CS Professional Programme Paper-8, Module-IV Governance, Business, Ethics and Sustainability Solution (June - 2013) Answer: 2013 - June [1] (a) Ch-1 A corporate does not exist by itself and it does not operate in vacuum. Its work is organized and facilitated with the help and co-operation of all the constituents of the society in which it functions. The fundamental basis of corporate governance and responsibility in the value system of the corporation includes the following: (i) its human resource principles - respect and dignity for all. (ii) its dedication to accurate and transparent accounting and financial standards. (iii) its concern for the environment, for good business ethics and conduct for social advancement. (iv) its focus to serve customers and to guarantee its products and services. (v) its insistence on fair treatment of suppliers and competitors. (vi) its commitment to comply with government laws and regulations in all countries in which it operates. (vii) its desire to work with others to lead society to a better economic standard and quality of life. A good structure of corporate governance satisfies these needs and interests of different stakeholders in a way that provides for long- term growth in the value of the company and its contribution to society. In the Indian context, the arena of corporate governance is continually evolving. Clause 49 of Listing Agreement is the foremost amongst legislation on corporate governance, which was included in the Listing Agreement in February 2000. In the recent years Corporate Social Responsibility and sustainability is being regarded as an important element of corporate governance. In this context, the Ministry of Corporate Affairs issued the CSR Voluntary Guidelines in 2009. Keeping in view the feedback from stakeholders, review of 2009 Guidelines was undertaken resulting in the formulation of 2011 Guidelines entitled “National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business” that will mainstream the subject of business responsibilities. The Guidelines were released by MCA on July 8th, 2011. Answer: 2013 - June [1] (b) (i) Ch-17 The statement is False. As per clause 49 of the listing agreement, the performance evaluation of non-executive directors could be done by a peer group comprising the entire board of directors, excluding the director being evaluated. Answer: 2013 - June [1] (b) (ii) Ch-17

1

The statement is True. Section 299 imposes a specific duty on every director to disclose his interest to the full board. Every director of a company must disclose the nature of his concern or interest in any transaction of the company at a meeting of the board of directors and not by circulation. Answer: 2013 - June [1] (b) (iii) Ch-17 The statement is True. CSR is about how a company aligns their values to social causes by including and collaborating with their investors, suppliers, employees, regulators and the society as a whole. Answer: 2013 - June [1] (b) (iv) Ch-17 This statement is False. The company may establish a mechanism for employees to report to the management concerns about unethical behaviour actual or suspected fraud or violation of the company’s code of conduct or ethics policy. Answer: 2013 - June [1] (b) (v) Ch-17 This statement is False. The Agenda, setting out the business to be transacted at the Meeting and Notes on Agenda should be given at least seven days before the date of the Meeting. Answer: 2013 - June [2] (a) (i) Ch-8 Corporate Blogs: A corporate blog is a blog published or with the support of an organization to reach the organization goals. The word blog is derived from the word web log wherein regular entries of commentary description of events are published. Corporate blog is used by an organization to reach its organization goals. The advantage of the blog is that posts and comments are easy to reach and follow due to centralised hosting and generally structured conversation threads. Corporate blog is very popular as economical, effective, has wide coverage is expedient and cost effective. As a marking and public relation tool, its value is immense. Answer: 2013 - June [2] (a) (ii) Ch-5 Continual disclosure: Continual disclosure is envisaged under SEBI (Substantial Acquisition and Takeover) Regulation 2011 by a person who together with persons acting in concert with him, hold shares or voting rights entitling him to exercise 25% or more of the voting rights in a target company and promoter of every target company shall together with persons acting in concert with him, disclose their aggregate shareholding and voting rights as of the 31st day of March, in such target company in such form as may be specified.

2

In terms of SEBI (Prohibition in Insider Trading) Regulation, 1992, any person who holds more than 5% of shares for voting rights in any listed company shall disclose to the company the number of shares or voting rights held and change in shareholding or voting rights, if such change results in shareholding falling below 5%, if these has been change in such holdings from the last disclosure made and such change exceeds 2% of total shareholding or voting rights in the company. Any person who is a director or officer of a listed company is required to disclose to the company and the sock exchange where the securities are listed, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings of such person from the last disclosure made and the change exceeds ` 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower. Answer: 2013 - June [2] (a) (iii) Ch-4 Please refer 2010 - Dec [4] (a) (iv) on page no. Answer: 2013 - June [2] (a) (iv) Ch-7 CSR Assessment: CSR audit has yet to gain momentum but the concept aims to give an independent opinion by external auditor on the extent of alignment of CSR objectives with the business goals and level of managerial commitment and performance with regard to attainment of social responsibility objective defined by the Company’s Board. Answer: 2013 - June [2] (b) Ch-5 To The Board of Directors XYZ Ltd. A model Board charter may include the following: C Code for Board of Directors and Board Committee. C Board charter and Role of Board of Directors. C Duties of the Directors. C Role of the Board and Management. C Procedure for selection and appointment of the Board Members. C Board membership criteria. C Board orientation and induction. C Board structure and performance. C Size of the Board. C Board composition. C Tenure of Board members. C Compensation to Directors. C Ethics and conflicts of interest. C Boards interaction with institutional Investors, Press, customer etc.

3

C C C C C C C

Selection of chairman and Chief Executive officer. Selection of Lead Independent Director. Board interaction with senior management. Board meeting. Remuneration committee charter. Board Performance Evaluation. Director liability insurance. Sd\Company Secretary

Answer: 2013 - June [3] (a) Ch-8 Please refer 2010 - Dec [2] (a) (iii) on page no. Answer: 2013 - June [3] (b) Ch-4 Please refer 2010 - June [2] (a) (i) on page no. Answer: 2013 - June [3] (c) Ch-3 Please refer 2012 - June [3] (b) on page no. Answer: 2013 - June [4] (a) Ch-8 To The Board of Directors ABCD Limited Corporate Communication Policy defines the role and responsibilities of the employees in the communication structure of the company. Corporate communication policy may specifically focus on: (a) Information to Employees - Internal Communications: All the relevant information should be communicated to the employees through internal channels. (b) Media Relations: This involves building and maintaining a positive relationship with the media. (c) External Event: Could involve vendor/supplier/distributor meets, channel partner meetings, event related to product launches, important initiatives etc. (d) Investor Communication: Investor relation cell can held responsible for coordinating communications with investors. (e) Brand Management: Major responsibility of corporate communication is image or brand building. (f) Legal Communication: Regulators are the external players having considered role in communication by

4

the, company. At various points communication are to be made to the stock exchange, government and judicial authorities. Secretarial and legal department may be held responsible for timely and accurate communication. Answer: 2013 - June [4] (b) (i) Ch-1 Please refer 2012 - June [4] (b) (i) on page no. Answer: 2013 - June [4] (b) (ii) Ch-4 Reputation Risk: Reputation is the trust that an organization has gained over the years by the products, services, brands it has provided to the society. It is an intangible assets that is broad and far- reaching and includes image, goodwill and brand equity. If ruined can devastate the financial health and welfare of an organization. Component of Reputation Risk Management: C Management of Reputation Risk. C Preparation for Reputation Crises. C Handling of Reputation Crises. Answer: 2013 - June [4] (b) (iii) Ch-2 Please refer 2011 - June [2] (a) (i) on page no. Answer: 2013 - June [4] (b) (iv) Ch-8 Corporate Governance in Insurance Sector: The Insurance Regulatory and Development Authority (IRDA) has outlined corporate Governance Guidelines for Insurance Companies. These are in addition to provisions of the Companies Act, 1956, Insurance Act, 1938 and requirement of any other laws or regulations framed thereunder. Where any provisions of the Corporate Governance Guidelines appear to be in conflict with the provisions contained in any law or regulations, the legal provisions will prevail. However where, the requirements of the Guidelines are more rigorous than the provisions of any law, the Guidelines shall be followed.

5

Part B Answer: 2013 - June [5] (a) Ch-10 Please refer 2011 - June [7] (a) on page no. Answer: 2013 - June [5] (b) (i) Ch-11 Please refer 2012 - Dec [5] (b) (iii) on page no. Answer: 2013 - June [5] (b) (ii) Ch-11 Integrity Pact: The Integrity Pact (IP) is a tool aimed at preventing corruption in public contracting. It was developed by Transparency International. It consists of a process that includes an agreement between a government or a government department and all bidders for a public contract. It contains rights and obligations to the effect that neither side will pay, offer, demand or accept bribes, collude with competitors to obtain the contract, or engage in such abuses while carrying out the contract. The Integrity Pact also introduces a monitoring system that provides for independent oversight and accountability. Answer: 2013 - June [5] (b) (iii) Ch-12 Please refer to 2009 - June [7] (b) (ii). Answer: 2013 - June [5] (b) (iv) Ch-10 Ethics in Finance: The ethics issue in finance that companies and employees are confronted with include: C In accounting - window dressing, misleading financial analysis. C Related Party Transaction not at arms length. C Insider trading, securities found leading to manipulation of the financial markets. C Executive Compensation. C Bribery, Kickbacks over billing of expenses, facilitation payments. Answer: 2013 - June [6] (a) Ch-11 Please refer 2009 - Dec [6] (c) on page no. Answer: 2013 - June [6] (b) Ch-11 Please refer 2010 - Dec [7] (c) on page no.

6

Answer: 2013 - June [6] (c) Ch-12 The ethical dimension of an activity can be determined with the help of the following grid which is self explanatory. Activity Analysis (Ethical) Parasite

Win-win Situation

Helping Self Injuring Others

Helping Self Helping Others

Martyr

Total Loss

Helping Others Injuring Self Injuring Self Injuring Others The first block in the grid - help self and injuring others is obviously unethical. The second block that is helping others and injuring self may appear to be ethical, however it is not ethical. The third grid wherein one helps self and also helps others is the most ideal and ethical situation. The win-win situation. The last grid is a situation that should be avoided at all costs and is highly unethical. Answer: 2013 - June [7] (a) Ch-12 Stakeholder engagement is an alliance - building tool. Corporations practice stakeholder engagement in an effort to understand the needs of their stakeholders create partnership and promote dialogue. Stakeholder engagement identifies stakeholders, assesses stakeholders needs, develops stakeholders relations plans and forms alliance with stakeholders. Stakeholders engagement leads to increased transparency, responsiveness, compliance, organisational learning, quality management, accountability and sustainability. Stakeholder engagement is a central feature of sustainability performance. Stakeholder engagement involves following steps: 1. Identity stakeholder. 2. Establish the goals and objectives of the company for stakeholder engagement. 3. Identity stakeholder needs and interests. 4. Determine the stakeholder engagement strategy. 5. Evaluate outcome and internalize learnings. Answer: 2013 - June [7] (b) Ch-12 Please refer 2009 - Dec [7] (b) on page no. Answer: 2013 - June [7] (c) Ch-11 Please refer 2009 - June [7] (b) (i) on page no. Part C Answer: 2013 - June [8] (i) Ch-14

7

The primary responsibility for administration and implementation of the Policy of the Government of India with respect to environmental management, conservation, ecological sustainable development and pollution control rests with the Ministry of Environment and Forest (MOEF). The MOEF is the agency responsible for the review and approval of Environmental Impact Assessment. Under this notification certain activities must obtain clearance from Central and State Government and also to obtain no objection certificate before commencement of the operations. The MOEF is responsible to enforce the Regulations established pursuant to major legal enactment which include: C The Water (Prevention and Control of Pollution) Act, 1974. C The Air (Prevention and Control of Pollution) Act, 1981. C The Environment (Protection) Act, 1986. C National Environment Appellate Authority Act, 1997. C The prevention of cruelity to Animals, Act 1960. C Wild Life (Projection) Act, 1972. C Scheduled Tribes and other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006. C Forest Conservation Act, 1980. C Indian Forest Act, 1927. C Biological Diversity Act, 2002. Answer: 2013 - June [8] (ii) Ch-13 As a good corporate citizen, the companies are required to focus on the following key aspects: 1. Absolute value creation for the society. 2. Ethical corporate practices. 3. Worth of earth through environmental protection. 4. Equitable business practices. 5. Corporate social responsibility. 6. Innovate new technology/process/system to achieve eco-efficiency. 7. Creating market of all. 8. Switching over from stakeholder dialogue to holistic partnership. 9. Compliance of statutes, rules and regulations, standards. Answer: 2013 - June [8] (iii) Ch-14 Please refer 2011 - June [8] (iii) on page no.

Answer: 2013 - June [8] (iv) Ch-15 The Rio-Declaration on Environment and Development consists of following 10 principles intended to guide future sustainable development around the world.

8

1. 2.

Human being are at the centre of concerns for sustainable development. The right to development must be fulfilled so as to equitably meet developmental and environmental needs of present and future generations. 3. In order to achieve sustainable development, environmental protection shall constitute an integral part of the development process and cannot be considered in isolation from it. 4. States should reduce and eliminate unsustainable pattern of production and consumption and promote appropriate demographic policies. 5. States shall enact effective environmental legislation. 6. In order to protect the environment, the precautionary approach shall be widely applied by state according to their capabilities. 7. Women have a vital role in environmental management and development. Their full participation is therefore essential to achieve sustainable development. 8. The creativity, ideals and courage of the youth of the world should be mobilized to forge a global partnership in order to achieve sustainable development and ensure a better future for all. 9. The environment and natural resources of people under oppression, domination and occupation shall be protected. 10. Peace, development and environmental protection are interdependent and indivisible. Answer: 2013 - June [8] (v) Ch-16 The statement was made by the Supreme Court in the Writ petition filed by the environmentalist and lawyer M.C. Mehta, as a public interest litigation. [M.C. Mehta and another (Petitioners) v. Union of India and others (Respondents) and Shriram Foods and Fertiliser Industries (Petitioners) v. Union of India (Respondents). The petition raised some determining questions concerning the principles and norms for determining the liability of large enterprises engaged in manufacture and sale of hazardous products, the basis on which damage in case of such liability should be quantified and whether such large enterprise should be allowed to continue to function in thickly populated areas and if they permitted so to function, what measures must be taken for the purpose. The pressing issue which the Supreme Court had to decide immediately in the petition was whether to allow the caustic chlorine plant of Shriram Foods and Fertilizer Industries to be restarted. The accused Company, Delhi Cloth Mills Ltd., a public limited company having its registered office in Delhi, ran an enterprise called Shriram Food and Fertilizer Industries. A major leakage of oleum gas took place from one of the units of Shriram and this leakage affected a large number of people, both amongst the workmen and the public. The leakage resulted from the bursting of the tank containing oleum gas as a result of the collapse of the structure on which it was mounted and it created a scare amongst the people residing in that area. The Delhi Administration issued two orders, on the behest of Public Health and Policy, to cease carrying on any further operation and to

9

remove such chemical and gases from the said place. The Inspector of Factories and the Assistant Commissioner (Factories) also issued separate orders to shut down both plants. Aggrieved Shriram filed a writ petition challenging the two prohibitory orders issued under the Factories Act of 1948 and sought interim permission to reopen the coustic chlorine plant. The Supreme Court after examining the reports of the various committees held that pending consideration of the issue whether the coustic chlorine plant should be directed to be shifted and relocated at some other place, the coustic chlorine plant should be allowed to be restarted by the management subject to certain stringent conditions which were specified. The Court said that it is not possible to adopt a policy of not having any chemical or other hazardous industries merely because pose hazard or risk to the community. If such a policy were adopted, it would mean the end of all progress and development. Such industries, even if hazardous have to be set up since they are essential for the economic development and advancement of well being of the people. The option available was to reduce the element of hazard or risk to the community by taking all necessary steps for locating such industries in a manner which would pose least risk or danger to the community and maximizing safety requirements in such industries.

10