Page 172 - DMGT401Business Environment

Unit 7: Socio-cultural Environment

In the present scenario, India is reinventing the principles of corporate governance. Notes

Example: Scams like the share market scams post-liberalisation in 1991, failure of banks
like the Global Trust Bank, Lala Kashinath Bank, issue of the age of directors at Tatas, the UTI
fiasco are examples where corporate governance in order can play a role.

Also, the option of share buyback, big remunerations and perks enjoyed by top management,
instances where most of the businesses where the Chairman and Managing Director is the same
person, and in cases where the son becomes the CEO, there is an urgent need of ethical Corporate
Governance to protect the rights and safeguard the interest of small shareholders and other
stakeholders.
In purview of this situation, the government and the industry took a step to be more accountable.
Both tried at their level to make Indian business more responsible to the shareholders. The
result was the constituents of various committees by the CII and SEBI. Corporate governance
initiatives in India began in 1998 with the Desirable Code of Corporate Governance
(a voluntary code published by the CII), and the first formal regulatory framework for listed
companies specifically for corporate governance, established by the SEBI. This resulted in the
amendment in the Companies Act to introduce effective Corporate Governance in India.

7.7 Corporate Social Responsibility

The socio-economic obligation of business refers to its responsibility in preventing to prevent
economic consequences of business from adversely affecting public welfare. Social-human
obligation denotes to the obligation of business to nurture and develop its human resources so
that employees get every opportunity to grow, develop and advance through life and their
careers and to promote human values within the organization.
Keth Devis has defined social responsibility in the following words:

"Social responsibility refers to the businessman's decision and actions taken for reasons at least partially
beyond the firm's direct economic or technical interest."

7.7.1 Responsibility towards Shareholders

People invest in money to make money. Milton Friedman claims that the ethical mandate of
business is to increase shareholders' profit. The primary responsibility of business is to increase
shareholders' wealth, to give good returns on investment, to give dividends at the proper time,
to protect the interests of even small shareholders, to listen to and respect shareholders, to
regularly invite shareholders to participate in decision-making.

So the basic responsibility of a business towards shareholders is to create wealth for them.
Economic Value Added analysis is an effective tool to measure the increment in shareholder's
wealth. Economic values added are increments in the shareholder's wealth beyond its expected
return. Debt has its cost in terms of interest, but in financial terms equity does not has any cost.
So in EVA, Equity costs are the risk-adjusted rate of return that investors should expect from this
type of investment.
Could be met and above this it is EVA and if it is below this then company may be in profit but
in terms of EVA it is decreasing shareholders wealth. These expected returns should be met and
if returns are above that, EVA is positive and if it is lesser than EVA is negative. That is, the firm
may be in profit but it is not meeting expectations.

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