Corporate Governance, CSR and Business Ethics Notes for UPSC

Ethics is not only for the government officer; it is equally important in business. Companies have great power over the economy, the environment, workers and consumers. When a company acts honestly and responsibly, it builds trust and long-term success. When it cheats, as in the cases of large financial frauds, it harms thousands of people. The UPSC Ethics paper (GS Paper 4) has a section on "ethical issues in private institutions", "corporate governance" and "corporate social responsibility", and the case studies often involve business situations. This note explains corporate governance, CSR, business ethics, major scandals and the Indian legal framework in simple language, with tables and a Mains structure.

What Is Corporate Governance?

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. It balances the interests of the shareholders, the management, the customers, employees, suppliers and the community. The four basic principles are transparency (honest disclosure of information), accountability (the management is answerable for its decisions), fairness (equal treatment of all shareholders, including the small ones) and responsibility (care for the stakeholders and society). Good governance reduces the risk of fraud, attracts investors and improves the reputation of the company.

Key Features of Indian Corporate Governance

• Board of directors: The Companies Act, 2013 requires that listed companies have at least one-third of the board as independent directors, who can give an unbiased view, and at least one woman director.
• Committees: The audit committee, the nomination and remuneration committee and the stakeholder relationship committee.
• Disclosure and audit: Regular financial reports, independent auditors and a rotation of auditors.
• SEBI regulation: The Securities and Exchange Board of India issues the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, which set the governance standards for the listed companies.
• Whistle-blower mechanism: Listed companies must have a vigil mechanism to protect those who report the wrongdoing.

Committees on Corporate Governance

Corporate Social Responsibility (CSR)

CSR means that a business has a duty to contribute to the society and the environment, beyond making profit. India is the first country to make CSR spending mandatory by law. Section 135 of the Companies Act, 2013, which came into effect in 2014, applies to a company with a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more in a financial year. Such a company must form a CSR committee and spend at least 2 per cent of its average net profit of the three preceding years on the CSR activities listed in Schedule VII, such as the eradication of hunger and poverty, education, gender equality, health, environmental sustainability, rural development and support for the armed forces' veterans.

Theories and Ideas in Business Ethics

• Shareholder theory (Milton Friedman): The only social responsibility of business is to increase its profits within the rules of the law.
• Stakeholder theory (R. Edward Freeman): A business must consider all those affected: employees, customers, suppliers, the community and the environment.
• Triple bottom line (John Elkington): A company should measure success by three Ps: people, planet and profit.
• Gandhian trusteeship: Wealthy people should consider themselves as trustees who hold the wealth for the good of the society.
• ESG: Environmental, social and governance factors are used by investors to judge a company. In India, the top listed companies have to give a Business Responsibility and Sustainability Report (BRSR).

Common Ethical Issues in Business

Lessons From Corporate Scandals

Several scandals show the cost of poor governance. Enron in the USA (2001) collapsed after the accounts were found to be manipulated, and it led to the Sarbanes-Oxley Act. The Satyam case (2009) in India, in which the chairman admitted to inflating the company's accounts by a very large sum, shook the confidence of the investors and led to reforms in auditing and board practice. The Volkswagen emissions scandal (2015) showed how a company cheated on pollution tests. The Punjab National Bank fraud (2018), involving fake guarantees, exposed the weakness in banking controls. The Bhopal gas tragedy (1984) is the worst industrial disaster that showed the lack of safety and responsibility. The common lessons are that the boards must be independent and active, the auditors must be honest, the whistle-blowers must be protected and the regulators must act quickly.

Consumer Protection and Ethics

The Consumer Protection Act, 2019 gives rights to the consumer: the right to safety, information, choice, to be heard, to seek redress and to consumer education. It created the Central Consumer Protection Authority (CCPA) to act against unfair trade practices and misleading advertisements, and has a provision on product liability. The Advertising Standards Council of India (ASCI) is a self-regulatory body for advertisements. These laws show that ethical business also means honesty towards the customer.

Ethics for Employees: Role of the Individual

Corporate ethics also depends on the daily choices of employees and managers. A manager may be pressed to meet the target by hiding a defect, an accountant may be asked to change the figures, or a salesperson may be tempted to make a false promise. An ethical professional follows the law and the company code, refuses to take part in wrongdoing, reports the problem through the proper channel, and keeps the interest of the customer and the society in mind. Companies can support this by clear codes of conduct, regular ethics training, a safe whistle-blower system and by rewarding honest behaviour and not only the results. Leaders play the biggest role, since their example sets the culture of the whole organisation: if the top is honest, the people below follow, and if the top cuts corners, so will the others.

Mains Angle: Should CSR Be Mandatory?

Present both views. Supporters say that a legal duty ensures a steady flow of funds to the social sector and that voluntary action alone was not enough. Critics say that a real responsibility cannot be forced, and that it may become a box-ticking exercise. A balanced answer will suggest that the mandatory spending should be combined with better monitoring and impact assessment, the focus on the backward regions, the participation of the local communities and the transparent reporting. Conclude that the real aim of CSR is not charity but to build business that is good for the society and the planet.

Practice Questions

• Q1. Which section of the Companies Act deals with CSR? Answer: Section 135.
• Q2. What percentage of the average net profit must be spent on CSR? Answer: 2 per cent.
• Q3. Who proposed the stakeholder theory? Answer: R. Edward Freeman.
• Q4. What is the BRSR? Answer: The Business Responsibility and Sustainability Report that top listed companies have to submit.

Read it with our notes on conflict of interest and codes of conduct and ethics in public and private relationships.

Quick Revision

• Principles: transparency, accountability, fairness, responsibility.
• One-third independent directors; SEBI LODR 2015; Birla Committee 1999.
• CSR: Section 135, 2 per cent, Schedule VII; mandatory since 2014.
• Stakeholder theory vs shareholder theory; triple bottom line; ESG and BRSR.
• Satyam (2009), Enron (2001), Volkswagen (2015).

Frequently Asked Questions (FAQ)

What is corporate governance?

It is the system of rules and practices by which a company is directed and controlled, balancing the interests of all stakeholders.

What are the principles of corporate governance?

Transparency, accountability, fairness and responsibility are the main principles.

Which Act makes CSR mandatory in India?

The Companies Act, 2013, under Section 135, makes CSR spending mandatory for eligible companies.

How much must a company spend on CSR?

An eligible company must spend at least 2 per cent of its average net profit of the previous three years.

What is Schedule VII of the Companies Act?

It lists the activities on which CSR funds can be spent, such as education, health and environmental sustainability.

What is the role of independent directors?

They give an unbiased view on the board and protect the interests of the minority shareholders.

What is stakeholder theory?

It says that a business should consider all the groups affected by it, and not only the shareholders.

What is the triple bottom line?

It is the idea that a company should measure its success by people, planet and profit.

What is Gandhian trusteeship?

It is the idea that wealthy persons should act as trustees who hold their wealth for the good of society.

What is the BRSR?

It is the Business Responsibility and Sustainability Report that the top listed companies in India must file.

What did the Satyam scandal show?

It showed the danger of false accounts and weak governance, and led to reforms in auditing and board practices.

What does the Consumer Protection Act, 2019 do?

It protects consumer rights, created the CCPA, and provides action against unfair trade practices and misleading ads.