Business ethics and corporate governanace

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Business ethics and corporate governanace

  1. 1. Jayashree Sadri and Sorab SadriBUSINESS ETHICS ANDCORPORATEGOVERNANACEProfessor Jayashree SadriAndDr Sorab Sadri
  2. 2. Jayashree Sadri and Sorab SadriDefinition Corporate Governance is a system ofstructuring operating and controlling acompany with a view to achieve long runstrategic goals. These goals are meant tosatisfy shareholders, creditors,employees, suppliers and society at largein such a manner that legal and regulatoryrequirements would be met on the onehand and society needs would be satisfiedon the other.
  3. 3. Jayashree Sadri and Sorab SadriWHO IS A STAKE HOLDER? The definition of stakeholders was expanded toinclude customers, creditors, employees,purchasers and the public at large. Hence theambit of concern for corporate governanceexpanded to cover all aspects of society. The basic argument runs thus: An organization isa social entity and impacts various sections ofsociety to each of which it owes an obligation. Itmust be based on values that must conform tothe values of society in which the organizationexists.
  4. 4. Jayashree Sadri and Sorab SadriCorporate Governance and Values Corporate Governance is thus viewed as avalue based system along whichcompanies are run, managerial activitiesare judged and efficiency is achieved. The concept of Corporate Governancehinges on total transparency, integrity andaccountability of the management.
  5. 5. Jayashree Sadri and Sorab SadriArgument The role of Corporate Governance is toensure that the directors of a company aresubject to their duties, obligations andresponsibilities to act in the best interestof their company, to give direction and toremain accountable to their shareholdersand other beneficiaries for their actions.
  6. 6. Jayashree Sadri and Sorab SadriArgument Corporate Governance is in essencedetermination of how companies are governed,how executive actions are supervised and how acompany is accountable to regulations imposedon it by law or other commitments toshareholders. One of the most important aspects of the moderncorporation is that quality, ethics and excellencemust be built into the system at the level of theperson, process and the product. In the process,the corporation adopts the learning organizationmode of existence.
  7. 7. Jayashree Sadri and Sorab SadriArgument However, all this is not possible unless theCorporate Governance function is in place. Thisneeds managerial maturity, civic consciousnessand a high sense of values. It is no wondertherefore that in organizations that have welldefined and empowered corporate governancefunctions, the public perception is enhanced andis reflected in higher share prices.
  8. 8. Jayashree Sadri and Sorab SadriVarious committees on CG Dr. J.J. Irani Report on New Companys Act 2005:The aim of the report was to make the Directors onthe Board of companies both accountable andempowered. The role and status of the independentdirectors was consequently examined andrecommendations were made accordingly. Its notableachievements include recommending the deletion ofSection 208 of the Companies Act 1956 under whichgovernment approval was needed for payment ofinterest on share capital and maintaining thatcorporate governance cannot be regulated by law butbrought out through peer pressure. However, it maybe remarked that the small investor was somewhatoverlooked by the Irani Committee Report.
  9. 9. Jayashree Sadri and Sorab SadriVarious committees on CG Concept Paper on Companies Bill 2004 (Ministry ofCompany Affairs, Govt. of India): Following therecommendations of the Company Law Committeeknown as the Bhabha Committee set up in 1950 theCompanies Act, 1956, was enacted with the object toamend and consolidate the law relating to companiesand certain other associations by repealing theCompanies Act, 1913. Concept Paper on Companies Bill 2004 (CIIs Views): TheCompanies Act, 1956, has been in force now for nearlyfive decades. The present Companies Act, 1956, hasbeen amended in the past, for more than 20 times. Theproliferation and diversity of amendments aggravatedthe complexities of the Law and its comprehensivereview became inevitable. However, no new path wascharted. Even FICCI voiced the concern that the ConceptPaper did not veer away from the bias towardsregulators and regulations. This over emphasis onframing rules for every aspect of law may indeed domore harm than good to Indian business.
  10. 10. Jayashree Sadri and Sorab SadriVarious committees on CG Clause 49 (2004) (SEBI): Listed companies in India (with paid-up capital ofRs.3 crore and more) have to comply with the corporate governancerelated provisions of Clause 49 of the Listing Agreement of StockExchanges. Clause 49 has been prepared by the Securities and ExchangeBoard of India (SEBI). SEBI has issued a circular dated 13th January 2006amending certain clauses of Clause 49 of the Listing Agreement to takeeffect from 1st January 2006. The changes proposed by SEBI were: (a) the maximum time gap between two Board meetings has beenincreased from three months to four months. (b) .Sitting fees paid to non-executive directors as authorized by theCompanies Act, 1956 would not require the previous approval ofshareholders. (c) Certification of internal controls and internal control systems by CEO/CFO would be for the purpose for financial reporting. Other changes are (i) the maximum time gap between two Board meetingshas been increased from three months to four months. (ii) Sitting fees paidto non-executive directors as authorized by the Companies Act, 1956would not require the previous approval of shareholders. (iii) Certificationof internal controls and internal control systems by CEO/ CFO would be forthe purpose for financial reporting. In view of the above, certain changeshave to be incorporated in the revised Clause 49 and The Stock Exchangeshave been advised to accordingly amend the listing agreement withimmediate effect.
  11. 11. Jayashree Sadri and Sorab SadriVarious committees on CG Confederation of Indian Industry (CII) in partnership with the Institute ofCompany Secretaries of India (ICSI) and the Institute of CharteredAccountants of India (ICAI) has set up the National Foundation forCorporate Governance (NFCG). However this more of a debating anddiscussion forum of experts rather than a decision making body. True,decisions may emanate from these discussions and debates but theconference can at best make recommendations. Narayana Murthy Committee Report of the SEBI Committee on CorporateGovernance (2003): The Committee was constituted by SEBI to review theperformance of corporate governance in the country as well as todetermine the role of companies in responding to rumour and other pricesensitive information circulating in the market in order to enhance thetransparency and integrity of the market. The Committee submitted itsreport to SEBI in February 2003. While the Naresh Chandra Committee hadrecommended a nine year term for non-executive directors the NarayanaMurthy Committee recommended that it be restricted to three terms ofthree years each running one after the other. But the main theme ofNarayana Murthy Committee was the fillip it gave to whistle blowers. Inshort, someone could go straight to the top management bypassing thesuperiors if any unethical practices were unearthed in the company. Thiswas taking the twin issues of transparency and accountability to newheights. Understandably the bureaucratically inclined CompanySecretaries were quite critical of this as they saw in it the seeds ofdepletion of their discriminatory power.
  12. 12. Jayashree Sadri and Sorab SadriVarious committees on CG Recommendations of the Naresh Chandra Committee Report on CorporateAudit and Governance (2002): In the wake of the corporate scandals of the US,the Department of Company Affairs (DCA), Government of India set up theNaresh Chandra Committee to examine various corporate governance issues sothat the same may not be repeated here. Many recommendations of the reportwere incorporated in the Companies (Amendment) Bill 2003, which is currentlybeing reviewed. It is indeed a pale shadow if not an imitation of the SarbanesOxley Act 2002 (SOX) of the USA which deals with four things: (a) CorporateSocial Responsibility of management and setting up of Audit Committees (b)Enhancement of financial disclosures in the larger public interest (c)Independence of Auditors and Audit Committees to present a fair picture ofcorporate ground level reality and (d) the Role of Public Company AccountingOversight Board. The Naresh Chandra Committee too the cue from SOX andconcentrated on the Company-Auditor relationship, Auditing the Auditors and theRole, Status, Appointment and Training of independent directors on the board. Adeep study of the Committee Report would show that it lacks teeth. In point offact it strangely silent on what happens to Independent Directors if an Enron likesituation were to emerge.
  13. 13. Jayashree Sadri and Sorab SadriVarious committees on CG Kumar Mangallam Birla Committee on CorporateGovernance (1999): The Committee was set up by SEBI topromote and raise the standards of Corporate Governance.The Committee’s terms of reference included suggestingsuitable amendments to the listing agreement executed bythe stock exchanges with the companies in order toenhance corporate governance standards of listedcompanies, drafting a code of corporate best practices; andsuggest safeguards to be instituted within the companiesto deal with insider information and insider trading. Severalof the Committee’s recommendations were incorporated inClause 49 of the listing agreement of stock exchanges.However there were two gaping lacunae: (i) the Committeedid not look beyond the stock exchanges as if the othersectors of business did not need governance and (ii)several corporate giants that were unlisted like TCS andHLL were not covered by the Committee raising questionsof whether multinational expropriation of national wealthcould be audited adequately let alone checked.
  14. 14. Jayashree Sadri and Sorab SadriVarious committees on CG CII Code on Corporate Governance (1998):The Confederation of Indian Industry (CII)published India’s first comprehensive code oncorporate governance (Desirable CorporateGovernance: A Code) in 1998. This Codewas well received by Corporate India andmany of its recommendations became part ofsubsequent regulations. It was a slowbeginning and it was evident there was a longway to go further ahead.
  15. 15. Jayashree Sadri and Sorab SadriCloned Capitalism? After 1980 international trade opened up in newerways and increased communication systemsbrought about an added transparency inbusiness. Free market capitalism became thenorm and competition in every conceivablemarket began to increase. This increase incompletion meant that many people were fightingfor a bigger piece of the same pie. This meantthat a dog eat dog attitude emerged in thebusiness and industry sector where only thefittest would survive.
  16. 16. Jayashree Sadri and Sorab SadriFitness and Free Markets If only the fit would survive what would happen tothose who were weak? Who would decide whoand what was fit and who and what was not fit? Was it the market? The government? Thechambers of commerce? Or the company itself? There was a need for market regulation: eitherthrough the Smithian “invisible hand” or theKeynesian “macro interventionism”.
  17. 17. Jayashree Sadri and Sorab SadriFITNESS WAS DEFINED IN TERMS OF: Better Quality: the product or the servicewas dependable. Better delivery: the lead time between orderand receipt was cut down.Logistics becameimportant. Better prices: People could afford to buy thegoods and services. Competition helped reduceprice levels.
  18. 18. Jayashree Sadri and Sorab SadriThe Small Fry However, when any one or more of the abovethree things was absent people began to adoptfoul means for getting business. Trust, Faithand Dependability on products began to bequestioned. So people went for known brandswhose products they could trust.
  19. 19. Jayashree Sadri and Sorab SadriThe Smaller Fry The smaller players suffered as a result ofbusiness being diverted to the biggerplayers and wanted a “level playing field”.The governments intervened. Minimumquality standards were laid down and hallmarks were placed on products declaredthat they were good like the Agmark, ISI,etc. A product or a service having such astamp was considered safe anddependable.
  20. 20. Jayashree Sadri and Sorab SadriPublic Acceptance This led to a general acceptance of theimportance of Business Ethics and alongwith it the realized need to have goodCorporate Governance.
  21. 21. Jayashree Sadri and Sorab SadriGOOD CORPORATE GOVERNANCEENSURED: Company actions were guided by a set of knownand accepted values. Companies acted in the best interests of societyat large since the organization itself was aresponsible social citizen. Business Ethics was built into the system and sowas reflected in all actions.
  22. 22. Jayashree Sadri and Sorab SadriThe Expanse of CG Corporate Governance was thus not just aboutcorporate management. It was somethingbroader. It included:- Fairness- Efficiency- Dependability- Transparent Administration- Well defined objectives.
  23. 23. Jayashree Sadri and Sorab SadriLINKAGE of CG with B EFour points emerge from any definition ofCorporate Governance and show its linkwith Business Ethics. Effective accountability to all stakeholders. Fair efficient and transparent administration. Diverse interests have to be managed. Competition needs to be tempered with somesort of value system.
  24. 24. Jayashree Sadri and Sorab SadriIndian Government and Keynesian StyleInterventionism This view taken implies that Government mustpay an increasing role as a referee, a counselorand an active change agent so as to bring aboutcorporate governance. This can be done eitherthrough legislation or through influencingindustry and business leaders in various forumslike the BMA, CII and FICCI. Special seminars canalso be organized to spread the message.
  25. 25. Jayashree Sadri and Sorab SadriWhat is expected from CG An effective Corporate Governance systemshould provide mechanisms for regulatingdirectors’ duties in order to restrain them fromabusing their powers and to ensure that they actin the best interests of the company in its broadsense. Hence it moves from being a compliancemechanism managed by regulators andregulations into being a developmental toolregulated through management strategy.
  26. 26. Jayashree Sadri and Sorab SadriBUT Logically it is unfair to expect somethingunless conditions for it have been laid downand a system is in place to guide it. In the case of Corporate Governance suchconditions and systems exist more by defaultthan by design.
  27. 27. Jayashree Sadri and Sorab SadriHence Corporate Governance is also concernedwith the ethics,values and morals of acompany and its directors. Corporate Governance recognizes issueslike maintaining continuity by successionplanning, identifying opportunities, facingchallenges and managing changes withinthe business and allocation of resourcestowards the right priority.
  28. 28. Jayashree Sadri and Sorab SadriTwo Routes To C G The first route to Corporate Governance isthrough the mechanism of regulators andregulations and here it becomes ruledriven and compliance based. The second route to CorporateGovernance is through the enabling ofbusiness ethics via well planned and wellmanaged management strategies that aregoal driven and value based.
  29. 29. Jayashree Sadri and Sorab SadriThe Need Given the positivist nature of change in thiscountry the State must lead by example if theeffect is to percolate through various levels ofcivil society. This need is not adequately fulfilled by thoseat the helm both in the economy and in thepolity. What we then need is an empowered,responsible, accountable and transparentsystem of National Level Governance.
  30. 30. Jayashree Sadri and Sorab SadriConclusion.. Governance is not only managing share market.It relates itself with all aspect of management. Governance is not only concerned withcompliance to rules but with overall corporategrowth. WE TAKE THE SECOND ROUTE AND POSITTHAT CORPORATE GOVERNANCE MUST BEBASED ON BUSINESS ETHICS.

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