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ect. The project will study the current state of ESG in the investment chain
in India and review the relevance of international experience in SRI for
India.



Global application of CSR
In the US the largest corporation employing the largest number of employees in
the world is Wal-Mart. It has been reported that Sam Walton, the founding presi-
dent of Wal-Mart wrote in his book, Made in America, that he avoided various
issues like employee welfare and environmental development in his struggling
years. However, as Wal-Mart started becoming a phenomenon in the retail
world, he realised that CSR management techniques would make Wal-Mart
No.1 in the world.
The West was not the only place where CSR played a revolutionary role in
the corporate world. For example, in the 1970s, being struck between capital-
ism and socialism, major Indian business houses like TATA or Jindal in the pri-
vate sector and HMT or NTPC in the public sector played a revolutionary role
in applying CSR management techniques.
SERM case studies have revealed that CSR can be applied in:
Private sector corporations;
Public sector corporations;
Semi-public corporations; and
Cooperative corporations.
The applicability of CSR can vary from corporation to corporation. However,
the most important task in business sustainability remains to find the right mix-
ture for CSR applicability with the ultimate aim of shareholder satisfaction. As
the EU initiative shows, CSR techniques can be applied in all countries
whether developed, developing or underdeveloped. The corporation can be
large scale or SME. However, in the context of sustainable risk management
the greatest challenge for a corporation would be for the risk manager to realise
Part E “ Case Studies of Business Risks
580



the need for CSR. There are key mechanisms for corporations to consider in this
situation:
Laws and regulations formulated by the state requiring the companies to
apply CSR to ultimately become the role model for corporate citizens.
Various countries in the world have already started formulating and applying
the rules and regulations of this nature. The enforcement of these laws can
be by:
Making directors being accountable for inaction of CSR;
Taxing the corporations who do not maintain a CSR norm;
Exempting the corporations not maintaining CSR levels from competing to
attain governmental projects, etc.; and
Giving incentives to the corporations applying CSR techniques.
Shareholder regulations: the regulations to be set by the shareholders or
share trading agencies whereby the corporations are rated by their CSR tech-
niques. CSR should be one component with other traditional components for
evaluation of share value;
Peer group regulations: a CSR norm to be set by the groups or lobbies of cor-
porations such as chambers of commerce; and
Transnational regulations: countries formulating an international regulatory
pattern to rate the CSR of the corporations that will regulate the transnational
trade, import/export duties, etc.


CSR and sustainable development
For some time, sustainable development has been a concept that is leading
most of the international organisations. As was indicated in Chapters 18 and 19
sustainable development is about ensuring a better quality of life for everyone,
now and for generations to come. Thus, combining CSR and SD means combin-
ing the ecological, social and economic concerns, and offers business opportun-
ities for companies that can improve the lives of the world™s people. This is
crucial for emerging jurisdictions.



Balancing issues in India: Vedanta case study
Vedanta signed an agreement with the eastern state of Orissa in 2004 to set
up an alumina refinery in bauxite-rich Lanjigarh, also home to one of
India™s most primitive tribes, the Dongaria Kondh. The state government
also recommended giving mining rights to the company to extract bauxite
required to make alumina, but this prompted environmentalist groups to
oppose the project and move to court. Activists say that mining in the
nearby Niyamgiri hills would displace thousands of tribal people and
destroy the fragile eco-system of the region. Legal wrangles have since
stalled the project. However, Vedanta officials said they would commis-
sion the refinery by last December. The company would source bauxite
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 581




from other states if it did not get mining rights in Niyamgiri. The state gov-
ernment said it expected the protest to evaporate as the tribals would be
resettled and rehabilitated.
It has been reported by Reuters that thousands of tribal people
armed with bows and arrows came out of their hill-top homes in eastern
India to protest against an alumina refinery being set up by Britain™s
Vedanta Resources plc. The protesters, along with environmental activists,
marched to the refinery site in Orissa, about 600 km (375 miles) southwest
of the state capital Bhubaneswar, and vowed to stop the US$874 million
project. Dressed in their traditional clothes and wearing colourful
headgear, they held placards that read ˜Vedanta Go Back™, and burnt
effigies of senior state government ministers. The protesters also briefly
blocked roads in the area, disrupting traffic on a national highway. The
tribal peoples mostly live on the hills and depend on fruit and vegetables
grown there. ˜We would rather die than give up our homes™, said
Kumuti Majhi, a tribal spokesman, raising his fist in the air. This type of
incident clearly affects the reputation of the company. The balance is
again a sensitive one.




It should be emphasised that individuals are the points of connectivity between
the real world and the board room, in addition to the pre-eminence of govern-
ment. As is well understood when businesses have strong views that they want
to see enacted in the world, they lobby government in order to achieve legisla-
tion to back their position. Similarly as regards CSR, several advisors have
argued that businesses should lobby government in turning their values into
law. A company™s CSR strategy exists at the point where the need
to adapt in the world, and the ability to adapt, coincide. This should take into
account the features of the rich, industrialising and poor countries. Against
this backdrop, decisions surrounding risk management adaptability would be
made in the future. In the context of sustainable risk management and CSR
strategies, facts in the real world would be brought to bear, and the knowledge
economy would dictate the pace of that process. This raises key questions
such as:
Where should sustainable development be on the agenda of a middle man-
ager? and
How should these possible abstractions from everyday working lives as risk
managers fit with our annual objectives and professional evaluation?
CSR may be defined as an evolving business practice that integrates govern-
ance, management and investment of a corporation with the social and envir-
onmental concerns in its business practices and thereby formulating a socially
responsible, productive and human friendly corporate structure. As the climate
Part E “ Case Studies of Business Risks
582



change debate has also witnessed, corporations have a greater role to play in
sustainable development, as the potential markets attain sustainable develop-
ment. It could be argued that CSR with a view of sustainable development
would build up a respectable, responsible and thriving management technique.
The whole concept of CSR and SD can be divided into two, as advocated in the
EU Green Paper on CSR, that is:
Internal CSR and SD:
CSR towards human resources: applying management techniques by
investing in human resources of the corporation. Corporation being
socially responsible towards its employees;
CSR towards the suppliers and distributors;
CSR towards the health, safety and development of the internal society; and
CSR towards the environment of the immediate communities.
External CSR and SD:
CSR towards the global environmental concerns;
CSR towards the human rights;
CSR towards the replenishment of natural resources; and
CSR towards the non-renewable energy resources.


How to implement the CSR and SD
By pressurising governments to reorganise the existing corporate governance
regulations to implement the CSR and SD;
By shareholder education to make them aware of the long-term benefits by
investing in the CSR and SD compliant corporations;
By developing a system where corporations can be rated for their CSR and SD
initiatives;
By developing a CSR and SD mark (similar to the ISI mark or EURO1 marks)
and making companies compete to get the mark;
By developing ready to fit CSR and SD management and investment tech-
niques to different corporations of different size, geographical setting or man-
agement philosophy; and
By sensitising the corporate world to the concepts of CSR and SD and educat-
ing them on the long-term and short-term benefits.


The business case for CSR
It is well known that the spirit of capitalism drives business, and forms the
framework within which it operates. The potential for cross-pollination of
ideas from sector to sector is encouraging in light of the ultimate intentions that
different corporations might have for their CSR strategy, because it suggests that
there is something convergent in how different sectors define their responsibil-
ity. In other words, for its advocates CSR has become much more than about
philanthropy “ any company that wants to revitalise their strategy should also
recognise CSR as part of their business risk strategy. It is about how a
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 583



company™s operations are performing at the interface with the real world,
where various business sectors do co-habit, in which the grey area between
political and corporate power is blurred, and in which future generations
will live.




The business case for CSR
We live in a world more fragile and fragmented than before the experience
of globalisation, the end of the cold war and the events of 9/11. Exactly
because of globalisation and the encroachment of corporations into that
grey area once occupied by governments, it is a world in which there is
less certainty about who or what is accountable for society™s well-being.
There is a growing obligation on business to recognise the need to dedicate
internal resources to more thoroughly and completely understand the
world in which they operate, so that they can respond accordingly.
Engaging this new form of CSR “ beyond philanthropy “ is called the
˜business case™, not just because it offers an opportunity for value creation,
but also because without engaging the supply chain, cross-sector alliances,
external verification, transparency and lobbying for new laws to define the
framework in which to operate, business fails.




CSR Performance
When looking at the CSR performance of companies, the price/earnings (P/E)
ratio has particular significance. It is defined as:



Market capitalisation Share price
or alternatively as
Company earnings Earnings per share



Typically P/E ratios range from 4 to 30, and, within reason, higher numbers are
indicative of greater investor confidence. They also vary from sector to sector.
The P/E ratio combines two key aspects of a company™s financial situation:
the company™s executive team is responsible for, and can influence, the com-
pany™s earnings through the strategies they adopt. Market capitalisation on the
other hand is set by the attractiveness of the company shares in the market, and
the extent to which investors trade them. Investor views on the attractiveness
of the shares are influenced by the prospects for the sector, the competitive
position of the company within it, and, perhaps most importantly, by their per-
ceptions of the competence of the executive team. Judgements on these factors
Part E “ Case Studies of Business Risks
584



can enhance or depress the P/E ratio of a company relative to its sector peers,
and so affect the relative and absolute value of the company.
The basis of the analytical tool, supported by statistical analysis, is that
companies having a superior coverage of social, ethical and environmental
(CSR/CR) matters will, on average, have a higher P/E ratio relative to their sec-
tor. From this derives some general considerations, applicable to all companies,
and some specific ones.


The model basis
Figure 1 illustrates a correlation between P/E ratios and the extent to which
companies cover their CSR issues. One question is: what comes first, strong
CSR reporting or share price outperformance? The coverage of CSR issues was
assessed by taking the quintile position of companies within the UK™s Business
in the Community and Business in the Environment surveys. While these sur-
veys relate to companies quoted on the UK Stock Exchange, the general princi-
ples will apply to other markets, and the correlation is borne out with other
comparable surveys.
To remove sector to sector differences the individual P/E ratios are normalised
to their quoted sector means, all data being taken from the Financial Times.

P/E Ratio Normalized to Sector
2.5


2


1.5


1

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