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Public Enterprise:

Accountability and





After reading the unit you should be able to:

Understand the meaning & scope of Corporate Governance, Social Responsibility & Scope of Social Audit of PEs;

Appreciate the need and importance of Corporate Governance of Social Responsibility in the changes Scenario; and

Discuss the Social Responsibility in PEs.


  • 9.1 Corporate Governance: Concept

  • 9.2 Committee Recommendations on Corporate Governance

  • 9.3 Coporate Governance in Public Enterprises

  • 9.4 Social Responsibility Strategies

  • 9.5 Social Audit- Introduction

  • 9.6 What is Social Audit

  • 9.7 Social Audit in India

  • 9.8 Benefits of Social Audit

  • 9.9 Summary

    • 9.10 Self Assessment Questions

    • 9.11 References

    • 9.12 Further Readings


“A code of corporate governance cannot be imported from outside, it has to be developed based on the country’s experience. There cannot be any compulsion on the corporate sector to follow a particular code. An equilibrium should be struck so that corporate governance is not achieved at the cost of the growth of the corporate sector.

—Sir Adian Cadbury

What is Corporate Governance?

Corporate Governance has succeeded in attracting a good deal of public interest because of its importance for the economic health of corporation and the welfare of society, in general. However, the concept of corporate governance is defined in several ways because it potentially covers the entire gamut of activities having direct or indirect influence on the financial health of the corporate entities. As a result, different people have come up with different definition, which basically reflect their special interests in the field. The best way to define the concept is perhaps to list a few of the different definitions rather than mentioning just one or two.



Adolf Berle has defined social responsibility as “the manager’s responsiveness to

public consensus”


Corporate Governance and Corporate Social Responsibility

Koontz and O’Donnell have given the definition of social responsibility thus: “The

personal obligation of the people as they act in their own interests to assure that the rights and legitimate interests of others are not infringed”

(Hindu business line, 1998).

Corporate Governance can be defined as a systematic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, we believe that the governance process should ensure that these companies are managed in a manner that meets stakeholders aspirations and societal expectations. (Chartered Secretary, Oct, 1997).


Cadbury Committee (1991)

The Cadbury Committee, under the chairmanship of Sir Adrian Cadbury, was set up by the London Stock Exchange in May 1991. The committee, consisting of representatives drawn from the top levels of British industry, was given the task of drafting a code of practices to assist public enterprise. In defining and applying internal controls to limit their exposure to financial loss, from whatever cause.

Birla Committee (2001)

The first formal committee was appointed by Securities and Exchange Board of India (SEBI), under the Chairmanship of Kumara Managalam Birla (known as Birla Committee). This was set up after the CII code on corporate governance was framed; to study the corporate governance from listed companies’ perspective and culminated when its recommendations were included in the listing agreement.

The recommendations were applicable to listed companies; their directors, management, employees and professionals associated with such companies and other bodies corporate.

The major recommendations of Birla Committee on corporate governance were:

The Board of directors of a company should have an optimum combination of executive and non-executive directors with not less than 50% of the Board consisting of non-executive directors. In case the company has a non-executive chairman, at least one-third of the board should consist of independent directors.

Board meetings should be held at least four times in a year with a maximum time gap of four months between any two meetings.

The Board should set up a remuneration committee to determine the company’s policy on specific remuneration packages for executive directors.

The Board should set up a qualified and independent audit committee.


Public Enterprise:

Accountability and


Companies should required to give consolidated accounts in respect of all their subsidiaries. A company having multiple lines of business should be segmental reporting.

A management discussion and analysis report should form part of the annual report to the shareholders covering industry structure, opportunities and threats, segment wise or product wise performance, outlook, and risks.

Companies should arrange to obtain certificates from their auditors regarding compliance of corporate governance provisions and the certificates should be sent to stock exchanges and all the shareholders.

As mentioned, these recommendations were incorporated in the listing agreement (Clause 49) and were sought to be implemented within a time frame of three years. Later, these recommendations got statutory recognition when they were introduced a provisions in the Companies (Amendment) Act, 2000.

Naresh Chandra Committee (2002)

Following the Enron fiasco and subsequent enactment of Sarbanes-Oxley Act in the US, Government of India [Department of Company Affairs (DCA)] had set up another committee to study corporate governance. This committee was formed under the Chairmanship of Naresh Chandra (known as Naresh Chandra Committee/NC Committee).

This committee examined various governance issues, such as:

  • a) Statutory Auditor – company relationship including independence of Audit functions and restriction on non-audit services.

  • b) Need for rotation of statutory audit firms.

  • c) Advantages of setting up an independent regulator.

  • d) Role of independent directors for their composition in Board.

After discussions with trade associations and professional bodies the committee made the following recommendations.

Disqualification for audit assignments like prohibition of non-audit services and any direct financial interest or any other business relationship with the audit client by the audit firm.

Prohibition of service during cooling off period i.e., no partner or member of the audit team can joint the audit client nor any key officers of the client can join the audit firm during this cooling off period (two years)

Prohibition of undue dependence on an audit client; audit fee received from any one audit client and its subsidiaries should not exceed 25% of the total revenues of the audit firm.

A special resolution should be passed in case an auditor is to be replaced, who is otherwise eligible for re-appointment and an explanatory statement should disclose management’s reasons for such replacement.

In case of all listed companies and companies whose paid up capital and free reserves exceeds Rs. 10 crore or a turnover of Rs. 50 crore, there should be certification by the CEO and the CFO to the effect that they have reviewed the financial statements and that these statements reflect a true and fair picture of the company.

Independent directors should play a vital role in the board and all the committees should be constituted of independent directors.


The minimum Board size should be at least seven, of which four should be independent directors.

To specifically exempt independent directors from certain criminal and civil liabilities.

DCA should encourage institutions to have regular training programs for independent directors and make it mandatory for such directors to attend these training sessions before assuming responsibilities.

Corporate Governance and Corporate Social Responsibility

Unlike the Birla committee, this committee focused on corporate governance from the perspective of companies in general, without bifurcating as listed or unlisted.

Narayan Murthy Committee

After this study, SEBI appointed a second committee under the chairmanship of N.R Narayana Murthy to analyze the compliances of clause 49. Narayana Murthy committee focused mainly on the role of the audit committee and the board composition, particularly independent directors. The objective of this committee was to examine and recommend amendments to the law in order to maintain high standards of corporate governance and also to ensure that corporate governance is looked beyond mere procedures and is implemented by companies to is protect the interests of shareholders.

The recommendations of the committee, in short, are:

Audit committees should consist of members who are ‘financially literate’ i.e., ability to read and understand basic financial statements.

Audit committees of listed companies should review the financial statements and certify that they are true and report any material deviations from prescribed accounting standards if any.

A statement of all transactions with related parties should be placed before audit committee for formal approval.

Procedures should be in place to inform board members about the risk assessment and minimization procedures.

To lay down the code of conduct for all the board members and senior management.

Nominee directors, if appointed, shall be only by the shareholders and institutional directors shall be subject to same liabilities as other directors.

Non-executive director’s compensation should be fixed by the board and should be approved by the shareholders.

Companies to frame policies, where by personnel who observe any unethical or improper practice are able to approach the audit committee directly. Further, companies should affirm annually that they have provided protection to such ‘whistleblowers’.

A close look at the amendments proposed in the Companies (Amendment) Bill, 2003 reveals that the changes proposed are based upon the recommendations of Naresh Chandra Committee and Narayana Murthy Committee.

Hopefully, these recommendations when accepted in true spirit, should raise the standards of corporate governance in Indian firms and make them attractive for domestic and global capital and should form as base for further evolution of structure of corporate governance.


Public Enterprise:

Accountability and



Public sector enterprises are ‘generally autonomous bodies’ which are owned and managed by the government and which provide goods or services for a price. The ownership of the government extends to 51 percent, or more, in order to make it a public enterprise/entity. Public enterprises are considered as important instruments for self-reliant economic growth. They also help speed up economic growth, provide the required infrastructure, act as tools to achieve various social objectives like better distribution of income, expansion of employees’ employment opportunities, removal of regional imbalances, reducing concentration etc. From a paltry Rs. 29 crore in 1951- 52, with 29 PEs the investment in the central public sector went up to well over Rs. 6,00,000 crores by 2000 with 240 PEs.

Public enterprises have been organized in many ways as distinct autonomous units, with varying degrees of legal and operational independence. Where an autonomous legal entity is established by an Act of Parliament or legislature, it is called ‘public corporation’ or ‘statutory corporation’. These are the principally chosen as instruments for the management of nationalized industries. The other popular method followed is forming government companies under the provisions of the Companies Act, 1956 (Sec. 617), in which not less than 51 percent of the paid-up share capital he held by the central or the state governments, or jointly by the central and state governments. A subsidiary of a government company is also a government company.

The Board of Directors is the top management organ, and is responsible for implementing the objectives of an enterprise. The board members are nominated by the shareholders, i.e., government. Under the normal pattern, it includes the Chairman-cum-Managing Director, one or more full-time functional directors, officials representing and administrative ministry of finance, and sometimes one or two other relate ministries, and lastly, one or two non-officials, selected for their expertise and business experience. Under the trusteeship and entrepreneurial functions concept, the board looks after its various categories of functions – establishment of basic policies including corporate strategies, decisions on major financial matters, selection of key personnel, receiving working reports and, reviewing and passing judgment upon them.

The functioning of PE boards has been subjected to criticism on various grounds. The various practices followed, it is complained, do not facilitate the emergence of an autonomous enterprise management with initiative and operating effectiveness, and yet be responsible and responsive to the government guidelines and policies. The 40 th Report of the Committee on Public Undertaking (73-74) regretted that the performance of public undertakings continues to be judged by a variety of vague objects and considerations. It recommended government presenting a white paper which can set out the framework of governments general, economic, financial and social strategy for public sector undertakings, micro-objects – both financial and economic – of each public undertaking and their review, and also qualification of their social objectives and obligations and the issue of government directives in appropriate cases. The nomination of government officials, according to experience, has also to be termed as superfluous and non-functional. The enterprises are also facing problems as the government is not strictly adhering to the policy that all heads of public enterprises will have a five-year tenure. This was accepted to improve the efficiency of top management.


Obligation to the Public Sector Enterprise

  • a) The role of the executives is to assist the PSE to achieve its objectives as spelt out in the charter constituting the setting up of the enterprise.

Corporate Governance and Corporate Social Responsibility

  • b) It is the obligation of every employee of the public sector administrative ministry to uphold the Rule of Law and respect for human rights solely in the public interest while making recommendations or exercising administrative authority. He or she must maintain the highest standards of probity and integrity.

  • c) In relation to the general public, the employees in the PSE and administrative ministries should conduct themselves in such a manner that the public feels that the decisions taken or the recommendations made by them are objective and transparent and are not calculated to promote improper gains for the political party in power or for themselves or for any third party. This would be particularly significant so far as the customers of the public service are concerned. This will apply also mutatis mutandis to the employee in the administrative ministry concerned with the PSE.

  • d) Employees of the PSEs/administrative ministries should not seek to frustrate or undermine the policies, decisions and action taken in the public interest by the management decision. Where following the instruction of the superior authority would appear to conflict with the exercise of impartial professional judgment or affect the efficient working of the enterprises, he/she should set out points of disagreement clearly in writing to the superior authority or seek explicit written instruction. This will apply also mutatis mutandis to the employee in the administrative ministry concerned with the PSE.

  • e) Where an employee of the PSE has reasonable ground to believe that he or she is being required by the superior authority to act in a manner which is illegal or against the prescribed rules and regulations or if any legal infringement comes to his or her notice, he or she should decline to implement the instruction, and would also have a right to bring the facts to the notice of the Chairman / Managing Director of the enterprise or the Secretary of the Administrative Ministry / the Cabinet Secretary to examine the issue carefully to concerned employees in the administrative ministry.

Accountability and Responsiveness to the Public

  • a) Consistent with accountability to the superior officers and the ministers in accordance with provisions governing PSE/administrative ministry, the employees in the public sector should practice accountability to the people in terms of quality of service, timeliness, courtesy, people orientation on readiness to encourage participation of and form partnership with citizen groups, for responsive management.

  • b) Employees in the PSE/administrative ministry should be consistent, equitable and honest in their treatment of the members of the public, with particular care for the weaker section of society and should not even be or appear to be unfair or discriminatory. Decision in pursuit of discretionary powers should be justifiable on the basis of non arbitrary and objective criteria.

  • c) Employees in the PSE/administrative ministry should accept the obligation to recognize and enforce customers right for speedy redressal of grievance and commit themselves to provide services of declared quality and standard to customers.

  • d) Employment in the PSE/administrative ministry should respect the right of public to information on all activities and transactions of the organizations except where they are debarred in the public interest from releasing information by provisions of law or by valid instructions.


Public Enterprise:

Accountability and


Concern for Value of Public Assets and Funds

The employees in the PSE/administrative ministry should avoid wastage and extravagance and ensure effective and efficient use of the public money within their control.

Non Abuse of Official Position

Employees of PSE/administrative ministry have a responsibility to make decisions on merits. They are in a position of trust. They must not use their official position to influence any person to enter into financial or arrangements with them or with any one else. They must not abuse their official position to obtain a benefit for themselves or for someone else in financial or some other forms. This will apply also mutatis mutandis to the employee in the administrative ministry concerned with the PSE.

Continuous Improvement through Professionalism and Teamwork

It shall be the duty of every employees of the PSE/administrative ministry to continuously upgrade his/her skills and knowledge, strive for creativity and innovation and nurture the values of team working and harmony. He / she should promote and exhibit public and private conduct in keeping with the appropriate behaviour and standards of excellence and integrity. He / she should support the junior in the latter’s efforts to resist wrong or illegal directives and in abiding by the Code of ethics. At the same time, they should reward good work and publish any dereliction of duty and obligations based on objectives and transparent criteria.

Public Accountability

For accountability in the case of central government enterprises, the appropriate legislature is Parliament, and for state-owned enterprises, the respective state assemblies. The principle followed here is, as Mr Appleby observes: “Parliament performs quite admirably when it debates the important questions of Policy. The wisdom of non individual is substitute for the general wisdom of society, and the general judgment of society is more closely approximated by a representative legislature than by any other entity”.

PEs come in for parliamentary consideration through debates, short discussion, questions, Committee on Pubic Undertakings, and also public inquiry recommendations made by COPU. The feeling is that MPs are mostly interested in raising issues of topical nature and those effecting their constituency / state and do not raise critical issues, such as the government’s failure to fulfil promises made in various policy statements, eg., Policy Statement of July 1991. The COPU examines the reports and accounts of PEs, examines the Management Review and Responsibility

Appropriate Governance Model for PEs

In the literature on corporate governance a distinction is drawn between the “insider model” and the “outsider model” of corporate governance. The insider model is one in which a compact group of shareholders business families/houses in India and East Asia exercise full control over the corporate entity in such a way that the professional managers hardly enjoy any decision making powers. Overwhelming part of the Indian corporate economy has adopted the insider model of corporate governance. The board of directors of such companies are often rubber-stamping authorities with the boards concurring with almost all the proposals made by the controlling families. The outsider model of corporate governance is characterized by a separation of control


from ownership arising separation of control from ownership arising from a widely dispersed equity ownership among large number of institutional and innumerable small shareholders. Consequently governance such corporate entities vests with professional managers and their board of directors. Growing importance of the economies of scale and scope has necessitated birth of the large firm with its necessitated birth of the large with its distant shareholders and professional managers who have to handle complex tasks and responsibilities.

Corporate Governance and Corporate Social Responsibility

In the case of insider model, the debate on good governance is concentrated on ensuring that the controlling business family does not appropriate most of the gains. Several studies on the last East Asian Crises have highlighted that the insider model of corporate governance prevalent in these countries was largely responsible for aggravating the seriousness of this crisis. In the case of the outsider model, the main concerns relate to devising mechanisms to tackle what is known as the agency problem viz., how to ensure that professional managers function in the interests of shareholders and the stakeholders.

In the case of PEs ascertaining wishes of the ultimate shareholders (Voters) is difficult since it is not a practical proposition to put board resolutions for voting at the AGME/EGM in the same manner as in the case of typical listed company. The common voters elect their representatives who in turn form a government in turn is supposed to ensure that voters wishes are translated into concentrate actions.

“In reality far more complex problems arise especially because the layered and hierarchical principal-agent structure that characterizes the public sector ownership. The ultimate owners of the public sector entities viz., the voters express their interests / objectives in a diffuse, indirect and cultured up manner. However, when the governments/ politicians act on behalf of the owners or the voters to crystallize owners/voters’ interests in terms of specific objectives, they are prone to could these objectives to the extent that their self interests influence interpretation of voters objectives. Since governments / politicians act as principals through civil service, another layer is added to the principal-agent chain. Civil servants too are liable to act as agents by allowing their own objectives to dominate their own actions during administration of public entities.

One may argue that already we have eminent bodies like the Public Enterprise Selection Board (PESB). The PESB recommends personnel for the posts of Chairman, Managing Director, Chairman & Managing Director (CMD) and Functional Directors in PEs as well as posts at any other level. PESB is also expected to advise the government on such matters as (A) the desired structure of the boards, (b) performance appraisal system for both PEs and their managerial personnel, (c) build data bank on the performance of the PEs and their key personnel, (d) formulation and enforcement of code of conduct for PEs managerial personnel and (e) suitable training and development programmes for management personnel in PEs. Despite all these lofty goals placed before the PSEB, the matters have not improved much in regard to the PEs. Complaints about their performance in all the matters vested with the PESB continue to be voiced, sometimes loudly even in highly respectable and responsible quarters. Instances of PEs remaining headless for long periods of their boards not being constituted with adequate number of functional and independent directors continue to be frequent and numerous. Quite often the appointment process gets bogged down because of complaints with regard to integrity of the candidates being considered for the PEs boards. There are also instances of spurious complaints lodged by competing candidates, thereby necessitating vigilance inquiries. In many instances it is a hurdle race especially for competent and clean candidates, who often prefer to remain out of the race if they attack higher value to enjoying peace of mind.


Public Enterprise:

Accountability and




The growth of large corporations with their professional managers has changed the nature of society through its effect on competitive forces and the ownership of private property. With their increases power in society, they are forced to concern themselves with the nature of social responsibilities. Management must take decisions involving moral issues and must adapt itself to the social forces that affect it. The idea of social responsibility of business is based upon the concept that business is something more than a purely economic institution.

Public Enterprises operates within the precincts of the society. While its immediate society, where it operates, provides its environment, material, manpower, market etc. the whole global society provides for its global corporate citizenship and ensures its facilities in terms of environment, market, perspectives, exposure to technology and integration with priorities in the business scenario. The social responsibility of Public Enterprises consists of its responsibility to its consumers and customers, its prospects, its immediate society (community), its human resources (people), its society at large, ecological environment, the Government, and its business environment. Social responsibility of business is not new to our country. In the olden days, whenever there was a famine, the leading businessmen of the area would literally throw open their godowns and their treasure chests to provide food and other assistance to the needy. The history of every region of this country is replete with stories of the magnificent manner in which businessmen rose to the occasion in times of calamity. Even in ordinary times, it was the businessmen who looked after the welfare of the destitute, the goshalas, wells and ponds wherever what was difficult to get, the pathashalas and so on. So to accept social responsibility is no more than rededicating ourselves to the cherished values in the field of business. Gandhiji reminded of these values when he propounded the theory of trusteeship. India is a democratic welfare state. She wants to achieve welfare through democratic means. Business organization, which fit in with such a specification, would have a better scope to survive and grow here. In order to make them suitable for such a business environment, they should foster a corporate objective of maximizing social benefit. This must be considered as the social responsibility of business. It pertinently means that every business enterprise has a responsibility to take care of the society’s interest.

Though the fundamental purpose of Public Enterprises is to produce and distribute goods and services in such a manner that income exceeds costs, society expects that business is conducted in a socially responsible manner. Social responsibility embraces multitude of internal and external relationships of the firm. Business enterprises, conscious of their social responsibility, would seek to comply with the laws concerned with employment of women, non-discrimination in employment, ecological effects of production, consumers, and employee welfare, and in general they would think of the impact their action on the community.

Social and ethical aspects of business impinge upon the choice of strategy. How societal values and expectations after business and how a firm perceives its social and ethical obligations are interactive in character and both of these may become constraints in strategy formation. That how consumerism, occupational health and safety, product safety, concern for environmental protection, nutritional issues, beliefs about ethics and morals and other for environmental protection, nutritional issues, beliefs about ethics and morals and other similar societal based factors impact upon the strategies have to accommodate these factors. Some instances can be cited. Most of the Public and Private Enterprises adopted the villages for development. Most of the Enterprises launched awareness camps about AIDS. Cigarette manufacturers have reduced the tar and nicotine content of cigarettes. Food processors have altered the use of preservatives in food products and have begun to

  • 44 promote nutritional content and “natural” flavours.

The lending institutions have given up their overly concern with safety or security of money advanced and are now more concentrating on the competence of the entrepreneure and commercial viability of the project. All these instances demonstrate how business has adapted itself to changing social values and expectations.

Corporate Governance and Corporate Social Responsibility

Running the enterprise in a “socially responsible” manner implies that the activities of the organizational are in tune with what is generally perceived as in the public interest. It also implies that the firm responds positively to emerging societal priorities and balances the interests of its various stakeholders. Further, it realizes the importance of being “good citizen” in the community and makes social and ethical obligations an explicit and high priority consideration in conducting its affairs.

Being “socially responsible” has a positive appeal. The organization improves its standing in the public, which has the effect of enhancing its own performance opportunities. If the firms ignore the changing priorities and expectations of society, the result could be greater public criticism and more onerous regulation by government.

Concern for social responsibility has led to the development of (more or less) formal procedures to monitor corporate compliance with changing demands. One such procedure is “social audit”. It is also common knowledge these days that business has attempted through advertising and public relations activity to explain and accentuate its consistency with various social objectives. Recognition of the need for social responsibility has also led several large enterprises to make intentional efforts to increase their sensitivity towards current and future pressures for changes in social expectations.


In view of the ongoing controversy regarding whether or not a business has social responsibility, it is not surprising to find a wide range of industry responses to the issue. Business responses to social responsibility tend to fall within four categories: (i) Social opposition, (ii) social obligation, (iii) social response, and (iv) social contribution. As illustrated in Fig. 9.1, these positions fall along a continuum, ranging from low to high levels of socially responsible behaviour.

Responsibility Degree of Social
Degree of
Responsibility Degree of Social So Obli Contribution Social Response Social
So Obli
So Obli
So Obli
Responsibility Degree of Social So Obli Contribution Social Response Social



Contribution Social



Response Social

Figure: 9.1: Approaches to Social Responsibility Source: Gene Burton and Manab Thakur, Management Today


Public Enterprise:

Accountability and


Social opposition: This view is taken by the business which feel that they have no obligation to society in which they operate. When they are caught for any offense, their immediate responses is to try cover it up while denying it.

Table 9.1: Common Characteristics of Socially Responsible Firms

  • 1. Initially founded by far-sighted people who visibly set the firms moral tone.

  • 2. Stuck to the basics and produced only high quality goods and services for specific market niches.

  • 3. Developed a public image that emphasized that commitment to quality and often used non-traditional means to promote it.

  • 4. Firmly practiced the dual principles of self-management and decentralization.

  • 5. Brought in outside people to provide needed talent and additional perspectives.

  • 6. Encouraged all employees to become part of the shared mission through full worker participation in decisions.

  • 7. Paid fairly and usually offered benefit packages exceeding the competition.

  • 8. Emphasized a democratic people orientation and did without executive perks.

  • 9. Constantly solicited feedback from customers on all subjects from product direction to corporate donations.

    • 10. Top managers possessed an extensive knowledge of current events and took a wide-ranging interest in affairs outside their business.

    • 11. Offered donations in cash or services to people in need of help.

    • 12. Took an active role in the operations of their local communities.

    • 13. Deal with like minded businesses and encourage their employers to do the same.

    • 14. Constantly look to the future but always pay attention to the past.

Social Responsibility Towards Different Groups

  • 1. In addition to making a fair and adequate return on capital, business must be just and humane, as well as efficient and dynamic. The modern business has manifold responsibilities (a) it self, (b) to its customers; (c) employees; (d) owners, shareholders and partners, (e) community and (f) the state. The task of management is to reconcile and harmonise these separate and sometimes conflicting responsibilities.

  • 2. The S.R. of Business can best be assumed in an atmosphere of freedom with the least possible restraint on healthy competition. Concentration and monopoly have to be watched and guarded, and wherever necessary, dispersed.

  • 3. Every business has an overriding responsibility to make the fullest possible use of its resources, both human and capital. Management has the responsibility to provide security of employment with fair wages and equal opportunity for personal growth and advancement within the business, which is a requirement of justice, and means of securing efficient management.

  • 4. It highlights the respective roles of the enterprises, the shareholders, the workers, the customers, the management and the community. The responsibility of management is to fulfill the fair first needs of these claimants besides, providing consumer satisfaction.


  • 5. It laid emphasis on the reciprocal duties between business and the community through laying down of practical measures like reliable means of communication, better education of he citizens about civil responsibilities, local meetings and social audit.

Corporate Governance and Corporate Social Responsibility

On the basis of the above seminar report, we may put down the social responsibilities of Business, in the Indian context in the flow chart given below

We discuss, in the paragraphs that follow, the S.R. of business towards these different groups. The following flowchart presents business’s social responsibilities towards different groups.

Business Firm’s Responsibilities

Towards Owners/ Towards Employees Towards Customers Shareholders • Fair Dividend • Meaningful Work • Fair price
Towards Owners/ Towards Employees Towards Customers Shareholders • Fair Dividend • Meaningful Work • Fair price

Towards Owners/


Towards Employees

Towards Customers



Fair Dividend

Meaningful Work

Fair price

Solvent and Efficient Business

Job Satisfaction

Superior Quality

Optimum use of

Fairness Salaries

Superior Service


& Benefits

Planned Growth

Best Quality of Work life

Superior Product Design


Succession Planning

Quick and Complete


and Development


Towards Owners/ Towards Employees Towards Customers Shareholders • Fair Dividend • Meaningful Work • Fair price
Towards Owners/ Towards Employees Towards Customers Shareholders • Fair Dividend • Meaningful Work • Fair price
Towards Owners/ Towards Employees Towards Customers Shareholders • Fair Dividend • Meaningful Work • Fair price

Towards Government

Towards Society

Towards Inter-Business

Payment of Taxes, Custom Duties etc

Employment without Discrimination

Fair Competition

Abide by the Laws

Employment to Disadvantaged Persons

Cooperation for Sharing of Scarce Resources and Facilities

Observe the Policies

Community Welfare

Collaboration for



Maximisation of Business efficiency

Business Morality


Maintain Law & Security

Maintaining Pollution free Environment


Maintaining Ecological Balance


Public Enterprise:

Accountability and


Social Audit, which is a tool for evaluating, verifying and reporting the performance of the firm in the sphere of social responsibility. It will help a “socially conscious organization” to bring about greater strategic articulation and desirable modifications in its social policies and programs. In this unit the term social audit is defined and the desirability of undertaking social audit by a business enterprise is discussed. The various frameworks or methodologies for conducting social audit are explained. The potential difficulties that could be faced by an organization adopting social audit are discussed and critically evaluated. The status and the state of art of social audit in relation to India is examined and analysed. Finally, what looks like the future of social audit is explored.


Case Study 1




Bharat Petroleum Corporation Limited (BPCL) is a downstream oil refining and marketing company. The company has its network spread over all the four regions in India and is represented in almost all markets. It caters to different petroleum sectors – Liquefied Petroleum Gas (LPG) and Kerosene for domestic consumption, automotive fuels and lubricants for vehicles, and feedstock and fuels for industrial applications. The company also manufacture petrochemicals like Benzene, Toluene, Linear Alkyl Benzene feedstock etc. With a sales turnover of Rs. 25,650 crore and profits of Rs. 701.30 crore in 1999, BPCL is the 5 th largest company by sales in India. Its strength lies in an efficient refinery and strong distribution network, which has given it a 20% market share in petroleum products in India. BPCL has a tie up with Shell Petroleum Co. of Netherlands to manufacture and market Shell lubricants in India. In a major expansion move, BPCL is increasing its refining capacity through 3 joint ventures and also adding on to its distribution strength by laying a similar number of pipelines. BPCL is also planning a foray into petrochemicals through a 1.8 million tonnes (mt) naphtha craker plant in Tamil Nadu for around Rs. 7,000 crore and this project is scheduled to go on stream by 2002.

Ecological Concern

BPCL has been continuously striving towards conservation and improvement of the environment by adopting new technologies. In March 2003, BPCL introduced low lead MS (with 0.15 gm of lead per liter) in the country. From April 1996, HSD with a maximum sulphur content of 0.5% by weight, was introduced in the metro cities and in the Taj Trapezium. From September 1996, HSD, with a maximum sulphur content of 0.25% by weight, was introduced in the Taj Trapezium. To meet the requirement of HSD all over the country with the revised specification of maximum sulphur content of 0.25% by weight, from April 1999, facilities for Diesel Hydro De-sulphurisation are being put up in the refinery. Distribution of other low sulphur fuels (which has maximum sulphur content of 1.8% by weight) was started in the National capital region from October 1996, which ended the use on High Sulphur FO and RFO. BPCL conducted two advertising compaigns of behalf of the industry – the first on the importance of LPG conservation and the second on the introduction of low leaded petrol. On the pollution control front, BPCL has set up a special sophisticated plant to meet the stringent standards set by Minimum National Standards for Effluents from Oil Refineries (MINAS). BPCL’s emission standards are far more stringent than the limits laid down by the Pollution Control Board. BPCL had also invested around Rs. 220 crore, in pollution abatement and energy conservation systems.

Contd ....

Corporate Governance and Corporate Social Responsibility


Public Enterprise:

Accountability and


Contd ....

Safety and Social Commitments.

Safety continued to be accorded the highest priority in BPCL both in refining and marketing operations. In 2002-03, its refinery achieved 3 million man-hours without Lost Time Accident (LTA) on one occasion and one million man-hours without LTA on two occasions. The microprocessor based control system as its refinery monitors the operating conditions for safety hazards and the refinery is divided into three separate areas as high risk, low risk and medium risk. Each employee, irrespective of levels, is given fire-fighting training and mock drills are carried out at quarterly intervals for different range fires. Employees are given training on simulators so that they learn by committing mistakes on simulators and not in real conditions. BPCL’s Mumbai refinery has a Mutual Aid agreement along with the neighboring 9 industries for fighting major fires.

As a result of higher exposure to various safety awareness programs, there has been a reduction of injuries in BPCL’s refinery by 34% for its own employees, and 43% for contractors’ employees, in 1996-97. Moreover the frequency of LTA has come down from 1.5% to 0.6% for its employees and from 5.6% to 1.7% for contractors employees. To enhance safety performance, BPCL introduced ‘safety by walk-around’ concept wherein experienced officers were appointed as safety surveyors and safety sampling was done by senior management staff. It also organized a safety symposium at its refinery in which members from the oil industry, government bodies. Oil awareness on LPG safety, BPCL also screened one-minute films on the safe handling of LPG, on popular TV channels.

BPCL sponsors many sporting events like Santosh Trophy, National Football

Tournament, and also coaching camps for youngsters. Lifeline Express was contributed to social welfare – a fully equipped train, which look the latest medical technology to remote villages of India. The company has also adopted

  • 11 Scheduled caste/Scheduled tribes villages under the Component and Tribal

sub-plan. The facilities provided by the company include community centers, tube/borewells, educational support medical facilities, vocational guidance and training to make villagers self-reliant and improve their standard of living.


BPCL was adjudged the winner of the ‘Oil Industry Safety Awards’ for its safety performance being the best among all the “LPG Marketing Organization in 1995-96” for the fourth year in succession. BPCL’s annual report for 1994-

  • 95 was selected by ICAI as the best presented amongst the public sector/joint

sector companies for the second year in succession. The South Asian

Federation of Accountants also adjudged the same as the second best

presented in the non-financial sector in the SAARC region. BPCL received ISO-9002 certification from Bureau Veritas Quality International (BVQI) for

  • 15 out of its 22 bottling plants. BPCL has also received ISO-9002 accrediation

for its refinery, aviation service stations at Mumbai, Delhi, Calcutta and

Bangalore depots at Miraj and Mysore and lubricants blending plant at Wadilube.


Case Study 2


The Rashtriya Chemicals and Fertilizer’s Chembur plant is one of Bombay’s most well known cases of industrial pollution. The company, in the face of sustained public pressure, is making attempts to reduce environmental damage. When the World Bank instituted the Industrial Pollution Control Project (IPCP). RCF was one of the first to approach IDBI. In January 1993, RCF entered into an agreement with the financial institution for a DM 12.5 million (approximately, Rs. 45 crore) loan at 15.5 percent.

RCF’s problem was its two ammonia plants. These plants have been score spot for the company and have been shut down on more than one occasion. At the time the plants were setup, it was not mandatory, to include cost of pollution control equipment in the project cost. But as local residents started complaining about the pollution levels, RCF started looking for alternatives.

There were modifications going on in both plants. RCF had to wait till these were complete to be able to estimate the volume of pollutants that would require treatment. Finally a Ministry of Environment notification in the late 1980’s ordering them to clean up forced RCF into action.

In the process of manufacturing ammonia, certain gases are accumulated which need to be removed by purging. Using cryogenic technology bought from a German firm, RCF decided to set up a purge gas recovery plant, which would in the process of treating ane-rich fuel, both of which can be sold commercially, thereby making pollution control not just pay for itself but also generate additional resources. And at the end of the process, the plant produces no effluents.

RCF’s choice of technology is determined by financial considerations. They had three options. In the first case, they could simply treat the ammonia, which is all they are required to do under the regulations. Their internal rate of return (IRR) for just ammonia recovery was an uneconomical 10.7 percent. Their second option was to choose ammonia and synthetic gas recovery, for which the IRR was 27 percent. The final option, the one they chose, includes the recovery of liquid argon and gives them an IRR of 46.3 per cent. Pay back period is a brisk 26 months.

Whether RCF will actually earn its projected income is doubtful. Since the time the plant has come up, argon prices have crashed due to excess capacity and intense competiters are mainly the steel and automobile industry, which use argon for welding. RCF officials however, say they are safe, because even recovery to synthetic gas stage gives them an IRR of 27 percent, leaving RCF a comfortable profit margin.

Corporate Governance and Corporate Social Responsibility

Social Opposition: This view is taken by the business which feel that they have no obligation to society in which they operate. When they are caught for any offense, their immediate response is to try to cover it up while denying it.


Public Enterprise:

Accountability and



It is generally believed today that it is the duty of the privately owned enterprise to ensure that it does not adversely affect the life of the community in which it operates. Though the duty is not clearly defined, it is usually thought that the corporate business should not cause pollution, should not discriminate in employment, should not make money from insavoury or immoral activities and should not withhold information from consumers about their products. It is also expected that they should make positive contribution to the life of the community.

The corporate business has become an integral part of the functioning of any society. It is the recipient of the benefits and privileges of the State and society in which it operates. The society therefore expects the corporate business to assume responsibility towards it. Earlier it had been assumed that the vast material resources like water, land and air could absorb the wastes of production and neutralise any potential harmful effects. Man assumed that the natural environment would always renew itself. It is abundantly clear now that this is not so. It is common knowledge that society is being threatened by pollution of land, sea and air. To an increasing degree, business has been creating conditions that have resulted in many social ills, though the same may not be by design or choice. There are various social abuses, some germane to the profit persuit, some to the negligent and unscrupulous behavior of business leaders. Most would agree that if these conditions are permitted to continue it must inevitably lead to social suicide. Steps must be taken to correct the abuses.

With changing social and economic values and with increasing expectations of society from corporate business, the companies that adjust to the rational changes and help in pioneering such changes are likely to survive and flourish and those which oppose, block or restrict the changes may find it difficult to survive in future. Economic goals or corporate business can no longer be separated from social goals.

Firms have to recognize their due responsibilities and consider these in the planning and action stages. They must have a social policy which means that they must include in their accounting the direct costs to society of their operations to the extent possible. They should communicate their social policy not only to the members of the organization but also to outside groups. Social audit is a tool for judging how a corporate entity has implemented its social policy.

The increasing demand for socially oriented programmes of one kind or another and for measurement and disclosure of environmental effects of organizational behaviour has created pressure for adopting some kind of social auditing procedure. This unit attempts to provide a general definition of social audit, discusses the various approaches or methodologies for conducting social audit and points out the difficulties encountered in measuring social performance etc.


Social audit has been variously defined. As it happens with any new management technique, there is not yet any definition which has gained acceptance. Bauer and Fenn define Social audit as “a commitment to systematic assessment of and reporting of some meaningful definable domain of a company’s activities that have social impact”. The author’s emphasis is on the assessment and reporting of corporate social programmes.


Dilley defines the social audit as “investigation of an enterprise’s performance as a member of the community in which it has its primary impact: such investigations consisting of the preparation of an inventory of the socially relevant activities of the enterprise, qualification (to the extent possible) of the social costs and benefits resulting from those activities and compilation of the other quantitative information providing insight into the social performance of the enterprise” (Hindu Business Line, 1997). Dilley’s definition highlights the making of an inventory of the socially relevant activities and their quantification in terms of costs and benefits.

Corporate Governance and Corporate Social Responsibility

Caroll and Bailer, describe social auditing “as a form of measurement”. According to them “Social audit is a natural evolutionary step in the concern for operationalising corporate social responsibilities and, in its essence, represents a managerial effort to develop a calculus for gauging the firm’s socially oriented activities. That, it is an attempt to measure, monitor and evaluate the organizations performance with respect to its social programmes and social objectives” (Chartered Secretary, Oct, 1997) Ahmed Belkaoui has attempted to collate the definitions by Bauer and Fenn, and by Dilley. He states that “Social Audit – much like the financial audit – is an identification and examination of the activities of the firm in order to assess, evaluate, measure and report their impact on the immediate social environment” (Reddy, 1999). The words in bold are important in this definition which require some elaboration.

  • 1. Identification assures a tracking down and inventory of all the firms activities having potential impact on the firms environment identification will result in a definition of the social dimensions of the firms activities in terms of social costs or social benefits depending on the nature of their impact on the social environment.

  • 2. Assessment and Evaluation imply the categorisation of the firms impact on its environment as either positive social benefits or negative social costs.

  • 3. Measurement implies the assignment of a quantitative or qualitative score to the social costs and benefits identified in assessment and evaluation.

  • 4. Reporting assumes the disclosure of the firms performance as measured.

Features of Social Audit

The nature of social audit can be made more clear if we bring out its salient features.

The areas for social audit include any activity (see Table 9.1) which has a significant social impact, such as activities affecting environmental quality, consumerism, opportunities for women and other disadvantaged people in society and similar others.

The second feature about social audit is that it can determine only what an organization is doing in social areas, not the amount of social good that results from these activities. It is a process audit rather than an audit for results.

Thirdly, social performance is difficult to audit because most of the results of social activities occur beyond the company’s gate and the company has no means of securing data on the results. Even if data are available it is difficult to establish how many of them have occurred due.


Public Enterprise: Table 9.2 Activities Covered by Social Audit Accountability and Governance A. Ecology and Environmental
Public Enterprise:
Table 9.2 Activities Covered by Social Audit
Accountability and
Ecology and Environmental Quality:
Clear-up of existing pollution
Design of processes to prevent pollution
Aesthetic improvements
Noise control
Dispersion of industry
Control of land use
Required recycling
Truth in labeling, in advertising, and in all business activities
Product warranty and service
Control of harmful products
Community Needs:
Use of business expertise to solve community problems
Reduction of role of business in community power structure
Aid with health care facilities
Aid with urban renewal
Governmental Relations:
• Restrictions on lobbying
Control of business in political action
• Extensive new regulation of business
• Restrictions on international operations
Business Giving:
• Financial support for assorted charities
Financial support for artistic activities
Donations to education
Minorities and Disadvantaged Persons:
Training of hard-core unemployment
Equal employment opportunities and quotas for minority employment
Operation of programmes for alcoholics and drug addicts
Employment of persons with prison records
Building of plants and offices in minority areas
Purchasing from minority businessmen
Retraining of workers displaced by technology
Labour Relations:
Improvement of occupational health and safety
Prohibition of “export of jobs” through operations in nations with law
labour costs.
Provision of day-care centres for children of working mothers
• Expansion of employee rights
• Control of pensions, especially vesting of pension rights
• Impatience with authoritarian structures; demand for participation
Contd ....

Contd ....

  • H. Shareholder Relations


Opening of boards of directors to members of public representing various interest groups

Prohibitions of operations in nations with “racist” or “colonial” governments

Improvement of financial disclosure

Disclosure of activities affecting the environment and social issues

  • I. Economic Activities


Control of conglomerates

Breakup of giant industry


Restriction of patent use

Need for Social Audit

Corporate Governance

and Corporate Social Responsibility

Thus, social audit need be adopted by every corporation to apprise its shareholders, investors customers, government and the community of the social activities and financial results of its working. Such information should be disclosed, as mentioned by the National Association of Accountants’ Committee on Accounting for Corporate Social Performance in Canada, for four major categories as below:


Community Involvement: Socially-oriented activities that are primarily of benefit to the general public. Examples include : general corporate philanthropy, housing construction, and financing, health, services, volunteer activities among employees, food programmes and community planning and improvement.


Human Resources: Social performance directed to the well-being of employees. Categories in this area include employment practices, training programmes, job enrichment, working conditions, promotion policies and employee benefits.


Physical Resources and Environmental Contributions: Activities directed towards alleviating or preventing environmental deterioration (pollution). This category includes the adherence to the law and going beyond it in areas such as air quality, water quality. Also included is the conservation of scare resources and the disposal of solid waste.


Production or Service Contribution: Concerned with the impact of the company’s product or service on society. This includes consumerism, product quality, packaging, advertising, warranty provisions and product safety.

In India, the companies in general and the public sector undertakings in particular should make disclosure of information for the use of people outside the enterprise, which include:


financial institutions and creditors (who are interested in financial position, fund- flow and debt-paying capacity of the enterprise);


shareholders, academic institutions and consultants (who are interested in quantitative and qualitative information regarding proper utilization of resources transferred to the concern);


the government (for knowing about financial and statistical information for planning and operating of those enterprises and initiating and administering financial and economic polices and programmes at state and national levels


Public Enterprise:

Accountability and



trade unions, political leaders (require information for broad labour policy decisions, for etc); and

  • v) environments (who need information regarding air and water pollution ecological imbalances, depletion of resources and conservation of energy).

Disclosure of information should be thus financial and non-financial.

Financial Information

This includes the disclosure of financial position of the firm, the form of balance sheet, profit and loss accounts, special accounts, audit reports. Such information is mainly disclosed in quantitative form, such as income and expenditure of the company, sources and uses of funds, details about assets and liabilities, working capital, new capital investment, outstanding distribution of earnings, interest taxes paid, liquidity position and incentives. Financial information reveals the true position of a company regarding its liquidity and bankruptcy.

Non-Financial Information

This includes information relating to social performance, human resources, marketing activities, business environment, production etc. Such information may be disclosed in quantitative and qualitative terms, but the disclosure of information is to influence profitability in the long run and to build the company’s image.

Information on social performance generally includes various activities regarding employee welfare, community work and involvement, social cultural programmes, role of company in solving social problems of the area, programmes dealing with training and developing human resources etc. Social programmes are specified in annual reports.

Information on human resources includes expenditure on recruitment, selection, training and development of employees, facilities for self-development in organization, special provision for development of hard-core unemployed persons, sponsoring executives for delivering lectures in universities, educational institutions and for foreign training. Such information is disclosed in the Directors’ Report and the Chairman’s speech.

Information on marketing includes sales figures product-wise and plant-wise, cash and credit sales, pricing and impact of competition on pricing, product innovations and development, quality of product advertising and promotional efforts for distribution of the products, selling commission traveling expenditure of marketing personnel, etc. Such information is disclosed in the Directors report. Chairman’s statement or in advertisements etc.

Environment information includes information about the political, economic, socio- cultural and technological environment, especially on such items as inflation, unemployment, impact of changes on taxes, changes in legal requirements of business activities, contribution and participation in company in community development, technological development, pollution control measures, use of indigenous materials and efforts at conservation of natural and human resources. The disclosure of information finds place in the annual reports and chairman’s speech.



Corporate Governance and Corporate Social Responsibility

In India, the TISCO has been the first company to set up a Social Audit Committee for conducting social audit of its work under the chairmanship of Justice S.P. Kotwal, and Prof. Rajini Kothari and Prof. P.G. Mavalankar as members. This committee was entrusted with the task of “examining and reporting whether, and the extent to which, the TISCO has fulfilled the objectives contained in Clause 3A of its Articles of Association regarding its social and moral responsibilities to the consumers, employees, shareholders, and the local community”. The Committee opined, “On an examination of all aspects, the company has fulfilled its obligations to all concerned.”

Started with TISCO the social audit has picked up. UTI, the premier financial institution has also planned for a social audit. In the report for 1993-94, the chairman of UTI has declared that “to address the question as to what extent this unique organization has been able to fulfill its responsibilities vis-à-vis its various publics and society at large. And independent social audit committee of five eminent citizens has been setup”.


The benefits of social audit are as follows:

  • 1. Social audit enables the company to take close look at itself and understand how far the company has lived up to its social objectives.

  • 2. Related to the first benefit is the fact that social audit encourages greater concern for social performance throughout the organization.

  • 3. Social audit provides data for comparing effectiveness of the different types of programmes.

  • 4. Social audit provides cost data on social programmes so that management can relate the data to budgets, available resources, company objectives, and projected benefits of programmes.

  • 5. Social audit provides information for effective response to external claimants that make demands on the organization. News know what a business is doing in areas of their special interest, and a business needs to respond as effectively as possible. The social audit shows a business where it is vulnerable to public pressure and where its strengths lie.


  • a) What activities of the organization in which you are working (or with which you have been associated) fall, in your view, in the area of social audit? ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ......................................................................................................................


Public Enterprise:

Accountability and


  • b) Discuss the social reporting done by your organization. ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ......................................................................................................................


In recent times corporate governance and corporate social responsibility have become the talk of the day. In almost all business organizations, this concept is now being used formally. This has gained a wide recognition as it is important for the economic health of the organization and the welfare of the society at large. Since early 90s recommendations of different committees have been taken into consideration to understand the practical approach to the concept of corporate governance.

Social responsibility in business or more popularly known as corporate social responsibility means that the organization has to work in tune with the public interect. This comprises of areas like social audit. This becomes a monitoring tool for the public enterprises so as to enhance the efficiency of these enterprises.


  • 1. Define Corporate Governance?

  • 2. Discuss the obligations of public enterprises?

  • 3. How Corporate Governance is relevant in today’s context? Explain?

  • 4. Why Social Responsibility is important for the business?

  • 5. What are your recommendations of social responsibility?

  • 6. Explore one successful enterprise of your choice, which is society oriented?

  • 7. Bring out the features and benefits of social audits?




The Hindu business line, (1997).

Corporate Governance and Corporate Social Responsibility

Corporate Governance. (October, 1997). The New Paradigm, Chartered Secretary October.

The Freedom to be Giants. (July 1997). in Leash, The Economic Times.

Reddy, B. Rathan. (1999). Essentials of Business Environment. Institute of Public Enterprise.


R.K. (2002). Restructuring of State Level Public Enterprise. Institute of

Public Enterprise.

Mishra, R. K. & Reddy, Venugopal. (1995). Public Enterprises towards a White Paper .

Corporate Governance Putting Investors First: Scott C. Newquist with Max B. Russel, Jaico books. www.jaicobooks.com

‘Corporate Governance and PSU’. Dec. 19, (1996) The Economic Times ..

Committee on Financial Systems. (1998). (Narasimham Committee-part II).


Corporate Governance. October, 1997. The New Paradigm, Chartered Secretary.

Reddy B. Rathan. (1999). Essentials of Business Environment, Institute of Public Enterprise.

Mishra, R. K. (2002). Restructuring of State Level Public Enterprise, 2002 Institute of Public Enterprise.

Mishra, R. K.& Venugopal Y. (1995). Public Enterprises towards a White Paper.