SOCIAL AUDIT OF BUSINESS
A social audit is a systematic study and the evaluation of an organization’s social
performance, as distinguished from its economic performance. It is concerned with the possible
influence on the social quality of life instead of the economic quality of life. Social audit leads
to a report on the social performance of a business unit.
There are various operational approaches of defining social audit. First, the social audit
is taken in terms of measuring total expenditures for social activities. This approach involves the
recognition of costs and search for ways to reduce such costs. Second, the social audit is
designed to measure the value of productive capability of organization’s human resources and
value of various parties external to the organisation but interacting with the organisation. Third,
there is a programme management approach of social audit which focuses on measuring only
those activities in which a particular organisation is involved largely for social reasons. Fourth,
there is inventory approach of social audit involving the cataloguing and describing what the
organisation is doing in each area it recognizes that society expects to do something. Fifth, there
is a cost/benefit approach which tries to quantify values contributed to the society and detriments
to the society for actions taken or not taken and array them in a fashion comparable to the typical
financial balance sheet. Thus various approaches of social audit provide different measurement
yardsticks, though all approaches lead to the same measurement, that is, an organization’s
contributions to the society. Thus, social audit has been defined as a commitment to systematic
assessment of and reporting on some meaningful, definable domain of the company’s activities
that have social impact.
FEATURES OF SOCIAL AUDIT
The areas for social audit include any activity 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 organisation 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 to company’s actions.
Finally, social audits use both qualitative and quantitative data.
ORGANISATION FOR SOCIAL AUDIT
Social audit can be made by internal auditors, external consultants or a combination of the two.
The internal auditor has the advantage of familiarity with the business, but his assessment might
be influenced by his loyalty to the company. A consultant has the advantage of an outsider’s
view but lacks familiarity with the company and he is likely to ignore significant data. A
combination of the two is ideal for carrying on the audit of social performance.
BENEFITS OF SOCIAL AUDIT
The benefits of social audit are as follows:
• Social audit enables the company to take close look at itself and understand how far the
company has lived up to its social objectives.
• Related to the first benefit is the fact that social audit encourages greater concern for
social performance throughout the organisation.
• Social audit provides data for comparing effectiveness of the different types of
• 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
• Social audit provides information for effective response to external claimants that make
demands on the organisation. News reporters, welfare organisations and variety of
others want to 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.
Corporate governance is about how an organisation is managed, its corporate and other
structures, its culture, its policies and the ways in which it deals with its various stakeholders.
Corporate governance is the overall control of activities in a corporation. It is concerned with
the formulation of long-term objectives and plans and the proper management structure
(organisation, systems and people) to achieve them. At the same time, it entails making sure that
the structure functions to maintain the corporation’s integrity and responsibility to its various
The structure to ensure corporate governance includes the board of directors, top
management, shareholders, creditors and others. Role of each of these stakeholders is crucial in
guaranteeing responsible corporate performance.
FACTORS INFLUENCING CORPORATE GOVERNANCE
Four factors influence corporate governance, namely,
1. The ownership structure of a corporation,
2. Its financial structure,
3. The structure and functioning of the company boards and
4. The legal, political and regulatory environment within which the company operates.
MECHANISMS OF CORPORATE GOVERNANCE
In our country, there are six mechanisms to ensure corporate governance:
1. The companies Act, 1956,
2. The Securities and Exchange Board of India (SEBI) Act, 1992,
3. A market for corporate control,
4. Participation of block shareholders in the governance of companies
5. Statutory audit; and
6. Code of Conduct.
CORPORATE ETHICS PROGRAMS
Every organisation has an ethics program of some kind, although it may not be
recognised as such. In the broadest sense, an ethics programme consists of the rules and policies
of an organisation and the procedures and systems for motivating and monitoring ethical
performance. Rules and policies include the culture and values of an organisation and formal
documents, such as mission statements, codes of ethics, policy and personnel manuals, training
materials, and management directives. Compliance with rules and policies is secured by various
procedures and systems for orientation, training, compensation, promotion, auditing and
investigation. These procedures and systems are essential functions in any business organisation.
Companies with an identifiable ethics programme are distinguished by the emphasis that they
place on these functions and the manner in which they address them.
The components of a corporate ethics programme generally include a code of ethics,
ethics training for employees, means for communicating with employees about matters of ethics,
a reporting mechanism for enabling employees to report alleged wrongdoing, an adult system for
detecting wrongdoing, and a system for conducting investigations and taking corrective action.
The corporate ethics programs are designed to secure compliance with the law and with the
company’s own rules and policies. The goals are to prevent criminal conduct and violation of
government regulations on the one hand and to protect the company from self-interested action
by employees on the other. Compliance of this kind is essential in any organisation, but some
corporations take a broader view of ethics. Ethics programs that communicate the values and
vision of the organisation, seek to build relations of trust with all stakeholder groups and
emphasize the responsibility of each employee for ethical conduct.
THE BENEFITS OF AN ETHICS PROGRAM
The main benefit of an ethics program is to prevent ethical misconduct by employees,
which is costly to companies not only in direct losses but also in those sustained from a tarnished
Second, ethics programs provide a managerial tool for adapting the organisation to rapid
change. Among the factors that have led corporations to adopt ethics programs are increased
competition, the development of new technologies, increased regulation, recent mergers and
acquisitions and the globalization of business.
A third benefit of ethics programs is managing relations with external constituencies. An
ethics program serves to reassure customers, suppliers, investors and the general public of the
serious intent of a corporation to adhere to high ethical standards.
The existence of an ethics program is an assurance not only to socially responsible
investors, who look for such indicators, but also to shareholders generally, who want to avoid the
cost of major scandals.
CORPORATE SOCIAL RESPONSIBILITY
All accounts of corporate social responsibility recognise that business firms have not one
but many different kinds of responsibility, including economic and legal responsibilities.
Corporations have an economic responsibility to produce goods and services and to provide jobs
and good wages to the work force while earning a profit. Economic responsibility also includes
the obligation to seek out supplies of raw materials, to discover new resources and technological
improvements, and to develop new products. In addition, business firms have certain legal
responsibilities. One of these is to act as a fiduciary, managing the assets of a corporation in the
interests of shareholders, but corporations also have numerous legal responsibilities to
employees, customers, suppliers and other parties.
Social responsibility, according to some accounts, is the selection of corporate goals and
the evaluation of outcomes not solely by the criteria of profitability and organisational well-
being but by ethical standards or judgments of social desirability. The exercise of social
responsibility, in this view, must be consistent with the corporate objective of earning a
satisfactory level of profit, but it implies a willingness to forgo a certain measure of profit in
order to achieve non-economic ends.
RELATIONSHIP BETWEEN ETHICS AND CORPORATE EXCELLENCE
Business ethics helps the organisation to achieve corporate excellence in many ways. It
results in organisations establishing distinctive cultures for individual companies. When such
distinctive cultures are established, they promote creativity and innovations within the
There are many ways in which an organisation can achieve corporate excellence. The
first instrument for achieving such excellence is the Corporate mission Statement.
1. Corporate Mission Statement
An organization’s mission consists of its long term vision of what it seeks to achieve and
the reasons for its existence. Usually this mission of the organisation is denoted through its
mission statement and it contains an account of how it wishes to serve the society and contribute
to social welfare. The mission statement has to be guided by a set of core values and moral
integrity of every employee. It incorporates the ethical values that the organisation strives to use
in order to achieve corporate excellence. The mission statement acts like the Constitution of the
company, the solid expression of the company’s vision and values. It becomes the criterion by
which the company measures its activities and achievements.
2. Code of Ethics
A code of Ethics is a statement of the norms and beliefs of an organisation. Norms are
the standards of behaviour, expected from everyone in the organisation when confronted with a
particular situation consisting of ethical dilemmas.
3. Organisational Culture
In the organisational context, culture refers to the set of values, dominant beliefs and
guiding norms of behaviour for its employees. It denotes the climate, the atmosphere, the mental
attitude shared by the members of the organisation. A strong culture provides a basis for
productive ethos and ethical behaviour of an organisation.
4. Total Quality Management (TQM)
TQM is a systematic approach to guide an organisation towards excellence through
superior quality products, services and processes.
CORPORATE GOVERNANCE INITIATIVES IN INDIA
The budding Indian Entrepreneurs, at the time of Indian Independence, were not very
comfortable with the restrictions imposed by the Government of India. The penal rates of
taxation have resulted in a culture of avoidance, which went upto evasion in many Indian
companies. Unable to sustain in the righteous way, companies were forced to try and gain
special business advantages by bribing the officials. Bribery has generated unaccounted money
(popularly) known as black money). In order to get away from the risks of possessing black
money, people started making political donations.
People who accepted political donations and get elected into law making bodies failed to
take strict action against those companies, which fooled the exchequer by projecting overseas
holidays as business trips and so on. As a result, the economy lost tax revenues and corporate
non-governance has begun at the highest level.
In this scenario, the Confederation of Indian Industries (CII) was the first to initiate the
conceptualization of corporate Governance in the late 1990’s. The confederation came out with
its version of an Audit Committee closely followed by the Securities and exchange Board of
India (SEBI). On May 7, 1999, SEBI constituted an 18-member committee, on corporate
Governance, chaired by Mr. Kumaramangalam Birla (the Chairman of Aditya Birla Group). The
Committee made 25 recommendations, 19 of them were ‘mandatory’ and were enforceable.
These recommendations were accepted by the SEBI in December 1999. SEBI has obliged all the
listed companies to comply with these on account of the contractual obligation arising out of the
listing agreement with Stock Exchanges. Many of the SEBI regulations emphasize on the need
for the Board of Directors to honestly discharge their fiduciary responsibilities towards the
companies, shareholders and creditors.
Frauds and scams have become almost an annual feature in India. Indians had the
Harshad Mehta scam, Ketan Parikh scam, UTI scam, to name a few. Vatsa Corporation was
blamed for non-dispatch of dividend warrants. The merger of Arvind Mills with Arvind Intex (a
sister organisation) was said to be against the interest of the investors in Arvind Mills. Company
Law Board is nowadays busy with recommending prosecution of financial corporations under
acts like RBI Act. Insider trading has become quite common. All pink papers are allocating
some space to cover news on siphoning off funds. News items on irregularities in allotment of
shares have become routine for those who go through finance papers regularly. Boardroom
battles have become a common feature. Some companies are going untraceable after Initial
Interestingly, when the Harshad Mehta scam took place, it was claimed that the manner
in which the bank receipts were being treated was the prevailing norm. All these mal practices
were made possible by encashing on the loopholes of Indian Legal Systems by the professional
experts. This clearly indicates that there is a wide gap between what principles say and how they
Corporate Governance is the net result of the individual sense of values – the values held
in society or part of society like professional bodies or business associations and finally the
system of public governance. What we lack today is the fear that violators of corporate
governance will be caught. If those who violate the norms are promptly caught and effectively
punished then there is a fear and hence adherence to the principles of corporate governance.