Environmental concerns, social diversity and similar issues within a company must be seen as its core, interrelated elements.
The introduction of the Companies Bill 2009 in the Lok Sabha on August 3, 2009 was an important step. First introduced in 2008, it lapsed because of the dissolution of the 14th Lok Sabha. The new Bill is meant to address issues of corporate governance and accountability. Companies are accountable for their financial performance as well as social impact. Thus, the Companies Act should be defined broadly, obliging companies to take stock of their business activities and their effect on employees, communities and the environment. This Bill, coming after more than 50 years, deserves much better understanding and broader coverage.
Companies are a powerful force for the good — they provide jobs, boost economies and help to protect the environment — but they can also cause serious problems. There are too many instances in which irresponsible behaviour by companies has harmed poor communities, undermined workers’ rights and damaged the environment. Voluntary measures such as codes of conduct or voluntary social and environmental reporting have failed to address these issues and deliver real change. There are too many documented cases in which companies have signed up for such voluntary codes but have failed to deliver.
During discussions last year on the need for a new Bill, there were concrete demands for changes in the law which would ensure that companies became:
(i) Transparent on their social and environmental impact. They should be legally required to report on these, both to shareholders and the public.
(ii) Responsible. Companies and their directors must have a lawful responsibility to manage their wider social and environmental impacts, including taking action to minimise any harm caused to workers, local communities and the environment.
(iii) Accountable. People who are harmed by the activities of a company should be able to take action against it in court, especially when government remedies are inadequate or unavailable.
What the Bill says
The Companies Bill 2009 strives to provide certain basic principles for various aspects of internal governance of corporate entities and a framework for their regulation, and the articulation of shareholder democracy with protection of the rights of minority stakeholders, responsible self-regulation with disclosures and accountability, substitution of government control over internal corporate processes, and decisions by shareholder control. Shareholders’ Associations/Group of Shareholders will be enabled to take legal action for any fraudulent action by the company, and to take part in investor protection activities.
The Bill deals with the duties and liabilities of the directors and provides for independent directors to be appointed on the boards as may be prescribed, along with attributes determining independence. It recognises both accounting and auditing standards. A more effective regime for inspections and investigations of companies while laying down the maximum as well as minimum penalty for offence is prescribed. In case of fraudulent activities/acts, provisions for recovery and disgorgement have been included. There are special courts to deal with offences under the Bill.
Its lengthy arrangements of clauses are for incorporation of companies, share capital and debentures, management and administration, accounts of companies, audit and auditors, appointment and qualification of directors, inspection, inquiry and investigation, revival and rehabilitation of sick companies, the national company law tribunal and appellate tribunal, special courts and many more. However, the Bill, as proposed, has certain serious lacunae.
To illustrate this point, we can compare our Bill with the U.K. Companies Act that came into force in 2007-08. It lays out the basic procedures and systems for the operation of a company also in terms of social accountability, which are lacking in proposed Indian Bill. Unlike any previous law, the U.K. Act states companies must now consider their impact on the community, employees and the environment. Two key sections highlight links between a company’s financial performance and its social and environmental impacts. They are: (a) Directors’ duties (Section 172) — they have a responsibility to consider their company’s impact on a range of social and environmental matters; (b) Transparency (Section 417) — publicly listed U.K. companies have a responsibility to report openly on their social and environmental risks and opportunities to their shareholders, as well as on employee matters and risks down supply chains. With these two sections in place, the U.K. Act provides a tool to help defend the rights of people and protect the environment against irresponsible corporate behaviour. However, this is severely lacking in the Indian case.
What should it mean?
To make the Companies Bill in India truly effective, we have to think of it within the framework of corporate social accountability. The directors of a company have a primary duty to promote its success for the benefit of shareholders. Importantly, the Bill must state that in fulfilling this duty, directors should also consider issues relating to employees, suppliers, customers, community, and the environment. In practice, this means that violating social and environmental standards can present a financial risk to the company. Generally speaking, directors will be required to be more conscious of how they manage their social and environmental impacts.
Take another example. Companies are required to produce annual reports. Under the proposed Bill, they should be asked to report on environmental matters, including the impact of the business on environment, employees’ social and community issues, persons with whom the company has contractual or other arrangements, which are essential to the company’s business. Companies should be expected to report to shareholders measures for reducing pollution or carbon dioxide emissions, staff retention, diversity and training, human rights implications of their activities, and supply chain issues (including the environmental and human rights standards of other companies which they own or of which they are part).
Seeing the recent corporate events in India, stakeholders are demanding greater credibility and transparency from the companies. Just stressing management and administration, reporting and auditing and ensuring financial performance through the Bill are not enough. A new accountability system is required to define, capture, manage and report on obligatory indicators, beyond traditional financial measures of performance. There are growing efforts among countries and international organisations to move towards enforceable standards and implement a company management system that can assess and report on economic, environmental and social impacts together. Many times, money and effort have gone into preparing a new Company Bill with ideas “to allow the country to have modern legislation for growth and regulation of the corporate sector in India ... in consonance with the changes in the national and international economy,” “to be suitable for addressing various contemporary issues relating to corporate governance, including those which have been recently noticed during the investigation into the affairs of some of the companies.”
But what will be the real value if it remains a weak and narrow Act? This search for value can lead us to learn from different countries, and other Acts and formats, targeting multiple concerns. This approach will help the government and the corporate sector address some of the serious deficits that emerged in the past and exist in the present. Some of the limitations act as a reminder, telling us that financial governance is only one part of the broader issue of corporate governance, with diverse stakeholders, citizens and society at large. Environmental concerns, social diversity and similar issues within a company must therefore be seen as its core, interrelated elements. They should be in a continuum under such an Act rather than stand-alone exercises.