business ethics


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business ethics

  1. 1. BE & CG BULLET POINTS Business Ethics: An Overview What is Ethics? 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 behaviour. 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.
  2. 2. 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: • Impartiality • Responsiveness to public interest • Accountability • Honesty • Transparency • Integrity 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:
  3. 3. (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 practices. 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 ends. Why should Businesses act Ethically? The reasons for an organization to be ethical include: • To protect its own interest,
  4. 4. • To protect the interests of the business community as a whole so that the public will have trust in it, • 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. Ethical Decision-making 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.
  5. 5. Corporate Governance Ethics • Corporate governance is a set of rules that governs the administration and management of companies. • 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 organization. • 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
  6. 6. 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 should do. • Impersonal egoism: Everyone should follow their best long-term interest.
  7. 7. 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- deceptive means. 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 ways. Utilitarianism 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 place. Kantian Ethics 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 conduct. 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.
  8. 8. The origin of the trusteeship principle can be traced to the concept of non-possession detailed in the Bhagawad Gita. 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 : Egoism Individual egoism: I should do whatever is in my own interests. This theory applies only to me, Kent Peacock! 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. Utilitarianism Basic tenets: • 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.)
  9. 9. 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 weighed unfairly. Kantian or Deontic Ethics Basic tenets: 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 Imperative. 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 religious "spin". 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.)
  10. 10. 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 reason. Virtue Ethics Virtue ethics is subtle and more difficult to define. The word "virtue" is a mistranslation of an ancient Greek word ("arete") that means, roughly, "characteristic excellence". 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, wisdom, etc. 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 artistic ability). 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 an act. 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 of excellence.
  11. 11. Naturalistic Theories 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. Intuitionism 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 sheer whimsy. Rights Theories 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 non-interference. 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 inalienable right.)
  12. 12. 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 human nature. Social contract rights: says that rights are products of social contracts; and could be different in different societies. 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 works.) 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. Justice Theories 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 others). 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:
  13. 13. Balance Impartiality 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. Stakeholder Alliance 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 public. Consumer Protection 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.
  14. 14. c. Government: The government should enforce various laws and amend existing laws to protect consumer interests. 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 Action Project. 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 8) Understand 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
  15. 15. 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 23) Tie-in-sales 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
  16. 16. 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
  17. 17. • 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 Commissions. • 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 courts • 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
  18. 18. Other Initiatives to Promote Consumer Protection 1) National Awards 2) Publicity measures 3) Customer Service Department of RBI Environmental Ethics 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 International cooperation Sustainable development Innovative Business Responses to Environmental Regulations There are several reasons why those managing business are becoming increasingly conscious of environmental issues: • 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
  19. 19. • Eco-labelling • 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
  20. 20. 2. Air (Prevention and Control of Pollution) Act, 1981 3. The Factories’ Amendment Act, 1987 4. The National Environmental Policy 2004 Marketing Ethics 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; • Teaching/preparing;
  21. 21. • Rewarding; • Evaluating performance; and • Creating a positive work environment. • Recruitment • Training and development • Learning organizations • Performance management • Pay • Team work • Motivation Emerging Challenges of HRM Some of the challenges that confront HR professionals and their roles in organizations and the industrial scenario are: 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 organizations; and 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
  22. 22. • Discrimination issues • Suppression of democratization in the workplace • Privacy issues  Recruitment and selection  Performance tracking  Privacy issues of computerized employee records  Electronic surveillance • 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 employees. • 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.
  23. 23. • 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”. Frauds include: • Financial services sector, i.e., credit card fraud, cheque fraud and other types of identify-related fraud; • 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 customers
  24. 24. • Credit card fraud • Phishing 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 Corporate Ethics: Investors Rights, Privileges, Problems and Protection Agency Costs
  25. 25. 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’ report;
  26. 26. 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 mismanagement; 22. can make a petition to the High Court for the winding up of the Company under certain circumstances; 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  Shareholders’ Rights  The Naresh Chandra Committee
  27. 27. • 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. Shareholders’ Responsibilities • 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 investment;
  28. 28. 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 are : 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
  29. 29. • 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 society.  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 society. • 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
  30. 30. 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 relationships. 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 MMooddeell EEmmpphhaassiiss PPrrooppoonneenntt EEtthhiiccaall VVoolluunnttaarryy ccoommmmiittmmeenntt bbyy ccoommppaanniieess ttoo ppuubblliicc wweellffaarree MMaahhaattmmaa GGaannddhhii
  31. 31. SSttaattiisstt SSttaattee oowwnneerrsshhiipp aanndd lleeggaall rreeqquuiirreemmeennttss ddeetteerrmmiinnee ccoorrppoorraattee rreessppoonnssiibbiilliittiieess JJaawwaahhaarrllaall NNeehhrruu LLiibbeerraall CCoorrppoorraattee rreessppoonnssiibbiilliittiieess lliimmiitteedd ttoo pprriivvaattee oowwnneerrss ((sshhaarreehhoollddeerrss)) MMiillttoonn FFrriieeddmmaann SSttaakkeehhoollddeerr CCoommppaanniieess rreessppoonndd ttoo tthhee nneeeeddss ooff ssttaakkeehhoollddeerrss –– ccuussttoommeerrss,, ccrreeddiittoorrss,, eemmppllooyyeeeess,, ccoommmmuunniittiieess,, eettcc.. RR.. EEddwwaarrdd FFrreeeemmaann Advantages of Corporate Social Responsibility There are several advantages to corporations when they exhibit a sense of CSR and implement it, such as: 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
  32. 32. 2) Promotion of common welfare programmes 3) Philanthropy 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 Social Responsibility: 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)
  33. 33. • 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 projects. • 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?
  34. 34. An ethical dilemma is a moral situation in which a choice has to be made between two equally undesirable alternatives. 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
  35. 35. 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
  36. 36. • 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.
  37. 37. • 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 • Reflect. • 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 contemplated. 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.
  38. 38. 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.
  39. 39. 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 it. 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 obligations. • Choose the action that produces the greater good, or the lesser harm, when the effects are mixed. 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 issue concerned. 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: 1. Trustworthiness
  40. 40. 2. Respect 3. Responsibility 4. Fairness 5. Caring and 6. Citizenship 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 clearly 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
  41. 41. • 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 good • 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 20th century. 2. With more countries reducing trade barriers, the number of firms affected by international competition is increasing every day.
  42. 42. 3. Many MNCs have subsidiaries, affiliates and joint venture partners in most of the developing countries. 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 as dominant. • 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.
  43. 43. 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 nations. • Political interest of the home nations of MNCs could be served. • Host country may lose some control over its own economy.
  44. 44. • 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.
  45. 45. • 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
  46. 46. 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 of society Key Global Issues for Business • Employment dilemma • Sustainable practices and values • Trust, honesty and transparency • Collaboration and partnerships for action Global Compact 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 anti-corruption. Corporate Governance: An Overview
  47. 47. 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 control.” 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 property rights.” 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.
  48. 48. “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
  49. 49.  protection of shareholder rights and their expectations  Dialogue with institutional shareholders  Should investors have a say in making a company socially responsible corporate citizen 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 development. 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 Objective 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?
  50. 50. 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 not implemented. 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 Behavioural Differences
  51. 51. THEORY AGENCY STEWARDSHIP Managers act as Agents Stewards Governance approach Materialistic Sociological and psychological Behaviour pattern Individualistic Opportunistic Self-serving •Collectivistic •Pro-organizational •Trustworthy Managers motivated by Their own objectives Principal’s objectives Manager’s and principal’s Interests Differ Converge Management structures Monitor and control Facilitate and empower Owners’ attitude Risk avoidance Risk taken Principal – Manager Relationship based on Control Trust Psychological Mechanisms
  52. 52. PSYCHOLOGICAL RESPONSES AGENCY THEORY STEWARDSHP THEORY Motivation • Lower order needs • Extrinsic needs • Higher order needs • Intrinsic needs Social comparison Compatriots Principal Attachment Little attachment to company Great attachment to company Power Institutional Personal Situational Mechanisms SITUATIONAL RESPONSES AGENCY THEORY STEWAREDSHIP THEORY Management Philosophy Control-oriented Involvement-oriented
  53. 53. While dealing with increasing uncertainty and risk Greater controls More supervisions Training and empowering people Making jobs to be more challenging a Risk orientation Through a system of control Through trust Time frame Short-term based Long-term based Objective Cost control Improving performance Cultural differences Individualism Large power distance Collectivism 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
  54. 54. • Political non-alignment • Legal compliances • Rule of law • Honest and ethical conduct • Corporate citizenship • Ethical behaviour • Social concerns • Corporate social responsibility • Environment-friendliness • Health, safety and working environment • Competition • Trusteeship • Accountability • 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 • Transparency • Financial reporting and records Obligations to customers o Quality of products and services o Products at affordable prices o Unwavering commitment to
  55. 55. o Customer satisfaction Obligations to employees • Fair employment practices • Equal-opportunities employer • Encouraging whistle blowing • Humane treatment • Participation • Empowerment • Equity and inclusiveness • Participative and collaborative environment Managerial Obligations Protecting company’s assets • Behaviour towards government agencies • Control • Consensus-oriented • 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 be. • 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.
  56. 56. • 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 qualified. • 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 Problems • Inadequate sanction and enforcement. • No clear demarcation of control mechanisms between SEBI, DCA and stock exchanges.
  57. 57. • 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 Objectives 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.
  58. 58. Introduction 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.
  59. 59. 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.
  60. 60. • 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 position. • The Board should ensure that an objective and professional relationship is maintained with the Auditors. • 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. The committee • 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 • Disclosure • 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.