How to green the corporate sector

Companies Act, 2013 has taken steps to improve governance; however, key to improvement in environment and social performance is enhanced disclosure

By Priyavrat Bhati
Published: Tuesday 22 April 2014

Companies Act, 2013 has taken steps to improve governance; however, key to improvement in environment and social performance is enhanced disclosure

“Good [corporate] governance is bad business.” That was the refreshingly frank admission of a couple of top industrialists made in private to Prithvi Haldea, chairperson of Prime Database, an information provider on capital markets. I could hear only murmurs of approval from the captains of industry in attendance at the auditorium of PHD Chamber of Commerce.

The occasion was the National Conference on new initiatives of Securities and Exchange Board of India (SEBI) and Ministry of Corporate Affairs (MCA) in corporate governance held last week. The conference was organised to “promote” the new Companies Act, 2013, which includes a slew of measures to improve corporate governance and to oblige companies to undertake corporate social responsibility (CSR) activities. An array of grandees from alphabet soup of regulators, including SEBI, NSE, BSE and MCA made presentations to emphasise how the law will have a beneficial impact.

Why should we care about the new Act? Well, the Act is fairly progressive in its conception and has relevance for anybody interested in the environment performance of companies. “Good governance,” according to Prashant Saran, whole time member of SEBI, “means businesses should focus not only on profits but strive to be good corporate citizens.” CSR means businesses need to consider all stakeholders—shareholders, employees, buyers, suppliers, community and the environment—in their objectives. Businesses should be custodians of natural resources that are utilised optimally, not exploited endlessly.

The hurdles

Critics say the devil is in the detail. A number of key provisions have been watered down. For example, corporate governance is sought to be strengthened by requiring that at least one-third of directors of listed companies are independent. In the clubby world of family run businesses, typical in India, where does one find independent directors? How does one ensure independence when the company/owners pay them? Second, independent directors can’t be held responsible for decisions on which they didn’t have relevant information. The easiest way to escape liability, therefore, paradoxically, is to not ask any questions.

The second issue is implementation. Right now companies that do not comply with governance-related provisions don’t face material penalties. In fact some provisions could actually help them. A company facing hostile acquisition may deliberately violate certain provisions that will result in delisting from stock exchanges that will hurt only small shareholders. The companies aim to meet the provisions in letter not spirit. There are countless examples of CSR funds being used for promoters’ family trust or favourite charity.

I think the Companies Act can be a useful tool in improving environment and social performance of the corporate sector, notwithstanding the weak CSR provisions. Disclosure of environment and social indicators, suggested by the MCA, and made mandatory by SEBI, is a welcome start: sunlight is the best disinfectant, as the cliché goes. I believe once the disclosures become more extensive, publicly available data will be sufficient for credible ratings. So far, environment, social and governance (ESG) ratings based on publicly available information have little influence, largely because the information is limited. (Centre for Science and Environment’s Green Ratings  are an exception because the data behind them is privately sourced and meticulously researched—a time consuming exercise.) Robust “public” ESG ratings will likely be used by a different set of stakeholders: investors, banks and financial institutions. Their investment and lending decisions should influence the environment performance of companies.

It was left to M J Joseph, additional secretary with the ministry of corporate affairs to finally defend the legislation as a step in the right direction even if it is not a final solution. I agree, unless it is going to be like a line-dance: one step forward two steps back.

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