New CSR Rules....... CSR versus sustainability

CSR versus sustainability – the new law has missed out on something. 

 CauseBecause Bureau, New Delhi March 5, 2014

With the introduction of Section 135 in the Companies Act and corporate social responsibility (CSR) taking centre stage in the Indian business environment, many corporate groups are expected to initiate social programmes starting next financial year. Will all these CSR programmes be aligned with sustainability and how should the impact of such programmes be measured?  
In order to address such questions and find a way forward, Institute of Rural Management Anand (IRMA) is organizing ‘Round Table on CSR – The Road Ahead and Exhibition of CSR Initiatives’, a two-day event at the IRMA campus on 24–25 March 2014. The event will engage various stakeholders including corporate bodies, ministries and representatives from civil society and other relevant organizations. Concurrent with the Round Table will be an exhibition showcasing CSR initiatives of companies.  

Answering CauseBecause’s query on how IRMA sees the mandatory CSR spending clause, Dr Girish K Agrawal, convener of CSR Round Table, said, ‘One of the critical CSR activities covered under Schedule VII specifically talks about  ensuring environmental sustainability, ecological balance... maintaining quality of soil, air and water. This is the most positive feature among other scheduled activities and was not covered earlier. While other activities mentioned in the Schedule have been the focus of most companies engaged in CSR, this clause goes a long way in meeting the crucial need of the hour because negative externalities arising from depletion of common property resources are becoming alarming in view of environmental changes impacting India. China is already asphyxiating under air pollution.’  

When askedwhat will be the 'take away' from the event and why should corporate as well as development and social sector organizations participate, Dr Agrawal, who is also the coordinator of Center for Social Entrepreneurship and Enterprises and associate at Center for Rural Infrastructure and Corporate Social Responsibility, IRMA, said, ‘The background for this round table debate is when a company depletes common property resources and engages in CSR activities (as per the new law), does it serve the spirit and purpose of the Act while fulfilling development goals of the Government? Are these activities aligned with sustainability? In the event, the way forward will be underlined. We expect that some directions will emerge about policy changes that are required to redress any deficiency, if any, and how should Schedule VII activities be executed to so that they are sustainable.’  

Commenting on exclusion of ‘guiding principle’ in the new rules, Dr Agrawal said, ‘It is a disheartening change. It was in consonance with Part II operating provisions but has been deleted entirely. Now all activities that are undertaken in pursuance of its normal course of business are explicitly excluded. The result of such change may be that cola companies or junk food retailers whose main products give heavy doses of calories to consumers and create enormous healthcare costs on society have no further incentive to improve their business processes except those arising from consumer awareness, which take a long time to effect.’

The guiding principles in the earlier rules read: CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth.  
When questioned about the 'business angle' in CSR, Dr Agrawal stated, ‘The value addition to Indian businesses now appears to be remote and lies in the hope that customers will value companies' products more because they are spending money in scheduled or socially beneficial activities – a link that is at best tenuous in Indian consumers’ context since they are probably more price-conscious.’

Rise Of Corp Governance & Shareholder Activism In India

Rise Of Corp Governance & Shareholder Activism In India

Published on Wed, Mar 05,2014 | 13:34, Updated at Wed, Mar 05 at 13:34 Source : Moneycontrol.com

By: Umakanth Varottil, Assistant Professor, NUS Law

While corporate governance has acquired prominence in India for nearly two decades now, it has taken centre-stage more recently due to wide-ranging reforms. The new Companies Act, 2013 has ushered in significant changes in the way companies are to be managed and governed. Consistent with this approach, the Securities and Exchange Board of India (SEBI) has also announced changes to its corporate governance regime to bring it in tune with the new Companies Act. Governance issues have received impetus through market developments as well. Shareholders (particularly of the institutional variety) have begun to take on a more activist role in companies, and they are aided by a burgeoning proxy advisory industry that has established deep roots in India within a short span of time. A discussion on developments in corporate governance and shareholder activism in India could not have been timelier. At the same time, these developments ought to be considered in the context of global developments in corporate governance.

The discussion on governance reforms may be bifurcated into issues pertaining to the board of directors and those pertaining to the shareholders (where the phenomenon of shareholder activism occupies pride of place). Beginning with the board of directors, the spotlight in India has, among other things, been focused squarely on independent directors. The Companies Act, 2013 adopts a “regulation-heavy” approach towards board independence. It is considerably prescriptive regarding the number of independent directors, their appointment, their role, their duties and their liabilities. While the legislation addresses several pressing concerns regarding board independence, it is not clear if its implementation will be without difficulties. Corporate governance norms are dynamic in nature and require periodic reconfiguration to keep pace with the ever-changing business environment. Usually, while the basic governance framework is dealt with by statures, the details are dealt with in codes of conduct that are more flexible in nature. The question remains whether an attempt to address governance norms through legislation might lead to unnecessary rigidity in compliance and enforcement.

Internationally too, issues of board composition and compensation have occupied the minds of regulators. While board independence has become accepted practice, differences about as to the extent to which it is required and to be relied upon. The issue of compensation of directors, including independent directors, has become prominent following the global financial crisis, and the effort is still ongoing to arrive at the right balance that provides sufficient incentive to attract the right talent without creating any distortions that might adversely affect the interests of the company or its shareholders. While issues of board independence and director compensation are not new, they are likely to continue to be at the forefront of corporate governance debate in the years to come.

Moving to shareholders as a constituency, activism on their part, a hitherto non-existent phenomenon in India, has become pervasive in recent years. This development has been aided both by efforts on the part of the regulators to encourage shareholder participation in corporate decision-making, and by growth in the activist stance of institutional investors in the Indian markets. This is part of a growing international trend, particularly in the wake of the global financial crisis.

Over the last decade, regulatory reforms have focused on promoting shareholder participation in corporate decision-making. This has been implemented through legislative and regulatory measures. While the Securities and Exchange Board of India (SEBI) initiated measures in 2012 to introduce electronic voting, the new Companies Act, 2013 provides for electronic meetings, minority shareholder rights to approve significant related party transactions and other forms of protection to minority shareholders such as the class action mechanism. These measures are expected to engender greater participation by shareholders in general meetings of companies.

Apart from regulatory measures, shareholders themselves have been proactively adopting an activist stance. They have begun to engage with management and promoters of companies to pursue corporate policies that may enhance shareholder value. Where mere interaction with management is found to be ineffective, activist investors typically advance to the next stage of voting against the company’s resolutions. The ultimate option of confronting management with efforts to displace them has been used elsewhere in the world, but in India such option is quite daunting given that most companies are controlled through a significant stake held by the promoter.

The activist investors are now effectively aided by the emergence of a set of corporate governance intermediaries in the form of proxy advisors. While proxy advisors play a significant role in influencing corporate decision-making internationally, the industry is still nascent in India (although it is gradually exerting its presence as a key corporate governance intermediary to reckon with).

These developments have brought about a paradigm shift in corporate governance. Anecdotal evidence suggests that managements can no longer take shareholders for granted when seeking their approval of significant corporate transactions. These may have the effect of raising transparency and governance standards in Indian companies, particularly where they are listed on a stock exchange.

This is consistent with the trend elsewhere. World over, shareholder activism has taken on a more vibrant role, particularly after the global financial crisis. While institutional investors have been gradually increasing engagement with their portfolio companies, the new brand of hedge fund activism has taken corporate boardrooms by storm. Influencing their actions are proxy advisory firms such as ISS and Glass Lewis, which are two predominant firms in the industry.

In all, these developments (particularly in relation to shareholder activism) have brought about a significant change in the way companies are managed. No longer can managements pay short shrift to governance concerns, as their actions (and omissions) will to put to strict scrutiny from the perspective of their effect on minority shareholders as well as other stakeholders.

Professor Umakanth Varottil and Sergio Sánchez Solé, Garrigues are co-chairing a session on the Rise of corporate governance and shareholder activism in India at the IBA M&A Conference in Mumbai, 21-22 March 2014

New CSR rules still has some grey areas

CSR still has some grey areas

SIDHARTH BIRLA

 A more flexible interpretation of what activities come under corporate social responsibility would be welcome

The much-awaited corporate social responsibility rules have been notified by the Ministry of Corporate Affairs and they allay many, but unfortunately not all, of industry’s concerns. For instance, exempting overseas branch profits from the calculation of net profit is an equitable step.

Similarly, the clarification on excluding independent directors in the formation of CSR committees for private and unlisted public companies is a huge relief for companies that are not required to appoint such directors under the law.

There are numerous companies in India which already have CSR initiatives in crucial sectors of the economy such as health, education, environment and so on.

However, when the rules come into force on April 1, 2014, around 8,000 companies in India will fall under the ambit of the CSR provision. This mandate will translate into an estimated CSR spending of $1,954-$2,442 million annually.

Therefore, the implementation aspect of the CSR provision is very significant; if implemented in the right spirit, CSR will facilitate the desired investment in human development.

India is one of the first countries in the world to have legislated this provision; it is a positive step paving the way for the corporate sector to play a larger and more conscious role in shaping communities and participating in the social side of the economy. The areas covered under the Revised Schedule VII such as healthcare, education, gender equality, environmental sustainability and rural development are critical for inclusive growth.

Rewriting business

CSR is increasingly being viewed as an important part of business operations. The growing importance of CSR has rewritten the relationship of business not just with shareholders but also with its stakeholders, including employers, supply chain partners, government, creditors, customers and communities.

However, as a concept it will evolve over a period of time. In order for it to be able to make a genuine social impact, it is important to integrate it with the model of ‘shared value’.

An increasing number of companies in India and abroad are making this concept an integral part of their strategy and the benefits accruing from this integration are manifold.

On the one hand, it enhances the competitiveness of a company while simultaneously advancing economic and social wellbeing in communities, therefore increasing the long-term sustainability of the company. On the other hand, it enhances the possibility of cooperation between business, society and government.

Corporate social responsibility in the form of shared value creation is the key to establishing a symbiotic link between corporations and communities and in taking forward the India growth story.

But for that, CSR should be embedded in the corporate culture which, in turn, requires inspiration from the leadership and commitment across the organisation.

Going forward, we hope the concept of ‘shared value’ in the CSR Rules is captured.

Being non-intrusive

The underlying intent of the new Companies Act is to promote self-regulation, non-intrusion and accountability. However, the rules have limited CSR expenditure to the activities listed under Schedule VII.

Even though the list is wide and covers a lot of sectors that have been neglected so far, industry expects that the implementation of the CSR provision will allow boards reasonable flexibility to decide their own CSR activities. Such flexibility will certainly facilitate greater participation and engagement of the private sector.

Industry has been a responsible proponent of CSR, called by whatever name, for decades. However it should be seen in the context of building deeper trust in society through a structured approach; it should also help institutionalise the practice as opposed to discretionary participation.

The Minister for Corporate Affairs Sachin Pilot has, on various occasions, assured industry that all steps will be taken by his Ministry to ensure that CSR expenditure does not impose itself as a kind of tax.

Industry views this with great optimism and hopes that the finance ministry will find it fit to ensure CSR spend remains tax-deductible, more so since this spend is a part and parcel of doing responsible business. India Inc anxiously awaits clarity and certainty on this matter.

While most concerns on CSR provisions have been attended to, there remain practical concerns on flexibility within legitimate boundaries, and how the monitoring and interpretation of companies’ efforts will take place.

The government has, till date, been receptive to legitimate concerns but will need to ensure a conducive environment so that companies can sincerely adapt to the new requirements.

 

The writer is the president of FICCI

CSR Reduces Crash Risk

Corporate Social Responsibility Reduces Crash Risk: Study

by Clayton Browne

March 07, 2014, 11:37 am

 

 

Academic study shows socially responsible corporations have less risk of a stock price crash

We now have empirical evidence that being socially responsible is not merely altruistic, but actually pays dividends, even in the business world. A forthcoming article in the Journal of Banking and Finance demonstrates a strong relationship between firms with strong corporate social responsibility performance and reduced risk of stock price crashes.

The authors of the article, Yongtae Kim, Haidan Li and Siqi Li, undertook a study investigating whether corporate social responsibility (CSR) mitigates or contributes to stock price crash risk. They summarize the results of their study below.
“Using a large sample of U.S. public firms from 1995 to 2009, we find a significantly negative association between firms’ corporate social responsibility performance and one-year-ahead stock price crash risk, suggesting that socially responsible firms have a lower future stock price crash risk. The results are robust after controlling for other predictors of future stock price crash risk identified in prior studies, including divergence of investor opinion, past returns, firm size, and accounting opaqueness.”

Greater social responsibility means less “hoarding” of bad news

The authors argue that the key dynamic in why firms with strong corporate social responsibility have less crash risk is that socially responsible firms commit to a high standard of transparency and rarely delay announcing bad news. They point to a number of studies that show when senior management withholds bad news from investors due to career and compensation concerns, that means bad news accumulates and eventually reaches a tipping point and comes out all at once, often leading to a stock price crash.

Corporate social responsibility especially important for firms with less effective corporate governance

Another finding of interest in the study was that firms with strong corporate social responsibility but relatively weak corporate governance did not have a high risk of crashes. This means these firms are in effect “protected” from crashes by their high CSR. High CSR scores did not mean less risk of crashes for companies with strong corporate governance, but this makes sense as strong corporate governance itself prevents the behaviors that lead to crashes.
“We find that when firms have less effective corporate governance (indicated by lower governance ratings by MSCI ESG, CEO being the chairman of the board, and lower shareholder rights based on the Gompers et al. (2003) governance index) or a lower level of long-term institutional ownership, the negative relation between corporate social responsibility and future crash risk is significant. On the other hand, when firms have more effective corporate governance or a higher long-term institutional ownership, CSR does not appear to have a significant impact on crash risk. The results are consistent with the notion that the role of CSR in reducing stock price crash risk is particularly important when internal monitoring by the boards or external monitoring by institutional investors is weak.”