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January 05, 2010

Indian Government Issues Voluntary Guidelines for Corporate Governance and Corporate Social Responsibility
    by Robert Kropp

At the conclusion of the first India Corporate Week, the Ministry of Corporate Affairs issues guidelines intended to encourage best practices in corporate governance and corporate social responsibility. -- Asserting that “the business sector also needs to take the responsibility of exhibiting socially responsible business practices that ensures the distribution of wealth and well-being of the communities in which the business operates,” India’s Ministry of Corporate Affairs issued Voluntary Guidelines for Corporate Social Responsibility, the intention of which is to encourage Indian corporations to acknowledge the need for observance of corporate social responsibility (CSR).

The guidelines were issued at the conclusion of the first India Corporate Week, which is planned to be a monthly event. Also introduced at the event were Corpora te Governance Voluntary Guidelines, which are intended to help create a “system of transparent and accountable corporate functioning.”

The CSR guidelines state that the CSR initiatives of Indian companies should become integral parts of overall business policy and aligned with business goals. The guidelines set out six core elements for companies to address.

Companies should engage with all stakeholders, including shareholders, employees, customers, suppliers, project affected people, and society at large, to inform them of inherent risks as well as strategies to mitigate them.

In order to function in an ethical manner, companies should not engage in business practices that are abusive, unfair, corrupt or anti-competitive.

The CSR policies of companies should fully respect the rights of workers in the areas of workplace environment, career advancement, and freedom of association. Furthermore, companies should not employ child or forced labor, and should maintain equality of opportunities without discrimination.

Companies should respect human rights for all and avoid complicity with human rights abuses.

Companies should adopt sustainable environmental policies that prevent pollution, recycle, manage and reduce waste, and manage natural resources in a sustainable manner. Corporate environmental policies should also address the challenges of climate change by adopting cleaner production methods and promoting energy efficiency and environmentally friendly technologies.

Finally, “companies should undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations.”

In order to facilitate implementation of the CSR guidelines, “companies should disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their website, annual reports, and other communication media,” according to the report.

The need for improved CSR performance was documented in a 2009 report from Karmayog, a Mumbai-based online organization, which found that while 51% of Indian companies practice CSR in some form, only 2% publish a separate sustainability report, and only 3% report the amount they spent on CSR.

And in a December report by the Emerging Markets Disclosure (EMD) Project of the US-based Social Investment Forum (SIF), Indian companies were among those in emerging markets with the lowest disclosure rates on CSR reporting.

In her speech at India Corporate Week, Indian President Shrimati Pratibha Devisingh Patil recognized that India is “one of the largest agrarian economies of the world,” in which “agriculture provides employment to around 60% of the country's workforce and is contributing about 18% to the Gross Domestic Product.”

The President said, “Through a sense of social responsibility, the corporate sector can contribute to rural development.” She then outlined a number of ways in which corporations can do so.

“I call on corporate leaders to voluntarily come forward to partner with Government in mission mode programs, for the provision of basic infrastructure facilities in rural areas,” she said. Corporations could also “consider setting up a dedicated fund for entrepreneurship development and capacity building among farmers.”

The President continued, “The private sector could invest in storage, market terminals, cold chains and grading facilities.” She also called on information technology (IT) companies to help the Government in creating IT networks in villages throughout India, and also for support for environmentally friendly technological innovations.

The guidelines for corporate governance include calls for independent boards of directors, separation of the positions of Chief Executive Officer and Chairman of the Board, executive compensation in which performance-related remuneration should form a significant proportion of the total compensation, and disclosure of a critical risk management framework that identifies risks as well as strategies to minimize them.

In his Preface to the Corporate Governance Voluntary Guidelines, R. Bandyopadhyay of the Ministry of Corporate Affairs stated, “Sound and efficient corporate governance practices are the basis for stimulating the performance of companies, maximizing their operational efficiency, achieving sustained productivity as well as ensuring protection of shareholders’ interests.”

In another 2009 report, commissioned by the International Finance Corporation (IFC), India was found to have the lowest standards of environmental, social, and governance (ESG) implementation of the five emerging market countries surveyed. In particular, active ownership of Indian companies was found to be noticeably absent.

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