redefining business ethics

8/2/2019 Redefining Business Ethics

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REDEFINING BUSINESS ETHICS AND CORPORATE

GOVERNANCE : NEED OFTHE HOUR



WHY BOTHER WITH INTEGRITY AND

ETHICS IN THE MANAGEMENT OF

YOUR CORPORATION AND YOUR

COUNTRY?

Ethics as a whole a part of the global agenda.

The world is going through not just

economic crisis but also ethical

crisis.



ETHICS AND FINANCE

Finance would be impossible withoutethics.

The very act of placing our assets in the hands of other people requireimmense trust.

Financial scandals shock us precisely because they involve people and institutions that we should be able to

trust.



WHY DO WE NEED ETHICS

DEPENDENCE ON OTHERS FOR MANAGEMENT OF FINANCIAL NEEDS

CONTRACTUALIZATION NOT POSSIBLE

PARADOXICAL SITUATION:-

The ever increasing need for getting things done by others on the one hand, and the description of human nature that emphasizes selfish behaviour on the other.



HUMAN DILEMMA

A Human is a MORAL and ETHICALbeing by nature.

At the same time Humans are also ECONOMIC BEINGS:-Steep economic demands and the lure of a materialistic,consumptive society might cause people to become more insatiable and less rational.



INTERNAL COMPETITION

BETWEEN MORAL AND

ECONOMIC SELVES

Thus they tend to make expedient choices

which might be convenient and practical though not necessarily moral, at the same time rationalising that “ everyone else is

doing it, so what‟s wrong with it” or “takethe risk and just don‟t get caught”.

AND THAT‟S HOW THE ROT STARTS.



Sir Walter Scott said “Oh what a tangled webwe weave when first we practice to deceive.For every crook there are at least ten corporate deceivers.”



HOW DOES THE WEB

OPERATE?Deceit demands more deceit until eventually the pile collapses under the weight of its own incredibility.

As WARREN BUFFET puts it,

“Once a company moves earnings from one

period to another operating shortfalls that occur thereafter require it to engage in further accounting manoeuvres that must be even more heroic.” THESE CAN TURN FUDGING INTO FRAUD.



ENRON-THE MOST

OUTSTANDING EXAMPLE

Investors loved it enough to value the company at $28 billion in October 2001, less than two months before it

skidded into bankruptcy.

It was not that Enron lacked substance, but in the end the hype got the better of it.

To disguise its liabilities, it wrapped them up in private

partnerships and took them off its balance sheets.

To satisfy the wishful thinkers insatiable demands, it brought earnings forward by selling shares in other off

balance sheet partnerships, and counting the proceeds

as revenues.



COLLAPSE OF ENRON

MICHAEL JENSEN says,

“My hypothesis is that they

overreached to try to become all things to everybody, to become the

world‟s greatest company. No one

can grow that fast.”



ENRON OF INDIA-SATYAM

Classic example of how a

company can dig its own

grave.

How auditors who see no evil , regulators

who hear no evil and

credit rating agencies

who speak no evil are

corroding India.



Contd….

Until now a much-touted corporate success story, suggests that capitalism in

India even if led by Entrepreneurial

firms like SATYAM, is no lessvulnerable to corporate fraud, deception

and deceit.

The SATYAM SAGA raises seriousquestions about the key parts of India’s

financial ecosystem



Satyam fraud: Misplaced faith in

self-regulation RAMALINGA RAJU,THE DISGRACED

CHAIRMAN OF SATYAM COMPUTER SERVICES ,HAS BEEN CONSIDERED AS ONE OF THE PIONEERS OF INDIAN INFORMATION TECHNOLOGY BOOM.

SATYAM AS THE 4 th LARGEST SOFTWARE SERVICES COMPANY OF INDIA

IN YEAR 2007 ,RAJU BECAME ERNST &YOUNG ENTREPNEUR OF THE YEAR

IN 2008 ,HIS COMPANY WON THE GOLDEN PEACOCK AWARD FOR EXCELLENCE IN CORPORATE GOVERNANCE.



CONT.. TRUE TO THE PARADOX OF LIFE ,IT IS THE SAME

RAJU WHO WROTE LETTER ON 7 th JAN TO THE BOARD OF SATYAM ,ADMITTING THE FUDGING OFTHE COMPANY BALANCE SHEET .

HIS APPREHENSION ABOUT RIDING A “ TIGER ,NOT

KNOWING HOW TO GET OFF IT WITHOUT BEING EATEN”

ACTUALLY THE WHOLE EPISODE STARTED FROM HIS DECISION TO DIVERSIFY INTO REALTY AND INFRASTRUCTURE TO DE-RISK ITSELF.

IT DECIDED TO ACQUIRE STAKES IN TWOCOMPANIES ie MAYTAS PROPERTIES AND MAYTAS

INFRA.



FROM ICON TO I.CON

Flawless code for the perfect fraud- B. Ramalinga Raju wrote a code that was simple, resolved the

conflict for being seen as one of the biggest without being one and

delivered riches. It was perfect because nobody got a whiff of the

scandal till he confessed to it.

By his own admission, for seven long years- that is, 28 quarters-

Raju inflated income, profits and cash reserves.

The virus that he authored infected the mainframe of India’s

fourth largest software company and exposed India to speculation

and suspicion of multiple fiddles.



Contd….

Every sentry leading to the ethical mount called corporate governance was caught napping.

The algorithm of this massive fraud has wrecked public faith in the institution of internal auditors,

external auditors and independent directors.



Contd….

Regulators ranging from the Registrar of companies (ROC) , the SEBI and the RBI were caught asleep at the wheel.

Very simply, there were no whistle blowers and nobody called the bluff.

SHERLOCK HOLMES would have been tempted to call it the curious case of

the night the dog didn‟t bark.



Contd….

The little that is known on the scam is thanks to the

confession of Raju and later Vadalamani Srinivas, theCFO of the Satyam computers.

Worse, Raju managed to orchestrate the fraud even as

the diluted his holding from 26.5% in 2001 to a mere

3.6% in 2009. A minority shareholder can wreck such havoc is in

itself a testimonial to the pathetic state of corporate

governance.

Even the most charitable explanation of the scam- that

he cooked his books, ramped up share prices and used

the profit from dilution to further inflate profits reveals

the appalling systemic failure.



In short

that is fraud, forgery , cheating

and insider trading all in onelong sequence.



Bigger Question And one to be addressed more urgently – is :

Do we have the kind of business environment

and business culture that actually promotes

good corporate governance and demonstratesit?



MORAL AND ECONOMIC

CONFLICTS

The AMERICAN HERITAGE DICTIONARY

defines the term “ethics” as “the study of general

nature of morals and of specific choices to be madeby a person”

and

Business ethics as that set of reasons which govern

the conduct of a business. Being ethical requires

acting with an awareness of how products or

services of an organization can affect the society

as a whole.



• Society bestows upon businesses the

right to own and use land, labourand natural resources.

•In return, society has the right toexpect these organizations to honour

existing rights, limit their activities

within boundaries of justice andbring about overall development of

the society.



NEED TO REDEFINE CORPORATE

GOVERNANCECorporates at the centre stage of social

development because of globalization of

economies.

No choice between profits and ethics but profits in

an ethical manner – this is Corporate

Governance.

Corporate Governance is about promoting corporate

fairness, transparency and accountability.



A SEBI report defines Corporate Governance as

“The acceptance by Management of the

inalienable rights of shareholders as the true

owners of the corporation and of their own role

as trustees on behalf of the shareholders. It is

about commitment to values, about ethical

business conduct and about making a distinction

between personal and corporate funds in the

management.



HOW TO ENCOURAGE

CORPORATE HONESTY The dialogue between chief executives and wall

street must change. Bosses need to put an end to

the expectations game by simply saying “no” to

what has been termed “earnings guidance”.

The recession in America gives companies an

excellent opportunity to reset the conversation

on a number of levels.



ENCOURAGING WHISTLE

BLOWERS

People who draw attention to suspected corporate malpractices.Regrettably, whistle blower today are

treated as pariahs.

Unless that message is conveyed continually companies risk finding that

it is too late to turn honest.



ROLE OF INDEPENDENCE DIRECTORS

As well said by OMKAR GOSWAMI, the director

on the board of Infosys Technologies:-Good independent directors are like watch dogs.

Mostly, they will be collegial and work in tandem

with management to grow long term shareholdervalue. But when management contemplates something, which may be inimical to the value or reputation of the company, or hurts the rights of

minority shareholders, it is their responsibility to bark. No definition of independence matters if, at the end of the day, you cannot stand up to the management and be counted.



Contd….

The Satyam episode is a lesson in more ways

than one. It shows that management can put

forward questionable transactions and expect

Boards to give their assent- a fact that should make Independent Directors be even more

vigilant in discharging their fiduciary

responsibilities.



PROFESSIONAL COMMITMENT

OF THE MODERN MANAGER

Being a decision maker is like, being a surgeon or a soldier who is loyal to the ethics of his profession, and not just concerned about

personal gain.

An ethical manager works for the organization

that employs him and is remunerated not just by his own gain, but by the fact that the organization grows and all the stakeholders are benefited.



Need for rotation of Audit firms as well

as members on Board of Directors. Former SEBI Chairman, M.DAMODARAN Stresses on the fact

that:-

The quarterly system of reporting puts undue pressure on the management to deliver members. This could lead

to a tendency to try and do financial engineering. TheUK has a six-month reporting system, the US three-month reporting system. It’s been a little premature for

India to move to a quarterly system.

There is a need for ROTATION of audit firms as well as of routinely changing members on the board of directors. If auditors and directors stay associated with one company for too long, thequestioning mind dulls.



GOOD LEADERSHIP BY

EXAMPLE

As well said by BILL LYTTON, who worked for

General Electric:-

“ Sometimes you want to be able to cite a

good failure, somebody who didn’t make the

numbers, but for all the right reasons.”

LYTTON said the key to avoiding ethical

disaster was good leadership by example.



Contd….

Management leaders must not only lead by

example but also institutionalize the high

level of integrity and ethics which they champion, so that such positive values are

not merely confined to a handful of people

within the organization but will be pervasive throughout all levels and all units

at the workplace.



JRD TATA said, “You have to adopt

yourself to their (employees) ways and deal accordingly to draw out the best in

each man. At times it involves

suppressing yourself. It is painful but necessary. To be a leader, you have got

to lead human beings with affections.”

To him, ethics included Gratitude, Loyalty and Affection.



RULES AND REGULATIONS-ONLY A

PATCHWORK

In the near term as an outcome from investigations /analysis government will come up with more rules,

regulations and compliance procedures. These are more

like patchwork and will address some of the

outcomes of this fraud and add more overheads to the system (similar to Sarbanes Oxley regulations in US).

Putting more regulations will not address the root cause of this issue. This whole episode will keep repeating itself time and again till we reach a stage where our rules and regulations become more of an impediment to our businesses instead of enabling them and defining

boundaries/acceptable norms.



Tata Sons Ltd. Director Jamshed Irani says

that „Corporate Governance is a culturethat cannot be mandated, but has to be built of gradually with strong link between the board and the management of the

company‟.

We should change the way we look at

Governance and also our mindset.



LESSONS TO BE LEARNED



NEW SCIENCE OF HUMAN

RELATIONSHIP

JAMES H QUIGLEY, CEO of Deloitte and Touche, points out that,

IQ-INTELLIGENCE QOTIENT which has been so highlylauded by many employers, should now be replaced with a new

IQ-INTEGRITY QUOTIENT.

DANIEL GOLEMAN, author of New York Times bestseller Emotional Intelligence and Social Intelligence points out that

the importance of high EMOTIONAL QUOTIENT-EQ for corporate leaders is right, but what would now further differentiate one emotionally mature talent from the other would be the other EQ-ETHICAL QUOTIENT.

IT’S NEVER TOO LATE TO LEARN FROM



IT’S NEVER TOO LATE TO LEARN FROM

OUR PHILOSOPHICAL GUIDES

MAHATMA GANDHI’S QUESTION

Economics that hurts the moral

well-being of an individual or a

nation is immoral and, therefore,

sinful…True economics never

militates against the highest ethical

standard, just as all true ethics to be worth its name must at the same

time be also good economics.



Contd….

SWAMI VIVEKANANDA ON

ETHICS

The senses say, “myself first”.

Ethics says, “I must hold

myself last”.

Ethics itself is not the end, but

the means to the end . If theend is not there, why should we

be ethical?



AN ACID TEST

If character is what you do when no

one is looking, then business ethics is

how executives and other employees behave when customers, partners and

regulators aren’t paying close

attention - or when investors and bosses demand results at all cost.

IT IS HIGH TIME WE CHANGE OURSELVES



IT IS HIGH TIME WE CHANGE OURSELVES

Just like there are rules and regulations for the

society, each of us need to operate under the boundaries of personal ethics and values.

We as a society need to encourage moral valueslike honesty, integrity ethics etc.

The value system needs to be imbibed into the future generations through our education systems and by parents setting an example to

their children.While this may sound very philosophical it is

essential that we fix this as failure of personal ethics and values is root cause of this issue.



We as individuals need

to take ownership and

drive this change bothin us and in societies.



OUR MOTTO

SATYAMEVA JAYATE

ANANRITHAM-

only the truth prevails

redefining business ethics

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