corporate citizenship.

DIFFERENCE BETWEEN CORPORATE GOVERNANCE AND CORPORATE CITIZENSHIP^[12]

Corporate Governance	Corporate Citizenship and CSR
Aim at incorporation of stakeholder’s interest to companies operation	The primary focus is on interest of shareholders
Aim at investor protection, value creation, transparency	Problems are solved business society and the business environment
Problems are solved among Principals and agents	Aim at incorporation of stakeholder’s interest to company operation
Formulates report standards, guidelines and fiduciary duty	Formulates recommendations and philanthropic trustee of public’s interests[13]
Focuses on financial dimensions	Focuses on social, environmental and moral  dimensions
Shortcomings on orientation and regulations on fundamental problems	Shortcomings on weak accountability

CONCLUSION

Board of Directors, Audit Committee, Subsidiary Companies, Institutional Investors, and Stakeholders Relationship Committee are vital part in every corporation all over the world. It prioritizes the retainment of true talent of the employees and navigates steep surge and steep valuations of the company. Whereas, corporate citizenship reflects goodwill in the company. Both, corporate governance and corporate citizenship are two sides of coin that must function with proper coordination and administration for better growth of the company. Every company must aim at developing their corporate network with an optimistic ideology and strategy. The company must able to cope with every hurdle with ease. A proper management always play crucial role in the corporation. The management must formulate efficient policies, maintain proper code of conduct, make initiative in making better rules by keeping their employees as top priority. A proper corporate management reciprocated by employees ethical values leads to a successful business entity. The corporate governance and corporate citizenship demonstrates job satisfaction, clarity in management, proper administration. Effective corporate governance and corporate citizenship must be paramount consideration in the corporate world. The corporate governance and corporate citizenship reflects fostering better relations with corporate personalities and corporate entities.

REFERENCES

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4. https://www2.deloitte.com/in/en/pages/risk/articles/governance-101.html
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^[1]Accesswire,https://finance.yahoo.com/news/insight-report-finds-52-companies-163000568.html#:~:text=Insight%20Report%20Finds%2052%25%20of,Over%20the%20Last%2020%20Years  [last visited on 08 April,2024]

^[2]https://www.taxmann.com/bookstore/bookshop/bookfiles/auditingandcorporategovernancechapter63.pdf  [last visited on 08 April,2024

^[3]JamesChen,CorporateGovernance,https://www.investopedia.com/terms/c/corporategovernance.asp#:~:text=Corporate%20governance%20is%20the%20structure,company’s%20operations%20and%20ultimate%20profitability [last visited on 08 April,2024]

^[4]DiligentTeam-historyofcorporategovernanceandhowhasitchanged?https://www.diligent.com/resources/blog/what-is-the-history-of-corporate-governance-and-how-has-it-changed [last visited on 08 April, 2024]

^[5]Principles of Good Governance https://www.coe.int/en/web/good-governance/12-principles# [last visited on 08 April,2024]

^[6]  Monesh Mehndiratta, Corporate governance, https://blog.ipleaders.in/corporate-governance-3/ ,[last accessed on 08 April,2024]

^[7]Article Governance 101 https://www2.deloitte.com/in/en/pages/risk/articles/governance-101.html [last visited on 08 April,2024]

^[8]DilsherDhillon,https://www.businessinsider.in/heres-how-indra-nooyi-changed-pepsico-in-her-12-years-as-ceo/articleshow/65307441.cms, Business Insider [last visited on 08 April,2024]

^[9]Chezuba, https://chezuba.net/blog/what-does-it-mean-to-be-a-good-corporate-citizen[last visited on 08 April,2024]

^[10] Companies Act, 2013 Act,§135,Act of Parliament,2013(India)

^[11] Securities and Exchange Board of India[SEBI] Act,1992,§10,cl.49,Act of Parliament,1992(India)

^[12] Aluchna, Roszkowska-Menkes 2015,p.41

^[13]https://www.slideserve.com [last visited on 08 April,2024]

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