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ACKNOWLEDGEMENT

One of the pleasant aspects of preparing a Thesis is the opportunity to thank to those who have
contributed to make the project completion possible.

I am extremely thankful to Professor Mr. NADIRSHAW K. DHONDY, Advocate Supreme Court,

whose active interest in the project and insights helped me formulate, redefine and implement my
approach to the project.

Last but not certainly the least, I would like to extend my gratitude to the faculty of ALKESH
DINESH INSTITUTE OF MANAGEMENT FOR FINANCIAL AND MANAGEMENT STUDIES,
UNIVERSITY OF MUMBAI, and the Library staff for equipping me with the basics that helped
me throughout the making of this project.

-Miss. Nisha D. Prabhu.

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PROLOGUE:

'No one pretends that democracy is perfect or all-wise, indeed it has been said that democracy is
the worst form of government except all those other forms that have been tried from time to
time.'

-WINSTON CHURCHILL to the house of `commons'

This is an interesting & thoroughly worthwhile project. Its basic messages are relevant to any
organization & any manager. This project is not encyclopedic (as Corporate Governance itself is
a very large issue), although it is hoped that answers to meet question will be found, or that at
least a pointer may be given as to where the answers are

Corporate Governance brings power; and power corrupts. The antidotes to that power are
transparency, objectivity and accountability. All three requires a stead fort and clear
app\reciation of oneself as seen by others.

Corporate Governance is the term given to the management practices followed by the business
organizations. We believe that good business practices, transparency in corporate financial
reporting and the highest levels of corporate governance must be maintained. These channels in
turn are activated through several structural and institutional factors pertaining to the
corporation. They are as follows:

[1] The ownership structure of the organization.

[2] The financial structure of the corporation.

[3] The structure and functioning of the company boards and the associated internal control
systems.

[4] The legal, political and regulatory environment within which the Corporate functions

 


 

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Thus Corporate Governance (CG) is the way the firm ought to be run, managed and controlled.
It is related with supervision and holding the responsibility of those who direct and control the
management.

Prime time Matter:

| troductio :

The concept of corporate governance is poorly defined because it covers various economics
aspects. As a result of this different people have come up with different definitions on corporate
governance. It is hard to point on any one definition as the ultimate definition on corporate
governance. So the best way to define the concept is to provide a list of the definitions given by
some noteworthy people.

Though it may sound, financial scandals the world over highlight the ever-growing importance
of corporate governance. Future scandals will continue to assure a focus on governance issues -
especially transparency and disclosure, control and accountability - and on the most appropriate
form of board structure that may be capable of preventing such scandals occurring in future.

The relationship between corporate governance reforms and recession is cyclical, with waves of
reform and increased regulation occurring during periods of recession, corporate collapse and
reexamination of the viability of regulatory systems (Clarke, 2004). During long periods of
expansion, both companies and shareholders are concerned with the generation of wealth rather
than in ensuring governance mechanisms are working purposefully for the retention of wealth.
This leads to diminishment of active interest in governance.

The recent global financial crisis proves beyond a doubt that we are living in a global age and
has brought to the fore the relevance of a sound corporate governance system as an essential
element of effective risk-management. Though not the only cause, governance failings are
significant where boards fail to understand and manage risk, and tolerate perverse incentives.
The recent crisis highlights the need to develop more effective approaches to corporate
governance and risk management, as well as the importance of social responsibility in the

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financial sector; the role that corporate governance can and should play is in restoring trust
(International Corporate Governance Network, 2008).

To some extent, shareholders may be criticized for not holding companies accountable, and it is
true that shareholders have encouraged companies to ramp up short-term returns through
leverage. However, regulators have often not responded decisively on realizing that markets
were mispric- ing risk, allowing bank boards to operate with too little capital, excessive
leverage, too much liquidity risk and poor mortgage lending practices.

There is an increasing perception that contagion and spill-over effects from the global financial
turmoil could undermine the economic achievements of any country. As a result, there has to be
an increased interaction between corporate governance and the stability and soundness of the
financial system.

Hence, corporate governance practice needs strengthening, in particular by increasing board

competence and responsibility. Board members need to have up-to-date knowledge on financial
issues and risk-management to fulfill their functions and training should it be required when
necessary. Boards should conduct annual evaluations of their performance and report to
shareholders. Risk management frameworks, processes, and implementation practices require
reform in order to redress the shortcomings revealed by the turmoil. It is vital that regulatory
reform augments corporate governance solutions without aggravating existing weaknesses.

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Structure of corporate gover a ce:

Various definitions of corporate governance:

1. According to Sir Adrian Cadbury.

The system by which companies are directed and controlled

Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance framework is
there to encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society´

2. According to Mathiesen (2002)

³Corporate Governance is a field in economics that investigates how to secure/motivate efficient

management of corporations by the use of incentive mechanisms, such as contracts,
organizational designs and legislation. This is often limited to the question of improving




 

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financial performance, for example, how the corporate owners can secure/motivate that the
corporate managers will deliver a competitive rate of return.´

The definition given by Mathiesen means that corporate governance is a method which tries to
find out the different incentives which would motivate the managers of a corporate to give a
good return to the owners of the corporation.

3. According to the Journal of Finance written by Shleifer and Vishnv (1997),

³Corporate governance deals with the way in which suppliers of finance to corporate assure
themselves of getting a return on their investment´

The definition here means that corporate governance is basically a technique where people who
give money (lenders of the money) promise themselves or comfort themselves about getting a
return on their investment.

4. According to J. Wolfensohn, president of the World Bank, (in 1999)

³Corporate governance is about promoting corporate fairness, transparency and

accountability´

Corporate governance thus refers to the manner in which a company is managed and states the
rules, laws and regulation that affect the management of the firm. It also includes laws relating
to the formation of the firm, establishment of the firm and the structure of the firm. The most
important concern of corporate governance is to ensure that the managers and directors act in
the interest of the firm and for the shareholders.

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Why corporate gover a ce?

a) The liberalization and de-regulation world over gave greater freedom in management. This
would imply greater responsibilities.

b) The players in the field are many. Competition brings in its wake weakness in standards of
reporting and accountability.

c) Market conditions are increasingly becoming complex in the light of global developments like
WTO, removal of barriers/reduction in duties.

d) The failure of corporates due to lack of transparency and disclosures and instances of
falsification of accounts/embezzlement and the effect of such undesirable practices in other
companies.

It is the increasing role of foreign institutional investors in emerging economies that has made
the concept of corporate governance a relevant issue today. In fact, the expression was hardly in
the public domain. In the increasingly close interaction of the economies of different countries
lies the process of globalisation. This involves the rapid migration of four elements across
national borders. These are

Physical capital in terms of plant and machinery;

Financial capital;

Technology; and

Labour

The increasing concern of the foreign investors is that the enterprise in which they invest should
not only be effectively managed but should also observe the principles of corporate governance.
In other words, the enterprises will not do anything illegal or unethical. This need for re-
assurance is felt by the FIIs due to the fact that there have been cases of dramatic collapse of
enterprises which were apparently doing well but which were not observing the principles of
corporate governance.

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In India corruption is an all-embracing phenomenon. In this, if the respective players in the field
were to adopt healthy principles of good corporate governance and avoid corruption in their
transactions, India could really take a step forward to becoming a less corrupt country and
improving its rank in the Corruption Perception Index listed by the Transparency International.

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A company should:

1. Lay solid foundations for management and oversight, recognise and publish the respective
roles and responsibilities of board and management.

2. Structure the board to add value - Have a board of an effective composition, size and
commitment to adequately discharge its responsibilities and duties.

3. Promote ethical and responsible decision-making

- Actively promote ethical and responsible decision-making.

4. Safeguard integrity in financial reporting

- Have a structure to independently verify and safeguard the integrity of the company¶s financial
reporting.

5. Make timely and balanced disclosure

- Promote timely and balanced disclosure of all material matters concerning the company.

6. Respect the rights of shareholders

- Respect the rights of shareholders and facilitate the effective exercise of those rights.

7. Recognise and manage risk

- Establish a sound system of risk oversight and management and internal control.

8. Encourage enhanced performance

9. Remunerate fairly and responsibly

10. Recognise the legitimate interests of stakeholders

11. Corporate Governance Rating be made mandatory for listed companies.

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The concept of corporate governance has attracted public attention for quite some time in India.
In 1996, the Confederation of Indian Industry (CII) initiated the first institutional evaluation of
corporate governance in Indian industry. The objective was to develop a code for corporate
governance to be adopted and followed by Indian firms, financial institutions and public
organizations. The 1999 Kumar Mangalam Birla Committee on Corporate Governance made
recommendations that define the responsibilities and obligations of boards and management in
instituting systems for good governance and emphasizes the rights of shareholders. The 2000
Task Force on Corporate Excellence through Governance recommended the phased
implementation of essential measures, depending upon the size and the capabilities of the
companies and market requirements. The Advisory Group on Corporate Governance: Standing
Committee on International Financial Standards and Codes 2001, laid emphasis on audit
committees and the appointment of truly independent directors to raise the quality of board
deliberations and performance.

In 2002, the Reserve Bank set up the Consultative Group of Directors of banks and financial
institutions to review the supervisory role of boards of banks and financial institutions, and to
obtain feedback on the functioning of boards with respect to compliance, transparency,
disclosures, and audit committees. They also made recommendations for making the role of the
Board of Directors more effective with a view to minimizing risks and overexposure. The Naresh
Chandra Committee on Corporate Audit and Governance Committee in 2002 recommended
changes in areas such as the statutory auditor-company relationship, the procedure for
appointment of auditors and determination of audit fees, independence of auditing functions and
measures required to ensure that the management and companies actually present a 'true and
fair' statement of the financial affairs of the company. The SEBI Committee on Corporate
Governance in 2003 discussed issues related to audit committees, audit reports, independent
directors, related parties, risk management, directorships and director compensation, codes of
conduct and financial disclosures. Finally, the Naresh Chandra Committee II on Regulation of
Private Companies and Partnerships was constituted to suggest a scientific and rational
regulatory environment, the hallmark of which is quality rather than quantity, of regulation with
particular reference to the Companies Act 1956 and the Indian Partnership Act 1932.

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The Department of Company Affairs, in May 2000, invited a group of leading industrialists,
professionals and academics to study and recommend measures to enhance corporate excellence
in India. The Study Group in turn set up a Task Force, which examined the subject of Corporate
Excellence through sound corporate governance and submitted its report in Nov. 2000. The task
force in its recommendations identified two classifications namely essential and desirable with
the former to be introduced immediately by legislation and the latter to be left to the discretion of
companies and their shareholders. Some of the recommendations of the task force include:

* Greater role and influence for nonexecutive independent directors

* Stringent punishment for executive directors for failing to comply with listing and other
requirements

* Limitation on the nature and number of directorship of managing and whole-time directors

* Proper disclosure to the shareholders and investing community

* Interested shareholders to abstain from voting on specified matters

* More meaningful and transparent accounting and reporting

* Tougher listing and compliance regimen through a centralized national listing authority

* Highest and toughest standards of Corporate Governance for listed companies

* A code of public behaviour for public sector units

* Setting up of a centre for Corporate Excellence

Recently, the Government has announced the proposal for setting up the Centre for Corporate
Excellence under the aegis of the Department of Company Affairs as an independent and
autonomous body as recommended by the study group. The centre would undertake research on
Corporate Governance; provide a scheme by which companies could rate themselves in terms of
their corporate governance performance; promote corporate governance through certifying
companies who practice acceptable standards of corporate governance and by instituting annual
award for outstanding performance in this area. Government¶s initiative in promoting
corporate excellence in the country by setting up such a center is indeed a very important step in

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the right direction. It is likely to spread greater awareness among the corporate sector
regarding matters relating to good corporate governance motivating them to seek accreditation
from this body. Cumulative effect of the companies achieving levels of corporate excellence
would undoubtedly be visible in the form of much enhanced competitive strength of our country
in the global market for goods and services.

A large number of public sector companies both in the banking industry and financial sector
have on their Boards representative of the Government / Reserve Bank of India. It is for debate
whether functionaries of the Government should sit on their boards. While there is no easy or
straightforward answer to this question, at some distant future it is hoped, all the Directors
would be truly independent. The subject is no doubt complex and can be looked upon from
various angles. Frauds in the banking system are also increasing but computer Management
Information Systems should be able to detect them early and the Board must have the will to deal
with such mischief-makers in an exemplary manner. Zero tolerance should be the goal for
frauds in the banking system. It is the leader at the helm of affairs who makes a difference. A
close coordination exists through High Level Co-ordination Committee (HLCC) between RBI,
SEBI, IRDA and the Secretary Finance, Government of India who has a formal structure for
reviewing the affairs which impact the whole financial system. Although the US and UK models
are different, this model has served us well and we seem to be comfortable to continue with the
same for some more time to come.

There is an entire subject called ³whistle blowing´ and there is enormous literature on this
subject ± when to blow the whistle, who should blow the whistle and where the whistle should be
heard. These are the questions for which one needs to find the answers between spate of
anonymous letters to which any one working in public sector is used to and honest officials are
harassed sometimes on one side and the damaging investigative audit reports and doctored
balance sheets on the other side. Somewhere in between lies the governance and ethics; and
standards expected to be set up by the virtuous men appointed for heading these institutions. In
such organizations the shareholders and the other stakeholders derive full value. It is myopic,
bordering on foolishness, to look for astronomical return by the shareholders, who would allow
the boards to indulge in unethical practices like market rigging, insider trading, speculation and
host of other irregular practices for the sole purpose of making huge profits. One cannot argue

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that the shareholder¶s value is enhanced by higher profits and dividends are distributed by the
board acting merely as an agent of the shareholder who becomes the principal. Here lies the
test of governance of the board of directors walking the well-defined, honest and straight path in
conducting the affairs in the required atmosphere of transparency seen and perceived by all the
stakeholders, the markets and the regulators. Then only one can confidently state that corporate
governance has taken firm roots in this country.

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Corporate Governance µis only a small part of Governanceµ. In 2001, Indian listed companies on
our stock exchanges embraced the culture, practice and accountability of ÄCorporate
Governance , which covers about, 7% of India¶s GDP and 100% of our market capitalization.

Good Governance of India should be an A1 priority, as it affects all the 1090 million people and
100% of Indiaµs GDP! It covers all activities of the Nation, that is, the public sector, private
sector, unorganized sector and even NGOs. And its members have mailed and distributed about
6,00,000 booklets, about the advantages of good governance, and loss to the citizens and the
nation, in the absence of good governance and effective administration. We have received
positive responses from Indian citizens in politics, government, business, management, teaching
and the youth of India. We are therefore very positive about INDIA.

  





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With corporate responsibility and the need for governance high in the public and medias eye
there has been much discussion regarding how the management of the corporate resource and
skills pool needs to reflect, accurately, contemporary business needs and to deliver the services
required supporting line of business activities including key projects. With this in mind business
need to credibly provide evidence that their management of resources, business capability,
programs and projects is inline with regulatory and corporate governance requirements.

A good corporate governance framework has the potential for these benefits:

a Enhancing overall company performance.

a Preparing a small enterprise for growth, and so helping to secure new business
opportunities when they arise.

a Increasing attractiveness to investors and lenders, which enables faster growth.

a Increasing the company's ability to identify and mitigate risks, manage crises and
respond to changing market trends.

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a Increasing market confidence as a whole. All companies suffer from corporate scandals,
which scare potential investors away from the market.

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|

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i Corporate Gover a ce

Corporate Governance has been defined in different ways by different writers and
organizations. Some define it in a narrow perspective to include on it only the shareholders,
while others want it to address the concerns of all stake holders. Some talk about corporate
governance being an important instrument for a country to achieve sustainable economic
development, while some others consider it as corporate strategy to achieve ling tenure and a
healthy image. Thus, corporate governance has different meaning to different people. But to all
corporate governance is a means to an end, the end being long term shareholder, and more
importantly stakeholder value. They identify some governance issues being crucial and critical
to achieve these objectives. These are:

1. Distinguishing the roles of board and management:

Constitutions of more and more companies stress and underline that the business is to be
managed ³by or under the direction of the board´. In such a practice, the responsibility for
managing the business is delegated by the board to the CEO, who in turn delegates the
responsibility to other senior executives. Thus, the board occupies a key position between the
shareholders (owners) and the company¶s management (day-to-day managers of the companyµs
resources).

2. Composition of the board and related issues:

A board of directors isa ³committee elected by the shareholders of a limited company to be

responsible for the company´. Sometimes, full-time functional directors are appointed, each
being responsible for some particular branch of the firmµs work. The composition of board of
directors refers to the number of directors of different kinds that participate in the work of the
board. Over a period of time there has been a change as to the number and proportion of
different types of directors in the board in recent times in most of the countries.

E.g.: The SEBI appointed Kumar Mangalam Birlaµs Committee Report defined the composition
of Board thus: ʊthe BODµs of the company shall have an optimum combination of the
executives and non-executives directors with not less than 50% of the BODµs to be non-executive
directors. In case of executiveµs chairman, at least half of the board should be independent

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directors and in case of non-executive chairman, at least one-third of the board should
compromise independent directors.

3. Separation of the roles of the CEO and chairperson:

The composition of the board is a major issue in corporate governance as the board acts as a
link between the shareholders and the management and it decisions affect the performance of the
company. It is now increasingly being realized that the practice of combining the role of the
chairperson and with that of the CEO as is done in countries like US and India leads to conflicts
in decision-making and too much concentration of power in one person resulting in unsavory
consequences. The role of CEO is to lead the senior management team in managing the
enterprise, while the role of the chairperson is to lead the board.

4. Should the board have committees?

Many committees on corporate governance have recommended in one voice the appointment of
special committees for nomination; remuneration and for auditing. These committees would
lessen the burden of the board and enhance its effectiveness. When these committees are peopled
with independent directors selected for their competence, professional expertise in their chosen
fields and long years of work experience would help the respective committees decide issues
objectively and in a manner that would promote the long term interests of the organization.

5. Appointments the board and directors re-election:

As per the Indian company law, shareholders elect directors to the board. However,
shareholders are a legion in large companies and also scattered and to have them together to
elect the directors will be expensive and time-consuming. Therefore, in actual practice, in most
cases, the board or its specially constituted committees selects and appoints the prospective
director and get the person formally ³elected´ by the shareholders at the ensuring Annual
General body Meeting. Shareholders in fact only endorse the boardµs nominees and it is only in
rarest of rare cases that shareholders refuse to ratify the boardµs nominees for directorship.

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Corporate Governance Ethics:

Though the concept of Corporate Governance may sound a novelty in the Indian business
context and may be linked to the era of liberalisation, it should not be ignored that the ancient
Indian texts are the true originators of good business governance as one important sloka from
the Rugveda says: 'A businessman should benefit from business like a honey-bee which suckles
honey from the flower without affecting its charm and beauty.'

As a public company, it is of critical importance that companies' information reporting with the
regulators be accurate and timely. The chief executive officer and the senior leadership of the
finance department bear a special responsibility for prompting integrity throughout the
organization, with responsibilities to stakeholders both inside and outside of companies.

1. Act with honesty and integrity, avoiding actual or apparent conflict of interest in personal and
professional relationships.

2. Provide information thatis accurate, complete, objective, relevant, timely and understandable
to ensure full, fair, accurate, timely, understandable disclosure in reports and documents that
companies file with, or submit to, the regulators.

3. Comply with applicable laws, rules and regulations of federal, state, and local governments,
and other appropriate public and private regulatory agencies in all material respects.

4. Act in good faith, responsibility, with due care, competence and diligence, without
misrepresenting material facts or allowing one's independent judgment to be subordinated.

5. Respect the confidentiality of information acquired in the place of one's work except when
authorized or otherwise legally obligated to disclose. Confidential information required in the
course of oneµs work will not be used for personal advantage.

6. Share knowledge and maintain skills importantand relevant to stakeholders' needs.

Proactively promote and be an example of ethical behaviour as a responsible partner among
peers, in the work environment and the community.

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(a) Attention to business ethics has substantially improved society:

Establishment of anti-trust laws, unions, and other regulatory bodies has contributed to the
development of the society. There was a time when discriminations and exploitation of employees
were high, the fight for equality and fairness at workplace ended up in establishing certain laws
which benefited the society.

(b) Ethical practice has contributed towards high productivity and strong team works:

Organizations being a collection of individuals, the values reflected will be different from that of
the organization. Constant check and dialogue will ensure that the employee matches to the
values of the organization which will in turn result in better co-operation and increased
productivity.

(c) Changing situations require ethical education:

During turbulent times, where chaos becomes the order of the day, one must have clear ethical
guidelines to take right decisions. Ethical training will be of great help in those situations.

(d) Ethical practices create strong public image:

Organizations with strong ethical practices will possess a strong image among the public. This
image would lead to strong and continued loyalty. Conscious implementation of ethics in
organizations becomes the cornerstone for the success and image of the organization. It is
because of this ethical perception that the employees of TISCO and the general public protested
in 1977 when the then Minister for Industries in the Janata Government, attempted to nationalise
the company.

(e) Strong ethical practices act as insurance & strong ethical practices of the organization are
an added advantage for the future function of the business. In the long run, it would benefit if the
organization is equipped to withstand the competition.

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(a) Corporate governance is meant to run companies ethically in a manner such that all
stakeholders, creditors, distributors, customers, employees, the society at large and governments
are dealt in a fair manner.

(b) Good corporate governance should look at all stakeholders and not just shareholders alone.
Otherwise, a chemical company, for example, can maximize the profit of shareholders, but
completely violate all environment laws and make it impossible for the people around the area to
lead a normal life. Ship-breaking in Valinokkam, near Arantangi in Tamil Nadu, leather
tanneries in South, Arco and hosiery units in Tirupur, have brought about too much of
environmental degradation that has unleashed untold miseries to people in and around their
locations.

(c) Corporate governance is not something which regulators have impose on a management, it
should come from within. There is no point in making statutory provisions for enforcing ethical
conduct.

(d) There is a lot of provisions in the Companies Act, for example, (i) disclosing the interest of
directors in contracts in which they are interested; (ii) abstaining from exercising voting rights
in matters they are interested; and (iii) statutory protection to auditors who are supposed to go
into the details of the financial management of the company and report the same to the
shareholders of the company. But most of these may be observed in letter, but not in spirit.
Members of the board and top management should ensure that these are followed both in letter
and spirit.

(e) There are a number of grey areas where the law is silent or where regulatory framework is
weak, which are manipulated by unscrupulous persons like Ketan Parikh and Harshad Mehta. In
the US, for instance, the courts recognise that new forms of fraud may arise, which may not be
covered technically under any existing law and cannot be interpreted as violating any of the
existing laws. For example, a clever conman can try to sell a piece of the blue sky. In order to
check such crooks, there is the concept of the 'blue sky' law. However, such wide-ranging
processes are not available to courts in developing countries.

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(f) The Securities and Exchange Board of India (SEBI) has jurisdiction only in cases of limited
and listed companies and are concerned only with their protection.

(g) The Serious Fraud Investigation Office (SIFO) in the Department of Company Affairs (DCA)
has been investigating several 'Vanishing Companies'. By 2003, SEBI has identified 229 as
'vanishing companies' which tapped the capital market, collected more than Rs. 800 crores
from the public and subsequently became untraceable.

However, thousands of investors have lost their hard-earned money and no agency has come to
their rescue so far.

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The Indian corporates are governed by the Company¶s Act of 1956 that follows more or less the
UK model. The pattern of private companies is mostly that of closely held or dominated by a
founder, his family and associates. The figure drawn below indicates how the corporate
governance system works in India.

Indian Corporate governance Model:

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The model measures 6 parameters of corporate governance. Accounting Quality, Value

Creation, Fair Policies and Actions, Communication, Effective Governing Board and
Reliability.For Accounting Quality the fundmanagers look at all or any of the following
variables: company accounting policies, disclosure standards, proactive adoption of accounting
policy improvements, internal audit and control mechanisms for addressing auditorµs queries.
The top companies were ranked accordingly. Similarly, for ³Value Creation Focus´ business
strategy (driven by value creation focus), effective use of cash surplus, capital structure, usage of
IPO funds, shareholder friendliness are among the key variables. For ³Fair policies among
actions´, the fund managers take the cue from fair treatment of minority shareholders,
transparency of trades by top management and ethical behavior with customers, suppliers, tax

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authorities and government. Similar variables were used for ranking companies based on other
parameters.

  
    





There is an increasing awareness that corporates owe their existence to shareholders and the
long-term sustainability of companies depends upon winning their confidence through
disclosures and transparency in accountability for their actions to them. This is achieved
through voluntary actions on the part of board of directors and through regulatory framework
such as stock exchanges, securities and exchange board and other regulatory bodies. These
principles are codifies as principles of corporate governance. The following diagram clearly
illustrates how board of directors and top management are placed in the structure of corporates
to interface, interact and intervene, when necessary, to carry on the running of the company
efficiently.

Role of the board in the dynamics of Corporate Governance:

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Case study: TATA Steel

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The Tata Group is a giant family of businesses that dominates Indian markets. There is a long
history of corporate responsibility within the group, and it is no surprise that all Tata companies
have adopted a Tata Code of Conduct as well as many international standards. This case study
concerns initiatives undertaken by Tata Steel, as examples of those implemented by the wider
organization.

It is divided into two broad sections; the first of which discusses corporate responsibility during
the business process (entitled µCorporate Governance¶); the second of which discusses social
investment and philanthropy undertaken with the use of company profits and donations. Because
Tata Steel appears to choose and implement projects of its own design, the last section contains
discussion of the dangers (and benefits) of ³targeting´.

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Tata Steel is one of twenty-eight major corporations within the Tata Group. Founded in 1907, it
is the largest private sector steel company in India, with a capacity of 3.5 million tonnes per
annum crude steel production. Operations are spread across the country, with the steel
manufacturing unit at Jamshedpur, and other manufacturing and mining activities situated in the
states of Jharkhand and Orissa at eight locations. Headquarters are based in Mumbai,
Maharashtra.

Tata¶s stock is listed and traded on the Bombay Stock Exchange and the National Stock
Exchange in New Delhi. Exports are primarily to Japan, the USA, and the Middle East and
South East Asian countries. It manufactures products including rods, pipes, tubes and rings.
However it also provides services such as personnel and technical training, IT and Design and
Engineering.

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The company employs approximately 48,800 people as at April 2002, out of which 43,000 are
directly involved with the steel business.

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The ideals and philosophy of the Tata Group originated from the founding father,
JamsetjiNusserwanji Tata (1839-1904). In 1895 he explained: We do not claim to be more
unselfish, more generous or more philanthropic than others, but we think we started on sound
and straightforward business principles considering the interests of the shareholders, our own
and the health and welfare of our employees« the sure foundation of prosperity.

Throughout the last century, Tata pioneered the notion of employee benefits in India. It
introduced the eight-hour working day in 1912 ± an astonishing thirty-six years before the
Indian government. Maternity benefits, schooling facilities and leave with pay are just some
examples of benefits the Tata Group bestowed many years before it became law to do so. These
³sound and straightforward business principles´ carried through the generations of Tata
Chairmen to influence Ratan N. Tata, Chairman as of 1992. With such a strong tradition of
corporate responsibility, it is no surprise that Tata¶s current initiatives target community
development and corporate sustainability.

The following section provides an overview of some of the initiatives Tata Steel has implemented
and encouraged in recent years. The first part considers ³before-profit´ practice and
³corporate governance,´ that is to say the company¶s conduct in the process of manufacturing
steel. This includes employee welfare, Codes of Conduct, environmental regulation, and internal
structures for improving the company¶s accountability. The second part reviews ³after-profit´
practice, social investment projects that are not directly related to the ³business´ of Tata itself.

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Tata Steel has articulated its policy position regarding human resources, the environment, and
health and safety. It has a statement of purpose, a ³vision,´ and a mission that shape business-
community relations as well as organizational structure. Tata¶s organizational structure is

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called the Tata Business Excellence Model (TBEM). This has been introduced across the Tata
Group as a means of increasing efficiency and tightening business processes.

Activities are broken down into the following;

‡ Market development

‡ Planning, control and risk management

‡ Investment management

‡ Operations (production and maintenance)

‡ Supply management

‡ Human resources management

‡ Social responsibility and corporate citizenship

Good ³corporate governance´ should be an integral part of all of these processes, not just (as
often assumed) social responsibility and corporate citizenship. After all, a good corporate citizen
needs to be accountable to stakeholders while conducting business as well as when investing in
the community at a later date.

Tata Steel has gone some way in ensuring corporate governance at all stages of the business
process. Every year the company aims to exceed its targets on the Employee and Customer
Satisfaction Indexes, and the Corporate Citizenship Index. In order to improve its internal
management systems it has also adopted two systems of evaluation;

‡ Tata Code of Conduct ± Follows guidelines established by the UN Global Compact (to which
Tata is also a signatory). A company signing to the Tata Code of Conduct entitles that company
to use the Tata brand name. It prescribes principles by which all employees are expected to act.

‡ Audit Committee

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Tata Steel was the first integrated iron and steel plant in India to have been certified with the
ISO-14001 Environmental Standard, and one of only a few in the world to have this
accreditation in 2000. It operates its own Environmental Management System (EMS), aimed at
increasing efficiency and limiting environmental impact at all stages of steel production.

This system focuses on improved staff education (including contractors), instituting a system of
waste segregation and its eco-friendly disposal, the safe disposal of industrial waste and where
possible, a 100 per cent recycling of hazardous wastes such as tar sludge, oil soaked jute, and
waste acid from batteries.

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Tata Steel has also established several social departments and societies that work within the
structure of the company. Table 1 lists them and details when they were established.
Programmes implemented under these departments and societies are described in the next
section, Social Investment.

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This section reviews ³after-profit´ practice, work in and for the community that is not
directlyrelated to the ³business of business.´ Again, Tata Steel has internal procedures that
guide policy, meaning that community initiatives are seldom ad hoc. Below are six of these
initiatives or procedures, three of which are organised by some of the departments listed in
Table 1 above.





 

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TCCI is a product of the Tata Group¶s commitment to the community. It serves to help the Tata
companies in their business-community relations, by drawing up µTata Guidelines for
Community Development,¶ designing programmes then implementing them. Programmes include
training courses in which Tata companies conduct technical (IT, vocational) training to
members of the community. This is done with the help of company volunteers, often
management staff. A forthcoming project involves forming a Tata Corps of Volunteers, under
which employee volunteering will play an increasingly important role in developing business-
community relations.

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ERA is a procedure by which Tata¶s community projects are evaluated for their impact on the
target communities and their level of accountability. Although ERA is not independent of Tata,
such procedures are influential in improving programme delivery and ensuring continuing self-
evaluation and learning.

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The Global Business Coalition on HIV/AIDS aims to check the growth of the disease with the
help of over a hundred major international companies. Believing that business holds the
necessary marketing skills, management and infrastructure to be able to raise awareness in rural
communities, the GBC encourages companies to campaign with imagination and consistency.

Tata Steel has done just that, and won an award in June 2003 for ³Best Initiative.´ Initially Tata
focused on educating employees, but now targets over 600 villages in the State of Jharkhand.
This is done through the dissemination of mass media, as well as more inventive schemes, such
as student workshops which employees are trained to deliver, or travelling street plays in local
languages that reach the rural illiterate. Tata paid for six condom-vending machines in the city
of Jamshedpur in public places, which are also proving to be a success. At one of these
locations, a busy coach station, there is also a clinic where passers-by can have free check-ups
and learn more about HIV/AIDS.


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A µDirectory of Employee Volunteers¶ was established by the Tata Group as an efficient way of
matching jobs in the community with employee skills and interests. A corporate committee,
comprised of a senior executive, union and government officials, interacts with the communities
to ascertain their needs. This is done on a quarterly basis with senior citizens of each village,
and biannually with target women¶s groups.

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Working with government to prioritize projects, Tata Steel¶s involvement in health initiatives
remains largely philanthropic, with the exception of the Global Business Coalition for HIV/AIDS
awareness scheme (see subsection 3 above). Tata Steel has invested in a local hospital which
treats an average of 2,300 people per day. It has also bought specialist cancer-treating
equipment, and part-finances the running of one blood bank, two rehabilitation Centre¶s and five
homeopathic clinics. Donations to the clinics and Centre¶s are regular and on a long-term basis,
which does indicate a move from ad hoc sponsorship to a more strategic social investment. This
is organized by the Family Welfare department.

  
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Education and Youth Development Programmes have built and maintained infrastructure for
sports across Jharkhand. Over 1,500 young people are currently training at Tata Steel¶s two
sporting academies, six training centers or their Adventure Foundation. Awards are given to
employees who excel in sports. A Tribal Cultural Centre was built in 1993 and a Jubilee
Amusement Park in 2001 to enrich the cultural heritage of the city of Jamshedpur. Tata Steel has
also invested in education, part-financing eleven schools and colleges that teach nearly 10,000
students per year.

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Along with the TCCI¶s forthcoming project to formalise employee volunteering, Tata Steel also
hopes to align more with global standards and initiatives. In 2001 Tata Steel produced a
Corporate Sustainability Report following guidelines established by the Global Reporting

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Initiative. This is another step forward for the company looking to make its mark on the new
corporate responsibility agenda.

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1. Wikipedia: www.wikipedia.com
2. www.mbaknol.com
3. Corporate governance by Vasuda.




 

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EP|LOGUE:

Tata Steel has provided many examples of how business-community relations are approached by
the private sector in India at the present time. Summaries of Tata initiatives reveal that the
company is working to improve both ³before´ and ³after-profit´ practice.

Corporate governance is being tackled through increased transparency in business operations,

illustrated in the establishment of an Audit Committee. The Tata Code of Conduct also means
that the company holds certain principles, based on value judgments that influence its policies
and procedures. One result of this has been the adoption of various organizational structures
that are responsible for targeting particular issues, such as the Family Welfare and
Environmental Management Department.

Moreover, Tata Steel has seemingly pushed back the boundaries of what is expected from
³corporate social responsibility´ (CSR) in India at this time. Not only has it given donations to
local education, health and sports projects, but it has also demonstrated longer-term
commitment in the establishment of the Tata Council for Community Initiatives (TCCI). Its
participation in the Global Business Coalition to raise awareness of HIV/AIDS has earned
international recognition over a sustained period. This is indicative of a move towards ³social
investment,´ which heralds a more serious commitment to CSR than donations or sponsorship.

Tata Steel¶s dalliance with employee volunteering is, however, of the most interest for this
research project. It seems that the volunteer database enables the company to match volunteers
with community positions easily and quickly. The experience then is more beneficial to everyone.
It would be interesting to learn if employees are given incentives for volunteering, or if they are
rewarded afterwards. This would have implications on the ³real´ motivation behind employees

 


 

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giving up their time for a local cause. Would this make a difference of the quality of work? Do
volunteers need extra motivation anyway, or is altruism and personal satisfaction enough?
Another issue that arises from Tata¶s employee volunteering scheme is the manner in which
³jobs´ and communities are chosen. On the Tata website, it is claimed that:

Companies are encouraged to design and implement programmes that help improve the health
and hygiene of the various communities that are ³adopted.´ Prioritizing health and hygiene
programmes seems like a good idea, because it targets the community¶s ³basic needs.´ The
doubts appear because the companies are expected to design their own projects. Moreover, the
term ³adopted´ implies that the communities themselves had little choice in the matter.

All of a sudden it seems the company is dictating development programmes. While this might be
a misinterpretation, there are dangers in ³top-down´ approaches, especially when initiated by
the private sector. In the first instance, the private sector might not have the technical knowledge
to identify cause and solution. It is also possible that community projects are implemented in a
manner similar to a business project. This might be by following a blueprint plan, rather than
opting for a more flexible approach. It might lack community participation. Alternatively it might
try to engage in community participation but have an inadequate understanding of power
dimensions within the community that affects the outcome of the project. In short, a business
might not have the technical or sociological knowledge to implement a successful community
project. Moreover, the community does need to have some opportunity to voice their complaints,
for these to be heard and then challenged by way of a community project ± although it is worth
bearing in mind that often those who are able to ³speak out´ are not powerless.

Tata¶s paternal ³adoption´ of communities is therefore worrying, the implication being that the
³targeted´ communities have minimal input into their future relations with the company.
Although Tata Steel¶s initiatives have served communities on many levels, a means of enhancing
business-community relations in the future would require communication between both sectors,
when both parties are able to contribute to project selection and planning procedures.

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