CORPORATE GOVERNANCE AND ENVIRONMENTAL DISCLOSURE PRACTICES IN INDIA
Introduction:
Against the backdrop of an increasing relevancy in demand for corporate transparency, there is a growing pressure from shareholders and government alike on global corporate entities to disclose environmental reports. These reports are generally thought as a reflection or an indicator of a corporate’s moral conscious in regards to how the business they conduct affect their surroundings. Similar to other countries, India maintains a unique legislatory framework regarding their environmental disclosure practices. Repeated circumvention by corporates and periodic overhauling of these laws by government authorities however has led us to believe that the laws pertaining to disclosure practices aren’t as robust and stringent as it should be. Malarvizhi and Yadav (2008) had performed a study on environmental disclosure practices by Indian companies and it was revealed that the sample Indian companies had reported only positive environmental related information with practically no disclosure on any adverse or negative environmental performance.
The interactions between enforcement agencies and corporate entities still persists on a ‘carrot & stick’ type of agenda. Thus, only a handful of companies remain forthcoming and retroactive in their environmental compliances reports as most corporates are under the impression that releasing these reports would lead to the cost outweighing the benefits and possibly lose public support for their brand. Now, this country was founded on many great principles, one being in the form of a fundamental duty which required citizens to protect the natural environment. In this paper, the salient issue of corporate governance approaches and environmental disclosure practices will be tackled so as to render an outlook on the current state of environmental laws [in regards to corporates] and any viable recommendations that can act as a game-changer in the field of law.
Statement of Problem:
The Ministry Of Environment, Forest & Climate Change in conjunction with the Central Pollution Control Board [CPCB] and State Pollution Board [SPCB] of each of the 28 states and 8 union territories in India, regulate and enforce environmental laws. Additionally, the branches of the National Green Tribunal [NGT] divide India into several jurisdictional zones for handling and ensuring speedy disposal of cases pertaining to the sanctity of the environment with subsequent compensation and relief for damages caused to person or property. At face value, these measures seem strict in its own right, however, corporates even today avoid disclosure practices as there are no formal guidelines pertaining to voluntary disclosures and additionally, an absence of incentive in approaching enforcement agencies is prevalent as no existing reward is available which rewards companies on their contributions in environmental compliancy. With little to no transparency, India has been gripped with an iron fist of bad corporate faith that has been spanning for decades. A notable example for the same is the Bhopal Gas Tragedy caused by Union Carbide India Limited [UCIL] which claimed the lives of over 15,000 people and an additional 500,000 cases of exposure due to a methyl isocyanate leak. Even though subsequent civil liability laws relating to compensation in response to the tragedy had been enforced, history has taught us that even be it past of future, corporate greed and zero accountability are recipes for destruction. As response in today’s times of increasing global warming and pollution levels, investors and shareholders have begun assuming their position as watchful critics and preventing corporates from overestimating their authority. In June 2019, an alliance of global investors whose combined portfolio exceeded 10 trillion dollars had accused 22 companies, notably ITC, Coal India and Bharti Airtel and other companies of the Bombay Stock Exchange [BSE] Top 200 of not revealing their business dealings’ impact and providing standardised date of their environmental impact for a fair comparison.
The World Bank had estimated that the annual cost of degradation in India alone, amounts up to nearly 5.7% of the country’s GDP [World Bank, 2013]. With money being funnelled out in matters that can be easily resolved with due diligence and stringent actions, the Indian government has to administer and direct companies in the nation with suitable disclosure laws so as to ensure absolute liability is maintained at all times and prevent any further wrongdoings which is tantamount to environmental damages.
Scope of Study & Objective:
This study will essentially identify and cover the impact of corporate governance on environmental matters along with current disclosure practices of the BSE Top 200 companies.
This study also includes in its scope those corporates which are exclusively functioning in India. Variables such as profitability, size and environmental certification were also considered.
Furthermore, relevant data from government authorities and verified sources will be used to supplement the hypothesis made in this research paper with due cognizance of the current generations impact on the environment.
Methodology of Study:
A doctrinal approach was followed wherein existing sources were referred to and built upon with further analysis. The selection of these sources was based on its usefulness and appropriateness for this particular research paper. Both quantitative and qualitative data was employed and analysed in this study.
Furthermore, the rationale behind choosing this approach was based on the sheer number of existing sources which tackled the much relevant issue of environmental protection. With an influx of various sources providing various angles of information, this research paper hopes to include nearly every possible perspective of disclosure practice in India.
Additionally, the data in this study was observed in context to the prevailing generations issues with environmental protection and thereby elucidated in this research paper.
Literature Review:
There are various research works conducted by known professors and research scholars in order to exhibit the overarching linkages between corporate governance and its implication on the environment. The ones that have been considered for the research paper have been mentioned below:
BARNALI CHAKLADER and PUJA AGGARWAL GULATI in their paper, ‘A Study of Corporate Environmental Disclosure Practices of Companies Doing Business in India’ have studied the impact of different independent variables on the Environmental Disclosure Index [EDI] and had constructed a regression model to elucidate the correlation between bigger sized companies and environmental certifications. It was found that environmentally certified companies by an external agency often disclose more environmental information. Additionally, the cost of monitoring is reduced as firms voluntarily follow a set of environmental objectives.
EZHILARASI G. and K.C. KABRA in their paper, ‘The Impact of Corporate Governance Attributes on Environmental Disclosures: Evidence from India’ examines the impact of quantitative and qualitative variables in regards to sectors of Indian companies and their respective disclosure practices. However, the report only considers annual standardised reports as a viable source of communicating environmental information and studies have previously shown that most firms don’t partake in disclosing this information out of fear of extensive scrutiny.
ANNA JESSOP, NICOLE WILSON, MICHAL BARDECKI and CORY SEARCY in their paper ‘Corporate Environmental Disclosure in India: An Analysis of Multinational and Domestic Agrochemical Corporations’ examines the current environment disclosure practices from a 15-year span between subsidiary and domestic companies. It touches on the relevancy of corporate governance with stakeholders such as investors and the additional impact of revisions made in the Companies Act, 2013.
Stock Market Regulations
There exists a plethora of legislations to regulate over disclosure practices including and not limited to the Chartered Accountants Act 1949, the Securities and Exchange Board Of India [Amendment] Act 2002, the Companies Act 2013 and the Indian Accounting Standards. The SEBI (Amendment) Act 2002 had introduced a new clause in the Listing Agreement of Stock Exchanges in which disclosure of financial and non-financial information are obligatory to curb financial fraud. Despite this, there are no mandated provisions for corporates to disclose these practices. Thus, environmental disclosure by corporates in India is purely voluntary in nature except clause 55 of Business Responsibility [BR] reports that were introduced by SEBI [2011] in which the top 100 listed firms based on market cap must provide reports for the same as part of corporate social responsibility.
Rationale in Disclosing Environmental Practices
As mentioned earlier in this paper, companies often find it trivial or risky to disclose reports on environmental compliancy for already above-mentioned reasons. Now, according to Jensen & Meckling, 1976, the agency theory can render a rational framework linking disclosure practices to corporate governance and that environmental monitoring or external agency costs arise from conflicts of interests with known stakeholders in the company i.e. investors. Furthermore, a domestic institutional investor holding huge shares or private ownership in the company can pressurize management into acting for the larger public interest. If companies can voluntarily indulge in disclosure practices, it would reduce any or entirely remove any burden on external agencies for conducting the assessment. Additionally, shareholders would remain enthusiastic about companies remaining pursuant to social responsibility goals.
Board of Directors Size
The Board of Directors of any company plays a huge role in complying with the legal framework of laws pertaining to corporations and maintaining smooth publicity with the media and investors alike. A smaller board of directors can prove to be efficient in handling management performance and encouraging disclosure practices provided the company is off small market capitalization. However, in the case of a company having a huge market capitalisation and relevancy in the business world, a larger board of directors would be required in adding multiple perspectives into the flow of environmental compliancy in a positive association. The findings of Buniamin, Alrazi, Johari & Rahman [2008] in a study of 243 Malaysian companies which examined which variables [board independence, CEO duality, board size and management ownership] had an association with the companies environmental practices. It was found that only board size had an impact on the companies environmental reporting standards.
CEO Duality
CEO Duality refers to a person who is both CEO and chairman of the Board of Directors at the same time. In such a case, it is often found that directors in this position and with this authority go as for as to withhold undesirable practices from being instanced in their reports and present only valuable and positive information for shareholders. Empirical studies have shown that CEO duality is commonly associated with low level of corporate disclosure practices (Forker, 1992; Gul & Leung, 2004). Based on this, it can be hypothesised that there exists a negative correlation between CEO duality and environmental disclosure practices.
Regulations enacted by Indian Government & Existing Laws
Under the Right to Information Act [RTI] 2005, any citizen can request government authorities to provide information at a minimal fee. However, there are certain exceptions including and not limited to information that may compromise national safety, that of someone’s personal privacy and can damage the reputation or commercial confidential secrets. With this in mind, citizens cannot avail much use of this right as it would in a way, infringe on the personal financial secrets of companies and thus block any and all possible way of keeping a check on the company’s environmental practices.
Some of the more recent environmental laws such as E-Waste [Management] Rules, 2016 have added a ‘self-declaration’ mechanism to guarantee that companies out of their own volition are liable for any harm that may be caused by them on the environment. Some states have also gone ahead and established an ‘auto-renewal’ of environment permits based on a criteria of sustainable development goals that has to be met.
What can be further done in this realm is introducing ‘cause-effect’ notices that target companies not following environmental goals propounded by the ministry of their home state. If no such response is delivered within the next couple of weeks, criminal prosecution can be introduced as punishment for offenders. Another way to ensure effective environment protection is requiring companies to sign an oath of good faith and make it mandatory by law to release environmental disclosure reports on a bi-annual basis which shall be reviewed and compared among several companies belonging in the same industry by the Supreme Court.
These hypotheses present an overview of 2 main sides in this paper i.e. corporations themselves and Indian legislatures. A perfect symbiosis must exist between the two in order to guarantee environmental protection and standardised disclosure reports.
Conclusion:
In the 21st Century, more and more companies are starting to sensitize themselves with the increasing necessity of environmental protection in India. According to Numbeo Pollution rankings, 8 out of the top 20 places in the world are from India with Faridabad being the most polluted out of the others. While it cannot be unequivocally derived that corporates make up the bulk of India’s pollution levels and that individual pollution is also to be accounted for, it points out a huge gap in today’s laws. In conclusion, corporate governance and environmental disclosure practices are a far cry in todays day and age. Everyday, some other company is being tried for environmental fraud and others are being shut down for multiple transgressions that had only been recently discovered due to the lack of scope present that can pinpoint which company is not following the issued directives and which one is making progress where its required. It is up to the government to take the next step in environmental protection and up to the corporates to take a step back and rationalize where and how they see themselves in terms of what they leave behind for future generations.
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Environmental Applied Science and Management, Ryerson University, Toronto, ON M5B 2K3, Canada Department of Geography and Environmental Studies, Ryerson University, Toronto, ON M5B 2K3, CanadaYeates School of Graduate Studies, Ryerson University, Toronto, ON M5B 2K3, Canada Author to whom correspondence should be addressed.
Sustainability 2019, 11(18), 4843; https://doi.org/10.3390/su11184843
Received: 11 August 2019 / Revised: 26 August 2019 / Accepted: 27 August 2019 / Published: 5 September 2019
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By Aniket Raina