First Principles IASlearning from first principles

Corporate governance and corporate social responsibility

Syllabus
Corporate Governance
As of
October 2026
  • corporate governance
  • agency problem
  • independent director
  • audit committee
  • Clause 49
  • LODR
  • Kotak committee
  • related party transaction
  • whistle blower
  • stakeholder theory
  • corporate social responsibility
  • section 135
  • Schedule VII
  • moral integrity
  • professional efficiency

The first principle

A company uses other people's money, other people's labour and the shared air, water and land of society. Corporate governance is the system that makes those who run a company answerable to those whose resources they use, starting with shareholders but not ending with them. Corporate social responsibility (CSR) asks the further question of what a company owes to society beyond obeying the law and making a profit.

The core

  • The agency problem: managers and controlling owners run the company, while many small shareholders own it. Governance exists because the people in control may serve themselves instead of the owners.
  • Shareholder and stakeholder views: Milton Friedman argued that the social responsibility of business is to increase its profits within the rules of the game. The stakeholder view replies that workers, customers, communities and the environment also have a claim, because they bear the company's risks.
  • Moral integrity: honest accounts, fair dealing with small shareholders and suppliers, and refusing to hide losses or bribe officials, even when no one is watching.
  • Professional efficiency: competent strategy, cost control and quality. The two virtues support each other, because fraud eventually destroys value and incompetence tempts managers to hide it.
Mind map of the pillars of good corporate governanceGood corporategovernanceIndependent boardDirectors who cansay no to ownersAudit committeeChecks accounts;oversees auditorsDisclosureTrue, timely,complete reportsMinority rightsFair voice forsmall shareholdersWhistle blowingSafe channel toreport wrongdoingStakeholdersWorkers, buyers,society, natureWhat holds a company honest
Figure: the six pillars that keep a company honest.

Dimensions

Moral integrity and professional efficiency in corporate governance comparedTwo virtues a company needsMoralintegrityProfessionalefficiencyMeansHonesty when noone is watchingDoing the jobwell and on timeShown byTrue accounts,fair dealingSound strategy,cost controlFailureFraud, insiderdeals, cover upsWaste, delays,poor productsWho checksBoard, auditors,whistle blowersMarkets, customers,rating agenciesNeither is enough aloneEfficiency without integrity ends inscandal; integrity without it, in decline
Figure: moral integrity and professional efficiency compared.
  • Legal: company law and stock exchange rules fix the minimum, such as independent directors, audit committees and disclosure.
  • Ethical: a company can comply with every rule and still mislead, for example by aggressive accounting or by moving harm to suppliers in weaker jurisdictions.
  • Environmental and social: the largest social effect of a company is usually how it makes its profit, through pollution, wages and product safety, not how it spends a part of it.

In practice

Timeline of corporate governance reform in India from 1999 to 2022Reform, often after a scandal1999Kumar Mangalam BirlaSEBI committee; listingagreement Clause 492009SatyamChairman confesses toinflated accounts2013Companies ActIndependent directors,CSR under section 1352015SEBI listing rulesListing Obligations andDisclosure Requirements2017Kotak committeeStronger boards, moreindependent directors2018IL&FSDefaults expose weakboard oversight2022SEBISeparating chair andMD made voluntary
Figure: Indian corporate governance reform, which has often followed a scandal.
  • Companies Act, 2013: a listed company must have at least one third of its board as independent directors (section 149), and must have an audit committee of at least three directors, with independent directors in the majority (section 177).
  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: the Securities and Exchange Board of India (SEBI) sets board composition, committee and disclosure rules for listed companies, replacing the old Clause 49 of the listing agreement.
  • Kotak committee (2017): chaired by Uday Kotak, it recommended stronger boards, including more independent directors and the separation of the posts of chairperson and managing director in large listed companies. After poor compliance, SEBI made that separation voluntary in February 2022.
  • Satyam (2009): the chairman confessed in January 2009 to inflating the company's cash and profits over years, and the auditors and board had failed to catch it. It became India's leading case on why independent oversight must be real.
How the corporate social responsibility rule in section 135 of the Companies Act works, step by stepCSR under section 135Companies Act, 2013Is the company covered?In the preceding year: net worthRs 500 crore, or turnover Rs 1,000crore, or net profit Rs 5 croreBoard approves a CSR policyThrough a CSR committee, where requiredSpend at least 2 per centOf average net profit of thethree preceding financial yearsOn Schedule VII activitiesHealth, education, environment,rural development and othersUnspent moneyMoved to a specified fund, or anunspent CSR account for ongoing workDiscloseIn the board report andon the company website
Figure: how the CSR rule in section 135 of the Companies Act, 2013 works.

Issues and way forward

Is mandatory CSR sufficient? Arguments on both sides and a balanced viewIs CSR enough?It helpsIt falls shortLarge sums flowto social causesSmall next to theharm of core businessBuilds a habit ofsocial reportingSpending clusters inricher statesPartners withlocal groupsCan becomebrand buildingA balanced viewCSR is a floor, not a licence: the realtest is how profit is made
Figure: whether mandatory CSR is enough, and a balanced view.
  • Independent directors are not independent, because promoters often choose them and can remove them. Selection through a nomination committee, fixed tenures and a public record of their dissent strengthen their hand.
  • CSR spending is concentrated, because companies prefer projects near their plants and in better served states. Matching CSR to district needs, and partnering with local bodies, would spread it more fairly.
  • CSR can become public relations, because spending is easier to show than impact. Impact assessment for large projects and honest reporting of outcomes, not just amounts, are the fix.
  • Whistle blowers are punished, because they threaten powerful people inside the company. A protected channel to the audit committee, as the listing rules require, must be made to work in practice.

Common confusions

  • CSR and philanthropy. Philanthropy is voluntary giving, usually by owners. CSR under section 135 is a legal duty of the company, with rules on amount, activities and disclosure.
  • Corporate governance and management. Management runs the business day to day. Governance is the system of oversight that holds management to account.
  • Compliance and integrity. Compliance means meeting the rules. Integrity means acting honestly where the rules are silent, and the worst failures, like Satyam, happened in companies that appeared compliant.

For the exam

  • Keyword bank: agency problem, independent director, audit committee, LODR, Kotak committee, related party transaction, whistle blower, shareholder value, stakeholder theory, CSR, section 135, Schedule VII, moral integrity, professional efficiency.
  • Previous year questions: Practise the previous year questions on this topic →
  • Introduction lines:
    • India is among the few countries that make CSR spending a legal duty: covered companies must spend at least 2 per cent of their average net profit under section 135 of the Companies Act, 2013.
    • The Satyam fraud of 2009, confessed by its own chairman, showed that a board can look independent on paper and still fail to protect shareholders.
  • Conclusion lines:
    • The best CSR is not what a company gives away but how it earns: fair wages, clean processes and honest accounts.
    • Integrity and efficiency together build lasting companies, because trust lowers the cost of every transaction.