1. EMERGING CHALLENGES BEFORE
THE INDEPENDENT DIRECTORS TO
MEET CORPORATE SOCIAL
RESPONSIBILITY
By:
CA. C. S. Nanda
Central Council Member, ICAI
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2. Corporate
Governance
- Impacts on four key factors
-Strategy
-People
-Performance
-Risk
- Is a commitment to values and to ethical
business conduct
- Can work only with informed, committed
oversight from the Chairman and inputs from
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independent experts
3. Corporate Governance
& Independent Director
• One of the most powerful notions in
corporate governance is the presence of
‘independent’ directors on the board of a
company
• There is a need for Independent
Directors to be inducted in all listed
companies as a corporate governance
compliances
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4. “Independent board members can contribute
significantly to the decision-making of the
board. They can play an important role in
areas such as executive remuneration,
succession planning, changes of corporate
control, take-over defences, large acquisitions
and the audit function.”
OECD Principles of
Corporate Governance, 2004
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5. What then, is the Role of
Independent Director?
• A spokesperson for independent and minority
interests
• A bulwark against entrenched vested
interests
• A sounding board for checking effectiveness
of strategy before implementing it
• Oversight for Management Performance
•Expert oversight for Financial Performance
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6. And?….
Role of Independent Director
(contd.)
• Oversight on what is to be paid to whom
(especially Executive Directors) and who is
appointed to senior positions on what basis
(shareholders should remain assured that they are
getting the best possible people to run their
company)
•And in family managed companies, their
wisdom in succession planning is invaluable
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7. Challenges before the
Independent Directors in Value
Maximization
• Value creation involves vision, risk taking
and complex trade offs among a variety of
different participants in the business
enterprise of the firm
• In order to maximize value, one must not
only satisfy but enlist the support of all
corporate stakeholders- customers, employees,
managers, suppliers and local communities
• Top management plays a crucial role in this
function through its leadership and
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effectiveness in creating, protecting and
8. Challenges before the Independent
Directors in Value Maximization
(contd.)
•The job of Boards of Directors should be to
maximize ‘The total wealth- creating
potential of the enterprises they direct’
•In doing this, directors must understand
that business enterprises generate wealth in
at least three different ways: consumer
surplus, labour surplus and capital surplus.
•They provide products services that are
worth more to the customer than the
customer pays for them (this results in
“customer surplus”). 8
9. Challenges before the Independent
Directors in Value Maximization
(contd.)
•They provide opportunities for workers to be more
productive at their jobs than they could be in other
available employment (to the extent that the workers
are paid more than they would earn at alternative
employment, they capture some of this wealth as
(“labour surplus”)
•They can provide a flow of profits to its investors
that is greater than those investors could get by
investing in alternative activities(such wealth
captured by financiers is “capital surplus”)
•Finally, the sum of consumer surplus, labour
surplus, and capital surplus must exceed any costs
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imposed on the surrounding community, or on others
10. Corporate Social
Responsibility
• is about capacity building for sustainable
livelihoods.
• continuing commitment by business to behave
ethically and contribute to economic development
• collection of policies and practices linked to
relationship with key stakeholders,
values,compliance with legal requirements, and
respect for people, communities and the environment
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11. Is Corporate Social
Responsibility a Defensive or
Offensive strategy?
The defensive side of the equation includes the
following:
•Preservation of reputation and brand equity
•Reduction of litigation cost and liability arising from
environmental or other damage claims
•Avoidance of regulatory fines and penalties
•Avoidance of legislative or regulatory initiatives designed
to correct perceived corporate misconduct or indifference
to social or environmental issues
•Ability to manage or avoid shareholder proposals related
to social or environmental issues that could adversely
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affect business prospects
12. Is Corporate Social
Responsibility a Defensive or
Offensive strategy?
Some of the attributes of social responsibility that
can be used more offensively include:
•Development of new products to meet emerging
social or environmental needs
•Enhanced customer loyalty
•Improved ability to enter new markets and obtain
government support for expanded franchise
•Competitive differentiation and enhanced
marketing opportunities
•Ability to attract and retain a pool of talented
employees 12
13. Social Responsibility and
Economic Development
According to the UN Report, a key dependency for
corporate social responsibility efforts is for governments
and communities to create an enabling environment that
will encourage companies to act in a socially responsible
manner and discourage irresponsible behavior. Some of
these interdependencies include the following:
•Transparent legal framework and “rule of law” that provides
equivalent treatment for foreign and domestic enterprises
•Independent judicial and administrative system
•Laws that prohibit bribery and corruption 13
14. Social Responsibility and
Economic Development
(contd.)
•Government assistance for education,health,training
and social infrastructure efforts
•Reasonable tax rates and administration
•Rules that promote market entry and discourage
“informal” markets
•Access to capital markets and financing
•Rules that protect intellectual and other property rights
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15. W.E.F SURVEYED KEY BUSINESS
FACTORS
The World Economic Forum(WEF) conducted a survey of over
1300 companies on global corporate citizenship. When asked to
make the business case for social responsibility, CEOs cited the
following four factors as being the most significant:
•Managing reputation and brand equity
•Attracting, motivating and retaining talented employees
•Protecting the license to operate.
•Enhancing competitiveness and market positioning
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16. POSSIBLE CONSEQUENCES OF
NEGLECTING CSR AS A
CORPORATE MANAGEMENT TOOL
•More litigation against the company and its key officers
•Loss of top talents
•Loss of credible investors
•Increased cost of capital
•Decline in stock value
•Loss of business partners and customers
•Loss of public contracts e.g. from international organizations
like World Bank, EU etc.
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17. POSSIBLE CONSEQUENCES OF
NEGLECTING CSR AS A
CORPORATE MANAGEMENT TOOL
(contd.)
•Exposure to shaming/blacklisting campaigns
•Erosion of reputation and brand value
•Sabotage of facilities.
•Increased insurance premiums
•Staff strike-breach of contracts
•Risk of provoking more stringent regulations
•Courts may take failure to adopt CSR principles into
consideration in deciding liability issues
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18. ISO 26000 to guide
CSR actions
A recent poll, of 100 business leaders from Fortune 500
companies, conducted in Feb’06 by the American society
for quality, reveals significant lags in implementing
commitment to CSR. According to the poll, 96 percent of
the business leaders think their company’s CSR behaviour
will greatly impact the nation’s economic future, but more
than 40 percent still do not have any policy in place to
guide their company’s actions. The ISO 26000, social
Responsibility standards, due out in the fourth quarter of
2008 will solidify how CSR is measured and Managed.
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19. CSR - Challenges before the
Independent Directors
•To upholds the highest ethical
standards of integrity, probity;
•To supports executives in their
leadership of the business while
monitoring their conduct;
•To questions intelligently, debates
constructively, challenges rigorously
and decides dispassionately; 19
