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BE & CG BULLET POINTS
Business Ethics: An Overview
What is Ethics?
• is a branch of philosophy.
• is a normative science because it is concerned with the norms of human conduct.
• as a science, it must follow the same rigours of logical reasoning as other sciences.
• as a science, involves systemising, defending and recommending concepts of right and wrong
Principles of Professional Ethics
• Impartiality: Objectivity;
• Trustworthiness and honesty;
• Openness: Full Disclosure;
• Confidentiality: Trust;
• Due Diligence: Duty of care;
• Fidelity to professional responsibilities; and
• Avoiding potential or apparent conflict of interest.
Principles of Personal Ethics
1. Concern for the well being of others;
2. Respect for the autonomy of others;
3. Trustworthiness and honesty;
4. Willing compliance to law;
5. Basic justice: being fair;
6. Refusing to take unfair advantage;
7. Benevolence: doing good; and
8. Preventing harm to any creature.
What is Business Ethics?
Business ethics is the application of general ethical ideas to business behaviour.
It is based on the principle of integrity and fairness and concentrates on the benefits to the
stakeholders, both internal and external. Stakeholder includes those individuals and groups without
which the organization does not have an existence. It includes shareholders, creditors, employees,
customers, dealers, vendors, government and the society.
What is not Business Ethics?
1. Ethics is different from religion.
2. Ethics is not synonymous to law.
3. Ethical standards are different from cultural traits.
4. Ethics is different from feelings.
5. Ethics is not a science in the strictest sense of the term.
6. Ethics is not just a collection of values.
Code of Conduct and Ethics for Managers
Managers must observe the following ethical values while performing their duties:
• Responsiveness to public interest
Evolution of Business Ethics over the years
The 1970s saw papers from the academic circle. Businessmen became more concerned with their public
image and addressed ethics more directly.
1974: The first conference held at the University of Kansas.
1975: Business ethics became institutionalized at many levels through writings and conferences.
1979: Three anthologies on business ethics appeared:
(i) Ethical Theory and Business by Tom Beauchamp and Norman Bowie; (ii)Ethical Issues in
Business: A Philosophical Approach by Thomas Donaldson and Patricia Werhane; and (iii) Moral Issues in
Business by Vincent Berry.
1980s: The subject was taught in several universities in the US and Europe. There were also, by this
time, many journals of business ethics, apart from centres and societies established to promote ethical
1982: Richard De George brought out Business Ethics, and Manuel G. Velasquez published his Business
Ethics: Concepts and Cases.
1990: Business ethics as a management discipline was well-established.
Parallel to these academic pursuits, the late 1980s and early 1990s saw increased concern for consumer
rights, quality, safety, price, customer service and environment in Britain.
Simultaneously, with these developments, religion also lent its powerful voice.
Importance and Need for Business Ethics
• A business organization competes in the global market on its own internal strength, in
particular, on the strength of its human resource and on the goodwill of its stakeholders.
• The value-based management and ethics that an organization uses in its governance enables it
to establish productive relationship with its internal customers, and lasting business relationship
with its external customers.
• Real type situations (Tata Steel and Infosys) show that use of ethical practices in business
creates high returns for companies.
Values and Ethics in Business
A value is a view of life and judgement of what is desirable. It is very much part of a person’s personality
and a group’s morale.
Business ethics relates to issues of “what is right” and “what is wrong” while doing business. What
values are to individuals, ethics are to business.
Business ethics operates as a system of values, relating business goals and techniques to specific human
Why should Businesses act Ethically?
The reasons for an organization to be ethical include:
• To protect its own interest,
• To protect the interests of the business community as a whole so that the public will have trust
• To keep its commitment to society to act ethically, and
• To meet stakeholder expectations.
• To prevent harm to the general public,
• To build trust with key stakeholder groups,
• To protect themselves from abuse from unethical employees and competitors,
• To protect their own reputations,
• To protect their own employees, and
• To create an environment in which workers can act in ways consistent with their values.
Norman Vincent Peale’s and Kenneth Blanchard’s suggestions to conduct ethical business.
• Is your decision fair?
• Is it a win-win situation for all?
• Is your decision legal? If it is not legal, it is not ethical.
• The Eleventh Commandment: “Thou shall not be ashamed when found”, meaning when hauled
up for unethical behaviour, if one’s conscience is clear, then there is nothing to be ashamed of.
How Corporations Observe Ethics in Their Organizations?
• Publish in-house codes of ethics to be strictly followed by all their associates.
• Employ people with a reputation for high standards of ethical behaviour at the top levels.
• Incorporate consideration of ethics into performance reviews.
• Give rewards for ethical behaviour.
• SEBI, CII and such other organizations representing corporations issue codes of best practices
and enjoin their members to observe them.
• IIMs and highly rated B-schools give extensive and intensive instruction in business ethics,
corporate social responsibility and corporate governance as part of their curriculum.
• Conduct an Ethics Audit.
Corporate Governance Ethics
• Corporate governance is a set of rules that governs the administration and management of
• Its goalposts are transparency, integrity, full disclosure of financial and non-financial
information, and protection of stakeholders’ interests.
Benefits from Managing Ethics in Workplace
The many benefits that arise from managing ethics in the workplace are:
• Attention to business ethics improves society.
• Ethical practice contributes towards high productivity and strong team work.
• Changing situations require ethical education.
• Ethical practices create strong public image.
• Strong ethical practices act as an insurance.
Characteristics of an Ethical Organization
Mark Pastin provides the following characteristics of ethical organizations:
• At ease while interacting with diverse internal and external stakeholder groups.
• Obsessed with fairness.
• Individual responsibility, with individuals assuming personal responsibility for actions of the
• See their activities in terms of purpose.
Recognizing Ethical Organizations
There are certain characteristics by which we will be able to identify an ethical organization:
• On the basis of corporate excellence
• In relation to the stakeholders
• In relation to corporate governance
Concepts and Theories of Business Ethics
Definition of Ethics
Ethics as a moral and normative science refers to principles that define human behaviour as right, good
and proper. “Morality”, according to philosophers, refers to human conduct and values.
Law and Morality
There is a clear-cut difference between law and morality. In a particular situation, an act that is legal
may not be morally right. For example, it will be legal for an organization running in loss to lay off a few
employees so as to sustain itself. But it is not morally right to do so, because the employees will find it
difficult to find a living.
On the other hand, an action performed can be illegal but morally right. For example, it was illegal to
help Jewish families to hide from the Nazis, but it would have been a morally admirable act.
Law Vs Morality in Organizations
In the organization too, we will find such situations where an act will be morally right and legally wrong
to perform. The strong ethical base of the individual as well as that of the organization helps an
employee overcome such a situation. The law cannot cover the wide variety of possible individual and
group conduct. The law prohibits actions that are against the moral standards of society.
Ethical Theories in Business
Ethics is a normative study, i.e., an investigation that attempts to reach normative conclusions.
Ethical theories in business include:
• Consequentialist normative theory: Normative themes—egoism, utilitarianism, Kantian ethics.
• Non-consequentialist normative theory: Non-consequentialist normative themes—duties, moral
rights, and prima facie principles
Normative Themes : Egoism
• contends that an act is morally right if and only if it best promotes an agent’s long-term interests
• makes use of self-interest as the measuring rod for actions performed
• is equated with an individual’s personal interest but it is equally identified with the interest of
an organization or society
• intends to provide positive consequences to the party’s interest without considering the
consequence to the other parties
• Personal egoism: One should pursue his/her long-term interest and not dictated what others
• Impersonal egoism: Everyone should follow their best long-term interest.
Normative Themes : Stockholder Theory
Expresses business relationship between stock owners and their managers running the day-to-day
business of the company. As per the theory, managers should pursue profit only by all legal, non-
Normative Themes : Stakeholder Theory
This theory argues that a corporate’s success in the marketplace can best be assured by catering to the
interests of all its stakeholders (shareholders, customers, employees, suppliers, management and the
local community). This objective is achieved when corporations adopt policies that ensure an optimal
balance among all stakeholders.
Normative Themes : Social Contract Theory
This is based on the principles of “social contract”, wherein it is assumed that there is an implicit
agreement between the society and any created entity such as a business unit, in which the society
recognizes the existence of a condition that it will serve the interest of the society in certain specified
The proponents were Jeremy Benthan (1748–1832) & John Stuart Mill (1806–1873)
Utilitarian principle: An action is ethically right only if the sum total of utilities produced by that act is
greater than the sum total of utilities produced by any other act that could have been performed in its
Proponent: Immanuel Kant (1724–1804)
This theory introduces an important humanistic dimension to business decisions, which is to
behave in the same way that one would wish to be treated under the same circumstances and
to always treat other people with dignity and respect.
• Stressed that action must be undertaken for duty's sake and not for some other reason.
• Opined that the imperatives of morality are not hypothetical but categorical. The core idea of
this categorical imperative is that an action is right if and only if it will become a universal law of
Gandhian Principles of Trusteeship
Implies that an industrialist or businessman should consider himself to be a trustee of the wealth he
possesses. The trusteeship concept should also be extended to the labour in industry.
The origin of the trusteeship principle can be traced to the concept of non-possession detailed in the
Indian Ethical Traditions
The Hindu scriptures such as the Gita and the Upanishads speak of the performance of right duty, at the
right time in the right manner. The rich Indian tradition has always emphasized the dignity of human life
and the right to live in a respectful manner.
Righteousness as the Way in the Gita
The Bhagawad Gita cites numerous instances of how moral values and ethics can be incorporated into
one's work life. Many of its verses are directly significant for the modern manager who may be confused
about his direction and struggling to find an answer to ethical dilemmas. The Lord reiterates that work
or karma is the driving force of life, and that this work has to be ethical.
Summary of some key ethical theories :
Individual egoism: I should do whatever is in my own interests. This theory applies only to me, Kent
Problems: not much use to anyone else in the world!
Universal egoism: everyone should do whatever is in their own best interests.
Advantages: a certain healthy self-interest seems entirely natural; an organism would be in a sorry state
if it could or would not look after its own interests; the question is whether that is all you look after.
Disadvantages: it does not explain the fact that many people do carry out altruistic or self-sacrificing
acts; many people do defer self-interest in favour of wider interests; seems too narrow.
• Fundamental ethical principle (Principle of Utility): “Act in such a way as to produce the greatest
happiness for the greatest number.”
• Actions are judged good or bad according to the amount of happiness or unhappiness they product.
• Happiness is defined as pleasure (broadly understood), unhappiness is defined as pain.
• Happiness is sometimes called “utility”, unhappiness “disutility”.
• It is assumed that utility can be measured (see details in text).
• Cost-benefit analysis is a version of utilitarianism that takes money to be a measure of utility.
• Outcomes are weighed by their probabilities and utilities; select the outcome that will probably have
the greatest utility for the greatest number.
Act versus Rule Utilitarianism:
Act utilitarianism: each individual act is judged independently according to the Principle of Utility.
(Thus it might be okay to steal the money if it benefited enough people.)
Rule utilitarianism: we make rules (such as “thou shalt not steal”) on the basis that following these
rules can be justified by the Principle of Utility. (On this view, it might not be okay to steal the money.)
Benefits of utilitarianism:
It provides a definite method for solving moral dilemmas that can take into
account conflicting interests.
Problems with utilitarianism:
It is not clear that all values can be measured.
It is not clear that utilities and disutilities add up in a linear fashion.
It may lead to acts (such as embezzling the money) that are, perhaps, simply
wrong in themselves, regardless of their consequences.
The calculation may be biased, so that some people’s costs and benefits may be
Kantian or Deontic Ethics
Based on idea that duty is fundamental; Tittle calls such systems "principle-based"
Studied by Immanuel Kant (1724-1804), but the idea is ancient
Motivation counts as much or more than consequences; compare with criminal code
Kant thought that ethics had to be universal to make sense; hence, this led to his first
Categorical Imperative: act only in such a way that your action could be a universal law. (This
means that stealing, for instance, could not be ethical because if everyone stole it would destroy
the conditions under which stealing would give an advantage.)
It is reason, not feeling, that determines which acts are in accordance with Categorical
Kant placed a high value on individual autonomy, the freedom to make moral choices; this led to
his second Categorical Imperative: "No person should be treated only as a means; but rather as
an end." (This position would, for example, rule out slavery as morally acceptable, since a slave
is by definition a person who is used only as means to an end.)
Advantages of duty ethics:
Gives a powerful and clear framework for stating codes of ethics: e.g., Ten
Commandments, Engineering Code of Ethics are stated as lists of duties.
Forms strong basis for defending human rights.
Impartial: the same rules apply to all persons
Fits well with many religious moral codes, although it does not have to be given a
Weaknesses of duty ethics:
Does not give clear means of choosing between conflicting duties; Kant himself was an
absolutist, which led to some very impractical recommendations. (E.g., you should not
lie even if it might save someone's life.)
Universalizability can be questioned: how do we know that the same rules should apply
to everyone in the same circumstances?
Sometimes consequences matter more than motivation: "Oops, I didn't mean to spill
the milk" doesn't mean that you aren't responsible for cleaning it up.
Many authors doubt that it makes sense to suppose that we can base ethics purely on
Virtue ethics is subtle and more difficult to define.
The word "virtue" is a mistranslation of an ancient Greek word ("arete") that means, roughly,
To be virtuous is to be excellent in some way.
"Excellence" suggests both efficiency and beauty.
Efficiency suggests that an end or purpose must be specified in order to define a virtue.
Beauty suggests that actions and things may have a quality that is independent of their purpose.
One can identify specific virtues, such as (for instance) courage, temperance, generosity,
For Aristotle, the most characteristic virtue for humans was rationality, which does not imply
merely an ability to calculate; rather, it implies an ability to make good judgement calls on the
basis of often incomplete information.
Also for Aristotle, the "golden mean" was important; he felt that many virtues are means
between extremes (for instance, courage would be a mean between rashness and cowardice);
judgement was in important part the ability to find that golden mean in a fluid situation.
Virtue ethics emphasizes the idea that virtues involve an element of skill and training; you have
to learn how to be virtuous (though you may have a certain innate talent, just as with any other
By comparison with virtue ethics, duty ethics says that whether or not your act was right depends
mostly on your intentions and the nature of the act, rather than the result.
Consequentialist theories (such as utilitarianism) say that the result is the main criterion of goodness of
Virtue ethics says that the means/end distinction is artificial (though certainly not meaningless); actions
and their results may often form a whole that is difficult to separate out into parts. What counts is the
excellence of the whole.
The virtue ethicist might respond to the embezzlement problem as follows: sure, I could take the
money, and I might get away with it. But it would be like taking candy from a baby -- easy enough, but a
very unworthy act that would make me a less worthy person. As one student said, if I took the
money, I would know. This would diminish my self-respect and, worse still, might lead me down a
slippery slope into bad habits.
Virtue ethics are widely used. For instance, the Engineering Code of Ethics (although stated in the form
of a duty ethic) is in fact more like a virtue ethic; it says that the engineer should strive for a certain kind
Basic idea is that we have natural inclinations (which might come from God or biology), and that the
right thing to do is what is natural to us.
Problems are obvious:
Not everyone seems to have same "natural" inclinations.
In humans it is very hard to distinguish the natural from the learned.
There seems to be an is/ought fallacy: why should I do something merely because I have an
instinctive inclination to do it.
Evolutionary ethics: attempts to explain ethical/social/moral behaviour in evolutionary terms; we try to
understand why certain behaviour had an adaptive advantage.
This says that we all (or most of us) have an intuition or consciousness such that we "just know" what is
right and wrong.
There certainly is something we can call intuition, and often it can be very useful; however,
People's intuitions differ; if intuition is all we have to go on, who is to say what is right?
Intuition can sometimes be hard to distinguish from learned expectation, habit, prejudice, or
Concept of rights is very important legally and politically.
Think of a right as something that someone owes you, like a debt. But there is an important distinction:
Negative rights: a right such as free speech or freedom from sexual harrassment; you have the right to
Positive (or claim) right: something that you are owed, such as health care (in Canada!); society has
decided that it owes adequate health care to all persons.
Some rights may be limited and created by agreement, such as the rights you might have if you entered
into a business contract.
Other rights are said to be inalienable, meaning that they cannot be taken away from you. We deem
the basic right to personal liberty to be inalienable (unless you break the law and have to go to jail!);
meaning that even you yourself cannot remove it. (For instance, a contract in which you signed yourself
into slavery would not be recognized by any court in the US, Canada, or the UK, since it would violate an
In simple terms, for every right there is a corresponding duty.
Natural rights: view that some rights we have are "inbuilt," perhaps by God, or perhaps as part of
Social contract rights: says that rights are products of social contracts; and could be different in
Rights theories could clash with utilitarianism, since the latter says that it might be okay to violate a right
for the sake of the greater good. (This happens, for instance, when property is expropriated for public
Societies often have a lot of difficulty deciding what rights its members have, since if I have a certain
right, others may have certain obligations.
The concept of justice is ancient, but very difficult to define. (The ancient Greeks called it "Dike", which
can be interpreted as an abstract principle of balance that must be obeyed even by the gods.)
The concept of justice is similar to rights; you have been dealt with justly if you get what was your right,
what you deserved; except that what you deserved might have been punishment!
The book said "whatever's fair is right." But what is fairness? -- Perhaps just another word for justice!
Some theories of justice:
The simplest justice theory is egalitarianism: everyone gets the same thing. The problem is
that it is not clear if this is actually just,
Desert: justice is getting what you deserve; maybe if it took you ten years to get your degree,
you deserve higher pay than someone who had a month of training.
Need: if I need medical care or basic sustenance, some would argue that it is justice that I get it.
Aristotle's terminology (which is still widely used):
Distributive justice (which is concerned with the fair distribution of goods, especially basic
goods such as land, food, water, etc.).
Retributive justice (which is concerned with punishment of law-breakers).
Compensatory justice (which is concerned with recompensing those who have been injured by
Just procedure: a process (such as a legal process) which can be perceived to be fair, just, and
unbiased; sometimes called "due process".
Just outcome: a decision that is just.
Two main components to notion of justice:
The principle of balance roughly means that we should try to find a way of comparing goods or harms so
that we can define goods that are equivalent, or harms that are equivalent and balance one against the
other. (In terms of harms, "an eye for an eye, a tooth for a tooth"). We should attempt to make the
books balance; on some religious views, the books just will be made to balance whether we like it or
not! It is often difficult to find equivalents; also, in some cases, there is no way of assessing penalties or
rewards that are truly in proportion to what a person did. (E.g., there is no penalty a society could hand
out that would balance the evil done by a child-killer.)
The principle of impartiality roughly means that decisions about deserts should be made by procedures
that are applied in the same way to all persons who differ only in ways that are not relevant to the case
at hand. For instance, a person's race, religion, or gender should make no difference as to what they are
paid to do a certain job, whereas the amount of training or experience they have had (things that
arerelevant to the performative requirements of the job) could justly make a difference.
Ethics of Consumer Protection
Hidden Taxation on Society
Dr Estes’ contention was that the profit and loss statements revealed only the costs companies had
internalized and not the uncompensated costs to society, namely, the external diseconomies. For the
persons affected, these represented “coerced assessments”, a form of hidden taxation.
A North American Advocacy Group, The Stakeholder Alliance, is pressing corporations to become fully
accountable to their stakeholders. The alliance has come out with the Sunshine Standards with the
objective that corporations must provide information that stakeholders need in order to make rational,
informed decisions in a free market system, and to protect themselves from the negative consequences
of corporate actions. Disclosure must be complete, accurate, timely, objective, understandable and
Consumer Protection refers to the steps necessary to be taken or measures required to be accepted to
protect consumers from business malpractices.
Parties to Consumer Protection
a. Consumers: Should know their rights and exercise them.
b. Businessmen: Producers, distributors, dealers, wholesalers as well as retailers should pay due
attention to consumer rights in their own interest, by ensuring supply of quality goods and
services at reasonable prices.
c. Government: The government should enforce various laws and amend existing laws to protect
Ralph Nader’s Contribution to Consumer Protection
• He coined the term “consumer advocate”.
• He called for the accountability of carmakers.
• He worked towards improved environment, healthcare, insurance, pension and disability rights.
• He is the founder of numerous non-profit organizations.
• He educated America’s consumers.
• He started the US Public Interest Group (PIRG).
• He founded the Center for Study of Responsive Law, Center for Auto Safety, the Disability Rights
Center, the Pension Rights Center, the Project for Corporate Responsibility, and the Clean Water
Consumer Duties and Responsibilities
1) Substantiate the complaint
2) Listen to seller
3) Cooperate with the seller if needed
4) Avoid inconvenience to others
5) Not personalize issues
6) Not lend self to others
7) Be well informed
9) Avoid impulsive buying
10) Buy goods from authorized agents
How are Indian Consumers Exploited?
1) Exorbitant prices of products and services
2) Deceptive selling practices
3) False and misleading advertisements
4) Defective quality, higher prices
5) Sale of hazardous products to ignorant consumers
6) Suppression of material information
7) False product differentiation
8) Producers’/sellers’ collusion
9) Supply of adulterated and substandard products
10) Cheating consumers by giving lesser quantity for the price
11) Dishonoured guarantees and warranties
12) Poor redressal of customers’ genuine grievances
13) Creating a scare out of scarcity
14) Making consumer buy unwanted goods
15) Misleading representation on utility of products
16) Manipulating conditions of delivery
17) Customers pay for numerous intermediaries
18) Fall in prices never passed to consumers
19) Buying unaffordable goods
20) Advertisement cost
21) Counterfeits: These constitute a substantial quantity of goods on store shelves
22) Hoarding and blackmarketing
24) Gifts for products/services
Legal Protection to Indian Consumers
1. Agricultural Products (Grading and Marketing) Act, 1937
2. Industries (Development and Regulation) Act, 1951
3. Prevention of Food Adulteration Act, 1954
4. Essential Commodities Act, 1955
5. The Standards of Weights and Measures Act, 1956
6. Monopolies and Restrictive Trade Practices Act, 1969
7. Prevention of Black-marketing and Maintenance of Essential Supplies Act, 1980
8. Bureau of Indian Standards Act, 1986
9. Consumer Protection Act, 1986
Consumer Protection Act 1986
The Consumer Protection Act (COPRA), 1986, conferred a legal right to the individual consumer to seek
legal redress or recover costs and damages for injury or loans suffered by him/her as a result of faulty,
defective goods and services, bought or secured for valuable consideration.
Rights of Consumers Under COPRA
The SIX RIGHTS of the consumer as enunciated under Section 6 of the COPRA are:
I. The Right to Safety
II. The Right to be Informed
III. The Right to Choose
IV. The Right to be Heard
V. The Right to Seek Redressal
VI. The Right to Consumer Education
Redressal agencies under COPRA
• A Consumer Disputes Redressal Forum known as the District Forum has been established by the
State Government in each district of the State by notification.
• A Consumer Disputes Redressal Commission known as the State Commission has been
established in each state by the State Government by notification.
• A National Consumer Disputes Redressal Commission known as the National Commission
established by the Centre by notification.
Consumer Protection (Amendment) Act 2002
• The District Consumer Redressal Forums can now deal with complaints involving
compensation amount upto Rs 2 million
• For the State Commission the limit is Rs 10 million
• For the National Commission, the limit is more than Rs 10 million.
• Setting up of benches and increase in the number of members in the National and State
• A sitting judge of the High Court is to preside over selection committee when the
president of the State Commission is absent.
• In the absence of the incumbent president of the District Forum, State Commission or
National Commission, the senior member to act as president of the respective bodies.
• Minimum qualifications prescribed for members of all consumer courts.
• For admission of complaints, issue of notices and disposal of complaints a specific time
frame has been prescribed.
• Exclusion of services used for commercial purposes from the purview of consumer
• The court can award punitive damages.
• Any affected party to deposit 50 percent of the amount awarded to the consumer if
appealed against the order of the Forum
• If any person fails to pay compensation, the consumer court can order recovery in the
same manner as arrears of land revenue.
Institutional Arrangements Under Copra
• Consumer protection councils—both as the centre and states
THREE-TIER CONSUMER DISPUTE REDRESSAL SYSTEM
• District forums
• State Consumer Dispute Redressal Commission
• National Commission
Role and Initiatives of Voluntary Organizations
1) Consumer Associations or Councils
2) Consumer Co-operatives
3) Co-ordination at the National Level
Other Initiatives to Promote Consumer Protection
1) National Awards
2) Publicity measures
3) Customer Service Department of RBI
Environmental Preservation: Role of Stakeholders
The stakeholders are:
• The Public,
• The Media,
• Environmental Groups,
• Corporations, and
• The Government
Future Outlook on Environment
Environmentalism in the 21st century can be characterized by three principles that serve as bases for
continued activism and policy formulation.
Public – Private partnerships
Innovative Business Responses to Environmental Regulations
There are several reasons why those managing business are becoming increasingly conscious of
• For management morale
• To cut waste
• Benefits arising from pollution prevention
• Advantages of taking a proactive stance towards environmental regulation
• ‘Green design’ of products
• Production of environment-friendly products, packages and processes
• Savings through pollution prevention measures
• Increased fear of environmental damage
• Coordination with environmental advocacy groups and government regulators
Key Strategies for Industrial Pollution Prevention
1. Systematic waste reduction audit
2. Material balance
3. Economic balance
4. Identifying waste reduction
5. Use of newer, cleaner technologies
6. Life-cycle assessment
Managing Environmental Issues
Reinhardt suggests five different approaches to managing environmental issues
1. Investing in environment friendly processes or products.
2. Managing environmental regulations.
3. Investing in environmental performance improvement, without increasing costs.
4. Combining all the three methods mentioned above to change the basis for competition.
5. Looking at environmental issues from a risk management perspective.
Charter for Voluntary Pollution Control
• The Ministry of Environment and Forests and the country’s industrial sector have entered into a
partnership on voluntary pollution control by releasing a Charter on Corporate Responsibility for
Environmental Protection in New Delhi on 13 March 2003.
The Charter marks a shift from regulatory enforcement of pollution control norms to voluntary
compliance by the industry to significantly enhance the quality of environment.
India’s Environmental Policy
The Environment (Protection) Act, 1986 takes into account the following:
1. Water (Prevention and Control of Pollution) Act, 1974
2. Air (Prevention and Control of Pollution) Act, 1981
3. The Factories’ Amendment Act, 1987
4. The National Environmental Policy 2004
Defining Marketing Ethics
• Marketing ethics as a right or wrong action: Marketing ethics means a standard by
which a marketing action may be judged ‘right’ or ‘wrong’ .
• It can also be defined as how moral standards are applied to marketing decisions,
behaviours and institutions.
• Ethics and law
• Effect of time
• Tacit and explicit codes of ethics
Areas in Marketing Ethics
• In product development
• In pricing
• In placing (distribution)
• In promotions (advertising)
• Keeping information about the stakeholders confidential.
• Follow ethical standards in marketing research/ intelligence.
• In other promotional activities (i.e. excluding advertising)
Ethical Issues in Human Resource Management
Scope of HRM
• Determining human resource needs;
• Attracting potential employees;
• Choosing employees;
• Evaluating performance; and
• Creating a positive work environment.
• Training and development
• Learning organizations
• Performance management
• Team work
Emerging Challenges of HRM
Some of the challenges that confront HR professionals and their roles in organizations and the industrial
a. Globalization of markets and intensification of competition has made employers and employees
conscious of their changing and strategic roles in organizations;
b. Corporate restructuring has become an absolute necessity for organizations;
c. Need for reconciling to multiple work ethos as a result of mergers and acquisitions;
d. Emphasis on total quality management;
e. Changing job profiles and the need for and ability to get adjusted to them;
f. Adoption to changing workforce profile consequent on structural changes;
g. Increasing role of women employees in organizations;
h. Increasing role of women employees in organizations;
i. Increasing use of Information Technology that is altering the very nature of work delivery in
j. Increasing emphasis on knowledge management and the need for acquisition and use of
knowledge to keep pace with the fast changing world.
HR-related Ethical Issues
• Discrimination issues
• Suppression of democratization in the workplace
• Privacy issues
Recruitment and selection
Privacy issues of computerized employee records
• Safety and health
• Performance appraisals
Role of HRM in Creating an Ethical Organization
• The top management should be committed to ethical behaviour.
• They should be the role models to their employees.
• The organization should evolve codes of ethics for its employees and enforce them.
• Ethics committees should be formed with top executives as members to advice on ethical issues.
• Company journals to publish articles on ethical issues and pose hypothetical ethical dilemmas
and discussions on how to resolve these.
• An ethics office with ethics officers to oversee the process and help communicate policy to
• Organize employee ethics training which can play an integral role in ensuring compliance with
the ethics code.
• A disciplinary system to deal with ethical violations promptly and decisively.
Ethical Issues in Financial Management
Financial and Management Accounting
• Financial Accounting is defined as reporting of the financial position and performance of a firm
through financial statements issued to external users on a periodic basis.
• Management or Cost Accounting is the process of identifying, measuring, analysing,
interpreting, and communicating information for the pursuit of an organization's goals.
• Financial management encompasses resource management and finance operations.
• Resource management is the efficient and effective deployment of an organization's resources
such as financial resources, inventory, human skills, production resources, or information
technology when needed.
• Financial operations is providing financial advice and guidance, support of the procurement
process, providing pay support, and providing disbursing support .
Frauds in the Financial Sector
Legal authorities define fraud as a crime that “involves the use of dishonest or deceitful conduct in
order to obtain some unjust advantage over someone else”.
• Financial services sector, i.e., credit card fraud, cheque fraud and other types of identify-related
• Insurance fraud
• Telecommunication-related fraud
• Securities-related fraud
• Computer-related fraud
Types of Bank Frauds
• Unauthorized extension of credit facilities;
• Pledging of spurious goods;
• Hypothecating goods to more than one bank;
• Inflating the value of goods;
• Removing goods with the connivance or negligence of bank employees;
• Pledging of goods belonging to a third party;
• Accepting obsolete and inadequate stocks;
• Frauds in deposit accounts are opening of bogus accounts, forging signatures of introducers, and
collecting through such stolen accounts or forged cheques or bank drafts.
• Frauds are also committed in the area of granting overdraft facility in the current accounts of
• Credit card fraud
Measures against Bank Frauds
• Prevention of Money Laundering Act, 2002
Reporting of Cash and Suspicious Transactions
Types of Reports: Cash Transaction Reports (CTR), Suspicious Transaction Report (STR),
Counterfeit Currency Report (CCR)
Reporting to RBI
Other guidelines are also given under the Act to curb the menace of money laundering
Compliance o Anti-Money Laundering Standards
• The Banking Ombudsman Scheme, 2006
Combating Insurance Fraud
The following measures can be adopted to combat fraud in the insurance sector:
1. Collection of proper evidence
2. Need for regulation
3. Regulation of allied services
4. Need for judicial cooperation
5. Insurers should aim at conviction
6. Need for transparency and fair play
7. Insurers’ coalition
8. Building consumers’ awareness
9. Rewards for whistle-blowers
10. Effective legislation and judicial action
Investors Rights, Privileges, Problems and Protection
Shareholders are the owners of joint-stock, limited liability company and are its principals. By virtue of
their ownership, the principals define the objectives of the company. The management, directly or
indirectly selected by shareholders to pursue such objectives, are the agents. While the principals might
assume that the agents will invariably do their bidding, it is often not so.
Two broad instruments that reduce agency costs and hence, improve ethical corporate governance
• Financial and non-financial disclosures, and
• Independent oversight of management, which consists of two aspects—the first relates to the
role of the independent, statutory auditors and the second to the board of directors of a company.
Rights of Shareholders
A shareholder of a company
1. has a right to obtain copies of the Memorandum of Association, Articles of Association and
certain resolutions and agreements on request on payment of prescribed fees (Section 39);
2. has a right to have the certificate of shares held by him within 3 months of the allotment;
3. has a right to transfer his shares or other interests in the company subject to the manner
provided by the Articles of the Company;
4. has a right to appeal to the Company Law Board if the company refuses or fails to register the
transfer of shares;
5. has the preferential right to purchase shares on a pro-rata basis in case of a further issue of
shares by the Company. Moreover, he/she also has the right of renouncing all or any of the
shares in favour of any other person;
6. has a right to apply to the Company Law Board for the rectification of the register of members;
7. has the right to apply to the Court to have any variation or abrogation to his/her rights set aside
by the Court;
8. has the right to inspect the register and the index of members, annual returns, register of
charges, and register of investments not held by the Company in its own name without any
charge. He/she can also take extracts from any of them;
9. is entitled to receive notices of general meetings and to attend such meetings and vote thereat
either in person or by proxy;
10. is entitled to receive a copy of the statutory report;
11. is entitled to receive copies of the annual report of the directors, annual accounts and auditors’
12. has the right to participate in appointment of auditors and the election of directors at the
annual general meeting of the company;
13. has a right to make an application to the Company Law Board for calling annual general meeting
if the company fails to call such a meeting within the prescribed time limits;
14. can require the directors to convene an extraordinary general meeting by presenting a proper
requisition as per the provisions of the Act and hold such a meeting on refusal;
15. can make an application to the Company Law Board for convening an extraordinary general
meeting of the company where it is impracticable to call such a meeting either by the directors
or by the members themselves;
16. is entitled to inspect and obtain copies of minutes of proceedings of general meetings;
17. has a right to participate in declaration of dividends and receive his/her dividends duly;
18. has a right to demand poll;
19. has a right to apply to the Company Law Board for investigation of the affairs of the Company.
20. has the right to remove a director before the expiry of the term of his/her office;
21. has a right to make an application to the Company Law Board for relief in case of oppression and
22. can make a petition to the High Court for the winding up of the Company under certain
23. has a right to participate in passing of a special resolution that the company be wound up by the
Court or voluntarily; and
24. has a right to participate in the surplus assets of the company, if any, on its winding up.
Views of Various Committees on Shareholders’ Rights
• Working Group on the Companies Act
• CII’s Committee on Corporate Governance
• Kumar Mangalam Birla Committee
Recommendations Relating to Shareholders
Responsibilities of Shareholders
The Naresh Chandra Committee
• The Narayana Murthy Committee
• Dr. J.J. Irani Committee Report on Company Law, 2005
SEBI Guidelines on Rights of a Shareholder
• To receive the share certificates on allotment or transfer as the case may be in due time.
• To receive copies of the abridged Annual Report, the Balance Sheet, the Profit & Loss A/c and
the Auditors’ Report.
• To participate and vote in General Meetings either personally or through proxies.
• To receive dividends in due time once approved in general meetings
• To receive corporate benefits such as rights, bonus etc., once approved.
• To apply to Company Law Board (CLB) to call or direct the Annual General Meeting.
• To inspect the minute books of the General Meetings and to receive copies thereof.
• To proceed against the company by way of civil or criminal proceedings.
• To apply for the winding-up of the Company.
• To receive the residual proceeds.
• To requisition an extra-ordinary General Meeting.
• To demand a poll on any resolution.
• To apply to CLB to investigate the affairs of the company.
• To apply to CLB for relief in cases of oppression and/or mismanagement.
• To remain informed
• To be vigilant
• To participate and vote in general meetings
• To exercise one’s rights on one’s own, or as a group
N.K. Mitra Committee on Investors Protection
1. There is need for a specific Act to protect investor interest. The Act should codify, amend and
consolidate laws and practices for the purpose of protecting investors interest in corporate
2. Establishment of a judicial forum and award of compensation for aggrieved investors;
3. Investor Education and Protection Fund, which is under the Companies Act, should be shifted to
the SEBI Act and be administered by SEBI;
4. SEBI should be the only capital market regulator, clothed with the powers of investigation;
5. The regulator, SEBI, should require all IPO’s to be insured under third party insurance with
differential premium based on the risk study by the insurance company.
6. SEBI Act 1992, to be amended to provide for statutory standing committees on investors
protection, market operation and standard setting; and
7. The Securities Contracts (Regulation) Act, 1956, to be amended to provide for corporatization
and good governance of stock exchanges.
Law Enforcement for Investor Protection
• Stock Exchanges: Grievance redressal mechanism and investor protection find.
• Regulatory Agencies:
Investors’ Grievances and Guidance Division of SEBI
Department of Company Affairs
Department of Economic Affairs
Reserve Bank of India
Consumer Courts and Courts of Law
Grievance Redressal Mechanisms
Apart from SEBI and DCA two other avenues available to the investor to seek redressal of his complaints
1. Complaints with consumers disputes redressal forums
2. Suits in the court of law.
SEBI’s Poor Performance and Suggestions for Improvement
• Poor tackling of price manipulation and insider trading issues
• Poor conviction rate
• Need to enhance its manpower skills
• It should simplify and trim regulations
o It should tone up quality of disclosures
o It should solve issues of IPOs and mutual funds
Handmaid of Ethics: Corporate Social Responsibility
Perspectives of Corporate Social Responsibility
There are three perspectives that prompt corporate social responsibility. These are:
• Business perspective
• Eco-social perspective
• Rights-based perspective
Why Social Responsibility of Business?
Accountability to Society : In a democratic society any kind of enterprise exists for the sake of
Corporations’ Debt to Society : A corporation has to behave as a good citizen. The corporation
has to donate generously towards causes of public welfare and must get itself directly involved
in social welfare programmes.
Definitions of CSR
It is a set of obligations to pursue those policies, to make those decisions, or to follow those lines of
action which are desirable in terms of the objectives and values of our society.
It is the overall relationship of the corporate with all of its stakeholders.
Elements of social responsibility include investment in community outreach, employee relations,
creation and maintenance of employment, environmental stewardship and financial performance.
The classical economic model: Adam Smith believed that public interest was served best by individuals
pursuing their own self-interests.
The socio-economic model: Business is seen as one subsystem among many in a highly interdependent
• It recognizes that companies have stakeholders other than their stockholders.
• Business has an obligation to respond to the needs of all stakeholders while pursuing its profit.
Today’s Corporate Social Responsibility
The corporate social responsibility of an organization today, is a set of obligations with which it has to
protect, enhance, and otherwise work to the betterment of the society in which it functions.
The concept of corporate social performance includes a business organization’s
• configuration of principles of social responsibility
• process of social responsiveness, and
• policies, programmes, and observable outcomes as they relate to the firm’s societal
Implementation of CSR
The systematic implementation of CSR means:
● The adoption of strong organizational values and norms depicting behaviours that are
appropriate towards a variety of stakeholders.
● The continuous generation of intelligence about stakeholder issues, along with positive
responses to these issues.
Theoretical Justification for CSR
Trusteeship Model : It adopts a realistic and descriptive perspective in viewing the current governing
situation of a publicly held corporation, drawing from the continental European conception of the
corporation as a social institution with a corporate personality.
Social entity theory: The social entity conception of the corporation regards the company not as a
private association united by individual property rights, but as a public association constituted through
political and legal processes and as a social entity for pursuing collective goals with public objectives.
The Pluralistic Model: This model supports the idea of multiple interests of stakeholders, rather than
shareholder interest alone. It argues that the corporation should serve and accommodate wider
stakeholder interests in order to make the corporation more efficient and more legitimate.
Models for Implementation of CSR
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Advantages of Corporate Social Responsibility
There are several advantages to corporations when they exhibit a sense of CSR and implement it, such
1. Improved financial performance
2. Enhanced brand image and reputation
3. Increased sales and customer loyalty
4. Increased ability to attract and retain employees
5. Reduced regulatory oversight
6. Innovation and learning
7. Risk management
8. Easier access to capital
9. Reduced operating costs
Understanding Social Responsibility of Business
1) Protecting and promoting stakeholders’ interests
a) to consumers and community
b) social responsibilities of business towards employees
c) to owners and inter-business establishments
2) Promotion of common welfare programmes
4) Good corporate governance
5) Render social service
6) Abiding by rules and regulations
7) Creation of wealth
8) Ensure ecological balance
9) Focus on the human element
10) Improve productivity
11) Sponsor social and charitable causes
12) Supplement state efforts
Steps to Corporate Social Responsibility
The International Chamber of Commerce recommends the following nine steps to attain Corporate
1. Confirm CEO/Board commitment to prioritize responsible business conduct
2. State company purpose and agree on company values
3. Identify key stakeholders
4. Define business principles and policies
5. Establish implementation procedures and management systems
6. Benchmark against selected external codes and standards
7. Set up internal monitoring
8. Use language that everyone can understand
9. Set pragmatic and realistic objectives.
External Standards on CSR
• The Caux Round Table (CRT)
• Organization for Economic Cooperation and Development (OECD)
• United Nations Global Compact
• Asian-Pacific Economic Cooperation (APEC) Business Code of Conduct
• The Global Reporting Initiative (GRI)
• AA1000 Accountability
• Social Accountability 8000
• Principles for Global Corporate Responsibility
• The Global Sullivan Principles
• The Keidanren Charter for Good Corporate Behaviour
India on the Ethical/CSR Matrix
Wider adoption of CSR in Indian companies will be enabled by:
• Provision of tax, duties and custom benefits.
• Inclusion of CSR performance of promoters as a parameter in according fast track clearance to
• Decreased government interventions.
• Depreciation benefits where asset investments are made.
• Development guidelines on estimation of socio-economic impacts.
Future of Indian CSR
There is a clear need for
• Transition from the present compliance centric approach to the new paradigm
• Creation of an enabling environment and an array of support measures.
• Business schools teaching CSR to facilitate this process
• Industry associations to share experiences and reward best practice
• Need to incorporate public policies into the Indian CSR.
• International agencies to share cross-country experience.
Ethical Dilemma, Sources and their Resolutions
What is Ethical Dilemma?
An ethical dilemma is a moral situation in which a choice has to be made between two equally
What is Business Dilemma?
A business dilemma exists when an organizational decision maker faces a choice between two or more
options that impacts on (a) the organization’s profitability and competitiveness, and (b) its stakeholders.
Corporate Dilemma Over Ethics
People in business come across several ethical problems that cause ethical dilemmas. For instance,
• They feel that there is lack of clear linkage between business ethics and financial success;
• They are not clear as to how much they should invest in the business ethics system;
• They are unclear about the right balance between business ethics and the investment required
for the same; and
• The seemingly long gestation periods and the lack of short term gains, also, is an obstacle.
Sources of Ethical Problems
I. Failure of Personal Character
People whose personal values are not desirable may embezzle funds, steal supplies from the company,
pad expense accounts, take unjustified leave, shirk obligations to fellow-workers, take bribes for
favouring suppliers use inside information for their personal benefit and to the detriment of others.
II . Conflict of Personal Values and Organizational Goals:
The company uses methods or pursues goals unacceptable to the manager.
Reported case: George Couto, an employee of Bayer AG, exposed that Bayer AG used to re-label Cipro
and sell it to another pharmaceutical company, Kaiser Permanente, with a different identification
number so that it could claim more money from the Medicaid programme.
III. Organizational Goals Versus Social Values
Activities of a company taken as unethical by the stakeholders, due to changing social scenario or milieu.
Procter and Gamble withdrew its Relytampon promptly when its use was linked statistically to some
deaths and Johnson & Johnson cleared all retail shelves of its Tylenol analgesic within days of the
discovery that some containers have been poisoned.
IV. Personal Beliefs Versus Organizational Practices
Ethical dilemmas in organizations arise when they employ multi-racial and multi-religious employees.
Several organizations are accused of racial discriminations and gender bias in the work place and have
been paying fines of billions of dollars or opting for out-of-court settlements.
V. Production and sale of hazardous but popular products
Where does the ethical burden lie, when business sells products known to be actually or potentially
harmful to society? Is the principle of caveat emptor in mercantile law to be adapted suitably? Should
individual rights and free choice override social costs? Could drunken drivers and carefree smokers
deprive others of their legitimate rights to life and safety? Could free trading in hard drugs, dynamite
and guns be considered ethical? Will the ineffective control ‘Smoking is Injurious to Health’ and that too
given as a ‘Statutory’ warning legitimatize the unethical business?
VI. Other Ethical Challenges
• Price fixing and profiteering due to monopoly, and often by artificially created scarcity.
• Shifting unfair shares to the producer stakeholders and employees.
• Discriminatory wage structure.
• Using up too fast, scarce and irreplenishable industrial resources and raw materials.
• Shifting or locating business at the cost of society.
• Overworking women and children.
Why do Businesses have such a Negative Image?
Competitive pressures, individual greed and differing cultural contexts generate ethical issues for
organizational managers. Further, in almost every organization some people will have the inclination to
behave unethically (the ethical egoist) necessitating systems to ensure that such behaviour is either
stopped or detected (after unethical behaviour occurs) and remedied. Ethics, involves systematizing,
defending, and recommending concepts of right and wrong behaviour.
Why Should Businesses Act Ethically?
There are a number of reasons why businesses should act ethically:
• to meet stakeholder expectations (and protect the former’s reputations),
• to prevent harm to the general public,
• to build trust with key stakeholder groups,
• to protect themselves from abuse from unethical employees and competitors,
• to protect their own employees, and
• to create an environment in which workers can act in ways consistent with their values.
How Corporates are Observing Ethics in Their Organization?
Organizations have started to implement ethical behaviour by the following actions:
• publishing in-house codes of ethics
• employing people with a reputation for high standards of ethical behaviour at the top levels
• starting to incorporate consideration of ethics into performance reviews
• Starting to reward ethical behaviour
• conducting an ethics audit
Code of Personal Ethics for Employees
Most company codes list the following values being expected from their employees:
• Respect confidential information to which you have access.
• Maintain high standard of professional responsibility.
• Avoid being placed in situations involving conflict of interest.
Most company codes list the following values being expected from their employees.
• Act with integrity.
• Do not be biased against anybody or anything.
• Maintain professional relations based on mutual respect for individuals and organizations.
• Be committed to the goals of the organization.
• Do not give up your individual professional ethics.
How to Create an Ethical Working Environment?
• Make the decision to commit to ethics.
• Recognize that you are a role model by definition, by your action, and by your values.
• Assume the responsibility for instilling ethical behaviour.
• Articulate your values.
• Train your staff.
• Encourage open communication.
• Be consistent.
• Abide by the laws of the land.
How do We Establish Ethical Standards?
Think and reflect about yourself, about the management, about the people, and about the relationship
and the values you wish to incorporate.
• Create time for thinking
• Periodically take time off to reflect and consider ‘where I am’, ‘where I have to go’ and ‘how I
am going there’.
Walton’s Six Models of Business Conduct
(i) The Austere Model : It gives almost exclusive emphasis on ownership interest and profit objects
(ii) The Household Model : Following the concept of an extended family, the model emphasizes
employee job, benefits and paternalism.
(iii) The Vendor Model : In this model, consumer interests, tastes and rights dominate the organization.
(iv) The Investment Model : This model focuses on the organization as an entity and thus on long-term
profits and survival. In the name of enlightened self-interest, it gives some recognition to social
investments along with economic ones.
(v) The Civic Model : Its slogan is ‘corporate citizenship’. It goes beyond imposed obligations, accepts
social responsibility and makes a positive commitment to social needs.
(vi) The Creative Model : This model encourages the organization to become a creative instrument,
serving the cause of an advanced civilization with a better quality of life. The employees perform as
artists, building their own creative ideas into actions, resulting in new contributions not originally
The above six models may be thought of as points on a continuum from low to high social responsibility.
Employees become proud of performance, and develop a sense of belonging and creativity. Regardless
of the model adopted by an organization, one of its most important jobs is to establish and blend its
value together so that they become a consistent, effective system that is known and accepted by the fair
primary claimant groups – investors, employees, customers and society, including the government. The
system must be strong enough to withstand changes by partisan pressure groups, but flexible to move
with the changing society.
Ask Three Questions
To resolve questions that create a dilemma, ask three questions
• Utility: Do the benefits exceed the cost (Share Holder)?
• Rights: Do they respect human rights (Society)?
• Justice: Does it distribute benefits and burdens evenly (Employees)?
How to Resolve Ethical Dilemmas?
Two basic approaches are possible in resolving ethical dilemmas: deontological and teleological
Deontological (action-oriented) approach: An ethical standard consistent with the fact that it is
performed by a rational and free person. These are inalienable rights of human beings and reflect the
“characteristic and defining features of our nature”. These fundamental moral rights are inherent in our
nature and are universally recognized.
Teleological (results-oriented) ethics: The moral character of actions depends on the simple, practical
matter of the extent to which actions actually help or hurt people. Actions that produce more benefits
than harms are “right”; those that don’t are “wrong”.
Center for Ethics and Business offers “a brief, three-step strategy” in which both the deontological and
teleological approaches converge
• STEP 1: Analyse the consequences
• STEP 2: Analyse the actions
• STEP 3: Make a decision
Ethical Decision Making in Business
Ethical Models that Guide decision Making
1. Rights Theories: These were advocated by Immanuel Kant and Locke and based on the view that
ethical decisions should protect the legal and moral rights that an individual is entitled to.
2. Justice Theories: These were originally advocated by Greek philosophers and more recently by
Rawl, and is based on the view that ethical decisions should result in a situation where all
human beings are treated equally, and in case some are treated unequally, it must be based on
some defensible reasons.
3. Utilitarianism: Advocated by Adam Smith, David Ricardo, Jeremy Benthem and John Stuart Mill,
this theory employs a teleological approach to ethics and asserts that behaviour or actions
should be evaluated in terms of their consequences.
4. The Virtue Approach: It advocates that ethical actions should be consistent with certain morally
acceptable virtues that would pave the way for full development of humanity.
5. The Common Good Approach: It underlines the societal view that life in a community is good in
itself and that it is every person’s moral responsibility not only to contribute, but also to enrich
Ethical Decision Making with Cross-holder Conflicts and Competition
Barry proposed the following decision making rules regarding cases of conflicts and mixed effects:
• Choose the more important obligation between two or more conflicting obligations
• Choose an action of higher ideal when two or more ideals conflict or when ideals conflict with
• Choose the action that produces the greater good, or the lesser harm, when the effects are
Kohlberg’s Model of Cognitive Moral Development
Kolberg’s six stage model of cognitive development explains why people make different decisions in
similar ethical situations.
1. The stage of punishment and obedience
2. The stage of individual instrumental purpose and exchange
3. The stage of mutual interpersonal expectations, relationships and conformity
4. The stage of social system and conscience maintenance
5. The stage of prior rights, social contract or utility
6. The stage of universal ethical principles
Influences on Ethical Decision Making
There are three major influences that have an impact on an employee’s decision making in
business—his personal moral standards, his workplace ethics and culture, and the nature of the
Personal Values and Ethical Decision Making
For an individual to be considered as an ethical decision maker, he needs to build and develop
certain values. The Josephson Institute of Ethics proposed the following Six Pillars of Character:
5. Caring and
Corporate Values and Ethical Decision Making
A corporate culture can be defined as “a set of values, beliefs, goals, norms and ways of solving
problems” that an organization’s employees share and live up with in their work environment. It
involves certain prescriptions of behaviour the organization’s employees are expected to follow.
A Framework of Ethical Decision Making
Michael Josephson has constructed the following components of good choices:
1. Take Choices Seriously
2. Good Decisions are both Ethical and Effective
3. Discernment and Discipline
The Process of Making Good Ethical Decisions
The process one has to follow to make good ethical decisions is:
1.Recognize and identify the kind of ethical issue you need to resolve : Recognize the ethical issue,
seek answers to questions such as the nature of the issue, the conflict it has raised and how the
decision would impact the larger community.
2. Pause and Think : Pause for sometime on the ethical issue; think ahead,reflect on the
consequences that are likely to follow.
3. Make Sure of Your Goals : Be clear on goals, both short-term and long-term, weigh options
4. Get Your Facts Right
• Gather all facts concerning the issue
• Verify the uncertain facts
• Get additional information
5. Evaluate choices from Different Ethical Perspectives
• Make a list of options that attempts to accomplish the goal.
• Test each option against various ethical perspectives such as rights, justice, virtue or common
• Find out which option will produce the most good and do the least harm to others.
6. Consider the Consequences
• Ensure that there is no unethical option
• See that your option is consistent with all core ethical values
• Analyze the possible consequences of each of the options for each stakeholder
• Ensure that the end result causes more good than any harm
• Identify the stakeholders who are likely to be impacted by the decision
• Find out what important stakes individuals and groups have, in the outcome
• Find out whether some individuals have a greater stake because they have a special need or
because we have special obligations to them.
7. Make a Decision
Prepare a criteria derived from the facts gathered.
Create a decision criterion including the financial outcome, if any.
Rate the appropriate action against your list of criteria.
Talk to a person whose judgment you respect.
8. Act, then Reflect on the Decision Later
• Implement the decision
• Evaluate the consequences.
Globalization and Business Ethics
Growth of Global Corporations
1. International business has become an important economic force during the second half of the
2. With more countries reducing trade barriers, the number of firms affected by international
competition is increasing every day.
3. Many MNCs have subsidiaries, affiliates and joint venture partners in most of the developing
Factors Facilitating Globalization
Many factors have come to play a facilitating role in recent times to promote and foster
international trade. These are:
1. Falling trade barriers
2. Political reforms have opened-up new frontiers
3. More developing nations joining the bandwagon of global business
4. Emergence of new technologies and businesses spanning continents
Doing Business in a Diverse World
The two perspectives of corporations doing business are:
• Ethnocentric perspective, where in corporations doing business considered the country of their
origin as the major source of their capital, revenues and personnel and the home country’s laws
• Geocentric perspective, where in firms develop managers at all levels from a worldwide pool of
talent and seek to use the best people for all jobs regardless of where they come from.
Role of Multinational Corporations
“Multinational corporations” are business entities that operate in more than one country. While still
maintaining a domestic identity and a central office in the country where it was incorporated, a
multinational corporation now aims to maximize its profits on a worldwide basis. The corporation is
so large and extended that it may be outside the control of a single government. Besides
subsidiaries, a multinational corporation may have joint ventures with individual companies, either
in its home country or foreign countries.
Excessive Economic Clout
Global business operates within the context of international and where necessary, regional rules
and regulations setup by appropriate governmental agents. Global business is dominated by
multinational corporations that have their businesses spread across continents.
Anderson and Cavanagh study for Corporate Watch 2000, found that the combined sales of the
world’s top 2000 corporations is greater than a quarter of the world’s economic activity and are
bigger than the combined economies of all countries minus the biggest nine.
The Institute for Policy Studies (IPS) study indicates that 200 giant corporations control over a
quarter of the world’s economic activity.
Multinational Corporations — Current Issues
Issues faced by multinational corporations:
• Maximize profits
• Meet customer demands
• Adapt to technological change
• Be aware of trends and events in various countries where they operate.
• Be accountable
Benefits of MNCs to the Host Nation
• Better access to world-wide markets
• Best access to capital investment
• Transfer of advanced technology
• Benefit of large-scale operations in R&D.
• Encouragement of local supplier development.
• New jobs for labour
• Advanced training for labour
• Better access to managerial talent
• New products for consumers
• Lower cost products and/or better products
• Exports contribution to the host nation
Disadvantages to the Host Country Because of MNCs
• Loss of national sovereignty, as the host nation cannot control what an MNC does in other
• Political interest of the home nations of MNCs could be served.
• Host country may lose some control over its own economy.
• Negative impact on the host’s own balance of payments.
• Exploitation of hosts’ national resources, causing them to dwindle.
• Exploitation of labour of the host-nation.
• Indulging in harmful acts vis-à-vis environments.
• Host nations’ feelings regarding unfair competition by MNCs.
Evolution of INTERNATIONAL CODES OF CONDUCT
• 1970s: ILO developed covenants on better labour practices and canvassed member nations to
put these into effective practice.
• 1974: The United Nations established the UN Commission on Transnational Corporations
(UNCTC), at the instance of 77 developing countries which sought the creation of a New
International Economic Order.
• 1976: The UNCTC called for the creation of a code of conduct for transnational enterprises that
would have a legal sanction.
• 1977: The Global Reporting Initiative (GRI) was founded to lay stress on auditing practices
focussed on public disclosure of relevant information
• 1985: The Caux Round Table (CRT) and Social Accountability International (SAI) established.
• 1994: Montreal Protocol on chemical processes that endangered the ozone strata of the
atmosphere and the Kyoto treaty on global warming.
• 1995: The Institute for Social and Ethical Accountability developed the AA 1000, an independent
index to grade business practices and to evaluate firms on the basis of their learning process and
commitment to the social and ethical cause.
• 1997: OECD statute prohibiting the bribing of foreign officials.
CAUX Round Table: Principles for Business
• Founded in 1986 by Frederick Phillips, former President of Phillips Electronics and Oliver Giscard
d’Estaing, former Vice-Chairman of INSEAD.
• The CRT advocates implementation of the CRT Principles for Business.
• The principles apply fundamental ethical norms to business decision making.
• World standard expressed for measuring business behaviour.
• Drawn form Minnesota Principles – developed by Minnesota Centre for Corporate
Responsibility, included views of US, Japan and European countries.
CAUX Round Table General Principles: TOWARDS WORLDWIDE BUSINESS
1. The responsibilities of business are beyond shareholders and towards stakeholders.
2. Economic and social impact of business to world commission
3. Beyond the chapter of law and towards a spirit of trust.
4. Respect for rules
5. Support multinational trade (GATT/World Trade Orgn.)
6. Respect for environment
7. Avoidance of illicit operations eg. bribery, money laundering, support for terrorists., gun
running, drug trafficking
CAUX Round Table General Principles: Towards Shareholders
8. Provide highest quality of product services etc. at a reasonable price.
9. Remedy their dissatisfaction
10. Health and safety of the customer and quality of his or her life not impaired by the work
11. Ensure human dignity in goods or service offered.
12. Respect the integrity and culture of customers
CAUX Round Table General Principles: Towards Employees
13. Work conditions to be fair and improved consistently.
14. Health and dignity of worker to be borne in mind.
15. Open in dealings, share all but classified information
16. Listen and act when grievances are received
17. In conflicts – “good faith” negotiation and not legal tangle
18. No discrimination on any ground
19. Ergonomics – in practice
20. Update their skills and knowledge
21. Sensitive problems to be tackled amicably
CAUX Round Table General Principles: Towards Investors
22. Fair and competitive return on capital by efficient management.
23. Disclose relevant information except “classified”
24. Conserve, protect and increase owners’ assets
25. Respect their complaints for solutions.
CAUX Round Table General Principles: Towards Suppliers
26. Pricing to be fair
27. No coercion or litigation
28. Long-term stability
CAUX Round Table General Principles: Towards Community
29. Respect and maintain human rights
30. Good corporate citizenship through charitable donations to educational, cultural and civic needs
Key Global Issues for Business
• Employment dilemma
• Sustainable practices and values
• Trust, honesty and transparency
• Collaboration and partnerships for action
July 26, 2000: Release of Global Compact
Worldwide initiative under the aegis of the UNO to make corporate social responsibility an area of
paramount importance to business
It consists of ten principles concerning issues of human rights, labour standards, environment and
Corporate Governance: An Overview
Corporate Governance Objectives
Corporate governance is the new buzzword in corporate and academic circles today. It means
several things to several people, depending on the sensitivity of the analyst and his vested interest
in it. This chapter gives an overview of the concept, defines it, discusses its evolution and explains its
relevance and impact on the economy.
Capitalism at crossroads
America’s hall of shame – 2002
Giant corporations such as Enron Worldcom, Dynegy, Waste Management, Adelphia Communications,
Tyco, Imclone Systems and Rite Aid failed and were being investigated for fraud and malpractices.
Many of their top executives were penalized for committing fraud and irregularities.
Corporate misgovernance in India : Reasons for corporate misgovernance
Indian corporations were insulated. A closed economy, a sheltered market, limited need and access to
global business/trade, lack of competition, lack of adequate regulatory framework were all the causes.
Besides, promoter families ruled the roost. As a result, there were a series of scams.
• Increasing awareness
• Global concerns
• What is corporate governance?
Definitions of Corporate Governance:
From the Academic Point of View
“Corporate governance addresses problems that result from the separation of ownership and
From the Angle of Developed Versus Developing Countries
John D. Sullivan: “In developing economies, one must look to supporting institutions – for
example, shoring up weak judicial and legal systems in order to better enforce contracts and protect
Narrow Versus Broad Perceptions of Corporate Governance
Corporate Governance… is defined narrowly as the relationship of a company to its shareholders
or, more broadly, as a relationship to society.
A. C. Fernando. “Corporate Governance – The Time for a Metamorphosis”, The Hindu Businessline,
July 9, 1997.
“Corporate governance is not just corporate management; it is a much broader concept and includes a
fair, efficient and transparent administration to meet certain well-defined objectives. It is a system of
structuring, operating and controlling a company with a view to achieving long-term strategic goals to
satisfy shareholders, creditors, employees, customers and suppliers and complying with the legal and
regulatory requirements, apart from meeting environmental and local community needs. When it is
practised under a well-laid out system, it leads to the building of a legal, commercial and institutional
framework and demarcate the boundaries within which these functions are performed.”
Different Perceptions in Definitions
Corporate Governance is more than just board processes and procedures. Its :
The Rights of Shareholders
The Equitable Treatment of Shareholders
The Role of Stakeholders in Corporate Governance
Disclosure and Transparency
The Responsibilities of the Board
• A Historical Perspective of Corporate Governance
From a Narrow to a Broader Vision : (Shareholder to Stakeholder perspective)
The Growth of Modern Ideas of Corporate Governance from the USA
England Catches Up With US
The Cadbury Committee
The Aftermath of Cadbury Report
Corporate Governance in the Banking Sector
Revival of Corporate Governance Issues in the New Millennium
• Issues in Corporate Governance
Distinguishing the roles of the board and the management
Composition of the board and related issues
Separation of the roles of the CEO and the chairperson
Should the board have committees
Appointments to the board and directors’ re-election
Directors’ and executives’ remuneration
Disclosure and audit
protection of shareholder rights and their expectations
Dialogue with institutional shareholders
Should investors have a say in making a company socially responsible corporate
Relevance of Corporate Governance : Managements usually have an information advantage over
others. Good corporate governance will ensure all stakeholders interests are protected, while their
requirements are fulfilled.
Need for and Importance of Corporate Governance:To maximize long-term shareholder value
Governance and Corporate Performance : These are very closely inter-related
Investors’ Preference for Good Governance : Shareholders are prepared to pay a premium for a
company with good corporate governance practices.
Strategies and techniques basic to sound corporate governance
Corporate values, codes, internal control systems etc. are useful to ensure flow of capital for
combating corruption, stakeholder protection, ensuring industrialization and economic
Benefits of good corporate governance to a corporation culture within the organization and
industry improves shareholder confidence improves
Companies that are seen as well governed get a premium for their stocks
Creation and enhancement of a corporation’s competitive advantage
Enabling a corporation perform efficiently by preventing fraud and malpractices
Providing protection to shareholders’ interest
Creates additional shareholder value over time
Enhancing the valuation of an enterprise
Ensuring compliance of laws and regulations
Theory and Practice Of Corporate Governance
Over the past three decades, the concept of corporate governance has gone through a metamorphosis.
Theoretically, from one that was related to agency cost, it is now perceived to encompass everyone’s
interests. This chapter discusses the theoretical basis, mechanisms and the divergent models of
corporate governance and culminates in the identification of an ideal corporation.
What is a Corporate?
The term “corporate” refers to an association of many persons, who contribute money or money’s
worth to a common stock and employ it in some trade or business, and who share the profit and loss
arising there from. The common stocks so contributed is denoted in money and is the capital of the
company. The persons who contribute it, or to whom it belongs, are its members. The proportion of the
capital to which each member is entitled is his share. Shares are always transferable, although the right
to transfer them is often more or less restricted.
What is Governance?
Governance is the process of decision making and the process by which decisions are implemented or
Characteristics of a Corporation
• Incorporated association
• Artificial legal existence
• Perpetual existence
• Common seal
• Extensive membership
• Separation of management and ownership
• Limited liability
• Transferability of shares
Theoretical Basis of Corporate Governance
• Agency theory
• Problems with the agency theory
• Stewardship theory
• Shareholder vs stakeholder approaches
• Stakeholder theory
• Criticisms of the stakeholder theory
• Sociological theory
THEORY AGENCY STEWARDSHIP
Managers act as Agents Stewards
Materialistic Sociological and psychological
Their own objectives Principal’s objectives
Monitor and control Facilitate and empower
Owners’ attitude Risk avoidance Risk taken
Motivation • Lower order
• Extrinsic needs
• Higher order needs
• Intrinsic needs
Social comparison Compatriots Principal
Attachment Little attachment to
Great attachment to company
Power Institutional Personal
Management Philosophy Control-oriented Involvement-oriented
While dealing with
uncertainty and risk
Training and empowering people
Making jobs to be more challenging a
Risk orientation Through a system of
Time frame Short-term based Long-term based
Objective Cost control Improving performance
Cultural differences Individualism
Large power distance
Small power distance
Corporate Governance Mechanisms
• The importance of corporate governance
• Contemporary corporate governance situation
• Growing awareness and societal responses
Corporate Governance Systems
• Anglo-American model
• The German model
• The Japanese model
• Indian model of corporate governance
What Is Good Corporate Governance?
Obligation to society at large
• National interest
• Political non-alignment
• Legal compliances
• Rule of law
• Honest and ethical conduct
• Corporate citizenship
• Ethical behaviour
• Social concerns
• Corporate social responsibility
• Health, safety and working environment
• Effectiveness and efficiency
• Timely responsiveness
• Corporations should uphold the fair name of the country
Obligations to Investors
• Towards shareholders
• Measures promoting transparency and informed shareholder participation
• Financial reporting and records
Obligations to customers
o Quality of products and services
o Products at affordable prices
o Unwavering commitment to
o Customer satisfaction
Obligations to employees
• Fair employment practices
• Equal-opportunities employer
• Encouraging whistle blowing
• Humane treatment
• Equity and inclusiveness
• Participative and collaborative environment
Protecting company’s assets
• Behaviour towards government agencies
• Gifts and donations
• Role and responsibilities of corporate board and directors
• Direction and management must be distinguished
• Managing and whole-time directors
Johnson & Johnson’s excellent Credo exemplarily epitomizes what an ideal corporate should aspire to
• We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers
and all others who use our products and services.
• In meeting their needs everything we do must be of high quality.
• We must constantly strive to reduce our costs in order to maintain reasonable prices.
• Customers' orders must be serviced promptly and accurately.
Our suppliers and distributors must have an opportunity to make a fair profit.
• We are responsible to our employees, the men and women who work with us throughout the
world. Everyone must be considered as an individual. We must respect their dignity and
recognize their merit.
• They must have a sense of security in their jobs. Compensation must be fair and adequate, and
working conditions clean, orderly and safe.
• We must be mindful of ways to help our employees fulfill their family responsibilities.
• Employees must feel free to make suggestions and complaints.
• There must be equal opportunity for employment, development and advancement for those
• We must provide competent management, and their actions must be just and ethical
• We are responsible to the communities in which we live and work
and to the world community as well.
• We must be good citizens — support good works and charities and bear our fair share of taxes.
• We must encourage civic improvements and better health and education.
• We must maintain in good order the property we are privileged to use, protecting the
environment and natural resources.
• Our final responsibility is to our stockholders.
• Business must make a sound profit.
• We must experiment with new ideas.
• Research must be carried on, innovative programs developed and mistakes paid. for.
• New equipment must be purchased, new facilities provided and new products launched.
• Reserves must be created to provide for adverse times. When we operate according to these
principles, the stockholders should realize a fair return.
Johnson & Johnson
Corporate Governance in India
• Inadequate sanction and enforcement.
• No clear demarcation of control mechanisms between SEBI, DCA and stock exchanges.
• Lack of professionalism of directors
• Institutional investors show poor commitment
• Indian boards are not professional
• Unindependent independent directors
• Whistle Blower Policy not in place
• Too many unlisted companies
• Accounting gimmicks
• Poor Shareholder participation
• Obliging auditors
• Soft state, lethargic judiciary, inefficient market regulator, poor enforcement machinery, and a
value system which is indifferent to moral turpitudes.
However Things are Improving Now
• The market is competition-driven
• Professional new players are coming in
• High growth in market – capitalization
• Well-focused, well-researched portfolio investors
• Media influences
• Influence of banks and financial institutions
• Realization among Indian companies of the benefits of corporate governance
• Impending Capital Account Convertibility will exert its own pressure.
Landmarks in the Emergence of Corporate Governance
Corporate governance as a desideratum for orderly development of an economy has evolved
over the past three decades, and, in its present system and structure, is the outcome of studies,
research and the sum total of responses by regulators of corporate scams and debacles. This chapter
traverses through the history of evolution of the concept and system of corporate governance over the
years, both in the West and in India.
There has been a perceptible change in people’s minds as to the objective of a corporation -
from one which was intended to benefit exclusively the shareholders to one which is expected to
benefit all its stakeholders. The corporate scams and frauds that came to light have brought about a
change in the thinking of advocates of free enterprise that the system was not self-regulatory and
needed substantial external regulation, which should penalise the wrongdoers while those who abide by
the rules of the game are amply rewarded by the market forces.
All these measures have brought about a metamorphosis in corporations that realised that the
people who invest in corporations are pretty serious about corporate governance; hence they started
internalising these values and later adopting them, initially albeit selectively and sporadically.
Developments in the USA
Corporate governance gained importance with the occurrence of the Watergate scandal in the United
States. Thereafter, as a result of subsequent investigations, the US regulatory and legislative bodies
were able to highlight control failures that had allowed several major corporations to make illegal
political contributions and to bribe government officials. In 1979 by the Securities and Exchange
Commission’s proposals for mandatory reporting on internal financial controls.
In 1985, following a series of high profile business failures in the USA, the most notable one being the
Savings and Loan collapse, the Treadway Commission was formed to identify the main causes of
misrepresentation in financial reports and to recommend ways of reducing incidence thereof. The
Treadway Report published in 1987 highlighted the need for a proper control environment, independent
audit committees and an objective internal audit function and called for published reports on the
effectiveness of internal control.
Developments in the UK
In England, the seeds of modem corporate governance were probably sown by the BCCI scandal.
BCCI was a global bank, constituting multiple layers of entities related to one another through an
impenetrable series of holding companies, affiliates, subsidiaries, banks-within-banks, insider dealings
and shareholder (nominee) relationships. With this corporate structure of BCCI and shoddy record-
keeping, regulatory review and audits, the complex BCCI family of entities was able to evade ordinary
legal restrictions on the movement of capital and goods as a matter of daily practice and routine.
Since BCCI was a vehicle fundamentally free of government control, it was an ideal mechanism for
facilitating illicit activity by others, including such activity by officials of many of the governments whose
laws BCCI was breaking. The failure of Barings Bank was another landmark that heightened people’s
awareness and sensitivity on the issue and the resolve that something ought to be done to stem the rot
of corporate misdeeds. Nick Leeson was posted in charge of the back office operations of Barings Bank
as well. He started trading on behalf of the Bank, when he had to trade only on behalf of the customers.
Eventually when his strategy failed because of an earthquake in Japan, Barings Bank had already lost
$1.4 billion and it had to shut office.
As a result of these failures and lack of regulatory measures from authorities as an adequate
response to check them in future, the Committee of Sponsoring Organisations (COSO) was born. The
report produced by it in 1992 suggested a control framework, and was endorsed and refined in the four
subsequent UK reports: Cadbury, Ruthman, Hampel and Turnbull.
Cadbury Committee on Corporate Governance, 1992
The stated objective of the Cadbury Committee was "to help raise the standards of corporate
governance and the level of confidence in financial reporting and auditing by setting out clearly what it
sees as the respective responsibilities of those involved and what it believes is expected of them".
The Cadbury Code of Best Practices had 19 recommendations.
Relating to the board of directors, the recommendations are:
• The Board should meet regularly, retain full and effective control over the company and monitor
the executive management.
• There should be a clearly accepted division of responsibilities at the head of a company, which
will ensure balance of power and authority, such that no individual has
unfettered powers of decision.
• The board should include non-executive directors of sufficient calibre and number for their
views to carry significant weight in the board's decisions.
• All directors should have access to the advice and services of the Company Secretary, who is
responsible to the Board for ensuring that board procedures are followed and that applicable
rules and regulations are complied with. Any question of the removal of company secretary
should be a matter for the board as a whole.
• All directors should have access to the advice and services of the Company Secretary, who is
responsible to the Board for ensuring that board procedures are followed and that
applicable rules and regulations are complied with. Any question of the removal of company
secretary should be a matter for the board as a whole.
Relating to the non-executive directors the recommendations are:
• Non-executive directors should bring an independent judgment to bear on issues of strategy,
performance, resources, including key appointments, and standards of conduct.
• Non-executive Directors should be appointed for specified terms and reappointment
should not be automatic.
• Non-executive Directors should be selected through a formal process and both, this
process and their appointment, should be a matter for the Board as a whole.
On reporting and controls, the Cadbury Code of Best Practices stipulate the following:
• It is the Board’s duty to present a balanced and understandable assessment of the company’s
• The Board should ensure that an objective and professional relationship is maintained with the
• The Board should establish an audit committee of at least 3 non-executive directors with written
terms of reference, which deal clearly with its authority and duties.
• The directors should explain their responsibility for preparing the accounts next to a statement
by the auditors about their reporting responsibilities.
• The directors should report on the effectiveness of the company’s system of internal control.
The Greenbury Committee, 1995
This committee was set up in January 1995 to identify good practices by the Confederation of
British Industry (CBI) in determining directors' remuneration and to prepare a code of such practices for
use by public limited companies of the United Kingdom.
• aimed to provide an answer to the general concerns about the accountability and level
of directors' pay;
• argued against statutory control and for strengthening accountability by the proper
allocation of responsibility for determining directors' remuneration, the proper
reporting to shareholders, and greater transparency in the process.
Produced the Greenbury Code of Best Practice which was divided into four sections thus:
• Remuneration committee
• Remuneration policy
• Service contracts and compensation.
The Hampel Committee, 1995
The Hampel Committee was set up in November 1995 to protect investors and preserve and enhance
the standing of companies listed on the London Stock Exchange.
The committee developed further the Cadbury Report , produced the Combined Code and
the auditors should report on internal control privately to the directors
the directors maintain and review all (and not just financial) controls
• Companies that do not already have an internal audit function should from time to time review
their need for one
• Introduced the Combined Code that consolidated the recommendations of earlier corporate
governance reports (Cadbury and Greenbury).
The Turnbull Committee, 1999
The Turnbull Committee was set up by the The Institute of Chartered Accountants in England and Wales
(ICAEW) in 1999. The committee
• provided guidance to assist companies in implementing the requirements of the
Combined Code relating to internal control.
• recommended that where companies do not have an internal audit function, the board
should consider the need for carrying out an internal audit annually.
• recommended that boards of directors confirm the existence of procedures for
evaluating and managing key risks.
World Bank on Corporate Governance
The World Bank, both as an international development bank and as an institution interested and
involved in equitable and sustainable economic development worldwide, was one of the earliest
international organisations to study the issue of corporate governance and suggest certain guidelines.
Corporate governance is concerned with holding the balance between economic and social goals and
between individual and communal goals. The governance framework is there to encourage the efficient
use of resources and equally to require accountability for the stewardship of those resources.
Openness is the basis of public confidence in the corporate system and funds will flow to those centres
of economic activity, which inspire trust. This Report points the way to the establishment of trust and
the encouragement of enterprise. It marks an important milestone in the development of corporate
The Organisation for Economic Cooperation and Development (OECD) was one of the earliest non-
governmental organisations to work on and spell out the principles and practices that should govern
corporations in their goal to attain long-term shareholder value.
In summary, they include the following elements.
• The Rights of Shareholders : The rights of shareholders include a set of rights to secure
ownership of their shares, the right to full disclosure of information, voting rights, participation
in decisions on sale or modification of corporate assets mergers and new share issues.
• Equitable Treatment of Shareholders : The OECD is concerned with protecting minority
shareholders’ rights by setting up systems that keep insiders, including managers and directors,
from taking advantage of their roles.
• Disclosure and Transparency : The OECD lays down a number of provisions for the disclosure
and communication of key facts about the company ranging from financial details to governance
structures including the board of directors and their remuneration.
• The Responsibilities of the Board : The OECD guidelines provide a great deal of details about
the functions of the board in protecting the company and its shareholders. These include
concerns about corporate strategy, risk, executive compensation and performance as well as
accounting and reporting systems.
• The Role of Stakeholders in Corporate Governance : The OECD recognizes that there are other
stakeholders in companies in addition to shareholders. Banks, bondholders and workers, for
example, are important stakeholders in the way in which companies perform and make
McKinsey Survey on Corporate Governance
McKinsey, the international management consultant organisation conducted a survey with a sample size
of 188 companies from six emerging markets (India, Malaysia, Mexico, South Korea, Taiwan and Turkey),
to determine the correlation between good corporate governance and the market valuation of the
In short, good corporate governance increases market valuation by:
• Increasing financial performance;
• Transparency of dealing, thereby reducing the risk that boards will serve their own self-
• Increasing investor confidence.
McKinsey rated the performance on corporate governance of each company based on the
• Accountability: Transparent ownership, board size, board accountability, ownership
• Disclosure and transparency of the board, timely and accurate disclosure, independent
• Shareholder equality: One share, one vote
• Through the survey, McKinesy found that companies with good corporate governance practices
have high price-to-book values indicating that investors are willing to pay a premium for the
shares of a well-managed and governed company. Additionally, the survey revealed that
investors are willing to pay a premium of as much as 28 per cent for shares of such a corporate
governance based company.
• Companies in emerging markets often claim that Western corporate governance standards do
not apply to them. However, the survey revealed that studies of the six emerging markets show
that investors the world over look for high standards of good governance. Additionally, they are
willing to pay a high premium for shares in companies that meet their requirements of good
Sarbanes-Oxley Act, 2002
The Sarbanes–Oxley Act (SOX Act), 2002 is a serious attempt to address all the issues associated with
corporate failures to achieve quality governance and to restore investor confidence. The Act contains a
number of provisions that dramatically change the reporting and corporate directors governance
obligations of public companies, the directors and officers.
Important provisions contained in SOX Act are briefly given below:
Establishment of Public Company Accounting Oversight Board (PCAOB)
All accounting firms will have to register themselves with this board and submit among other
details particulars of fees received from public, company clients for audit and non-audit services,
financial information about the firm, list of firms staff who participate in audits, quality control policies,
information on civil criminal and disciplinary proceedings against the firm or any of the staff.
The board will conduct annual inspections of firms, which audit more than 100 public
companies, and once in three years in other cases. The board will establish rules governing audit quality
control, ethics, independence and other standards. It can conduct investigations and displinary
proceedings and can impose sanctions on auditors. The board reports to SEC.
New Improved Audit Committee/Audit Practices
• The SOX Act provides for a “new improved” Audit Committee.
• The audit committee is responsible for appointment, fixing fees and oversight of the work of
independent auditors. The committee is also responsible for establishing reviewing the
procedures for the receipt, treatment of accounts, internal control and audit complaints
received by the company from the interested or affected parties.
• The SOX Act provides for mandatory rotation of lead audit or co-ordinating partner and the
partner reviewing audit once every five years.
• It will be unlawful for any executive or director of the firm to take any action to fraudlently
influence, coerce, manipulate or mislead any auditor engaged in the performance of an audit
with the view to rendering the financial statements materially misleading.
• Prohibition of Non-audit Services: Non-audit services include: (i) book-keeping or other services
related to the accounting records or financial statements of the client; (ii) financial information
system, design and implementation; (iii) appraisal or valuation services, fairness opinions; (iv)
acturial services; (v) internal audit outsourcing services; (vi) management functions or human
resources; (vii) broker or dealer, investment adviser, or investment banking services; (viii) legal
services or expert services unrelated to the audit and (ix) any other service that the board
determines, by regulation, is impermissible. However, the Board has the power to grant
• CEOs and CFOs Required to Affirm Financials : Chief Executive Officers and Chief Finance
Officers are required to certify the reports filed with the Securities Exchange Commission. If the
financials are required to be restated due to material non-compliance “as a result of
misconduct” of CEO or CFO, then such CEO or CFO will have to return to the company bonus and
any other incentives received by him. False and or improper certification can attract fine ranging
from $ 1 million to $ 5 million or up to 10 years imprisonment or both.
• Loans to Directors : The SOX Act prohibits US and foreign companies with securities traded
within the US from making or arranging from third parties any type of personal loan to directors.
• Attorneys : The attorneys dealing with the publicly traded companies are required to report
evidence of material violation of securities law or breach of fiduciary duty or similar violations
by the company or any agent of the company to the Chief Counsel or CEO and if the Counsel or
CEO does not appropriately respond to the evidence the attorney must report the evidence to
the audit committee or the board of directors.
• Securities Analysts : The SOX Act has a provision under which brokers and dealers of securities
should not retaliate or threaten to retaliate an analyst employed by the broker or dealer for any
adverse, negative or unfavourable research report on a Public Company.
• Penalties : The penalties prescribed under SOX Act for any wrongdoings are very stiff. Penalties
for willful violations are even stiffer. Any CEO or CFO providing a certificate knowing that it does
not meet with the criteria stated may be fined upto $ 1 million and/or imprisonment upto 10
Indian Committees and Guidelines
Working Group on the Companies Act, 1956. : The government accordingly set up a Working Group in
August 1996 for this purpose. The Working Group on the Companies Act has recommended a number
of changes and also prepared a working draft of Companies Bill 1997. The Bill was introduced in the
Rajya Sabha on 14 August 1997, containing the following recommendations.
Financial Disclosures Recommended by the Working Group on the Companies Act
• A tabular form containing details of each director’s remuneration and commission should form a
part of the Directors’ Report.
• A listed company must give certain key information on its divisions or business segments as a
part of the Directors Report in the Annual Report.
• Where a company has raised funds from the public by issuing shares, debentures or other
securities, it would have to give a separate statement showing the end-use of such funds.
• The disclosure on debt exposure of the company should be strengthened.
Non-financial Disclosures Recommended by the Working Group on Companies Act
1. A comprehensive report on the relatives of directors—either as employees or Board members—
to be an integral part of the Directors’ Report of all listed companies.
2. Companies have to maintain a register, which discloses interests of directors in any contract or
arrangement of the company.
3. Likewise, the existence of the directors’ shareholding register and the fact that members in any
AGM can inspect it should be explicitly stated in the notice of the AGM of all listed companies.
4. Details of loans to directors should be disclosed as an annex to the Directors’ Report in addition
to being a part of schedules of the financial statements.
5. Appointment of sole selling agents for India will require prior approval of a special resolution in
a general meeting of shareholders.
6. Subject to certain exceptions there should be a Secretarial Compliance Certificate forming a part
of the Annual Returns that is filed with the Registrar of Companies.
7. The Compliance Certificate should certify in prescribed format that the secretarial requirements
under the Companies Act have been adhered to.
Deficiencies of the Companies Act
(i) Though non-executive directors can play a significant role in providing independent and
objective opinion in discussions on many strategic areas in board deliberations, the Act does not assign
them any formal role between executive and non-executive directors.
(ii) In actual practice, non-executive directors have only ornamental value.
(iii) With regard to financial reporting, the provisions of the Act make it more rule-based and
ritualistic, rather than being transparent.
(iv) The Act does not prescribe any formal qualifications for a director of a company, with the result
even an incompetent and mediocre person can become a member of the board.
(v) Though the Act formally provides for the appointment of auditors by shareholders, in practice
they work more closely with the company management. Shareholders hardly have a chance to interact
with the auditors.
The Confederation of Indian Industry’s Initiative
• In 1996, the Confederation of Indian Industry (CII) took a special initiative on Corporate
Governance, the first ever institutional initiative in Indian industry. This initiative by CII flowed
from public concerns regarding the protection of investors interest, especially of the small
investor; the promotion of transparency within business and industry; the need to move
towards international standards in terms of disclosure of information by the corporate sector
and through all of this, to develop a high level of public confidence in business and industry..
• A National Task Force that was set up with Rahul Bajaj, former President of CII as the Chairman
and members from industry, the legal profession, media and academia, presented the draft
guidelines and the Code of Corporate Governance in April 1997 at the National Conference and
Annual Session of CII.
• The CII has pioneered the concept of corporate governance in India and has been internationally
recognized as one of the best in the world.
Recommendations of the CII’s Code of Corporate Governance
1. A single board, if it performs well, can maximize long-term shareholder value. The board should
meet at least six times a year, preferably at intervals of 2 months.
2. A listed company with a turnover of Rs 100 crores and above should have professionally
competent and recognized independent non-executive directors who should constitute
• at least 30 per cent of the board, if the Chairman of the company is a non-executive
• at least 50 per cent of the board, if the Chairman and Managing Director is the same
3. A person should not hold directorships in more than 10 listed companies.
4. For non-executive directors to play a significant role in corporate decision making and
maximising long term shareholder value they need to
• become active participants in boards and not passive advisors;
• have clearly defined responsibilities within the board such as the Audit Committee; and
• know how to read a balance sheet, profit and loss account, cash flow statements, and financial
ratios and have some knowledge of various company laws.
5. To secure better effort from non-executive directors, companies should pay a commission over and
above the sitting fees for the use of the professional inputs.
6. While re-appointing members of the board, companies should give the attendance record of the
7. Key information that must be reported to, and placed before the board, must contain:
• Annual operating plans and budgets, together with up-dated long term plans;
• Capital budgets, manpower and overhead budgets;
• Internal audit reports including cases of theft and dishonesty of a material nature;
• Fatal or serious accidents, dangerous occurrence, and any effluent or pollution problems;
• Default in payment of interest or non-payment of the principal on any public deposit and/or to
any secured creditor or financial institution;
• Defaults such as non-payments of the principal on any company or materially substantial non-
payments for goods sold by the company;
• Details of any joint venture or collaboration agreement;
• Transactions that involve substantial payment towards goodwill, brand equity or intellectual
• Recruitment and remuneration of senor officers just below the board level, including
appointment or removal of the Chief Financial Officer and the Company Secretary;
• Labour problems and their proposed solutions and
• Quarterly details of foreign exchange exposure and the steps taken by management to limit the
risks of adverse exchange rate movement, if material.
8. For all companies with paid-up capital of Rs 20 crores or more the quality and quantity of
disclosure that accompanies a GDR issue should be the norm for any domestic issue.
9 Companies that default on fixed deposits should not be permitted to accept further deposits
and make inter-corporate loans or investments or declare dividends until the default is made good.
11. Major Indian Stock Exchanges should insist upon a compliance certificate, signed by the CEO and
the CFO which should clearly state:
• The company will continue business in the course of the following year;
• The accounting policies and principles conform to the standard practice;
• The management is responsible for the preparation, integrity and fair presentation of financial
statements and other information contained in the Annual Report.
• The board has overseen the company’s system of internal accounting and administrative
controls either directly or through its Audit Committee.
• The Securities and Exchange Board of India (SEBI) appointed a committee on corporate
governance on May 7, 1999, with eighteen members under the Chairmanship of Kumar
Mangalam Birla to promoting and raising the standards of corporate governance.
Kumar Mangalam Birla Committee
• The Committee’s recommendations consisted of (i) mandatory recommendations, and (ii) non-
Mandatory Recommendation :
1. Applicability : Applicable to all listed companies with paid-up share capital of Rs 3 crore and
2. Board of directors : The Board of Directors of a company must have an optimum combination of
executive and non-executive Directors. The number of independent Directors should be at least one-
third in case the company has a non-executive Chairman and at least half of the Board in case the
company has an executive Chairman.
3. Audit Committee : The Audit Committee should have a minimum 3 members. The
Chairman should be an independent Director and must be present at the Annual General Meeting to
answer shareholders’ queries.
4. Remuneration Committee of the Board : The Board of Directors should decide the
remuneration of non-executive directors. Full disclosure of the remuneration package of all the directors
covering salary benefits, bonuses, stock options, pension fixed component, performance linked
incentives along with the performance criteria, service contracts, notice period, severance fees, etc., is
to be made in the section on corporate governance of the annual report.
5. Board Procedures : The Board meeting should be held at least four times a year with a
maximum time gap of four months between any two meetings.
6. Management : Management discussions and analysis report covering industry structure,
opportunities and threats, segment-wise or product-wise performance outlook, risks, internal control
systems, etc. are to form a part of Directors Report or as an addition thereto.
7. Shareholders : In case of appointment of a new Director or re-appointment of existing Director,
information containing a brief resume, nature of expertise in specific functional areas and companies in
which the person holds Directorship, Committee Membership, must be provided to the benefit of
shareholders. A Board committee under the chairmanship of a non-executive director is to be formed to
specifically look into the redressing of shareholder complaints of declared dividends etc. In order to
expedite the process of share transfers, the Board should delegate the power of share transfer to an
officer or a committee or to the Registrar and share transfer agents with a direction to the delegated
authority to attend to share transfer formalities at least once in a fortnight.
8. Non-mandatory Recommendations :
A. Chairman of the Board : The Chairman’s role should in principle be different from that of the
Chief Executive, though the same executive can perform both the roles.
B. Remuneration Committee : The Board of Directors should set up a Remuneration
Committee to determine on their behalf and on behalf of the shareholders with agreed terms of
reference the company’s policy on specific remuneration packages for executive directors including
pension rights and any other compensation payment.
C. Shareholders’ Rights : Half-yearly declaration of financial performance including summary of
the significant events in the six months should be sent to each of the shareholders.
D. Postal Ballot
Naresh Chandra Committee Report, 2002
The Naresh Chandra Committee was appointed as a High Level Committee to examine various corporate
governance issues by the Department of Company Affairs on 21st August, 2002. The Committee’s
recommendations mainly concerned: (i) the Auditor–Company relationship; (ii) disqualifications for
audit assignments; (iii) list of prohibited non-audit services; (iv) independence standards for consulting;
(v) compulsory audit partner rotation; (vi) auditor’s disclosure of contingent liabilities; (vii) auditor’s
disclosure of qualifications and consequent action; (viii) managements certification in the event of
auditor’s replacement; (ix) auditor’s annual certification of independence; (x) appointment of auditors;
(xi) certification of annual audited accounts by CEO and CFO; (xii) auditing the auditors; (xiii) setting up
of the independent Quality Review Board; (xiv) proposed disciplinary mechanism for auditors; (xv)
independent directors; (xvi) audit committee charter; (xvii) exempting non-executive directors from
certain liabilities; (xvii) training of independent directors; (xix) establishment of Corporate Serious Fraud
Office; (xx) SEBI and subordinate legislation.
• Tightening of the noose around the auditors by asking them to make an array of disclosures,
• Called upon CEOs and CFOs of all listed companies to certify their companies’ annual accounts,
• Setting up of quality review boards by the Institute of Chartered Accountants of India (ICAI),
Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of
India, instead of a Public Oversight Board similar to the one in the United States.
Rationale for a Review of the Birla Code
• In the perception of SEBI, there was a need to appoint a committee as a follow-up of the Birla
Committee’s report and the experience gained from the analysis of compliance reports.
• SEBI, therefore, set out to form another committee with the twin perspectives: (a) to evaluate
the adequacy of the existing practices, and (b) to further improve them. This committee on
corporate governance was constituted under the chairmanship of N.R. Narayana Murthy,
Chairman and Chief Mentor of Infosys Technologies Ltd. and comprised representatives from
stock exchanges, chambers of commerce, investors associations and professional bodies.
Narayana Murthy Committee Report, 2003
The Committee on Corporate Governance set up by SEBI under the Chairmanship of N.R. Narayana
Murthy which submitted its Report in February, 2003
The Committee’s report expresses its total concurrence with the recommendations contained in the
Naresh Chandra Committee’s report on
Disclosure of contingent liabilities
Certification by CEO and CFO
Definition of independent directors
Independence of audit committees
Audit Committee: An Audit Committee is the bedrock of quality governance. The Committee
recommended a bigger role for the audit committee.
A statement of all transactions with related parties including their bases should be placed before the
audit committee for formal approval/ratification
Companies raising money through initial public offering should disclose to the audit committee the uses
and application of funds under major heads on a quarterly basis.
The Committee has deemed it necessary for the boards of companies to be fully aware of the risks
involved in the business and that it is also important for shareholders to know about the process by
which companies manage their business risks. The mandatory recommendations in this regard are:
“Procedures should be in place to inform board members about the risk assessment and minimisation
procedures. These procedures should be periodically reviewed to ensure that executive management
controls risks through means of a properly defined framework.”
• Management should place a report before the entire board of directors every quarter
documenting the business risks faced by the company, measures to address and minimize such
risks and any limitation to the risk-taking capacity of the corporations. The board should
formally approve this document.
• The Committee has recommended that it should be obligatory for the board of a company to lay
down a code of conduct for all board members and senior management of the company. This
The Committee recommended doing away with nominee directors. If a corporation wishes to
appoint a director on the board, such appointment should be made by the shareholders. The
Committee insisted that an institutional director, if appointed, shall have the same
responsibilities and shall be subject to the same liabilities as any other director. Nominees of the
Government on public sector companies shall be similarly elected and shall be subject to the
same responsibilities and liabilities as other directors. code should be posted on the company’s
• The Committee recommended doing away with nominee directors. If a corporation wishes to
appoint a director on the board, such appointment should be made by the shareholders. The
Committee insisted that an institutional director, if appointed, shall have the same
responsibilities and shall be subject to the same liabilities as any other director. Nominees of the
Government on public sector companies shall be similarly elected and shall be subject to the
same responsibilities and liabilities as other directors.
• Compensation to non-executive directors (to be approved by the shareholders in general
• Whistle blower policy to be in place in a company.
Dr J.J. Irani Committee Report on Company Law, 2005
Appointed in December 2004. It submitted its report in May 2005. The committee
recommended: (i) One-third of the Board of listed company should be independent directors, should be
independent directors, (ii) Corporates should be allowed to maintain pyramidal structure, i.e., a
subsidiary of a holding company itself be a holding company; (iii) Full liberty to shareholders to do
decide to issues; (iv) Mooted the concept of single person company; (v) Companies encouraged to self-
regulate their affairs; (vi) Provided Stringent penalties for wrongdoers and recommended publication of
the punishment; (vii) Suggested continuation of Audit and Accounting standards of ICAI; and (viii)
Present governance standards to continue.
Although India has been fortunate in not having to go through the massive corporate failures such as
Enron and Worldcom, it has not been wanting in its resolve to incorporate better governance practices
in the country’s corporates emulating stringent international standards.
However, as the Naresh Chandra Committee on Corporate Audit and Governance pointed out: “There is
scope for improvement. For one, while India may have excellent rules and regulations, regulatory
authorities are inadequately staffed and lack sufficient number of skilled people. This has led to less
than credible enforcement. Delays in courts compound the problem. For another, India has had its fair
share of corporate scams and stock market scandals that has shaken investor confidence. Much can be
done to improve the situation”.
Board of Directors: A Powerful Instrument in Corporate Governance
Inevitably and unquestionably, the board of directors of a corporation is the most important
instrument that would make it or break it. If a corporation is considered a role model or a beacon, it is
in no small measure due to its CEO and a proactive board, while many corporate failures and scams
invariably point out to an inactive or ‘obedient’ board. This chapter goes in depth into all these issues, as
well as positive and negative elements connected to the board of directors.
The separation of ownership from active direction and management is an essential feature of
the company form of organisation. To manage the affairs of the company, shareholders elect their
representatives called the “Directors” of the company. A number of such directors constitutes the
“Board of Directors”. The board generally has only part-time directors.
Corporate Management Structure
The board may be expected to lay down policies, procedures and programmes, but may not be able to
secure their implementation under their guidance and continuous supervision, or communicate their
decision to the rest of the staff.
The CEOs who include Managing Directors and managers receive instructions from the board
and disseminate them to executives in charge of various departments.
Company Director and the Board
In the eyes of law, a company is an artificial person, who however has no physical existence and
has neither a body nor soul.
In many countries, as in India, it is mandatory for a public limited company to have directors and in
practice “the identities of directors and those of their companies are inseparable for good or bad”.
Who is a Director?
Section 2 (13) of the Companies Act defines a director as follows: “A director includes any person
occupying the position of director by whatever name called. The important factor to determine whether
a person is or is not a director is to refer to the nature of the office and its duties. It does not matter by
what name he is called. If he performs the functions of a director, he is a director?
Section 2(6) of the Companies Act states that directors are collectively referred to “Board of Directors”
or simply the ‘board’.
Kinds of Directors
• A director may be a full time working director, namely, managing or whole time director
covered by a service contract.
• A company may also have non-executive directors who do not have anything to do with the day-
to-day management of the company.
. We can recognize another category of directors as per certain provisions of the (Indian)
Companies Act “Shadow Directors’’. These so-called “deemed- directors’’ acquire their status by
virtue of their giving instructions (other than professional advices) according to which “appointed”
directors are accustomed to act.
The Articles of Association of a company usually name the first set of directors by their respective names
or prescribe the method of appointing them.
Certain provisions of the Companies Act in India govern the appointment or reappointment of directors
by a company in general meeting.
Legal Position of a Director
• They have been described variously as agents, trustees, or managing partners of the company.
• The legal position of the directors as agents and trustees emanate from the fact that a company
being an artificial person cannot act in its own person.
• It has become a well-settled fact now that directors are not only agents but also act as trustees
as a result of several court decisions in India and England.
• The directors have certain duties to discharge. These are: (i) Fiduciary duties (ii) Duties of care,
skill and diligence; (iii) Duties to attend board meetings; (iv) and duties not to delegate their
functions except to the extent authorized by the Act or the constitution of the company and to
disclose his interest.
Qualifications and Disqualifications of Directors
• No body corporate, association or firm can be appointed directors of a company. A director
must: (a) be an individual; (b) be competent to enter into a contract; and (c) hold a share
qualification if so required by the Articles of Association.
The following persons are disqualified for appointment as directors (i) A person of unsound
mind; (ii) an undischarged insolvent or one whose petition for declaring himself so is pending in
a Court; (iii) a person who has been convicted by a Court for any offence involving moral
turpitude; (iv) a person whose calls in respect of shares of the company held for more than six
months have been in arrears; and (v) a person who is disqualified for appointment as director by
an order of the Court on grounds of fraud or misfeasance in relation to the company and, of
course, directors can be removed from office by (i) the shareholders; (ii) the Central (Federal)
Government ;and (iii) the Company Law Board.
Board of Directors
The Board of Directors of a company which includes all the directors elected by shareholders to
represent their interests is vested with the powers of management. The board has extensive powers to
manage the company, delegate its power and authority to executives and carry on all activities to
promote the interests of the company and its shareholders, subject to certain restrictions imposed by
The board of directors of a company is authorised to exercise such powers and to perform all such acts
and things as the company is entitled to.
Subject to two conditions: (1)The board shall not do any act which is to be done by the company in
general meeting of shareholders; and (2)The board shall exercise its powers subject to the provisions
contained in the Articles or the Memorandum or in the Federal Acts concerned with companies or any
regulation made by the company in any general meeting.
Powers of the Board
(a) make calls on shareholders in respect of money unpaid on their shares;
(b) issue debentures;
(c) borrow moneys otherwise (For example, through public deposits);
(d) invest the funds of the company; and
(e) make loans.
The board of directors also can exercise certain other powers as listed below with the consent of the
company in general meeting, as in the case of an amalgamation scheme:
(a) to sell, lease or otherwise dispose of the whole or substantially the whole, of the undertaking of
(b) to remit or give time for repayment of any debt due to the company by a director except in the
case of renewal or continuance of an advance made by the banking company to its director in the
ordinary course of business;
(c) to borrow in excess of capital;
(d) to contribute to charitable and other funds not relating to the business of the company or the
welfare of its employees beyond a specified amount;
(e) to invest, compensation amounts received on compulsory acquisition of any of company
(f) to appoint a sole selling agent.
• A Nominee Director is generally appointed in a company to ensure that the affairs of the
company are conducted in a manner dictated by the laws governing companies and to ensure
good corporate governance. A nominee director, as an affiliated director, is nominated to
ensure that the interests of the institution which he or she represents are duly or effectively
• Kumar Mangalam Birla Committee on Corporate Governance suggested that financial
institutions should not have their representatives on the boards of assisted companies.
Liabilities of Directors
(1) Directors of a company may be liable to third parties in connection with the issue of a
Prospectus, which does not contain the particulars required under the Companies Act or which contains
(2) Directors may also incur personal liability under the Act.
(a) on their failure to repay application money if minimum subscription has not been subscribed;
(b) on an irregular allotment of shares to an allottee (and likewise to the company) if loss or
damage is sustained;
(c) on their failure to repay application money if the application for the securities to be dealt in on a
recognized Stock Exchange is not made or refused; and
(d) on failure by the company to pay a bill of exchange, hundi, promissory note, cheque or order
for money or goods wherein the name of the company is not mentioned in legible characters.
The Directors’ Liability to the Company
(1) Ultra vires Acts: Directors are personally liable to the company in matters of illegal acts.
(2) Negligence: A director may be held liable for negligence in the exercise of his duties.
(3) Breach of Trust: They are liable to the company for any material loss on account of the breach
(4) Misfeasance: Directors are liable to the company for misfeasance, i.e, wilful misconduct.
Liability for Breach of Statutory Duties
The Companies Act imposes penalty upon the directors for not complying with or contravening the
provisions of the Act, which include sections on criminal liability for mis-statements in Prospectus,
penalty for fraudulently inducing persons to invest money, purchase by a company of its own shares,
concealment of names of creditors entitled to object to reduction of capital, penalty for default in filing
with the Registrar for registration of the particulars of any charge created by the company.
Liability for Acts of his Co-directors
• A director is not liable for the acts of his co-directors provided he has no knowledge and he is
not a party.
• When more than one director is alleged to have neglected his duties of care, all the directors are
jointly and severally liable.
Directors with Unlimited Liability
• In a limited company ,the liability of all or any of the directors may ,if so provided by the
Memorandum is unlimited.
Disablities of Directors
In order to protect the interest of a company and its shareholders, the Companies Act has placed the
following disabilities on the directors:
(1) Any provision in the Articles or an agreement which exempts a director (including any officer of
the company or an auditor) from any liability on account of any negligence, default, misfeasance, breach
of duty or breach of trust by him shall be wholly void.
(2) An undischarged insolvent shall not be appointed to act as director of any company or in any way to
take part in the management of any company.
(3) No person shall hold office at the same time as director in more than 15 companies.
(4) A company shall not without obtaining the previous approval of the Central Government in that
behalf, directly or indirectly make any loan to
(i) any director of the lending company or of a company which is its holding company or any
partner or relative of any such director;
(ii) any firm in which any such director or relative is a partner;
(iii) any private company of which any such director is a director or member;
(iv) any body corporate at a general meeting of which not less than 25 per cent of the total voting
power may be exercised or controlled by any such director; or
(v) any body corporate, the board of directors, managing director, or manager whereof is
accustomed to act in accordance with the directions or instructions of the Board, or of any director or
directors of the lending company.
(5) Except with the consent of the board of directors of a company, a director of the company or his
relative, a firm in which such a director or relative is a partner, any other partner, in such a firm, or a
private company of which the director is a member or director, shall not enter into any contract with
(a) for the sale, purchase or supply of any goods, materials or services; or for underwriting the
subscription of any shares in, or debentures of, the company.
(6) A director shall not assign his office. If he does, the assignment shall be void.
Prevention of Management by Undesirable Persons
An undischarged insolvent cannot
(1) act as, or discharge any of the function of, a director or manager of any company, or
(2) directly or indirectly take part or be concerned in the promotion, formation or management of
(1) a person who is convicted of any offence in connection with the promotion or management of a
(2) a person who in the course of winding up of a company
(i) has been guilty of fraudulent conduct of business; or
(ii) has otherwise been guilty, while being an officer of the company, of any fraud or misfeasance in
relation to the company or of any breach of his duty to the company.
Effectiveness of the Board of Directors
Though the board is recognised legally as the top layer of management with the responsibility of
governing the enterprise, yet, in actual practice, the board of directors delegates most of its managerial
power to chief executives- say, the managing director or manager. In many cases, the board appoints
many committees and clothes them with its power.
The realistic functions of the board may, therefore, be enumerated as follows:
(a) Confirming management decisions on major changes in objectives, policies, and those
transactions which will have a substantial effect on the success of the company;
(b) Providing constructive advice to the executives through discussion on important matters such
as business outlook, new governmental legislation, wage policy, etc., with a view to guiding the
executives when the policies are still in the process of formation;
(c) Selecting the chief executives and confirming the selection of the other executives in the
company made by chief executives; and
(d) Reviewing the results of current operations.
Role of Board in Ensuring Corporate Governance
• The quality of directors, their competence, commitment, willingness and ability to assume a
high degree of obligation to the company and its shareholders as members of the board alone
drives the value of any board. A strategic board with broad governing responsibilities rather
than one that acts in response to the demands of the CEO has become the need of an intensely
Susan F. Shultz, founder of SSA Executive Search International, author of several best sellers on the
subject and a member of several boards of directors condenses her experiences and research in the
1. The smaller the board, the greater the director’s involvement.
2. The essence of strategic boards is independence.
3. Diversity (of Board) means that a company has access to the best. It also means that the
company is not arbitrarily limited to a single subset of its global constituency.
4. If the board is not informed appropriately, intelligently and comprehensively, it cannot function.
In simple words, the output is only as good as the input.
5. The board has a broader responsibility to long-term shareholder value than the CEO, who is
necessarily focused on day-to-day operations.
The Role of Directors
1. An efficient and independent board should be conscious of protecting the interests of all
stakeholders and not concerned too much with the current price of the stock.
2. Another important function of the director is to set priorities and to ensure that these are acted
3. One of the toughest challenges confronted by boards arises while approving acquisitions.
4. A director is also expected to have the courage of conviction to disagree.
5. Directors have great responsibility in the matter of employment and dismissal of the CEO.
6. An efficient board should be able to anticipate business events that would spell success or lead
to disaster if proper measures are not adopted in time.
7. The directors have a duty to act bona fide for the benefit of the company as a whole.
8. In recent times, those who advocate reform of laws governing corporate practices stress the
importance of reformulation of the concepts behind these laws.
SEBI directions are meant only for listed companies Recommendations of Irani committee apply both to
the listed & non-listed companies
Independent Director – Clause 49
Definition of ‘Independent Director’ is now wider and includes a Non-Executive Director (NED), who
Does not have any material pecuniary relationships or transactions with the company’s
Is not related to promoters or persons occupying management positions at the Board level or a
Has not been a company executive in past 3 years
Is not/was not in last 3 years a partner or executive of the statutory audit/internal
Is not a material suppliers, service provider, customer, lessor or lessee of the company
Does not own 2 per cent or more of voting shares
Role and Responsibilities
• At least one Independent Director to be present on the Boards of all material subsidiaries
• Minutes of the Board meeting of a subsidiary to be tabled at board meeting of parent company
• Significant transactions or arrangements entered into by each subsidiary to be reported to the
• Audit Committee to have minimum of three directors as members, of which two-thirds must be
• Independent Director to be Chairman of Audit Committee and be present at AGM to answer
• A minimum of two Independent Directors to be present at AGM
Remuneration of Independent Directors
• Prior approval of shareholders required in a general meeting for all fees and compensation paid
• Maximum number of stock options for NEDs including independent directors in a financial year
to be specified in shareholders’ resolution
• Criteria of making payments to NEDs to be disclosed either in the annual report or on the
• Number of shares and convertible instruments held by NEDs to be disclosed in Annual Report
• Shareholding of persons proposed to be appointed as NEDs to be disclosed in the notice if the
general meeting called for appointment of the directors
Challenges for Independent Directors
• Formulation and execution of strategy
• Audit and assurance process
• Shareholder and stakeholder communications
• Legal and regulatory compliance
• Enterprise risk management
• Organisational ethics, brand loyalty, and employee retention
• Executive Pay, an Unsettled Issue
• Emphasis on Transparency and Disclosure
• Pay as a Reward for Performance
• Performance Hurdles
• Remuneration Committee
• Severance Payments
• Other Remuneration Packages
Remuneration shall include,
a. any expenditure incurred by the company in providing any rent free
accommodation, or any other benefit or amenity in respect of accommodation free of charge, to
any director or manager;
b. any expenditure incurred by the company in providing any other benefit or amenity
free of charge or at a concessional rate to any of the person aforesaid;
c. any expenditure incurred by the company in respect of any obligation, or service,
which but for such expenditure by the company, would have been incurred by any of the
persons aforesaid; and
d. any expenditure incurred by the company to effect any insurance on the life of, or to
provide any pension, annuity or gratuity for, any of persons aforesaid or his spouse or child.
Prohibition of Tax-free Payments
According to Section 200 of the Companies Act:
(1) No company shall pay to any officer or employee thereof, whether in his capacity as such or
otherwise, remuneration free of any tax, or otherwise calculated by reference to, or varying with, any
tax payable by him, or the rate or standard rate of any such tax, or the amount thereof.
Family-owned Businesses and Corporate Governance
The board of directors, including chairmen and managing directors, consisted of family members with a
couple of directors from funding financial institutions and perhaps a couple of outside passive directors.
Prof. N. Balasubramanian in his article “Economic Reforms, Corporate Boards, and Governance”
provides a profile of the post-reforms corporate board.
(a) Family concerns will turn professional in order to face successfully competition and market
(b) Members of the board will be persons with technical and managerial capabilities “Who can
guide and oversee operating management in the discharge of their functions”.
(c) The practice of one person combining in himself both the positions of Chairman and CEO will
sooner rather than later, come to an end.
(d) Rubber stamp boards will be a relic of the past, prompted and goaded by SEBI and its
guidelines, board members would be expected to devote more time and show commitment.
(e) Boards delegating specific tasks such as audit, remuneration and appointments to committees
with members having professional expertise will be a normal phenomenon.
(f) Transparency in reporting and full disclosures will be norms.
(g) Guidelines on corporate governance all over the world insist on independence of audit, and this
will be observed by boards in India too. Boards will have to ensure unattached and
professionally competent auditors audit the company’s accounts.
(h) The highest priority of the boards would be to ensure long-term maximisation of shareholder
value and wealth. Better corporate performance through legitimate and transparent policies will
enrich shareholders. Accountability to shareholders does not mean, that other stakeholders
such as customers and employees would have to be excluded, as the respective objectives are
not naturally exclusive.
(i) Since boards will have to shoulder greater responsibility, bear risk and manage uncertainty with
a great deal of pressure on them to perform, their members would have to be compensated
adequately and appropriately.
(j) Corporate social responsibility would become part and parcel of the duties of boards of
(k) Companies in India emulating the examples of Western countries, would have their own
corporate governance rules that clearly describe their vision, value systems and board
(l) Companies would in due course put in place an appropriate whistle blower policy enabling both
the board and senior management take corrective measures to stem the rot.
Some Pioneering Indian Boards
1. The foray of Infosys Technologies into consultancy and Business Process Outsourcing (BPO) from
its original profile of just a services company was prompted by its proactive board.
2. The Industrial Credit and Investment Corporation of India (ICICI), has an active board. The board
initiated and helped actively the merger of the ICICI and its banking arm. The ICICI Bank also
insists that its middle level managers make presentations to the board regularly.
3. The board of the fast-growing Chennai-based pharmaceutical company, Orchid Chemicals and
Pharmaceuticals Ltd, directed its Managing Director to seek the advice of the international
consultant, Mckinsey and Co. on his growth strategy for the company.
4. The board of Chennai-based Polaris Software Lab. forced its Chairman and Managing Director
not to acquire any new business at the peak of dotcom boom, but instead to consolidate the
5. Godrej Consumer Products consulted the Confederation of Indian Industry (CII) for forming its
board. The CII advised the company to choose independent professionals and not industrialists.
• In the new era, the board of directors has to shoulder larger responsibilities to meet the
increasing demand of the market place.
• The Board of Directors expected to play a powerful role in such a metamorphosis the world is
waiting to see happen.
Role, Duties and Responsibilities of Auditors
Corporate scams, debacles and subsequent erosion of investor confidence with a deleterious impact on
the economy invariably indicate one fact: audit failures. An auditor is a kingpin among got as an
‘outsiders’ who can bring to light the corrupt and questionable practices indulged by the ‘insiders’. This
chapter details the role, liabilities and responsibilities of auditors and the measures suggested to ensure
that they do their job – of protecting the shareholders and other claimants to the resources of a
• Ethics and values get short shrift in business in two ways; first, by the failure of management
and second, by the failure of auditors.
• Recent unearthing of corporate frauds both in developed countries and developing and
transitional economies revealed the fact that the auditors had failed to do what they were
assigned to do. They involved themselves in unethical practices and failed to whistle-blow when
things went wrong in the organization.