July 2005 | Saloni Meghani

The covenant and the code

Long before corporate governance became a buzzword in industry circles, Tata Steel was following the letter and spirit of the rules that define ethical business behaviour

Companies learned long back that having the complete cooperation and participation of their employees meant improved efficiencies and, consequently, superior products. Now they have begun understanding that a strong commitment from investors and other stakeholders can lead to similar payoffs for the organisation. Both are elements of a corporate governance template which demands that broad-based systems of accountability be built into the spinal structures of companies. Government regulations can be a guide, at best, in this process. More important is a culture of self-policing.

Tata Steel has imbibed this culture better than most. Much before the business world woke up to the importance of evolving a 'method' for corporate governance, Tata Steel had already been practising its substance. It is no surprise, therefore, that the ministry of finance, Government of India, awarded the company the national award for excellence in corporate governance in 2000. Two years later Tata Steel bagged the golden peacock award for excellence in corporate governance and corporate social responsibility from the Institute of Directors, an apex association of company directors.

Deputy managing director AN Singh defines the Tata Steel approach thus: "Corporate governance is the ethical and responsible behaviour of a corporation towards its owners, its shareholders, but it has a fallout effect on other constituents too." Tata Steel has engaged all its stakeholders — a broad category that includes employees, regulators, the communities in and around the areas where it operates, and shareholders — at every stage of its evolution. The shareholders, though they are the farthest away and the most fragmented, remain at the heart of the company.

"We have to ensure a transparent and fair administration so that the money the shareholders put in is safe and productive," says Mr Singh. To ensure this Tata Steel has a three-pronged governance structure that provides for checks and balances throughout its operation.

The first layer of this structure is the law of the land. Statutes on the number of non-executive and independent directors, board procedure, and terms of office are followed with rigour. Tata Steel's balance sheet is certified as fair and true by its chief executive officer and its chief finance officer, and the company also submits a report on various corporate governance parameters. It has mandated committees for audit, remuneration for directors and investor grievances. Tata Steel's investor grievance committee, which looks into complaints about transfer of shares, receipt of balance sheet and dividends, meets twice or thrice a year and checks if all issues have been resolved satisfactorily.

The second tier of Tata Steel's corporate governance edifice is based on the Tata code of conduct, a comprehensive set of tenets that all Tata employees have to adhere to. The code goes way beyond government-mandated regulations. For example, the offices of non-executive chairman and managing director are separated in Tata companies, even though the law does not require this. The Tata code explicitly prohibits insider trading and sets out disclosure practices that help shareholders take informed decisions. This ensures that the interests of shareholders are put above all else and that people inside the company conduct their personal securities transactions in an ethical manner.

Tata Steel has an ethics and compliance committee, as stipulated by the code, and this comprises, among other things, labour welfare measures like the eight-hour working day, leave with pay, provident fund, gratuity and profit sharing.

The rules implicit in Tata Steel's proactive workday ethos have been around for many years. The company never meddles in the share market. It invites a social audit every 10 years, in which an independent authority checks if it has functioned responsibly and ethically with all its stakeholders. Tata Steel recently adopted the Social Accountability (SA) 8000 standard, which promotes responsible behaviour towards labour supplied by its contractors. It has also set up apex committees for management, business excellence, safety, research and development, information technology, etc.

To ensure that a culture of self-motivated ethics percolates to the rank and file, Tata Steel lays plenty of emphasis on communication, the third layer of its corporate governance structure. The office of the ethics counsellor executes this vision. Says ethics counsellor Rekha Seal, "We manage with trust. We start with the given that everyone is honest, but if we find that someone has flouted rules we take decisive and immediate action. This is important because trust is the foundation of our name and our brand."