Chapter 9 Corporate Governance and Other Stakeholders – CS Professional Governance, Risk Management, Compliances and Ethics Notes is designed strictly as per the latest syllabus and exam pattern.
Corporate Governance and Other Stakeholders – Governance, Risk Management, Compliances and Ethics Study Material
Question 1.
Write short note On the following:
Whistle blower mechanism [Old Syllabus] (June 2014, 3 marks)?
Answer:
Whistle Blower Policy: 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. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization.
Question 2.
Write short note on the following:
Clarkson principles of stakeholder management. [Old Syllabus] (June 2014, 3 marks)
Question 3.
Write short note on the following:
Whistle blower policy [Old Syllabus] (Dec 2014, 3 marks)
Answer:
Regulation 22 of SEBI LODR Regulations, 2015 following are the requirements for the ‘Whistle Blower Policy’ in a listed entity:
1.The listed entity shall formulate a vigil mechanism/whistle blower policy for directors and employees to report genuine concerns.
2. The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or employee(s) or any other person who avail the mechanism and also provide for direct access to the chairperson of the. audit committee in appropriate or exceptional cases.
Question 4.
Explain the key principles of Stakeholder Engagement. (June 2017, 5 marks)
Answer:
Key principles of Stakeholder engagement
- Communicate: Interactions from the various stakeholders should be promoted.
- Consult, early and often: Always ask the right questions to get the useful information and ideas.
- Remember, they are human: Operate with an awareness of human feelings.
- Plan it: Time investment and careful planning against it, has a significant payoff.
- Relationship: Try to engender trust with the stakeholders. Seek out networking opportunity.
- Simple but not easy: Show your care. Be empathetic. Listen to the stakeholders.
- Managing risk: Stakeholders can be treated as risk and opportunities that have probabilities and impact.
- Compromise: Compromise across a set of stakeholders’ diverging priorities.
- Understand what success is: Explore the value of the project to the stakeholder.
- Take responsibility: Project governance is the key of project success.
Question 5.
“Stakeholder analysis is the identification of a project’s/activity’s key stakeholders, an assessment of their interests and the ways in which these interests affect project’s riskiness and viability.” Elaborate the statement. (June 2012, 5 marks)
Answer:
Stakeholder analysis is the identification of a project’s/ activity’s key stakeholders, an assessment of thefr interests, and the ways in which these interests affect project riskiness and viability. It is linked to both institutional appraisal and social analysis, drawing on the information deriving from these approaches but also contributing to the combining of such data in a single framework. Stakeholder analysis contributes to project design/activity design through the logical framework and by helping to identify appropriate forms of stakeholders participation.
Doing a stakeholder analysis can:
- draw out the interests of stakeholders in relation to the problems which the project is seeking to address (at the identification stage) or the purpose of the project (once it has started).
- identify conflicts of interests between stakeholders.
- help to identify relations between stakeholders which can be built upon and may enable to establish synergies.
- help to assess the appropriate type of participation by different stakeholders.
Question 6.
Discuss briefly the Caux Round Table (CRT) and its principles of business. (June 2012, 5 marks)
Answer:
The Caux Round Table (CRT) is based on the belief that the world business community should play an important role in improving economic and social conditions.
The Caux Round Table was founded in 1986 by Frederick Phillips, former President of Philips Electronics and Oliver Giscard d Estaing, former vice Chairman of INSEAD, as a means of reducing escalating trade tensions.
The CRT Principles for business were formally launched in 1994 and presented at the United Nations world summit on social development in 1995. The Principles are comprehensive statement of responsible business practice formulated by’business leaders for business leaders.
Business behaviour can affect relationships among nations and the prosperity and well being of us all. Business is often the first contact between nations and by the way in which it causes social and economic changes, has a significant impact on the level of fear or confidence felt by people world wide.
The emphasis is on seeking to establish what is right rather than who is right.
Principle 1: The Responsibilities of Businesses beyond shareholders toward stakeholders:
Business have a role to play in improving the lives of all their customers, employees, and shareholders by sharing with them the wealth they have created. Suppliers and competitors as well should expect business to honour their obligation in a spirit of honesty and fairness. As responsible citizens of the local, national, regional and global communities in which they operate, businesses share a part in shaping the future of those communities.
Question 7.
Discuss briefly the following:
Stakeholder engagement (Dec 2012, 3 marks)
Answer:
Stakeholder engagement is an alliance building tool. Corporate practice stakeholder engagement in an effort to understand the needs of their stake holders create partnership and promote dialogue. Stakeholder engagement identifies stakeholders, assesses stakeholder needs, develop stakeholder relations plans and form alliances with stakeholders.
Question 8.
Discuss the Clarkson Principles of Stakeholder Management. (Dec 2012, 5 marks)
Answer:
The Clarkson Principle of stakeholder management
Max Clarkson (1922 – 1998) founded the Centre for Corporate Social Performance and Ethics in the faculty of management, now the Clarkson Centre for Business Ethics & Board effectiveness or CC (BE)2. The Clarkson Principles Emerged From a Project undertaken by the Centre for Corporate Social Performance and Ethics:
Principle 1: Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders and should take their interests appropriately into account in decision -making and operations.
Principle 2: Managers should listen to and openly communicate with stakeholders about their respective concerns and contribution, and about the risks that they assume because of their involvement with the corporation.
Principle 3: Managers should adopt processes and modes of behaviour that are sensitive to the concerns and capabilities of each stakeholder constituency.
Principle 4: Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities.
Principle 5: Managers should work cooperatively with other entities, both public and private to ensure that risks and harm arising from corporate activities are minimized and where they can not be avoided , appropriately compensated.
Principle 6: Manager should avoid altogether activities that might jeopardize inalienable human rights (e.g. The right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders.
Principle 7: Manager should acknowledge the potential conflicts between (a) Their own role as corporate stakeholders and (b) Their legal and moral responsibilities for the interests of all stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and where necessary, third party review.
Question 9.
(a) “Stakeholders engagement is an alliance building tool.”Comment.
(b) Discuss briefly the Clarkson principles of stakeholder management. (June 2013, 5 marks each)
Answer:
(a) 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.
Stakeholder’s 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:
- identify stakeholder.
- Establish the goals and objectives of the company for stakeholder engagement.
- Identify stakeholder needs and interests.
- Determine the stakeholder engagement strategy.
- Evaluate outcome and internalize learnings.
Question 10.
Explain the following:
The Clarkson principles of stakeholder management. (Dec 2014, 3 marks)
Question 11.
“Employees’ participation in Corporate Governance system can be found in many countries and corporations throughout the
world.” In the light of this statement, discuss some of the important examples for ensuring good governance by employees. (Dec 2014, 4 marks)
Answer:
Employee participation in corporate governance systems can be found in many countries and corporations throughout the world. Following are the some important example for ensuring good governance by employees:
1. Right to consultation: Where employees must be consulted on certain management decisions. This right increases transparency of management decisions and allows employee opinion to ameliorate the asymmetry of information between management and the market.
2. Right to nominate/vote for supervisory board members: In many . cases employee participation on the board is mandated. This right
creates a check and balance system between management and the supervisory board, which in turn creates the perception of greater fairness.
3. Compensation/privatization programs that make employees holders of shares, thereby empowering employees to elect the board members, which, in turn holds management responsible.
Employees have a stake in the long-term success of the corporation. In that regard the shareholders are not the only residual claimants. “Employees possess skills and knowledge which are specific to their particular corporation and may be of limited value if they were to become employed elsewhere. Moreover, employees care about a wide range of decisions within corporations.” – Greenfield (1998).
Question 12.
“Organisation that builds mutually strong relationship with its vendors improves its overall performance in the market place.” Discuss. (Dec 2014, 4 marks)
Answer:
Vendors play a key role in the success of an organisation. The organisation which builds a mutually strong relationship with its vendors improves its overall performance in the marketplace. The time, money and energy used to nurture a positive vendor relationship cannot be measured directly against the company’s bottom line. However, a well managed vendor relationship will result in increased customer satisfaction, reduced costs, better quality and better sen/ice from the vendor. It ultimately contributes toward the good governance of an organisation. A proper systematic approach of vendor management will benefits all the employees, organisation, customer and vendors.
Question 13.
What do you understand by the ‘stakeholders concept’? Whether this concept has been recognised in law? [Old Syllabus] (Dec 2014, 5 marks)
Answer:
Stakeholder Concept:
In a business context, customers, investors and shareholders, employees, suppliers, government agencies, communities and many others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry and outcomes are known as stakeholders. These groups are influenced by business, but they also have the ability to affect businesses.
Stakeholders provide resources that are more or less critical to a firm’s long-term success. These resources may be both tangible and intangible. Shareholders, for example, supply capital; suppliers offer material resources or intangible knowledge; employees and managers grant expertise, leadership and commitment; customers generate revenue and provide infrastructure and the media transmits positive corporate images.
Recognition of Stakeholder Concept in Law
The stakeholder concept has been reflected in the laws governing the corporate for a long period. The labour laws seeks to ensure fair and equitable treatment to employees, the environment protection laws seeks ensure adoption of measures which will minimize the negative impact on environment. Tax laws give incentives in the form of tax holidays for development of backward areas. Tax benefits in the form of exemptions for donations made to recognized funds and organizations etc.
Question 14.
What do you understand by ‘stakeholder analysis’? (June 2015, 5 marks)
Answer:
Stakeholder Analysis:
Stakeholder analysis is the identification of a project’s/activity’s key stakeholders, an assessment of their interests, and the ways in which these interests affect project riskiness and viability. It is linked to both institutional appraisal and social analysis: drawing on the information deriving from these approaches, but also contributing to the combining of such data in a single framework. Stakeholder analysis contributes to project design/activity design through the logical framework, and by helping to identify appropriate forms of stakeholder participation.
Doing a stakeholder analysis can:
- draw out the interests of stakeholders in relation to the problems which the project is seeking to address (at the identification stage) or the purpose of the project (once it has started).
- identify conflicts of interests between stakeholders,
- help to identify relations between stakeholders which can be built upon, and may enable establish synergies
- help to assess the appropriate type of participation by different stakeholders.
Question 15.
Discuss Clarkson principles of stakeholder management. (June 2015, 5 marks)
Question 16.
“Better stakeholders’ engagement ensures good governance.” Analyse this statement in the context of employees as stakeholders. (Dec 2015, 5 marks)
Answer:
Better Stakeholders Engagement Ensures Good Governance:
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which will be foremost in their minds at the start of an engagement process. However, as the process unfolds they will soon take a particular role with related tasks and responsibilities. Representatives of special interests, such as employees invited to participate in stakeholder panels to review company performance and/or reporting practices in the following manner:
Right to consultation:
Where employees must be consulted on certain management decisions. This right increases transparency of management decisions and allows employee opinion to ameliorate the asymmetry of information between management and the market.
Right to nominate/vote for supervisory board members:
In many cases employee participation on the board is mandated. This right creates a check and balance system between management and the supervisory board, which in turn creates the perception of greater fairness.
Compensation/privatization programs that make employees holders of shares, thereby empowering employees to elect the board members, which, in turn holds management responsible.
Question 17.
Answer the following in brief:
How a better stakeholder engagement ensures good governance? (June 2017, 2 marks)
Answer:
Better Stakeholder Engagement ensures Good Governance
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which will be foremost in their minds at the start of an engagement process. However, as the process unfolds they will soon take a particular role with related tasks and responsibilities.
The following are Just some of the different roles that stakeholders can play:
- Experts, such as academics, who have been invited to contribute knowledge and strategic advice to the company’s board.
- Technical advisors with expertise on the social and environmental risks associated with particular technological and scientific developments invited to sit on scientific and ethical panels in science-based industries.
- Representatives of special interests, such as employees, local communities or the environment, commonly invited to participate in stakeholder panels to review company performance and/or reporting practices.
- Co-impiementers, such as NGOs, who have partnered with the company to implement a joint solution or program to address a shared challenge.
Question 18.
Answer the following:
“Stakeholder is any group of individuals which can effect or is affected by the organization.” What are the types of stakeholders? (Dec 2017, 2 marks)
Answer:
The stakeholders may be classified into Primary and Secondary
Stakeholders:
- Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival; these include employees, customers, investors, and shareholders, as well as the governments and communities that provide necessary infrastructure.
- Secondary stakeholders do not typically engage in transactions with a company and thus are not essential for its survival; these include the media, trade associations, and special interest groups.
Question 19.
“How does better stakeholder engagement enables good governance.” Discuss. (Dec 2017, 5 marks)
Answer:
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which will be foremost in their minds at the start of an engagement process. However, as the process unfolds they will soon take a particular role with related tasks and responsibilities. The following are just some of the different roles that stakeholders can play:
- Experts, such as academics, who have been invited to contribute knowledge and strategic advice to the company’s board;
- Technical advisors with expertise on the social and environmental risks associated with particular technological and scientific developments invited to sit on scientific and ethical panels in science-based industries;
- Representatives of special interests, such as employees, local communities or the environment, commonly invited to participate in stakeholder panels to review company performance and/or reporting practices;
- Co-implementers, such as NGOs, who have partnered with the company to implement a joint solution or program to address a shared challenge.
- Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues that impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand, hot just be understood.
Question 20.
“Stakeholder engagement provides opportunities to further align business practices with societal needs and expectations, helping to drive long-term sustainability and shareholder value”. In the context of this, discuss key principles of stakeholder engagement. (June 2018, 5 marks)
Answer:
Key Principles of Stakeholder engagement
- Communicate: Interactions from the various stakeholders should be promoted.
- Consult, early and often: Always ask the right questions to get the useful information and ideas.
- Remember, they are human: Operate with an awareness of human feelings.
- Plan it: Time investment and careful planning against it, has a significant ‘ payoff.
- Relationship: Try to engender trust with the stakeholders. Seek out networking opportunity.
- Simple but not easy: Show your care. Be empathetic. Listen to the Stakeholders.
- Managing risk: Stakeholders can be treated as risk and opportunities that have probabilities and impact.
- Compromise: Compromise across a set of stakeholders’ diverging priorities.
- Understand what success is: Explore the value of the project to the stakeholder.
- Take responsibility: It’s always the responsibility of everyone to maintain an ongoing dialogue with stakeholders.
Question 21.
What are CRT Principles of Responsible Business? Discuss. (Dec 2018, 5 marks)
Answer:
The 2009 CRT Principles for Responsible Business comprise of seven principles and more detailed Stakeholder Management Guideline covering each of the key stakeholder dimensions of ethical business practices i.e., customers, employees, shareholders, suppliers, competitors, and communities.
The CRT Principles for Business are a worldwide vision for ethical and responsible corporate behavior and serve as a foundation for action for business leaders worldwide. As a statement of aspirations, the CRT Principles aim to express a world standard against which business behavior can be measured. The Caux Round Table has sought to begin a process that identifies shared values, reconciles differing values, and thereby develops a shared perspective on business behavior acceptable to and honoured by all.
CRT Principles for Responsible Business set forth ethical norms for acceptable businesses behaviour. The principles also have a risk management foundation because good ethics is good risk management. And they balance the interests of business with the aspirations of society to ensure sustainable and mutual prosperity for all.
Seven CRT Principles are:
Principle 1: Respect stakeholders beyond shareholders.
Principle 2: Contribute to economic, social and environmental development. Principle 3: Build trust by going beyond the letter of the law.
Principle 4: Respect rules and conventions.
Principle 5: Support responsible globalisation.
Principle 6: Respect the environment.
Principle 7: Avoid illicit activities.
Question 22.
Write a brief note on Caux Round Table (June 2019, CRT). (June 2019, 3 marks)
Answer:
The Caux Round Table (CRT) is an international network of business leaders working to promote a morally and sustainable way of doing business. The Caux Round Table was founded in 1986 by Frits Philips Sr, former President of Philips Electronics, and Olivier Giscard d’Estaing, former Vice-Chairman of INSEAD, as a means of reducing escalating international trade tensions between Europe, Japan and the USA. At the urging of Ryuzaburo Kaku, then Chairman of Canon Inc. the CRT began to focus attention on the importance of global corporate responsibility in reducing social and economic threats to world peace and stability. This led to the development of the 1994 Caux Round Table Principles for Business around three ethical foundations, namely:
- responsible stewardship
- the Japanese concept of Kyosei – living and working for mutual advantage: and
- respecting and protecting human dignity.
These principles recognize that while laws and market forces are necessary, they are insufficient guides for responsible business conduct. The Caux Round Table believes that the world business community should play an important role in improving economic and social conditions. Through an extensive and collaborative process in 1994, business leaders developed the CRT Principles for Business to embody the aspiration of principled business leadership. The CRT believes that its Principles for Responsible Business provide necessary foundations for a fair, free and transparent global society.
Question 23.
“Better Stakeholder engagement ensures Good Governance”. In light of this sentence, elaborate the role of stakeholders in governance. (Dec 2019, 3 marks)
Answer:
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which will be foremost in their minds at the start of an engagement process. However, as the process unfolds they soon take a particular role with related tasks and responsibilities. The following are just some of the different roles that stakeholders can play:
- Experts, such as academicians, who have been invited to contribute knowledge and strategic advice to the company’s board.
- Technical advisors with expertise on the social and environmental risks associated with particular technological and scientific developments invited to sit on scientific and ethical panels in science-based industries.
- Representatives of special interests, such as employees, local communities or the environment, commonly invited to participate in stakeholder panels to review company performance and/or reporting practices.
- Co-implementers, such as NGOs, who have partnered with the company to implement a joint solution or program to address a shared challenge.
Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues that impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand, not just be understood.
Question 24.
“A responsible business activity contributes to good public policy and to human rights in the communities in which it operates.” Explain the responsibilities of business provided in the Caux Round Table’s (CRT) Stakeholder Management Guidelines. (Dec 2020, 5 marks)
Answer:
As a global corporate citizen, a responsible business actively contributes to good public policy and to human rights in the communities in which it operates. Business therefore has a responsibility to:
a. Respect human rights and democratic institutions, and promote them wherever practicable.
b. Recognize government’s legitimate obligation to society at large and support public policies and practices that promote social capital.
c. Promote harmonious relations between business and other segments of society.
d. Collaborate with community initiatives seeking to raise standards of health, education, workplace safety and economic well-being.
e. Promote sustainable development in order to preserve and enhance the physical environment while conserving the earth’s resources.
f. Support peace, security and the rule of law.
g. Respect social diversity including local cultures and minority communities.
h. Be a good corporate citizen through ongoing community investment and support for employee participation in community and civic affairs.
Question 25.
Define the role of Stakeholders in Corporate Governance under SEBI (LODR), Regulations, 2015. (Aug 2021, 5 marks)
Answer:
Role of Stakeholders in Corporate Governance:
As per Regulation 4(2)(d) of SEBI (LODR) Regulations, 2015 the listed entity should recognise the rights of stakeholders and encourage co-operation between listed entity and the stakeholders in the following manner:-
- The listed entity should respect the rights of stakeholders that are established by law or through mutual agreements.
- Stakeholders should have the opportunity to obtain effective redress for violation of their rights.
- Stakeholders should have access to relevant, sufficient and reliable information on a timely and regular basis to enable them to participate in Corporate Governance process.
- The listed entity should devise an effective whistle blower mechanism enabling stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices.
(Note: According to SEBI (LODR) 2nd Amendment Regulations, 2021 dt. 5th May, 2021, in regulation 4(2)(d) - the words ‘vigil mechanism/ whistle blower policy’ shall be used instead of the words ‘whistle blower mechanism’).
Question 26.
“Shareholders and stakeholders are both associated with a corporation, but their interests in the organization differ.” Explain with reference to stakeholder theory. (Dec 2021, 5 marks)
Answer:
A shareholder is a person or entity that owns shares in the company. A shareholder is entitled to vote in general meetings, receive dividends from the company, transfer the shares etc. and include equity shareholders and preference shareholders of the company. Stakeholders represent a substantially broad group, because they include anyone having an interest in the success or failure of a business. A company’s stakeholders are “those groups without whose support the organization would cease to exist.” This group include shareholders, but goes well beyond shareholders to also include creditors, customers, employees, investors, suppliers, the local community, government agencies and many others who have a ‘stake’ or claim in some aspect of the company’s products, operations, markets, industry and outcomes. Thus, shareholders are a subset of the larger group of stakeholders.
Traditionally, shareholders have been considered more important than all other stakeholders in a business, .since they own the entity and have rights to receive its cash flows under certain circumstances. However, the stakeholder theory suggests that the purpose of a business is to create as much value as possible for stakeholders. It creates an ecosystem of related groups, all of whom need to be considered and satisfied to keep the company healthy and successful in the long term. In order to succeed and be sustainable over time, executives must keep the interests of customers, suppliers, employees, communities and shareholders aligned and going in the same direction.
Question 27.
Describe the principles in respect of:
(1) Audit, Risk and Internal Control
(2) Remuneration
Under the UK Corporate Governance Code, 2018. (June 2022, 5 marks)
Question 28.
Stakeholder engagement is the process by which an organisation involves people who may be affected by the decision it makes or can influence the implementation of its decisions. In reference to stakeholder’s engagement, explain the three key principles of stakeholder’s engagement. (June 2022, 3 marks)
Corporate Governance and Other Stakeholders Notes
Stakeholder analysis:
Stakeholder analysis is a key part of stakeholder management. A stakeholder analysis.of an issue consists of weighing and balancing all of the competing demands on a firm by each of those who have a claim on it, in order to arrive at the firm’s obligation in a particular case. A stakeholder analysis does not preclude the interests of the stakeholders overriding the interests of the other stakeholders affected, but it ensures that all affected will be considered.
The Caux Round Table (CRT):
The Caux Round Table (CRT) is an international network of business leaders working to promote a morally and sustainable way of doing business. The CRT believes that its Principles for Responsible Business provide necessary foundations for a fair, free and transparent global society.
Primary stakeholders:
Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival; these include employees, customers, investors, and shareholders, as well as the governments and communities that provide necessary infrastructure.
Secondary stakeholders:
Secondary stakeholders do not typically engage in transactions with a company and thus are not essential for its survival; these include the media, trade associations, and special interest groups.
Corporate Social Responsibilities:
Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.