Responsible business is today's buzzword. But, the idea is not new. Professor Kenneth R Andrews of Harvard University in his classic book ('The concept of corporate strategy' )(1980 edition) emphasises that alternative strategies should be evaluated by considering, among other things, its impact on the society and the pressure towards unethical behaviour it would exert on the members of the corporation. He writes: "The dominant position of the corporation in our society, the influence it has on all citizens, and its inevitable relations with local, state, and national governments makes it increasingly important to consider, company by company, what the corporation's social responsibility will be". Unfortunately, managers are so focused on shareholder value that they consider ideas like that of Andrews as utopian, which cannot be implemented. It is time to remind them that by ignoring ethical, social and environmental responsibilities, they are exposing shareholders' investments to undue risks.
The Ministry of Corporate Affairs has done that by issuing the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of business (NVG) in July 2011.
The principles are: Conduct and govern business with ethics, transparency and accountability; provide safe and sustainable goods and services; promote the wellbeing of all employees; respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalised; respect and promote human rights; respect, protect, and make efforts to restore the environment; influence public and regulatory policy in a responsible manner; support inclusive growth and equitable development; and engage with and provide value to their customers and consumers in a responsible manner.
Sebi mandated top 100 listed companies, based on market capitalisation at BSE and NSE as on March 31, 2012, to include Business Responsibility Report (BRR) in the annual reports. The circular is applicable from financial year ending on or after December 31, 2012. The report requires disclosure of how and to what extent it has adopted NVG principles; and the reasons, if any, why the company could not adopt one or more of those principles.
Some companies have already published BRR. Reports give an impression that every large company is doing business responsibly. However, this does not match with our general perception about businesses' level of concern for ethics, people (internal and external) and environment. Uttarakhand disaster shows that our concern for environment is low. The recent tragic episode of suicide by Charudatta Despnade, an ex-employee of Tata Steel, which belongs to a highly respected Tata group, shows group policy does not percolate down due to inherent insensitivity to human problems. If such tragedy occurs in a Tata group company, we cannot ignore it as an aberration. (See Shaymal Majumdar's article 'Dealing with a tragedy' in Business Standard dated July 5, 2013.) Sexual harassment of women at workplace is in common knowledge.
Rosy picture in BRRs is not a surprise. After all, reporting that the company has scant respect for NVG principles would bring shame to the company. Therefore, it is likely that every reporting company will formulate policies, albeit on paper, to enable it to disclose that it has adopted NVG principles. Policies on paper do not change the culture and practices within a company. Cultural change is a very slow process in any social unit and so it is in a company. BRR might not reflect the reality in the company.
In absence of a mechanism to ensure credibility of BRR, companies, other than a few enlightened companies, might not take concrete steps to bring necessary cultural changes. Auditing is a dirty word for companies. Therefore, most likely, they will resist any proposal for audit of BRR. We need to find out an alternative mechanism.
CSR provisions in the Companies Bill 2012, will be much more effective in enforcing accountability of companies towards the society.
There is a clear road map on how CSR provisions will be implemented. Board is made responsible to formulate the CSR policy, to monitor CSR projects and to assess impact of those projects. I expect that CSR Rules will introduce structured reporting format. Effectiveness shall improve if government mandates impact assessment by a third party and social audit periodically, say every three years. Tools being used by CAG in evaluating performance of social projects might be useful. Creating CSR culture in companies is a great challenge. If we succeed in this, that itself will be a great accomplishment.
As an instrument BRR will be effective only to create awareness about the doctrine of responsible business. At best, it will bring some cosmetic changes in business behaviour. But, it might prove ineffective in enforcing accountability. Champions of NVG should reinforce the efforts of those who are fighting to eradicate all types of social inequalities, such as, economic inequality, gender inequality and inequality due to the prevailing cast system. Societal changes will push companies to adopt NVG principles.
The Ministry of Corporate Affairs has done that by issuing the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of business (NVG) in July 2011.
The principles are: Conduct and govern business with ethics, transparency and accountability; provide safe and sustainable goods and services; promote the wellbeing of all employees; respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalised; respect and promote human rights; respect, protect, and make efforts to restore the environment; influence public and regulatory policy in a responsible manner; support inclusive growth and equitable development; and engage with and provide value to their customers and consumers in a responsible manner.
Sebi mandated top 100 listed companies, based on market capitalisation at BSE and NSE as on March 31, 2012, to include Business Responsibility Report (BRR) in the annual reports. The circular is applicable from financial year ending on or after December 31, 2012. The report requires disclosure of how and to what extent it has adopted NVG principles; and the reasons, if any, why the company could not adopt one or more of those principles.
Some companies have already published BRR. Reports give an impression that every large company is doing business responsibly. However, this does not match with our general perception about businesses' level of concern for ethics, people (internal and external) and environment. Uttarakhand disaster shows that our concern for environment is low. The recent tragic episode of suicide by Charudatta Despnade, an ex-employee of Tata Steel, which belongs to a highly respected Tata group, shows group policy does not percolate down due to inherent insensitivity to human problems. If such tragedy occurs in a Tata group company, we cannot ignore it as an aberration. (See Shaymal Majumdar's article 'Dealing with a tragedy' in Business Standard dated July 5, 2013.) Sexual harassment of women at workplace is in common knowledge.
Rosy picture in BRRs is not a surprise. After all, reporting that the company has scant respect for NVG principles would bring shame to the company. Therefore, it is likely that every reporting company will formulate policies, albeit on paper, to enable it to disclose that it has adopted NVG principles. Policies on paper do not change the culture and practices within a company. Cultural change is a very slow process in any social unit and so it is in a company. BRR might not reflect the reality in the company.
In absence of a mechanism to ensure credibility of BRR, companies, other than a few enlightened companies, might not take concrete steps to bring necessary cultural changes. Auditing is a dirty word for companies. Therefore, most likely, they will resist any proposal for audit of BRR. We need to find out an alternative mechanism.
CSR provisions in the Companies Bill 2012, will be much more effective in enforcing accountability of companies towards the society.
There is a clear road map on how CSR provisions will be implemented. Board is made responsible to formulate the CSR policy, to monitor CSR projects and to assess impact of those projects. I expect that CSR Rules will introduce structured reporting format. Effectiveness shall improve if government mandates impact assessment by a third party and social audit periodically, say every three years. Tools being used by CAG in evaluating performance of social projects might be useful. Creating CSR culture in companies is a great challenge. If we succeed in this, that itself will be a great accomplishment.
As an instrument BRR will be effective only to create awareness about the doctrine of responsible business. At best, it will bring some cosmetic changes in business behaviour. But, it might prove ineffective in enforcing accountability. Champions of NVG should reinforce the efforts of those who are fighting to eradicate all types of social inequalities, such as, economic inequality, gender inequality and inequality due to the prevailing cast system. Societal changes will push companies to adopt NVG principles.
Affiliations: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited