SYLLABUS

1. Introduction to Business Ethics Ethics – Normative, Prescriptive and Applied Ethics, Morality and Legality Concept of Rights and Duties in Business –

Indian and Western Perspective Relevance in Social Change Ethical Organism and Corporate Code of

Conduct

2. Business Ethics – Conceptual Conceptual Approaches to Business Ethics EGOism vs. Altruism Roles and Responsibilities of Entrepreneurs

and Mgrs. Responsibilities towards stake holders: an

overview Profit Making – An objective with an ethical

dimension

3. Indian Perspective of Ethics Purusharthas – Dharma, Artha, Kama and

Moksha Various Concepts

4. Ethics – A Global PerspectiveEthics in Global Marketing and AdvertisingEthical Perspective in employmentEthics and IT, E Commerce, Privacy CodesEnvironmental Ethics:-• Culture Influences• Ethical Issues and Functional Aspects of Business

5. Corporate Governance Meaning, Scope and Reporting Agency Theory – Principal Agent Relationship Role of CEO, Board and Senior Executives Right of Investors and Shareholders Financial Regulations and their role of scope

in C.G. Corporate Governance from Cadbury

Committee to Narayan Murthi Committee

6. Concept of CSR Meaning and Scope Relevance and Significance in Contemporary

Society Value Approach to CSR

7. CSR within Organization Labour Relation Work Atmosphere – Healthy and Productive Exploitation, Attrocities and Harassment Safety Standards and Environmental Concerns Perquisites and Incentives

8. CSR and Society Role and Responsibilities of Local Community

in Business Interventions of Business to fulfill Social

Responsibilities Role of NGO and Internal Agencies Integrating CSR into Business CSR Measures and Indicators CSR and Sustainable DevelopmentCSR and Triple Bottom Line – An International

Endeavour

1. Ethics - Ethos

Webster Dictionary:- Ethics is the discipline dealing with good or bad, right or wrong, or moral duty or obligation.

It is a group of moral principles or set of values. Morality is concerned with conduct and character Ethics is a rational analysis and conclusions about

the fundamental elements that decides good or bad, right or wrong doings.

“SUPREME ONENESS IS THE RATIONALE OF ALL ETHICS AND MORALITY” - Swami Vivekananda

Ethics are derived from eternal principles of truth

NO society can succeed without any religious aim

OBJECTIVE OF ETHICSTo define the greatest good of man and

establish a standard for the sameSet moral standards of behaviourAn overall study of human behaviourApply judgement upon human behaviourSuggest moral behaviour – Prescribe Do’s and

Don'tsOne’s opinion or attitude about human

conduct

ETHICS AND RELATED TERMSEthics and Morality – the sameEthics and Religion – ETHICS get ideas from

RELIGION. Role of ETHICS in economic lifeEthics and Law• Ethics on Do’s and Don’ts• Law on Don’tsEthics and Values

ETHICS

LAWaaa

THREE GOLDEN RULES OF ETHICS1.Everything you want others to do for you, do

it for others.2.Do not do to others, that which you do not

wish them to do to you.3.Do not do anything to others that if done to

you, would cause harm to you.These rules have Universal ApplicabilityExamples of Ethical Values

Trust Worthiness: Honesty, Integrity, Promise keeping, Loyalty

Respect: Autonomy, Privacy, Dignity, Courtesy, Tolerance, Acceptance

Responsibility: Accountability, Pursuit of Excellence

Caring: Compassion, Consideration, Giving, Sharing, Kindness, Loving

Justice and Fairness: Consistency, Equity, Equality, Impartiality

Civic Virtue and Citizenship

ETHICS NORMATIVENormative theory aims to discover what

should be and would include sentences like “Persons/Organizations should follow standards” OR they should act in a manner to avoid conflict of standards.

Attempts to reach conclusions about moral rights and wrongs, good and evil.

PRESCRIPTIVEMoral judgements are not descriptive but

prescriptive. They state what we ought to do, not what we actually do.

Thus prescriptive ethics evaluate our conduct as right or wrong.

APPLIEDAccording to this, to decide whether an act is

ethical or not, a person must:-1.Perform the act out of his own freewill and

not be compelled to do it by some overwhelming force.

2.Be in possession of fully developed rational faculty which can help him distinguish right from wrong, good from bad

3.Not lose his normal personality

• In applied theory of ethics, while giving judgement, medical ,habitual and psychological aspects are also considered. .

• In applied ethics, judgement is based on the three stages of human action:-

1.Mental Stage2.Bodily Stage3.External Stage of Consequence

Ethics And Morality

ETHICS AND MORALITY – Morality is a set of rules to guide the action of an individual. It is a code of value to guide man’s choice and actions.They are related to traditional beliefs customs and conventions

Ethics is the principle that guides the human behaviour and they are developed through proper testing to guide human behaviour

Therefore Ethics and Morality are different.

ETHICS AND LAW:- Respect for law is an ethical value. Law is the code of conduct which the authority in power prescribes for society. It is considered with the minimum regulations necessary for public order. So Government gives shapes to only those minimum social obligations, customs or traditions which are essential for peace and happiness.

The most important divergence between ethics and law is that Ethics concentrate on Do’s and Law o the Don’ts.

• ETHICS is much wider than LAW

Required Ethical Behaviour may not be covered by Law e.g.

Look after the eldersRespect the eldersBe considerable to your workersBe PunctualTeach well to studentsStudents must focus on the subject taught in

classStudents should not talk while the teacher is

teaching

Concept of Rights and Duties

Right Principles grant a person certain moral rights by virtue of being a human being.

These rights are closely associated with duties:- It is one’s duty not to violate the rights of

others, just as it is the duty of others not to violate his rights

People should never be treated as means to an end but as ends themselves

When using people to accomplish your goals, organizations have a duty to respect them as human beings.

Rights may be either positive or negative Positive rights imply that an organization has a

duty to provide whatever is required to exercise the rights

If education is a right, the state has a duty to provide access to education. If I have a right to freedom of speech, it is the duty of an organization not to interfere with my freedom of speech.

There are 6 rights that are basic to business activities:-

1.Life and Safety2.Truthfulness3.Privacy4.Freedom of Conscience5.Free Speech6.Private Property These rights also create primafacie duties

Negative rights imply that if someone is infringing on my rights, I have a right to negate that, either socially, personally or legally. This is a part of Redistributive justice and Compensatory Justice.

Western Perspective believes in ‘Give and Take”. It believes in the rights of the individual along with duties.However, Indian Philosophy believes in ‘Nishkam Karma’ and ‘Karmanya Vadhika Raste Maa Phaleshu Kadachin’ – Do your duties without expectations.

According to one shloka from the ‘Rig-Veda’, “An organization should benefit from business like a honeybee which sucks honey from the flower without affecting its charm and beauty.”

Indian Ethics believe more in giving

In today’s modern world, with growing materialism, man’s needs have become greed and he is not bothered about the means. As a result, corruption is increasing and unethical practices are increasing with sole objective of earning money. Therefore business ethics is needed in every walk of life, so as to have peace and happiness.

ETHICAL ORGANISATIONSCODE OF CONDUCT1.Integrity2.Impartiality3.Responsiveness to the Public Interest4.Accountability5.Honesty6.Transparency

With these:- a. Ethical Organizations are at ease interacting

with diverse internal and external stake holders. Organizations good is taken as stakeholders good and vice versa.

b.Obsessed with fairness – other’s interest is their own.

c. Responsibility is individual than collective.d.They see their activities in terms of purpose.e.They have clear communication.f. Minimized bureaucracy and control

Also ethical organizations can be identified with the help of following characteristics:-

1.On the basis of corporate culture2.Relationship with stakeholders3.In relation to Corporate Governance (Ethical

Practices of Top Managers)

2. BUSINESS ETHICS - CONCEPTUALBACKGROUND

Many people think that Business and Ethics are two different concepts and are not inter-related.

Business is an economic activity based on Input and Output relationship.

Ethics is moral behaviour of an individual and it determines what is right or wrong.

Therefore Business and Ethics have nothing to do with each other. However, this does not stand to Logic.

Business is a part and parcel of human life and, society and business exist together. Therefore business has to consider concepts and norms of good and bad developed by the society.

Norms of conduct which apply to common man has to be applied to the business.

Baum hart:- Objectives, intentions, circumstances and actions of businessmen, and the right and wrong of it is the domain of ‘Business Ethics’

William Shaw:- Business Ethics is the study of what constitutes right and wrong, good and bad human conduct in a business context.

According to Thomas Garret, Business Ethics is concerned primarily with the relationship of business goals and techniques to satisfy human needs.

It studies the specific obligations which a man and a citizen accepts when he becomes a businessman.

It examines the impact of actions and interactions of business people and organizations on individuals, institutions, business committee and society as a whole.

It questions about the morality of prevalent business practices and try to assess and evaluate as to how far they are good and right.

It also tries to investigate the basic purpose of business and the fundamental duty of business towards the society.

It attempts to develop a self-monitoring mechanism to see that the right kind of business practices will prevail and the business will be organized and conducted in a good spirit.

THE NEED FOR BUSINESS ETHICSThe need for business ethics Can be highlighted

with the help of the following points:-1.To safeguard the interest of all stakeholders

against unfair, unethical ways of dealing and exploitation.

2.To protect the following rights of consumers:-a)Right of informationb)Right of Safetyc) Right of Choiced)Right to be heard

3. To develop or prescribe business code which provides ethical standards of suppliers, dealers, suppliers, financiers and other related agencies.

4. To enable business to tackle social issues like ecology, environmental protection, consumerism, people oriented management, human dignity, energy conservation, etc.

5. To enable business to prepare and publish a code of ethics. This will boost up the confidence of customers, employees, dealers and suppliers in the quality of functions and dealing of the organization.

FACTORS AFFECTING BUSINESS ETHICSa)Personal Code of Behaviour of the individualb)Policies of the companyc) Ethical Standards imposed on the managers

by Superiors.d)Ethical Climate of the Country

PRINCIPLES OF BUSINESS ETHICS1.Rule of Publicity:- People should be

adequately informed about the nature, purpose and consequences of business dealings.

2.Rule of Equivalent Price:- People receive the goods and services fully equivalent to the money paid. People should get the best return of their spending. There should be an element of mutual benefit – Business gets the price of the Product and consumer get the satisfaction.

3. The Rule of Conscience in Business:- a) Rules of Business should be judged by the

moral judgement.b) Decision of businessmen should be governed

by the concern for the society, rather than selfish motives.

4. The Rule of Spirit of Service – Service FIRST and Profit NEXT.

5. Business should be just and human as well as efficient and dynamic.

6. Growth of the size of business must be accompanied by the growth of human values

7. Business must make best and fullest use of its input.

8. Business should promote and support open and healthy competition.

EGOism vs. AltruismEGOism – Advocates individual self interest as

the guiding principle of Business. It states that an action is good if it produces results to maximize a person’s self interest. It also associates morality with self interest. Moral Egoist thus is long term interest as a standard to judge the rightness of an action. According to a Greek philosopher, sole standards of right action is the avoidance of painful and unpleasant experience, and increase pleasure.

However, this theory has been criticized because it supports selfishness.

ALTRUISM is also known as UtilitarianismIt is based on the concept of usefulnessIt is described as the degree of preference for

a particular product in relation of its priceIt helps us to evaluate costs and benefitsIt is a moral doctrine that we should always

act to produce the greatest possible balance of good over bad for everyone affected by our action

According to Henry Sedgwick, Altruism is based on the following principles:-

1.Care Based Thinking – Do what you want others to do for you.

2.Rule Based Thinking – Follow your highest sense of Principles.

3.End Based Thinking – Do what is best for the greatest number of people.

ROLE AND RESPONSIBILITIES OF ENTREPRENEURS AND MGRS

1.Protecting Company’s Assets – These include tangible as well as intangible.

2.Behaviour towards Government Agencies - Mgrs should not offer monetary or other gifts to any Government Agencies to obtain any favor.

3.Control – Proper checks and Balances – It ensures prevention of misuse of power, facilitates timely management response to change and be premptively and effectively managed.

4. Consensus Oriented – Keeping the best interest of the whole community, taking into consideration historical, cultural and social aspects.

5. Gifts and Donations – Mgrs should not give or receive any gifts, to obtain business or uncompetitive favors.

6. More Transparency and Accountability.

RESPONSIBILITY TOWARDS STAKE HOLDERSAny ethical organization has a responsibility to

meet the needs of stake holders. The organizations must take decisions to see that the stake holders enjoy the maximum benefit of that decision e.g. in Marico, the members of Parachute oil discovered a harmless tint in the oil from one of its production lines. The company withdrew the batch from the market, shutdown the production line, but kept the workers on pay roll and involved them in the investigation of the case. Shortly, the workers located the cause, rectified it and resumed normal production.

PROFIT MAKING – AN OBJECTIVE WITH AN ETHICAL DIMENSION

Business Entities are designed to make some profit. However, they shouldn’t use unethical means to earn profit. Even according to Indian Ethos, Profit making is genuine, provided the means adopted are just.

There is plenty of evidence that unethical behaviour can cost a company its reputation and hard cash and reduce its stock price. On the other hand, the companies which are ethical ,build trust among their stake holders and community, and make good business in the long run. Many scandals in the business had their origin in their total disregard to ETHICS.

BENEFITS FROM BUSINESS ETHICSi. It substantially improved society - Establishment of

Unions and other regulatory bodies has contributed to the development of the Society. Discrimination and exploitation of employees have been reduced.

ii. High Productivity and Strong Team Work.iii.Helps in turbulent(violently disturbed) times - Ethical

training helps in such times.iv.It creates Strong Public Image - This leads to strong and

continued loyalty of employees, consumers and General Public.

v. Acts as an insurance Future functions Competition

3. INDIAN PERSPECTIVE OF ETHICSThese are based on Vedas, Upanishads and

the Bhagwad Gita.These do not depict any religion.These have universal appeal, because they

deal with universal truths of Life.These believe in UNITY IN DIVERSITY because

of belief in “Vasudev Kutambakam”.• Vasudev-Whole World• Kutumbakam-One Family

• Whole world is one family because each individual has a soul which is connected to one soul –Supreme Soul

• This concept helps in resolving the conflict and chances of disputes are reduced.

• This increases the feelings of sharing and caring , and we move from competition to cooperation

• Herein, the world includes all the living beings including the trees, rivers and environment.

These believe in Patience, Tolerance, Respect for others, Forbearance, Honesty, Integrity, Team Work, Sacrifice and Selfless Service.

Believe in “Ayam Atma Brahma” – This Self is Brahma. We are all part of SUPREME SOUL also:-

Hamsa Soham, Soham Hamsa I am He , He is Me He is Me, I am He

Therefore, each individual has Immense Potential.

Indian Ethos lays much stress on Self-Management and Self-Development. The self development is not mere development of skill, but is oriented to development of Inner-being. It is related to the development of soul through development of Satvik qualities.

Indian Ethos emphasizes on development of value based personality wherein there is a proper mix of spiritualism and materialism, knowledge and wisdom, value and skills.

It transforms the Individual from “Tamsik”(negative traits) to “Satvik”.

It emphasizes on holistic approach to life.Nishkam Karma.“Karmanya Vadhikaraste Ma Phaleshu Kadachana” Self-Motivation Work is Worship, Dignity of Work

1. Purushartha – It is the self-effort to modify the past and to create the future, may be for better or for worst.

Another Philosophy is Prarabdha – destiny – luck

Through Purushartha – Prarabdha can be changed.

It can also be called “Missions of Life” According to Indian Culture, there are four fold

Purushartha or Missions of Life.

1. DHARMA – It is the righteous conduct which one should practise. It is the basic value system which must be followed by each generation. It is the true north timeless principles and our actions are judged in the context of DHARMA, including Satya, Ahimsa and Tapasya.

2. ARTHA – It is acquisition of wealth. It incorporates means to achieve wealth according to DHARMA. Artha or acquisition of material wealth, power, money and knowledge are very important factors to motivate and to excel.

3. KAAM – Desires and Expectations. It includes enjoyment of sensual pleasure. It also implies zeal and passion in one’s activity, the fun and joy one finds in one’s work, and the delight in any creative endeavours.

4. MOKSHA – It is a state of supreme bliss where the individual soul is free from all bondages caused by Maya. In this state, one is in touch with one’s True Self. To attain Moksha, one need not leave the material world. This is ultimate stage of spiritual life.

ETHICS – A GLOBAL PERSPECTIVE

Ethics, Morality and Globalization are Connected with each other. Therefore the ethical dimension of Globalization is being debated world wide.

The basic need in the context of Globalization is to control the ethical conflicts to its minimal level.

This demands that ethical standards must be viewed from different perspectives, viz.

a)Global Marketing and Advertisingb)Employmentc) IT, E. Commerced)Environment…relating to the functional aspects of Business

ETHICS in GLOBAL MARKETING and ADVERTISING

Marketing efforts are directed towards pushing up sales and winning customers.

To do this, a company has to develop a suitable marketing mix with the help of various P’s and develop suitable strategies.

Here certain ethical problems and practices start emerging. They are as follows:-

1.Sometimes product defects are covert. Only the prolonged use of such products may expose them. Customers are kept in dark about the same.

2.Certain safety measures and precautions are to be mentioned on the product pack. However, if the probability of the adverse effect is low, many manufacturers conveniently forget to mention it.

However, certain unethical practices prevail in this area:-

1. The big suppliers form their syndicate and distribute the contracts among themselves. Thus, they can control the entire industry, can earn and enjoy profits through collectivism, and can prevent new entrants.

2. Sometimes a supplier quotes a very low price and grabs the contract. Later on, he expresses his inability to supply material and asks for favours to fulfill his contract obligations.

3. Sometimes he bribes the important officer in the organization, and then supplies low quality goods.

3. Legal and Medical Warning and Terms and Conditions are printed on a product pack on a small script.

4. Gifts, bribes and kick-backs are offered to customers – usually large ones.

5. Market Research Data is tactfully manipulated to prepare a bright and glossy picture of the product popularity and sale, to attract customers.

6. In monopolistic situation, a company may resort to higher pricing or unilaterally make price rise.

7. Deceptive Communication Organizations invite quotations for making

purchases. This is done to promote fair competition and to make deals at the most reasonable price.

However, these days, according to Business Ethics, services come first and profit later. Customer is considered the most important purpose of Business.

Therefore Ethical Marketing has the following dimensions:-

a. Developing and selling a product which suits to the real needs of people and fulfill the same.

b. Fixing and charging a fair pricec. Keeping the product supply regular and continuous.

No artificial scarcity or price rise.d. Maintain ethics in its advertising and sales

promotion activities.

Ethics and AdvertisingAdvertising is described as any form of

propaganda in respect of an idea, product or services with a purpose to increase its sale. In the global perspective, advertising has two important functions:-

i. To make effective communication with the actual and potential buyers in respect of company’s product.

ii. To provide the competitive edge to the company

It works on AIDAB formulaA – AttractionI – InterestD – Desire A – Action – TO B – BuyAdvertising has Information- Value and

Communication Value, Persuasive- value and Educative – value.

Important ethical issues relating to advertising are as follows:-

i. Use of sex and sexual imagery in an overt and obsessive manner. This is objectionable and in bad taste

ii. Resort to lies, exaggeration and misleading claims.iii.Too much advertisement increases the product priceiv.Induce exaggerated wants among buyers and they

purchase products they do not need.v. Advertising develops disappointments and

discouragements about their present lifestyle. Advertisers display a more decorative and materially rich life and viewers compare it with their real life.

vi. Advertising creates a false impression that simply by using a particular product, a person can become successful, efficient, smart and sexy, strong and handsome.

vii. Lip service to statutory requirements – Statutory warnings are displayed in such a manner that it is not visible

viii.Advertisements present only a part of facts which support the product

ix. Advertising make a strong appeal to emotions like love, fear, anxiety, jealousy and encash on them. It penetrates the subconscious mind in an artistic and clever way and thus breeds artificial hunger and temptation. Viewers are thus forced to forget reason and act on emotional upheaval.

Therefore for ethical advertising, following suggestions are made:-

i. The advertisement should make honest claims and should not mislead.

ii. Advertisement should not offend the generally accepted standards of decency.

iii.Products which are regarded as hazardous should not be advertised.

iv.Advertisement should observe and maintain fairness in the competition between different brands of the same products or a product and its substitute.

v. Children advertisements should not try to exploit the innocence of the child.

ETHICAL PERSPECTIVE IN EMPLOYMENT

Employment is synonymous with HRM. It deals with man-management. It resolves issues in the field varying from recruitment to final retirement or termination of services.

Recruitment – The process of screening, testing and interviewing the candidates must be fair, impartial, with objective valid and reliable. There should not be any discrimination against individuals on the basis of sex, caste, religion, race or origin. The screening of the candidates should be done on the basis of job description and job specification as reflected in the advertisement.

• Promotions decisions have an effect on employees morale, productivity and performance. It should therefore be on the basis of proper system of performance appraisal. Promotion of incapable persons adversely affect employees loyalty& achievement drive. Promotions should either be based on seniority or merit. Many organs. follow Merit based promotion scheme develops an atmosphere of performance& productivity. It induces people to work hard for personal growth.

Discipline – The essence of discipline is obedience. This requires organizations to prepare norms for appearance, punctuality, behaviour, efficiency and co-operation.

This discipline mainly deals with work and behaviour.

If an employee if found to be disobedient and action has to be initiated against him, he should be given a fair chance to plead and present his case.

Punishment should be proportionate to his offence and should not appear to be revengeful.

Wages – Wages are the most delicate and rather explosive issue in the employment. Wages develop the foundation of the employee-employer relations.

Wages are looked upon from different angles as follows:

Means of livelihood for the employees Important cost of operation for the employers Matter of Collective Bargaining for Unions They have impact on Industrial productivity, peace

and prosperity.(continued)…

Minimum Guaranteed wages Equal wages for equal work. Includes incentives for higher efficiency and thus

provide a reward for the meritorious performance.

Related to cost of living Fair and Just

Employee Unions - Protector of Employees Rights - prevent workers from the abuse of power by employers. Unions act as a check and counter balance on employer’s uncontrolled power.However, Union leader should be an employee and not a political leader.

Also, a union leader should not be always in an aggressive tone and declare strike too often to pressurize employers. Strike should be for a just cause, with proper authorization and as a last resort.

Employees Privacy- is to provide people the protection against illegal searches and seizures. Also too much disclosures about personal life should not be resorted to.

Job Design – Lead to muscular disorders, back pain, crippled fingers, eye-problems etc

Discrimination treatment – Discrimination on the basis of race, religion, language, color, place of origin is unethical.

Corporate loyalty – Employee must promote the employer’s interest, as he is an agent of employer.

Trade Secrets Insider Trading Whistle Blowing

Child Labor• Child labor is work for children under the age of 18 that in

some way harms or exploits them physically, mentally, morally or by blocking their education.

• They should not be employed in the work that by its nature is hazardous like manufacturing of fireworks, soldering, mining industries, etc.

• They should not be forced or bonded.• All child labor is not bad. For example a child who delivers

newspaper or milk, etc.,before going to school is beneficial• It is a myth that child labor exists only in poor countries. • Increased family incomes, education, NGOs, can reduce

child labor.

Ethics - Information Technology and e-commerce Information Technology (IT) refers to the creation,

gathering, processing, storage and delivery of information, and processes and devices that make all this possible.

Due to globalization, IT has no geographical boundaries.

Electronic information enables faster and economical processing of any amount of data. with best programming can easily process any amount of data to logical conclusion.

IT is boon to modern management

However, diversity of IT increased and the increased use of technology have created many ethical issues.

These unethical practices can be categorized into 4 groups

i. Accessibility ii. Privacyiii.Property (IPR)iv.Accuracy.

Unethical issues 1. Employees waste the time in computer games or

visiting various web-sites during work hours or free time.

2. Employees use the company computers for private purposes

3. Computer Hackers steal the data, they may also alter the data

4. Theft of funds using computers are increasing in many organizations

5. Computerization , sometimes infringes upon the individuals companies right to privacy of data (continued)

6. Internet is posing another ethical problem. Some of the web-sites do not confirm to the standards of morality and decency of certain societies.

Therefore in IT, following issues must be considered on ethical basis

i. Human welfare, peace and happiness must be of primary concern.

ii. Individual freedom, right of privacy, people safety and public decency should always be given a deep thought while using technological progress.

iii. Technology is the means and not an end in itself. The end in this regard is human comfort and happiness. So anything that results into discomfort or unhappiness should not be used.

ETHICS and ENVIRONMENT With increased industrialization, the problem of

environmental degradation has become more serious. Scientists have started thinking about inter-dependence between the environment and life of all the organizations including human beings. Therefore, human race has the basic responsibility to protect the environment and avoid all such actions and behaviors that cause environmental damages and destructions.

Business organizations must use air, water, land and natural resources judiciously.

Business organizations resort to waste disposal management – air and water. The waste disposal may cause harm to human beings, plants and animal kingdom

Business organizations should have obligation to future generations.

5. Corporate Governance

Corporate Governance deals with problems that result from the separation of ownership and control.

From this perspective, Corporate Governance focuses on the internal structure and the rules of the Board of Directors; the creation of independent audit Committee, rules for disclosure to share holders and creditors and Control Management.

According to the “Cadbury Committee”, Corporate Governance is defined as holding the balance between economic and social goals, and in between individual and community goals. The governance framework is there to encourage the efficient use of resources and equally to acquire accountability for the stewardship to those resources.

It ensures the interests of stakeholders. It enables corporations to realize their aims and

attract investments. It enables state to strengthen their economies

and discourage frauds and mismanagement.

OECD has defined Corporate Governance as the system by which business corporations are directed and controlled.

The structure of CG specifies the distribution of rights and responsibilities among different participants in the corporations, and spells out the rules and procedures for making decisions in corporate affairs.

These are shareholder/stake holder centric. They dwelve with the following concerns:-(continued)

1. Management Accountability2. Providing adequate investments to management3. Disciplining and Replacement of Bad

Management4. Enhancing corporate performance5. Transparency6. Shareholder’s activism7. Investor Protection8. Improving access to Capital Markets9. Promoting long-term Investments10.Encouraging innovations

REPORTING1. Business Line Reporting say that the financers should

get integrated information about the Profitability of different divisions of the company.

2. Since investors of the company are in different groups, viz. Subsidiary Companies jointly controlled companies and Associate companies, therefore company must prescribe different accounting reporting.

3. Tax effect Accounting and Reporting4. Earning per share (EPS) Reporting5. Proper and Timely information to the Board. BOD

must get proper report about long-term plans, budgets, competitive developments, quarterly results etc. This enables BOD to have an overview.

CORPORATE GOVERNANCE – AGENCY THEORY

Corporate Governance has to Subordinate Managers interest to that of shareholder.

Since ownership and control are different in large corporate, there is distinction between these two entities. Managers representing agents of the Principal owners(Stakeholders), may have interests different from owners and may misuse their position to subserve their own interest rather than the interest of their owner, which represents the interest of the corporation.

Role of CEO, Board and Senior Executives

The main task of a Board, CEO and Senior Executives is to monitor the performance of Managers and to ensure that returns to share holders are maximized.

The Board should be independent and should ensure that all share holders are treated equally.

CEO and Board should provide timely disclosure relating to financial position ownership pattern and shareholding pattern. It infuses a sense of discipline and accountability among managers. It lowers risk perception. It reduces information gap between management and share holders.

CEO and Board

Investors and ShareholdersIt includes the following:-i. Registration to the right of ownershipii. Conveyance and transfer of sharesiii.Obtaining relevant information from the

company on a timely and regular basisiv.Participate and play proper role in general share

holder meetings, elect members of the boardv. Get a fair share of the profits of the company

Corporate Governance from ‘Cadbury Committee’ to ‘Narayan Murthi Committee’

To prevent the business failure, the Cadbury Committee under the chairmanship of Sir Adrian Cadbury was set up in 1991. It submitted its report on “Code of Best Practices” in December 1992, laying down the methods of Governance needed to achieve a balance between the essential Powers of the BOD and their proper accountability. They provide guidelines to the BOD, Non-Executive Directors and those on Reporting and Control.

BOD

1. Board should meet regularly, retain full and effective control over the company and monitor the executive management.

2. Clear division of responsibility at the head of the company, which will ensure balance of power and authority.

3. Board should include sufficient number of non-executive directors so that their views carry sufficient weight.

4. Board should have a formal schedule of matters specifically reserved to it.

5. There should be an agreed procedure to take professional advice and services of the experts for the company, if required, at the company’s expense.

Relating to Non-Executive Directors1. Non-Executive directors should give independent

decisions on strategy, performance, resources, including key appointments, and standards of conduct.

2. The majority should be independent of the Management and free from business or any other relationship, which could interfere with their exercise of their Independent Judgement.

6. All directors should have the advice and services to the Company Secretary, who is responsible to ensure that Board procedures are followed and that applicable rules and regulations are complied with. Any removal of Company Secretary should be only approval of the Board.

Executive Directors1. Directors Service Contracts should not exceed three

years without shareholder’s approval.2. There should be full clear disclosure of their total

emoluments, including those of the Chairman,and i their pension contributions and stock optiions.

3. E.Ds pay should be subject to the recommendations of a Remuneration Committee.

3. Non-Executive Directors should be appointed for specific terms and reappointment shouldn’t be automatic.

4. Non-Executive Directors should be selected through a formal process and both, this process and their appointment should have the approval of the Board.

Reporting and Control Code of Best Practices1. It is the board’s duty to present a balanced and a

understandable assessment of the company’s position.

2. Objective and Professional relationship is maintained with the Auditors.

3. The Board should establish an Audit Committee of at least three Non-Executive Directors with written terms of reference, clearly defining authority and duties.

4. Directors should explain their responsibilities for preparing the accounts next to a statement by the Auditor about their reporting responsibilities.

5. Directors should report on the effectiveness of company’s system of Internal Control.

6. Directors should report that the business is a growing concern, with supporting assumptions.

Other Committees, Paul Ruthman Committee, Ron Hampel Committee, Greenbury Committee evolved a combined code of conduct.The stipulations contained in the combined code require, among other things, that the board should maintain a sound system of internal control to safeguard the shareholder’s statement and company’s assets, and that Directors should, at least annually, conduct a review of the effectiveness of the Group’s system of Internal Control and they should report to share holders that they have done so, and the review should contain all controls, including financial, operational, compliance controls and risk management.

Committees in India

Turnbill Committee in Sept 1999 for identifying required that BOD to confirm that there was an on-going process for identifying, evaluating and managing the key business risks.

Many provisions relating to Corporate Governance such as additional ground of disqualification of Directors in certain cases, setting up of Audit Committees, Directors Responsibility Statement in the Director’s Report etc. were introduced by the companies(Amendment)Act 2000. C.G. was also inspected in 2001 by the Advisory Group Constituted by the Standing Committee on International Finance Standards and Codes of the RBI under the chairmanship of Dr Y. V. Reddy, the then Dy. Governor, RBI.

Naresh Chandra Committee, 2002

A high level Committee was appointed to examine and recommend drastic amendments to the law involving auditor-client relationships and the role of independent Directors, by the Dept. of Company Affairs in the Min. of Fin. And Company Affairs under the Chairmanship of Naresh Chandra. It included rotation of auditors, restriction on non-audit work/fee, procedures for appointment of auditors.

Narayan Murthi Committee – 2003

It envisaged many amendments in the Company Law, to promote Corporate Governance practices in India.

Dr. J. J. Irani Committee - 2005It was set up to evaluate the views of several stakeholders in the development of Company Law. Some of the important recommendations are:-1.One-third of the board of a listed company should comprise independent directors.2.Allow pyramid corporate structures, that is, a company which is a subsidiary of a holding company could itself be a holding company.

3. Give full liberty to the stake holders and the owners of the company to operate in a transparent manner.

4. The new company law should recognize principles such as “Class Actions” and “derivate actions”. There are proposal for exit options for share holders.

5. Introduce the concept of One Person Company as against the current stipulation of at least two persons.

6. Allow corporations to self-regulate their affairs.7. Mandate publication of information relating to

conviction of criminal breaches of the Company’s Act on the part of the company or its officers, in the annual report.

8. Disclose proper and accurate financial information of a corporation.

Reform Measures in India1. Companies are required to make disclosures on a

continuous basis.2. The decisions pertaining to dividend bonus, right

announcements, or any other financial information are required to be made within 15 minutes of the Conclusion of the Board Meeting.

3. Accounting procedures have been streamlines with norms introduced for segment reporting, related party transactions, and consolidated Balance Sheet.

4. Insider Trading is a Criminal Offence.5. Takeover process has been made transparent to

protect the interests of minority shareholders.Financial Regulations and CG. Companies Act 1956 has been amended many

times. RBI has also set up an advisory group for Corporate Governance and in 2001, it prescribed certain Corporate Governance norms. It is applicable to all the companies listed or non-listed.

In 1992, Government set up SEBI, a statutory body to regulate all the merchant bank and to safeguard the interest of all the Listed Companies.

Birla Committee report also enabled stock exchange to bring in CG. standards among the listed companies.

All the companies with a minimum paid up capital of the Rs. 10 crores and net worth of Rs. 25 crores have to comply.

This clause covers, Composition of Board, constitution of Audit Commitment and it’s role, Remuneration of Directors, Board procedures, Management Discussions and Analysis report.

-------------------------------------------------------------------- Share holders information, Nominee Directors

and their independence, and the code of conduct for all the Board Members and Senior Members.

C.I.I. also produced a document “Corporate Governance – A desirable Code to create corporate wealth and distribute it among all their stake holders.

Factories Act 1948 and its various amendments. The primary aim of the act was to ensure welfare of workers not only in their working conditions in factories but also their employment benefits. Various amendments included environmental protection, and 29 categories of industries which cause physical impairment to the workers and pollute environment.

Hazardous waste Management Laws of 1998, 1999, 2000 etc.

Hazardous waste Management Laws of export or import of hazardous material.

6. Concept of CSRMeaning and ScopeWorlds Business Council for Sustainable Development defines CSR as continuing commitment by Business to behave ethically and contribute to economic development, while improving the quality of life workforce, their families as well as local community and society at large.CSR is about capacity building for Sustainable livelihoods. It respects cultural differences and funds the business opportunities in building the skills of employees, the community and the Government.

CSR is about Business Giving Back to the Society.

Leading Practitioners of CSR believe that CSR is an integral part of the Wealth Creation Process and it should enhance competitiveness of the business and help the company in times of crisis.

- Henry Ford

CSR is ‘to do as much good as we can, everywhere for everybody concern and incidentally to make money’

CSR is no philanthropy. It is no charity. It is an investment in our collective future

- Dr Manmohan Singh, PM

Wealth created from the society has to be ploughed to the society

- Mahatma Gandhi

Meaning of CSR can be put into the following Propositions:-

1. It is an attempt made by companies to be voluntarily responsible to social and ethical considerations.

2. It is not a legal binding.3. It is a set of obligations to pursue, those policies, to

make those decisions and to follow those lines of action which are desirable in terms of the objectives and values of our society.

4. The set of obligations an organization has to project, enhance and work for the betterment of the society.

5. It is the overall relationship of the corporate with all its stakeholders-customers, employees, communities, owners/investors, Govt. suppliers, competitors and environment.

6. The CSR will cover the economic, legal, ethical and environmental aspects.

7. It is different from society to society, and changes over time.

8. Broadly CSR means to protect, enhance and work for the betterment of society.

Relevance and Reasons1. For the long-term survival of the company it has to

establish a loyal brand customers, repeat customers from the society.

2. Public Expectations – General Public expects that apart from supplying quality goods, fair prices, good services etc, company should not disturb any balance in the society – pollution, crimes and corruption.

3. Goodwill4. Better environment to operate5. Govt. laws and preparations6. Keep the balance – Give and TakeValue Approach to CSR

Business, Ethical Values, and Social Responsibility are not contradictory.An enterprise adopting value-driven management can manage Profit and can also assure the common good.Such an enterprise represents business with a soul. This is also Indian Ethos in Management.

In a such a company each member performs and feels.

In such organizations, employee is cared for along with his family.

An employee is considered a human being performing multiple role.

Such an organization is duly oriented around individual’s autonomy, self-discipline and self-control and caring relationship with others. This Management Concept is ‘Golden Mean’.

Top Management believes in ‘Management by Values – Human and Ethical Values’

Mission statement says “To be a profitable and a successful company while acting in a socially responsible manner”

Long-term objective states – To become the choice of customers who care about health, the natural world and their communities, these values of profits and common good(private good and public good) will definitely enhance our internal growth together with their external growth.

In value-driven Management four aspects are taken into consideration:-

• Fair Competition• Social Responsibility• Consumer Autonomy• Corporate Behaviour etc.

1. Code of Ethics dealing with company policy.2. Ethics Committee – discusses ethical problems, deals

with grey or clouded areas, enforce the codes, reports to the BOD.

3. Teaching Ethics in Development Programs of Managers and Employees.

4. Appointing Ombudsman to investigation decisions from ethical and moral point of view.

5. Social Audit to assess ethical behaviour and action, and on some meaning full social activities of the companies, viz., pollution control, social programs, product performance requirement in terms of social/ethical norms.

6. Annual Report contains Social Responsibility and ethical performance disclosure.

In value-driven corporate ethical concepts with daily action is integrated as follows:-

1. The source of effectiveness of the organization lies in the level of development of consciousness in individuals who run it.

2. Developing the Man in the Manager with “Pure Mind”.

3. According to Swami Vivekananda, much of the work-problem emanates from ‘jealousy’. We should work unselfishly for the greater good.

4. Development of love and discipline5. Human Nature – Body, Mind, Intellect and Soul.

Link these to raise performation at a higher level as per inspiration.

Telco. is one of the organization which follows value based approach. They conduct value workshop with the following essence:-

6. Self Transformation – Linking of the individual Consciousness with Supreme Consciousness.

7. Developing “Satwa” guna through spiritual practices, meditation, prayer etc. ‘Satwa’ is the key to wholesome, ethical and long-term decision making.

8. Central to the program is ‘Mindful’ deep breathing exercise, Meditation and Imagery. This purifies mind and elevate consciousness.

Follow this affirmation:-I have this Body, Mind, IntellectBut I am not theseI am Soul-Pure Consciousness

Essence“There must be an absence of selfishness in whatever you do. Free your mind from all negative feelings, do not get unduly affected by pain, and achieve congruence through Words and Action”

- Mr. N. Vaghul, Chairman ICICI

Place of CSR in the interconnected scheme of Business Ethics:-

CSR – Giving back to societyEthical – Following Morales acceptable to stake holdersLegal – Abiding by the law of the LandEconomic – Maximize long-term stakeholders values

7. CSR with in organizationIn recent years many organizations have established separate departments to document the best practices of CSR and integrate them into the Organizational Fabric. They are investing huge amounts in creating Special Foundation for the implementation of these practices with a view to make a difference in the life of people around them. They have also drafted special policies to ensure better working conditions and promoting family welfare of the work forceTata Group of Companies, G.E Foundation, Infosys, TVS Group, Cadbury India Ltd, Sundaram Finance, have evolved new approaches to CSR.

Workers should be treated as human beings and not just a worker and Dignity of worker should be preserved.

Workers should be treated as first customer and a human being.

Safe, friendly and healthy work environment and adequate job security should be offered.

Within the organization CSR cultivates a sense of trust and loyalty amongst the employees. Also it offers a soothing divergence from the monotonous work place routine and gives them a sense of satisfaction and fulfillment.

CSR and Labour Relations, Exploitation and Harassment

It be equal opportunity employer, equal pay for equal work.

On recruitment, professional ability should be given first priority.

Business should uphold the freedom of association and the effective recognition of the right to collective bargaining.

It should eliminate all forms of forced and compulsory Labour.

Effective abolition of Child Labour. Elimination in discrimination in respect of

employment and occupation. Encourage whistle blowing. Firing or dismissal should be done for a just

cause.

Concerned employee should be given a reasonable and fair chance to explain his case and plead it.

Harmful effect of dismissal should be mitigated as far as possible.

It is the Corporate Responsibility to ensure that the following unethical practices are not resorted to in the organization:-I.Discrimination between genders, due to origin, disablement, pay, promotion, etc., while employing or while in employment.II.There should not be any sexual harassment.

To build a good relationship, workers and their representatives must be listened to and tackled amicably.

Try to upgrade the skills. Push the practice of ergonomics in practice.

Perquisites and Remuneration should be just and according to the performance.They should be able to compensate the rising Cost of Living, and offer them a decent family life.

8. CSR and the SocietyRole and Responsibility of the Local Community

in BusinessAs per the definition of CSR, it is ‘Business giving back to the society’. Therefore society should take positive/ proactive role in the process of development to be initiated by the corporates. Through their representatives or local NGOs working in the area, they should identify the immediate and the future needs of the society and distinguish between the role of Government and the corporates. These roles have to supplementary and not complimentary. The role areas could be in the fields of health, education, environment etc. Having done this there should be a monitoring Community jointly of NGO, representatives of Community and Corporates.

The business can fulfill the Social Responsibilities through the following measures:-

1. Make the decisions to commit to Ethics.2. Recognize that Business is role model by

definition, by action and by its values.3. Assume the responsibility to instill ethical

behaviour in the entire business structure.4. Articulate values.5. Train Staff.6. Encourage Open Communication.7. Be Consistent.8. Abide by the Laws of the Land.

Interventions of Business to fulfill Social Responsibility

Role of NGOs and Internal Agency1. They assist corporates to become humane and

prevent dehumanization.2. They serve as a best means of human communication.3. They also serve as an effective agency for social

control of human behaviour.4. They exert great influence on the Morale of

Employee’s and other stake holders.5. They serve as a watchdog. 6. They galvanize workers, concerned citizens and

environment activitists to force factories not to resort to environmental pollution through disposal of toxic wastes etc.

7. Also they can be behind workers to take legal action against any violation by the company.

8. They can resort to protest, rallies, public meetings, etc. to gather mass support.

9. These days they use websites for public awareness.

Integrating CSR into Business1. Corporates should first believe that their

responsibility is to their customers who use their product and services in fully meeting their needs, desires and expectations.

2. Everything they do must be of high quality.3. They must try to reduce costs.4. Customer’s orders must be serviced promptly and

accurately.

5. Suppliers and distributors must have an opportunity to make a fair profit.

6. Employees must be considered as human beings, and corporates must respect their dignity and recognize their merit.

7. They must practice the ethics of care perspective, which is characterized by a sense of connection to others, a life of affection and caring for others.

8. Corporates should feel that they are responsible to the community they live, and to the world community in general.

9. They must encourage and promote civic improvement, better health and education.

10. They must believe in “Sewabhav”.11. Instead of “What I can get”, they must believe in “What

I can give”.12. Stress on duties rather than rights.13. Corporates must follow “Other Oriented” approach.

CSR and Sustainable DevelopmentIn the Context of Developing Societies CSR is about capacity

building for Sustainable Development. Integrating Sustainable Development in Corporate

Strategy improves all Corporate performance. It creates positive image and goodwill among the

public, earns a special respect among peers, customers, Government agencies, investors and media. All of this go a long way in promoting long-term shareholder value and Sustainable Development.

It also creates a sense of loyalty and trust among employees.

It also serve as a soothing diversion from the mundane workplace routine and give workers a feeling of self satisfaction and a meaning to their lives.

Infosys, Wipro, Tata Steel, Dr. Reddy’s Lab, Polaris have integrated philosophy in their corporate culture and earned a big brand name.

In Wada, of Thane district, Mumbai, Coca Cola has a bottling plant. It uses rain harvesting techniques to recharge ground water and supply water to people in summer. They have also established water supply system in another village.

Some of the corporations, train local people in IT applications and employ them later on.

CSR Measures and indicators – Triple Bottom Line

1. The three basic measures of CSR are:- Sustainability Accountability TransparencySustainability – There must be clear linkage between

use of resources and their regeneration. It serves he needs of the society – both present and future.

Accountability – It lies in an organization assuming responsibility for the effect of its action that have impacted the external environment adversely. This will call for the organization compensating for the cost of damages caused by the actions of the organization, and creating the benefits that exceed the costs to all affected stake holders.

Transparency - For Transparency, Organizations must report the impact of its action to all stake holders truthfully without misleading them in any manner.

The Triple Bottline for CSR performance of a corporation is as follows:-

Social-People Environment -Planet Economic -ProfitCaux Round Table(CRT) in 1986 laid the following

principles to measure performance for corporates in CSR

a) Social Impact of Company’s operations on the local Community.

b) Respect for rules and ethics.c) Promote Judicious liberation of Trade.

d) Respect for the Environment.e) Avoidance of illicit Operations, including bribery,

money laundering etc.2. Many organizations like Organization for Economic

Co-operation and Development (OECD), U N Global Compact, Asia Pacific Economic Co-operation (APEC), have specified many Business Code of Conduct and Social accountability to enable a corporate to develop, maintain, enforce policies and procedure in order to manage those issues which it can influence and control. They also cover standards and monitoring program for child labour, forced labour, disciplinary practices, non-discrimination, wages and benefits, working hours, health and safety, freedom of association, collective bargaining and management system.

3. Also 275 Religious organizations all over the world, formulated Principles of Global Corporate Responsibilities, to use their investments for social change. The Principles cover a wide range of CSR issues including workplace, community, environment, human rights, ethics, suppliers and consumers.

TRIPLE BOTTOM LINE• THREE PILLARS OF TBL are People, Planet, and

Profit.• TBL accounting means expanding the

traditional reporting framework to take into consideration ecological and social aspects in addition to financial performance.

• It measures organizational success in terms of economical, social and environmental concerns.

CSR Initiatives by CorporatesITC Ltd• ITC LTD has made farmer development a vital part of its business

strategy and made considerable efforts to improve the livelihood of rural communities:

SOCIAL• ITCs businesses generate livelihood for over 5 million Indians.• ITC s e- chaupal has benefitted over 4 million farmer families.• ITC s watershed development initiatives brings water to nearly35000

ha. Of land• ITCs social and farm forestry program has greened over 80000 ha of

land and created nearly 35 million persondays of employment• Community Dev. Program included womens empowerment,

supplementary education , and animal husbandry programmes.

ENVIRONMENT• ITC has been carbon positive, water positive and

has close to 100 percent solid waste recycling• All Environment, health and Safety Mangement

Systems confirm to the best international standards.

ITC has also made significant contributions to the promotion of Indian classical music, theatre, art, cuisine, thereby preserving National Heritage.

Thus ITC has been able to achieve the twin goals of shareholder value enhancement and societal value creation.

CADBURY India Ltd1. Commitment to environment• Their Bangalore factory has constructed a check

dam to store rainwater. It acts as a major groundwater replinishing source for borewells in factories and surrounding communities.

• Also it acts as a stop over for migratory birds.• Pioneered development of cocoa cultivation,

resulting in cocoa increased productivity and benefitted 1000s of farmers.

• Installed 28 solar-power street lights.

2. Growing Community Value• Tied up with an NGO-Akshay Patra that

produces nutritious midday meals to cover over 10 lakh schoolchildren each day.

• For tsunami affected villages in Pondicherry, Tamil Nadu, they committed funds and resources to Sri Aurobindo Rural Village Action Movement (SARVAM).

• Started Project ‘Sahyog’ for improvig community health through education and primary health care at Baddi (H.P.).

SAIL (Steel Authority of India Ltd)• Established 123 schools educating 80000 children.• Provided improved sources of drinking water to

more than 2 million people in rural area• Supported 20 state-of-the-art hospitals.• Collaborated with national AIDS Control Organisation

to launch Aids awareness and control programs.• Inititated many tribal welfare programs.• Free boarding and lodging to nearly 800 SC/ST

children. • Taking up regular afforestation.Thus making a meaningful difference in people’s life.

IT (Information Technology)

• TCS and WIPRO have developed software programs for teachers and children.

• TCS have started adult literacy programme software.

• TCS and WIPRO work closely with gov. to deploy computer based functional literacy programme.