Thursday, December 31, 2009

Voluntary Guidelines on Governance and Social Responsibility

Corporate Governance

Earlier this month, we had highlighted the recommendations of the CII Task Force and the Institute of Companies Secretaries of India seeking reforms to the existing regime for corporate governance in India. Shortly thereafter, and based on various other suggestions received, the Ministry of Corporate Affairs has published the Corporate Governance Voluntary Guidelines 2009. The preamble sets the tone:

These guidelines provide for a set of good practices which may be voluntarily adopted by the Public companies. Private companies, particularly the bigger ones, may also like to adopt these guidelines. The guidelines are not intended to be a substitute for or addition to the existing laws but are recommendatory in nature.

While it is expected that more and more corporates should make sincere efforts to consider adoption of the guidelines, there may be genuine reasons for some companies in not being able to do so completely. In such a case it is expected that such companies should inform their shareholders about the reasons for not adopting these guidelines either fully or partially. It is hoped that “India Inc” would respond to these guidelines with keen interest. It is also hoped that by following good governance practices, the Indian corporate sector would be in a better position to enhance not only the economic value of enterprise but also the value for every stakeholder who has contributed in the success of the enterprise, and while doing so, it would be setting the global benchmarks for good corporate governance.

After taking into account the experience of voluntary adoption of these guidelines by the corporates and consideration of relevant feedback, the Government would initiate the exercise for review of these guidelines for further improvement after one year.
This is similar to the ‘comply-or-explain’ approach followed in the U.K. Substantively the guidelines cover areas such as board of directors, responsibilities of the board, the audit committee, auditors, secretarial audit and the institution of a mechanism for whistle blowing.

Corporate Social Responsibility

Almost simultaneously, the Ministry of Corporate Affairs has issued the Corporate Social Responsibility Voluntary Guidelines 2009. The preamble sets out the background:

CSR is not philanthropy and CSR activities are purely voluntary- what companies will like to do beyond any statutory requirement or obligation. To provide companies with guidance in dealing with the abovementioned expectations, while working closely within the framework of national aspirations and policies, following Voluntary Guidelines for Corporate Social Responsibility have been developed. While the guidelines have been prepared for the Indian context, enterprises that have a trans-national presence would benefit from using these guidelines for their overseas operations as well. Since the guidelines are voluntary and not prepared in the nature of a prescriptive road-map, they are not intended for regulatory or contractual use.

While it is expected that more and more companies would make sincere efforts to consider compliance with these Guidelines, there may be genuine reasons for some companies in not being able to adopt them completely. In such a case, it is expected that such companies may inform their stakeholders about the guidelines which the companies have not been able to follow either fully or partially. It is hoped that “India Inc.” would respond to these Guidelines with keen interest.

After considering the experience of adoption of these guidelines by Indian Corporate Sector and consideration of relevant feedback and other related issues, the Government may initiate the exercise for review of these Guidelines for further improvement after one year.
These guidelines cover the core elements of CSR and also provide guidance for their implementation.

In some sense, these guidelines represent a path-breaking step. It is true that several Indian corporate groups have been well-known for decades for their socially responsible behaviour, which has often received recognition in business and related literature. There have been efforts amongst the industry, professional associations and academia to engender a greater sense of social responsibility among companies. However, this step is unique as it represents the first concrete step regulatory standpoint that recognises the need for observance of CSR as a separate matter. Although this is only by way of exhortation rather than a mandatory requirement, it does send perceptible signals to corporate India.

We hope to blog more in due course about the detailed provisions of both sets of voluntary guidelines.

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