New Ethics 5


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New Ethics 5

  1. 1. MODULE V SOCIAL AUDIT OF BUSINESS A social audit is a systematic study and the evaluation of an organization’s social performance, as distinguished from its economic performance. It is concerned with the possible influence on the social quality of life instead of the economic quality of life. Social audit leads to a report on the social performance of a business unit. There are various operational approaches of defining social audit. First, the social audit is taken in terms of measuring total expenditures for social activities. This approach involves the recognition of costs and search for ways to reduce such costs. Second, the social audit is designed to measure the value of productive capability of organization’s human resources and value of various parties external to the organisation but interacting with the organisation. Third, there is a programme management approach of social audit which focuses on measuring only those activities in which a particular organisation is involved largely for social reasons. Fourth, there is inventory approach of social audit involving the cataloguing and describing what the organisation is doing in each area it recognizes that society expects to do something. Fifth, there is a cost/benefit approach which tries to quantify values contributed to the society and detriments to the society for actions taken or not taken and array them in a fashion comparable to the typical financial balance sheet. Thus various approaches of social audit provide different measurement yardsticks, though all approaches lead to the same measurement, that is, an organization’s contributions to the society. Thus, social audit has been defined as a commitment to systematic assessment of and reporting on some meaningful, definable domain of the company’s activities that have social impact. FEATURES OF SOCIAL AUDIT The areas for social audit include any activity which has a significant social impact such as activities affecting environmental quality, consumerism, opportunities for women and other disadvantaged people in society and similar others. The second feature about social audit is that it can determine only what an organisation is doing in social areas, not the amount of social good that results from these activities. It is a process audit rather than an audit for results. Thirdly, social performance is difficult to audit because most of the results of social activities occur beyond the company’s gate and the company has no means of securing data on
  2. 2. the results. Even if data are available, it is difficult to establish how many of them have occurred due to company’s actions. Finally, social audits use both qualitative and quantitative data. ORGANISATION FOR SOCIAL AUDIT Social audit can be made by internal auditors, external consultants or a combination of the two. The internal auditor has the advantage of familiarity with the business, but his assessment might be influenced by his loyalty to the company. A consultant has the advantage of an outsider’s view but lacks familiarity with the company and he is likely to ignore significant data. A combination of the two is ideal for carrying on the audit of social performance. BENEFITS OF SOCIAL AUDIT The benefits of social audit are as follows: • Social audit enables the company to take close look at itself and understand how far the company has lived up to its social objectives. • Related to the first benefit is the fact that social audit encourages greater concern for social performance throughout the organisation. • Social audit provides data for comparing effectiveness of the different types of programmes. • Social audit provides cost data on social programmes so that management can relate the data to budgets, available resources, company objectives and projected benefits of programmes. • Social audit provides information for effective response to external claimants that make demands on the organisation. News reporters, welfare organisations and variety of others want to know what a business is doing in areas of their special interest, and a business needs to respond as effectively as possible. The social audit shows a business where it is vulnerable to public pressure and where its strengths lie. CORPORATE GOVERNANCE Corporate governance is about how an organisation is managed, its corporate and other structures, its culture, its policies and the ways in which it deals with its various stakeholders. Corporate governance is the overall control of activities in a corporation. It is concerned with the formulation of long-term objectives and plans and the proper management structure (organisation, systems and people) to achieve them. At the same time, it entails making sure that
  3. 3. the structure functions to maintain the corporation’s integrity and responsibility to its various constituencies. The structure to ensure corporate governance includes the board of directors, top management, shareholders, creditors and others. Role of each of these stakeholders is crucial in guaranteeing responsible corporate performance. FACTORS INFLUENCING CORPORATE GOVERNANCE Four factors influence corporate governance, namely, 1. The ownership structure of a corporation, 2. Its financial structure, 3. The structure and functioning of the company boards and 4. The legal, political and regulatory environment within which the company operates. MECHANISMS OF CORPORATE GOVERNANCE In our country, there are six mechanisms to ensure corporate governance: 1. The companies Act, 1956, 2. The Securities and Exchange Board of India (SEBI) Act, 1992, 3. A market for corporate control, 4. Participation of block shareholders in the governance of companies 5. Statutory audit; and 6. Code of Conduct. CORPORATE ETHICS PROGRAMS Every organisation has an ethics program of some kind, although it may not be recognised as such. In the broadest sense, an ethics programme consists of the rules and policies of an organisation and the procedures and systems for motivating and monitoring ethical performance. Rules and policies include the culture and values of an organisation and formal documents, such as mission statements, codes of ethics, policy and personnel manuals, training materials, and management directives. Compliance with rules and policies is secured by various procedures and systems for orientation, training, compensation, promotion, auditing and investigation. These procedures and systems are essential functions in any business organisation. Companies with an identifiable ethics programme are distinguished by the emphasis that they place on these functions and the manner in which they address them.
  4. 4. The components of a corporate ethics programme generally include a code of ethics, ethics training for employees, means for communicating with employees about matters of ethics, a reporting mechanism for enabling employees to report alleged wrongdoing, an adult system for detecting wrongdoing, and a system for conducting investigations and taking corrective action. The corporate ethics programs are designed to secure compliance with the law and with the company’s own rules and policies. The goals are to prevent criminal conduct and violation of government regulations on the one hand and to protect the company from self-interested action by employees on the other. Compliance of this kind is essential in any organisation, but some corporations take a broader view of ethics. Ethics programs that communicate the values and vision of the organisation, seek to build relations of trust with all stakeholder groups and emphasize the responsibility of each employee for ethical conduct. THE BENEFITS OF AN ETHICS PROGRAM The main benefit of an ethics program is to prevent ethical misconduct by employees, which is costly to companies not only in direct losses but also in those sustained from a tarnished reputation. Second, ethics programs provide a managerial tool for adapting the organisation to rapid change. Among the factors that have led corporations to adopt ethics programs are increased competition, the development of new technologies, increased regulation, recent mergers and acquisitions and the globalization of business. A third benefit of ethics programs is managing relations with external constituencies. An ethics program serves to reassure customers, suppliers, investors and the general public of the serious intent of a corporation to adhere to high ethical standards. The existence of an ethics program is an assurance not only to socially responsible investors, who look for such indicators, but also to shareholders generally, who want to avoid the cost of major scandals. CORPORATE SOCIAL RESPONSIBILITY All accounts of corporate social responsibility recognise that business firms have not one but many different kinds of responsibility, including economic and legal responsibilities. Corporations have an economic responsibility to produce goods and services and to provide jobs and good wages to the work force while earning a profit. Economic responsibility also includes the obligation to seek out supplies of raw materials, to discover new resources and technological improvements, and to develop new products. In addition, business firms have certain legal responsibilities. One of these is to act as a fiduciary, managing the assets of a corporation in the
  5. 5. interests of shareholders, but corporations also have numerous legal responsibilities to employees, customers, suppliers and other parties. Social responsibility, according to some accounts, is the selection of corporate goals and the evaluation of outcomes not solely by the criteria of profitability and organisational well- being but by ethical standards or judgments of social desirability. The exercise of social responsibility, in this view, must be consistent with the corporate objective of earning a satisfactory level of profit, but it implies a willingness to forgo a certain measure of profit in order to achieve non-economic ends. RELATIONSHIP BETWEEN ETHICS AND CORPORATE EXCELLENCE Business ethics helps the organisation to achieve corporate excellence in many ways. It results in organisations establishing distinctive cultures for individual companies. When such distinctive cultures are established, they promote creativity and innovations within the organisations. There are many ways in which an organisation can achieve corporate excellence. The first instrument for achieving such excellence is the Corporate mission Statement. 1. Corporate Mission Statement An organization’s mission consists of its long term vision of what it seeks to achieve and the reasons for its existence. Usually this mission of the organisation is denoted through its mission statement and it contains an account of how it wishes to serve the society and contribute to social welfare. The mission statement has to be guided by a set of core values and moral integrity of every employee. It incorporates the ethical values that the organisation strives to use in order to achieve corporate excellence. The mission statement acts like the Constitution of the company, the solid expression of the company’s vision and values. It becomes the criterion by which the company measures its activities and achievements. 2. Code of Ethics A code of Ethics is a statement of the norms and beliefs of an organisation. Norms are the standards of behaviour, expected from everyone in the organisation when confronted with a particular situation consisting of ethical dilemmas. 3. Organisational Culture In the organisational context, culture refers to the set of values, dominant beliefs and guiding norms of behaviour for its employees. It denotes the climate, the atmosphere, the mental
  6. 6. attitude shared by the members of the organisation. A strong culture provides a basis for productive ethos and ethical behaviour of an organisation. 4. Total Quality Management (TQM) TQM is a systematic approach to guide an organisation towards excellence through superior quality products, services and processes. CORPORATE GOVERNANCE INITIATIVES IN INDIA The budding Indian Entrepreneurs, at the time of Indian Independence, were not very comfortable with the restrictions imposed by the Government of India. The penal rates of taxation have resulted in a culture of avoidance, which went upto evasion in many Indian companies. Unable to sustain in the righteous way, companies were forced to try and gain special business advantages by bribing the officials. Bribery has generated unaccounted money (popularly) known as black money). In order to get away from the risks of possessing black money, people started making political donations. People who accepted political donations and get elected into law making bodies failed to take strict action against those companies, which fooled the exchequer by projecting overseas holidays as business trips and so on. As a result, the economy lost tax revenues and corporate non-governance has begun at the highest level. In this scenario, the Confederation of Indian Industries (CII) was the first to initiate the conceptualization of corporate Governance in the late 1990’s. The confederation came out with its version of an Audit Committee closely followed by the Securities and exchange Board of India (SEBI). On May 7, 1999, SEBI constituted an 18-member committee, on corporate Governance, chaired by Mr. Kumaramangalam Birla (the Chairman of Aditya Birla Group). The Committee made 25 recommendations, 19 of them were ‘mandatory’ and were enforceable. These recommendations were accepted by the SEBI in December 1999. SEBI has obliged all the listed companies to comply with these on account of the contractual obligation arising out of the listing agreement with Stock Exchanges. Many of the SEBI regulations emphasize on the need for the Board of Directors to honestly discharge their fiduciary responsibilities towards the companies, shareholders and creditors. Frauds and scams have become almost an annual feature in India. Indians had the Harshad Mehta scam, Ketan Parikh scam, UTI scam, to name a few. Vatsa Corporation was blamed for non-dispatch of dividend warrants. The merger of Arvind Mills with Arvind Intex (a sister organisation) was said to be against the interest of the investors in Arvind Mills. Company
  7. 7. Law Board is nowadays busy with recommending prosecution of financial corporations under acts like RBI Act. Insider trading has become quite common. All pink papers are allocating some space to cover news on siphoning off funds. News items on irregularities in allotment of shares have become routine for those who go through finance papers regularly. Boardroom battles have become a common feature. Some companies are going untraceable after Initial Public Offers. Interestingly, when the Harshad Mehta scam took place, it was claimed that the manner in which the bank receipts were being treated was the prevailing norm. All these mal practices were made possible by encashing on the loopholes of Indian Legal Systems by the professional experts. This clearly indicates that there is a wide gap between what principles say and how they are practiced. CONCLUSION Corporate Governance is the net result of the individual sense of values – the values held in society or part of society like professional bodies or business associations and finally the system of public governance. What we lack today is the fear that violators of corporate governance will be caught. If those who violate the norms are promptly caught and effectively punished then there is a fear and hence adherence to the principles of corporate governance.