Chapter 1: Corporate governance

The tug of war between individual freedom and institutional power is a continuing theme of history. Early on, the focus was on the church; more recently, it is on the civil state. Today, the debate is about making corporate power compatible with the needs of a democratic society. The modern corporation has not only created untold wealth and given individuals the opportunity to express their genius and develop their talents but also has imposed costs on individuals and society. How to liberalise individual energy without inflicting unacceptable costs on individuals and society has emerged as a key challenge.

Corporate governance lies at the heart of this challenge. It deals with the systems, rules, and processes by which corporate activity is directed. Narrow definitions focus on the relationships between corporate managers, a company’s board of directors, and its shareholders. Broader descriptions encompass the relationship of the corporation to all of its stakeholders and society, and cover the sets of laws, regulations, listing rules, and voluntary private-sector practices that enable corporations to attract capital, perform efficiently, generate profit, and meet both legal obligations and general societal expectations. The wide variety of definitions and descriptions that have been advanced over the years also reflect their origin: lawyers tend to focus on the contractual and fiduciary aspects of the governance function; finance scholars and economists think about decision-making objectives, the potential for conflict of interest, and the alignment of incentives, while management consultants tend to adopt a more task-oriented or behavioral perspective. Complicating matters, different definitions also reflect two fundamentally different views about a corporation’s purpose and responsibilities. Often referred to as the “shareholder versus stakeholder” perspectives, they define a debate about whether managers should run a corporation primarily or solely in the interests of its legal owners—the shareholders (the shareholder perspective)—or whether they should actively concern themselves with the needs of other constituencies (the stakeholder perspective).

This question is answered differently in different parts of the world. In Continental Europe and Asia, for example, managers and boards are expected to concern themselves with the interests of employees and the other stakeholders, such as suppliers, creditors, tax authorities, and the communities in which they operate. Reflecting this perspective, the Centre of European Policy Studies (CEPS) defines corporate governance as “the whole system of rights, processes and controls established internally and externally over the management of a business entity with the objective of protecting the interests of all stakeholders.”

In contrast, the Anglo-American approach to corporate governance emphasizes the primacy of ownership and property rights and is primarily focused on creating “shareholder” value. In this view, employees, suppliers, and other creditors have rights in the form of contractual claims on the company, but as owners with property rights, shareholders come first: Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to

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appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.

Perhaps the broadest, and most neutral, definition is provided by the Organization for Economic Cooperation and Development (OECD), an international organization that brings together the governments of countries committed to democracy and the market economy to support sustainable economic growth, boost employment, raise living standards, maintain financial stability, assist other countries’ economic development, and contribute to growth in world trade.

Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

The Evolution of governance

Early on in antiquity, the hard labour of subsistence living was transformed gradually by the invention of tools-the beginnings of technology. With the development of new resources of energy-first the steam engine and then electricity and the internal combustion engine-came machines that dramatically increased productivity. In the past 50 yrs technological advances in practically every field have exploded, nearly all traceable to the invention of the transistor. With the subsequent development of digital technology, we have seen revolutions in electronics, communications, transportation, medicine, and all forms of manufacturing, leveraged by an exponential increase in our ability to gather and disseminate information. A requisite driver of these evolutionary forces has been the advent of universal education. The breakthrough that made education more readily available to the masses was the invention of movable type by Gutenberg in 1438, and the evolution of printing that followed ushered in growing literacy that became the foundation for an educated populace. We recognize the impact of this innovation in the axiom, “we learn to read so that we can read to learn.”

As widespread literacy spawned education that has driven technology, there has been a comparable evolution in how we govern our affairs. From the outset, humankind has sought to discover the best ways to make decisions for its groups-to find ways to govern so as to resolve disputes, control destructive behavior, and achieve goals that advance the mutual welfare of the members of the society. The effectiveness of a given approach to governance has determined, to a large extent, the survival and prosperity of that society. In the beginning, groups of people were small, simple, and located in one place. Their governance processes could be equally simple. Over time, these groups have become large, complex, far- reaching organizations. Tribal and

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feudal fiefdoms have evolved into nation-states. Small, local proprietorships have evolved into large corporations. Their decision making processes likewise have matured to reflect the more complex governance issues.

Among the seminal breakthroughs in this journey from simplicity to complexity in governance were the social revolutions of the eighteenth and nineteenth centuries- particularly the American and French revolutions and their accompanying periods of enlightment. Prior to that time, as societies grew, they became progressively more stratified, with smaller ruling classes accumulating greater wealth generated by the labours of the subservient masses. Rich nations became ever more powerful and, by force, colonized weaker nations, particularly those endowed with an abundance of natural resources. For centuries, governance was exercised by a privileged few who gained power over the many. The powerful ruled until they were overthrown by a revolt from within or defeated by a conqueror from outside. However, the nature of the society seldom changed; it was simply a case of one monarchy or dictatorship replacing another. Some were competent and benevolent, and the people benefited. More typically, there was incompetence, corruption, and oppression of the citizenry.

The prevailing system of governance resulted from the actions of individuals, not from the evolution of legal principles. As individuals gained power, however, they increasingly ruled by oppressive force, often creating a backlash of revolution. The social revolutions that followed were fueled by a hunger for individual freedom and by a sense of moral imperative of how people should treat one another. Out of these revolutions grew the modern concept of democracy- a rule of the people, by the people, and for the people- a concept implied in the Constitution of the United States and articulated in Lincoln’s Gettysburg Address.

In the 19th century, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US's wealth has been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become increasingly derivative and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society. Berle and Means' monograph "The Modern Corporation and Private Property" (1932, Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today.

Since the late 1970’s, corporate governance has been the subject of significant debate in the U.S. and around the globe. Bold, broad efforts to reform corporate governance have been driven, in

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part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors’ duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners

Definition

The concept of corporate governance is poorly defined because it covers various economics aspects. As a result of this different people have come up with different definitions on corporate governance. It is hard to point on any one definition as the ultimate definition on corporate governance. So the best way to define the concept is to provide a list of the definitions given by some noteworthy people.

1. According to Sir Adrian Cadbury

"Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society”

2. According to Mathiesen (2002)

“Corporate Governance is a field in economics that investigates how to secure efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return.”

According to J. Wolfensohn, president of the World Bank, (in 1999)

“Corporate governance is about promoting corporate fairness, transparency and accountability”

5. Financial Times [1997]

"Corporate governance can be defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society

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7. According to OECD (Organization for Economic Co-operation and Development)

“Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.”

The definition given by OECD means that corporate governance is an arrangement which manages the corporations. The configuration of corporate governance defines the duties and obligations of all the members of the corporation, gives the structure of setting the objectives and the method of attaining the set of objectives.

Thus we conclude from all the above stated definitions that corporate governance is a mode by which the management is motivated to work for the betterment of the real owners of the corporation i.e. the shareholders.

In other words corporate governance can be defined as the relationship of a company to its shareholders or more broadly the relationship of the company to the society.

Corporate governance thus refers to the manner in which a company is managed and states the rules, laws and regulation that affect the management of the firm. It also includes laws relating to the formation of the firm, establishment of the firm and the structure of the firm. The most important concern of corporate governance is to ensure that the managers and directors act in the interest of the firm and for the shareholders.

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Chapter 2: G-Cube Model of Corporate Governance

The model measures six parameters of Corporate Governance accounting quality, value creation, fair policies & actions, communication, effective governing and reliability.

For accounting quality the managers look at all or any of the following variables: company accounting policies, disclosure standards, proactive adoption of accounting policy improvements, internal audit and control mechanisms for addressing auditor’s queries. The top companies were ranked accordingly.

For value creation focus business strategy (driven by value creation focus), effective use of cash surplus, capital structure, usage of IPO funds, shareholder friendliness are among the key variables.

For Fair policies and actions the managers take the cue from fair treatment of minority shareholders, transparency of trades by top management and ethical behavior with customers, suppliers, tax authorities and government. Similar variables were used for ranking companies based on other parameters.

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Chapter 3: Historical Perspective of Corporate Governance

The seeds of modern corporate governance were probably sown by the Watergate scandal in the United States. The global movement for better corporate governance progressed in fits and starts from the mid-1980s up to 1997. There were the odd country-level initiatives such as the Cadbury Committee Report in the United Kingdom (1992) or the recommendations of the National Association of Corporate Directors of the US (1995). It would be fair to say, however, that such initiatives were few and far between. And while there were the occasional international conferences on the desirability of good corporate governance, most companies – both global and Indian knew little of what the phrase meant, and cared even less for its implications. More recently, the first major stimulus for corporate governance reforms came after the South-East and East Asian crisis of 1997-98. This was no classical Latin American debt crisis. Here were fiscally responsible, healthy, rapidly growing, export-driven economies going into crippling financial crises. Gradually, governments, multilateral institutions, banks as well as companies began to understand that the devil lay in the institutional, microeconomic details – the nitty-gritty of transactions between companies, banks, financial institutions and capital markets; the design of corporate laws, bankruptcy procedures and practices; the structure of ownership and crony capitalism; sharp stock market practices; poor boards of directors showing scant regard to fiduciary responsibility; poor disclosures and transparency; and inadequate accounting and auditing standards.

Suddenly, ‘corporate governance’ came out of dusty academic closets and moved centre stage. Barring Japan and possibly Indonesia, countries in Asia recovered remarkably fast. By the year 2001, Thailand, Malaysia and Korea were on the upswing and on course to regain their historical growth rates. With such rapid recovery, corporate governance issues were in the danger of being relegated to the back stage once again. There were projects to be executed, under-value assets to be bought, and profits to be made. International investors were again showing bullishness. In such a milieu, there seemed no urgent need to impose concepts like better accounting practices, greater disclosure, and independent board oversight. Corporate governance once again settled into a phase of extended inactivity.

India’s experience was somewhat different from this Asian scheme of things. First, unlike South-East and East. Asia, the corporate governance movement did not occur due to a national or region-wide macro – economic and financial collapse. Indeed, the Asian crisis barely touched India.

Secondly, unlike other Asian countries, the initial drive for better corporate governance and disclosure, perhaps as a result of the 1992 stock market ‘scam’, and the onset of international competition consequent on the liberalization of economy that began in 1990, came from all-India industry and business associations, and in the Department of Company Affairs.

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Thirdly, it is fair to say that, since April 2001, listed companies in India are required to follow some of the most stringent guidelines for corporate governance throughout Asia and which rank among some of the best in the world.

Even so, there is scope for improvement. For one, while India may have excellent rules and regulations, regulatory authorities are inadequately staffed and lack sufficient number of skilled people. This has led to less than credible enforcement. Delays in courts compound this problem. For another, India has had its fair share of corporate scams and stock market scandals that has shaken investor confidence. Much can be done to improve the situation.

Just as the global corporate governance movement was going into a bit of hibernation, there came the Enron debacle of 2001, followed by other scandals involving large US companies such as WorldCom, Qwest, Global Crossing and the exposure of lack of auditing that eventually led to the collapse of Andersen. After having shaken the foundations of the business world, that too in the stronghold of capitalism, these scandals have triggered another more vigorous phase of reforms in corporate governance, accounting practices and disclosures – this time more comprehensively than ever before.

As a US – based expert recently put it, “Enron and WorldCom have done more to further the cause of corporate transparency and governance in less than one year, than what activists could do in the last twenty.”

This is truly so. In June 2002, less than a year from the date when Enron filed for bankruptcy, the US Congress introduced in record time the Sarbanes-Oxley Bill. This piece of legislation (popularly called SOX) brought with it fundamental changes in virtually every area of corporate governance – and particularly in auditor independence, conflicts of interest, corporate responsibility and enhanced financial disclosures. The SOX Act was signed into law by the US President on 30 July 2002. While the US Securities and Exchanges Commission (SEC) is yet to formalize most of the rules under various provisions of the Act, and despite there being rumbles of protest in the corporate world against some of the more draconian measures in the new law, it is fair to predict that the SOX Act will do more to change the contours of board structure, auditing, financial reporting and corporate disclosure than any other previous law in US history.

Although India has been fortunate in not having to go through the pains of massive corporate failures such as Enron and WorldCom, it has not been found wanting in its desire to further improve corporate governance standards. On 21 August 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs appointed this Committee to examine various corporate governance issues.

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Recent Development in Corporate Governance

The Department of Company Affairs, in May 2000, invited a group of leading industrialists, professionals and academics to study and recommend measures to enhance corporate excellence in India. The Study Group in turn set up a Task Force, which examined the subject of Corporate Excellence through sound corporate governance and submitted its report in Nov. 2000. The task force in its recommendations identified two classifications namely essential and desirable with the former to be introduced immediately by legislation and the latter to be left to the discretion of companies and their shareholders. Some of the recommendations of the task force include:

Greater role and influence for nonexecutive independent directors Stringent punishment for executive directors for failing to comply with listing and other

requirements Limitation on the nature and number of directorship of managing and whole-time

directors Proper disclosure to the shareholders and investing community Interested shareholders to abstain from voting on specified matters More meaningful and transparent accounting and reporting Tougher listing and compliance regimen through a centralized national listing authority Highest and toughest standards of Corporate Governance for listed companies A code of public behavior for public sector units Setting up of a centre for Corporate Excellence

Recently, the Government has announced the proposal for setting up the Centre for Corporate Excellence under the aegis of the Department of Company Affairs as an independent and autonomous body as recommended by the study group. The centre would undertake research on Corporate Governance; provide a scheme by which companies could rate themselves in terms of their corporate governance performance; promote corporate governance through certifying companies who practice acceptable standards of corporate governance and by instituting annual award for outstanding performance in this area. Government’s initiative in promoting corporate excellence in the country by setting up such a center is indeed a very important step in the right direction. It is likely to spread greater awareness among the corporate sector regarding matters relating to good corporate governance motivating them to seek accreditation from this body. Cumulative effect of the companies achieving levels of corporate excellence would undoubtedly be visible in the form of much enhanced competitive strength of our country in the global market for goods and services.

A large number of public sector companies both in the banking industry and financial sector have on their Boards representative of the Government / Reserve Bank of India. It is for debate whether functionaries of the Government should sit on their boards. While there is no easy or straightforward answer to this question, at some distant future it is hoped, all the Directors would be truly independent. The subject is no doubt complex and can be looked upon from various

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angles. Frauds in the banking system are also increasing but computer Management Information Systems should be able to detect them early and the Board must have the will to deal with such mischief-maker in an exemplary manner. Zero tolerance should be the goal for frauds in the banking system. It is the leader at the helm of affairs who makes a difference. A close coordination exists through High Level Co-ordination Committee (HLCC) between RBI, SEBI, IRDA and the Secretary Finance, Government of India who has a formal structure for reviewing the affairs which impact the whole financial system. Although the US and UK models are different, this model has served us well and we seem to be comfortable to continue with the same for some more time to come.

There is an entire subject called “whistle blowing” and there is enormous literature on this subject – when to blow the whistle, who should blow the whistle and where the whistle should be heard. These are the questions for which one needs to find the answers between spate of anonymous letters to which any one working in public sector is used to and honest officials are harassed sometimes on one side and the damaging investigative audit reports and doctored balance sheets on the other side. Somewhere in between lies the governance and ethics; and standards expected to be set up by the virtuous men appointed for heading these institutions. In such organizations the shareholders and the other stakeholders derive full value. It is myopic, bordering on foolishness, to look for astronomical return by the shareholders, who would allow the boards to indulge in unethical practices like market rigging, insider trading, speculation and host of other irregular practices for the sole purpose of making huge profits. One cannot argue that the shareholder’s value is enhanced by higher profits and dividends are distributed by the board acting merely as an agent of the shareholder who becomes the principal. Here lies the test of governance of the board of directors walking the well defined, honest and straight path in conducting the affairs in the required atmosphere of transparency seen and perceived by all the stakeholders, the markets and the regulators. Then only can one confidently state that corporate governance has taken firm roots in this country.

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Chapter 4: Scope & Importance of Corporate Governance

Corporate governance is all about ethics in business. It is about transparency, openness and fair play in all aspects of business operations, the key aspects of corporate governance include:

Accountability of Board of Directors & their constituent responsibilities to the ultimate owners- the shareholders

Transparency, i.e. right to information, timeliness and integrity of the information produced.

Clarity in responsibilities to enhance accountability. Quality and competence of Directors and their track record. Checks & balances in the process of governance. Adherence to the rules, laws and spirit of codes.

An active and involved board consisting of professional and truly independent directors plays an important role in creating trust between a company and its’ investors and is the best guarantor of good corporate governance.

Good corporate governance is integral to the very existence of a company. It is important for the following reasons:

Corporate governance ensures that a properly structured Board, capable of taking independent and objective decisions is at the helm of affairs of the company. This lays down the frame work for creating long term trust between the company and external providers of the capital.

It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience and a host of new ideas.

It rationalizes the management and monitoring of risk that a corporation faces globally. Corporate governance emphasizes the adoption of transparent procedures and practices

by the Board, thereby ensuring integrity in financial reports. It limits the liability of top management and directors, by carefully articulating the

decision making process. It inspires and strengthens investors’ confidence by ensuring that there are adequate

number of non-executive and independent directors on the Board, to look after the interests and well being of all the stakeholders.

Corporate governance helps provide a degree of confidence that is necessary for the proper functioning of a market economy, as it contemplates adherence to ethical business standards.

Finally, globalization of the market place had ushered in an era wherein the quality of corporate governance has become a crucial determinant of survival of corporate. Compatibility of corporate governance practices with global standards has also become

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an important constituent of corporate success. Thus, good corporate governance is a necessary pre-requisite for the success of Indian corporate.

Principles of corporate governance

For good corporate governance key principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect and commitment to the organization.

However, it is important for directors and management to develop a model of governance that aligns the value of the corporate participants and periodically evaluate this model for its effectiveness. The senior executive should at all times conduct themselves honestly and ethically, especially matters in concerning actual or apparent conflict of interest.

Commonly accepted principles of corporate governance:

1. Rights an equitable treatment of share holders:Organization should respect the rights of share holders and help the shareholders to exercise those rights. This can be done by effectively communicating information that is understandable and which encourages shareholders to participate in general meetings.

2. Interest of other stakeholders:Organizations should realize that they have legal and other obligations to all bonafied stakeholders.

3. Role and responsibility of the board:The board has to deal with various business issues. Hence it will have to possess necessary skills n understandings and also have the ability to review and critically analyze management performance

4. Integrity & ethical behaviorOrganization should develop a code of conduct for their directors and executives. This promotes ethical and responsible decision making.

5. Disclosure & transparencyThe roles n responsibilities of board and management should be made publicly known by the organizations. It provides shareholders with a level of accountability. Disclosure of material matters concerning the organization should timely n also balanced so that all investors have access to clear n factual information.

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Chapter 5: Steps Implemented By Companies Act With Regard To Corporate Governance

The Ministry of Company Affairs appointed various committees on the subject of corporate governance which lead to the amendment of the companies Act in 2000. These amendments aimed at increasing transparency and accountabilities of the Board of Directors in the management of the company, thereby ensuring good corporate governance.

Corporate Governance in India-A Background

The history of the development of Indian corporate laws has been marked by interesting contrasts. At independence, India inherited one of the world’s poorest economies but one which had a factory sector accounting for a tenth of the national product; four functioning stock markets (predating the Tokyo Stock Exchange) with clearly defined rules governing listing, trading and settlements; a well-developed equity culture if only among the urban rich; and a banking system replete with well-developed lending norms and recovery procedures.24 In terms of corporate laws and financial system, therefore, India emerged far better endowed than most other colonies. The 1956 Companies Act as well as other laws governing the functioning of joint-stock companies and protecting the investors’ rights built on this foundation.

The beginning of corporate developments in India were marked by the managing agency system that contributed to the birth of dispersed equity ownership but also gave rise to the practice of management enjoying control rights disproportionately greater than their stock ownership. The turn towards socialism in the decades after independence marked by the 1951 Industries (Development and Regulation) Act as well as the 1956 Industrial Policy Resolution put in place a regime and culture of licensing, protection and widespread red-tape that bred corruption and stilted the growth of the corporate sector. The situation grew from bad to worse in the following decades and corruption, nepotism and inefficiency became the hallmarks of the Indian corporate sector. Exorbitant tax rates encouraged creative accounting practices and complicated emolument structures to beat the system.

In the absence of a developed stock market, the three all-India development finance institutions (DFIs) – the Industrial Finance Corporation of India, the Industrial Development Bank of India and the Industrial Credit and Investment Corporation of India – together with the state financial corporation’s became the main providers of long-term credit to companies. Along with the government owned mutual fund, the Unit Trust of India, they also held large blocks of shares in the companies they lent to and invariably had representations in their boards. In this respect, the corporate governance system resembled the bank-based German model where these institutions could have played a big role in keeping their clients on the right track. Unfortunately, they were themselves evaluated on the quantity rather than quality of their lending and thus had little incentive for either proper credit appraisal or effective follow-up and monitoring. Their nominee directors routinely served as rubber-stamps of the management of the day. With their support,

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promoters of businesses in India could actually enjoy managerial control with very little equity investment of their own. Borrowers therefore routinely recouped their investment in a short period and then had little incentive to either repay the loans or run the business. Frequently they bled the company with impunity, siphoning off funds with the DFI nominee directors mute spectators in their boards.

This sordid but increasingly familiar process usually continued till the company’s net worth was completely eroded. This stage would come after the company has defaulted on its loan obligations for a while, but this would be the stage where India’s bankruptcy reorganization system driven by the 1985 Sick Industrial Companies Act (SICA) would consider it “sick” and refer it to the Board for Industrial and Financial Reconstruction (BIFR). As soon as a company is registered with the BIFR it wins immediate protection from the creditors’ claims for at least four years. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision, after which period the delay has roughly doubled. Very few companies have emerged successfully from the BIFR and even for those that needed to be liquidated, the legal process takes over 10 years on average, by which time the assets of the company are practically worthless. Protection of creditors’ rights has therefore existed only on paper in India. Given this situation, it is hardly surprising that banks, flush with depositors’ funds routinely decide to lend only to blue chip companies and park their funds in government securities.

Financial disclosure norms in India have traditionally been superior to most Asian countries though fell short of those in the USA and other advanced countries. Noncompliance with disclosure norms and even the failure of auditor’s reports to conform to the law attract nominal fines with hardly any punitive action. The Institute of Chartered Accountants in India has not been known to take action against erring auditors.

While the Companies Act provides clear instructions for maintaining and updating share registers, in reality minority shareholders have often suffered from irregularities in share transfers and registrations – deliberate or unintentional. Sometimes non-voting preferential shares have been used by promoters to channel funds and deprive minority shareholders of their dues. Minority shareholders have sometimes been defrauded by the management undertaking clandestine side deals with the acquirers in the relatively scarce event of corporate takeovers and mergers.

Boards of directors have been largely ineffective in India in monitoring the actions of management. They are routinely packed with friends and allies of the promoters and managers, in flagrant violation of the spirit of corporate law. The nominee directors from the DFIs, who could and should have played a particularly important role, have usually been incompetent or unwilling to step up to the act. Consequently, the boards of directors have largely functioned as rubber stamps of the management.

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For most of the post-Independence era the Indian equity markets were not liquid or sophisticated enough to exert effective control over the companies. Listing requirements of exchanges enforced some transparency, but non-compliance was neither rare nor acted upon. All in all therefore, minority shareholders and creditors in India remained effectively unprotected in spite of a plethora of laws in the books.

Parties to Corporate Governance

Parties involved in corporate governance include the governing or regulatory body (e.g. the Securities and Exchange Commission in the United States), the Chief Executive Officer, the board of directors, management and shareholders. Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.

In corporations, the principal (shareholder) delegates decision rights to the agent (manager) to act in the principal's best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the main two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders, in order to limit the self-satisfying opportunities for managers. With the significant increase in equity holdings of institutional investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.

A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organization’s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities.

All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors, workers and management receive salaries, benefits and reputation; whilst shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital.

A key factor in an individual's decision to participate in an organization (e.g. through providing financial capital or expertise or labor) is trust that they will receive a fair share of the organizational returns. If some parties are receiving more than their fair return (e.g. exorbitant executive remuneration), then participants may choose to not continue participating...potentially leading to organizational collapse (e.g. shareholders withdrawing their capital). Corporate governance is the key mechanism through which this trust is maintained across all stakeholders.

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Chapter 6: Factors Influencing Corporate Governance

1. The ownership structure

The structure of ownership of a company determines, to a considerable extent, how a Corporation is managed and controlled. The ownership structure can be dispersed among individual and institutional shareholders as in the US and UK or can be concentrated in the hands of a few large shareholders as in Germany and Japan. But the pattern of shareholding is not as simple as the above statement seeks to convey. The pattern varies the across the globe.

Our corporate sector is characterized by the co-existence of state owned, private and multinational Enterprises. The shares of these enterprises (except those belonging to a public sector) are held by institutional as well as small investors. Specifically, the shares are held by

The term-lending institutions Institutional investors, comprising government-owned mutual funds, Unit Trust of India

and the government owned insurance corporations Corporate bodies Directors and their relatives and Foreign investors. Apart from these block holdings, there is a sizable equity holding by

small

2. The structure of company boards

Along with the structure of ownership, the structure of company boards has considerable influence on the way the companies are managed and controlled. The board of directors is responsible for establishing corporate objectives, developing broad policies and selecting top-level executives to carry out those objectives and policies.

3. The financial structure

Along with the notion that the structure of ownership matters in corporate governance is the notion that the financial structure of the company, that is proportion between debt and equity, has implications for the quality of governance.

4. The institutional environment

The legal, regulatory, and political environment within which a company operates determines in large measure the quality of corporate governance. In fact, corporate governance mechanisms are economic and legal institutions and often the outcome of political decisions. For example, the extent to which shareholders can control the management depends on their voting right as defined in the Company Law, the extent to which creditors will be able to exercise financial claims on a bankrupt unit will depend on bankruptcy laws and procedures etc.

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Chapter 7: Recent Corporate Governance Failures

The creation of corporate regulation is often linked to perceived failures of corporations and their management to behave in the way society expects them to. Corporate governance is not an exception to this trend, and, as with accounting, different countries may well experience difficulties at different times. However, the wave of corporate scandals, mostly in the USA, at the turn of the century has been marked not only by the number of cases but also by the effect they have had on investor confidence and market values worldwide.

The long-term view is something of a rarity in many companies. A critical factor in many corporate failures was:

Poorly designed rewards package Including excessive use of share options (that distorted executive behaviour towards the

short term) The use of stock options, or rewards linked to short-term share price performance (led to

Aggressive earnings management to achieve target share prices) Trading did not deliver the earnings targets, aggressive or even fraudulent accounting

tended to occur. This was very apparent in the cases of Ahold, Enron, WorldCom and Xerox (IFAC, 2003).

Some of the better known cases of financial irregularities are summarized in following table.

Company Country What went wrong

Ahold NL earnings overstated

Enron USA inflated earnings, hid debt in SPEs

Parmalat Italy false transactions recorded

Tyco USA looting by CEO, improper share deals, evidence of tampering and falsifying business records

WorldCom USA expenses booked as capital expenditure

Xerox USA accelerated revenue recognition

In terms of corporate governance issues, Ahold, Enron and WorldCom all suffered from Questionable ethics Behaviour at the top Aggressive earnings management Weak internal control Risk management Shortcomings in accounting and reporting

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Corporate governance failure at Wal-Mart

It has co-filed a shareholder proposal over concerns that Wal-Mart Stores Inc, the US supermarket group, is failing to comply with its own governance standards. Karina Litvack, head of governance and sustainable investment.

Despite strong policies on paper, Wal-Mart has struggled to implement its standards across its US business.

'Weaknesses in internal controls have eroded the company's reputation as an attractive employer and are adding fuel to the fires of Wal-Mart's critics.

Its failure to deliver on these policy commitments is inhibiting Wal-Mart's ability to expand into new domestic markets.

Over 'the past several years', it has become increasingly concerned by signs of failure in internal controls that have led to government investigations and class action lawsuits by employees.

Allegations include requiring employees to 'work off the clock' -- during breaks and after shifts -- systematic discrimination against women, and alleged questionable tactics to prevent workers from voting for union representation.

It got off to a promising start in 2005 with expectations of a dialogue with the independent directors on the audit committee. But when this simply withered on the vine, Wal-mart had little choice but to bring concerns about internal controls, labour violations and the erosion of the company's reputation to fellow shareholders.

Company was not interested in engaging in a productive discussion about how it builds and supports a compliance culture and, as a result, they have joined an international group of large filers led by the New York City Employees' Retirement System to file a shareholder proposal.

Corporate Governance failure at Satyam

It is one of Corporate India's worst unfolding chapters. What could be the reason behind such a huge collapse? The top level management failed to estimate the intensity of the gangrene in the organization. Questions also arise on the role of the auditors, and how such a magnitude of financial fraud could have gone unnoticed. Corporate governance is a field which constantly investigates how to secure and motivate efficient management of corporations. It has began as a corporate governance issue back in December has now turned into a major financial scandal for the ages in India. The shares of Satyam Computer Services has plummeted more than 90% in trading at the NYSE today, a stark reminder that investors must always cover their backs or else get racked even by the big names in the industry. NYSE today halted trading in Satyam Computer at its bourses in the US as well as in Europe after the Chairman disclosed financial bungling at the Indian IT major.

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A business will always have two sides, it’s not necessary to gain profits every time, but to sustain in the market the integrity is vital. Every day in some or the other place there is a merger or an acquisition happening, but due to the projected image the co-players in the market are dropping out their plans of taking over Satyam.

Undoubtedly there will be intense focus directed at the other Indian IT Services companies as well. The Satyam corporate governance failure may also make its competitors bolder in terms of acquiring market share created by its fallout provided the industry can regain the trust of the same investors that Satyam has deceived.

From this necessarily brief review of the evidence, and particularly of the sources of failure in financial firms, draw some tentative conclusions. It is important to recognize, however, the evidence base for firm recommendations on corporate governance in financial institutions is thinner than one would like, and certainly not robust enough to offer a standardized set of recommendations valid at all times and in all places.

Principal conclusions are:

First, that people are more important than processes. Many of the failed firms, or near failed firms which we have encountered, had Boards with the prescribed mix of executives and non-executives, with socially acceptable levels of diversity, with directors appointed through impeccably independent processes, yet where the individuals concerned were either not skilled enough for, or not temperamentally suited to, the challenge role that came to be required when the business ran into difficulty.

Secondly, and in spite of first conclusion, there are some good practice processes worth having. Properly constituted audit committees, and Board risk committees can play an important role, as long as they are prepared to listen carefully to sources of advice from outside the firm.

Third and this is a foundation stone of the FSA's approach, a regulatory regime built on senior management responsibilities is absolutely essential. In some of the cases we have wrestled with, senior management did not consider themselves to be responsible for the control environment and indeed, in the old pre FSA regime, were able successfully to claim that they were not responsible even if the business failed. So our regulation is built on a carefully articulated set of responsibilities up and down the business. It is important that they are not unrealistic. We do not expect the CEO to check in the bottom drawers of each of his traders for un-booked deal tickets. But we do expect the CEO to ensure that there is a risk management structure and a control framework throughout the business which ought to identify aberrant behaviour, or at least prevent it going on unchecked for any length of time.

One consequence of this senior management regime, fourth point, is that regulators must focus attention on the top level of management in the firm. For the major firms we regulate we insist that our supervisors have direct access to the Board, and that they present to the Board their own

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unvarnished view of the risks the firm is running, and of how good the control systems are by comparison with the best of breed in their sector. Unfortunately, we find some resistance to this approach. The management of some of our firms want to negotiate the regulators assessment, so that when it reaches the Board it is an agreed paper and sufficiently bland to cause no debate. Well-structured Board, and a confident management, should welcome an independent view, even expressed at the Board level, which they may challenge and contest if they wish. And non-executive directors should find it helpful to see a knowledgeable view of the institution which does not come from or through its own senior management.

Fifth and penultimate point may not be a popular one. Boards should take more interest in the nature of the incentive structure within the organization. I am not talking solely about the pay of the CEO, important though that is to get right - as some firms in Britain have recently discovered. Talking about ensuring that the incentives within the firm, and pay is a very powerful one, are aligned with its risk appetite. A number of our most problematic cases have their roots in a misalignment of incentives.

Lastly, no corporate governance system will work well unless there is some engagement on the part of shareholders. Boards are responsible to shareholders. That is the received wisdom in Anglo-American capitalism, at least. But if those shareholders are not prepared to vote their shares, and show little interest in business strategy, then that accountability is somewhat notional, and unlikely to be effective. Certainly regulators cannot hope to substitute for concerned and challenging shareholders, though in some senses they may complement them.

Corporate governance failure at Enron

EVERY time you turn a stone, another worm creeps out. That seems to be the story of the Enron debacle. Not a day goes by without a new expose of wrong doing in the company that one begins to wonder if there is anything in our systems and structure of an enterprise that can prevent such a catastrophe.

Enron is an excellent example where those at the top allowed a culture to flourish in which secrecy, rule-breaking and fraudulent behaviour were acceptable. It appears that performance incentives created a climate where employees sought to generate profit at the expense of the company's stated standards of ethics and strategic goals (IFAC, 2003). Enron had all the structures and mechanisms for good corporate governance. In addition, it had a corporate social responsibility task force and a code of conduct on security, human rights, social investment and public engagement. Yet no one followed the code. The board of directors allowed the management openly to violate the code, particularly when it allowed the CFO to serve in the special purpose entities (SPEs); the audit committee allowed suspect accounting practices and made no attempt to examine the SPE transactions; the auditors failed to prevent questionable accounting.

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The use of questionable accounting and disclosure practices, their approval by the board and their verification by the auditors arose from a variety of forces, including:

Pressure to meet quarterly earnings projections and maintain stock prices after the expansion of the 1990s

Executive compensation practices Outdated and rules-based accounting standards

Complex corporate financial arrangements designed to minimize taxes and hide the true state of the companies, and the compromised independence of public accounting firms.

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Chapter 8: Introduction to Corporate Social Responsibility

When a company acts in a society in a responsible manner, it increases the motivation of its employees for their work. As a result they stay longer with the company. And that makes a lot of difference. For Ordina, it is a big problem to attract and retain well qualified staff (Tom Rodrigues, member of the board of ICT company Ordina)

We produce and sell a first class brand. Society will expect that this brand stands for a professional and responsible company an outstanding reputation. But it also implies that we have our eyes on the environmental and social/ethical aspects with which our company is confronted (Jan Claes, GM, Coca-cola Enterprises Nederland B.V

As a general director of a coffee still one deals continuously with the position of the company in society. Apart from looking after our employees and keeping up a good relationship with customers it is the way Peeze gives coffee a responsible place in society. Why this is so important? Call it idealism: taking care of future generations and looking back at a stone that has been turned. Hopefully in this way we contribute a bit to a world in which one deals more carefully with natural resources (Amie Peeze, general director of the Peeze coffee still)

These quotations are chosen at random from three totally different companies that all embrace corporate social responsibility. Their motto is: “looking after people and the environment goes hand in hand with good financial results”. These companies do not wait until the government imposes particular rules or laws. They look ahead and determine for themselves which environmental and social measures they are able or willing to take. They choose not only those measures which fit in with their own vision and business strategy, but they also take account of what the outside world asks of them. They have developed an identity that is based on finding a responsible balance between people (social well being), planet (ecological quality) and profit (economic prosperity).

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Profit

Planet People

Their attention shifts from gaining financial profit to sustainable profit. Finally they want to communicate openly about these things. Directly or indirectly they have a stake (the stakeholders) in their company. That, in a nutshell, is what corporate social responsibility means.

Corporate Social Responsibility- A Historical Review

Since trade ignores national boundaries and manufacturer insists or having the world as a market, the flag of his nation must follow him, and the doors of the nations which are closed against him must be battered down. Concessions obtained by financiers must be safeguarded by ministers of state, even if the sovereignty of unwilling nations be outraged in the process. Colonies must be obtained or planted, in order that no useful corner of the world is over looked…. The seed of war in the modern world is industrial and commercial rivalry. (Woodrow Wilson, 1907)

As a field of study in management, corporate social responsibility probably emerged in the 1950s in the United States. Business practices in the 1990s that could be termed socially responsible took different forms: philanthropic donations to charity, service to the community, enhancing employee welfare and promoting religious conduct. Early proponents were CEOs and business leaders from the big oil energy companies, telecommunication corporations and automobile manufacturers of the 1920s. for instance, in 1951 Frank Abrams, Chairman of board of standard oil (now Exxon), in an article in the Harvard business review called for top management to become “good citizen”, aspire to a “higher duty of professional management” and contribute to the “solution of the many complex social problems of our time” because business firms were “man-made instruments of society” (Abrams, 1951). Abrams was not alone in articulating the social role of corporations: a series of articles appeared in the Harvard business review in the 1950s written by a diverse range of authors including theologians, philosophers, economists, business leaders and historians all advocating a broader role for business. The titles of these papers reflected the ideas of the times: “management’s responsibilities in a complex world”, “management’s mission in a new society”, “can businessman apply Christianity?”, “can Christianity produce corporate good?”, “business and religion” and “has business developed a conscience?” are some examples. A notable exception in this collection of authors was Theodore Levitt (1958), who described social responsibility as “a happy new orthodoxy, a prevailing vogue, a new tyranny of fad and fancy” that could harm business interests. Milton Friedman was a powerful advocate of this line of thinking when he claimed some years later in his book capitalism and freedom (1962) that social responsibility was a “fundamentally subversive doctrine in a free society”, arguing that profit itself was a social good and that society was best served when corporations maximized shareholder value.

It is interesting to note that some writers who were strongly advocating a socially responsible corporation in the 1950s also warned that corporate social responsibility could be used as a window dressing. For instance, in his article exploring the relationship between religion and

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business, Johnson (1958) discussed the “dualistic nature of man” in Christian theology where “man as angel” could use business to serve a social purpose whereas “man as devil” could misuse corporate power and responsibility. Believing that their corporations served a larger social purpose could lead managers to “assume exaggerated views of their abilities, judgments and contributions to the enterprise of which they are a part” (Johnson, 1958). He described two hypothetical scenarios:

Company executives may stress that their ‘socially responsible’ philosophy works to the general benefit; yet basically such a philosophy may be a subtle device to maintain economic power in their own hands by extending their influence and decision making power into so many non-business areas that they become benevolent dictators.

Corporations may give funds to charitable or educational institutions and may argue for them as great humanitarian deeds, when in fact they are simply trying to buy community goodwill.

Johnson thus anticipated the term ‘green washing’ which entered the popular lexicon nearly 50 years later. The oxford English dictionary defines ‘green wash’ as ‘disinformation disseminated by an organization so as to present an environmentally responsible public image.’ The non- governmental organization crop watch has a less charitable definition of ‘green wash’: ‘the phenomenon of socially and environmentally destructive corporations attempting to preserve and expand their markets by posing as friends of the environment and leaders in the struggle to eradicate poverty.’

The ideology of corporate social responsibility in the 1950s was primarily based on an assumption of the obligation of business to society. This obligation arose because some scholars and practitioners saw business to society. This obligation arose because some scholars and practitioners saw business as an instrument of society and managers as public trustees whose main job was to balance often competing demands of employees, customers, suppliers, communities and shareholders (the term ‘stakeholder’ to define these different groups was coined 30 years later). Most of the academic research over the next few decades took an instrumental approach to corporate social responsibility by describing the ways and means by which corporations could meet their social obligations without losing sight of their main shareholder value maximizing function (Jones, 1995). There was a shift in corporate social responsibility thinking in the 1990s from fulfilling societal obligations through philanthropy to a more strategic level that attempted to tie corporate social initiatives to corporate objectives.

One of the earliest books written on corporate social responsibility, the social responsibilities of the business man, was written by Howard Bowen in 1953. Bowen argued that since social institutions shaped economic outcomes it was to be expected that business firms as an economic outcome of societal interests should consider the social impact of business activity. It took less than 50 years for this argument to come full circle: as we shall see, neoliberal political economy, which is dominant in most parts of the world, is based on an ideology that economic institutions

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should shape social outcomes. Enlightened self interest was a key assumption of corporate social responsibility were responsibility was to be manifested through philanthropic activity, community service and employee welfare, all of which were supposed to serve the public interest. Frederick (2006) notes that Bowen took a more skeptical view of corporate social responsibility in the 1970s when he stated, ‘voluntary social responsibility cannot be relied upon as a significant form of control over business. The power of business overcomes the weak reed of voluntary social responsibility. The social responsibility concept is of minimal effectiveness.’ However, the effectiveness of lack thereof of corporate social responsibility appears to be irrelevant going by the hundreds of books and papers written on corporate social responsibilities since the 1970s. And this attention is not just generated by academics: every fortune 500 company and thousands more across the world have some sort of corporate social responsibility statement in their annual reports; government leaders, CEOs, policy makers and academic bodies regularly host corporate social responsibility conferences; and international bodies like the United Nations, World Bank and International Monetary Fund all publicly affirm their commitment to social responsibility. However, if we do accept Bowen’s general argument that because business is an instrument of society, it must consider societal interests then we need to understand what social, economic and political forces created the modern corporation.

Corporate social responsibility: theoretical perspective

Did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked? And by God, it ought to have both! (First Baron Thurlow (1731-1806), Lord Chancellor of England)

The above quote attributed to the First Baron Thrulow was made in the heyday of what was probably the world’s first multinational corporation- the infamous east India Company. In an era of British colonial expansion, the company was engaged in conquering markets, eliminating competition, securing cheap sources of raw material supply and building strategic alliances. Colonial expansionist practices of the British empire in 1800s involved both capital appropriation and permanent destruction of manufacturing capacities in the colonies- the “technological superiority” of the British textile industry, for example, was established as much by invention as by a systematic destruction of India’s indigenous industry involving innovative competitive strategies such as serving of the thumbs of master weavers in Bengal, forced cultivation of indigo by Bihar’ peasants and the slave trade from Africa that supplied cotton plantations in the US with free labour.

The end of direct colonialism shifted the powers of chartering corporations from the British monarchy to state legislatures. A series of court rulings in the mid nineteenth century succeeded in freeing corporations from state control and created the legal fiction of a corporation as an artificial person. The corporate body was now defined as a ‘nexus of contracts’ between wealth

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maximizing rational actors. The focus was on identifying institutions, markets and governance structures that could align incentives of managers with interests of shareholders. The emergence of corporate social responsibility in the mid twentieth century can be seen as an attempt to create a soul for the corporate body based on its obligations to society- doing good to do good. However, these efforts were by no means universally accepted. Some critics saw CSR as an ideological movement intended to legitimize the power of MNCs. Others saw CSR activity as ‘theft’ from a firms key stake holders groups: shareholders, customers and employees. Some popular definitions of corporate social responsibility are:

A commitment to improve community well being through discretionary business practices and contribution of corporate resources.

A key element of this definition is the word discretionary. We are not referring here to business activities that are mandated by law or that are moral or ethical in nature and perhaps therefore expected. Rather, we are referring to a voluntary commitment a business makes in choosing and implementing these practices and making these contributions. Such a commitment must be demonstrated in order for a company to be described as socially responsible and will be fulfilled through the adoption of new business practices and/or contributions, either monetary or non-monetary. The term community well-being in this definition includes human conditions as well as environmental issues.

Others have offered several distinct definitions of corporate social responsibility (CSR). One from the world business council for sustainable development reflects the council’s focus on economic development in describing CSR as “business commitment to contribute to sustainable economic development, working with employees, their families, the local community, and society at large to improve their quality of life.” The organization business for social responsibility defines CSR as “operating a business in a manner that meets or exceeds the ethical, legal, commercial, and public expectations that society has of business.” This definition is somewhat broader as it encompasses business decision making related to “ethical values, legal requirements, as well as respect for people, communities, and the environment.”

We also use the term corporate social initiatives to describe major efforts under the corporate social responsibility umbrella and offer the following definition:

Corporate social initiatives are major activities undertaken by a corporation to support social causes and to fulfill commitments to corporate social responsibility.

Causes most often supported through these initiatives are those that contribute to community health (i.e. AIDS prevention, early detection for breast cancer, timely immunizations), safety (designated driver programs, crime prevention, use of car safety restraints), education (literacy, computers at school, special needs education), and employment (job training, hiring practices, plant locations); the environment (recycling, elimination of the use of harmful chemicals,

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reduced packaging); community and economic development (low-interest housing loans); and other basic human needs and desires (hunger, homelessness, animal rights, voting privileges, anti-discrimination efforts).

Support from corporations may take many forms, including cash contributions, grants, paid advertising, publicity, promotional sponsorships, technical expertise, in-kind contributions (i.e. donations of products such as computer equipment or services such as printing), employee volunteers and access to distribution channels. Cash contributions may come directly through a corporation or indirectly through a foundation it has established to focus on corporate giving on behalf of the corporation.

Corporations may be sponsoring these initiatives on their own (such as the New York Times Company Foundation support for journalism and journalists) or in partnership with others (as with ConAgro foods and America’s Second Harvest). They may be conceived of and managed by one department within the corporation, or by a team representing multiple business units.

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Chapter 9: Corporate Social Initiatives-Six Options for Doing Good

We defined corporate social initiatives as major activities undertaken by a corporation to support social causes and to fulfill commitments to corporate social responsibility. We have identified six major initiatives under which most social responsibility- related activities fall.

The six social initiatives explored are as follows:

1. Cause promotions: a corporation provides funds, in-kind contributions, or other corporate resource to increase awareness and concern about a social cause or to support fund-raising, participation, or volunteer recruitment for a cause. The corporation may initiate and manage the promotion on its own (i.e. the body shop promoting a ban on the use of animals to test cosmetics); it may be a major partner in an effort (Aleve sponsoring the arthritis foundation’s fundraising walk); or it may be one of several sponsors (keep America beautiful 2003 sponsors for the “great American cleanup” included Lysol, PepsiCo and firestone tire and service centers among others).

2. Cause-related marketing: a corporation commits to making a contribution or donating a percentage of revenues to a specific cause based on product sales. Most commonly this offer is for an announced period of time, for a specific product, and for a specified charity. In this scenario, a corporation is most often partnered with a non-profit organization, creating a mutually beneficial relationship designed to increase sales of a particular product and to generate financial support for the charity (for example, Comcast donates $4.95 of installation fees for its high speed internet service to Ronald McDonald house charities through the end of a given month). Many think of this as a win-win-win, as it provides consumers an opportunity to contribute for free to their favorite charities as well.

3. Corporate social marketing: a corporation supports the development and/ or implementation of a behavior change intended to improve public health, safety, the environment or community well being. The distinguishing feature is the behavior change focus, which differentiates it from cause promotions that focus on supporting awareness, fund-raising and volunteer recruitment for a cause. A corporation may develop and implement a behaviour change campaign on its own (i.e. Philip Morris encouraging parents to talk with their kids about tobacco use), but more often it involves partners in public sector agencies (home depot and a utility promoting water conservation tips) and/or non-profit organizations (pampers and the SIDS foundation encouraging caretakers to put infants on their backs to sleep).

4. Corporate philanthropy: a corporation makes a direct contribution to a charity or cause, make often in the form of cash grants, donations and/ or in-kind services. This initiative

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is perhaps the most traditional of all corporate social initiatives and for many decades was approached in a responsive, even ad hoc manner. More corporations are experiencing pressures, both internally and externally to move to a more strategic approach, choosing a focus and trying philanthropic activities to the company’s business goals and objectives.

5. Community volunteering: a corporation supports and encourages employees, retail partners and/or franchise members to volunteer their time to support local community organizations and causes. This activity may be a stand- alone effort (i.e. employees of a high tech company tutoring youth in middle schools on computer skills) or it may be done in partnership with a non-profit organization (shell employees working with the ocean conservancy on a beach cleanup). Volunteer activities may be organized by the corporation, or employees may choose their own activities and receive support from the company through such means as paid time off and volunteer database matching programs.

6. Socially responsible business practices: a corporation adopts and conducts discretionary business practices and investments that support social causes to improve community well-being and protect the environment. Initiatives may be conceived of and implemented by the organization (i.e. Kraft deciding to eliminate all in school marketing) or they may be in partnership with others (Starbucks working with conservation international to support farmers to minimize impact on their local environments).

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Chapter 10: Why CSR is Important?

CSR is an important business strategy because, wherever possible, consumers want to buy products from companies they trust; suppliers want to form business partnerships with companies they can rely on; employees want to work for companies they respect; and NGOs, increasingly, want to work together with companies seeking feasible solutions and innovations in areas of common concern. Satisfying each of these stakeholder groups allows companies to maximize their commitment to another important stakeholder group—their investors, who benefit most when the needs of these other stakeholder groups are being met:

“I honestly believe that the winning companies of this century will be those who prove with their actions that they can be profitable and increase social value—companies that both do well and do good….Increasingly, shareowners, customers, partners and employees are going to vote with their feet — rewarding those companies that fuel social change through business. This is simply the new reality of business — one that we should and must embrace.” Carly Fiorina,Chairman and Chief Executive Officer, Hewlett Packard Company.

The businesses most likely to succeed in the globalizing world will be those best able to combine the often conflicting interests of its multiple stakeholders, and incorporate a wider spectrum of opinions and values within the decision-making process and objectives of the organization. Lifestyle brand firms, in particular, need to live the ideals they convey to their consumers:

“The 21st century will be the century of the social sector organization. The more economy, money, and information become global, the more community will matter.” Peter F. Drucker, Founder of the Drucker Foundation (now the Leader to Leader Institute)

CSR is increasingly crucial to maintaining success in business—by providing a corporate strategy around which the company can rally, but also by giving meaning and direction to day- to-day operations.

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Chapter 11: What Business Areas Does CSR Cover?

CSR is a means of analyzing the inter-dependent relationships that exist between businesses and economic systems, and the communities within which they are based. CSR is a means of discussing the extent of any obligations a business has to its immediate society; a way of proposing policy ideas on how those obligations can be met; as well as a tool by which the benefits to a business for meeting those obligations can be identified.

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CSR covers all aspects of an organization’s operations and can be divided into subsections identified in the figure 1: what is CSR?

Examples of issues within the economic sphere that contain a CSR component range from ‘corporate governance’ to ‘patriotism;’ from the issue of ‘fair trade’ to ‘diversity in the workplace.’ All contain, in some form or another, issues connected to the perception of the company, and therefore its brand, in the eyes of one or more of its stakeholder groups:

1. Corporate governanceTransparency is the key to encouraging trust in the managers selected to run a company on behalf of the shareholders. It is also vital to maintaining confidence within other stakeholder groups and the general public. The issues of accurate financial statements, executive compensation, and independent oversight, have become particularly sensitive and important for companies to get right.

2. PatriotismAn issue such as ‘patriotism’ is by definition subjective, but has risen in importance in the U.S. following the September 11, 2001 terrorist attacks. A good example of an issue that falls into this category is the trend today of companies attempting to avoid paying corporation tax, some even going to the lengths of incorporating off-shore (particularly Bermuda), even though company headquarters and the majority of workers are based in the U.S:According to a recent Harvard University study, U.S. companies avoided paying tax on nearly $300 billion in income in 1998. … In 1940, companies and individuals each paid about half the federal income tax collected; now the companies pay 13.7% and individuals 86.3%.

3. DiversityThe 2000 Census data has revealed that the ethnic make-up of the U.S. is changing rapidly. Organizations need to adapt their traditional structures and mind-sets, which prevent companies from marketing products effectively to significant segments within the market:Latinos are now the largest minority in the U.S., making up 13 percent of the overall U.S. population—a 58 percent increase from 1990. As black, Asian, and Pacific Islander populations also experience strong growth rates, whites are steadily heading toward minority status. Already in California, New Mexico, Hawaii and the District of Columbia, the majority of residents are nonwhite. That is also true in 48 of the nation’s100 largest cities.Literally, CSR (the extent to which an organization’s decisions reflect the values and needs of consumers and other stakeholders) can creep into every decision that a company makes. One sub-area of the issue of ‘diversity’ involves the equal treatment of men and women. There are plenty of examples of both good and bad practice:

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Bad – The US Masters, women, and the Ku Klux Klan.In response to Augusta National Golf Club’s failure to invite women to become members of the club, the National Council of Women’s Organizations (NCWO) launched a campaign aimed at corporations supporting the 2003 U.S. Masters golf tournament and demanding they withdraw their support, with some success. As the club dug-in its heels, the situation got worse with the KuKlux Klan announcing it would protest at the Masters tournament in support of the Golf Club’s right to exclude female members. A PR nightmare! Whatever be the merits of the case, the Club could have avoided a lot of negative press coverage by adopting a more enlightened stance on this issue at an early stage.

Good – Annika Sorenstam, Bank of America, and the Colonial Golf Tournament.

The Bank of America, in its first year as the title sponsor of the PGA Tour event.The Colonial (May 22-25, 2003) at Fort Worth Texas, invited Annika Sorenstam, the best player on the LPGA Tour to compete. No female player had played in a PGA Tour event since 1945. The move significantly raised the level of interest in the golf tournament nationwide and stood in stark contrast to the controversy that had surrounded the U.S. Masters the month before. Many would call the Bank of America’s move ‘opportunistic,’ whilst highlighting Augusta National’s right, as a private club, to associate with whom it wants. From the corporate perspective, however, it would have been noted that the Bank of America was widely praised for its progressive approach and received acres of positive press coverage as a result, while Augusta National was widely denounced for its dogmatic stance and extremely conservative approach that does not reflect the feelings of the majority of U.S. citizens.

4. Fair tradeCompanies in particular industries have felt pressured to pay a ‘fair’ price for the goods they purchase, over and above the market-driven price, directly to the producer. This is particularly the case in many food industries, where world market prices may well have decreased over time, while costs have either remained the same or increased:Today, with suppliers at small farmer cooperatives in Peru, Mexico, and Sumatra, Green Mountain pays Fair Trade prices for coffee beans -- not the market price of 24 to 50 cents per pound, but a minimum of $1.26 per pound for conventional coffee and $1.41 for organically grown. In 2002, these Fair Trade purchases represented 8 percent of sales. Green Mountain also has a “farm direct” program that cuts out middlemen to deliver higher prices to farmers. Roughly a quarter of its coffee purchases are farm direct.

5. CSR & corporate brandsBrands today are one of the key focal points of corporate success. Companies try to establish popular brands in consumer minds because it increases leverage, which is directly reflected in sales and revenue. All aspects of a company’s operations today feed into helping build the corporate brand. Crucial is how a brand is perceived by all stakeholders. Three benefits in particular indicate the positive value for a company in

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striving to remain in tune with the community within which it is based by implementing a strong CSR policy:

Positive marketing/brand-building– BPBP, with a $200 million re-branding exercise, has effectively re-positioned itself as the most environmentally sound and socially responsible of the extraction companies. The company stands in stark contrast today with Exxon Mobil that faces on-going NGO (Non-Governmental Organization) attacks, consumer boycotts, and activist-led litigation because of its decision to fight the environmental movement, and its failure to recognize the wider importance of CSR as a corporate strategy.

Brand insurance– NIKENIKE has emerged as one of the most progressive global corporations in terms of CSR because it has learned from its past mistakes and attacks by NGOs. As one of the first corporations to have a Vice-President for Corporate Responsibility and to publish an annual CSR Report, the company has done a lot to mitigate public opinion, establish its brand as representative of a much more committed corporate citizen, and ‘insure’ itself against any repeat of the consumer boycotts it faced in the mid-1990s.

Crisis management– Johnson & JohnsonJohnson & Johnson’s transparent handling of the crisis facing its Tylenol brand in 1982 is widely heralded as the model case in the area of crisis management. J&J went far and above what had previously been expected of corporations in such situations, instigating a $100 million re-call of 31 million bottles of the drug following a suspected poisoning/product tampering incident. In acting in the way it did, J&J saved the Tylenol brand, enabling it to remain a strong revenue earner for the company to this day. Given the large amount of time, money and effort companies invest in their brands; a good CSR policy is an effective means of protecting that investment and maximizing its impact.

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Chapter 12: Arguments Underpinning CSR

Arguments offered in favor of CSR can be broadly split into two camps - moral and economic.

1. A moral argument for CSRWhile recognizing that profits are necessary for any business entity to exist, all groups in society should strive to add value and make life better. Businesses rely on the society within which they operate and could not exist or prosper in isolation. They need the infrastructure that society provides, its source of employees, not to mention its consumer base. CSR is recognition of that inter-dependence and a means of delivering on that obligation, to the mutual benefit of businesses and the societies within which they are based:

Charles Handy makes a convincing and logical argument for the purpose of a business laying beyond the goals of maximizing profit and satisfying shareholders above all other stakeholders in an organization:

The purpose of a business….is not to make a profit, full stops. It is to make a profit so that the business can do something more or better. That “something” becomes the real justification for the business….It is a moral issue. To mistake the means for the end is to be turned in on oneself, which Saint Augustine called one of the greatest sins….It is salutary to ask about any organization, “If it did not exist, would we invent it?” “Only if it could do something better or more useful than anyone else” would have to be the answer, and profit would be the means to that larger end.

Advocates of CSR believe that, in general, the goal of any economic system should be to further the general social welfare. In advanced economies, the purpose of business should extend beyond the maximization of efficiency and profit. Increasingly, society expects businesses to have an obligation to the society in which they are located, to the people they employ, and their customers, beyond their traditional bottom-line and narrow shareholder concerns.

At a minimum, businesses operating in a community benefit from the infrastructure of that community (tangible, practical elements such as the roads, other transport

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CSR broadly represents the relationship between a company and the wider community within which the company operates. It is recognition on the part of the business that ‘for profit’ entities do not exist in a vacuum, and that a large part of any success they enjoy is as much due to the context in which they operate as factors internal to the company alone.

infrastructure, the police, firefighters, etc) as well as more intangible benefits, such as a safe or clean environment. But, in most cases, businesses also draw their most important resource, its employees, largely from the local community. Any business will be more successful if it employs a well-educated workforce that can attend good hospitals if they become sick, and who have grown up in a positive environment. This is not to mention consumers, also often members of the local community, without whom no business could survive.

CSR advocates point out that no organization exists in isolation. They believe that businesses, without exception, have an obligation to contribute as well as draw from the community, on which they rely so heavily.

2. An Economic Argument For CSRA favourable economic argument of CSR can also be made. It is an argument of economic self-interest. Proponents of this argument believe that CSR represents a holistic approach to business. Therefore, an effective CSR policy will infuse all aspects of operations. They believe the actions corporations take today to incorporate CSR throughout the organization represent a real point of differentiation and competitive market advantage on which future success can hinge:

CSR covers all aspects of a business’ day-to-day operations. Everything an organization does in some way interacts with one or more of its stakeholder groups, and companies today need to build a watertight brand with respect to all stakeholders. Whether as an employer, producer, buyer, supplier, or investment, the attractiveness and success of a company today is directly linked to the strength of its brand. CSR affects all aspects of all operations within a corporation because of the need to consider the needs of all constituent groups. Each area builds on all the others to create a composite of the corporation (its brand) in the eyes of all stakeholder groups.

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CSR is an argument of economic self-interest for a business. In today’s brand-driven markets, CSR is a means of matching corporate operations with stakeholder values and demands, at a time when these parameters can change rapidly. One example is a company’s customers: CSR adds value because it allows companies to better reflect the values of this important constituent base that the company aims to serve.

Chapter 13: Why is CSR Relevant Today?

CSR as a strategy is becoming increasingly important for businesses today because of three identifiable trends:

Changing social expectations:Consumers and society in general expect more from the companies whose products they buy. This sense has increased in the light of recent corporate scandals, which reduced public trust of corporations, and reduced public confidence in the ability of regulatory bodies and organizations to control corporate excess.

Increasing affluence:This is true within developed nations, but also in comparison to developing nations. Affluent consumers can afford to pick and choose the products they buy. A society in need of work and inward investment is less likely to enforce strict regulations and penalize organizations that might take their business and money elsewhere.

Globalization:The growing influence of the media sees any ‘mistakes’ by companies brought immediately to the attention of the public. In addition, the Internet fuels communication among like-minded groups and consumers—empowering them to spread their message, while giving them the means to co-ordinate collective action (i.e. a product boycott).

These three trends combine with the growing importance of brands and brand value to corporate success (particularly lifestyle brands) to produce a shift in the relationship between corporation and consumer, in particular, and between corporation and all stakeholder groups, in general.

The result of this mix is that consumers today are better informed and feel more empowered to put their beliefs into action. From the corporate point of view, the market parameters within which companies must operate are increasingly being shaped by bottom-up, grassroots campaigns. NGOs and consumer activists are feeding, and often driving, this changing relationship between consumer and company.

CSR is particularly important within a globalizing world because of the way brands are built—on perceptions, ideals and concepts that usually appeal to higher values. CSR is a means of matching corporate operations with stakeholder values and demands, at a time when these values and demands are constantly evolving.

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CSR can therefore best be described as a total approach to business. CSR creeps into all aspects of operations. Like quality, it is something that you know when you see it. It is something that businesses today should be genuinely and wholeheartedly committed to. The dangers of ignoring CSR are too dangerous when it is remembered how important brands are to overall company value; how difficult it is to build brand strength; yet how easy it can be to lose brand dominance.

CSR is, therefore, also something that a company should try and get right in implementation.

Implementing CSR: Key Steps

CSR is about common sense policies that represent a means of integrating a complete ‘social perspective’ into all aspects of operations. The goal is to maximize true value and benefit for an organization, while protecting the huge investments corporations make today in their brands.

CSR asks companies to ensure their business operations are clean and equitable, and contribute positively to the society in which they are based. Otherwise, they leave themselves open to too much danger from a potential consumer backlash.

CSR is good business sense, and a total approach to doing business, in a globalizing world where companies are increasingly relying on brand strength (particularly global lifestyle brands) to add value and product differentiation, and where NGO-driven consumer activism is increasing.

Many believe the issue of how corporations integrate CSR into everyday operations and long- term strategic planning will define the business marketplace in the near future. It will become a key point of brand differentiation, both in terms of corporate entities and the products that carry their brands.

Key steps on the road to integrating CSR within all aspects of operations include:

Ensure the commitment of top management, and particularly the CEO, is communicated throughout the organization

Appoint a CSR position at the strategic decision-making level to manage the development of policy and its implementation

Develop relationships with all stakeholder groups and interests (particular relevant NGOs)

Incorporate a Social or CSR Audit within the company’s annual report Ensure the compensation system within the organization reinforces the CSR policies that

have been created, rather than merely the bottom-line Any anonymous feedback/whistle-blower process, ideally overseen by an external

ombudsperson, will allow the CSR Officer to operate more effectively

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Corporations today are best positioned when they reflect the values of the constantly shifting and sensitive market environment in which they operate. It is vital that they are capable of meeting the needs of an increasingly demanding and socially-aware consumer market, especially as brands move front and center of a firm’s total value. Global firms with global lifestyle brands have the most to lose if the public perception of the brand fails to live up to the image portrayed. Integrating a complete ‘social perspective’ into all aspects of operations will maximize true value and benefit for an organization, while protecting the huge investments companies make in corporate brands.

CSR within the Organization

In recent years many organizations have established separate departments to document the best practices of CSR and integrate them into the organizational fabric. They are investing huge amounts in creating special foundation for the implementation of these practices with a view to make a difference in the life of people around them. They have also drafted special policies to ensure better working and promoting family welfare of the work force.

Within the organization CSR cultivates a sense of trust and loyalty amongst the employees. Also it offers a soothing divergence from the monotonous work place routine and gives them a sense of satisfaction and fulfillment.

CSR & labour relations, exploitation & harassment

Workers should be treated as human beings and not just a worker & dignity of the worker should be preserved.

Workers should be treated as first customers. Safe, friendly and healthy work environment and adequate job security should be offered It should be equal opportunity employer, equal pay for equal work. On recruitment, professional ability should be given first priority. Business should uphold the freedom of association & the effective recognition of the

right to collective bargaining. It should eliminate all forms of forced and compulsory labour Effective and abolition of child labour Elimination in discrimination in respect of employment and occupation. Encourage whistle blowing Firing and dismissal should be done for a just cause. Concerned employees should be given a reasonable and fair chance to explain his case

and plead it. Harmful effects of dismissal should be mitigated as far as possible.

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It is the corporate responsibility to ensure that the following unethical practices are not resorted to in the organizations:-

Discrimination between genders, due to origin, disabled, pay, promotion etc, while employing or while in employment.

There should not be any sexual harassment.

Perquisites and remuneration should be just and according to the performance.

They should be able to compensate the rising Cost of Living, and offer them a decent family life.

To build a good relationship workers and their representatives must be heard/listened to and tackled amiably.

Try to upgrade the skills Push the practice of ergonomics in practice.

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Chapter 14: Examples of CSR

The sterling examples of how the corporate sector is contributing in genuine ways to the social good. Those bridges between the for-profit and nonprofit/social good sectors are becoming increasingly vital.

Here are two fantastic examples of how large companies have been contributing to the social good in compelling ways:

Molson Coors & responsible drinking

Over the years, Molson Coors Canada has used CSR to advance its brand — and is one of the few major corporations to take advantage of social media in doing so. (Shel Israel wrote about Molson in his book Twitterville.)Molson Coors invests more in responsible drinking education than on alcohol-centered events. Molson reaches out to the community to find ways to spread the message of responsible drinking, putting money behind the Taxi Guy program (for those who’ve had one too many) and covering the cost of free public transit on New Year’s Eve.

during the holiday season of 2008 when the Toronto Transit Authority canceled its New Year’s Eve free-ride transportation because of budget cuts. Molson stepped in and launched a campaign to replace public funding with private sector donations, starting with its own $20,000 donation.

Molson has a small social media team led by Ferg Devins, who is not only responsible for selling beer but for outreach to communities in need. The team uses Twitter and blogging to initiate community generosity projects.

Tyson Foods & hunger relief

Tyson foods offers another example of a major company tying its corporate social responsibility efforts to its core mission. Tyson has committed its brand to efforts to relieve and ultimately end childhood hunger, and in the past few years been integrating social media into its hunger relief efforts.

Tyson connected with the Social Media Club and began a string of extraordinarily smart and effective efforts to enlist the community. For example, it launched a campaign in Austin in which it agreed to donate 100 pounds of chicken to the Capital Area Food Bank of Texas for every comment posted on its blog. They received 658 comments in two hours and loaded up two trucks filled with chicken for the hungry. They repeated the success in Boston and San Francisco, launched a user-generated video contest in Minnesota and sponsored a day of service for its social media team.

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Chapter 15: CASE STUDY

Infosys technologies ltd. was started in 1981 by seven people with US $250. Today, it is a global leader in the “next generation” of IT & consulting with revenues of over US $4 billion.

Infosys defines designs and delivers technology-enabled business solutions that help Global 2000 companies win in a Flat World. Infosys also provides a complete range of services by leveraging domain and business expertise and strategic alliances with leading technology providers.

Infosys offers span business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, re-engineering, independent testing and validation services, IT infrastructure services and business process outsourcing.

Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruptive force in the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk.

Infosys has a global footprint with over 63 offices and development centers in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 114,822 employees as on June 30, 2010.

Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues come from existing customers.

VISION“To be globally respected corporation that provides best-of-breed business solutions

leveraging technology, delivered by best-in-class people.”

MISSION

“To achieve its objectives in an environment of fairness, honesty & courtesy

towards their clients, employees, vendors & society at large.”

VALUES

They believe that the softest pillow is clear conscience. The values that drive them underscore their commitment to: customer delight: to surpass customer expectations consistently.

Leadership by example: to set standards in the business & transactions & be an exemplar for the industry.

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Integrity & transparency: to be ethical, sincere & open in all transactions.

Fairness: to be objective & transaction oriented, and thereby earn trust & respect.

Pursuit to excellence: to strive relentlessly, constantly improve its teams, services & products to become the best.

Code of Conduct

Infosys has always followed the highest standards of corporate governance. They have set new levels in transparency & integrity. Every action of the company and its employees is the focus of public attention and Infosys need to reinforce their tradition of values. The challenge is to continue maintaining this high standard, even when they become a global company and work in multi-cultural environments.

To this end, Infosys have adopted this code of business conduct and ethics to guide their transactions with their colleagues, communities, customers, governments, investors, regulators and society.

The essence of this code is based on the Infosys core value of C-LIFE viz. customer delight, leadership by example, integrity and transparency, fairness and pursuit of excellence.

This code of business conduct and ethics helps ensure compliance with legal requirements and their standards of business conduct. All company employees and trainees are expected to understand this code of business conduct and ethics, in order to uphold the standards in day – to – day activities, comply with all applicable policies and procedures, and ensure that all agents and contractors are aware of, understand and adhere to these standards.

Since the principles described in this code of business conduct and ethics are general in nature, one should also review all applicable company policies and procedures and the employee handbook, when adopted for more specific instruction. Nothing in this code of business conduct and ethics, in any company policies and procedures or in other related communications (verbal or written) shall constitute and shall not be construed to constitute a contract of employment for a definite term or a guarantee of confirmed employment.

Infosys is committed to continuously reviewing and updating their policies and procedures. Hence this code of business conduct and ethics is subject to modification. This code of business conduct and ethics super cedes all other such codes, policies, procedures, instructions, practices, rules or written or verbal representations to the extent they are inconsistent. Hence the company has to update the code from time to time.

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Compliance is Everyone’s Business

Ethical business conduct is vey essential to Infosys. As an employee, each of the employee’s has responsibility to respect and adhere to these practices. Many of these practices reflect legal or regulatory requirements. Violations of these laws and regulations can attract penalty for employees, the company, its directors and its officers.

Part of their job and ethical responsibility is to help enforce this code of business conduct and ethics. They have to be alert to possible violations and report possible violations to the human resource department or the legal department. Reprisal, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of law, this code of business conduct or other company policies, or against any person who is assisting in any investigation or process with respect to such a violation, is prohibited.

If the employees find or have concerns related to questionable accounting, accounting controls, auditing matters, or reporting of fraudulent financial information to the company’s shareholders, government or financial markets, or of grave misconduct i.e. conduct which results in the violation of law by the company or in a substantial mismanagement of company resources and if proven constitutes a criminal offence or reasonable grounds for dismissal of the person engaging in such conduct, or conduct which is otherwise in violation of any law or the company’s policies, they should promptly contact any of the following, in accordance with the company’s whistleblower policy:

Corporate counsel Their immediate supervisor

Violations of law, this code of business conduct and ethics or other company policies or procedures by company employees can lead to disciplinary action up to and including termination.

In all cases, if you are unsure about the appropriateness of an event or action, please seek assistance in interpreting the requirements of these practices by contacting the human resource department or legal department.

Employee’s responsibilities to the company and its stockholders

1. General standards of conductThe company expects all employees, agents and contractors to exercise good judgment to ensure the safety and welfare of employees, agents and contractors and to maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. These standards apply on working on premises, at offsite locations where business is being conducted, at company sponsored business and social events, or at any other place where the employee is a representative of the company.

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2. Applicable lawsAll company employees, agents and contractors must comply with all applicable laws, regulations, rules and regulatory orders. Each employee, agent and contractor must acquire appropriate knowledge of the requirements relating to his or her duties sufficient to enable him or her to recognize potential dangers and to know when to seek advice from the legal department on specific company policies and procedures. Violations of laws, regulations, rules and orders may subject the employee, agent or contractor to individual criminal or civil liability, as well as to discipline by the company. Such individual violations may also subject the company to civil or criminal liability or the loss of business.

3. Conflict of interestEvery employee has a responsibility to the company, its stockholders and other employees. Althosugh this duty does not prevent employees in personal transactions and investments, it does demand to avoid situations where a conflict of interest might occur or appear to occur. Infosys strive to avoid the appearance of impropriety.

All employees must avoid situations involving actual or potential conflict of interest. Personal or romantic involvement with a competitor, supplier, or subordinate employee of the company, which impairs an employee’s ability to exercise good judgment on behalf of the company, creates an actual or potential conflict of interest. Supervisor-subordinate romantic or personal relationships also can lead to supervisory problems, possible claims of sexual harassment, and morale problems.

An employee involved in any type of relationship or situation described in the policy should immediately and fully disclose the relevant circumstances to his or her immediate supervisor, for determination about whether a potential or actual conflict exists. If an actual or potential conflict is determined, the company may take whatever corrective action appears appropriate according to the circumstances. Failure to disclose facts shall constitute grounds for disciplinary action.

4. Corporate opportunitiesEmployees, officers and directors may not exploit for their own personal gain opportunities that are discovered through the use of corporate property, information or position unless the opportunity is disclosed fully in writing to the company’s board of directors and the board of directors declines to pursue such opportunity.

5. Protecting the company’s confidential informationThe company’s confidential information is a valuable asset. The company’s confidential information includes product architectures; source codes; product plans and road maps; names and list of customers; dealers, employees and financial information. This information is the property of the company and may be protected by patent, trademark, copyright and trade secret laws. All confidential information must be used for company business purposes only. Every employee, agent and contractor must safeguard it. This

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responsibility includes not disclosing the company confidential information such as information regarding the company’s services or business over the internet. It also includes safeguarding, securing and proper disposal of confidential information in accordance with the company’s policy on maintaining and managing records.

6. Obligations under securities laws-“insider” tradingObligations under the Indian and U.S. securities laws apply to everyone as the company is listed both on the Indian and U.S. stock exchanges. In normal course of business officers, consultants, contractors, directors, employees, agents of the company may come into possession of significant, sensitive information. This information is the property of the company- employee has been entrusted with it. Employee may not profit from it by selling or buying securities themselves

Insider trading is a crime, penalized by fines and imprisonment for individuals. Insider traders must also disgorge any profits made, and are often subjected to an injunction against future violations.

Employees, agents and contractors of the company who violate this policy will also be subject to disciplinary action by the company, which may include termination of employment or of business relationship.

7. Prohibition against short selling of company stockNo company director, officer or other employee, agent or contractor may, directly or indirectly, sell any equity security, including derivatives, of the company if he or she

Does not own the security sold, or If he or she owns the security,

does not deliver it against such sale within the applicable settlement cycle. No company director, officer or other employee, agent or contractor may engage in short sales. While employees who are not executive officers or directors are not prohibited by law from engaging in short sales of company’s securities, the company has extended this prohibition to all employees even though such wider application is not required by the law.

8. Managing and maintaining recordsThe purposes of this policy is set forth and convey the company’s business and legal requirements in managing records, including all recorded information regardless of medium or characteristics. Records include paper documents, CDs, computer hard disks, email, floppy disks, microfiche, microfilm or all other media. The company is required by local, state, federal, foreign and other applicable laws, rules and regulations to retain certain records and to follow specific guidelines in managing its records. Civil and criminal penalties for failure to comply with such guidelines can be severe for employees, agents, contractors and the company, and failure to comply with such guidelines may subject the employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship.

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9. Records on legal holdA legal hold suspends all documents destruction procedures in order to preserve appropriate records under special circumstances, such as litigation or government investigations. The company’s legal department determines and identifies what types of company records or documents are required to be placed under a legal hold. Every company employee, agent and contractor must comply with this policy.The company’s legal department will notify employees if a legal hold is placed on records for which they are responsible. Employees then must preserve and protect the necessary records in accordance with instructions from the company’s legal department. Records or supporting documents that have been placed under a legal hold must not be destroyed, altered or modified under any circumstances. A legal hold remains effective until it is officially released in writing by the company’s legal department.

10. Export controlsA number of countries maintain controls on the destinations to which products or software may be exported. Some of the strictest export controls are maintained by the United States. The U.S. regulations are complex & apply both to exports from the United States & to exports of products from other countries, when those products contain U.S. origin components or technology. Software created in the United States is subject to these regulations even if duplicated and packaged aboard. In some circumstances, an oral presentation containing technical data made to foreign nationals in United States may constitute a controlled export. When working with U.S. based customers, U.S. export control compliance is responsibility of the customer. All employees should exercise diligence while working with U.S. based clients to clearly determine this responsibility early on.

11. Foreign corrupt practices act.The company requires full compliance with the U.S. foreign corrupt practices act (FCPA) by all of its employees, agents & contractors, even though the company is incorporated in India.

The anti bribery & corrupt payment provisions of the FCPA make illegal any corrupt offer, payment, promise to pay, or authorization to pay any money, gift or anything of value to any foreign official, or any foreign political party, candidate or official, for the purpose of influencing any act or failure to act, in official the capacity of that foreign official or party; or inducing the foreign official or party to use influence to affect a decision of a foreign government or a agency, in order to obtain or retain business for anyone, or direct business to anyone.

All company employees, agents and contractors whether located in the United States or abroad, are responsible for the FCPA compliance and the procedures to ensure FCPA compliance. All managers and supervisory personnel expected to monitor continued

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compliance with the FCPA to ensure compliance with the highest moral, ethical and professional standards of the company.

Responsibilities to company’s customers and suppliers

1. Customer relationshipsIf the job puts an employee in contact with any company customers or potential customers, it is critical for the employees to remember that they represent the company to the people with whom they are dealing. Act in a manner that creates value for customers and help to build relationship based upon trust. The company and its employees have provided services for many years and have built up significant goodwill over that time. This goodwill is one of the most important assets, and the company employees, agents and contractors must act to preserve and enhance company’s reputation.

2. Payments or gifts from othersUnder no circumstances employees, agents or contractors accept any offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value from customers, vendors, consultants, etc. that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commitment of fraud, or opportunity for the commission of any fraud. Inexpensive gifts, infrequent business meals, celebratory events and entertainment, provided that they are not excessive or create an appearance of impropriety, do not violate this policy.

Gifts given by the company to suppliers or customers or received from suppliers or customers should always be appropriate to the circumstances and should never be of a kind that could create an appearance of impropriety, the nature and cost must always be accurately recorded in the company’s books and records.

3. Publications of othersThe company subscribes to many publications that help employees do their job better. These include newsletters, reference works, online reference services, magazines, books and other digital and printed works. Copyright law generally protects these works and their unauthorized copying and distribution constitute copyright infringement.

4. Handling the confidential information of othersThe company has many kinds of business relationships with many companies and individuals. Sometimes, they will volunteer confidential information about their products or business plans to induce the company to enter into a business relationship. At other times company request that a third party provide confidential information to the company to evaluate a potential business relationship with that party. Whatever the situation, the company must take special care to handle the confidential information of others responsibly.

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5. Selecting suppliersThe company’s suppliers make significant contribution towards its success. To create an environment where suppliers have an incentive to work with the company, they must be confident that they will be treated lawfully and in an ethical manner. The company’s policy is to purchase supplies on need, quality. Service, price and terms and conditions. The company’s policy is to select significant suppliers or enter into significant supplier agreements through a competitive bid process where possible. Under no circumstances should any company employee, agent or contractor attempt to coerce suppliers in any way.

6. Government relationsIt is company’s policy to comply fully with all applicable laws and regulations governing contact and dealings with government employees and public officials, and to adhere to high ethical, moral and legal standards of business conduct. This policy includes strict compliance with all local, state, federal, foreign and other applicable laws, rules and regulations.

7. Government contractsIt is company’s policy to comply fully with all applicable laws and regulations that apply to government contracting. It is also necessary to strictly adhere to all terms and conditions of any contract with local, state, federal, foreign or other applicable governments.

8. LobbyingEmployees, agents or contractors whose work requires lobbying communication with any member or employee of a legislative body or with any government official or employee in the formulation of legislation must have prior written approval of such activity from the company’s corporate counsel. Activity covered by this policy includes meetings with legislators or members of their staffs or with senior government officials. Preparation, research, and other background activities that are done in support of lobbying communication are also covered by this policy even if the communication ultimately is not made.

9. Free and fair competitionThese laws often regulate the company’s relationships with its distributors, resellers, dealers and customers. Competition laws generally address the following areas pricing practices, discounting. Terms of sale, credit terms, promotional allowances, secret rebates, exclusive dealerships or distributorships, product bundling, restrictions on carrying competing products, termination and many other practices.

Competition laws also govern, usually quite strictly, relationships between the company and its competitors. As a general rule, contacts with competitors should always avoid subjects such as prices or other terms and conditions of sale, customers and suppliers. Employees, agents or contractors of the company may not knowingly make false or

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misleading statements regarding its competitors or the product of its competitors, customers or suppliers.

10. Industrial espionageIt is company’s policy to lawfully compete in the marketplace. This commitment to fairness includes respecting the rights of the company’s competitors and abiding by all applicable laws in the course of competing. The company expects its competitors to respect their rights to compete lawfully in the marketplace, and also respect competitor’s rights equally. The purpose of this policy is to maintain the company’s reputation as a lawful competitor and to help ensure the integrity of the competitive marketplace.

Corporate Governance & Infosys

“The primary purpose of corporate leadership is to create wealth legally and ethically. This translates to bringing a high level of satisfaction to five constituencies - customers, employees, investors, vendors and the society-at-large. The raison d'être of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year. “-N. R. Narayana Murthy, Chairman of the Board and Chief Mentor

Analyst felt that Infosys became one of the most respected companies in India, through its corporate governance practices, which were better than those of many other companies in India. Narayana Murthy’s move to adhere to the best global practices was driven by his vision to become a global player. Infosys adopted the stringent US generally accepted accounting practices (GAAP) many years before other companies in India did. Infosys’ corporate governance practices conformed to the recommendations of the confederation of Indian industries (CII) committee and the Cadbury committee on corporate governance with a few exceptions. To maintain transparency, Infosys provided details on high and low monthly averages of share prices in all the stock exchanges on which the company’s shares were listed. It is one of the few companies in India to provide segment wise break up of revenues.

Narayana Murthy believed in commitment to values, and ethical conduct of business. He said, “Investors, customers, employees and vendors have all become more discerning, and are demanding greater transparency and fairness in all dealings.” He also made a clear distinction between personal and corporate funds. Founding members took only salaries and dividends and did not have other benefits from the company.

Infosys received was the recipient of awards for its good governance practices. In 2001, Infosys was rated India’s most respected company by business world. Infosys was also ranked second in corporate governance among 495 emerging companies, in a survey conducted by credit Lyonnais securities Asia (CLSA) emerging markets. In 2000, Infosys was awarded the “national award for excellence in corporate governance” by the government of India.

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Corporate Governance Philosophy

Infosys corporate governance philosophy is based on the following principles:

Satisfy the spirit of the law and not just the letter of the law. Corporate governance standard should go beyond the law.

Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose. Make clear distinction between personal conveniences and corporate resources. Communicate externally, in a truthful manner, about how the Company is run internally. Comply with the laws in all the countries in which the Company operates Have a simple and transparent corporate structure driven solely by business needs. Management is the trustee of the shareholders' capital and not the owner.

Corporate Social Responsibility at Infosys

If wealth creation for the benefit of shareholders is an objective of corporate governance, social concern to protect the interests of all stakeholders and the society at large are also to be given due prominence. Infosys balances wealth and welfare strategically. Infosys has used its wealth and stands to contribute to improvements in the community. A core value of Infosys is a strong sense of social responsibility and commitment to help people and community. It is actively involved in various community development programmes.

Infosys estabilished the Infosys foundation, a trust founded to further the company’s commitment to social causes, to aid destitute and disadvantaged people. One percent of Infosys’ profit after tax is donated to the foundation every year. The foundation focuses on enhancing the living conditions of the rural population, healthcare for the poor, education and promotion of Indian arts and culture. In the year 2003-04, Infosys initiated three social programmes to improve computer literacy of rural people as well as the teachers in rural areas. Along with Microsoft, Infosys launched a programme, computers @ classrooms, as part of which old computers were given away to educational institutions.

“It is better to light a candle than to remain in darkness”. The Infosys foundation starts with this humble, but thought- provoking philosophy. The foundation aims at improving the health, education and basic facilities, benefiting a large number of individuals and institutions.

Infosys is committed to contributing to the society and has established the Infosys Foundation in 1996 as a not-for-profit trust to support social initiatives. Its Grants to the Foundation aggregated Rs.19 crore during the fiscal year 2007, as compared to Rs.13 crore in the previous year.

Infosys Foundation, the philanthropic arm of Infosys Technologies Ltd., fulfils the social responsibility of the company. The Foundation has undertaken various initiatives in providing

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medical facilities to remote rural areas, organizing novel pension schemes, etc. Promoted by Infosys Technologies Limited, the Foundation began its work in Karnataka, India, gradually extending its activities to the states of Tamil Nadu, Andhra Pradesh, Maharashtra, Orissa and Punjab. The foundation primarily aims at improving the health, education and basic facilities, benefiting a large number of individuals and institutions.

In a short span of time, the foundation has successfully implemented projects in following areas:

Healthcare Rural development and social rehabilitation Learning and education Art and culture

Over the years, it’s proved to be a catalyst, improving lives and helping thousands realize their potential.

Health care

Making high-quality healthcare the norm is an ongoing challenge. Since its inception, the Foundation has initiated several activities that benefit the rural and urban poor. Apart from constructing hospital wards, donating hi-tech equipment and organizing health camps, the Foundation also distributes medicines to economically-weaker sections in remote areas.

The Foundation constructed the Infosys Super-specialty Hospital on the Sassoon Hospital premises in Pune. This hospital caters to poor patients

It has spread its donations for medicines to aged and poor patients suffering from cancer, leprosy, and defects of the heart/kidney, mental illnesses and other major disorders. It helps this section meet substantial medical expenses and assures them of a steady source of income for their treatment.

The Foundation installed office management software at the KEM Hospital in Mumbai. This enables the hospital to manage store requirements, keep accounts as well as publish hospital papers and other information on the Web.

Additional blocks have been built at the Swami Sivananda Centenary Charitable Hospital at Tirunelveli in Tamil Nadu

Additional blocks have also been built at the Bangalore Diabetic Hospital A dharmashala was constructed at the Kidwai Cancer Institute in Bangalore

The Foundation constructed a pediatric hospital at the Capitol Hospital in Bhubaneswar, which caters to poor patients. A CT-scan machine was also donated to the hospital

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Additional wards were built at the Swami Shivananda Memorial Charitable Hospital in Pattumadai, Tamil Nadu

The annex to a cancer hospital in Kancheepuram, Tamil Nadu was added A hospital was built for tribals at H.D. Kote, Mysore. In Bellary, a hospital was constructed to treat patients with brain fever The Foundation air-conditioned the burns ward of the Victoria Hospital, Bangalore. A high-energy linear accelerator unit was purchased for the treatment of cancer patients

at the Chennai Cancer Institute in Tamil Nadu The Foundation has donated ambulances to medical centers and hospitals in

Kanchipuram, Tamil Nadu, Gadag, B.R. Hills and South Canara in Karnataka and Kalahandi, Chandrashekarpur and Bhubaneswar in Orissa

It has also donated high-tech surgical equipment to hospitals located at Mysore, Bijapur, Bellary and Hubli in Karnataka

Incubators, air conditioner units, neonatal resuscitation equipment and refrigerators have been given to the Bowring Hospital, Bangalore, while ultrasound scanners have been donated to the Ramakrishna Ashram, Coorg and the Bangalore Government Hospital

The Foundation has made donations to the Drug Foundation for Nuclear Medicine at the cancer hospital in Miraj and the Kidwai Hospital in Bangalore

A leprosy camp was conducted, and relief work was carried out at the Leprosy Colony in Gulbarga

Rural development and social rehabilitation

Whether it is organizing an annual mela that empowers destitute women or building orphanages that give children a better life, the Foundation's activities address the needs of society's most neglected.

The Foundation has organized unique annual melas in different parts of the country, including Bangalore and Sedam in Karnataka, and Chennai in Tamil Nadu, to distribute sewing machines to destitute women and help them earn a livelihood. Prior to the mela, the Foundation even holds tailoring classes and provides materials for the same at some centers.The Foundation has conducted relief work after natural disasters. Apart from monetary contributions, it believes in assessing the real needs of those affected and contributing accordingly. It has worked in the tsunami-affected areas of Tamil Nadu and the Andaman Islands, earthquake-affected areas of Kutch, cyclone-devastated areas of Orissa, tribal areas of Kalahandi in Orissa and drought-hit areas of Andhra Pradesh

The Foundation made a donation towards the mid-day meal program of the Akshaya Patra Foundation, Bangalore, for poor children in North Karnataka.

It established counseling centers to rehabilitate marginalized devadasis in North Karnataka

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The Foundation has offered compensation to families whose bread-winners have served in our Defence Forces and died fighting for the country.

The Foundation worked with the Red Cross Society to supply aid equipment to the physically challenged in rural areas and economically weaker sections of Karnataka

The Foundation offers monetary aid to the Divine Life Society, which is based in the Himalayas. The Society helps senior citizens and destitutes, often picking them up from the street and looking after them with the help of volunteers, some of whom are foreign tourists in the region

The Foundation improved a rehabilitation center in Chennai for mentally retarded women The Foundation has improved the lives of children with leprosy and those living on the

streets, and in slums

The Foundation has constructed:

Hostel buildings for under-privileged students at Ramakrishna Mission centers in Tamil Nadu, Orissa, Maharashtra and Andhra Pradesh

Orphanages in rural areas of these states, to provide shelter to children of local communities.

A free girls' hostel at Maharshi Karve Sthree Shikshana Samsthe, Hingne, Pune A girls' hostel for the blind in Banapur, Orissa, Jagruthi Blind School in Pune, Sri

Ramana Maharshi Academy for the Blind in Bangalore and Sri Sharada Andhara Vikasa Kendra in Shimoga,

Relief shelters in several parts of Orissa The Sri Ramakrishna Students' Home in Chennai, Tamil Nadu The Shakthidhama Destitute Center for Women in Mysore, Karnataka A hall for people with physical disabilities in Belgaum, Karnataka

Learning and education

"Basic education links the children, whether of the cities or villages, to all that is best and lasting in India," said Mahatma Gandhi. At no time have his words been more prophetic, than now. In a world where education has become the biggest differentiating factor, the Foundation offers an edge to deprived and rural students, through its activities

In what is one of the largest rural education programs in the country, the foundation has donated 10,200 sets of books in Karnataka alone, and in Andhra Pradesh, Karnataka, Orissa and Kerala, under its Library for Every Rural School project. Through this program, the Foundation has set up more than 10,150 libraries in rural government schools. A minimum of 200 books, depending on the strength of the school, is provided. Each set has around 200 to 250 books. The cost of each set ranges between Rs.2,000 and Rs.3,000. Books on various subjects, including science, history, mathematics, general

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knowledge, grammar, literature, geography, vocational training and fiction have been donated to cater to the interests of students in all age groups

To simplify the standard of computer education for students in rural areas, a separate book has been written and is being distributed under the library project. This book has also been translated into Hindi, Tamil and Telugu

In another innovative project that facilitates higher learning, the Foundation has set up libraries in Hubli and Bangalore, that can be accessed by under-privileged students. These well-equipped libraries have the latest books prescribed in hi-tech streams like medicine and engineering. All a student has to do is pay a deposit of Rs 800 for unlimited use of the library through his or her education

To identify and help students in dire need, the Foundation works with Prerna, an NGO in Raichur and Bangalore, and Vidya Poshak in Dharwad, to distribute scholarships to poor students. With the help of these organizations, the Foundation reaches out to deserving students across Karnataka

The Foundation has also made donations towards the reconstruction of old school buildings. For instance, 14 government schools in slum areas of Hyderabad were reconstructed

The Foundation has also renovated the Gandhinagar, Kottara St. Peter's School and Kapikad Zilla Panchayat schools in Mangalore, Karnataka

It also contributes towards the construction of additional classrooms, school funds/corpus funds, school furniture, equipment and so on, especially in backward areas

The Foundation recently purchased an index Braille printer for the Sharada Devi Andhara Vikasa Kendra in Shimoga, Karnataka

The Foundation donated study material, including science kits, to 20 schools in rural Karnataka

Donations have also been made towards computer centers in rural areas of Karnataka The Foundation works with various organizations in Maharastra, Tamil Nadu and Orissa,

to facilitate the education of slum children in these states The Foundation collaborated with the Center for Environment Education (CEE),

Bangalore, for the orientation of teachers specializing in science and the environment. The Center developed training material on water. During the program, it linked the Science and Social Studies curriculum with the environmental perspective. Around 15 camps were held in various parts of Karnataka over the last 3 years. Totally, around 1,000 teachers were trained

It helps the Bangalore Association for Science towards the development and maintenance of the planetarium in Bangalore, including funding of the sky-theater program at the planetarium

The Foundation constructed a science center at a rural school in the Kolar District of Karnataka, a one-of-its-kind center in the entire district. It caters to the students of the school, as well as schools in the neighboring villages

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It made a contribution to fund new self-employment courses at post graduation and post matriculation levels at the Nrupathunga Educational Institute in Hyderabad

Arts

Preserving our rich heritage and honoring our artisans are some of the ways the Infosys Foundation contributes to this space

The Foundation has helped revive the art of the weavers of Pochampalli village in Andhra Pradesh

It helps organize cultural programs to promote artists in rural areas of Karnataka and Andhra Pradesh

It traces and honors artistes from different parts of India Today, the scope of the foundation’s activities has widened to identifying under-

privileged artists from different walks of life; be it writers, painters, poets or musicians, who don’t have access to contacts or help. It assists them on a “need” basis, offering financial assistance, promoting their art, or helping them receive much-deserved recognition

It organizes programs like puppet shows and other cultural events to encourage artistes and performers in rural areas of Karnataka and Andhra Pradesh, and offers them financial assistance to carry forward their art

In Karnataka, the Gamaka form of music was fast disappearing. A few years ago, The Foundation coordinated a project to donate more than 200 sets - comprising a Gamaka cassette and record player - to 100 rural schools in Karnataka, to bring the dying art form back to life

It has sponsored art exhibitions and performing arts programs in Dharwad and Bangalore in Karnataka

Environment

Globalization continues to unleash far-reaching changes. The biggest benefit of globalization has been the rise of companies and economies and the consequent creation of jobs. However, the most telling consequence of development has been the deterioration of the environment. As a responsible corporate citizen, Infosys believes that the environment can be a participant and a beneficiary of progress. Infosys is reducing their carbon footprint even as they expand their global presence.

Further, Infosys wishes to be recognized by all stakeholders, including customers, employees, vendors, share owners and community at large, as a company committed to high standards of environmental management and to providing its employees, consultants and contractors with a safe and healthy environment, free of occupational injury and illness.

To achieve this, Infosys strive toward:

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Conservation of resources Prevention of pollution Adherence to all applicable legislations Eliminating accidents, occupational illnesses and injuries at work

The Health, Safety and Environmental Management System (HSEMS) at Infosys is called the 'Ozone Initiative'. It is the Infosys' endeavor to have and operate a HSEMS at various locations that will conform to the ISO 14001 standards and OHSAS 18001 requirements. Infosys has been certified compliant to OHSAS 18001 and re-certified compliant to ISO 14001 standards during May 2007, in eight of its development centers across India.

Infosys seek to change attitudes and influence actions toward the environment at the grassroots level. Their 'Project Ozone' campaign spreads environmental awareness and implements eco-friendly practices across development centers worldwide. Further, this vision is supported by voluntary groups of employees organized into eco-clubs.

Infosys' vision is to become "carbon and water neutral". They undertake several initiatives to neutralize their environmental impact:

Water ManagementPotable water is a depleting resource. Infosys harvest rainwater and consistently reduce the use of fresh water. In addition, they recycle waste water to be reused for primary and secondary purposes.

Energy ConservationInfosys uses energy responsibly. It measures our utilization of energy through energy audits. The data collected is used to achieve increasing levels of energy conservation.

Waste ManagementWaste is recycled scientifically. They reduce waste, segregate it at the source and dispose it at dedicated waste segregation and processing plants at each development center.

Infosys technologies contributed Rs 5 crore to the prime ministers national relief fund to assist the victims of the giant Tsunami that ravaged South and South-East Asia in the last week of December 2004. The company also actively supported its employees’ efforts across group companies globally, to make monetary and material contributions towards aid operations.

Infosys also instituted in 1999 the Infosys Fellowship Programme to foster excellence in education and offered funds at the five IITs and three IIMs for Ph.D. programmes in computer science, management, law and accounting. Under this programme, the company grants Rs 9 lakhs per fellowship for the entire duration of Ph.D. programme.

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The Phaneesh Murthy Case

For a company so revered by the entire Indian and Foreign business community for having set the highest ethical standards, it seemed to be only a matter of time before someone tried to pull it down. But to their credit, the company honorably resolved the issue and came back much stronger and surer of its values than ever before. Infosys became entangled in a scandal, between October 1999 and December 2000, that deneted its reputation as a company that had the best corporate governance as well as corporate social responsibility in the country. The Hindu Business Line reported on 7th august 2002, “since its inception, this is probably the first piece of negative news about Infosys”.

The case examines the controversy surrounding the charges of sexual harassment and unlawful termination made by an employee against Infosys, leading Indian software company, during 2001-03. Phaneesh Murthy, a top level executive and a director on the company board, was accused of sexually harassing and unlawfully firing his subordinate, Reka Maximovitch.

This is a story of blackmail, sex, stalking, threats, oppression, hurt feelings and revenge. Interestingly, all this happened in and around the US offices of Infosys, one of India's most well-known and respected software companies, between October 1999 and December 2000.

The events that took place during October 1999 and December 2000 became public knowledge in India only when Phaneesh Murthy (Phaneesh), the head of the sales and marketing, and communication and product services division of Infosys (and a director on the board), resigned from his post in June 2002. Phaneesh said that he had resigned to "devote time and attention to pursue a successful defence of the suit". The lawsuit, filed by his former secretary, Reka Maximovitch (Reka) alleged that Phaneesh had sexually harassed her and unlawfully terminated her employment. The company's share price declined by 6.6% soon after Phaneesh left.

The case created ripples in business circles, in the eyes of the public and attracted a lot of media coverage since a sexual harassment lawsuit implicating such a senior official had never been heard of in the Indian corporate world. It was also being seen as an event that could make Indian companies stop ignoring the sensitive issue of sexual harassment at the workplace.

Phaneesh was an integral part of Infosys' success story. While Chairman and Chief Mentor Narayana Murthy and a few others established Infosys in India back in 1981, Phaneesh successfully set up the company's overseas businesses.

He was often called the 'other Murthy' of Infosys and had many admirers within and outside the company. Not surprisingly, he was the highest paid executive in the company with a take home package of Rs 20 million. Belonging to a middle-class South Indian family, Phaneesh graduated from one of India's premier business schools. Before joining Infosys, Phaneesh was working with another software company, Sonata Software as a regional manager. He was said to be one of the main reasons for the company's good performance. In 1992, Phaneesh joined Infosys, then a $ 2 million company with a negligible presence in the US. Within three years, Phaneesh

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became the head of sales at the company, and in 1996, he was made the head of worldwide sales...

Initially, Phaneesh Murthy refused to participate in the settlement initiated by Infosys on the terms specified by it. however, later on. he voluntarily signed the settlement and agreed to every condition that Infosys had set. as the company retained its right to sue phaneesh for his actions and lack of contributions, it went ahead with the settlement without any contribution from phaneesh.

The stance adopted by Infosys in this case seemed to go against its image of a company considered to be a model of good corporate governance. Analysts claimed that the company had kept the issue under wraps for a long time. Media reports blamed Infosys for neglecting to formulate/implement a structured policy regarding sexual harassment and for compromising on moral values for an 'economically-valuable' person like Phaneesh.

Analysts wondered how a company that Forbes had once described as "a model of transparency, not just for the rest of corporate India but for companies everywhere," do such things! The saga of Phaneesh, Reka and Infosys and the issue of sexual harassment at the workplace (in India as well as abroad) were debated heatedly in corporate and media circles, as many more shocking events unfolded over the next one year.

Infosys technologies maintained a studied silence on the episode on the ground that the matter was subjudice. on 11th may 2003, Infosys finally announced the amicable settlement with Maximovitch by agreeing to pay $3million as compensation. the company contributed US $1.5million and the balance US $1.5million was contributed by the insurers under the company's Directors and Officiers Liability Insurance Cover. Infosys refused to give more details about the manner in which the settlement was arrived at, and whether Infosys conducted any internal enquiry before Phaneesh Murthy submitted his resignation.

A crisis brings out the best and worst in any organization oi in any person. It is also true that a crisis provided a learning opportunity for them. Infosys also leant its lesson and put in place principles of work ethics to be followed by its employees and a whistle blower policy.

Infosys chairman and chief mentor, Narayana Murthy said, "The litigation is behind us. We have taken further steps to strengthen our internal processes and improve the checks and balances to handle similar situations." Mohandas Pai added, "We have conducted several training programs, widened the dissemination of information and met employees on this issue." Infosys conducted a course for all its officers and members (in India as well as abroad) on sexual harassment and the importance of being sensitized about the issue. The code of conduct provided in the employee manual was modified in line with the above decisions.

Conclusion

The founder and chief architect of Infosys, N.R. Narayana Murthy is a visionary who exhibits a leading model of innovation and excellence in an industry that is rapidly evolving. He is

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capitalizing on growing oppurtunities in a world that is increasing its reliance on e-commerce and technology to form a vital part of business infrastructure. Narayana murthys vision is to harness technology and the free market to create success and build prosperity among the poverty prevalent in india. Infosys technologies is a company that the entire world looks up to, in terms of sticking to one’s sound ethical judgement and doing business the “right way.”

It continues to set standards in everything that it does, and the people who make the company never think twice when they have to make a tough decision involving ethics. To them dharma is above everything.

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