TITILE

 

Corporate governance: Indian perspective vis-à-vis international perspective.

The word ‘corporate governance’ has become a buzzword these days because of two factors. The first is that after the collapse of the Soviet Union and the end of the cold war in 1990, it has become the conventional wisdom all over the world that market dynamics must prevail in economic matters. The concept of government controlling the commanding heights of the economy has been given up. This, in turn, has made the market the most decisive factor in settling economic issues.

This has also coincided with the thrust given to globalisation because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers. Globalisation involves the movement of four economic parameters namely, physical capital in terms of plant and machinery, financial capital in terms of money invested in capital markets or in FDI, technology, and labour moving across national borders. The pace of movement of financial capital has become greater because of the pervasive impact of information technology and the world having become a global village.

When investments take place in emerging markets, the investors want to be sure that not only are the capital markets or enterprises with which they are investing, run competently but they also have good corporate governance. Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken. In other words, when investments take place across national borders, the investors want to be sure that not only is their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or involving moral hazard.

 

Corporate governance therefore calls for three factors:

a) Transparency in decision-making

b) Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and

c) The accountability is for the safeguarding the interests of the stakeholders and the investors in the organization.

 

Implementation of corporate governance has depended upon laying down explicit codes, which enterprises and the organisations are supposed to observe. The Cadbury’s code in United Kingdom was the starting point, which led to a number of other codes. In India itself we have the Kumaramangalam Birla code as a result of the committee headed by him at the behest of the SEBI. Earlier we had the CII coming up with the code for corporate governance recommended by the committee headed by Shri Rahul Bajaj. The codes, however, can only be a guideline. Ultimately effective corporate governance depends upon the commitment of the people in the organisation. The very first issue of corporate governance in India is, do the India managements really believe in corporate governance?

Corporate governance depends upon two factors. The first is the commitment of the management for the principle of integrity and transparency in business operations. The second is the legal and the administrative framework created by the government. If public governance is weak, we cannot have good corporate governance. The dramatic Enron case has highlighted how companies, which were the darlings of the stock market and held up as models for vigorous and innovative growth can ultimately collapse like a house of cards as they were based on fraud and dishonesty. The association of the accounting firm Anderson has also raised a doubt about the credibility of even well regarded global players.

In the Indian context, the need for corporate governance has been highlighted because of the scams we have been having almost as an annual feature ever since we had liberalisation from 1991. We had the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. I have been suggesting that we should learn from especially the United States to see whether we can replicate similar conditions in our capital market. It is not that the United States is free of scams. Right now the Enron issue is examined by a number of committees at different levels in the United States. At the end of all these examinations, they are likely to come with a better

model. In the Indian corporate scene we must be able to induct global standards so that at least while the scope for scams may still exist, we can reduce the scope to the minimum.

I. BRIEF HISTORY

The “revolution” started in the early 1990s with the Cadbury Report on the financial aspects of corporate governance, to which was attached a code of best practice. Aimed at listed companies and looking especially at standards of corporate behaviour and ethics, the “Cadbury Code” was gradually adopted by the City and the Stock Exchange as a benchmark of good boardroom practice. In 1995, the Greenbury Report added a set of principles on the remuneration of executive directors (in response to some particular “fat cat” scandals, notably that involving British Gas chief Cedric Brown, whose 75 per cent rise incensed both unions and small shareholders), and in 1998 the Hampel Report brought the two together and produced the first Combined Code. A year later, the Turnbull Report concentrated on risk management and internal controls.

In each case, the reports were prompted either by shareholder disquiet over perceived shortcomings in corporate structures and their ability to respond to poor performance, or to government threats of legislation if the corporate sector failed to put its house in order.

In 2002 Derek Higgs, an investment banker was given the brief to look again at corporate governance and build on the previous reports to produce a single, comprehensive code. Shortly afterwards, the full consequences of the Enron and WorldCom scandals were realised, leading to new unease. The Higgs Report came out in early 2003, but was greeted with horror by some leading companies, with claims that it placed an unrealistic burden on non-executives and marginalised the role of the chairman. The task of taking Higgs’s draft forward was passed to the Financial Reporting Council (FRC), a body established by government and comprising members from industry, commerce and the professions. The FRC consulted further and produced a revised Code that followed most of Higgs’s recommendations but softened a few of the more contentious points, and so gained general acceptance. With rather less fuss, at the same time Sir Robert Smith, chairman of the Weir Group, was leading a review of the role of audit committees and his recommendations were incorporated into the new Code. The 2003 Code was updated with minor amendments in June 2006, with the new version applying to financial years beginning on or after November 1, 2006.

Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty. On January 1, 2006, India entered a new era of corporate governance as the reforms popularly known as “Clause 49” took full effect.1 A decade in the making—and complicated by Enron and the other corporate scandals of this time period—Clause 49 has brought broad new requirements related to board composition, audit committee activity, information disclosure, and top management certification. The similarities with Sarbanes Oxley and other governa
nce reforms around the globe should be obvious.

II.         A BRIEF HISTORY OF CORPORATE GOVERNANCE REFORM IN INDIA

Corporate governance and financial regulation in India was generally considered quite poor until the economic reforms of the early 1990s. The Securities and Exchange Board of India (SEBI) was established in 1992 by an act of Parliament, and SEBI was given the job of regulating stock exchanges, brokers, fraudulent trade practices, and other areas of corporate activity.5 As its power grew over the decade, SEBI started to play a much more active role in setting minimum standards for corporate behavior. In addition, a voluntary code of corporate governance was developed by the Confederation of Indian Industry (CII), a group of well-regarded Indian firms.

Near the turn of the century, SEBI commissioned a series of projects to improve Indian corporate governance by building on CII’s code (and by converting the voluntary code into a mandatory one). This work would eventually lead to the Clause 49 reforms. The first SEBI committee, comprised of 17 prominent business leaders and chaired by Kumar Mangalam Birla, advocated a variety of new governance requirements— including a minimum number of independent directors, the creation of audit committees and shareholders’ grievance committees, and additional management disclosures on firm performance.

These recommendations were soon adopted, but, importantly, they were not imposed on every public company through legislation (in contrast with Sarbanes Oxley in the United States). Instead, SEBI implemented the Birla Committee reforms by modifying the listing requirements for firms seeking to go public on an Indian stock exchange. Thus was born Clause 49, a new collection of corporate governance obligations that individual firms would agree to when they signed listing contracts with any stock exchange in the country. As part of a gradual roll-out process, the Birla Committee reforms were not imposed immediately on all public firms. Instead, they were made mandatory in 2001 for the largest Indian companies (and for newly listing firms), and then expanded to smaller public companies over the next few years.

All of this seemed fine until 2002, when fallout from Enron, WorldCom, and other corporate governance catastrophes caused Indian regulators to wonder whether Clause 49 went far enough. SEBI decided to sponsor a second corporate governance committee chaired by Narayana Murthy, the renowned leader of Infosys Technologies. The Murthy Committee went to work and released its additional recommendations in 2003. SEBI quickly adopted these suggestions and issued a revised Clause 49 in 2004.

The Murthy Committee reforms expanded on the Birla Committee’s work in several areas. One main focus related to the qualifications for independent director status: a number of specific requirements were added to disqualify material suppliers and customers, recently departed executives, relatives, and other closely-related parties. A second set of changes affected the audit committee: it was now required to meet more frequently (four times per year), and members had to satisfy new financial literacy requirements. A third important change mandated CEO and CFO certification of financial reports and internal controls. And a number of additional shareholder disclosures, including expanded discussion of financial results, were added to the Clause 49 requirements. As before, these reforms were phased in gradually; all public firms were not required to comply with the Murthy Committee rules until January 1, 2006.

The fruits of this labor were generally well-received, and Clause 49 seems to have improved the overall state of Indian corporate governance. For example, a recent study by Bernard Black and Vikramaditya Khanna argues that stock prices of imminently affected firms jumped almost four percent when SEBI announced its decision to pursue the initial Clause 49 reforms. Similarly, the World Bank as part of its 2005 standards and codes initiative benchmarked India’s regulatory framework to the OECD principles of corporate governance. It announced that India has indeed come a long way over the past decade, reporting that “a series of legal and regulatory reforms have transformed the Indian corporate governance framework and improved the level of responsibility/accountability of insiders, fairness in the treatment of minority shareholders and stakeholders, board practices, and transparency.”

But in this same study, the World Bank also flags four areas of concern. First, many sanctions seem inadequate, and there is a need for stricter enforcement of governance violations in order to increase compliance with Clause 49. Second, the division of regulatory responsibility between SEBI, the Department of Company Affairs (DCA), and the individual stock exchanges needs to be clarified to prevent oversight from slipping between jurisdictional flagstones. Third, board practices need to be strengthened to avoid director “rubber stamping,” especially by establishing credible institutions for training board members on their fiduciary responsibilities.21 And finally, according to the World Bank, institutional investors and large independent shareholders still need to become “important forces to monitor insiders and play a disciplining role in the governance of corporations.”

                  

CONCLUSION

 

The ethical temperature of any business or capital market depends on three factors. The first is the individual’s sense of values. The second is the social values accepted by the business and industry. Let us not forget that when Harshad Mehta Scam took place, it was claimed that the manner in which the bank receipts were being treated was the prevailing norm. Perhaps a similar argument would have been given in the Ketan Parikh Scam. In other words, practices which were later on found to be highly objectionable become acceptable because that was the prevailing market practice. Social values will depend upon the standards set up by professional bodies like the Association of Chartered

Accountants or Cost Accounts of India and so on. The third and perhaps the most decisive factor is the system. It is here we face the main challenge. Our system encourages lack of corporate governance. Some of the specific steps that should be taken to improve corporate governance are the following:

a)         The Sick Industries Companies Act (SICA) has become so convenient for the unscrupulous managements that we find in our country industries become sick, the industrialist do not become sick. BIFR has also been called the Bureau of Industrial Funeral Rites! It is high time we scrap the entire system. This will mean the abolition of SICA and organisations like BIFR there under. Mere tinkering with the system by making amendments is not going to improve the situation.

b)         The entire banking system and the Banking Secrecy Act call for a review. Our banking system is such that if you borrow one lakh of rupees, you are afraid of the bank but if you borrow ten crores of rupees, the bank is afraid of you. With the amount of NPA going beyond 58000 crores, it is high time that we amend the Banking Secrecy Act to reveal those who are willful defaulters. The Narasimham Committee’s recommendation about putting this condition at the time of issuing new loans can cover only to some extent the moral hazard. It is high time that practice of disclosing the name of willful defaulters is made more practical and timely. Publishing the names in the case of suits, which have been filed, is of no value at all because by that time the matter is all but over.

c)         Laws like the Benami Transactions Prohibition Act and the Prevention of Money Laundering Act should be implemented effectively and vigorously. Agencies like the CVC can be used to ensure that corrupt practices are effectively punished because it is the atmosphere, which encourages prope
r corporate behaviour. In India today we have a system where the level of public governance is very poor. There is no fear of punishment at all. In such a situation it is only a saint who will be observing strictly the rules of corporate governance.

Corporations and Limited Liability Companies (LLC) are formed to shield owners from personal liability for the debts and obligations of their businesses. One of the major differences between a corporation and an LLC is that they have different federal tax liabilities.

Corporations are incorporated according to the state laws and the owners are shareholders, who have stock certificates issued by the corporation. The owners elect a Board of Directors to manage and guide the company and the owners appoint officers to execute and run the day-to-day operations. Members of the company form a Limited Liability Company, which they manage through one or more managers. Both entities, the corporation and the LLC, must pay franchise taxes.

Basic Differences Between The Corporations And The LLC The basic differences between and the corporations and the LLC are listed below.

1. A corporation pays taxes according to the laws of the particular state applicable to corporations. An LLC with more than one member is classified as a partnership by default. These partners may select being taxed as a C-Corporation or an S-Corporation.

2. In a corporation, the owners are called ’shareholders,’ whereas the owners of an LLC are called ‘members.’ S Corporations can have only 100 shareholders, but an LLC may have unlimited members. Corporations like the S corporations are not permitted to have non-US citizens as owners. This rule does not apply to LLC.

3. A corporation must adhere to certain formalities such as meetings for the Board of Directors, annual shareholders meetings. An LLC doesn’t need to engage in these formalities. S corporations can’t be owned by an LLC, trusts, or other corporations, but there are no such restrictions on an LLC.

4. Shareholders of a corporation can transfer their shares to another person easily. In the case of an LLC, the members must obtain permission from other members before they can do so.

5. Corporate laws allow shareholders and officers to be individually sued if the corporate formalities are not followed. The LLC laws specifically bar lawsuits against members for the liabilities of the LLC.

6. An LLC is not required to maintain records and documents, but this is mandatory for corporations. If the proper formalities are not followed in the case of a corporation, the owners are liable for the company’s obligations.

7. The existence of an LLC is limited to 30 years, whereas a corporation’s life is perpetual

8. An LLC offers liability protection like corporations and tax benefits provided by a partnership. However an LLC may face an uncertain future and possibly dissolution if a member dies without leaving instructions to replace, continue, or terminate an LLC.

Taxation The major difference between a corporation and an LLC is taxation. C corporations are taxed as separate entities, which pay their own tax, but LLCs are taxed as part of the members’ assets. This means C corporation owners can’t deduct business loses from individual tax returns, but LLC members can.

Additional Help These are a few of the differences between a corporation and a Limited Liability Company. It is advisable to form either one or the other according to the needs of your business to minimize the risk of losing personal assets due to unpaid business credits. Several firms offer excellent software and services related to corporations and Limited Liability Companies, which enable them to run smoothly.

1.         Introduction

Over the past two decades, the forces of economic globalization, political transformation and technological innovation have increased the global reach and influence of the private sector. The number of transnational corporations has almost doubled from 37,000 in 1990 to over 60,000 today, with some 800,000 foreign affiliates and millions of suppliers and distributors operating along their global value chains. This process has conferred new rights and created new business opportunities for global corporations and large national companies, while also exposing weaknesses in national and global governance structures. It has also resulted in new competitive pressures and risks, and led to increased demands for greater corporate responsibility, transparency and accountability.

As a result, today’s business leaders face a complex and often contradictory set of stakeholder expectations. They are being called on to engage with activists as well as analysts, to manage social and environmental risks as well as market risks, to be accountable for their non-financial as well as their financial performance, and to cooperate as well as to compete, often with non-traditional partners, focused on unfamiliar issues. They are under pressure from governments, consumers, trade unions, non-governmental organizations and a small but growing number of their investors, to demonstrate outstanding performance not only in terms of competitiveness and market growth, but also in their corporate governance and corporate citizenship.

In short, corporate executives are faced with a complex, unprecedented challenge: How can they continue to deliver shareholder value while also delivering, and demonstrating that they are delivering, societal value?

2.         What is corporate citizenship?

The term ‘corporate citizenship’runs the risk of being all things to all people. But it does have some easily identifiable elements too. The basic idea is to understand business as part of society, contributing directly to the welfare of society, rather than somehow separate from it. Whereas in the past the baseline of good behaviour was ‘acting within the law’across the company’s operations, newer aspirations range from the maxim ‘do no harm’through to assessing ‘overall net impacts’. Companies need to go beyond simply obeying the law and making a competitive return for their shareholders if they are to respond to the challenge of citizenship.

Corporate citizenship invites companies to make strategic choices based on an understanding of the total impacts of their business in society. The practice of corporate citizenship involves a

focus on one or more of three main areas:

v     the societal impacts that flow from basic business policy and practice (as managed and measured through various codes of conduct, ‘values statements’and company reports);

v     the impacts that a company has up and down the value chain (e.g. when child labour is employed by its suppliers; or when end consumers dispose of its products in ways likely to harm the environment); and

v     the impacts that come from the voluntary contributions that businesses make to communities affected by their operations (including charitable gifts, community investment and commercial initiatives in the community).

Management and communication tools such as the ‘social audit’, development of key performance indicators on corporate citizenship, ‘benchmarking’best practice across a variety of industries, and best practice on ‘cause-related marketing’have all grown up alongside these core elements of corporate citizenship. Codes of  good conduct for companies abound, as do stamps or standards awarded by third parties, such as the Social Audit stamp of the Brazilian NGO IBASE, or the Social Accountability 8000 standard developed by the Council on Economic Priorities Accreditation Agency. The professionalization of environmental management has had an impact on the ‘new’tools of social management and accounting, accelerating the process of adaptation to the corporate citizenship agenda. But not all companies professing to be good ‘corporate citizens’choose to use all of these tools, and the current state of ‘corporate citizenship’varies from country to country.

3.         What drives Corporate Citizenship in a Global Context?

The emergence of ‘corporate citizenship’as a guiding principle for business strategy has been driven by a number of changes in the business operating environment. The overall process of globalization

affects all businesses one way or another.

Globalization has given rise to unprecedented links between economies, cultures, individuals and groups. Technological advances such as the internet have transformed communications. When multinational corporations apply different standards at home from those in their overseas operations, the gaps are exposed to external scrutiny as never before. The result is that the corporate

citizenship debate has acquired an increasingly significant ‘international’ dimension, raising one of the most difficult sets of questions in the current policy and business agenda: where does the responsibility of companies end and the role of governments begin, and by what (and whose) standards should this be judged?

Economic liberalization and deregulation have seen a massive increase in the flow of capital, goods and services across borders, opening new markets to foreign investment. At the same time the gaps between rich and poor around the world have widened and the world’s population is growing rapidly.

As privatization proceeds apace around the world, companies are increasingly responsible for providing services that were public-sector responsibilities in the past; areas such as healthcare provision by private companies and liberalization of energy markets focus more attention on the role of companies in the place of governments. The role of the private sector in provision of technical assistance around the world has also increased as corporations have become more involved in providing funding for intergovernmental bodies and as contractors in the delivery of donor assistance programmes. The overall balance of public- and private sector responsibilities is changing.

Globalization has given rise to new demands on corporations to exercise their power responsibly. There is a popular perception that in some markets the economic power and influence of corporations is much greater than that of the incumbent government. Some international NGOs have focused in on this, giving rise to new demands that companies investing in politically unstable economies such as the Sudan should use their power to encourage host country governments to spend the revenue that their investments generate for social benefit – not to wage wars or benefit political elites.

It is often pointed out that the turnover of the world’s largest companies is greater than the GNP of all but around 20 members of the United Nations. But individually even large companies account for only a fraction of global economic ouput: BP, Amoco and Arco together produce no more than 0.01%.

Globalization is not an entirely ‘neutral’ driver of corporate citizenship from a business perspective. Indeed, a powerful ‘backlash against globalization’ has now been set in motion, as witnessed by the public demonstrations surrounding recent World Trade Organization (WTO) and International Monetary Fund (IMF) meetings in Seattle and Washington.

Some proponents of corporate citizenship in the North see it as a way of countering the backlash against globalization – of reinvigorating the notion that trade and investment can bring overall social and environmental welfare gains. Encouragement of global corporate responsibility then becomes part of efforts to put ‘
a human face on the global economy’.

One maxim seems to find resonance with all: that with power needs to come responsibility. Globalization, it is said, is transforming corporate responsibility from a choice into an imperative.6 But the extent of that responsibility remains a matter of hot debate.

4.         Commitments to Corporate Citizenship

There are numerous examples of commitments towards corporate citizenship. Many of them involve not only the private sector, but also the public sector and civil society organizations.

v     The Global Compact was proposed by the outgoing UN Secretary General, Kofi Annan, at Davos in January 1999. He called on business leaders to embrace and enact within their own corporate activities nine core principles derived from universally accepted agreements on human rights, labour and the environment. Today the Global Compact brings together several hundred companies, with some of the world’s leading trade union bodies, human rights and environmental organizations in a global learning forum, policy dialogues and variety of development projects. Companies engage in the initiative through the written support of their CEOs.

v     Tackling global health issues: The World Economic Forum Global Health Initiative (GHI) is designed to foster greater private sector engagement in the global battle against HIV/AIDS, tuberculosis and malaria. In cooperation with the World Health Organization and UNAIDS, the GHI brings together businesses, NGOs, civil society and academic institutions in a partnership, focusing on corporate best practices, resource gaps, partnership opportunities, philanthropy and the role of business in advocacy. The Global Business Council on HIV/AIDS is an international group of business leaders dedicated to advocating for an increased business response to AIDS both in the workplace and in the community. The Global Alliance for Vaccines and Immunization (www.vaccinealliance.org) was officially launched in January 2000 at Davos, with a mission of combining public and private resources and competencies to support immunization activities. It is a coalition of governments, the WHO, UNICEF and the World Bank; philanthropic foundations; the International Federation of Pharmaceutical Manufacturers Associations (IFPMA); and technical and research institutes.

v     Overcoming the digital divide: The ICT sector has engaged itself in a variety of policy dialogues and practical initiatives to bridge the ‘digital divide’ both within and between nations. Examples include: the G8 Digital Opportunity Task Force which consisted of leaders from the public, private and not-for-profit sectors; the UN’s multi-stakeholder ICT Task Force and the World Economic Forum’s Global Digital Divide Initiative. Business leaders are also supporting practical projects such as the Digital Partnership and Net Aid; and others such as those listed on the World Economic Forum website.

v     Investing in sustainable development: This has been an area of immense focus. The International Chamber of Commerce and World Business Council for Sustainable Development have established Business Action for Sustainable Development as a network and platform to provide business input and partnership examples to the World Summit for Sustainable Development in 2002.

v     Promoting good corporate governance: Business leaders are playing a role in several initiatives to promote good corporate governance. Examples include: The International Corporate Governance Network, pension funds and financial institutions with over $8 trillion in assets under management working towards global convergence on standards of governance; and business support for Transparency International to tackle corruption. Another aspect of good governance is the efforts to promote sustainability reporting such as the Global Reporting Initiative.

v     Corporate citizenship at the sector level: The World Business Council for Sustainable Development and UNEP have played an important role in promoting sector-based initiatives for sustainable development in industries as diverse as mobility, cement, pulp and paper, information technology, banking and finance. Other examples include the E7 network of electricity companies; the International Hotels Environment Initiative; and the Global Mining Initiative.

v     Supporting national development: At the national level business leaders are supporting initiatives focused on goals such as education, local enterprise and job creation, and rural development. Examples include: Philippine Business for Social Progress; the National Business Initiative in South Africa;  Instituto Ethos in Brazil;  Business in the Community in the UK;  and Landcare in Australia.

v     Engaging Tomorrow’s Leaders: Today’s business leaders are supporting networks such as the World Economic Forum’s Global Leaders for Tomorrow, which consists of young leaders from the public and private sectors and civil society, and AIESEC, the world’s largest student-run organization to promote sustainable development and corporate citizenship. A small but growing number of business schools have started to invest in research and teaching in this area supported by some CEOs.

 

5.         Progress of Corporate Citizenship in a Global Context

While the leadership challenge is especially apparent for executives in Europe and North America, it is also becoming a reality for many in Asia, Africa, the Middle East, and Latin America, especially those who aim to be global players – either doing business with or competing against the world’s top multinationals. Business leaders in each region are obviously influenced by different economic, social, cultural and political traditions, and different industry sectors face different types of corporate citizenship challenges. Despite these differences, the following trends in the concepts of corporate citizenship or corporate responsibility are common across geographic and sector boundaries:

1. From the corporate margins to the mainstream

2. From assertion to accountability

3. From paternalistic approaches to partnership

5.1.      From the corporate margins to the mainstream

In leading companies, corporate citizenship is moving beyond the boundaries of legal compliance and traditional philanthropy to become a more central factor in determining corporate success and legitimacy, with implications for corporate strategy, governance and risk management.

There is now growing recognition that global corporate citizenship is essentially about how the company makes its profits, everywhere it operates, not simply what it does with these profits afterwards. It is about how the company operates in three key spheres of corporate influence.

§         First, in its core business operations – in the boardroom, in the workplace, in the marketplace and along the supply chain.



Second, in its community investment and philanthropic activities.

Third, in its engagement in public policy dialogue, advocacy and institution building.



In all three spheres of corporate influence, the challenge for leadership companies is two fold:-

First, aim to ‘do minimal harm’ in terms of minimizing negative economic impacts, bad labour conditions, corruption, human rights abuses and environmental degradation that may result from a company’s operations. Thi
s is a goal that calls for management strategies such as compliance – with internationally accepted norms, guidelines and standards, such as the OECD Guidelines for Multinational Corporations and the UN Global Compact, as well as with national laws and regulation – and control of social and environmental risks, liabilities and negative impacts.

Second, aim to ‘do positive good’ in terms of creating new value for both the business and its stakeholders in the countries and communities in which it operates. This can be achieved through strategic philanthropy and community investment, which harnesses the company’s core competencies, products and services, not only its philanthropic cheques. Examples include, ICT companies supporting community projects to tackle the digital divide, financial companies supporting microcredit initiatives, and professional services firms sharing management expertise with local community organizations. More strategic, are efforts by companies to create new business value through developing new products, processes and technologies, and in some cases even transforming their business models, to serve untapped social and environmental needs, or facilitate entry into underserved markets. Examples include developing new markets for carbon emissions trading, creating new environmental technologies, and producing more affordable access to essential services such as clean water, energy, food, housing and medicines for the estimated 3 billion people who live on less than $2 a day.

A taskforce of the World Economic Forum, consisting of a group of over 40 CEOs and chairmen from 16 countries and representing 18 industry sectors signed a joint statement on global corporate citizenship. They agreed that: “The greatest contribution that we can make to development is to do business in a manner that obeys the law, produces safe and cost effective products and services, creates jobs and wealth, supports training and technology cooperation, and reflects international standards and values in areas such as the environment, ethics, labour and human rights. To make every effort to enhance the positive multipliers of our activities and to minimize any negative impacts on people and the environment, everywhere we invest and operate. A key element of this is recognizing that the frameworks we adopt for being a responsible corporate citizen must move beyond philanthropy and be integrated into core business strategy and practice.”

5.2. From assertion to accountability

A second key trend at the heart of the emerging corporate citizenship agenda is the growth in demands by stakeholders, including shareholders, for corporations to demonstrate greater accountability and transparency – and to do so not only in terms of their financial accounts and statements, but also in terms of their wider social, economic and environmental impacts.

Gone are the days when consumers, investors and the general public trusted all the information they received from companies and were relatively undemanding on what this information should cover in terms of corporate performance. In part this trust has been squandered by the recent series of corporate ethics scandals and governance failures. It has also been affected by a combination of increased democratization and press freedom around the world, easier access to more information through the Internet, greater public awareness of global issues through the media, increased consumer choice and sophistication, and higher societal expectations of the private sector.

In response to these trends, leading companies are being called on to be more accountable and more transparent to more stakeholders on more issues and in more places than ever before. In the wake of corporate governance and ethics scandals, there have been demands for greater financial accountability and transparency, resulting in increased shareholder advocacy and new regulations, such as Sarbanes-Oxley in the United States. At the same time, certain governments and stock exchanges are also calling for greater public disclosure on environmental and social performance, in areas such as carbon emissions, product safety, occupational health and safety, training and diversity. There are also growing calls for greater transparency on private sector engagement with governments on issues such as lobbying, financing political campaigns, payment of taxes and receipts of public procurement contracts and incentives.

In all of these areas, business leaders are facing new and challenging questions in terms of what to be accountable for, who to be accountable to, and how to actually measure and report non-financial performance in practice.

A number of global voluntary efforts are underway to develop standards, guidelines and procedures for measuring and reporting on corporate social and environmental performance. These range from multi-sector alliances, such as the Global Reporting Initiative, which is developing guidelines and indicators for public reporting on sustainability performance, to sector-focused efforts such as the Extractive Industries Transparency Initiative, which focuses on public disclosure of payments to governments by oil and mining companies, the Fair Labour Association in the apparel sector, the Equator Principles for project finance in the banking sector, and global framework agreements being negotiated between certain trade unions and global corporations. Growing numbers of Asian companies are engaging in these and other accountability initiatives.

5.3. From paternalistic approaches to partnerships

The third key trend in global corporate citizenship is a move away from more traditional, paternalistic attitudes that “the company and its senior executives knows best” to more genuine engagement, consultation and cooperation with key groups of stakeholders. There is growing recognition that the challenges we face, both as individual companies and nations and as a global community, are too great and too interdependent, and the resources for addressing these challenges too varied and too dispersed, for any one actor or sector to have all the solutions. New types of alliances between companies and other sectors, built on mutual respect and benefit, are becoming essential to both corporate success and societal progress.

The area of community investment offers a good example, where leading companies have moved away from traditional philanthropic approaches, focused on one way disbursement of charitable funds, to efforts aimed at engaging the core competencies of the company and building mutually beneficial partnerships between the company and non-profit or community organizations. Cisco Systems, for example, has been able to expand its Cisco Networking Academies program to over 10,000 academies in all 50 U.S. states and over 150 countries, working with partners ranging from the United Nations, the United States Agency for International Development and the Peace Corps, to local schools and nongovernmental organizations. In the Philippines, the Ayala Group has worked with Nokia, one of its key business partners, Pearson Education, the International Youth Foundation, the Department of Education, local authorities and parent-teachers associations to provide science materials to over 80 under-resourced schools. Just two of thousands of examples, through which companies, working in partnership with others, are providing education, training, and other opportunities to millions of young people and low-income communities around the world.

Some of the most interesting partnerships are in the form of strategic global or national alliances aimed at transforming not only individual corporate practices, but also influencing public policy frameworks and the broader enabling environment. National examples in Asia include the pioneering Philippines Business for Social Progress, the Thai Business Initiative for Rur
al Development and the Asia-Pacific Business Coalition Against HIV/AIDs.

In addition to community-level alliances between individual companies and nonprofit organizations, we are also witnessing the emergence of strategic global or national alliances aimed at transforming not only individual corporate practices, but also influencing public policy frameworks and the broader enabling environment. One example is the United Nations Global Compact, with over 2,000 corporate participants and some 30 national business networks, many of them from developing countries, working with UN agencies, trade unions and non-governmental organizations.

Through the power of collective action, the Global Compact seeks to advance responsible corporate citizenship so that business can be part of the solution to the challenges of globalization. It is a voluntary initiative with two objectives:

• Mainstream ten principles in the areas of environment, human rights, labour, and anti-corruption – all of which are based on international, intergovernmental agreements – into business activities and supply chains around the world;

• Catalyse business actions and partnerships in support of UN goals, especially the Millennium Development Goals.

Asian companies have been among the pioneers in supporting the Global Compact. In countries such as China, India, Indonesia, the Philippines, Thailand, South Korea and Australia, individual companies, stock exchanges, business associations and governments are starting to explore ways to implement the compact’s ten principles as core elements of sound business practice. In November 2005, the Chinese government will host a major Global Compact Summit, taking a vital leadership role at a time when global industrial capacity continues to shift to China and Chinese companies continue to increase their international investment and influence.

Concluding Remarks

Although local business conditions and cultures vary from country to country, the elements of what it takes to be a successful and sustainable business over the longer-term illustrate some common imperatives. Being a profitable, but also responsible corporate citizen is increasingly one of these imperatives. This requires business leaders to be committed to a set of clearly stated and publicly upheld values – underpinned by policies and standards that are applied everywhere the company operates, not only in its home market. It requires companies to have risk management systems and accountability structures in place to protect existing value, by minimizing any negative economic, social or environmental impacts and reputation damage arising from their business operations. It also requires companies to support learning, innovation and partnerships that help to create new value, by delivering new products and services that meet societal needs as well as creating shareholder value. And it calls for ongoing efforts to evaluate and measure progress and performance against each of these three areas.

In summary, regardless of industry sector or country, global corporate citizenship rests on four pillars: values; value protection; value creation; and evaluation. These four pillars not only underpin the long-term success and sustainability of individual companies, but are also a major factor in contributing to broader social and economic progress in the countries and communities in which these companies operate. Along with good governance on the part of governments, they offer one of our greatest hopes for a more prosperous, just and sustainable world.