Introduction

Corporate Governance and Corporate Social Responsibility (CSR) are two different concepts but are interconnected which focuses of how company’s business should operate and what would be its impact on society. Section 135 of the The Companies Act, 2013, provides the provision relating to implementation of ‘Corporate Social Responsibility’ (CSR) and for implementing effective CSR initiatives, good Corporate Governance is required.

Corporate Governance

Corporate Governance is a system of control which mainly focuses on areas like internal control, ethical decision making, accountability to shareholders, risk management. Comply with legal and regulatory requirements. It also includes key areas like Board management, internal audits, financial statements, remunerationsto key persons. All this is possible with ethical and responsible business practices within the organisation.

Corporate Governance mainly concerns the internal mechanisms and structures that control on how a company will operate ethically, legally and as per the regulatory requirements.

By implementing the company’s operations as transparent, ethical, and in compliance with legal and regulatory requirements, Corporate Governance gains maximize shareholder value,

Corporate Governance improves company’s reputation.

Corporate Social Responsibility (CSR) (Section 135)

CSR focuses on the company’s broader impact on society and the environment. CSR has many interpretations but can be understood to be a concept imposing a liability on the Company to contribute to the society. This contribution to society may be towards environmental causes, promotion of education, social causes etc. Along with the ethical, legal busines practises.

CSR involves both internal as well as external stakeholders. Internal stakeholders relates to employees whereas external stakeholders include community & environment, customers shareholders, vendors etc. It’s very important to have a strong leadership to carry out CSR effectively.

The Companies Act, 2013 has inserted a new section i.e. section 135 which provides for the constitution of the CSR Committee of the Board and this formulation of committee should be included in Board’s report.

Section 135 of the Companies Act, 2013, mandates that certain companies undertake Corporate Social Responsibility (CSR) activities and spend a specified portion of their profits on them.  

Section 135 states that, Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director and the Board’s report  shall disclose the composition of the Corporate Social Responsibility Committee.

The Corporate Social Responsibility Committee shall, formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII for example eradicating hunger, poverty, malnutrition, promoting education, promoting gender equality, enusring environment sustainability, ecological balance, protection of national heritage etc.)

The committee must recommend the amount of expenditure to be incurred on the activities and it shall monitor the Corporate Social Responsibility Policy of the company from time to time.

The Board shall in consideration of recommendations of committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any.

The Board must ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company. And also, the Board shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy

The company shall give preference to the local area and areas around it where it operates.

If the company fails to spend such amount, the Board shall, in its report made specify the reasons for not spending the amount and unless the unsent amount relates to any ongoing project, transfer such unspent amount to a fund specified in schedule VII within a period of six months of the expiry of the financial year.

The section 135 also provides the penalty provisions to company and every officer of the company in default, if company contravenes the provisions relating to non transfer of the abovementioned unspent amount to funds.

The section 135 also empowers the Central Government to give directions to companies to ensure compliance of this section 135.

Conclusion

Good Corporate Governance and Corporate Social Responsibility (CSR) play a very important role in the growth of the company.This concept is accepted and adopted not only in India but also globally. Good Corporate Governance helps company to achieve new heights in success. To name a few, companies like Tata, Reliance also companies like Apple, Samsung have strong Corporate Governance policies. So now we can say that, both Corporate Governance and CSR are not distinct. A good Corporate Governance can be achieved by adopting and implementing CSR policies