No other institution has contributed so much to the growth of market-driven capitalist economies of the world as modern corporations. The Joint Stock Company which is also known as “Corporation” is the nucleus of all business activities in modern economies. Such a company can be easily set up under the Companies Act. The corporation has become the most important industrial unit or business enterprise or a commercial venture. But it is also a fact that all corporations do not enjoy equal measure of power nor are they equal in terms of size and degree of operations. Be it in a developed country such as the US or a developing country such as India, the major portion of capital is in the hands of few giant corporations which are in a position to exercise considerable control over industrial production and its sale.
The definitions of the term “corporation” reflect the perspectives, predelictions and the sensitivity of the people writing them. Lawyers and economists describe the corporation as “a nexus of contracts,” arguing that the corporation is nothing more than the sum of all of the agreements leading to its creation.
No other institution has contributed so much to the growth of market-driven economies as modern corporations. “Corporation” is the nucleus of all business activities in modern economies. Lawyers and economists describe the corporation as “a nexus of contracts,” arguing that the corporation is nothing more than the sum of all of the agreements leading to its creation.
Melvin Aron Eisenberg defines a corporation thus: “The business corporation is an instrument through which capital is assembled for the activities of producing and distributing goods and services and making investments. Accordingly, a basic premise of corporation law is that a business corporation should have as objective the conduct of such activities with a view to enhancing the corporation’s profit and the gains of the corporation’s owners, that is, the shareholders.
According to Chief Justice John Marshall: “A corporation is an artificial being, invisible, intangible, and existing only in the contemplation of the law. Being the mere creature of the law, it possesses only those properties which the charter of its creation confers on it, either expressly or as incidental to its very existence. These acts are supposedly best calculated to effect the object for which it was created. Among the most important properties are immortality, and, if the expression be allowed, individuality; which a perpetual succession of many persons are considered the same, and may act as a single individual.”
In the capitalist economy, the process of capital accumulation that facilitates development of economies by fuelling growth of its various sectors such as industry, agriculture, infrastructure, trade and commerce has become institutionalised by the corporation. The corporation of today has come to replace the sole proprietor of earlier times and tries to maximise its profits and accumulate capital as he did. However, it differs from individual capitalist in two important aspects: (i) The life span of the corporation is much longer, and (ii) it is more rational in decision making by virtue of the fact that it has the benefit of the collective wisdom of the board of directors, and besides, they take decisions using the principles of cost accounting and budget analysis, data collection and processing and managerial consulting.
Though there are numerous definitions of a company, some of which have been quoted earlier, Justice Lindlay’s definition is both lucid and comprehensive. In his words: “By a company is meant an association of many persons, who contribute money or money’ s worth to a common stock and invest it in some trade or business, and who share the profit and loss (as the case may be) arising therefrom. The common stocks so contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable, although the right to transfer them is often more or less restricted.”1
The corporation of today differs from individual capitalist in two important aspects: (i) the life span of the corporation is much longer, and (ii) it is more rational in decision-making by virtue of the fact that it has the benefit of the collective wisdom of the board of directors. Besides, they take decisions using the principles of cost accounting, budget analysis, data collection and processing, and managerial consulting.
A corporation enjoys some privileges and is also bound by responsibilities, indicated in the following definition: A corporation is an association of persons recognised by the law as having a collective personality. The corporation can act as if it were distinct from its members; it has “perpetual succession” and a common seal. It can therefore CONTRACT quite freely—it can also be fined, but it obviously cannot be sent to prison or incur penalties which can only be applied to individuals.2
A corporation is an association of persons recognised by the law as having a collective personality. The corporation can act as if it were distinct from its members, it has “perpetual succession” and a common seal. Characteristics of a corporation are incorporated association, artificial legal existence, perpetual existence, extensive membership, separation of management from ownership, limited liability and transferability of shares.
From the above definitions, the following characteristics of a corporation emerge:
The concept of “governance” is as old as human civilisation. Simply stated, “governance” means the process of decision-making and the process by which decisions are implemented (or not implemented). Governance can be used in several contexts such as corporate governance, international governance, national governance and local governance.
Since governance is the process of decision-making and the process by which decisions are implemented, an analysis of governance focusses on the formal and informal players involved in decision-making and implementing the decisions made and the formal and informal structures that have been set in place to arrive at and implement the decision.
Government is one of the players in governance. Others involved in governance vary depending on the level of government that is under discussion. In rural areas, for example, other players may include influential landlords, associations of peasant farmers, cooperatives, NGOs, research institutes, religious leaders, finance institutions, political parties, the police, etc. The situation in urban areas is much more complex and includes the urban elite, decision-makers at various levels, both government and the private sector media, elected representatives, government officers of various levels, the middle class, the urban poor, NGOs and interested groups, small scale entrepreneurs, trade unions and so on. At the national level, in addition to the above players, media, lobbyists, international donors, multi national corporations, etc. may play a role in decision-making or in influencing the decision-making process.
“Governance” is as old as human civilisation. Simply stated, it means the process of decision-making and the process by which decisions are implemented (or not implemented). An analysis of governance focusses on the formal and informal players involved in decision-making and implementing the decisions made.
All players other than government and the military are grouped together as part of the “civil society”. In some countries, in addition to the civil society, organised crime syndicates also influence decision-making, particularly in urban areas and at the national level.
Similarly, formal government structures are one of the means by which decisions are arrived at and implemented. At the national level, informal decision-making structures, such as “kitchen cabinets” or informal advisors may exist. In urban areas, organised crime syndicates such as the “land mafia” may influence decision-making. In some rural areas, local powerful families may make or influence decision-making. Such informal decision-making is often the result of corrupt practices or leads to corrupt practices.
There are four broad theories to explain and elucidate corporate governance. These are: (i) Agency Theory (ii) Stewardship Theory (iii) Stakeholder Theory and (iv) Sociological Theory.
Recent thinking about strategic management and business policy has been influenced by agency cost theory, though the roots of the theory can be traced back to Adam Smith who identified an agency problem (managerial negligence and profusion) in the joint stock company. The fundamental theoretical basis of corporate governance is agency costs. Shareholders are the owners of any joint stock, limited liability company, and are the principals of the same. By virtue of their ownership, the principals define the objectives of a company. The management, directly or indirectly selected by shareholders to pursue such objectives, are the agents. While the principals generally assume that the agents would invariably carry out their objectives, it is often not so. In many instances, the objectives of managers are at variance from those of the shareholders. For instance, a chief executive may want to increase his managerial empire and personal stature by using the company’s funds to finance an unrelated diversification, which could reduce long term shareholder value. The shareholders and other stakeholders of the company, may not be able to counteract this because of inadequate disclosure about such a decision and because the principals may be too scattered or even not motivated enough to effectively block such a move. Such mismatch of objectives is called the agency problem; the cost inflicted by such dissonance is the agency cost. The core of corporate governance is designing and putting in place disclosures, monitoring, “oversight” and corrective systems that can align the objectives of the two sets of players as closely as possible and, hence, minimise agency costs.
In the modern corporation, where share ownership is widely held, managerial actions depart from those required to maximise shareholder returns. In agency theory terms, the owners are the principals and the managers are the agents and there is an agency loss, which is the extent to which returns to the owners fall. Agency theory specifies mechanisms that reduce agency loss.
The main thrust of the agency theory runs like this. In the modern corporation, in which share ownership is widely held, managerial actions depart from those required to maximise shareholder returns. In agency theory terms, the owners are principals and the managers are agents and there is an agency loss which is the extent to which returns to the residual claimants, the owners, fall below what they would be if the principals, the owners themselves, exercised direct control of the corporation. Agency theory specifies mechanisms which reduces agency loss. These include incentive schemes for managers which reward them financially for maximising shareholder’s interests. Such schemes typically include plans whereby senior executives obtain shares, perhaps at a reduced price, thus aligning financial interests of executives with those of shareholders. Other similar schemes tie executive compensation and levels of benefits to shareholders, returns and have part of executive compensation deferred to the future to reward long-run value maximisation of the corporation and deter short-run executive action which harms corporate value.
Total control of management is neither feasible nor required under this theory. The underlying assumption in the trade-off that shareholders make on employing agents is that they must accept a certain level of self-interested behaviour in delegating responsibility to others. The objective of agency theory is to check the abuse in this trade-off, but its limited success raises the question of its utility as a theoretical model to promote corporate governance. Besides, in agency theory the assumption is with the complexities of investor-board relationship in large organisations, shareholders should have correct and adequate information to wield effective control. Equity investors rarely get these and besides they rarely make clear their exact target returns, and yet delegate authority to meet the target. It is also to be understood that in terms of controls, equity investors hardly have sanctions over boards. Instead, they have to rely on self-regulation to ensure that an orderly house is maintained.
There are two broad mechanisms that help reduce agency costs and hence improve corporate performance through better governance: (i) fair and accurate financial disclosures, and (ii) efficient and independent board of directors.
There are two broad mechanisms that help reduce agency costs and hence, improve corporate performance through better governance. These are:
A company that discloses nothing can do anything. Improving the quality of financial and non-financial disclosures not only ensures corporate transparency among a wide group of investors, analysts and the informed intelligentsia, but also persuades companies to minimise value-destroying deviant behaviour. This is precisely why law insists that companies prepare their audited annual accounts, and that these be provided to all shareholders and is deposited with the Registrar of companies. This is also why a good deal of effort in global corporate governance reform has been directed to improving the quality and frequency of disclosures.
The stewardship theory of corproate governance discounts the possible conflicts between corporate management and owners and shows a preference for a board of directors made up primarily of corporate insiders. This theory assumes that managers are basically trustworthy and attach significant value to their own personal reputations. The market for managers with strong personal reputations serves as the primary mechanism to control behaviour, with more reputable managers being offered higher compensation packages. Financial reporting, disclosure and auditing are still important mechanisms, but there is a fundamental presumption that these mechanisms are needed to confim managements’ inherent trustworthiness.
The stewardship theory assumes that managers are basically trustworthy and attach significant value to their own personal reputations. It defines situations in which managers are stewards whose motives are aligned with the objectives of their principles. A steward’s behaviour will not depart from the interests of his/her organisation. Control can be potentially counterproductive, because it undermines the pro-organisational behaviour of the steward by lowering his/her motivation.
Stewardship theory can be reduced to the following basics:
This emphasis on the responsibility of the board to shareholders in the Anglo-Saxon model of corporate governance in terms of stewardship and trusteeship is nowhere better articulated than in the Canadian guidelines. It is stated therein: “Stewardship refers to the responsibility of the board to oversee the conduct of the business and to supervise management which is responsible for the day-to-day conduct of the business. In addition, as stewards of the business, the directors function as the catch-all to ensure no issue affecting the business and affairs of the company falls between cracks.” Similar views, though differently told, predominate in corporate governance guidelines of many countries of the world.
The greatest barrier, however, to the adoption of stewardship mechanisms of governance lies in the risk propensity of principals. Risk taking owners will assume that executives are pro-organisation and favour stewardship governance mechanisms. Where executives, investors cannot afford to extend board power, agency costs are effective insurance against the self-interest behaviours of agents.
The responsibility of the board to shareholders in terms of stewardship and trusteeship cannot be overemphasised. These concepts of stewardship and trusteeship are not new. The sacred scriptures, both in India and Christendom, emphasise the almost filial relationships between the rulers and the ruled. Gandhiji too elaborated the concept of trusteeship to make Indian industrialists better understand and appreciate their roles and responsibilities towards their employees.
Of course, these concepts of stewardship and trusteeship are not new. The sacred scriptures, both in India and Christendom, emphasise the almost filial relationships between the rulers and the ruled. Gandhiji too elaborated the concept of trusteeship to make Indian industrialists better understand and appreciate their roles and responsibilities towards their employees. It is said in many oriental societies including Japan, that an employer has been ordained by God to act as His trustee to own and administer assets for the benefit of his employees.
Though the Agency and Stewardship Theories have something in common, there are certain basic differences. The tables set out below summarise the main differences between the two theories.4
Davis, Schoorman and Donaldson (1997) state that the owners-managers relationship depends on the behaviour adopted respectively by them. Managers choose to act as agents or as stewards according to certain personal characteristics and their own perceptions of particular situational factors. Principals choose to create a relationship of one type or the other depending on their perceptions of the same situational factors and of their managers’ psychological mechanisms. The following tables set out these variables and the differences between the two theories.
TABLE 2.1 Behavioural differences
Agency Theory | Stewardship Theory |
---|---|
Managers act as agents | Managers act as stewards |
Governance approach is materialistic | Governance approach is sociological and psychological |
Behaviour pattern is • individualistic • opportunistic • self-serving |
Behaviour pattern is • collectivistic • pro-organisational • trustworthy |
Managers are motivated by their own objectives | Managers are motivated by the principal’s objectives |
Interests of the Managers and principals differ | Interests of the managers and principals converge |
The role of the management is to monitor and control | The role of the management is to faclitate and empower |
Owners’ attitude is to avoid risks | Owners’ attitude is to take risks |
Principal-Manager relationship is based on control | Principal-Manager relationship is based on trust |
Adapted from “Development of Corporate Governance System: Agency Theory Versus Stewardship Theory in Welsh Agrarian Coorperative Societies”, by Dr. Alfonso Vargas Sanchez.
TABLE 2.2 Psychological mechanisms
Agency Theory | Stewardship Theory |
---|---|
Motivation revolves around • lower order needs •Extrinsic needs |
Motivation revolves around • Higher order needs • Intrinsic needs |
Social comparison is between compatriots | Social comparison is between principals |
There is little attachment to the company | There is great attachment to the company |
Power rests with the institution | Power rests with the personnel |
Adapted from “Development of Corporate Governance System: Agency Theory Versus Stewardship Theory in Welsh Agrarian Coorperative Societies”, by Dr. Alfonso Vargas Sanchez.
TABLE 2.3 Situational mechanisms
Agency Theory | Stewardship Theory |
---|---|
Management philosophy is control oriented | Management philosophy is involvement oriented |
To deal with increasing uncertainty and risk, the theory advocates exercise of • greater controls • more supervisions |
To deal with increasing uncertainty and risk, the theory advocates exercise of • training and empowering people • making jobs more challenging and motivating |
Risk orientation is done through a system of control | Risk orientation is done through trust |
Time frame is short term | Time frame is long term |
The objective is cost control | The objective is improving performance |
Cultural differences revolve around • individualism • large power distance |
Cultural differences revolve around • collectivism • small power distance |
Adapted from “Development of Corporate Governance System: Agency Theory Versus Stewardship Theory in Welsh Agrarian Coorperative Societies”, by Dr. Alfonso Vargas Sanchez.
While studying theories of corporate governance, it is common to distinguish between shareholder and stakeholder approaches. Shareholder approaches argue that corporations have a limited set of responsibilities, which primarily consist of obeying the law and maximising shareholder wealth. The basic argument is that corporations, by focussing on shareholder interests maximise societal utility. The logic of this position goes back to the ability of the shareholder model to maximise utility, however, is tenuous in that it is based on the assumption of perfect competition. To the extent that the conditions of perfect competition are not in place, the argument falters. More specifically, as deviations from the conditions of perfect competition increase (e.g. imperfect markets, incomplete contracts, information asymmetries), after a certain point, corporations will not be maximising societal utility by merely pursuing shareholder interests. The shareholder approach is logically most compatible with the Anglo-American model of corporate governance.
In contrast to shareholder approaches, stakeholder models of corporate governance argue that those responsible for the governance of the corporation have responsibilities to parties other than shareholders and that, any fiduciary obligations owed to shareholders to maximise profits might be subject to the constraint of respecting obligations owed to such stakeholders.
The stakeholder theory of corporate governance has a lengthy history that dates back to 1930s. The theory represents a synthesis of economics, behavioural science, business ethics and the stakeholder concept. The history and the range of disciplines that the theory draws upon has led to large and diverse literature on stakeholders. In essence, the theory considers the firm as an input-output model by explicitly adding all interest groups—employees, customers, dealers, government and the society at large—to the corporate mix.
The theory is grounded in many normative theoretical perspectives including the ethics of care, the ethics of fiduciary relationships, social contract theory, theory of property rights, theory of the stakeholders as investors, communitarian ethics, critical theory, etc. While it is possible to develop stakeholder analysis from a variety of theoretical perspectives, in practice much of stakeholder analysis does not firmly or explicitly root itself in a given theoretical tradition, but rather operates at the level of individual principles and norms for which it provides little formal justification. Insofar as stakeholder approaches uphold responsibilities to non-shareholder groups, they tend to be in some tension with the Anglo-American model of corporate governance, which generally emphasises the primacy of “fiduciary obligations” owed to shareholders over any stakeholder claims.
The stakeholder theory is grounded in many normative, theoretical perspectives including ethics of care, the ethics of fiduciary relationships, social contract theory, theory of property rights, and so on. Stakeholder theory is often criticised, mainly because it is not applicable in practice by corporations.
The stakeholder theory is often criticised, more often than not as “woolly minded liberalism”, mainly because it is not applicable in practice by corporations. Another cause for criticism is that there is comparatively little empirical evidence to suggest a linkage between stakeholder concept and corporate performance. But there are considerable theoretical arguments favouring promotion of stakeholders’ interests. Managers accomplish their organisational tasks as efficiently as possible by drawing on stakeholders as a resource. This is in effect a “contract” between the two, and one that must be equitable in order for both parties to benefit.
The major problem with the Stakeholder Theory stems from the difficulty of defining the concept. Who really constitutes a genuine stakeholder? There is an expansive list suggested by authors of the theory, ranging from the most bizarre to include terrorists, dogs and trees, to the least questionable such as employees and customers. Some writers have suggested that any one negatively affected by corporate actions might reasonably be included as stakeholder, and across the world this might include political prisoners, abused children, minorities and the homeless. However, a more seriously conceived and yet contested list of stakeholders would generally include employees, customers, suppliers, the government, the community, assorted activist or pressure groups, and of course, shareholders. Some writers on the theory opine that where there are too many stakeholders, “in order to clarify and ease the burden it places upon directors” it is better to categorise them as primary and secondary stakeholders. Clive Smallman in his article “Exploring Theoretical Paradigms in Corporate Governance” says: “The case for including both the serious claimants and the more flippant are rooted in business ethics, in managerial morality and in best practice in business strategy. However, whilst the inclusion of a wide range of interested parties may be well-intentioned, in practice if directors (as agents) attempt to serve too many principals they will fail to satisfy those who have a genuine claim on an organisation.”
Further, Clive Smallman points out to another problem that stems from the stakeholder theory. “Relating to the range and diversity of stakeholders, some critics also accuse stakeholder theory of being “superfluous”, by which they mean that the intent of the theory is better achieved by relying on the hand of management to deliver social benefit where it is required.”
In the assessment of Clive Smallman, “the stakeholder model also stands accused of opening up a path to corruption and chaos; since it offers agents the opportunity to divert wealth away from shareholders to others, and so goes against the fiduciary obligations owed to shareholders (a misappropriation of resources)“.5 Thus, the stakeholder model of corporate governance leads to corrupt practices in the hands of managements with a wide option and also to chaos, as it does not differ much from the agency model, while increasing exponentially the number of principals the agents have to tackle.
The sociological approach to the study of corporate governance has focussed mostly on board composition and the implications for power and wealth distribution in society. Problems of interlocking directorships and the concentration of directorships in the hands of a privileged class are viewed as major challenges to equity and social progress. Under this theory, board composition, financial reporting, disclosure and auditing are necessary mechanisms to promote equity and fairness in society.
The sociological theory has focussed mostly on board composition and wealth distribution. Under this theory, board composition, financial reporting, and disclosure and auditing are of utmost importance to realise the socio-economic objectives of corporations.
As has been pointed out earlier, the joint-stock, limited liability company has become the preferred organisation for running business throughout the world. It has proved its worth in providing employment, generating wealth, and contributing to economic and social development. The original concept of the company, which stems from the mid-nineteenth century, has proved immensely innovative, elegantly simple and highly successful.
In the limited liability company, the business is incorporated as an independent legal entity, separate from its owners, whose liability for its debts is limited to the amount of equity capital they have agreed to subscribe to. In law, the company has many of the rights of a legal person—to buy and sell, to own assets, to incur debts, to employ, to contract and to sue and be sued. The company has a life of its own different from those of its innumerable owners. Although this does not guarantee perpetuity, it does give the company an existence independent of the life of the proprietors, who can transfer their shares to others.
Companies need to be governed as well as managed. Corporate governance is concerned with this need. The board of directors is central and its structure and processes are fundamental; so are the board’s relationships with the company’s shareholders, regulators, auditors, top management and other legitimate stakeholders.
Everywhere ownership is the basis of power. The shareholders nominate and elect directors, who run the enterprise on their behalf. The directors are the stewards of the resources of the business and demonstrate their accountability to the shareholders, in the form of regular financial account and directors’ reports. The shareholders also appoint independent auditors to report that these accounts show a true and fair view of the state of affairs of the company. Regular shareholders’ meetings provide an opportunity for the directors to report and clarify shareholders’ doubts or answer their questions.
Companies need to be governed as well as managed. Corporate governance is concerned with this need. The board of directors is central and its structure and processes are fundamental; so are the board’s relationships with the company’s shareholders, regulators, auditors, top management and other legitimate stakeholders.
There is no uniform scope or content of corporate governance. Some focus on the link between shareholders and the company; some concentrate on the formal structures of the board, codes of board practice and corporate effectiveness; yet others believe the focus should be on the social responsibilities of corporations to a wider set of stakeholders. Corporate governance is a useful umbrella term to cover the exercise of power over and within the company, for the good of all concerned.
In the original concept of the company, the basis of corporate governance was shareholder democracy. Shareholders were relatively few and close enough to the board of directors to exercise a degree of control. Indeed in millions of smaller, tightly owned companies around the world that is still the situation today.
In many countries, shares of public companies are now held by diverse shareholders: some by private individuals, some by institutional investors such as banks, pension funds and insurance companies, and some by other companies, who might have business relationships with the company. These days, ownership structures of major public companies around the world are complex.
But for major corporations, particularly those which have their shares listed on a stock exchange, the governance situation has practically changed. In many countries, the shares of public companies are now held by diverse shareholders—some by private individuals, some by institutional investors such as banks, pension funds and insurance companies, and some by other companies, who might have business relationships with the company. Ownership structures of major public companies around the world these days are often complex. The first step in understanding the reality of corporate governance in a given company is to understand the ownership structure and, hence, the potential to exercise power and influence over that company.
In the past, most institutional investors ignored their management or rights as shareholders, preferring to sell their shares rather than getting involved in challenging corporate performance. However, a trend in recent years has been for some institutional investors, particularly in the United States, Great Britain and Australia, to become pro-active, calling for boards to produce better corporate performance, questioning directors’ remuneration, and calling for greater transparency on company finances and more accountability from directors. Indeed, one US institutional investor—CalPERS (the Californian Public Employees Retirement System) has produced corporate governance guidelines for companies in which they have invested in France, Germany, Japan and the US.
The growing awareness of corporate governance around the world has been reflected in a plethora of official reports on the subject. These include the American Law Institute Report (1992), the Cadbury (1992), Greenbury (1995) and Hampel (1998) reports from the UK, the Hilmer report (1993) in Australia, the Vienot report (1995) in France, the King report (1995) from South Africa, the OECD report in 1998, as well as studies in Hong Kong, Singapore, Malaysia and elsewhere. In India, the Corporate Governance code was first laid out by the Confederation of Indian Industry (CII) in the wake of interest generated by the Cadbury Committee Report, followed by an in-depth study made by the Associated Chamber of Commerce (ASSOCHAM) and the Securities and Exchange Board of India (SEBI). SEBI appointed Kumar Managalam Birla Committee and adopted its report in mid-2000. The Reserve Bank of India (RBI) also constituted its own committee to study problems and issues relating to corporate governance from the perspective of the banking sector. Based on the inputs from these committees, the Department of Company Affairs amended the Companies Act in December 2000 to include corporate governance provisions which became applicable to all Indian companies effective from 1 April 2001.
Many of the official reports provide a code of best practices in corporate governance, detailing expectations on matters such as board structure, audit and audit committees, transparency in financial accounting and director accountability. Some institutional investors, particularly in the United States have also called for codes of corporate governance practices; the best known being the CalPERS’ Global Principles of Corporate Governance. Increasingly, to obtain access to international equity finance, companies around the world have to respond to the corporate governance requirements of these codes.
Meanwhile the debate on companies’ responsibilities to other stakeholders, other than their own shareholders, has been increasing in the US and UK; the Royal Society of Arts’ (RSA) inquiry in the UK produced a study called “Tomorrow’s Company” (1995), which suggested responsibilities to a wider range of stakeholders.
Further, most major companies now operate through group structures of wholly-owned subsidiary companies, partly-owned subsidiaries in which other external parties have a minority equity interest and associated companies in which the holding company has a significant, but not dominant holding. In addition, the globalisation of business dealings has meant that major companies frequently engage in a variety of joint venture and other strategic alliances with other companies. The second step in understanding the reality of corporate governance in a given company is to understand the network of ownership throughout the group, identifying minority interests in group companies and partner interests in joint venture companies. In India we have several such group structures of companies belonging to family-owned entities such as the Tata’s, Birla’s, TVS’, Murugappa’s etc., which are increasingly adopting corporate governance practices in all of their group companies.
Other reasons for the growing concern about corporate governance include changing societal expectations about the social responsibility of private sector companies, the attention being paid to more participatory political systems at national government level and the potential of global communications and information technology to spread ideas and to provide information on companies. The past decade has also seen a massive increase in academic research in corporate governance. At the heart of the exercise of governance over companies is the governing body, typically called the board of directors. It is vital to appreciate the role of the Board.
The board of directors seldom appears on the management organisation chart yet it is the ultimate decision making body in a company. The role of management is to run the enterprise while the role of the board is to see that it is being run well and in the right direction.
Management always operates as a hierarchy. There is an ordering of responsibility, with authority delegated downwards through the organisation and accountability upwards to the ultimate boss. By contrast, the board members need to work together as equals, reaching agreement by consensus or, if necessary, by voting. In almost all dispensations each director bears the same duties and responsibilities under the law. A useful way of depicting the interaction between management and the board is to present the board as a circle superimposed on the hierarchical triangle of management.
The role of the management is to run the enterprise while the role of the board is to see that it is being run well and in the right direction. Corporate governance systems vary around the world. Scholars tend to suggest three broad versions (i) The Anglo-American model; (ii) The German model and (iii) The Japanese model.
This model can be applied to the governance of any corporate entity, private or public, profit oriented or service-based organisation. The circle and triangle model mentioned earlier is a powerful analytical tool.
Corporate governance systems vary around the world. Scholars tend to suggest three broad versions: (i) The Anglo-American Model; (ii) The German Model; and (iii) The Japanese Model.
This is also known as unitary board model, as illustrated in Figure 2.1 in which all directors participate in a single board comprising both executive and non-executive directors in varying proportions. This approach to governance tends to be shareholder-oriented. It is also called the ‘Anglo-Saxon’ approach to corporate governance, being the basis of corporate governance in America, Britain, Canada, Australia and other commonwealth countries including India.
In the Anglo-American model, all directors participate in a single board comprising both executive and non-executive directors in varying proportions. ‘Anglo-Saxon’ approach to corporate governance is the basis of corporate governance in America, Britain, Canada, and Australia.
The major features of the Anglo-Saxon or Anglo-American model of corporate governance are as follows:
Figure 2.1 The Anglo-American Model
In this model, also known as the two-tier board model, corporate governance is exercised through two boards, in which the upper board supervises the executive board on behalf of stakeholders. This approach to governance is typically more societal-oriented and is sometimes called the Continental European approach, being the basis of corporate governance adopted in Germany, Holland, and to an extent, France.
Corporate governance in the German model is exercised through two boards, in which the upper board supervises the executive board on behalf of stakeholders and is typically societal-oriented. In this model, although shareholders own the company, they do not entirely dictate the governance mechanism. They elect 50 per cent of members of supervisory board and the other half is appointed by labour unions, ensuring that employees and labourers also enjoy a share in the governance. The supervisory board appoints and monitors the management board.
In this model although the shareholders own the company, they do not entirely dictate the governance mechanism. As shown in Figure 2.2, shareholders elect 50 per cent of members of supervisory board and the other half is appointed by labour unions. This ensures that employees and labourers also enjoy a share in the governance. The supervisory board appoints and monitors the management board. There is a reporting relationship between them, although the management board independently conducts the day-to-day operations of the company.
This is the business network model, which reflects the cultural relation-ships seen in the Japanese keiretsu network, in which boards tend to be large, predominantly executive and often ritualistic. The reality of power in the enterprise lies in the relationships between top management in the companies in the keiretsu network. approach bears some comparison with Korean chaebol.
Figure2.2 The German Model
In the Japanese model (Figure 2.3), the financial institution plays a crucial role in fovernance. The shareholders and the main bank together appoint the board of directors and the presdent.
The distinctive features of the Japanese corporate governance mechanism are as follows:
Figure 2.3 The Japanese Model
Despite some differences among the German and Japanese models of corporate governance, there are certain significant features to justify their being bracketed together. Their distinctive features are as follows:
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. Figure 2.4 illustrates how the corporate governance system works in India.
Indian corporates are governed by the Company’s Act of 1956 which 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. India has adopted the key tenets of the Anglo-American external and internal control mechanism after economic liberalisation.
Figure 2.4 Indian Corporate Governance Model
Available literature on corporate governance and the way companies are structured and run indicate that India shares many features of the German Japanese model, but of late, recommendations of various committees and consequent legislative measures are driving the country to adopt increasingly the Anglo-American model. In terms of the legislative mechanisms, Indian government and industry constituted three committees to study corporate governance practices in the country and suggest measures for improvement based on what has globally recognised as “best practices”. Significantly, most of the recommendations of the three committees—the SEBI-appointed Kumar Mangalam Birla Committee (2000), the government-appointed Naresh Chandra Committee(2003) and the SEBI’s Narayana Murthy Committee are remarkably similar to those of England’s Cadbury Committee and America’s Sarbanes-Oxley Act, in terms of their approaches and recommendations.
The thrust of the legislative reforms suggested by these committees and subsequent legislative actions adopted, centre around the strengthening of external governance mechanisms. “A key area here includes greater transparency and independent scrutiny of corporate accounts that are made available to investors. This is in line with the Anglo-American model where shareholder influence through the exit option which is contingent upon reliable and accurate information provided by companies. Institutional reforms, including a strengthening of oversight committees and the development of a serious fraud office, are further evidence of the drive to seek for external monitoring of corporate affairs. “In terms of reforms to internal mechanisms such as boards of directors, it is notable that again the recommendations are centred on Anglo-American practice, namely, a greater role for non-executive directors (NEDs) and the curtailment of interlocking directorates.”6
Further, experts point out that India has adopted the key tenets of the Anglo-American external and internal control mechanisms, in the wake of economic liberalisation and its integration into the global economy. “This is evident especially in the realm of the legislative framework where Indian policy-makers have taken their cue from the UK and US committees and their recommendations. Furthermore, a small, albeit high profile group of companies have voluntarily adopted Anglo-American protocols in their bid to successfully raise capital from international markets.”7 Thus corporate governance developments in India in recent years show a paradigm shift from the German/Japanese model to the Anglo-American model.
There are primary distinctions between the three broad models of corporate governance, and within them the actual practices adopted by companies vary considerably. There is not a single preferred model or set of corporate governance mechanisms. Moreover, ideas and practices are evolving fast in many countries. Indeed, given the high calibre directors with relevant experience, appropriate Board leadership and a shared vision for the company’s future, each of the models can prove effective, provided they are consistent with the overall corporate governance infrastructures in the countries concerned.
These various governance systems form a package of overall corporate control in each company law jurisdiction. It is vital to see the package as a whole. There has to be an integrated harmony between state legislation and regulatory infrastructure, stock market regulation and corporate self-regulation. Moreover, the overall corporate governance package has to be consistent with the way the business is done and the reality of relationships in that culture.
Recently the terms “governance” and “good governance” are being increasingly used in development literature. Bad governance is being recognised now as one of the root causes of corrupt practices in our societies. Major donors, institutional investors and international financial institutions provide their aid and loans on the condition that reforms that ensure “good governance” are put in place by the recipient nations. As with nations, corporations too are expected to provide good governance to benefit all their stakeholders. At the same time, good corporates are not born, but are made by the combined efforts of all stakeholders, which include shareholders, board of directors, employees, customers, dealers, government and the society at large. Law and regulation alone cannot bring about changes in corporates to behave better to benefit all concerned. Directors and management, as goaded by stakeholders and inspired by societal values, have a very important role to play. The company and its officers, who, inter alia, include the board of directors and the officials, especially the senior management, should strictly follow a code of conduct, which should have the following desiderata:
Bad governance is being recognised now as one of the root causes of corrupt practices in our societies. Institutional investors and international financial institutions provide their aid and loans on the condition that reforms that ensure good governance are put in place by recipients. Good corporates are not born, but are made by the combined efforts of all stakeholders, board of directors, government and the society at large.
TABLE 2.4 Corporate governance practices—An international comparison
Sources:
A corporation is a creation of law as an association of persons forming part of the society in which it operates. Its activities are bound to impact the society as the society’ s values would have an impact on the corporation. Therefore, they have mutual rights and obligations to discharge for the benefit of one another.
A corporation is a creation of law, as an association of persons forming part of the society in which it operates. Its activities are bound to impact the society as the society’s values would have an impact on the corporation. Therefore, they have mutual rights and obligations to discharge for the benefit of each other: national interest, legal compliances, honest and ethical conduct.
Legal compliance will also mean that corporations should abide by the tax laws of the nations in which they operate such as corporate tax, income tax, excise duties, sales tax, cesses and other levies imposed by respective governments. These should be paid on time and as per the required amount.
An ideal corporation has certain obligations to society such as corporate citizenship, ethical behaviour, environment-friendliness, observing correctly the rule of law and being politically non-aligned.
Such social commitment consists of initiating and supporting community initiatives in the field of public health and family welfare, water management, vocational training, education and literacy and encourages application of modern scientific and managerial techniques and expertise. The company should review its policy, in this respect, periodically in consonance with national and regional priorities. The company should strive to incorporate them as an integral part of its business plan and not treat them as optional and something to be dispensed with when inconvenient. It should encourage volunteering amongst its employees and help them to work in the communities. The company should develop social accounting systems and carry out social audit of its operations towards the community, employees and shareholders.
An ideal corporate should also exhibit social concern and adequate social responsibility besides ensuring healthy and safe working environment. Corporations should uphold the fair name of the country.
A company should market its products and services on its own merits and should not resort to unethical advertisements or include unfair and misleading pronouncements on competitors’ products and services. Any collection of competitive information shall be made only in the normal course of business and shall be obtained only through legally permitted sources and means.
That the investors as shareholders and providers of capital are of paramount importance to a corporation is such an accepted fact that it need not be overstressed here. A company has the following obligations to investors:
A company ideally has the following obligations to investors: promoting transparency and informed shareholder participation. In the context of enhanced awareness of better governance practices, an ideal corporate should address these issues and ensure meaningful and transparent accounting and reporting, so that there is better harmony in the workplace.
Likewise, internal accounting and audit procedures shall fairly and accurately reflect all of the company’s business transactions and disposition of assets. All required information shall be accessible to the company’s auditors, non-executive and independent directors on the board and other authorised parties and government agencies. There shall be no wilful omissions of any transaction from the books and records, no advance income recognition and no hidden bank account and funds.
Such wilful material misrepresentation of and/or misinformation on the financial accounts and reports shall be regarded as a violation of the firm’s ethical conduct and also will invite appropriate civil or criminal action under the relevant laws of the land.
For too long, corporations in free societies had been adopting a “Hire and Fire” policy in employment of men and women in their work places and hardly treated them humanely taking advantage of the fact that workers had a commodity, namely, labour that was highly perishable with little bargaining power. But in the context of enhanced awareness of better governance practices, managements should realise that they have their obligations towards their workers too.
By providing equal access and fair treatment to all employees on the basis of merit, the success of the company will be improved while enhancing the progress of individuals and communities.
A corporation’s existence cannot be justified without its being useful to its customers. Its success in the marketplace, its profitability and its being beneficial to its shareholders by paying dividends depends entirely as to how it builds and maintains fruitful relationships with its customers.
A company’s existence cannot be justified without its catering to the needs of its customers. The companies have an obligation to its employees, without whose assistance they cannot realise their objectives. They have to ensure quality of products and services; products at affordable prices; unwavering commitment to customer satisfaction. All these steps will earn for the company customers’ good will to stay long in the business.
A manager’s obligation to a corporation includes protecting company’s assets cordial behaviour towards government agencies, having control and being consensus oriented.
An ideal corporate calls for a greater role and influence for non-executive independent directors, a tighter delineation of independence criteria and minimisation of interest-conflict potential and some stringent punitive punishments for executive directors of companies failing to comply with listing and other requirements.
The analysis of the duties, responsibilities and obligations of different management groups illustrates the complexities involved in the administration of modern corporations. Gone are the days when the society looked at corporations as forms of business enterprises working exclusively for the material benefit of its shareholders. With the broadening vision of modern thinkers and opinion makers and enhanced and heightened social values, it is now an unacceptable proposition that corporations exist purely for the profit of those who constituted it. They are expected to be transparent, accountable and even beneficial to the larger society. Their employees, consumers of their products, and associates in their business such as dealers and stockists, the communities surrounding their facilities and workstations are as important as those who contributed their capital. Corporates cannot any more ignore the concerns of the society such as the environment and ecology. And these concerns are no more community-based or country-specific. In a global village such as the one all of us are moving into, if a corporate has to survive, grow and wants to be counted, its vision should focus on the ways and means of becoming a responsible and responsive corporate citizen, and its mission could no more be myopic as it used to be in the distant past. The values, concerns, duties and responsibilities the society casts on the corporates are exemplified in the following beautifully formulated and well-articulated Credo of Johnson & Johnson.
We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.
We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognise their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical.
We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens — support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.
Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programme developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realise a fair return.
Johnson & Johnson
In the modern financial and business world, good corporate governance is not an optional extra. Good corporate governance is fundamental to raising capital, satisfying investors and running successful businesses in increasingly global markets. Good corporate governance is essential to all other stakeholders in the firm—employees, suppliers, customers, and bankers as well as to the local and national society for the provision of employment, the creation of wealth and the building of a modern state. Good corporate governance also encourages the levels of transparency, accountability and corporate social responsibility that is increasingly necessary for a modern nation.
(This case is based on reports in the print and electronic media. It is meant for academic discussion only. The author has no intention to tarnish the reputations of corporates or executives involved.)
In the 1890s, Jamsetji Tata conceived of a dream project—a modern steel plant, with state-of-the-art-technology to produce 1 million tonnes of steel. Work on the steel plant commenced in 1907 in Jamshedpur which became operational in 1912. The capacity of the unit at the time of independence was around 1 million tonnes and this was increased to around 2 million tonnes by 1960. With the policy of the Indian government to give priority to the public sector to reach the commanding heights of the economy, the company, like many others in the private sector, was not allowed to grow until the liberalisation of the economy in 1991. ln fact, at the height of the socialist fervour of the 1970s, there was even a suggestion on the nationalisation of Tata Steel taking resort to the Industrial Policy Resolution that permitted nationalisation of any industry if needed in public interest. Fortunately, the government of the day did not have the resources to pay adequate compensation to the shareholders of the company after nationalisation and the effort was aborted.
Tata Steel is one of twenty-eight major corporations within the Tata Group and is the largest private sector steel company in the country with its headquarters based in Mumbai. The company’s stock is listed and traded on the Bombay Stock Exchange and the National Stock Exchange, New Delhi.
Tata Steel, today, is among the world’s foremost steel makers and India’s largest integrated private sector steel manufacturer. Its 4 million tonne per annum steel plant in Jamshedpur, and mines and collieries, span eastern India. It employed over 48,800 persons as on April 2002, out of whom 43,000 were directly involved in the steel business. Its net sales were approximately $2.2 billion in 2002-03.
The company decided to focus on modernisation of the production facilities in phases. Through careful de-bottlenecking and marginal investments, capacity increased to a level of 3 million tonnes in 1996. Low prices, slow growth in consumption and the reluctance of financial institutions to fund the steel sector came in the way of the company’s expansion. Over the next 3 years, the company added another million tonnes to its capacity.
The present huge growth in demand for steel globally especially from fast-track developing countries like China, along with higher prices have imparted the much-needed impetus to the steel industry. For the first time in several decades, there is enthusiasm on the part of the steel industry to take to large-scale expansion.
The opening up of the Indian economy has brought about a previously unheard of growth in the steel industry. In July 2004, B. Muthuraman, Managing Director, Tata Steel, referred to plans for expanding capacity of the company to 7.5 million tonnes by 2007. In subsequent months, however, the company has rapidly widened its sights. In December 2004, he assured that Tata Steel would become a 15 million-tonne company by 2010. “Jamshedpur alone will produce 7.5 million to 8 million tonnes. The recently acquired 2 million-tonnes capacity, Natsteel, Singapore, will be expanded by another 2 million tones”, outlined Muthuraman. A greenfield, port-based plant at Orissa, with an initial capacity of 3 million tonnes and another similar capacity plant in a different state are planned to be set up, he said.
When Ratan Tata succeeded J. R. D. Tata as chairman, a comprehensive review of identifying and focussing on the core businesses of the group was made. Several of the well-established businesses of the group that did not sync with the company’s major involvement in steel production were phased out. These included electronics, cement, soaps, pharmaceuticals and textiles. Interestingly, there were suggestions that steel could be one of these!
While it took 90 years to reach a capacity of 3 million tones, the company has expanded it five-fold in just 14 years! The shift of demand in large volumes to populous developing countries such as China and India has helped in the evolution: “From the commercialisation of the Bessemer process for producing steel in 1856, for around 100 years, upto 1960, the industry witnessed handsome growth of 7 to 8 per cent per annum. During 1960–80, the rate of growth dropped to around half that level, to around 4 per cent. During 1980–2002, the growth rate was even half of this, at around 2 per cent. In the earlier growth phase up to 1960, the US and Europe recorded handsome growth. In the subsequent decades, Japan and South Korea recorded high growth”, observed Muthuraman. But in India capacities were not being created in a big way. “The steel industry burdened for years with over capacity, of around 250 million tonnes, had not invested on fresh capacity. With the slack totally adjusted, naturally, there is this impact on prices. Price of steel started rising and this affected the ordinary consumer adversely.”
Tata Steel is conscious of the imperative to protect consumers of steel from steeper price increases. With the high increase in the cost of basic inputs, such as coal, iron ore, scrap and petroleum products, there has been a focus on achieving cost-efficiencies. The company has been especially considerate to its bona fide customers for whom the prices are offered at around Rs. 5000 per tonne lower than market prices. With 70 per cent of products going directly to customers, this large section of consum-ers is treated with special concern. The company also strictly enforces its maximum retail price at the dealer end. To serve the domestic consumers better, Tata Steel also decided to limit exports last year to 15 per cent of total sales.
The industry earned very modest profits for several years. In the early 1980s, annual profits were in the region of Rs. 6 crore. But costs of expansion and modernisation have been shooting up. Since 1992, when the company started expansion and modernisation, it has spent over Rs. 10,000 crore.
Right through its history, Tata Steel has earned profits every year and declared dividends (in 2002, it was one of five companies the world over that earned a profit). The present era of high profits has prepared the company to aim for quantum growth. Muthuraman provided an idea of the funds required: “The 6 million tonne plant in Orissa will require Rs. 16,400 crore, expansion of capacity at Jamshedpur by 3.5 million tonnes will call for Rs. 9800 crore and acquisition of Natsteel needs Rs. 1300 crore. Thus total funds required will be in the region of Rs. 27,500 crore.” To achieve higher growth in production and to reduce cost per unit, Tata Steel has invested heavily in industrial research. It has enabled the company to earn the proud position of the world’s cheapest producer of steel. There have been collaborative research projects with IIT-Kharagpur, Indian Institute of Science, Bangalore and with research institutions in Sweden, Germany and Japan. As a result, there has been a steep increase in the number of research papers published and intellectual property claims registered. Tata Steel spent a dollar per tonne of steel produced on R&D, which compares well with $1.8 per tonne spent by leaders like Nippon Steel.
Such focus on development has helped Tata Steel strive continuously to improve the quality of its product mix and also to increase the share of branded products, both of which helped it to have better realisations for a given quantum of output. Combined with the success in achieving continuous increases in production through rising operational efficiency, reduction in specific consumption of raw materials refractories, there is the twin advantage of handsome increases in labour productivity and a much more than proportionate increase in after tax profits. Of course, the steep increase in prices through the last couple of years has also contributed to this big jump.
At the root of the success of Tata Steel lies its close and continuous attention to human relations. The success of the management in regularly and continuously interacting with the union leaders has helped in resolving differences. “Succession of leaders believed that the temper of employees is as crucial as the temperature of the furnaces.” The tradition of maintaining a most cordial relationship with workers in the truest sense of Trusteeship wherein it is believed that the employer is ordained by Divine Providence to take care of the interest of workers and hence the resources of the enterprise are entrusted to him, has been built by J. R. D Tata on the very humane foundation laid by Jamsetji Tata still continues.
Among the most interesting aspects of Tata Steel’s evolution is its seamless and smoot success in downsizing. In 1994, for producing 2 million tonnes, the company employed around 80,000 workers. Today, for producing 4 million tonnes, the company employs only 39,000 workers. The reduction was on a well-delineated strategy of right sizing: “We closed a sheet mill that earlier produced buckets and dubbas. The open-hearth furnace continued to be operated for years more as a museum piece. We scrapped it and built a new blast furnace. We had extensive communications with the unions on rationalisation of manpower.” “We decided to focus on our core areas of steelmaking and decided on a lot of outsourcing of services such as security, milk distribution and power distribution. From April, 2004, we also formed JUSCO, transferring 1400 workers of Tata Steel to the new company entrusted with the task of running the township and bidding for such jobs nationally and globally”, explained Niroop Kumar Mahanty, Vice President, Human Relations Management of Tata Steel.
Numerous opportunities were also provided to employees to become entrepreneurs. “VSS (Voluntary Separation Scheme) had an attractive remuneration package for those opting for VSS. We provided interest-free loans up to Rs. 2 lakh; they were paid their basic salaries up to retirement (without annual increments and allowances but with all retirement benefits) which worked out to some 55 per cent of the last drawn pay. A transition support centre was set up to advise the retirees on investing their resources and also to try and find jobs. They were kept on the rolls for three months and paid the fare for interviews to them.” “Through VSS, the company cut down nearly 26,000 jobs. After such large-scale downsizing, the company introduced massive programmes of retraining and repositioning of employees. A huge exercise of cross-matching skills was done. We encouraged workers to pass trade tests and acquire technical qualifications”, observed Mahanty.
It is well known that Tata Steel has been administering the Jamshedpur town for the past eight decades, and anyone who visits the place is so impressed by its orderliness, extensive civic facilities and cleanliness that they would cite it as a model town. The company has been subsidising around Rs. 100 crore on administering the township. The entire services relating to town administration, provision of transport services, running schools and hospitals are all done by the company. Kanwal Midha, General Manager, said that JUSCO has recently taken over the responsibility as a separate corporate unit: “Jamshedpur is spread over 64 sq. km and has a population of 7 lakh with 625 km of roads, 22,000 residential flats and bungalows of Tata Steel and around 15,000 of Tata Motors and 5000 of other Tata companies.” In the township, over the years, the quality of municipal services has been maintained at high levels. JUSCO, with its considerable accumulated expertise in town management, especially in water and sanitation businesses, intends to become a national leader in these businesses and to bid for and undertake projects in other parts of the country.
A 98-year plant obviously has evolved with different technologies and makeshift arrangements. Under-standably, it lacks the advantages of building a state-of-the-art plant in a greenfield site. Large sections are getting scrapped and rebuilt on a continuous basis. New blast furnaces are being built to make iron-making more efficient. Simultaneously, capacities for cooking coal are being enhanced.
Tata Steel coined a beautiful slogan impregnated with a lot of meaning more than a decade ago. “We also make steel.” According to Muthuraman: “To me the statement represents everything Tata Steel does. It is pregnant with so much meaning and conveys a lot of things that making steel is not our only business, but a whole lot of other things define our business like corporate social responsibility, being ethical, spending effort and money on sports, having a green town caring for society....” Muthuraman deprecated the tendency to judge a corporate on a quarterly or yearly basis, not on the sustainability of its success over long period of time. The close involvement of the company in dozens of socially ameliorative projects has. understandably, been giving much more meaning to its corporate purpose than mere profits.
Tata Steel’s vision statement tells all as to what it stands for. “To seize the opportunities of tomorrow and create a future that will make us an EVA positive company. To continue to improve the quality of life of our employees and the communities we serve.”
“Tata… shall not undertake any project or activity to the detriment of the nation, or those that will have any adverse impact on the social and cultural life patterns of its citizens.”
Tata Steel’s operating units have all adopted the Tata Business Excellence Model, an integral part of which is corporate social responsibility. About 12 – 14 per cent of its PAT (Profit After Tax) is set aside for the welfare of the people. The Tata code of conduct enjoins every company of the Group to act responsibly in the interests of the nation where it operates.
Recognised as a benchmark for Corporate Social Responsibility in India, Tata Steel is among few Indian Companies to be invited to join the UN sponsored Global Company Forum, comprising organisations committed to translating the UN decreed principles of human rights, labour and environment, into practice.
Tata Steel is already one of the dozen founder members of the Global Business Compact (GBC), an initiative of UN Secretary General, Kofi Annan. The credo of GBC is that industrial corporations have a larger role to play than merely to earn profits. Tata Steel is the only Indian founder member of GBC that has gained respect and recognition for its social concerns. One of the secrets behind the success of a longevity of a corporate lies in its being part of the society. The belief of the company in such tasks was well-stated by Muthuraman: “Our corporate growth is further strengthened by our efforts in the areas of social development, relief and rehabilitation and sports. Initiatives such as Mission Hariyali, Child Survival Projects, Aids Awareness Programmes, Operation Muskaan etc., help us improve the quality of life of the communities we serve and other stakeholders.”
Since 1998, the ethical principles that govern the company’s activities have been articulated in the Tata Code of Conduct, which applies to all Tata Companies. In 2008, taking cognisance of the changing expectations within the society and the increasingly global scale of the Tata Group’s activities, the Code was updated in consultation with Corus and other Tata Steel Group Companies. The revised Code of Conduct was adopted by the Tata Steel Group Board in October 2008, and now applies to all companies within the group.
Tata Steel uses suitable resources, technology and work ethics to reinforce its concern for the environment and its desire to conserve natural resources. “It is committed to reducing its environmental footprint and to achieve the target levels set by it.”
Apart from improving the general standard of rural population, Tata Steel has been dealing with the problems of education, health, hygiene, family welfare, agriculture extension, improving the welfare requirements, sports, games and culture. In addition to the above, it has also involved itself with the needs of the environment improvements by way of bringing the awareness amongst masses of the benefits of land reclamation/rehabilitation and afforestation.
Intensive efforts have been made for the utilisation of barren and subsided land, as also utilisation of fire areas by large-scale plantations. Over 9 lakhs of plants have been planted, during the past 8 years with a survival rate of 70 per cent. Enormous experience has been gained in the process and every effort is being made to use even the smallest bit of land to provide a shade of greenery in the area.
Several measures have been taken for controlling water pollution by use of waste water for growing crops and vegetables, supply of drinking water to the colonies after proper treatment and launching a pisci-culture programme into the village ponds. Several wells and tube wells have been constructed and repaired for the local population.
Tata Steel created a separate Environment Cell that independently looks after matters of the environment and pollution control activities of the division. They have regular meetings every month to review pollution control activities. This cell is continually being expanded.
A laboratory to test air and water samples so as to monitor the environmental activities has been set up. The company appointed a team from C M R S, Dhanbad, to study the extent of pollution in their various establishments and to suggest action to be taken for reducing the pollution. A comprehensive programme of surface environmental studies with respect to air, water and noise has been undertaken. Based on the studies conducted and their recommendations, appropriate steps are being taken
Good “corporate 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 the following two systems of evaluation:
Presently, the governance checklist includes inter alia annual operating plans, budgets and updates, capital budgets, quarterly results, minutes of all meetings of various committees, remuneration of senior executives, legal issues.
A Tata company shall strive to provide a safe andhealthy working environment and comply, in the conduct of its business affairs, with all regulations regarding the preservation of the environment of the territory it operates in.
A Tata company shall be committed to prevent wasteful use of natural resources and minimise any hazardous impact of development, production, use and disposal of any of its products and services on the ecological environment.
Tata Steel’s social investment reflects its “after profit” practice, work in and for the community that is not directly related to the “business of business”. Again, Tata Steel has internal procedures that guide policy, meaning that community initiatives are seldom ad hoc. Given below are six of these initiatives or procedures which are being followed religiously:
1. Tata Council for Community Initiatives (TCCI): 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 “Tata 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.
2. Tata Social Evaluation, Responsibility and Accountability (ERA): 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.
3. Global Business Coalition (GBC): 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 “Best Initiative”. Initially, Tata focussed on educating employees, but now targets over 600 villages in the State of Jarkhand. 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 Steel 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.
4. Volunteer Database: A “Directory 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.
5. Health initiatives: Working with the government to prioritise projects, Tata Steel’s involvement in health initiatives remains largely philanthropic, with the exception of the Global Business Coalition for HIV/AIDS awareness scheme. Tata Steel has invested in a local hospital which treats an average of 2300 people per day. It has also bought specialized cancer-treating equipment, and part-finances the running of one blood bank, two rehabilitation centres and five homeopathic clinics. Donations to the clinics and centres are regular and on a long-term basis, which does indicate a move from adhoc sponsorship to a more strategic social investment. This is organised by the Family Welfare department.
6. Culture and education: Education and Youth Development Programmes have built and maintained infrastructure for sports across Jarkhand. Over 1500 young people are currently training at Tata Steel’s two sporting academies, six training centres 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.
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 Initiative. This is another step forward for the company looking to make its mark on the new corporate responsibility agenda.
(The author is obliged to Mr. S. Viswanathan for his permission to include excerpts from “Tata Steel: Rolling Ahead, Gathering Mass”, Industrial Economist 15–29 January & 30 January–14 February 2005.)
Tata Steel Ltd is one of the forerunners of the Indian industry in several respects. It is the largest private sector steel company in the country. It is also the country’s largest integrated private sector steel manufacturer, apart from being among the world’s foremost steel makers. This is not the only distinction the company has to fame; it has a lot of other things. The company is also known for its corporate social responsibility. It is known for its ethical stances and its close involvement in dozens of socially ameliorative activities, sports, building a grown town in Jamshedpur providing its people all possible facilities to lead a life of ease and comfort. No wonder Tata Steel has become a national leader in town planning which is being emulated by other industries and even government planners.
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