IMPACT OF CORPORATE GOVERNANCE ON SUSTAINABILITY: A STUDY OF THE INDIAN FMCG INDUSTRY.

Author:Sar, Ashok Kumar
Position:Fast Moving Consumer Goods - Statistical data
 
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INTRODUCTION

In the Indian Companies Act-1956 (1), a company is defined as an "artificial person", invisible, intangible, created by or under law, with a discrete legal entity, perpetual succession and a common seal. Every company needs a set of processes, which may include rules and practices for direction and control. Such processes are often referred to as Corporate Governance (CG). Like any other governance, CG essentially is associated with balancing expectations of stakeholders. Stakeholders in a firm would include community, complementors, suppliers, customers, government and the shareholders. In the U.S., corporate governance has become a pressing issue, which aims to restore confidence in the minds of people regarding companies and markets after accounting fraud leading to bankruptcy of high profile companies such as Enron and WorldCom. The Indian Companies Act, 2013 provides the basic framework for regulation of all companies. Besides, all listed companies need to act in accordance with the provision of the listing agreement as per Section-21 of the Securities Contract Regulation Act, 1956, which has been amended on February 21, 2000 and again on August 26, 2003. Broadly the Indian Corporate Governance framework is in compliance with the corporate governance principles of OECD. These principles of corporate governance are as follows (2):

  1. Ensuring the basis for an effective corporate governance framework;

  2. The rights of shareholders and key ownership functions protected and facilitated;

  3. Equitable treatment of shareholders;

  4. The role of stakeholders in corporate governance recognized;

  5. Disclosure and Transparency;

  6. The responsibility of the board-monitoring management and accountability to shareholders.

    Corporate governance discussions have progressively shifted to sustainability, popularly articulated through the three E's, i.e., Social Equity, Economic Performance and Environmental Performance (Rogers & Hudson, 2011). In 1980s, Gro Harlem Brundtland, the Norwegian Prime Minister defined sustainability as "Meeting the needs of the present without compromising the ability of future generations to meet their own needs" (Porter & Mark, 2007). This definition has been used by the "World Business Council for Sustainable Development". The associated concerns have resulted in changes in regulation, (e.g., the Indian Environment Protection Act) shift in consumer choices (e.g., towards the so-called green products and services) and increased media attention. In a survey conducted by McKinsey in February 2010, on how companies manage sustainability, it has been reported that companies who are managing sustainability actively are reaping the benefit of superior shared value. However, most companies fail to manage sustainability actively (3).

    The Indian Fast Moving Consumer Goods (FMCG) industry has been chosen for the study, owing to a trend of significant engagement in sustainability activities, as compared to other industries. During the last five years there is a shift towards naturals in the personal care products aimed at protecting the environment and contributing to the wellbeing of the society. For example Hindustan Unilever Limited has created The Unilever Sustainable Living Plan (USLP) as the blueprint for achieving their vision to grow business, whilst decoupling their environmental footprint from growth and increasing positive social impact. The Plan sets stretching targets, including how they source raw materials and how consumers use their brands. The two fast growing new entrants, Patanjali Ayurveda (promoted by the world famous yoga guru-Baba Ramdev) & Sri Sri Tattva (promoted by another world famous spiritual leader-Sri Sri Ravi Shankar) have similar aspirations. Not to be left out, other leading FMGC companies like Dabur, Himalaya, VLCC, Godrej, Colgate-Palmolive and Dr. Vaidy's, have realigned their strategies to create shared value.

    CONCEPTUAL FRAMEWORK AND HYPOTHESIS DEVELOPMENT

    Corporate governance is a key success factor for businesses, as it has been associated with improving sustainability performance and gaining trust of investors (Saltaji & Issam, 2013). The relationship between corporate governance and sustainability has been researched quite extensively separately, i.e. corporate governance and environment performance, corporate governance and social equity and corporate governance and economic value (Figure 1). Huang (2010) studied 1921 U.S. firms on the impact of ownership and management on environment performance. David studied 208 publicly traded firms on the impact of ownership structure on corporate social performance. Balasubramanian, Vikramyadita & Bernard (2008) studied the relationship between corporate governance and firm value, in the Indian context.

    Drawing on stakeholder theory, Michelon & Parbonetti (2012) have examined the relationship of board structure, leadership and composition on sustainability. Balasubramanian, Vikramyadita & Bernard (2008) have developed the Indian Corporate Governance Index (ICGI) based on forty nine variables in five groups capturing the aspects concerning corporate governance. Similarly, Robert (2000) has developed the sustainability life cycle analysis tool set to assess the sustainability. The framework refers to the four systems conditions, viz., "concentration of substances extracted from the Earth's Crust"; "concentration of substances produced by society"; "depletion of physical means"; and "people's capacity to meet their needs", through the five stages of product life cycle, viz., design and development, materials (raw and fabricated); production; packaging, distribution and retailing and usage and end of life. The associated variables have also been captured objectively in the form of dimension wise aspects and aspect wise key indicators, in the GRI guidelines by the Global Reporting Initiative (GRI) (4).

    The sustainability performance of...

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