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STUDY MATERIALPROFESSIONAL PROGRAMMEETHICS, GOVERNANCEANDSUSTAINABILITYMODULE IIPAPER 6ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003tel 011-4534 1000, 4150 4444 fax 91-11-2462 6727email website www.icsi.edui

THE INSTITUTE OF COMPANY SECRETARIES OF INDIATIMING OF HEADQUARTERSMonday to FridayOffice Timings – 9.00 A.M. to 5.30 P.M.Public Dealing TimingsWithout financial transactions – 9.30 A.M. to 5.00 P.M.With financial transactions – 9.30 A.M. to 4.00 P.M.Phones41504444, fo@icsi.eduLaser Typesetting by AArushi Graphics, Prashant Vihar, New Delhi, andPrinted at Tan Prints/PRN-2509/July 2014ii

PROFESSIONAL PROGRAMMEETHICS, GOVERNANCE AND SUSTAINABILITYCorporate Governance has emerged as an important academic discipline in its own right, bringing togethercontributions from accounting, finance, law and management. Corporate governance now offers a comprehensive,interdisciplinary approach to the management and control of companies. Corporate professionals of today andtomorrow must imbibe in themselves the evolving principles of good corporate governance across the globe ona continual basis. Excellence can be bettered only through continuous study, research and academic andprofessional interaction of the highest quality in the theory and practice of good corporate governance. Thecorporate world looks upon especially Company Secretaries to provide the impetus, guidance and direction forachieving world-class corporate governance.Company Secretaries are the primary source of advice on the conduct of business. This can take into its foldeverything from legal advice on conflicts of interest, through accounting advice, to the development of strategy/corporate compliance and advice on sustainability aspects.The paper on Ethics, Governance and Sustainability has been introduced to provide knowledge on globaldevelopment on governance, ethics and sustainability aspects and best governance practices followed worldwide.This paper would help in understanding of national and international governance norms, ethical business practices,corporate sustainability, CSR and sustainability reporting, role of various governance forums etc.The study material is based on those sections of the Companies Act, 2013 and the rules made there underwhich have been notified by the Government of India and came into force w.e.f. April 01, 2014 (includingAmendments/Clarifications/Circulars issued there under upto June, 2014). In respect of sections of the CompaniesAct, 2013 which have not been notified, applicable sections of Companies Act, 1956 have been dealt with in thestudy. Further students are advised to keep themselves abreast of latest developments on governance andsustainability issues by regularly reading economic dailies and visiting the websites of regulatory bodies, nationaland international corporate governance forums. Students are also advised to read regularly the ‘Student CompanySecretary’/’Chartered Secretary’ wherein all important regulatory amendments are reported regularly.In the event of any doubt, students may write to Directorate of Academics in the Institute for clarification Although due care has been taken in publishing this study material, yet the possibility oferrors, omissions and/or discrepancies cannot be ruled out. This publication is released with an understandingthat the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken inthat behalf.Should there be any discrepancy, error or omission in the study material, the Institute shall be obliged if thesame is brought to its notice for issue of corrigendum in the e-bulletin Student Company Secretary.iii

SYLLABUSMODULE 2 – PAPER 6: ETHICS, GOVERNANCE AND SUSTAINABILITY (100 Marks)Level of Knowledge: Advance KnowledgeObjective: To acquire knowledge of ethics, emerging trends in good governance practices and sustainability.Contents:Part A: Ethics and Governance (70 Marks)1. Introduction Ethics, Business Ethics, Corporate Governance, Governance through Inner Consciousness andSustainability Failure of Governance and its Consequences2. Ethical Principles in Business Role of Board of Directors Organization Climate and Structure and Ethics Addressing Ethical Dilemmas Code of Ethics; Ethics Committee; Ethics Training; Integrity Pact Case Studies and Contemporary Developments3. Conceptual Framework of Corporate Governance Introduction, Need and Scope Evolution of Corporate Governance Developments in India Developments in Corporate Governance – A Global Perspective Elements of Good Corporate Governance4. Board Effectiveness - Issues and Challenges Board Composition; Diversity in Board Room; Types of Directors; Board’s Role and Responsibilities Chairman, CEO, Separation of Roles Relationship between Directors and Executives Visionary Leadership Board Charter, Meetings and Processes Directors’ Training and Development Performance Evaluation of Board and Directorsiv

5. Board Committees Introduction Various Board Committees, their Composition, Role and Responsibilities, Contribution to BoardGovernance Audit Committee Shareholders Grievance Committee Remuneration Committee Nomination Committee Corporate Governance Committee Corporate Compliance Committee Other Committees6. Legislative Framework of Corporate Governance in India Under Listing Agreement, SEBI Guidelines, Companies Act Corporate Governance in PSUs Banks Insurance Companies7. Legislative Framework of Corporate Governance – An International Perspective Australia Singapore South Africa United Kingdom Contemporary Developments in the Global Arena8. Risk Management and Internal Control Risk and its Classification Risk Management and Oversight Enterprise Risk Management Internal Control Roles and Responsibilities of Internal Control Disclosure about Risk, Risk Management and Internal Control9. Corporate Governance and Shareholder Rights Rights of Shareholders Challenges in Exercising Shareholders Rightsv

Corporate Governance issues with regard to Related Party Transactions Role of Investor Associations in Securing Shareholders Rights Role of Institutional Investors in Corporate Governance10. Corporate Governance and Other Stakeholders Employees Customers Lenders Vendors Government Society11. Corporate Governance Forums The Institute of Company Secretaries of India National Foundation for Corporate Governance Organisation for Economic Co-operation and Development Global Corporate Governance Forum Institute of Directors Commonwealth Association of Corporate Governance International Corporate Governance Network The European Corporate Governance Institute Conference Board The Asian Corporate Governance Association Corporate Secretaries International AssociationPart B: Sustainability (30 Marks)12. Sustainability Meaning and Scope Corporate Social Responsibility and Corporate Sustainability Sustainability Terminologies and Meanings Why is Sustainability an Imperative Sustainability Case Studies Triple Bottom Line (TBL)13. Corporate Sustainability Reporting Frameworks Global Reporting Initiative Guidelinesvi

National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business International Standards Sustainability Indices Principles of Responsible Investment Challenges in Mainstreaming Sustainability Reporting Sustainability Reporting Case Studies14. Legal Framework, Conventions, Treaties on Environmental and Social Aspects15. Principle of Absolute Liability – Case Studies16. Contemporary Developments – Integrated Reportingvii

LIST OF RECOMMENDED BOOKSMODULE 2 : PAPER 6 : ETHICS, GOVERNANCE AND SUSTAINABILITYRecommended Readings and References:1.Inderjit Dube:Corporate Governance; LexisNexis Butterworths Wadhwa Nagpur2.Sanjiv Agarwal:Corporate Governance: Concept & Dimensions; Snow white PublicationsP. Ltd.3.K R Sampath:Law of Corporate Governance: Principles and Perspective; Snow whitePublications P. Ltd.4.N Balasubramanian5.H C Mruthyunjaya:Business Ethics and Value System, PHI6.A C Fernando:Business Ethics – An Indian Perspective7.ICSI Taxmann:Corporate Governance Beyond Letters8.JournalsCorporate Governance and Stewardship; Tata McGrawHill(a) ICSI — Chartered Secretary(b) ICSI — Student Company Secretary9.Guidance Note on Corporate Governance Certificate10.Companies Act, 201311.Rules on Companies Act, 201312.Listing Agreement by SEBIviii

ARRANGEMENT OF STUDY LESSONSPART A: ETHICS AND GOVERNANCE (70 MARKS)1.Introduction: Ethics and Governance2.Ethical Principles in Business3.Conceptual Framework of Corporate Governance4.Legislative Framework of Corporate Governance in India5.Board Effectiveness-Issues and Challenges6.Board Committees7.Corporate Governance and Shareholder Rights8.Corporate Governance and Other Stakeholders9.Risk Management and Internal Control10.Corporate Governance in Banks, Insurance and Public Sector Companies11.Corporate Governance Forums12.Legislative Framework of Corporate Governance – An International PerspectivePART B: SUSTAINABILITY (30 MARKS)1.Corporate Social Responsibility2.Sustainability3.Corporate Sustainability Reporting Framework4.Legal Framework, Conventions, Treaties on Environmental and Social Aspects5.Principles of Absolute LiabilityTEST PAPERSix

CONTENTSLESSON 1INTRODUCTION: ETHICS AND GOVERNANCEPageIntroduction2Governance through Inner Conscience2Ethics in Business3The Concept of Business Ethics3Corporate Governance Ethics4Theories of Ethics5Ethical Theories5Deontological Theories – Kantian Ethics5Teleological Theories6Utilitarian Approach6Virtue Theory6Justice Theory7Theory of Egoism7Theory of Relativism8Scope of Business Ethics8Advantages of Business Ethics10CONCLUSION11LESSON ROUND-UP11SELF-TEST QUESTIONS12LESSON 2ETHICAL PRINCIPLES IN BUSINESSIntroduction14Organization Structure and Ethics14Role of Board of Directors15Ethics Programme15Best Practices in Ethics Programme16x

PageFeatures of Good Ethics Programme16Code of Ethics17Code of Conduct18Preamble19General Moral Imperatives19Specific Professional Responsibilities20Specific Additional Provisions for Board Members and Management Committee Members22Compliance with the Code22Credo23Ethics Training and Communication25Ethics Committee26Integrity Pact27Concept of whistle-blower28Social and Ethical Accounting30Ethics Audit30Ethical Dilemma31CONCLUSION33LESSON ROUND-UP34SELF-TEST QUESTIONS35LESSON 3CONCEPTUAL FRAMEWORK OF CORPORATE GOVERNANCEIntroduction38Definitions of Corporate Governance38ICSI Principles of Corporate Governance39Need for Corporate Governance40Evidence of Corporate Governance from the Arthashastra41Corporate Governance Theories42Evolution of Corporate Governance44Corporate Governance Developments in USA44Corporate Governance Developments in UK44Developments in India48Confederation of Indian Industry (CII) - Desirable Corporate Governance: A Code48xi

PageGist of Coverage of CII Desirable Corporate Governance: A Code51Kumar Mangalam Birla Committee (2000)52Task Force on Corporate Excellence Through Governance55Naresh Chandra Committee (2002)56N.R. Narayana Murthy Committee (2003)61Dr. J J Irani Expert Committee on Company LAW (2005)64Corporate Governance Voluntary Guidelines 200965Some of the Provisions Relating to Corporate Governance under Companies Act, 201366Corporate Governance through Listing Agreement66Elements of Good Corporate Governance68LESSON ROUND UP70SELF TEST QUESTIONS71Lesson 4Legislative Framework of Corporate Governance In IndiaIntroduction74Board Structure74Separation of Roles of Chairman and Chief Executive76Meetings of the Board76Powers of the Board77Board Committees78Audit Committees78Nomination and Remuneration Committees78Stakeholders Relationship Committee78Corporate Social Responsibility Committee79Disclosure and Transparency791. In Terms of Companies Act, 2013792. In Terms of Various Rules Made Under Companies Act, 2013813. In Terms of Listing Agreement844. Disclosures In Terms of SEBI Regulations91CONCLUSION95ANNEXURE95LESSON ROUND-UP112SELF-TEST QUESTIONS112xii

PageLESSON 5BOARD EFFECTIVENESS - ISSUES AND CHALLENGESIntroduction114Segment I - Role of Directors114Who are Board of Directors?115Types of Board115Who are Directors?116Governance Functionaries116Case Studies125Board Composition132Segment II - Board Charter133Board Processes134Board Meetings134Good Practices in Convening Board Meetings134Provisions Regarding Meetings of the Board136Decision Making Process at the Meeting139Separate Meetings142Directors’ Time Commitment142Segment III - Responsibilities of Board143Corporate Social Responsibility144Responsibility towards government144Inter-se responsibilities145Responsibility for Leadership145Policy Governance145Relationship between Directors And Executive146The Key Difference between Directors And Managers146Barriers to Visionary Leadership148Segment IV - Training of Directors148Performance Review of Board & Individual Director150Parameters151Performance Evaluation of the Non-Executive Director152CONCLUSION153LESSON ROUND UP153SELF TEST QUESTIONS154xiii

PageLESSON 6BOARD COMMITTEESIntroduction158Need and Advantages of Committees Management158Enhancing Effectiveness of Committees159Membership in Committees159Mandatory Committees160Audit Committee160Nomination and Remuneration Committee167The Stakeholders Relationship Committee169Corporate Social Responsibility Committee169Non-Mandatory Committees170Corporate Governance Committee171Regulatory, Compliance & Government Affairs Committee171Science, Technology & Sustainability Committee172Risk Management Committee173Other Committees173LESSON ROUND UP174SELF TEST QUESTIONS175LESSON 7CORPORATE GOVERNANCE AND SHAREHOLDER RIGHTSIntroduction178Rights of Shareholders178Shareholder rights enshrined in the Companies Act, 2013180Challenges in Exercising Shareholders Rights186Investor Protection in India186Insider Trading187Investor Education & Protection Fund187Protection of Rights of Minority Shareholders and Related Party Transactions190Shareholder activism195Investor Relations (IR)197Role of Institutional Investors in Corporate Governance199xiv

PageInstitutional Investors – Global Trends201PRI- Principles for Responsible Investment- An investor initiative in partnership with UNEP Finance Initiativeand the UN Global Compact203The Code for Responsible Investing in South Africa (CRISA)205California Public Employees’ Retirement System205Tools Used by Institutional Investors206CONCLUSION208LESSON ROUND UP209SELF TEST QUESTIONS210LESSON 8CORPORATE GOVERNANCE AND OTHER STAKEHOLDERSIntroduction: Stakeholder Concept212Recognition of Stakeholder Concept In Law212Stakeholder Engagement213Stakeholder Analysis214Better Stakeholders Engagement Ensures Good Governance214Types of Stakeholders215The Caux Round Table215The Clarkson Principle of Stakeholder Management219Governance Paradigm and Stakeholders219Whistle Blower Policy220Recent Developments221The Employees-First t224Corporate Governance Voluntary Guidelines 2009224National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business225SEBI - Business Responsibility Report225Society225Governance Norms for Stakeholders under Companies Act, 2013226CONCLUSION226xv

PageLESSON ROUND UP227SELF-TEST QUESTIONS228Lesson 9Risk Management and Internal ControlIntroduction230Segment I - Risk Management230Risk Classification230Risk Management Process232Advantages of Risk Management236Fraud Risk Management237Reputation Risk Management238Non-Compliance Risk Management239Secretarial Audit & Company Secretary in Practice (PCS)240Responsibility of Risk Management241Role of Company Secretary242Segment II- Internal Control System243Internal Control Defined244COSO Definition of Internal Control245Components of Internal Control246Relationship of Objectives and Components247Components and Principles247Role and Responsibilities With Regard to Internal Control248CONCLUSION252LESSON ROUND UP253SELF TEST QUESTIONS254LESSON 10CORPORATE GOVERNANCE IN BANKS, INSURANCE AND PUBLIC SECTOR COMPANIESIntroduction256Classification of Banks256Regulation of Banks256Board Composition257Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1970258xvi

PageGovernance in Insurance Companies259Corporate Governance in Public Sector Enterprises263CONCLUSION265LESSON ROUND-UP265SELF-TEST QUESTIONS266LESSON 11CORPORATE GOVERNANCE FORUMSIntroduction268A. Institute of Company secretaries of India268B. National Foundation for Corporate Governance (NFCG)270C. Organization for Economic Co-Operation and Development (OECD)271D. Global Corporate Governance Forum (GCGF)272E. The Institute of Directors (IoD), UK274F. Commonwealth Association of Corporate Governance (CACG)274G. International Corporate Governance Network (ICGN)275H. The European Corporate Governance Institute (ECGI)276I. Conference Board276J. The Asian Corporate Governance Association (ACGA)277K. Corporate Secretaries International Association (CSIA)277LESSON ROUND UP279SELF TEST QUESTIONS279LESSON 12LEGISLATIVE FRAMEWORK OF CORPORATE GOVERNANCE - AN INTERNATIONALIntroduction282Australia282The ASX Corporate Governance Council issued Corporate Governance Principles and Recommendations 283Singapore287Corporate Governance in Singapore287South Africa291Corporate Governance in South Africa291United Kingdom295xvii

PageCorporate Governance in the United Kingdom (UK)295Malasiya298Malaysian Corporate Governance Code, 2012298Contemporary Developments in Corporate Governance – Globally300European Commission and legislative framework300Corporate Governance framework in European Union300European Commission Action Plan – 2012301Corporate Governance Codes - Globally302LESSON ROUND-UP302SELF-TEST QUESTIONS303LESSON 13CORPORATE SOCIAL RESPONSIBILITYIntroduction306Meaning and Definitions306CSR is not Philanthropy308CSR is a contract with society308Why CSR at All?308Factors Influencing CSR309Triple Bottom Line Approach of CSR310CSR in INDIA311Corporate Social Responsibility Voluntary Guidelines, 2009311National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business,2011314Corporate Social Responsibility Under The Companies Act, 2013318Companies (Corporate Social Responsibility Policy) Rules, 2014320Corporate Citizenship - Beyond The Mandate of Law323CSR Standard - ISO 26000324CSR Assessment325CONCLUSION325LESSON ROUND-UP327SELF-TEST QUESTIONS327xviii

PageLESSON 14SUSTAINABILITYIntroduction330Sustainable Development330Role of Business in Sustainable Development331Sustainability Terminologies332What Is Corporate Sustainability?334Corporate Sustainability and Corporate Social Responsibility336Why is Sustainability an Imperative?337Government’s Role in improving Sustainability Reporting337Kyosei337Triple Bottom Line (TBL)339CONCLUSION340LESSON ROUND-UP341SELF-TEST QUESTIONS341LESSON 15CORPORATE SUSTAINABILITY REPORTING FRAMEWORKSIntroduction344Key drivers of sustainability reporting344Business Responsibility Reporting in India345Global Reporting Initiative (GRI)348Transition to G4 Guidelines353UN Global Compact354CSR Reporting Frameworks356UN-Principles for Responsible Investment (PRI)357Sustainability Indices359Benefits Of Sustainability Reporting361Challenges In Mainstreaming Sustainability Reporting361Contemporary Developments- Integrated Reporting362Development of Successful Sustainability Report362Sustainability Reporting – Case Studies363CONCLUSION366xix

PageBusiness Responsibility Reports - Frequently Asked Questions (FAQs)366LESSON ROUND-UP371SELF-TEST QUESTIONS371Lesson 16LEGAL FRAMEWORK, CONVENTIONS, TREATIES ON ENVIRONMENTAL AND SOCIAL ASPECTSIntroduction3741. United Nations Conference on Human Environment3742. United Nations Environment Programme3743. Bru

Objective: To acquire knowledge of ethics, emerging trends in good governance practices and sustainability. Contents: Part A: Ethics and Governance (70 Marks) 1. Introduction Ethics, Business Ethics, Corporate Governance, Governance through Inner Consciousness and Sustainability Failure of Governance and its Consequences 2.

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