Navigating Environmental and Social Frontiers: Comparative Perspectives on Corporate Governance Strategies in the UK, India, and the OECD
Corporate governance has increasingly become a pivotal aspect of global business operations, addressing not just the traditional focus on shareholder value but also incorporating broader societal and environmental concerns. The comparative analysis of corporate governance strategies in the UK, India, and within the OECD framework reveals diverse approaches to tackling gender diversity, ethnic inclusion, and environmental sustainability. This article delves into how these regions have evolved their governance models to meet the contemporary challenges of social responsibility and environmental stewardship.
The core attributes of a business corporation are as follows:
1.Legal Personality: i.e., A company is a legal person capable of entering into contracts and delegating authority to its agents.
2.Limited Liability: A business’s creditors have no claim over shareholders’ personal assets.
3.Transferable Shares: Ownership of a business can be transferred, either through securities exchange or private transfer, and the business will continue nonetheless.
4.Delegation under a board structure: The Board of Directors is formally distinct from the business and acts as agents of the business.
5.Investor Ownership: Investors/Shareholders direct the firm according to their respective shareholding percentages and are entitled to reap the profits of the business proportional to their shareholding.
When these core attributes come into play, there arises a sudden requirement as to how such core attributes (including others) should interact with one another to ensure the efficiency and effectiveness of the operations conducted by a business. This is where Corporate Law shines; Corporate Law, in layman’s terms, dictates how such businesses must be conducted, thereby minimizing problems such as opportunism and principal-agent problems.
The need for Corporate Governance can be highlighted from two schools of thought on the definition of corporate law: the narrow view and the broad view. The former states that corporate law revolves around the interactions within the company, its members/shareholders, directors, and creditors. The latter adds to this definition by encompassing the creation of companies, employment, and allowing shareholders to reap the profits of the company. Although Corporate Law gets the job done, the need for Corporate Governance has exponentially increased, highlighted by the Covid-19 Pandemic, wherein company boards faced pressure from stakeholders and had to meet societal expectations while making decisions. Such pressures and expectations cannot be catered to by Corporate Law alone; hence Corporate Governance comes to the rescue, which, although possessing the same essential characteristics of Company Law, builds upon it.
Although there is no straightforward definition of Corporate Governance, two schools regarding the definition exist: narrow and broad. The former argues that the role of Corporate Governance is limited to answering questions of the structure and functioning of boards and ensuring shareholders have a say in the decision-making process. The latter argues that corporate governance not only covers the former but is primarily concerned with legal, cultural, and institutional arrangements that direct a company on how to act.
In my view, considering the needs of the hour, i.e., combating societal and environmental issues, the broad school definition of Corporate Governance is the way to go. I personally resonate with the definition put forth by Solomon, i.e., Corporate Governance not only covers the web of relationships between the company and its shareholders but also between the company and its stakeholders, as well as society. This allows Corporate Governance to be dynamic and fluid, necessary for a business to be effective in addressing issues beyond management and profits, such as ethics, transparency, and offering solutions for societal problems such as environmental and social issues like human rights violations and gender equality. This public dimension or stakeholderism demarcates the shift from corporate law, which in the past focused only on shareholder-driven regulatory areas, to Corporate Governance, which aims to fulfill the corporate purpose while promoting and achieving long-term societal value. An example of such a shift can be noted with the transnational move from voluntary codes of conduct and international voluntary initiatives to mandatory disclosures, due diligence, and expansive director’s duties to address issues of environmental and social corporate sustainability.
Over the past two decades, businesses have forged strong ties with international markets, where changes in one cause a domino effect on the other. This can be observed through events such as the Enron Scandal or the Financial Crisis of 2008. Therefore, it is evident that not only corporate law but also corporate governance has transcended national/local borders to become fields of transnational regulatory politics, wherein both domestic and international actors contribute to creating a transnational governance regime for businesses, ensuring that oversights like those in the Enron Case do not repeat themselves. Another reason why Corporate Governance has transcended borders can be realized through the massive amounts of cross-border investments. Nations now create “attractive” corporate governance laws to attract international investments, contributing to better governance of businesses and ensuring that they take note of the growing societal and environmental concerns.
International Organizations such as OECD (Organization for Economic Co-Operation and Development) have also stepped in to ensure good corporate governance is followed by OECD Member Countries and Non-OECD Member Countries. This aim is ensured through principles encompassed in the OECD Guidelines. Although these principles are non-binding and do not prescribe exact measures to be taken, they aim to guide nations in the right direction. This allows policymakers or even businesses flexibility in achieving the good corporate governance encompassed in the principles. It is noteworthy that although not all principles enshrined are applicable to all companies, some are more appropriate for larger companies than smaller ones; however, the inclusion of such principles aims to spread awareness among policymakers to ensure good governance for all companies. The principles enshrined in the OECD Guidelines cover six key areas, namely: rights of shareholders, equitable treatment of shareholders, role of stakeholders, disclosure and transparency, and the responsibilities of the board. For example, Principle E(8) under The Responsibilities of the Board (VI) advises countries to consider measures to ensure gender diversity on boards and in senior management. Principle A(2) under Disclosure and Transparency (V) encourages companies to disclose policies and performance relating to the environment. Therefore, we note that the OECD is taking into account the constant changes in society/economy and is addressing such issues with solutions while allowing policymakers and businesses to shape such rules as they deem fit. Therefore, OECD Principles are, in a way, a living instrument that learns by monitoring and/or by consulting.
Since the OECD is a dynamic set of rules that offers a model to be followed by nations, it greatly helps developing nations with weak institutional frameworks, wherein, for example, majority shareholders primarily take over the decision-making process with no regard to other shareholders or stakeholders. Such principles bridge the gap between such majority and minority shareholders, ensuring a value-creating relationship with both the shareholders and the stakeholders. To ensure awareness of these principles is spread, the OECD, along with The World Bank, conducts Regional Corporate Governance Roundtables, wherein even non-OECD members participate alongside the members.
Private Standard Setters such as The International Organization for Standardization have come up with a framework for good corporate governance (ISO 3700:2021) through a consensus-driven process involving experts from over 70 countries. ISO 3700 offers guidance to both governing bodies/policymakers and businesses by providing the tools needed to govern well. Some of the tools enshrined in ISO 3700 are:
1.Social Responsibility: Business managers must ensure decisions are properly disclosed and meet societal expectations, and such decisions are taken in an ethical manner.
2.Viability: Business managers must assess and ensure that key resources used in the business to generate value are protected and restored to ensure value creation in the future.
1.Gender Diversity via Modifying Board Structure Regulation:
Gender Diversity is one of the most prominent social problems faced by society. Companies are no different; women are unfairly discriminated against when it comes to board positions in companies. Despite corporate governance codes promoting gender diversity on boards, evidence suggests that only one-third of the fifty largest UK Private Companies have forty percent women occupying board positions, and only one-third of executive director positions amongst all companies are occupied by women. One must understand that the appointment of women to boards of companies is not just a numbers game but about what companies are missing out on; it is about ensuring decisions made by the board reflect the realities of society. To understand why such disparity still exists, we must understand how gender diversity is regulated on the board. Primarily, there are two ways companies are directed/advised to maintain gender diversity. The first is advice set out in principles of corporate governance codes, and the second is by way of quotas, i.e., a percentage threshold requirement of women being on the board. This, in turn, has two forms: Hard Quotas, where there is a penalty/sanction in case of non-compliance, and Soft Quotas, where there is no sanction/penalty in case of non-compliance. Both of these regulations are born out of a formal institutional framework; however, even when there is a lack of such a framework, informal frameworks, such as culture/society promoting businesses to hire women, help combat gender diversity.
The United Kingdom And Its Advice Mechanism Aka Corporate Governance Code To Combat Gender Diversity Issues:
The UK CG 2018 derives its genesis from the UK CG Code 1992 published by the Cadbury Committee. The UK CG Code published in 2018 has come a long way from the 1992 Code. Some stark differences exist between the two, as the 1992 Code focused on isolating issues related to the roles of directors in governing the company, the shareholder’s role in governance, and the appointment of directors. Although these remain in place in the 2018 Code, the Code now realizes that companies are interlinked with the economy as well as society, and it’s the responsibility of the company to build a long sustainable bond with wide stakeholders and not only mere shareholders. This is done by focusing on the application of the principles enshrined in it. The 2018 Code is divided into five sections, namely: 1) Board Leadership and Company Purpose, 2) Division of Responsibilities, 3) Composition, Succession and Evaluation, 4) Audit, Risk, and Internal Control, and 5) Remuneration; each having a set of principles and provisions therein.
Since the UK Corporate Governance Code applies primarily at the national and individual business levels, it remains as “advice” or “something that ought to be done”. This doesn’t mean it is completely voluntary (since it is a soft law) and there are no repercussions for deviating from it. Here, to avoid blatant disregard of the principles, a ‘comply or explain’ technique is used. This means that companies which deviate from the code’s principles must provide a ‘meaningful’ explanation to its shareholders or stakeholders as to why such deviation was made, and how such deviation would still allow for efficient and effective governance of the company. This therefore breaks the opaque window looking inside the boardroom and allows for accountability and transparency to the company’s shareholders as well as wide stakeholders.
Section 3 (Composition, Succession and Evaluation) of the UK Corporate Governance Code, 2018, Principle J states that appointments to the board should be formal, rigorous, and transparent and must be based on merit and objective criteria. It also mentions that appointments should promote gender diversity. Principle L states that an annual evaluation must be conducted to ensure Principle J is followed and desired aims are achieved. Adding onto Principle J, Provision 23 requires the annual report on the work of the nomination committee to mention the progress made on Principle J as well as include the requirement of mentioning the work done by the nomination committee regarding gender balance in senior management, such as the Executive Committee or below board level. This approach has been successful; as of January 11, 2023, women represent forty percent of the boards of directors of British companies.
Gender Diversity in India with Its Companies Act:
Unlike the UK, India has a quota system under Section 149(1) of the Companies Act (hard law), 2013. Section 149(1) states the requirement for companies to have a board of directors and necessitates the same. Section 149(1)(b) states that a prescribed class of companies must have at least one woman director on their boards. This prescription of the class of companies is made in The Companies (Appointment and Qualification of Directors) Rules, 2014, which states that every listed company or any public company with a paid-up share capital of Rs. 100 Cr or turnover of Rs. 300 Cr must have a woman director appointed as either an executive director, non-executive director, or an independent director.
The Companies Act, 2013, also provides for the creation of an Independent Director’s Databank, wherein individuals who are willing to act as independent directors can fill in their qualifications and companies who wish to hire an independent director can choose from such a databank. Such a databank is now operational online as well as offline by the Ministry of Corporate Affairs, India. However, out of all the independent directors enrolled in the databank, only a mere eight percent are women.
Even with such a system, there is only 18% of women directors on the boards of directors of Indian companies.
OECD Principles of Good Governance 2015:
Chapter VI: Responsibilities of the Board Principle E(4) requests that boards of companies ensure evaluations of the performance of directors and the board must ensure that the mix of directors ensures diversity in background and experience. It requests members of OECD/non-member nations to consider voluntary targets, disclosure requirements, boardroom quotas, and private initiatives that enhance gender diversity on boards and in senior management.
Quotas or Voluntary Appointments for Gender Diversity: Which is the Better Way Forward for the UK:
Looking at the quota system and its results arising from the Indian system, one might argue that the voluntary or the UK CG is the way forward. However, Norway with its Norwegian Public Limited Liability Companies Act, was the first to introduce a quota of 40% on the board to be women for listed companies back in 2005 and was successful in achieving this goal. Now, in 2022, Norway has proposed the same quota to be applied to unlisted companies. Although the quota system is very successful in some countries while failing in others, the same conclusion applies to the voluntary appointment system as well. However, to understand which system is the way forward for the UK, we need to delve into the merits and demerits of the quota system.
Since quota systems in the majority of cases carry repercussions for companies, they usually evolve into a “checkbox” formality for companies, and women are often appointed merely to fulfill the necessity, with their strengths and contributions not valued or considered. Secondly, setting a ‘particular number’ of women on boards, as the Indian system does, raises questions about whether a single woman on a board is sufficient or likely to have any impact on the decisions taken by the entire board. Moreover, the legitimacy argument holds weight in the case of a quota system, as women appointed because of a quota system may not be perceived as “legitimate” as pre-quota directors with respect to their merits. Post-quota women directors are considered to be subservient to other directors, given they are appointed out of necessity. Another critique of the quota system is offered by capitalism and individualism, suggesting that companies must be free to choose their own leaders, and market forces will ensure that if women directors lead to more progress, companies would then ensure more women directors serve on their board. A philosophical argument that arises is whether quotas are ethical or not, i.e., whether inequality should be reduced by removing the factors that cause inequality or if women should be given special treatment to reduce inequality.
However, a quota system mandates women representation, if not complied with. This ensures complete compliance compared to voluntary appointments. Hence, if successfully administered, the quota system leads to more women representation compared to voluntary appointments. This is much required in countries where society is not yet ready to accept such appointments. Moreover, once a quota has been introduced, it is very difficult to alter such a norm, and it becomes embedded in the system, ensuring stability and integrity in the business lobby as well as national integrity. As much as voluntary measures bring about actual and natural cultural change, they make smaller and slower differences.
In my opinion, a hybrid system is the way to go for the UK Government (it is to note that the voluntary system has an edge over the quota system as explained above). Wherein, the measures must be voluntary, but there must be repercussions other than ‘comply or explain’ and must be in terms of a required period to comply after a non-compliance has been triggered. Secondly, mandated threshold quotas ensure maximum representation of women on boards, and such appointed women would also per se could influence the board; considering they would be more than one in number. Therefore, the UK must set a voluntary appointment of 50% women both in listed as well as unlisted companies by the end of 2025; and failure to do so companies could either have their ratings decreased or a penalty; after giving 6 months post-2025 to allow compliance. There should be no comply or explain since at this juncture of society there is no viable explanation as to why women aren’t appointed at the board; and there cannot be any acceptance whatsoever against such a rule.
Ethnic Diversity has never been one of the focus areas in corporate law or corporate governance. It has always been a matter put up in the political sphere; however, if brought up in the corporate world, it can do wonders for people coming from ethnic backgrounds which were marginalized in the past. Here, the UK Corporate Governance Code 2018 Principle J in Chapter 3 asks the board to promote diversity not only in gender but also in social and ethnic backgrounds. This is a very welcome start brought up by the UK, which is not yet brought up by the OECD or Indian jurisdiction. This start is especially important in developing countries where there is a mentality that only a certain social and ethnic background is fit for business and not all. However, the UK must elaborate on such a request for appointing socially and ethnically diverse directors by adding repercussions for only appointing directors from a particular social and ethnic background.
3.Protection of Environment via Advancing Directors’ Duties:
It is noted that just one hundred companies contribute to more than 70% of the world’s greenhouse gas emissions since 1988. Companies like ExxonMobil, Shell, and BP are among the highest-polluting investor companies since 1998. However, there are companies like Facebook, Apple, and Google that have committed to one hundred percent renewable power. Therefore, we note that companies have a huge role to play in the protection of the environment, if not the biggest role. However, it is a weighing task since there is short-term profitability on one hand and environmental degradation on the other hand. Since the decision of either maximizing profit or saving the environment lies in the hands of the directors, aka The Board, it is imperative to understand how the directors’ duties are altered in recent times to protect the environment from the hands of brute capitalists.
The United Kingdom Jurisdiction:
Policymakers in the UK have given a higher pedestal of enforcement regarding environmental protection in comparison with gender/social/ethnic diversity, since environmental protection is included in the Companies Act, 2006 (hard law), rather than the Corporate Governance Code under the section of director duties. One must note that up until 2006, director duties were only derived from case laws, and there was no legislature for it. It was the Companies Act which legislated the said duties.
Section 172 is placed in Chapter Two (General Duties of Directors) and has the heading of “Duty to promote the success of the company”. The section, in essence, talks about how a director must always act in good faith and every action they do must promote the success of the company and its members. Sub-sections (a) and (d) require the directors to act keeping in mind the consequences of any decision in the long term and the impact of such decisions/operations on the community as well as the environment. To ensure directors act in compliance with section 172; the act requires them to issue a “Directors Report” under Section 417 of the act. The said section requires that companies must include any environmental/social/ and community issues in the report. It is also important to note that the primary focus of the section is the promotion of the interests of shareholders and profit maximization for them.
It is important to note that CSR (Corporate Social Responsibility), i.e., the responsibility of an organization to keep in mind society and the environment, is embedded in the essence of section 172 of the act; it is not enacted separately or articulated to include what acts contribute as CSR.
The Indian Jurisdiction:
The Indian Jurisdiction is in some ways similar to the UK’s but takes environmental safety ahead with its Companies Act, 2013. Chapter Eleven (Appointment and Qualifications of Directors) lays down Section 166 (Duties of Directors) which under Sub-section (2) states that a director of a company shall always act in good faith and ensure the success of the company, its members as well as the community and must always keep in mind the protection of the environment.
Chapter Nine (Accounts of Companies) lays down Section 135 (Corporate Social Responsibility), which requires companies with a net worth of more than Rs.500 Cr/ turnover of more than Rs.1,000 Cr/ profit more than Rs.5 Cr in a financial year to constitute a CSR Committee with more than three directors and out of which one must be an independent director. The present CSR spending is set to be a minimum of two percent of profits during the three preceding financial years for a financial year. Moreover, if the companies fail to comply with such CSR spending; under the Companies (CSR) Rules, 2014, the defaulting company is liable to a penalty of twice the amount required for the fund specified in Schedule Seven of the Companies Act, which specifies specific activities that constitute CSR. Moreover, the officer of the company liable for defaulting on the company’s CSR spending is also liable for one-tenth of the unspent CSR amount.
Companies in India are free to spend their CSR fund on any organization (must be permitted by the Govt. to accept CSR funds) or to do any activity which constitutes CSR. Schedule Seven gives broad activities that constitute CSR, namely: 1) eradicating hunger and poverty, 2) Promoting education, 3) promoting gender equality, 4) Reducing child mortality and maternal health, 5) Ensuring environmental sustainability, etc.
The Way Forward For The UK:
Although the UK considers factors other than shareholders’ interests while making decisions, the primary goal is still shareholders’ interests. This, according to me, must change, considering that companies impact society and the environment considerably, and the company owes the environment equally as much as it owes to the shareholders. The Companies Act must be amended to ensure that the environment is as equally important as the shareholders, and shareholders must not be prioritized by default as is the case presently. Moreover, to incentivize companies even more, the UK Government must create tax/other incentives for the companies which act towards low carbon activity and undertake steps to ensure environmental protection.
Section 172 is so broad; it doesn’t specify how a director must consider the impact on the environment. It is only evident when an act done by the director is so blatantly visible that it becomes obvious that such an act disregards the duty of a director. Hence, this section, in my opinion, doesn’t ensure a director to act positively to ensure the environment is protected; rather, it acts only to ensure that a director isn’t against environmental protection. The GC100 Guidance explains how an amendment must be made in Section 172. It addresses the need for: (1) identifying the elements that are most likely to play a strategic role in the company’s long-term success; (2) providing adequate initial and ongoing training; (3) reviewing information gathering (including metrics and reports) so that each of the elements listed in section 172(1) is addressed; and (4) fostering a practice of taking those elements into account and using them when making decisions about policies, director terms of appointment and role descriptions, and board terms of reference. This emphasizes how procedural in nature directors’ environmental impact assessment responsibilities are.
The UK must learn from India regarding the protection of the environment and legislate on CSR; mandating a company to spend a certain percentage of their profits only on activities which ensure society and the environment are protected and to ensure the environment is replenished from the result of capitalism. Such activities must be closely monitored and approved by the UK Govt like India, so that it ensures the funds are actually spent on the activities they are supposed to be spent on, ensuring a lack of bias and personal profits. The concept of personal liability of the defaulting officer of the company must also be replicated from India, since it gives the officer a sense of personal responsibility to ensure the CSR spending is done on time and according to the rules prescribed.
The concept of a penalty in cases of non-compliance with CSR would also be appreciated considering that mentioning non-compliance in an annual report doesn’t change anything and is a mere formality; the environmental problems stay as they are and keep on worsening. Hence, a strong penalty for companies who are in default of such CSR spending would be a welcome change in the UK.
The UK Government must also, in my opinion, incorporate a net-zero emission target in the corporate governance code first and later in the Companies Act; ensuring a smooth transition from a voluntary target to a mandatory one. This must be done promptly since environmental problems such as COVID-19 have taught us one thing: that the environment is on the brink of collapsing, and strong steps must be undertaken to protect it. Therefore, the UK must now start mandating and enforcing targets/principles rather than allowing them to be voluntary; the current “have-regard” isn’t, in my opinion, capable of ensuring any significant positive change in the realm of environmental protection.
Conclusion: The comparative analysis of corporate governance strategies in the UK, India, and the OECD reveals a spectrum of approaches to addressing the challenges of modern business, from gender diversity and ethnic inclusion to environmental sustainability. Each model offers valuable lessons in balancing the need for regulatory oversight with the benefits of corporate flexibility and innovation. As companies increasingly operate on a global stage, the integration of best practices from different governance models can help create more resilient, responsible, and sustainable businesses capable of navigating the complexities of the 21st century.