Stylemakers plc.in UK is a rising star in garment manufacturing and retailing business in UK, Europe and North America. The company supplies design and gets garments stitched in a number of developing countries including India and Bangladesh. A Bangladeshi firm X takes orders from Stylemakers and supplies garments to Stylemakers as pertheirorder and schedule.
The firm X also does not in its own account manufacture garments but gets this done from a number of other parties. One of the contract manufacturers had been doing this job in a large multistoreyed building ‘Golden plaza’ which collapsed due to structural failure. The catastrophe
resulted to morethan a thousand fatalities and evenlarger number of grievousinjuries. The workers were mostly poor and their families depended on the income from this contract job. In Golden Plaza the workers were stitching garments not only for Stylemakers plc. but many other multinational corporations who have an interest in garment selling.
Mr. Alex Bradford is the CEO of the company. He knew quite a bit about the condition of workers in outsourced countries especially Bangladesh. He had also travelled to that country for the same business as Bangladesh is the major supplier to Stylemakers plc. When the news of this major accident flashed in global media and he could see the footage the following courses of action occurred to him. Which course of action would you recommend to him?
1. Stylemakers plc. is not directly employing any workers in Bangladesh. Even firm X is employing contractor to get the job done. So, Stylemakers plc. need not take any action with the matter.
2. Stylemakers plc. though not directlyconnected with the workers have a humanitarian duty and need to express sympathy and concern for the deceased and the injured.
3. Stylemakers plc. in view of its commitment to UNGC principles, needs to support firm X to give immediate succor to the families as per the policy of Bangladesh Government.
4. Stylemakers plc. should give the same scale of benefits to the families of the deceased and the injured as if the accident occurred in UK or USA.
Theanswerchoice(1) is not correct.Stylemakersplc.cannot escaperesponsibility on thepretext that the labourers were not in its direct employment. The principal who is getting job done as per their design and schedule does have responsibility in Corporate Governance framework. The accident was the outcome of shoddy construction and overcrowding of machines and workers in a weak structure and hence responsibility attaches to Stylemakers plc.
The answer choice (2) is an inadequate response.Expression of grief and sympathy is absolutely necessary but not enough. The accident victims or their families need to be compensated so that they could restart their shattered lives.
Obviously, the answer choice (3) is appropriate. It is possible that Bangladesh Government will have a scale of benefits for victims of such calamities. The company needs to follow that policy prescription in the minimum and compensate.
Answer choice (4) is strictly speaking not necessary. First of all, such an accident is unlikely in a developed country. Secondly, the cost of living in a developed country is very different from that in Bangladesh. So it is not pragmatic to try and give compensation on the scale of UK or USA. The CEO is not required to go that far though his heart may suggest so.
Summary
¤ Companies are bodies incorporated under the Companies Act. They are regulated underthis Act and also by SEBI.
¤ Companies are owned by shareholders. Companies are set up by entrepreneurs or promoters. They put some money of their own and collect the balance from others. This is called share capital or equity.
¤ Normally, a major part of share capital comes from promoters; institutional investors also contribute to equity.
¤ In a company the ‘voting power’- which ultimately confers management control - depends on share capital holding.
¤ The promoter and his partners generally hold the required percentage of shares for management control and for taking necessary decisions. They may ignore or neglect the interests of small investors.
¤ The affairs of the company are managed by a board of directors. They are classified into three groups: (i) those representing the promoters, (ii) nominee directors who represent the financial institutions and (iii) independent directors.
¤ The results of a company’s operations over the financial year are placed for approval before the general body of the shareholders popularly known as annual general meeting.
¤ Profit and loss account shows all the revenues and expenditures and any resulting profit. The balance sheet reflects the assets and liabilities of the company as on March 31 of the financial year. The accounts are audited by both internal and external auditors.
¤ Accounts have to convey a fair and accurate picture of the company’s financial position. The Institute of Chartered Accounts has prescribed the ‘accounting standards’ or the correct ways of writing accounts.
¤ The profit can be increased or decreased, only within a narrow range, by tweaking the numbers.
¤ Many malpractices involve the manipulation of accounts – ranging from misrepresentation of finances to fraud.
¤ The essence of corporate governance consists in observing ethical norms.
¤ It connotes commitment to values, ethical business conduct, adherence to law and CSR. Cadbury committee observed that corporate governance is based on promoting fairness, transparency and accountability in company policies.
¤ Corporate governance can improve a company’s efficiency and financial performance.
¤ Cadbury committee defined openness or transparency as disclosing of information, within the limits set by the competitive position of a company to its stakeholders.
¤ Integrity is defined as meaning both straightforward behaviour and presenting a balanced picture of the company’s affairs.
¤ Boards of directors are accountable to their shareholders and both have to play their part in making accountability effective.
¤ Cadbury committee highlighted the role of board of directors, auditors and share holders in promoting corporates governance.
¤ Corporate governance in developed economies is also seen from the perspective of risk management. The collapse of Lehman brothers, the huge losses which banks suffered and instances of reckless risk trading by mangers in search of profits and bonuses made it necessary for boards to ensure better risk management. Financial Reporting Council, UK examined this question and gave guidelines to boards on handling business risks.
¤ The emphasis in Indian policies on corporate governance can be said to be more on protecting small shareholders, preventing frauds and malpractices and promoting corporate social responsibility. The components of corporate governance are embodied in the recently passed amendments to Companies Act.
¤ The new Companies Act includes various aspects of good corporate governance such as independent directors on boards; enhanced disclosure norms; enhanced accountability of management; stricter enforcement; audit accountability; protection for minority shareholders; investor protection and activism; and CSR.
¤ It has created a National Financial Reporting Authority for prescribing and enforcing accounting standards.
¤ It has strengthened audits andindependence of auditors.
¤ If a chartered accountant, company secretary in practice or cost accountant duringthe course of work notices that an offence involving fraud is being or has been committed against the company by its officers or employees, they have to report the matter to the Central Government.
¤ The independent directors are the custodians of corporate governance and the conscience keepers of the board. The Companies Act includes a code as a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investor community, particularly minority shareholders, regulators and companiesintheinstitution of independent directors.
¤ The qualities expected of an independent director include: integrity and probity; objective and constructive approach; bonafides of action; banishing extraneous considerations that threaten his objective, independent judgment; refraining from abuse of his office or from any action that would lead to loss of his independence.
¤ The audit committee is an important body which watches over the propriety of the company’s financial dealings.
¤ There is a kind of whistleblower provision under which directors and employees can express their concerns to the chairman of the audit committee.
¤ Related Party Transactions are strictly controlled.
¤ Secretarial audit ensures the company’s compliance with rules and regulations.
¤ The Companies Act has introduced the concept of class action for the first time in India.
¤ A company to which CSR applies has to spend on it every financial year, at least two per cent of the average net profitsmade during the threeimmediatelypreceding financial years.
¤ CSR policy has to be formulated and monitored by the board’s CSR committee.
¤ CSR can cover health, education, anti poverty, skill development and other similar programmes which help the poor and needy.
¤ UNGC’s appraoch can serve as an important guide for corporate governance.
PRACTICE QUESTIONS
1. Elucidate the concept of corporate governance.
2. “Corporategovernanceis only a publicrelationsgimmick to polishtheimageof corporatebosses or honchos”. Comment.
3. What are the ingredients of corporate governance? What is their rationale?
4. What is the importance of audit committee in ensuring corporate governance?
5. “The independent directors have to do moral policing in a company.” Discuss.
6. Write short notes on – (a) National Financial Reporting Authority (b) related party transactions
(c) arm’s length dealings (d) class action suits and (e) Secretarial audit.
7. “Corporate social responsibility is a camouflage for pursuing populist political agendas, depriving corporates of investible resources and hurting share holder interests.” State your view with supporting reasons.
8. After the recent financial crisis, regulators in developed economies have come out with many prescriptions on how boards of companies should handle risks involved in their operations. Do you think that it is like shutting the stable door after the horse has bolted?
9. Briefly outline the main features of corporate social responsibility policy applicable in India.
10. What qualities of head and heart should an independent director have?
11. List briefly (in a sentence or two) the main ways or means which can promote corporate governance in companies.
REFERENCES
The Companies Act.
Corporate Governance in India: A legal Analysis - Prabhash Dalei, Paridhi Tulsyan and Shikhar Maravi.
Corporate Governance of Public Bodies: Hong Kong Institute of Certified Accountants.
The Cadbury Committee Report, 1992.
