DEFINITIONS OF CSR

“Corporate Social Responsibilities is the continuing commitment by business to

behave ethical and contribute to economic development while improving the
quality of life of the workforce and their families as well as of the local community
and society at large.” Corporate Social Responsibility is an integrated combination
of policies, programs, education, and practices which extend throughout a
corporation’s operations and into the communities in which they operate.
Corporate Social Responsibility is achieving commercial success in ways that
honour ethical values and respect people, communities, and the natural
environment.

NEED FOR SOCIAL RESPONSIBILITIES

1. The Iron Law of Responsibility

2. To fulfill Long term Self-interest

3. To Establish a Better Public image

4. To Avoid Government Regulation or Control

5. TO Avoid Misuse Resources and Economic Power

6. To Convert Resistances into Resources

7. To Minimize Environment Damage

Companies implement CSR by putting in place internal management systems

that promote

 Adherence to labor standards by corporations and their business partners;

 Respect for human rights;
 Protection of the local and global environment;
 Reducing the negative impacts of corporations operating in conflict zones;
 Avoiding bribery and corruption; and;
 Consumer protection.
Meaning of Corporate Governance –

The management role is basically related with running the business operations
efficiently and effectively – the product design, procurement, personnel
management, production, marketing and finance functions. But by contrast, the
governance role is not concerned with running the business of the company but
with giving overall direction to the enterprise with the aim of satisfying legitimate
expectations for accountability and regulation by interest beyond the corporate
boundaries. All companies need governing as well as managing.

Need of Corporate Governance Code

The need for corporate governance has arisen because of the increasing concern
about the non-compliance of standards of financial reporting and accountability by
boards of directors and management of corporate inflicting heavy losses on
investors.

The collapse of international giants likes Enron, World Com of the US and Xerox
of Japan are said to be due to the absence of good corporate governance and
corrupt practices adopted by management of these companies and their financial
consulting firms.

The failures of these multinational giants bring out the importance of good
corporate governance structure making clear the distinction of power between the
Board of Directors and the management which can lead to appropriate governance
processes and procedures under which management is free to manage and board of
directors is free to monitor and give policy directions.

In India, SEBI realised the need for good corporate governance and for this
purpose appointed several committees such as Kumar Manglam Birla Committee,
Naresh Chandra Committee and Narayana Murthy Committee.
The process of corporate governance with principal activities

 Direction
 Executive Action
 Supervisor
 Accountability

Nature of Governance –

All human societies need governing, where power is exercised to direct, control
and regulate activities that affect people’s interests. Governance involves the
derivation, use and limitation of such powers. It identifies rights and
responsibilities, legitimizes actions and directions, accountability. Corporation
governance is concerned with the process by which corporate entities are
governed; that is, with the exercise of power over the direction of the enterprise,
the supervision and control of executive actions. Developing a Code of Conduct

– 1) Identify key behaviors needed to adhere to the ethical values proclaimed in

code of ethics.

2) Include wording that indicates all employees are expected to conform to the
behaviors specified in the code of conduct.

3) Obtain review from key members of the organization: Be sure that the legal
department reviews the drafted code of conduct.

4) Announce and distribute the new code of conduct.

5) Review which values produce the top three or four traits of a highly ethical and
successful product or service in your area.

6) Identify values needed to address current issues in your workplace.

7) Identify any values needed, based on findings during strategic planning.

8) Consider any top ethical values that might be prized by stakeholders.

 9) Collect from the above steps, the top five to ten ethical values, which are high
priorities in your organization –

a. Trustworthiness: honesty, integrity, promises keeping, loyalty.

b. Respect: autonomy, privacy, dignity, courtesy, tolerance, acceptance

. c. Responsibility: accountability, pursuit of excellence.

d. Caring: compassion, consideration, giving, sharing, kindness, loving.

e. Justice and fairness: procedural fairness, impartiality, consistency, equity,

equality, due process

. f. Civic virtue and citizenship: law abiding, community service, protection of

environment.

10)Obtain review from key members of the organization.

11)Announce and distribute the new code of ethics (unless you are waiting to
announce it along with any new codes of conduct and associated policies and
procedure).

12)Update the code at least once a year.

13)Note that you cannot include values and preferred behaviours for every possible
ethical dilemma that might arise.

Importance of Corporate Governance:

A good system of corporate governance is important on account of the
following:

1. Investors and shareholders of a corporate company need protection for

their investment due to lack of adequate standards of financial reporting and
accountability. It has been noticed in India that companies raised capital from the
market at high valuation of their shares by projecting wrong picture of the
company’s performance and profitability.
 The investors suffered a lot due to unscrupulous management of corporate that
performed much less than reported at the time of raising capital. “Bad governance
was also exemplified by allotment of promoters’ share at preferential prices
disproportionate to market value affecting minority holders interest”.

There is increasing awareness and consensus among Indian investors to invest in

companies which have a record of observing practices of good corporate
governance. Therefore, for encouraging Indian investors to make adequate
investment in the stock of corporate companies and thereby boosting up rate of
growth of the economy, the protection of their interests from fraudulent practices
of corporate of boards of directors and management are urgently needed.

2. Corporate governance is considered as an important means for paying heed

to investors’ grievances. Kumar Manglam Birla Committee on corporate
governance found that companies were not paying adequate attention to the timely
dissemination of required information to investors in by India.

Though some measures have been taken by SEBI and RBI but much more required
to be taken by the companies themselves to pay heed to the investors grievances
and protection of their investment by adopting good standards of corporate
governance.

3. The importance of good corporate governance lies in the fact that it will

enable the corporate firms to (1) attract capital and (2) perform efficiently. This
will help in winning investors confidence. Investors will be willing to invest in the
companies with a good record of corporate governance.

New policy of liberalization and deregulation adopted in India since 1991 has
given greater freedom to management which should be prudently used to promote
investors’ interests. In India there are several instances of corporate’ failures due to
lack of transparency and disclosures and instances of falsification of accounts. This
discourages investors to make investment in the companies with poor record of
corporate governance.

4. Global Perspective. The extent to which corporate enterprises observe the

basic principles of good corporate governance has now become an important factor
for attracting foreign investment. In this age of globalisation when quantitative
restrictions have been removed and trade barriers dismantled, the relationship
 between corporate governance and flows of foreign investment has become
increasingly important.

Studies in India and abroad show that foreign investors take notice of well-
managed companies and respond positively to them, capital flows from foreign
institutional investors (FII) for investment in the capital market and foreign direct
investment (FDI) in joint ventures with Indian corporate companies will be coming
if they are convinced about the implementation of basic principles of good
corporate governance.

Thus, “International flows of capital enable companies to access financing from a

large pool of investors. If countries are to reap the full benefits of the global capital
markets, and if they are to attract long-term capital, corporate governance
arrangements must be credible and well understood across borders”. The large
inflows of foreign investment will contribute immensely to economic growth.

5. Indispensable for healthy and vibrant stock market. An important

advantage of strong corporate governance is that it is indispensable for a vibrant
stock market. A healthy stock market is an important instrument for investors
protection. A bane of stock market is insider trading. Insider trading means trading
of shares of a company by insiders such directors, managers and other employees
of the company on the basis of information which is not known to outsiders of the
company.

It is through insider trading that the officials of a corporate company take undue
advantage at the expense of investors in general. Insider trading is a kind of fraud
committed by the officials of the company. One way of dealing with the problem
of insider trading is enacting legislation prohibiting such trading and enforcing
criminal action against violators.

In India, insider trading has been rampant and therefore it was prohibited by SEBI.
However, the experience shows prohibiting insider trading by law is not the
effective way of dealing with the problem of insider trading because legal process
of providing punishment is a lengthy process and conviction rate is very low.

According to Sandeep Parekh, an advocate (Securities and Financial Regulations),

the effective way of tackling the problem is by encouraging the companies to
practice self regulation and taking prophylactic action. This is inherently connected
to the field of corporate governance.
It is a means by which the company signals to the market that effective self-
regulation is in place and that investors are safe to invest in their securities. In
addition to prohibiting inappropriate actions (which might not necessarily be
prohibited) self-regulation is also considered an effective means of creating
shareholders value. Companies can always regulate their directors/officers beyond
what is prohibited by the law”.

Topic 2 Code of
Corporate Practices
To promote good corporate governance, SEBI (Securities and Exchange Board of India)
constituted a committee on corporate governance under the chairmanship of Kumar Mangalam
Birla. On the basis of the recommendations of this committee, SEBI issued certain guidelines on
corporate governance; which are required to be incorporated in the listing agreement between the
company and the stock exchange.

An overview of SEBI guidelines on corporate governance is given below, under appropriate

heads:

(a) Board of Directors:

Some points in this regard are as follows:

(i) The Board of Directors of the company shall have an optimum combination of executive and
non-executive directors.

(ii) The number of independent directors would depend on whether the chairman is executive or
non-executive.

In case of non-executive chairman, at least, one third of the Board should comprise of
independent directors; and in case of executive chairman, at least, half of the Board should
comprise of independent directors.

The expression ‘independent directors’ means directors, who apart from receiving director’s
remuneration, do not have any other material pecuniary relationship with the company.

(b) Audit Committee:

Some points in this regard are as follows:
 (1) The company shall form an independent audit committee whose constitution would be
as follows:

(i) It shall have minimum three members, all being non-executive directors, with the majority of
them being independent, and at least one director having financial and accounting knowledge.

(ii)The Chairman of the committee will be an independent director.

(iii)The Chairman shall be present at the Annual General Meeting to answer shareholders’
queries.

(2) The audit committee shall have powers which should include the following:

1.To investigate any activity within its terms of reference

2.To seek information from any employee

3. To obtain outside legal or other professional advice

4. To secure attendance of outsiders with relevant expertise, if considered necessary.

(3) The role of audit committee should include the following:

(i) Overseeing of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.

(ii) Recommending the appointment and removal of external auditor.

(iii) Reviewing the adequacy of internal audit function

(iv) Discussing with external auditors, before the audit commences, the nature and scope of
audit; as well as to have post-audit discussion to ascertain any area of concern.

(v) Reviewing the company’s financial and risk management policies.

(c) Remuneration of Directors:

The following disclosures on the remuneration of directors shall be made in the section on
the corporate governance of the Annual Report:

(i) All elements of remuneration package of all the directors i.e. salary, benefits, bonus, stock
options, pension etc.
 (ii) Details of fixed component and performance linked incentives, along with performance
criteria.

(d) Board Procedure Some Points in this Regards are:

(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4 months
between any two meetings.

(ii) A director shall not be a member of more than 10 committees or act as chairman of more
than five committees, across all companies, in which he is a director.

(e) Management:
A Management Discussion and Analysis Report should form part of the annual report to the
shareholders; containing discussion on the following matters (within the limits set by the
company’s competitive position).

(i) Opportunities and threats

(ii) Segment-wise or product-wise performance

(iii) Risks and concerns

(iv) Discussion on financial performance with respect to operational performance

(v) Material development in human resource/industrial relations front.

(f) Shareholders:
Some points in this regard are:

(i) In case of appointment of a new director or reappointment of a director, shareholders

must be provided with the following information:

1.A brief resume (summary) of the director

2.Nature of his expertise

3. Number of companies in which he holds the directorship and membership of committees of the
Board.

(ii) A Board Committee under the chairmanship of non-executive director shall be formed to
specifically look into the redressing of shareholders and investors’ complaints like transfer of
 shares, non-receipt of Balance Sheet or declared dividends etc. This committee shall be
designated as ‘Shareholders / Investors Grievance Committee’.

(g) Report on Corporate Governance:

There shall be a separate section on corporate governance in the Annual Report of the company,
with a detailed report on corporate governance.

(h) Compliance:
The company shall obtain a certificate from the auditors of the company regarding the
compliance of conditions of corporate governance. This certificate shall be annexed with the
Directors’ Report sent to shareholders and also sent to the stock exchange.

Topic 3 Social Responsibility of Corporate, Corporate Social Reporting

India is the first country in the world to make corporate social

responsibility (CSR) mandatory, following an amendment to The Company Act,
2013 in April 2014. Businesses can invest their profits in areas such as education,
poverty, gender equality, and hunger.

In the draft Companies Bill, 2009, the CSR clause was voluntary, though it was
mandatory for companies to disclose their CSR spending to shareholders. It is also
mandatory that company boards should have at least one female member.

CSR has been defined under the CSR rules, which includes but is not limited to:

 Projects related to activities specified in the Schedule; or

 Projects related to activities taken by the company board as recommended
by the CSR Committee, provided those activities cover items listed in the
Schedule.

Methodology of corporate social responsibility

CSR is the procedure of assessing an organization’s impact on society and

evaluating their responsibilities. It begins with an assessment of the following
aspects of each business:

 Customers;
 Suppliers;
 Environment;
 Communities; and,
 Employees.

The most effective CSR plans ensure that while organizations comply with
legislation, their investments also respect the growth and development of
marginalized communities and the environment. CSR should also be sustainable –
involving activities that an organization can uphold without negatively affecting
their business goals.

Organizations in India have been quite sensible in taking up CSR initiatives and
integrating them into their business processes.

It has become progressively projected in the Indian corporate setting because

organizations have recognized that besides growing their businesses, it is also
important to shape responsible and supportable relationships with the community
at large.

Companies now have specific departments and teams that develop specific
policies, strategies, and goals for their CSR programs and set separate budgets to
support them.

Most of the time, these programs are based on well-defined social beliefs or are
carefully aligned with the companies’ business domain.

CSR trends in India

FY 2015-16 witnessed a 28 percent growth in CSR spending in comparison to the

previous year.

Listed companies in India spent US$1.23 billion (Rs 83.45 billion) in various
programs ranging from educational programs, skill development, social welfare,
healthcare, and environment conservation. The Prime Minister’s Relief Fund saw
an increase of 418 percent to US$103 million (Rs 7.01 billion) in comparison to
US$24.5 million (Rs 1.68 billion) in 2014-15. The education sector received the
maximum funding of US$300 million (Rs 20.42 billion) followed by healthcare at
US$240.88 million (Rs 16.38 billion), while programs such as child mortality,
maternal health, gender equality, and social projects saw negligible spend.

In terms of absolute spending, Reliance Industries spent the most followed by the
government-owned National Thermal Power Corporation (NTPC) and Oil &
Natural Gas (ONGC). Projects implemented through foundations have gone up
from 99 in FY 2015 to 153 in FY 2016, with an increasing number of companies
setting up their own foundations rather than working with existing non-profits to
have more control over their CSR spending.

2017 CSR spends further rose with corporate firms aligning their initiatives with
new government programs such as Swachh Bharat (Clean India) and Digital India,
in addition to education and healthcare, to foster inclusive growth.

Corporate Social Reporting

Growth of corporate sector is the outcome of 20th century and number of

corporations is rapidly increasing throughout the globe. Increased number of
corporations not only domestic but global has led to the development of new type
of financial reporting. The concept of scattered ownership gave birth to the concept
of financial reporting whereas rapidly increased number of corporate sector
particularly industrial corporate sector has given birth to the social corporate
reporting.

Measurement and reporting of the social performance of profit oriented

corporations form the core of social corporate reporting.

“The term corporate social performance reflects the impact of a corporation’s

activities on the society. This embodies the performance of its economic functions
and other actions taken to contribute to the quality of life. These activities may
extend beyond meeting the letter of the law, the pressures of competition or the
requirements of contracts.”

American Accounting Association committee on measurement of social costs

supplement to the accounting review in 1974 has also emphasized on the role of
corporate form of organisations in attaining their operational goals such as
enhancement of profits by 8% p.a., increase in sales by 20%, a reduction in
pollution levels by 30% and employee mix reflects the mix of minorities in
working class where plants are located. General awareness among various classes
of society has led to serious debate on social desirability of industrial units. Social
accounting and reporting has emerged as contemporary accounting issues.

Problems and Prospects Concerning Social Corporate Reporting:

1. Interaction of Business with Society at Large:
A strong belief is that business carries out only economic functions of the society.
Business units have some type of social responsibility to society. Cannon chairman
of Marks and Spencer has rightly said that “Business only contributes fully to
society if it is efficiently profitable and socially responsible” Business should
undertake social activities with a business benefits is not a new concept. Wood
another author has rightly said that “The basic idea of corporate social
responsibility is that business and society are inter-woven rather than distinct
entities.”

2. Issues of Environments and Package of Financial Statements:

In past, only social accounting was prevalent and emphasis was only on social
disclosures. But in current global scenario, emphasis has shifted from social
accounting to green accounting. Earlier the financial statements were being
prepared for owners only, but now-a-days package of financial statements is
prepared for stake holders. Those stakeholders have not just interest in the affairs
of corporate unit, rather they also have keen interest on degree of influence over
the shaping of those affairs.

3. Transparency and Accountability:

The concept of accountability is not fully understood by managers and few of them
agree to the wider context within which the word accountability has been used
business, law, government, politics and morality. The notion of accountability is
commonly described in regard to organisation’s legal compliance and its financial
reporting to shareholders and governmental agencies.

Thus accountability is concerned with responsibility of supplying information and

the right to receive. Social responsibility is part of the reason for seeking greater
accountability from corporate management. This responsibility keeps on changing
and developing with the passage of time.

Nevertheless just because the natural responsibilities are difficult, if not impossible
to account for with accurate figures does not mean that such issues have to be
neglected. An accountable organisation has to bring transparency by supplying
financial and non financial information to all the stakeholders particularly other
than shareholders.
4. Stock Markets and Social or Environmental Disclosures:
Stock Markets throughout the world are playing a very dominant role for economic
development particularly in developed economies like Japan, UK, USA, etc.
Institutional investors are also playing their major role for fluctuations in share
markets indices. Market prices of shares of every corporate unit reflect financial
condition of corporate unit.

In most of the developed countries social and environmental disclosures in annual

reports do play very crucial role in quoting the market price of shares. Any
corporate unit cannot be run successfully without its concern for society in form of
social desirability of the corporate unit.

5. Accounting and Sustainability:

The central to any discussion of accounting and the environment is very
challenging and debatable question: Do we believe that the corporate unit which
accounting serves and supports can deliver environmental security and
sustainability? Sustainability relates to both present and future generations. Geno a
famous author has argued that sustainability is corner stone of green accounting.

6. Social and Green Accounting:

Social Accounting literature concentrated only the questions of how a corporate
unit should report on its social performance and how its performance should be
assessed. Now standards are being issued on social accounting and reporting for
instance, Global Reporting Initiative. Global warming is a burning issue for the
whole world and that has given birth to the Environmental or Green reporting.
Both country specific and comparative studies have recorded upward trend in
environmental disclosures through annual reports.

7. Environmental Issues and Auditing Practices:

Grey, a prominent author has identified an increasing concern amongst auditors
about potential risk exposure they face as a consequence of the environmental
impact on the business. There are growing demands upon auditors to include
environmental reports/data in their attestation of the financial statements. The main
problem which auditors face while doing audit practices is standards. Every,
accountant needs standards to do the audit concerning corporate social
responsibility.
8. “Environmental Influence” on Corporate, Managers, and Accountants:
Research studies have .identified a number of reasons why corporate might be
influenced to adopt more socially and environmentally responsible attitudes and
behaviour. Generally external pressures from stakeholders like customers,
competitors, environmentalists, NGOs, Governmental agencies etc. is there.

Corporate do environmental disclosures so as to satisfy needs of those

stakeholders. Researches have also identified number of reasons why corporate
might not be influenced to adopt environmental and social attitudes. One reason
may be additional costs involved for such social and environmental activities and
other reasons may be gathering of data, lack of understanding of the concepts of
environmental accounting.

9. Accounting Education:
A lot of research is still needed in the field of accounting education in general and
social and environmental in particular. Accountants themselves do not have
accounting knowledge and -practice particularly in environmental accounting.”
Another reason may be negative role being played by accounting teachers in the
area. Every business is an open system Corporate units have specific interaction
with, society. Corporate social responsibility is a part of the reason for seeking
greater accountability and transparency from corporate managements.

Topic 4 Corporate Governance and the Role of Board (BOD)

Understanding your roles and responsibilities should be your first task when
appointed. The board of directors is appointed to act on behalf of the shareholders
to run the day to day affairs of the business. The board are directly accountable to
the shareholders and each year the company will hold an annual general meeting
(AGM) at which the directors must provide a report to shareholders on the
performance of the company, what its future plans and strategies are and also
submit themselves for re-election to the board.

The objects of the company are defined in the Memorandum of Association and

regulations are laid out in the Articles of Association.

The board of directors’ key purpose is to ensure the company’s prosperity by

collectively directing the company’s affairs, whilst meeting the appropriate
interests of its shareholders and stakeholders. In addition to business and financial
issues, boards of directors must deal with challenges and issues relating
to corporate governance, corporate social responsibility and corporate ethics.

It is important that board meetings are held periodically so that directors can
discharge their responsibility to control the company’s overall situation, strategy
and policy, and to monitor the exercise of any delegated authority, and so that
individual directors can report on their particular areas of responsibility.

Every meeting must have a chair, whose duties are to ensure that the meeting is
conducted in such a way that the business for which it was convened is properly
attended to, and that all those entitled to may express their views and that the
decisions taken by the meeting adequately reflect the views of the meeting as a
whole. The chair will also very often decide upon the agenda and might sign off
the minutes on his or her own authority.

Individual directors have only those powers which have been given to them by the
board. Such authority need not be specific or in writing and may be inferred from
past practice. However, the board as a whole remains responsible for actions
carried out by its authority and it should therefore ensure that executive authority is
only granted to appropriate persons and that adequate reporting systems enable it
to maintain overall control.

The chairman of the board is often seen as the spokesperson for the board and the
company.

Appointment of directors

The ultimate control as to the composition of the board of directors rests with the
shareholders, who can always appoint, and – more importantly, sometimes –
dismiss a director. The shareholders can also fix the minimum and maximum
number of directors. However, the board can usually appoint (but not dismiss) a
director to his office as well. A director may be dismissed from office by a
majority vote of the shareholders, provided that a special procedure is followed.
The procedure is complex, and legal advice will always be required.

Roles of the board of directors

The roles of the board of directors include :-

 Establish vision, mission and values

 Determine the company’s vision and mission to guide and set the pace for its
current operations and future development.
 Determine the values to be promoted throughout the company.
 Determine and review company goals.
 Determine company policies

Set strategy and structure

 Review and evaluate present and future opportunities, threats and risks in the
external environment and current and future strengths, weaknesses and risks
relating to the company.
 Determine strategic options, select those to be pursued, and decide the
means to implement and support them.
 Determine the business strategies and plans that underpin the corporate
strategy.
 Ensure that the company’s organizational structure and capability are
appropriate for implementing the chosen strategies.
 PEST and SWOT analyses
 Determining strategic options
 Strategies and plans

Delegate to management

 Delegate authority to management, and monitor and evaluate the

implementation of policies, strategies and business plans.
 Determine monitoring criteria to be used by the board.
 Ensure that internal controls are effective.
 Communicate with senior management.

Exercise accountability to shareholders and be responsible to relevant stakeholders

 Ensure that communications both to and from shareholders and relevant

stakeholders are effective.
 Understand and take into account the interests of shareholders and relevant
stakeholders.
 Monitor relations with shareholders and relevant stakeholders by gathering
and evaluation of appropriate information.
 Promote the goodwill and support of shareholders and relevant stakeholders.

Responsibilities of directors

Directors look after the affairs of the company, and are in a position of trust. They
might abuse their position in order to profit at the expense of their company, and,
therefore, at the expense of the shareholders of the company.

Consequently, the law imposes a number of duties, burdens and responsibilities

upon directors, to prevent abuse. Much of company law can be seen as a balance
between allowing directors to manage the company’s business so as to make a
profit, and preventing them from abusing this freedom.

Directors are responsible for ensuring that proper books of account are kept.

In some circumstances, a director can be required to help pay the debts of his
company, even though it is a separate legal person. For example, directors of a
company who try to ‘trade out of difficulty’ and fail may be found guilty of
‘wrongful trading’ and can be made personally liable. Directors are particularly
vulnerable if they have acted in a way which benefits themselves.

 The directors must always exercise their powers for a ‘proper purpose’ – that
is, in furtherance of the reason for which they were given those powers by the
shareholders.
 Directors must act in good faith in what they honestly believe to be the best
interests of the company, and not for any collateral purpose. This means that,
particularly in the event of a conflict of interest between the company’s interests
and their own, the directors must always favour the company.
 Directors must act with due skill and care.
 Directors must consider the interests of employees of the company.

Calling a directors’ meeting

A director, or the secretary at the request of a director, may call a directors’

meeting. A secretary may not call a meeting unless requested to do so by a director
or the directors. Each director must be given reasonable notice of the meeting,
stating its date, time and place. Commonly, seven days is given but what is
‘reasonable’ depends in the last resort on the circumstances
 Non-executive directors

Legally speaking, there is no distinction between an executive and non-executive

director. Yet there is inescapably a sense that the non-executive’s role can be seen
as balancing that of the executive director, so as to ensure the board as a whole
functions effectively. Where the executive director has an intimate knowledge of
the company, the non-executive director may be expected to have a wider
perspective of the world at large.

The chairman of the board

The articles usually provide for the election of a chairman of the board. They
empower the directors to appoint one of their own number as chairman and to
determine the period for which he is to hold office. If no chairman is elected, or the
elected chairman is not present within five minutes of the time fixed for the
meeting or is unwilling to preside, those directors in attendance may usually elect
one of their number as chairman of the meeting.

The chairman will usually have a second or casting vote in the case of equality of
votes. Unless the articles confer such a vote upon him, however, a chairman has no
casting vote merely by virtue of his office.

Since the chairman’s position is of great importance, it is vital that his election is
clearly in accordance with any special procedure laid down by the articles and that
it is unambiguously minuted; this is especially important to avoid disputes as to his
period in office. Usually there is no special procedure for resignation. As for
removal, articles usually empower the board to remove the chairman from office at
any time. Proper and clear minutes are important in order to avoid disputes.

Role of the chairman

The chairman’s role includes managing the board’s business and acting as its
facilitator and guide. This can include:

 Determining board composition and organisation;

 Clarifying board and management responsibilities;
 Planning and managing board and board committee meetings;
 Developing the effectiveness of the board.

Find out more about director development and training.

Shadow directors

In many circumstances, the law applies not only to a director, but to a ‘shadow
director’. A shadow director is a person in accordance with whose directions or
instructions the directors of a company are accustomed to act. Under this
definition, it is possible that a director, or the whole board, of a holding company,
and the holding company itself, could be treated as a shadow director of a
subsidiary.

Professional advisers giving advice in their professional capacity are specifically

excluded from the definition of a shadow director in the companies legislation.

Code of Corporate Governance
Corporate governance refers to the accountability of the Board of Directors to all
stakeholders of the corporation i.e. shareholders, employees, suppliers, customers
and society in general; towards giving the corporation a fair, efficient and
transparent administration.

Following are cited a few popular definitions of corporate governance:

(1) “Corporate governance means that company managers its business in a manner
that is accountable and responsible to the shareholders. In a wider interpretation,
corporate governance includes company’s accountability to shareholders and other
stakeholders such as employees, suppliers, customers and local community.” –
Catherwood.

(2) “Corporate governance is the system by which companies are directed and
controlled.” – The Cadbury Committee (U.K.)

Certain useful comments on the concept of corporate governance are given

below:

(i) Corporate governance is more than company administration. It refers to a fair,

efficient and transparent functioning of the corporate management system.
(ii)Corporate governance refers to a code of conduct; the Board of Directors must
abide by; while running the corporate enterprise.

(iii)Corporate governance refers to a set of systems, procedures and practices

which ensure that the company is managed in the best interest of all corporate
stakeholders.

Need for Corporate Governance:

(i) Wide Spread of Shareholders:

Today a company has a very large number of shareholders spread all over the
nation and even the world; and a majority of shareholders being unorganised and
having an indifferent attitude towards corporate affairs. The idea of shareholders’
democracy remains confined only to the law and the Articles of Association; which
requires a practical implementation through a code of conduct of corporate
governance.

(ii) Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-

times; with institutional investors (foreign as well Indian) and mutual funds
becoming largest shareholders in large corporate private sector. These investors
have become the greatest challenge to corporate managements, forcing the latter to
abide by some established code of corporate governance to build up its image in
society.

(iii) Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public
confidence in corporate management. The event of Harshad Mehta scandal, which
is perhaps, one biggest scandal, is in the heart and mind of all, connected with
corporate shareholding or otherwise being educated and socially conscious.

The need for corporate governance is, then, imperative for reviving investors’
confidence in the corporate sector towards the economic development of society.

(iv) Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of
reasonable price, better quality, pollution control, best utilisation of resources etc.
To meet social expectations, there is a need for a code of corporate governance, for
the best management of company in economic and social terms.

(v) Hostile Take-Overs:

Hostile take-overs of corporations witnessed in several countries, put a question

mark on the efficiency of managements of take-over companies. This factors also
points out to the need for corporate governance, in the form of an efficient code of
conduct for corporate managements.

(vi) Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has
been a great increase in the monetary payments (compensation) packages of top
level corporate executives. There is no justification for exorbitant payments to top
ranking managers, out of corporate funds, which are a property of shareholders and
society.

This factor necessitates corporate governance to contain the ill-practices of top

managements of companies.

(vii) Globalisation:

Desire of more and more Indian companies to get listed on international stock
exchanges also focuses on a need for corporate governance. In fact, corporate
governance has become a buzzword in the corporate sector. There is no doubt that
international capital market recognises only companies well-managed according to
standard codes of corporate governance.

Principles of Corporate Governance:

(or major issues involved in corporate governance)

The fundamental or key principles of corporate governance are described

below:

(i) Transparency:
Transparency means the quality of something which enables one to understand the
truth easily. In the context of corporate governance, it implies an accurate,
adequate and timely disclosure of relevant information about the operating results
etc. of the corporate enterprise to the stakeholders.

In fact, transparency is the foundation of corporate governance; which helps to

develop a high level of public confidence in the corporate sector. For ensuring
transparency in corporate administration, a company should publish relevant
information about corporate affairs in leading newspapers, e.g., on a quarterly or
half yearly or annual basis.

(ii) Accountability:

Accountability is a liability to explain the results of one’s decisions taken in the

interest of others. In the context of corporate governance, accountability implies
the responsibility of the Chairman, the Board of Directors and the chief executive
for the use of company’s resources (over which they have authority) in the best
interest of company and its stakeholders.

(iii) Independence:

Good corporate governance requires independence on the part of the top

management of the corporation i.e. the Board of Directors must be strong non-
partisan body; so that it can take all corporate decisions based on business
prudence. Without the top management of the company being independent; good
corporate governance is only a mere dream.

Audit Committee
An Audit Committee may be defined as a committee or sub-group of the full Board
of Directors formed for overseeing and monitoring, on behalf of the board,
preparation of meaningful financial statements and reports, relying on senior finan-
cial management, internal and external auditors.

Composition of an audit committee depends on relevant provisions, if any, of

Statute(s) or requirements of stock exchanges and/or regulatory authorities like
SEBI.
Functions of Audit Committee:

An audit committee’s basic function is to act as a catalyst for efficient and trans-
parent financial reporting and as a bridge between the board, the internal auditors
and the statutory (external) auditors.

The major detailed functions of an audit committee include overseeing the process
of financial reporting and disclosure of financial information to ensure correct,
adequate and reliable financial statements; reviewing draft annual financial
statements with reference, inter alia, to changes in accounting policies and
practices, compliance with going concern assumption, accounting standards, legal
and stock exchange requirements, qualifications in draft auditor’s report, if any,
before submission to the board; discussing with management, internal and/or
external auditors the adequacy or otherwise of internal control and internal audit
systems, important findings of internal auditors (including irregularities) and
follow-up thereon; checking material defaults, statutory or otherwise.

Statutory Obligations of Audit Committee:

The new Section 292A introduced by the Companies (Amendment) Act, 2000,
contains detailed provisions relating to audit committee, which are
summarised below:

(a) Every public company having a paid-up capital of Rs. 5 crore or more must
constitute an audit committee.

(b) The committee shall comprise a minimum of 3 (three) directors and such other
number of directors as the Board may determine; two-thirds of the total number of
members of such a committee must be directors other than the managing or whole-
time directors. The members shall elect a Chairman of the committee from among
themselves.

(c) The committee shall act according to the terms of reference set in writing by the
Board. The auditor, the internal auditor, if any, and the director-in-charge of fi-
nance, must attend and participate at meetings of the committee without any voting
rights. The committee should interact periodically with the auditors about internal
control systems, scope of audit including observations of auditors, review half-
yearly and annual financial statements before submission to the Board and also
ensure compliance with internal control systems.
(d) The committee is empowered and authorised to probe any matter specified in
the terms of reference and, for that purpose, to have full access to information
contained in the company’s records and, if required, external professional expert
advice.

(e) The audit committee’s recommendations on financial management and audit

report shall be binding on the Board. The Board must record reasons for non-
acceptance of such recommendation, if any, and communicate the same to share-
holders.

(f) The annual report of the company must disclose the composition of the audit
committee.

(g) The Chairman of the committee must attend the company’s annual general
meeting to provide any clarifications on matters re: audit.

SEBI Requirements for Audit Committee:

The Kumarmangalam Birla Committee on Corporate Governance constituted by

the Securities and Exchange Board of India (SEBI) has made extensive
recommendations on audit committee vide paragraphs 9.1 to 9.10 of its report,
which are mandatory for companies whose shares are listed on stock exchange(s).

The major aspects of these recommendations are enumerated below:

(a) Audit committee is one of the essential tools of corporate governance, which

promotes an hierarchy of sound accountability and credibility in financial reporting
and fosters confidence of shareholders and investors.

(b) Audit committee is widely recognised as an effective instrument for overseeing

the financial reporting system.

(c) A qualified and independent audit committee should be constituted by the

Board of Directors of a company. Independence is determined or influenced by the
degree of economic or financial relationships of a director with the company, its
management or any other director except right to remuneration for attending board
meetings.
(d) Having regard to expertise and independence, an audit committee should have
at least 3 (three) members, being non-executive directors, majority being
independent, with at least one director possessing financial and accounting
knowledge. Executives considered appropriate, finance director and, if required, a
representative of the external auditor should be invited to meetings of the
committee. The Company Secretary should be the Secretary to the committee.

(e) The audit committee should meet at least thrice every year, once every six
months and once before finalisation of annual accounts. The quorum should be a
minimum of 2 (two) members or one- third of the members, whichever is higher,
with two independent members.

(f) The powers of the audit committee, which emanate from the Board’s au-
thorisation, include power to investigate any matter within the terms of reference,
to obtain information from the records or any employee(s) of the company, to
secure legal or other professional or expert advice, if required.

(g) The role and functions of an audit committee should include the following
major aspects:

(i) Overseeing and monitoring the process of financial reporting and disclosure of
financial information to ensure accurate, adequate and reliable financial statements.

(ii) Recommending appointment or removal of auditor and fixation of fees for

audit and other services, if any.

(iii) Reviewing draft financial statements before submission to the Board with
reference to going concern assumption; company’s financial and management
policies; changes in accounting policies and practices; major accounting entries
based on judgment exercised by management; compliance with accounting stand-
ards, legal and stock exchange requirements re : financial statements, if any;
material transactions of the company, if any, with promoters, their subsidiaries or
relatives conflicting with the company’s interests; reviewing with management,
internal and external auditors the adequacy of internal control systems and internal
audit functions (including coverage, frequency and reporting structure and
discussions on any significant findings thereof and follow-up thereon); discussion
with external auditors about nature and scope of audit before commencement of
audit, important adjustments arising out of audit and qualifications in draft audit
report; checking substantial defaults in payments to depositors, share-/debenture-
holders, creditors.

The directors and management of every concerned company should effectively

comply with the statutory provisions (Section 292A) and rules of relevant
regulatory agencies like SEBI, which has accepted the recommendations of the
Kumar Mangalam Birla Committee.

Corporate Excellence
Corporate Excellence is defined as the ability of the company to outsmart
Competitors consistently over a long period of time.  In this context, successful
organizations are different from excellent organizations.  Success may be of one
dimensions but excellence is of multiple dimensional in the company. In the ever-
changing business environment, the following are the critical areas that facilitate
the company to achieve excellence

(1) BUSINESS PROCESS REENGINERING:

As the business scenario is fast changing day by day, to meet the ever-changing
demands of the market the organizations need to restructure & redesign their
Business processes. The BPR facilities sweeping changes in all the functional areas
of the organization.  It reinvents the way the business is carried out, and ultimately
helps the company to engender corporate excellence. As, striving to become
excellent is a continuous process, corporate excellence can’t be a Destination, it is
a journey.

(2) GROWTH – SUSTAINABLE DEVELOPMENT:

The corporate objective of mere growth may just lead to maximization of sales
Revenue or profits, which don’t help the organization to be excellent.  Many
organizations are growing at a rapid speed, but they failed to develop consistently. 
Hence the companies need to redefine their objectives towards sustainable
development.

(3) CORE – COMPETENCE:
A unique strength either in technology or in the processing of functional areas, that
an organization enjoys exclusively and which can’t be copied by the competitors is
called – Core Competence. This unique strength helps the company to get
competitive advantage over a long period of time, which in turn facilitates the
company to excel.

Core competencies contribute significantly to customer benefits and satisfaction,

which is a primary aim of any business.  Core competencies help the firm in a
multifaceted manner.  A company can achieve competence superiority only by
means of core competence, and it will lead to corporate excellence.

E.g.: Honda has got its core competence in the design and manufacturing of
automobile engines.

(4) RESOURCE UTILIZATION:

Excellence in organization can be achieved through proper utilization of the basic

Human, Physical & financial, resources. New and advanced technologies have to
be adopted in all the functional areas like – production, marketing, finance, HRD,
of the organization.  Organizations need to strengthen their Research and
Development departments in order to embrace latest technologies.

(5) E-COMMERCE:

As the competition in business area is growing rapidly the business organizations

started redefining their business activities. According to Fortune Magazine –
“Electronic Commerce is the new industrial order.  It will change the relationship
between consumers & Producers.

As Electronic Commerce involves the exchange of products, Services, and

information of payment through the electronic medium of computers & networks,
it facilitates the continuum relation between the company and the customer, which
is a pre requisite for a company to excel.

(6) CRM  (CUSTOMER RELATIONSHIP MANAGEMENT):

In the process of achieving corporate excellence in the present day highly

competitive market, the organizations ability to compete depends on its
relationship with its target customers.  The basis for continuity of relation between
the company and the customer, over a period & time is value maximization to
customers, which will lead to customer loyalty.  In an attempt to achieve corporate
excellence the organizations should try to develop strong Customer Relationship
Management.

(7) SOCIAL CONSCIOUSNESS:

Organizations can achieve corporate excellence by means of contributing to the

well being of the society.  As the customers are becoming aware of the cause and
effect of polluted environment, all the business firms should have a concern for
society, by introducing ecologically friendly products or services.

Many companies in India are redesigning their business activities, giving

importance to society and are launching Non-Government Organizations.

Example :- Satyam Computers of Hyderabad started Byrraju Foundation, which

is    specialized in the field of rural development. Emergency ambulance services
by the name 108 has been a mega hit in various districts of Andhara Pradesh. 

Dr. Reddy’s Laboratories of Hyderabad floated Dr. Reddy’s Foundation in field of

youth welfare and development.

(8) BUSINESS ETHICS:

In order to achieve excellence, the companies should have basics positive values
and attitudes. Ethics deals with what is wrong and what is right in various
disciplines of the organization. Unethical practices may yield short term gains but
organization can’t be successful in the long run. The organization should develop
and formulate the right approaches and strategies to excel. Because it is to be noted
that being right in ethical behavior always pays off.

Besides the above said elements, there are certain areas by which corporate
excellence is facilitated in the modern business world. Young entrepreneurs and
business mangers must pay attention to all these areas in order to see their
organization excel

(a) EXCELLENCE THROUGH MANUFACTURING:

In the manufacturing area, a new concept called – World Class Manufacturing
( WCM ) has emerged recently. The companies adopting WCM are able to
introduce the products and services very much closer to the needs and wants of the
costumer. This helps the company to be successful because WCM has the
following characteristics

I) Products of high quality 
II) Products with enhanced features
III) Products at the right price. 

(b) EXCELLENCE THROUGH MARKETING MIX:

In the ever changing, highly competitive business field new directions have to be
shown in order to strive & ultimately to achieve corporate excellence.

All organizations, irrespective of the product they offer and the service they
provide are always in search of achieving excellence.  The basic area of concern to
accomplish corporate excellence is effective management of Marketing Mix of the
company. Innovation in product attributes, reasoning in prices, wide spread & easy
reach in placing, the right distribution networks, objective in promotion, are the
fields that a firm seeking excellence should concentrate on.

(c) EXCELLENCE THROUGH HRM:

Among all the organizational resources, the human resources are the most vital and
require constant refinement.  Organizational objectives and strategies must match
with HR strategies. Since the change is the fundamental element in achieving
corporate excellence, change management is to be backed by human resources of
the firm. The change can be facilitated by means of HR activity- Training. Hence
the training programmes in the new age business organizations should focus on –
Team work, leadership, initiation, interpersonal communication.

(d) EXCELLENCE THROUGH INFORMATION:

In this present networking era, information has become a major resource after
physical, financial, human resources of the organization. Proper management of
information is the best way to get competitive advantage. Computer based
information systems help the organization to convert raw data in to meaningful
information, which helps the manger in taking effective decisions, which in term
 improve business performance and ultimately lead to corporate excellence.
Information systems like TPS (Transaction Processing System), MIS (Management
Information Systems), DSS (Decision Support Systems), ESS (Executive Support
Systems) if used intelligently helps the organization to reach the pinnacle in the
competition.

Topic : Role of
Independent Directors
Role of an Independent Director

Independent Director acts as a guide, coach, and mentor to the Company. The role
includes improving corporate credibility and governance standards by working as a
watchdog and help in managing risk. Independent directors are responsible for
ensuring better governance by actively involving in various committees set up by
company

The independent directors are required because they perform the following
important role :

1. Facilitate withstanding and countering pressures from owners;

2. Fulfill a useful role in succession planning;
3. On issues such as strategy, performance, risk management, resources, key
appointments and standards of conduct he must support in gaining independent
judgment to bear on the board’s deliberations
4. While evaluating the performance of board and management of the company
bring an objective view
5. Scrutinizing, monitoring and reporting management’s performance
regarding goals and objectives agreed in the board meetings
6. Safeguard the interests of all stakeholders, particularly the minority
shareholders;
7. Balance the conflicting interest of the stakeholders;
8. Satisfying themselves that financial controls and systems of risk
management are in operation and check on the integrity of financial information
9. In situations of conflict between management and shareholder’s interest, aim
towards the solutions which are in the best interest of the company.
10. establishing the suitable levels of remuneration of

 Executive directors,
 Key managerial personnel
 Senior management

Duties of an Independent Director

The Independent Directors shall :

1. Undertake appropriate induction and regularly update and refresh their

skills, knowledge, and familiarity with the company
2. Attempt to attend company’s  general meetings
3. Attempt to attend BOD’s meetings and board committees meeting being a
member
4. Have adequate knowledge about the company and the external environment
in which it operates
5. Report matters concerning the unethical behavior, actual or suspected fraud
or violation of the company’s code of conduct or ethics policy
6. Acting within his authority, assist in protecting the legitimate interests of the
company, shareholders and its employees
7. Not to unfairly obstruct the functioning of the company or committee of the
Board
8. Participate in the Board’s committee being chairpersons or members of that
committee
9. Not to disclose confidential information, including commercial secrets,
technologies, advertising and sales promotion plans, unpublished price sensitive
information, unless such disclosure is expressly approved by the Board or required
by law
10. Ascertain and ensure that the company has an adequate and functional vigil
mechanism and to ensure that the interests of a person who uses such mechanism
are not prejudicially affected on account of such use.
Topic:
Protection of Stakeholders

General Rights of Shareholders

Record the amount of the investors’ shareholding in company’s records.

 The shareholder has the right to have the share ownership registered or to

 transfer the ownership and rights through a power of attorney or a special

authorization defined by the company for this matter. Receive the declared share
of the dividends distributed.

 Receive a share in the company’s assets in case of liquidation

. Receive information and data relating to company’s activities, its operational

 strategy and investment strategy on a periodic basis. Participate in the

company’s general assembly and vote on its decisions, unless
 the subject of vote is related to the shareholder’s personal interest Elect Board of
Directors members.

 Hold the Board of Directors or executive management accountable and sue

 them for responsibility in case if they fail to perform the tasks given to them.
The company must treat all shareholders’ holdings without discrimination. Each

 shareholder has voting rights equal to the number of shares registered in his
name. In addition, the company should not withhold any of the above mentioned
rights from any category of shareholders for any reason, or set in place any
standards which might lead to discrimination among shareholders in practicing
these rights, while not causing any damage to company’s interest or non-
compliance with the law and its bylaws and any of the instructions and regulatory
controls issued under it.

Stakeholder’s rights

Stakeholders are those individuals, institutions and bodies connected to NIC (such
as borrowers, creditors, investors, employees, and the society as a whole). NIC’s
policies and practices should:

 - Recognize the rights of stakeholders as established by the laws and regulations,

and encourage cooperation between NIC and its stakeholders in supporting
development, creating jobs for the national manpower, and the fostering of the
financial soundness of these corporations;

- Realize that an important aspect of good governance is to ensure funds’ inflows

and that their interest lies in the long term into supporting wealth creation through
joint cooperation and all stakeholders’ participation;

- Encompass principles that provide necessary protection to stakeholders’ rights,

particularly the rights of investors, borrowers and shareholders, so as to guarantee
the safeguard of its financial positions and to activate its role in serving the society
and the economic development process; and

- Ensure the rights of stakeholders to obtain effective redress for violation of their
rights.
 Where stakeholders participate in the corporate governance process, they should
have access to relevant information, according to the nature of their participation

Protection of stakeholder’s rights

The rules and procedures which would ensure the protection and
acknowledgement of stakeholders’ right including the following:

The protection rights of the Board of Directors members and related partie
conform to the various stakeholders parties, without any discrimination or
preferential conditions.

The procedures that will be followed in case any party fails to fulfill any of its
commitments, as well as the procedures to be followed for paying compensation
shall be noted within the contracts held between the company and stakeholders.

A mechanism for compensating stakeholders in case of violation of their rights

which are set by regulations and protected by contracts.

A mechanism demonstrating how the company builds strong relationships with

clients and vendors and maintains confidentiality with respect to their information

. A mechanism for settling complaints or disputes which could arise between

companies and stakeholders.

The company should set in place policies and internal charters which include a
clear mechanism for awarding different kinds of contracts and deals either through
tenders or various purchase orders. The mechanism should be fully disclosed.

Stakeholders do not get any preference through dealing in contracts and deals that
are carried out under company’s regular activities.

Participation of Stakeholders

The company should set mechanisms and charters that would ensure maximum
benefit is received from stakeholders’ contributions and encourage stakeholders to
participate in monitoring its activities.
 Periodically, provide stakeholders with access to reliable information and data
which are relevant to their activities on a timely basis.

Set appropriate mechanisms that would allow stakeholders to report to the

company’s Board of Directors on any improper practices which the company
exposes them to while providing them with adequate protection.

Topic : Changing Roles of

Corporate Boards with
changing times
The role of the board changes as the company grows and the management team
becomes more diverse, with a wide range of experts who can contribute to strategy
in different ways.

A company passes through several stages in its life cycle. In the first stage ‘Start-
up’ strategy is developed and implemented by the founder and a close team. At this
stage it is not often clear who is doing what. The team will switch from their
shareholder role, to their executive role and then their board role quickly whenever
the need arises. Usually, whichever role the founder plays most can be said to be
the place in the organisation where the strategy is developed.

As the company enters the second stage ‘Growth’ more people join and the roles
start to be defined with greater clarity. Skilled or qualified staff start to offer their
inputs to strategy and the board needs to be explicit about the sharing of the roles
to ensure that efforts are coordinated so that people feel engaged. Failure to
separate and define roles will lead to dissent and disorder. Failure to share
opportunities to contribute will disenfranchise management. The board need to be
especially vigilant that the founder does not continue to dominate the process
although they may still design the process so that the founder has the final say.

Eventually growth will start to slow down. This is a stage at which a company
needs to focus efforts on internal effectiveness, systems and processes. It is also a
stage during which the strategy development, in good companies, is formally
delegated to the now strong and experienced management team and the board
moves into the more traditional role of understanding, testing and endorsing
strategy. Much will depend on the decision of the founder to remain as an
executive (usually CEO) or to move to a non executive role (often Chairman but
not necessarily always so).

If the transition is an abrupt or unexpected slowing of growth and represents a

deviation from agreed plans it is not uncommon for a board, at this stage, to step in
and remove the CEO or undertake other actions to restructure management so as to
gain better visibility of the path ahead. If the transition is smooth, expected and
well prepared for then the role of the board is not as overt.

At this point the company needs to decide if there are additional activities they
wish to undertake that would effectively renew the organisation and continue the
growth or if they are happy to transition to a less volatile mature operating state as
the company becomes ‘Sustainable’ or ‘Mature’. This is the stage of life of most
large blue chip organisations. They undertake enough new developments to
maintain their sustainability but never so many that they revert to the risky volatile
growth phase. Outcomes are expected to conform to plans and the board spends as
much or more time monitoring strategy implementation as they do developing
strategy.

Finally the organisation will enter the stages of decline and, if this is not arrested
by reinvention, decay. A good board will be alert for indications that decline is
imminent and will ensure that management are challenged with the task of
developing new strategies for growth to counteract the tendency of the organisation
to drift into these stages. Companies in decline are often paradoxically very
profitable as investment in new lines of business and growth projects slows whilst
tried and tested products are efficiently produced and sold.

Many family businesses enjoy this phase as a means of creating funding for the
retirement of the founder. Other businesses work hard to transcend the tendency
towards decline and decay. The board may, again, need to become more active
(and possibly even forceful) to ensure that management focus their efforts
appropriately depending on the owners’ desires for the organisation.

Some not-for-profit businesses look forward to these stages as they will indicate
that the mission has been achieved; when a cure is found for cancer most cancer-
 related charities will focus on transitional arrangements to assist current sufferers,
on providing information about the cure and on closing down in an honourable
manner. A few will move into other disease related work whilst most will seek to
exit the marketplace. For commercial companies the imperative will be to either
create new business streams or to return capital to the shareholders whilst meeting
obligations to stakeholders. The board must step into their role as the ultimate
endorsers of strategy during these phases.

1. Board meetings feature a range of ideas and viewpoints. Directors

themselves should represent a diversity of perspectives to improve the group’s
collective decision-making. Gender and ethnic diversity certainly help in this
regard, but they are not enough: Additional sources of heterogeneity — such as age,
industry or educational specialties, and international experience — also increase the
potential range of innovative ideas.

Diversity may be an obvious goal, but is often elusive in practice. A recent study
indicates that directors with similar backgrounds (male, financial experience,
served on other boards) remain overrepresented today, with negative impacts on
firm performance.⁶ This does not mean that companies should try to “check every
box” of representation, which risks a bloated and ineffective board. However, they
should ensure that a variety of viewpoints and backgrounds are always represented.

Board meetings should regularly involve external experts, adding fresh

perspectives that can be tailored to the most pressing issues. To ensure that outside
voices are integrated into the strategic process, directors should also be chosen for
their ability to engage in productive debate — for example, being receptive to new
views, challenging others’ ideas in a constructive manner, and being motivated to
engage in strategy deeply and collectively.

2. The board challenges management adeptly — and management is

receptive to challenge. No matter how capable the executive team is, an external
perspective can always help ensure the strategy is more robust. However, board
members may have difficulty asking the tough questions — perhaps because they
do not know what or how to probe, due to information asymmetry; or perhaps
because they do not want to appear disruptive. (This is a long-standing problem:
As Warren Buffett wrote thirty years ago, “At board meetings, criticism of the
CEO’s performance is often viewed as the social equivalent of belching.”⁷) And
some CEOs are less receptive to challenges, perceiving tough questions as hostile.
 To avoid these pitfalls, directors must act as “loyal critics,” mastering the art of
challenging management while preserving trust. This starts by building a working
relationship outside of formal meetings, so directors know what issues to focus on
and the CEO is prepared to engage productively in the process. Then, the board
should ask challenging questions — ones that make critical hidden details explicit
by foregrounding strategic assumptions and essential features of the broader
context. Examples of probing questions include:

 What are plausible scenarios for the future of our industry?

 Will our strategy be robust to changes in the macro environment?
 What are the sensitivities of key assumptions?
 How do you ensure adequate implementation of the strategy?
 Do we have the right talent to execute it, for now and the future?
 What are the potential downside risks and mitigation plans?

The board and management should iterate until these questions are answered with
sufficient clarity and precision. To ensure every decision receives thorough
scrutiny, directors might institute a rule of “compulsory dissent”: No strategy may
be endorsed until at least one robust counterproposal has been explicitly offered
and considered.

3. Directors monitor execution of the strategy. Execution cannot be

separated from strategy — they are intertwined. Just as the approach to strategy
should be modulated according to the environment, so too should the approach to
execution. The board can play a vital role in ensuring that strategy is implemented
throughout the organization, but it can be difficult in practice: According to a
National Association of Corporate Directors survey, 67% of directors say it is
important to improve their monitoring of strategy execution.

Effectively monitoring strategy execution is not as simple as watching a dashboard

of results. The board should make sure that management is evaluated on both
financial and non-financial dimensions, with a clear prioritization of metrics in line
with the firm’s overall goals. This avoids the pitfalls of an excessively long list of
measurements, in which a few good ones can be highlighted while others are
explained away or overlooked.

Additionally, directors should meet with management frequently to test that the
original assumptions behind the strategy still hold. Follow-up meetings should
involve not only the CEO but other layers of management, ensuring that strategy is
 being implemented throughout the entire organization. These can be
complemented by employee surveys to understand the execution in even more
detail. For example, during a large transformation, the board might identify where
in the organization employees do not understand the strategy, do not see progress
in the change effort, or do not believe they have sufficient resources to implement
it.

4. Boards dedicate more time to strategy and keep discussions

focused. Given directors’ other responsibilities and the infrequent nature of board
meetings, it is challenging for them to stay up to date on key trends and
continuously validate the firm’s strategic direction. Though directors say they want
to spend more time on strategy, the reality is that instead they are increasing their
time spent on other topics, such as governance and risk.

To ensure sufficient focus on strategic topics, boards should schedule dedicated

time to discuss strategy in the agenda of every board meeting — not only on an
annual cycle. Furthermore, a robust knowledge system can give directors the
information they need: Frequent updates should keep directors apprised of changes
in the environment and resulting impacts on firm strategy. Extensive
communication before and after board meetings can streamline the sessions
themselves, freeing up time for strategic discussion. And directors should have
access to a repository of on-demand materials to increase their inside knowledge of
the company.

Time and information alone are not sufficient, however: Even when time has been
carved out for strategy, the discussion often devolves quickly to more familiar
territory, such as granular details or the firm’s current operations. For example, if
the board intends to discuss marketing strategy, it may soon find itself focusing on
sales strategies instead, and eventually questioning the firm’s practices in
managing a sales force. These discussions may yield useful suggestions, but by
ignoring the bigger picture, they represent a missed opportunity for the board to
add even more value. The best board chairs can keep discussion focused on key
strategic issues — a very difficult task, but one that is crucial.

A changing business environment calls for an enhanced role of directors in relation

to strategy. Strategy is becoming more challenging yet more important, increasing
the value of boards that can actively partner with management and guide the
company’s future direction. By practicing “self-activism” — challenging
assumptions, offering counterarguments, and closely monitoring execution — 
boards can help develop a strategy to succeed in the modern age.