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Business Ethics and Corporate Governance

(as per JNTUA, Anantapur)


H.K. Madhusudhana Rao,MBA,(CS) Associate Professor

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Business Ethic and Corporate Governance


Unit 1 Ethical theories and Approaches Modern Decision Making Ethical Models for Decision Making Introduction At all times, wise men and religions all over the world have considered value centered perfection and not material success as the ultimate goal of every human being. Unfortunately with passage of time, we started witnessing a degradation of values ethics forgetting the wise teachings, associating material success and fame as highest achievement. Ethics and Morals The word Ethics is derived from the ancient Greek word ehikos meaning character is the essence of values and habits of a person or group. It covers the analysis and employment of concepts such as right and wrong, good and evil, and acting with responsibility. It has many definitions according one ethics are the principles of conduct governing an individual or a group another describes ethics as relating to what is good or bad, and having to do with moral duty and obligation. Let us draw a distinction between Ethics and Morals. The word Moral is defined as relating to principles of right and wrong. Although both words are broadly defined in contemporary English as having to do with right and wrong conduct, the rood word for ethics is the Greek word Ethos meaning Character, while the root word of Moral is Latin Mos meaning custom. Ethics is a set of standards or a code or a value system worked out from human reason and experience, by which free human actions are determined as ultimately right or wrong, good or evil. Ethics may be defined as the science of the Highest Good. It is the science of the supreme ideal of human life. Nature of Ethics Ethics refers to standards of behavior that tell us how human beings ought to act in the many situations in which they find themselves in different roles. Ethics is not the same as feelings. Feelings provide important information for our ethical choices. Ethics is not religion. Many people are not religious but ethics applies to everyone. Ethics is not following law. A good system of law does incorporate many ethical standards. Ethics is not following culturally accepted norms. Ethics is not science. Social and natural science can provide important date to help us make better ethical choices. But science alone does not tell us what we ought to do. Ethical Principles The following are the Principles of Ethics: 1. Beneficence: the principle of beneficence guides the ethical theory to do what is good. This priority to do well makes an ethical perspective and possible solution to an ethical dilemma acceptable. 2. Least harm: it deals with situations in which neither choice is beneficial. In this a person should choose to do the least harm possible and to do harm to the fewest people. Business Ethics and Corporate Governance Page 2

3.

Respect for Autonomy: this principle states that an ethical theory should allow people to reign over themselves and to be able to make decisions that apply to their lives. It means people should have control over their lives.

Ethical approaches or Theories: The theories (philosophies) are ideal moral perspectives that provide individuals with abstract principles for guiding their social existence. The following are the five approaches or theories of Ethics 1. The Utilitarian Approach (Utilitarian approach): Jenny Bentham (1748 -1832) considered as the founder of traditional Utilitarian Approach. an action is right from an ethical point of view is and only if the sum total of utilities produced by that act is greater than the sum total of utilities produced by any other act the agent could have performed in its place i.e. the principle assumed that all the benefits & costs of an action can be measured as a common numerical scale and then added or subtracted from each other. 2. The rights & Duties approach (Deontological approach): other philosophers and ethicists suggest that the ethical action is one that best protects and respects the moral rights of those affected. This approach starts from the belief that humans have a dignity based on their human nature per se or on their ability to choose freely what they do with their lives. On the basis on such dignity, they have a right to treated as ends and not merely as means to other ends. 3. The Fairness and Justice and Equality (Egalitarianism) approach: According to the egalitarianism all benefits and burdens should be distributed by the following formula Every person should be given exactly equal share of societies or a groups benefits and burdens. Today we use this idea to say that ethical actions treat all human beings equally or unequally, then fairly based on some standard that is defensible. 4. The common good approach (Libertarianism) : The life in community is good in itself and our actions should contribute to that life. This approach suggests that the interlocking relationships of society are the basis of ethical reasoning and that respect and compassion for all others especially the vulnerable are requirements of such reasoning. This approach also calls attention to the common conditions that are important to the welfare of everyone, 5. The Virtue approach: A very ancient approach to ethics is that ethical actions ought to be consistent with certain ideal virtues that provide for the full development of our humanity. These virtues are dispositions and habits that enable us to act according to the highest potential of our character and on behalf of values like truth and beauty, honesty, courage, compassion, generosity, tolerance, love, fidelity, integrity, fairness, self control, and prudence are all examples of virtues.

Business Ethics:
Should a business entity be ethical? Experts often retort that business ethics is a contradiction in terms because of the inherent inconsistency between ethics and the self interest motive of profit. On the contrary it is now a well accepted fact that ethical behavior creates a positive motive of profit. Business ethics is the study of what constitutes right or wrong in business. Business ethics refers to the application of ethics to business. Business ethics then has to do with the authenticity and integrity of an enterprise. To be ethical is to follow the business as well as the cultural goals of the corporation, its owners, its employees and its customers. Business Ethics and Corporate Governance Page 3

Need for Business Ethics: 1. To give fair and equitable treatment to the employees 2. To charge fair prices 3. To use fair weights for measurements 4. To pay taxes 5. To earn reasonable profit Characteristics of Business Ethics: 1. It is important in all types of business 2. It s above law, it requires behavior which is socially desirable and legally binding 3. It is the systematic handling of values 4. By which the propriety of business activity may be judged 5. It concentrates on moral standard which apply to business strategies Benefits of Business Ethics 1. Improved society 2. Easier change management 3. Strong team work and greater productivity 4. Enhanced employee growth 5. Ethics programs help guarantee that personnel policies are legal 6. It help to avoid criminal act of omission and can lower fines 7. It help to manage values associated with quality management , 8. It helps to promote a strong public image. Scope of Business Ethics Business ethics covers all aspects of business as there is not business conduct which is totally free from moral considerations. As a science of conduct, it is concerned with the ideal standard to which business conduct should conform. Thus it enquires into the nature of springs of action or impetus, the forces that impels business, nature of voluntary or involuntary actions. It lays down the ideal of highest good and judges our conduct in the right of that ideal. Scope of business ethics

Societal Level Concern for all No discrimination Concern of Environment Conservation of Resources

Stake holders Level Employees Customers Shareholders Financial Lending Institutions Government

Internal policy level

Personal policy level

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Sources of Ethical Standards:


Ethical standards originate and develop from the following sources: 1. Social Attitudes: decline in societies norms as reflected in greater emphasis on permissiveness, decline in the influence of family and orientation towards quantity as opposed to quality ten to lower ethical standards. 2. Competitive Pressures: the economic system is built on two fundamental concepts of efforts and competition. The essence of these beliefs is that working hard and outperforming others is achieving goals will be rewarded with high levels of success. 3. Legal environment: the legislative environment is confusing and full of loopholes. Legal interpretations and entanglements often make it difficult for managers to know exactly what course to take or what decisions to make. Even the law affects ethical behavior. 4. Code of ethics: code of conduct serves as a guide to all members of the profession or industry. A code of ethics requires and prohibits specific practices. It may not deter the misbehaviors of intentional wrong doers but it reminds employees that the company is fully committed to meeting its standards and asks them to incorporate these standards into their daily activities.

Ethical issues in business


In India, the subject business ethics received little attention prior to the 1990s. However, it has gained major importance in the last couple of years. A broad array of incidents, beginning from the Harshad Mehatha has created awareness about ethical issues in the country. There have been issues of corruption, insider trading, cheating small investors and misappropriation of accounts where even big name of the industry have been faced prominently Some of the issues discussed in business are Concern about widespread corruption Financial scams Misleading advertisements Exploitation of labour Exploitation of child labour Exploitation of women at work Protection of the environment Safety and health in the workplace

Ethical Decision Making Process and Model


Ethical decision-making refers to the process of evaluating and choosing among alternatives in a manner consistent with ethical principles. In making ethical decisions, it is necessary to perceive and eliminate unethical options and select the best ethical alternative. The process of making ethical decisions requires:

Commitment: The desire to do the right thing regardless of the cost Consciousness: The awareness to act consistently and apply moral convictions to daily behavior Competency: The ability to collect and evaluate information, develop alternatives, and foresee potential consequences and risks

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Good decisions are both ethical and effective:

Ethical decisions generate and sustain trust; demonstrate respect, responsibility, fairness and caring; and are consistent with good citizenship. These behaviors provide a foundation for making better decisions by setting the ground rules for our behavior. Effective decisions are effective if they accomplish what we want accomplished and if they advance our purposes. A choice that produces unintended and undesirable results is ineffective. The key to making effective decisions is to think about choices in terms of their ability to accomplish our most important goals. This means we have to understand the difference between immediate and short-term goals and longer-range goals.

Steps in the Ethical Decision-Making Process Here are a few key points regarding ethical decisions. Responsible practice requires that you: base your actions on informed, sound, and responsible judgment consult with colleagues or seek supervision keep your knowledge and skills current engage in a continual process of self-examination remain open In making ethical decisions, as much as possible and when appropriate, include your client in this ethical decision-making process. Clients need enough information about the therapeutic process to be able to make informed choices. The informed consent process begins with the intake interview and continues for the duration of the therapeutic relationship. The aim is to involve clients in a collaborative partnership. The key is to make ethical decisions with clients, not simply for them. Get clients actively involved in the process to the extent possible and appropriate. Respecting the autonomy of your clients implies that you do not decide for clients, nor do you foster dependent attitudes and behaviors. Eight Steps in Making Ethical Decisions Ethical decision making should be a collaborative process between client and counselor, rather than a counselor making decisions for the client. Below are the steps, with suggested questions, to assist you in thinking through an ethical dilemma. This is one of several decision-making models which can be utilized. The steps taken may not always follow the same order shown and steps may be repeated several times in the process. 1. Identify the problem or dilemma. Does a problem or dilemma actually exist? Is this an ethical, legal, moral, professional, or clinical problem? Is it a combination of more than one of these? How can you know the nature of the problem? Would you consult at this early stage as you are identifying the problem? How might you begin the process of consultation with your client about the nature of the problem?

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2. Identify the potential issues involved. How might you best evaluate the rights, responsibilities, and welfare of all those involved and those who are affected by the decision, including your own welfare as a practitioner? How can you best promote your client's independence and self-determination? What actions have the least chance of bringing harm to your client? What decision will best safeguard the client's welfare? How can you create a trusting and collaborative climate where your clients can find their own answers? What principles can you use in prioritizing the potential issues involved in this situation? Are there any ways to encourage the client to participate in identifying and determining potential ethical issues? 3. Review the relevant ethical codes. What guidance can you find on the specific problem under review by consulting with the Professional codes? Are your values in agreement with the specific ethical code in question? How clear and specific are the codes on the specific area under consideration? Are the codes consistent with applicable state laws? 4. Know the applicable laws and regulations. Are there any laws or regulations that have a bearing on the situation under consideration? What are the specific and relevant state and federal laws that apply to the ethical dilemma? What are the rules, regulations, and policies of the agency or institution where you work? 5. Obtain consultation. Do you know where to go to obtain consultation with professionals who are knowledgeable about ethical issues? Assuming that vou will consult with a colleague or a supervisor, what would you expect from this consultation? What kinds of questions do you want to ask of those with whom you consult? With whom do you seek consultation? Do you consult only with those who share your orientation, or do you look for consultants with different perspectives? How can vou use the consultation process as an opportunity to test the justification of a course of action you are inclined to take? What kinds of information do you document when you consult? When you do make use of a consultation process, do you inform your client about this? Are there any ways you might include the client in this consultation process? 6. Consider possible and probable courses of action. What are some ways that you can brainstorm many possible courses of action? Do you have a systematic method for analyzing ethical obligations and possible courses of action? Are you willing to involve your client in the discussion of the various courses of action? What might you document pertaining to discussions with your client about probable courses of action? 7. Enumerate the consequences of various decisions. How can you best evaluate the potential consequences of each course of action, before implementing a particular action plan? Business Ethics and Corporate Governance Page 7

Are you willing to involve your client in the discussion of the implications of each course of action for the client? What ethical principles can you use as a framework for evaluating the consequences of a given course of action? Examine the consequences of various decisions for your client, for you as counselor, and for the profession in general. 8. Decide on what appears to be the best course of action. After carefully considering all the information you have gathered, how do you know what seems to be the best action to take? Do you solicit the input of your client in making this decision at this phase? Once you have formulated a plan of action, do you ask for feedback from a colleague or supervisor? Once the course of action has been implemented, what are some ways that you might evaluate the course of action? Are you willing to follow up to determine the outcomes and see if further action is necessary An Ethical Decision-Making Model Clarify. a. b. c. d. e. Determine precisely what must be decided. Formulate and devise the full range of alternatives. Eliminate patently impractical, illegal and improper alternatives. Force yourself to develop at least three ethically justifiable options. Examine each option to determine which ethical principles and values are involved.

Evaluate. a. If any of the options requires the sacrifice of any ethical principle, evaluate the facts and assumptions carefully. b. Distinguish solid facts from beliefs, desires, theories, suppositions, unsupported conclusions, opinions, and rationalizations. c. Consider the credibility of sources, especially when they are self-interested, ideological or biased. d. With regard to each alternative, carefully consider the benefits, burdens and risks to each stakeholder. Decide. a. b. c. d. e. f. Make a judgment about what is not true and what consequences are most likely to occur. Evaluate the viable alternatives according to personal conscience. Prioritize the values so that you can choose which values to advance and which to subordinate. Determine who will be helped the most and harmed the least. Consider the worst case scenario. Consider whether ethically questionable conduct can be avoided by changing goals or methods, or by getting consent. Page 8

Business Ethics and Corporate Governance

g. Apply three "ethics guides." o Are you treating others as you would want to be treated? o Would you be comfortable if your reasoning and decision were to be publicized? o Would you be comfortable if your children were observing you? Implement. a. Develop a plan of how to implement the decision. b. Maximize the benefits and minimize the costs and risks.

Monitor and modify. a. Monitor the effects of decisions. b. Be prepared and willing to revise a plan, or take a different course of action. c. Adjust to new information. Some other Methods of Decision Making in Business Ethics

The RESOLVEDD Method by Jonathan L. Kvanig 1. R Review the facts Review history, background and details of case What are the details? What is the background? 2. E Estimate (specify) the conflict or problem present in the case, i.e., what is at issue or at stake. 3. S List main possible solutions to the case. 4. O State important and probable outcomes or consequences of each solution. What will happen? What is likely to happen? What might happen? 5. L Describe likely impact of each main solution on peoples lives, and on the interests and concerns of entities (i.e., institutions, organizations, companies, governments and states), as well as nonhumans and the environment. Who will be benefited? Who will be harmed? Who else will be impacted and how? 6. V Explain the values upheld and those infringed by each main solution. Refer to relevant moral principles: honesty, harm, fidelity, autonomy, confidentiality, lawfulness, equal consideration of interests; Characterize salient moral rights: knowledge, privacy, life, free expression, due process, safety, property, profitability; Include the consideration of the interests and rights of future generations.
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7. E Evaluate each main solution in terms of outcomes, likely impact and values upheld or infringed. 8. D Decide which solution is best, state it, clarify its details, and justify it. 9. D Defend the decision against objections to its main weaknesses.
Problems in Ethical Decision Making 1. Due to globalization , as companies deal with other countries where cross cultural diversity arises mangers working in MNCs find it very difficult to standardize ethical standards as they do change as society change 2. Sometimes the decision makers do not follow what they must follow as they have conflict in individual values versus organizational goals. 3. Individual moral standards affect whole organization decisions f they a morally strong, ethical decision would be the outcomes 4. Poor decisions without deep thinking of implications. 5. Ambiguous situations create problem which put the manager in dilemma as to which decision they should make and follow. It is clear, then that although local laws or government decrees, prevalent practices, levels of development and cultural understandings all must be taken into account when evaluating the ethics of business policies and actions in a foreign country, the local status quo cannot simply be adopted without question by the multinational managers but must still be subjected to ethical analysis.

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Unit II Marketing Ethics Marketing Ethics advertising ethics ethics in business competition
Marketing ethics is the systematic study of how moral standards are applied to marketing decisions, behaviors, and institutions. Because marketing is a process inherent to most organizations, marketing ethics should be viewed as a subset of business ethics; thus, much of what is written about business ethics applies to marketing ethics as well. At the outset, it is also useful to distinguish between positive and nonnative marketing ethics. Positive marketing ethics looks at marketing practices from the standpoint of "what is." For example, specifying the percentage of organizations that have codes of ethical marketing practice or tracking the number of violations that deal with deceptive advertising would be examples of positive marketing ethics. In contrast, normative marketing ethics deals with how marketing ought to operate according to some moral standard or theory. The sort of moral standards (or theories) applied to marketing situations involve the usual moral frameworks commonly applied when evaluating business ethics (e.g., utilitarianism, dutybased theories, virtue ethics). When the words "marketing ethics" appear in the general media or business press, the reports typically describe a marketing strategy, tactic, or policy that some constituency feels is "unfair" or "exploitive" or "deceptive." Often, the subsequent discussion Tums to how marketing practices might become more consumer-friendly, socially compatible, or put in philosophical terms, how marketing might be normatively improved. Normative marketing practices might be defined as those that emphasize transparent, trustworthy, and responsible personal and/or organizational marketing policies and actions, and exhibit integrity as well as fairness to consumers and other stakeholders. In the true spirit of normative ethical standards, this definition provides certain virtues and values (e.g., trust, fairness) to which marketing practitioners ought to aspire. However, the definition also raises myriad questions. What do we mean by transparent? Does that mean no trade secrets are ever allowed? What is the essential nature of integrity? Does it insole involve keeping organizational promises to customers or is it broader than that? What is the nature of fairness, and who decides what standard of fairness is to be applied? Should it be consumers, the company at focus, regulatory agencies, or a broader cross-section of society? What stakeholder interests should be taken into consideration, and how should they be weighted? As one can see from these questions, the area of normative marketing ethics is likely to generate considerable controversy because there are differing views among various parties about what constitutes "proper" behavior in marketing.

Marketing practice
At the heart of marketing ethics are decisions that marketing practitioners make about ethical questions. Ethical questions most often arise in marketing when a stakeholder group or some segment of the public feels that the actions taken by some (or many) marketers might be judged to be morally inappropriate. Currently, for instance, many consumers feel that spam advertising over the Internet is far too prevalent and/or that product rebates have too often been intentionally made to be difficult to redeem. Similarly, other ethical questions occur when marketing managers believe that they might be compromising their own personal values in the quest for increased organizational profit. In such situations, marketers are often evaluating whether they should take business actions that they feel ought not to be done from the standpoint of personal ethics that they hold-the essence of an ethical dilemma. Most managers cannot avoid facing such tough issues because the majority of marketing professionals report confronting such ethical questions at some point in their careers. These "ethical" branch points can pertain to a host of marketing issues such as selling cigarettes to teenagers, the promotion of violence-oriented video games, pricing products at a level that exploits unsuspecting consumers, Business Ethics and Corporate Governance Page 11

bluffing in negotiations with long-time suppliers, writing intentionally misleading ad copy, and so on. If the marketing actions that are taken happen to be in violation of the law, these are also typically characterized as unethical. However, our focus in this entry is particularly on actions that are not illegal but that are criticized as "improper" according to some ethical value or norm. Therefore, marketing ethics is mostly focused on marketing behaviors that are not prohibited by the law but perhaps should not be indulged due to certain moral considerations. And thus, marketing ethics is often concerned with actions that are currently legal but still might be judged improper according to some invoked moral standard. Most generic areas of marketing practice provoke substantial ethical comment and discussion. These areas include marketing segmentation, marketing research, product development, pricing, distribution, personal selling, and advertising. In the paragraphs below, a sampling of marketing issues, often suggesting ethical questions from these areas of marketing practice is briefly reviewed to illustrate both the nature and the scope of marketing ethics in the conduct of business operations. Market Segmentation One of the basic strategies of marketing campaigns involves the division of the mass market into "segments" followed by the development of specific offerings to appeal to the selected "target market."Ethical questions especially surround the target marketing of segments that include potentially vulnerable populations such as children, the elderly, the impoverished, and marketing illiterates. The "ethical issue" at focus here centers on whether marketers have too much "power" over certain groups who are not prepared to independently participate in the marketplace. Marketing Research Since marketing decisions are often data driven, market research techniques and outputs are frequently used by marketing practitioners. Market researchers themselves often have considerable training in methodological and statistical techniques, and one might surmise that because of their greater education, they exhibit a higher degree of ethical professionalism than other marketing practitioners. Certainly, it is true that various professional organizations related to the practice of marketing research such as the Council for Survey Research, the Market Research Society and the European Society of Marketing and Opinion Research have developed detailed codes of ethics addressing common conflicts that occur in the execution of marketing research. Additional ethical issues arise owing to the fact that marketing research often involves contact with the general public, usually through the use of surveys that are increasingly being conducted online. Because marketing research activity relies heavily on publicly submitted information, some of which is personally sensitive, marketing research is ripe for ethical abuse or misuse. As survey research has become digitized, researchers have gathered substantial records about consumer product and service usage as well as their satisfaction. As a result, the issue of consumer privacy is at the forefront of marketing research ethics. It is hoped that the coming decade will yield definitive answers about the extent of privacy protection that consumers can expect when shopping online. Second, most marketing research is conducted by for-profit organizations to aid decision making within corporations. As a result, the profit motive may cause researchers or their clients to compromise the objectivity and precision of the research that is undertaken. Researchers inherently want to provide support for the outcomes their sponsors hope to find. Clients basically want the research they conduct to tell the best possible story about their company and their products. It should not be surprising then that marketers Business Ethics and Corporate Governance Page 12

sometimes fall to the temptation of misusing market research information by manipulating or exaggerating the results. UNFAIR OR DECEPTIVE MARKETING PRACTICES Marketing practices are deceptive if customers believe they will get more value from a product or service than they actually receive. Deception, which can take the form of a misrepresentation, omission, or misleading practice, can occur when working with any element of the marketing mix. Because consumers are exposed to great quantities of information about products and firms, they often become skeptical of marketing claims and selling messages and act to protect themselves from being deceived. Thus, when a product or service does not provide expected value, customers will often seek a different source. Deceptive pricing practices cause customers to believe that the price they pay for some unit of value in a product or service is lower than it really is. The deception might take the form of making false price comparisons, providing misleading suggested selling prices, omitting important conditions of the sale, or making very low price offers available only when other items are purchased as well. Promotion practices are deceptive when the seller intentionally misstates how a product is constructed or performs, fails to disclose information regarding pyramid sales (a sales technique in which a person is recruited into a plan and then expects to make money by recruiting other people), or employs bait-and-switch selling techniques (a technique in which a business offers to sell a product or service, often at a lower price, in order to attract customers who are then encouraged to purchase a more expensive item). False or greatly exaggerated product or service claims are also deceptive. When packages are intentionally mislabeled as to contents, size, weight, or use information, that constitutes deceptive packaging. Selling hazardous or defective products without disclosing the dangers, failing to perform promised services, and not honoring warranty obligations are also considered deception. OFFENSIVE MATERIALS AND OBJECTIONABLE MARKETING PRACTICES Marketers control what they say to customers as well as and how and where they say it. When events, television or radio programming, or publications sponsored by a marketer, in addition to products or promotional materials, are perceived as offensive, they often create strong negative reactions. For example, some people find advertising for all products promoting sexual potency to be offensive. Others may be offended when a promotion employs stereotypical images or uses sex as an appeal. This is particularly true when a product is being marketed in other countries, where words and images may carry different meanings than they do in the host country. When people feel that products or appeals are offensive, they may pressure vendors to stop carrying the product. Thus, all promotional messages must be carefully screened and tested, and communication media, programming, and editorial content selected to match the tastes and interests of targeted customers. Beyond the target audience, however, marketers should understand that there are others who are not customers who might receive their appeals and see their images and be offended. Direct marketing is also undergoing closer examination. Objectionable practices range from minor irritants, such as the timing and frequency of sales letters or commercials, to those that are offensive or even illegal. Among examples of practices that may raise ethical questions are persistent and highpressure selling, annoying telemarketing calls, and television commercials that are too long or run too frequently. Marketing appeals created to take advantage of young or inexperienced consumers or senior citizens including advertisements, sales appeals disguised as contests, junk mail (including electronic mail), and the use and exchange of mailing list say also pose ethical questions. In addition to being Business Ethics and Corporate Governance Page 13

subject to consumer-protection laws and regulations, the Direct Marketing Association provides a list of voluntary ethical guidelines for companies engaged in direct marketing (available at their Web site at www.the-dma.org). ETHICAL PRODUCT AND DISTRIBUTION PRACTICES Several product-related issues raise questions about ethics in marketing, most often concerning the quality of products and services provided. Among the most frequently voiced complaints are ones about products that are unsafe, that are of poor quality in construction or content, that do not contain what is promoted, or that go out of style or become obsolete before they actually need replacing. An organization that markets poor-quality or unsafe products is taking the chance that it will develop a reputation for poor products or service. In addition, it may be putting itself in jeopardy for product claims or legal action. Sometimes, however, frequent changes in product features or performance, such as those that often occur in the computer industry, make previous models of products obsolete. Such changes can be misinterpreted as planned obsolescence. Ethical questions may also arise in the distribution process. Because sales performance is the most common way in which marketing representatives and sales personnel are evaluated, performance pressures exist that may lead to ethical dilemmas. For example, pressuring vendors to buy more than they need and pushing items that will result in higher commissions are temptations. Exerting influence to cause vendors to reduce display space for competitors' products, promising shipment when knowing delivery is not possible by the promised date, or paying vendors to carry a firm's product rather than one of its competitors are also unethical. Research is another area in which ethical issues may arise. Information gathered from research can be important to the successful marketing of products or services. Consumers, however, may view organizations' efforts to gather data from them as invading their privacy. They are resistant to give out personal information that might cause them to become a marketing target or to receive product or sales information. When data about products or consumers are exaggerated to make a selling point, or research questions are written to obtain a specific result, consumers are misled. Without self-imposed ethical standards in the research process, management will likely make decisions based on inaccurate information. DOES MARKETING OVERFOCUS ON MATERIALISM? Consumers develop an identity in the market place that is shaped both by who they are and by what they see themselves as becoming. There is evidence that the way consumers view themselves influences their purchasing behavior. This identity is often reflected in the brands or products they consume or the way in which they lead their lives. The proliferation of information about products and services complicates decision making. Sometimes consumer desires to achieve or maintain a certain lifestyle or image results in their purchasing more than they need or can afford. Does marketing create these wants? Clearly, appeals exist that are designed to cause people to purchase more than they need or can afford. Unsolicited offers of credit cards with high limits or high interest rates, advertising appeals touting the psychological benefits of conspicuous consumption, and promotions that seek to stimulate unrecognized needs are often cited as examples of these excesses.

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SPECIAL ETHICAL ISSUES IN MARKETING TO CHILDREN Children are an important marketing target for certain products. Because their knowledge about products, the media, and selling strategies is usually not as well developed as that of adults, children are likely to be more vulnerable to psychological appeals and strong images. Thus, ethical questions sometimes arise when they are exposed to questionable marketing tactics and messages. For example, studies linking relationships between tobacco and alcohol marketing with youth consumption resulted in increased public pressure directly leading to the regulation of marketing for those products. The proliferation of direct marketing and use of the Internet to market to children also raises ethical issues. Sometimes a few unscrupulous marketers design sites so that children are able to bypass adult supervision or control; sometimes they present objectionable materials to underage consumers or pressure them to buy items or provide credit card numbers. When this happens, it is likely that social pressure and subsequent regulation will result. Likewise, programming for children and youth in the mass media has been under scrutiny for many years. In the United States, marketing to children is closely controlled. Federal regulations place limits on the types of marketing that can be directed to children, and marketing activities are monitored by the Better Business Bureau, the Federal Trade Commission, consumer and parental groups, and the broadcast networks. These guidelines provide clear direction to marketers. ETHICAL ISSUES IN MARKETING TO MINORITIES The United States is a society of ever-increasing diversity. Markets are broken into segments in which people share some similar characteristics. Ethical issues arise when marketing tactics are designed specifically to exploit or manipulate a minority market segment. Offensive practices may take the form of negative or stereotypical representations of minorities, associating the consumption of harmful or questionable products with a particular minority segment, and demeaning portrayals of a race or group. Ethical questions may also arise when high-pressure selling is directed at a group, when higher prices are charged for products sold to minorities, or even when stores provide poorer service in neighborhoods with a high population of minority customers. Such practices will likely result in a bad public image and lost sales for the marketer. Unlike the legal protections in place to protect children from harmful practices, there have been few efforts to protect minority customers. When targeting minorities, firms must evaluate whether the targeted population is susceptible to appeals because of their minority status. The firm must assess marketing efforts to determine whether ethical behavior would cause them to change their marketing practices. ETHICAL ISSUES SURROUNDING THE PORTRAYAL OF WOMEN IN MARKETING EFFORTS As society changes, so do the images of and roles assumed by people, regardless of race, sex, or occupation. Women have been portrayed in a variety of ways over the years. When marketers present those images as overly conventional, formulaic, or oversimplified, people may view them as stereotypical and offensive. Examples of demeaning stereotypes include those in which women are presented as less intelligent, submissive to or obsessed with men, unable to assume leadership roles or make decisions, or skimpily dressed in order to appeal to the sexual interests of males. Harmful stereotypes include those portraying women as obsessed with their appearance or conforming to some ideal of size, weight, or beauty. When images are considered demeaning or harmful, they will work to the detriment of the Business Ethics and Corporate Governance Page 15

organization. Advertisements, in particular, should be evaluated to be sure that the images projected are not offensive. Ethical Issues in Marketing Mix The elements of Marketing Mix i.e. Product, price, place, promotion and their ethical issues are as follows: 1. Product: under this element we should think of these things Quality of Product, Safety, Warranties, Packaging and Labeling and pollution. 2. Price: The unethical pricing practices are price fixing, price skimming, price discrimination, variable pricing, predatory pricing, price war, dumping pricing policy, price gouging. 3. Promotion: The Ethical issues relating to promotion are overemphasizes materialism, increases in costs of gods and services, ads related to bad habits, unfair tactics, deceptive & misleading ads etc,. 4. Place: ethical issues relating to place are collusion, dual distribution, secretive behaviour, full line forcing, refuse to deal, exclusive dealing. Ethical Values in Marketing: Honestyto be truthful and forthright in our dealings with customers and stakeholders. We will tell the truth in all situations and at all times. We will offer products of value that do what we claim in our communications. We will stand behind our products if they fail to deliver their claimed benefits. We will honor our explicit and implicit commitments and promises. Responsibilityto accept the consequences of our marketing decisions and strategies. We will make strenuous efforts to serve the needs of our customers. We will avoid using coercion with all stakeholders. We will acknowledge the social obligations to stakeholders that come with increased marketing and economic power. We will recognize our special commitments to economically vulnerable segments of the market such as children, the elderly and others who may be substantially disadvantaged. Fairnessto try to balance justly the needs of the buyer with the interests of the seller. We will represent our products in a clear way in selling, advertising, and other forms of communication; this includes the avoidance of false, misleading, and deceptive promotion. We will reject manipulations and sales tactics that harm customer trust. We will not engage in price fixing, predatory pricing, price gouging, or bait-and-switch tactics. We will not knowingly participate in material conflicts of interest. Respectto acknowledge the basic human dignity of all stakeholders. We will value individual differences even as we avoid stereotyping customers or depicting demographic groups (e.g., gender, race, sexual orientation) in a negative or dehumanizing way in our promotions. We will listen to the needs of our customers and make all reasonable efforts to monitor and improve their satisfaction on an ongoing basis. We will make a special effort to understand suppliers, intermediaries, and distributors from other cultures. Business Ethics and Corporate Governance Page 16

We will appropriately acknowledge the contributions of others, such as consultants, employees and coworkers, to our marketing endeavors. Opennessto create transparency in our marketing operations. We will strive to communicate clearly with all our constituencies. We will accept constructive criticism from our customers and other stakeholders. We will explain significant product or service risks, component substitutions or other foreseeable eventualities that could affect customers or their perception of the purchase decision. We will fully disclose list prices and terms of financing as well as available price deals and adjustments. Citizenshipto fulfill the economic, legal, philanthropic and societal responsibilities that serve stakeholders in a strategic manner. We will strive to protect the natural environment in the execution of marketing campaigns. We will give back to the community through volunteerism and charitable donations. We will work to contribute to the overall betterment of marketing and its reputation. We will encourage supply chain members to ensure that trade is fair for all participants, including producers in developing countries.

Advertising Ethics
Walter Thomson advertising is anon moral force, like electricity which not only illuminates but electrocutes, its worth to civilization depends upon how it its used. Commercial advertising is defined as a form of information which means providing information to consumers. Thus ethics in advertising means a set of well defined principles which govern the ways of communication taking place between the seller and the buyer. Ethics is the most important feature of the advertising industry. Though there are many benefits of advertising but then there are some points which dont match the ethical norms of advertising. An ethical ad is the one which doesnt lie, doesnt make fake or false claims and is in the limit of decency. Benefits of Advertising Economic: useful tool for sustaining honest and ethically responsible competition by informing people of the availability of rationally desirable new products and services and improvements in existing ones Political: helps counteract tendencies toward the monopolization of power by informing people of the ideas and policy proposals of parties and candidates Cultural: can exert a positive influence on decisions about media content; contribute the betterment of society by uplifting and inspiring people and motivating them to act in ways that benefit themselves and others. Importance of witty, tasteful and entertaining advertising, even to the point of becoming art.1 Moral and Religious: communicate messages of faith, patriotism, tolerance, compassion and neighborly service, charity, health, education Harms of Advertising Economic: misrepresent and without relevant facts; subvert the media by pressure not to treat of questions that are embarrassing and inconvenient; tout harmful or useless goods; move people based on non-rational decisions; become a tool of "consumerism"; particularly harmful in economically less developed countries Political: costs of advertising can limit political competition to wealthy candidates or to those willing to compromise their integrity; distorts the views and records of opponents Business Ethics and Corporate Governance Page 17

Cultural: corrupt culture and cultural values by contradicting sound traditional values; can create superficiality, tawdriness, and moral squalor; ignore educational and social needs of certain segments of the audience; contributes to stereotyping of particular groups Moral and religious harms: deliberate appeals to motives of envy, status seeking, and lust creates vulgar and morally degrading advertising; treat of religion in obnoxious and offensive manners; can promote morally suspect or perverse products and practices

Ethical Principles especially relevant to Advertising General o Principles of the moral order must be applied to the domain of media o Human freedom has a purpose: making an authentic moral response. All attempts to inform and persuade must respect the purposes of human freedom if they are to be moral. o Morally good advertising therefore is that advertising that seeks to move people to choose and act rationally in morally good ways; morally evil advertising seeks to move people to do evil deeds that are self-destructive and destructive of authentic community o Means and techniques of advertising must also be considered: manipulative, exploitative, corrupt and corrupting methods of persuasion and motivation Three Specific Moral Principles RESPECT TRUTHFULNESS (deception objection) o Never directly intend to deceive o Never use simply untrue advertising o Do not distort the truth by implying things that are not so or withholding relevant facts o "Puffery" is acceptable where it is consonant with recognized and accepted rhetorical and symbolic practice RESPECT THE DIGNITY OF EACH HUMAN PERSON (attacks autonomy objection) o Do not exploit our "lower inclinations" to compromise our capacity to reflect or decide either through its content or through its impact: using appeals to lust, vanity, envy and greed, and other human weakness. o Give special care to the weak and vulnerable: children, young people, the elderly, the poor, and the culturally disadvantaged RESPECT SOCIAL RESPONSIBILITIES (promotes consumption, empties communication, objections) o Example: Concern for the ecologyadvertising should not favor a lavish lifestyle which wastes resources and despoils the environment o Example: Advertising should not reduce human progress to acquiring material goods and cultivating a lavish lifestyle Unethical advertising Advertisement is considered unethical in the following situations; When it has degraded or underestimated the substitute or rival's product. When it gives false or misleading information on the value of the product. When it fails to give useful information on the possible reaction or side effects of the product. Ambiguity Exaggeration Concealed Facts Psychological appeal False Advertising Business Ethics and Corporate Governance Page 18

Harmful Products Degradation of women

Ways of misleading the consumers Many a time, traders entice the customers into their stores by advertising goods at a very low price, but they stock only a handful of such sale items in the store. When the advertised goods are sold out, consumers are steered towards the higher-priced stock or lower quality goods. Retailers must ensure that reasonable supply of products is available during the sales, and retailers should not purposely avoid it. Retailers should make it clear in the advertisement that how many items on sale are available or when the sale ends. Sale offer should be for a limited period. Advertisement should declare that sale offer is for a limited time period. The period of the offer should be made clear in the advertisement only when the advertised goods are available for a limited period or stocks are limited. Traders often offer insignificant price reduction. To illustrate, a trader may advertise that the price of product is reduced to Rs.99.95, when the normal selling price is Rs.100.. The trader must include the normal selling price and discounted price in his offer .The trader sale offer is misleading if the trader claims the product is below cost , when the price is not below cost after discounts, rebates and other allowances it is misleading if the trader simply shows a fictitious higher price as normal selling price in the advertisement. Advertisement must clearly indicate the total price of goods or services. All price comparison must be truthful and must not intentionally or unintentionally mislead the consumers. Under the Fair Trade Practices Act, retailers have an obligation to ensure that they do not mislead or make false representations to customers with respect to price of the goods. The consumers who shop around and compare the prices of various products are less likely to be deceived by misleading claims consumers should also be aware of what is a reasonable price of goods and not take any advertised discounts at face value. While many sales are legitimate or genuine, the consumers should not get attracted to such sales offers i.e., "Hurry...very few days remain for sale''. The consumers should be aware of what to expect when retailers place items on sale and how to avoid being misled by discount advertisements. A marketer should take care to ensure that when goods or services are advertised to be available at a discount or as being on sale, it is a genuine discount or sale. Remedies to overcome deceptive advertisements Cease-and- Desist Orders The cease-and-desist orders, which prohibit the respondent from engaging any more in deceptive practice, are actually the only formal procedure established by the Federal Trade Commission Act for enforcing the prohibition of ' deceptive acts and practices.'' Restitution Restitution means the consumer is compensated for any damage caused to him by the product that had advertised claims not adequately substantiated. Restitution is rarely considered because of its severity. Affirmative Disclosures If an advertisement has provided insufficient information to the consumers, an affirmative disclosure might be issued Affirmative disclosure require 'clear and conspicuous disclosure' of omitted information. Often the involved information relates to the deficiency or limitations of the product or service possibly relating to matters of health or safety. Corrective Advertising Business Ethics and Corporate Governance Page 19

Corrective Advertising requires the advertisers to verify past deception by making suitable amendment in any of its future commercial. Self Regulation in Advertising It is our responsibility to regulate our operations. And we must do it ourselves. Self regulation is not a quick-fix solution; it will be completely ineffective without commitment from and the integrity of one and all. Self Regulation may require the following; The development of a self-regulatory code of conduct covering all forms of media that is sensitive to ethics, legalities, decency and truthfulness in advertising. Provision for monitoring and accountability, including a policy allowing for the removal of ads that violate the code. Greater participation of advertising professionals in the regulatory process. The inclusion of non-industry players in the process Consumer awareness of the self regulation system. Simplification of the complaint process against ads. Transparency throughout the entire system. These reforms will achieve three goals. They will make the industry accountable for its actions. They will make regulators and critics think twice before attacking the industry and finally they will lead the public to trust ads, advertisers and agencies.

Ethics in business competition/Ethics in the Marketplace


Introduction If free markets are moral it's because they allocate resources & distribute commodities 1. in ways that are just 2. that maximize economic utility 3. that respect the liberty of both buyers and sellers These three benefits depend crucially on competition .Consequently, anticompetitive practices are morally dubious Two kinds of anticompetitive conditions and practices o monopoly conditions: a market segment controlled by one seller o oligopoly conditions: a market segment controlled by a few sellers 4.1 Perfect Competition Under perfect competition, "no buyer or seller has the power to significantly affect the prices at which goods are exchanged." Seven features of perfectly competitive markets: 1. distributed: numerous buyers & sellers, none of whom has a substantial market share 2. open: buyers and sellers are free to enter or leave the market 3. full and perfect knowledge: each buyer & seller has full and perfect knowledge of each others' doings 4. equivalent goods: goods being sold are similar enough that buyers don't care whose they buy. 5. unsubsidized: costs of producing or using goods is borne entirely by the buyers & sellers 6. rational economic agency: all buyers and sellers act as egoistic utility maximizers try to buy (or produce) as low as possible sell as high as possible 7. unregulated: no external parties such as governments regulate the price, quantity, or quality of goods Business Ethics and Corporate Governance Page 20

Breakdown of the seven features o 1-2 -- openness and distribution -- the "basic conditions" o 3-6 are "idealizing conditions" o 7 non regulation -- a measure of how free the market all real economies are mixed, mixing free market elements command elements regulative admixtures justified by appeal to social utility distributive justice rights -- especially positive or welfare rights Essential presuppositions o an enforceable private property system so buyers and sellers have ownership rights to exchange o a system of contracts to facilitate & control transfers of ownership o an underlying system of production so there's goods to be exchanged Self-regulation: the basis for the alleged moral benefits of competitive markets o supply > demand sellers bid prices down: assumes distribution among sellers falling profits lead to decreased production: assumes openness profits in one market sector falling below those in others causes sellers to move into the other, more profitable, sector o demand > supply buyers bid prices up: assumes distribution among buyers rising profits lead to increased production: assumes openness profits in one market sector rising above those in others causes sellers to move out of the others and into the more profitable sector Equilibrium in Perfectly Competitive Markets Principle of Diminishing Marginal Utility o affecting demand o states that each additional item consumed is less useful or satisfying than each of the earlier items consequently is less valuable than each of the earlier items o consequence: "the price consumers are willing to pay for goods diminishes as the quantity of goods they buy increases" Principle of Increasing Marginal Costs o affecting supply o states that each additional item produced after a certain point costs more to produce than earlier items point determined by countervailing economies of scale & scarcity or plenitude of resources costs breakdown = ordinary costs + normal profits "ordinary" costs of production & distribution costs of labor materials marketing distribution etc. Business Ethics and Corporate Governance Page 21

"normal" profit: "the average profit the producers could make in other markets that carry similar risks" Equilibrium price: the price at which supply = demand, i.e., o the amount buyers will pay for a quantity of goods o the production costs (including normal profits) of that quantity for the sellers Discussion: Perfect Competition as useful idealization o only a few markets -- mainly agricultural commodities markets -- come close to the ideal o perfect competition and explanatory construct or idealization enables economists to make predictions as with other useful idealizations use of equations governing "frictionless planes" to estimate behavior of real inclined planes use of equations governing "free fall in a vacuum" to estimate the behavior of bodies falling in the atmosphere etc. ethically illuminating provides us with a clear understanding of the advantages of competition and understanding of why it may be desirable to keep markets as competitive as possible Ethics and Perfectly Competitive Markets (PCMs) Capitalist distributive justice is well served by perfectly competitive markets o contributive justice: to each according to their contribution counting capital or ownership of the means of production as a contribution counting the value of workers contribution as = the price their services command on the job market accords with the practice of counting "normal" profit as a cost of production Economic utility or efficiency is best served o demand is served: sellers sell and producers produce what consumers want o efficiency is forced on producers & distributors by competition o consumers individual preferences are served each gets what they in particular most want from among the goods available Negative rights are well respected, especially rights of economic liberty o to buy and sell whatever you choose o whenever you choose o to and from whomever you choose Limitations on Perfectly Competitive Markets' Claims to Moral Superiority o Justice under competing conceptions not so well served egalitarian justice violated by income & wealth disparities arising under PCMs distribution according to ability to pay vs. need is contrary to needs-based conceptions counting the value of labor as the price it commands on the job market contrary to Marxian contribution-based justice value of labor = fair-market value of product minus the ordinary costs of production "normal" profit not counted as a cost of production o Justice and benefits alleged accrue only to market participants or those with money to buy it's only their demand that are served Business Ethics and Corporate Governance Page 22

it's only their individual preferences that are served Positive rights of the poor may be violated: e.g., rights to food & shelter education health-care o Conditions for perfect competition may conflict with care rational egoistic utility maximization neglects caring -- it's selfish efficiency demands of competition may conflict with caring if I'm too caring pay my help substantially more than my competitors if I spend substantially more on pollution controls than my competitors if I spend spend substantially more on safe working conditions than my competitors then I may lose out in the competition my production costs will be higher my competitors will undersell me putting me out of business o Certain bad character traits may be encouraged and certain good traits discouraged by competitive markets discouraged good traits kindness caring generosity negative traits encourages greed & self-seeking materialism o Imperfections of real markets insofar as they fall short of perfect competitiveness they may fail to deliver even the promised benefits of serving capitalistic justice maximizing utility securing negative rights of economic liberty 4.2 Monopoly Competition In monopoly conditions the first two of the seven conditions defining perfect competition are violated o not distributed but concentrated instead of "numerous sellers, none of whom has a substantial share of the market" one seller has a 100% share of the market o not open but closed instead of other sellers being able to "freely and immediately enter" other sellers are prevented from entering due to various factors patent laws high capitalization costs anticompetitive machinations of the monopoly holder etc. o Monopoly markets o

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Definition: "markets . . . in which a single firm is the only seller in the market and which new sellers are barred from entering." (p. 221) Principal Market-Distorting Effect inability of other competitors to enter the market thereby increasing supplies thereby bidding prices down results in artificially high prices above the "natural price" or equilibrium point natural price = cost of production + going-rate-of-profit (CP + GRP) Monopoly Competition: Justice, Utility, and Rights Monopoly Markets & Capitalist Justice o Capitalist justice says: "to each according to their contribution of labor or investment. o Equilibrium point is where Capitalist justice is served. o Under monopoly conditions prices kept above equilibrium so the seller charges more than the goods are worth (i.e., their natural price) so the prices the buyer is forced to pay are unjust (i.e. > CP +GRP) Monopoly Markets & Economic Utility 1. Monopolies foster distributive inefficiency: demand is not served monopolies create (virtual?) shortages (indicated by high profits) other firms unable to enter the market to make up these shortages excess profits absorbed by the seller are resources not needed to supply the amounts of goods the consumers are getting: if others were free to enter the market The same goods would be supplied for less. 2. Monopolies remove competitive pressures making for productive efficiency 3. Discretionary preferences of consumers not as well-served: consumers forced cut back more than they would have had to (under "normal" conditions) to buy the monopolized goods Monopoly Markets and Negative Rights of Economic Freedom o Sellers not free to enter. o Buyers buy under duress: monopoly sellers can dictate terms to buyers goods they may not want: "You have to buy the Service Agreement with that." Example: Microsoft marketing of Explorer Quantities they may not desire: "sorry it only comes by the dozen." o GM's reply to Bill Gates (humor) 4.3 Oligopolistic Competition True monopolies are rare: but a second type of "imperfectly competitive market" is common. Oligopoly conditions: a few firms control most of the market o relatively common ("business as usual") o have similar dynamics and anticompetitive effects In oligopoly conditions the first two of the seven conditions defining perfect competition are violated o not distributed but concentrated instead of "numerous sellers, none of whom has a substantial share of the market" Business Ethics and Corporate Governance Page 24

a few sellers have a near 100% share of the market not open but closed instead of others sellers being able to "freely and immediately enter" other sellers are prevented from entering due to high start-up costs anticompetitive machinations of the oligopoly firms long-term contracts with buyers etc. Concentration o the fewer the firms controlling the market the more "highly concentrated" the market o the more firms controlling the market the less "highly concentrated" Horizontal mergers: the chief cause of oligopolistic conditions o horizontal merger = "unification of two or more companies that were formerly competing in the same line of business" e.g., Daimler, Disney-Times-Warner anticompetitive Dynamic: Creation of Virtual Monopoly Conditions via Collusion o with only a few firms in the market it is relatively easy for them to join forces and act as a unit "much like a single giant firm" by agreeing to set prices at the same (excessively high) level tacitly: a "gentlemen's agreement" explicitly: price fixing by agreeing to restrict output & control supply (OPEC) o with similar anti-competitive & consequently dubious ethical consequences violations of capitalist justice negative impacts on economic utility distributive inefficiencies productive inefficiencies diminished discretionary preference satisfaction o with similar negative (economic freedom) rights violations others are prevented from entering the market sellers dictate terms buyers have no recourse since the "competition" has agreed to dictate the same terms Explicit Agreements Price fixing: managers meet (secretly) & agree to set prices at a artificially high levels. Manipulation of Supply: firms agree to limit their production o result in artificially induced shortages o hence in artificially high prices Exclusive Dealing Arrangements: firms sell to retailers on condition o that retailers will not buy from certain other companies (contra openness) o or will not sell outside of a certain geographical area (contra distribution) Tying Arrangements: the seller agrees to sell to buyer only on condition that the buyer agrees to buy other products from the firm. Retail Price Maintenance Agreements: manufacturer sells to retailer only on the condition o that they agree to charge the same set retail price for the goods. o effects diminishes competition between retailers o

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removes competitive pressure on the manufacturer to lower prices decrease production costs Price Discrimination: charging different prices to different buyers for identical goods. o Examples Continental Pie Co. underselling Utah Pie Co. in Salt Lake City Most famous case: Standard Oil cornering of the oil market at the end of the 19th century used regional price discrimination region by region to undersell the locally based oil companies & drive them out of business. The airlines? o Price differences are legitimate only when based on volume differences other differences related to true costs of manufacturing transporting packaging marketing servicing Tacit Agreements Explicit agreements to undertake many of the anti-competitive practices just named are illegal Most collusion between oligopolies, consequently is based on unspoken or "tacit" forms of cooperation Genesis of unspoken cooperation o firms each come to recognize that competition is not in their best interest o that cooperation would be in the best interests of all o so without any explicit agreement to cooperate they undertake to act as if there were such an agreement you might say there is such an agreement de facto or in practice Price-setting: when one major player raises prices, all the would-be competitors follow suit o each realizes all will benefit as long as they continue to act in this concerted fashion o "price leader" version the oligopolies recognize one (dominant) player as the industry's price leader and tacitly agree to follow suit in setting prices at whatever level this firm sets Bribery Bribes can be used to secure the sale of products o serve to shut out other sellers o hence, are anticompetitive Not all bribes are of this sort: e.g. "tips" customarily given to customs agents in some countries to "expedite the process" Ethical rules for bribery: potentially excusatory & mitigating questions o Is the offer of payment initiated by the payer? if so, this is a morally culpable act of bribery if not -- if the payee initiates the transaction by demanding payment (usually accompanied by an explicit or implicit threat: e.g., the processing won't be "expedited") it's more like extortion by the payee than bribery by the payer Business Ethics and Corporate Governance Page 26

the payer is absolved of moral responsibility or their responsibility is at least diminished o Is the payment made to induce the payee to act in a manner contrary to the duties or responsibilities of their office if so: it's a morally culpable bribe: the payer is inducing the payee to act immorally if not -- as in the case of the customs official -- it may not be. o Are the nature and purpose of the payment considered ethically unobjectionable by the local culture if so (again as in the case of the customs agent) then it may be morally excusable if not done for anticompetitive purposes if not done for the purpose of inducing the payee to do something immoral may be ethically permissible on utilitarian grounds: otherwise the process won't be "expedited" might, however, still be a legal violation of the Foreign Corrupt Practices Act of 1977 agreement with local practices won't be a mitigating or excusing factor if it is done for anticompetitive purposes or if it is done for the purpose of inducing the payee to do something immoral Oligopolies and Public Policy The problem o Competition within industries has declined & is declining. o What to do in light of this fact? The Do-Nothing View No Problem: Competition between industries with substitutable products takes the place of competition within o example: steel industry, though highly concentrated, faces competition from plastics, aluminum, etc. o question: what to do when Alcoa & U. S. Steel & 3M merge? "Countervailing power" of other large corporate groups blunts the effects of concentration o unions & government o large corporate buyers not so easy to dictate terms to Chicago School: markets are economically efficient with as few as three significant rivals Big is good o economies of scale reductions in unit costs of production using the same fixed resources o offsets drawbacks: excessive profits offset by incredible cost savings o necessary to meet foreign competition from subsidized industries o Velasquez is dubious: "research suggests that in most industries expansion beyond a certain point will not lower costs but will instead increase them." Business Ethics and Corporate Governance Page 27

The Antitrust View Reinstitution of competitive pressures o is necessary in order to rein in excessive oligopoly profits o requires breaking up large firms into smaller units (each controlling not more than 3-5% of the market) Expected results o higher levels of competition will emerge o along with a decrease in explicit and tacit collusion o bringing about the beneficial consequences lower prices for consumers greater innovation increased development of cost cutting technologies The Regulation View Oligopoly corporations should not be broken up o economies of scale would be lost if they were forced to decentralize mass production mass distribution etc. o these economies should be passed on to consumers in the form of cheaper products more plentiful products To pass savings due to economies of scale along to consumers requires proper regulation of large corporations o nationalization -- government take-over of operations the regulative extreme controversial sometimes necessary & beneficial, some argue never necessary or beneficial others argue leads to unresponsive bureaucracy removes competitive pressure from these firms or industries which negatively effects productivity efficiency innovation o proponent of regulation usually have in mind measures less extreme than regulation to ensure that markets continue to be structured competitively: to ensure that firms maintain competitive market relations between themselves i.e., to prevent collusion may be voluntarily followed or legally enforced justified insofar as competition is necessary to best secure utilitarian benefits distributive justice rights to negative freedom The ethical rules prohibiting collusion are meant to ensure that markets are structured competitively. These rules are followed voluntarily and enforced legally. They are justified insofar as society is justified in pursuing the benefits, justice and rights. ---------------------------------------******************************-------------------------------------------------Business Ethics and Corporate Governance Page 28

Unit III

Ethics in Human Resource Management


Ethics in Selection Training and Development Ethics at work place- Ethics in Performance appraisal whistle blowing Introduction: Human resource management deals with manpower planning and development related activities in an organization. Arguably it is that branch of management where ethics really matter, since it concerns human issues specially those of compensation, development, industrial relations and health and safety issues. There is however sufficient disagreement from various quarters. There are different schools of thought that differ in their viewpoint on role of ethics or ethics in human resource development. One group of thought leaders believes that since in business, markets govern the organizational interests and these interests are met through people, the latter are therefore at the highest risk. They believe that markets claim profits in the name of stakeholders and unless we have protocols, standards and procedures the same will develop into a demon monopolizing markets and crushing human capital; HR ethics are become mandatory. There is another group of ethicists inspired by neo-liberalism who believe that there are no business ethics apart from realization of higher profits through utilization of human resources. They argue that by utilizing human resources optimally, there is more value creation for the shareholders, organization and the society and since employees are part of the society or organization, they are indirectly benefited. Nevertheless ethics in human resource management has become a perennial debate of late! Discussions in ethics in HRD stem from employee relationships and whether or not there can be a standard for the same. Employee rights and duties and freedom and discrimination at the workplace are issues discussed and covered by most texts on the topic. Some argue that there are certain things in employment relationship that are constant others disagree with the same. For example, right to privacy, right to be paid in accordance with the work (fair compensation) and right to privacy are some areas that cannot be compromised upon. Ethics and Market System The kind of market system affects business and HR ethics; the latter thus becomes negotiable. In occupations where the market conditions do not favor the employees it is necessary to have government and labor union interventions in order to control the possible exploitation. In free market system, employees and the employer are almost equally empowered, negotiation create win situations for both the parties. Government or labor union interventions become harmful. Globalization has brought about the concept of globalizing labor, trade unions have started to decline and the role of HR as such in issues like employee policies and practices has become a debatable topic. In fact many people are of the opinion that HR is nothing but an arm of the stakeholders through which major strategic and policy decisions are divulged geared towards profit making. Thought there can be no single opinion on ethics in HR that is convincing. Market in itself is neither an ethical institution nor unethical and no policies and procedures alone cannot govern and align markets to human well being. However the requirement of such policies and procedures can also not be denied. In lieu of this HR ethics should take care of things like discrimination (sexual, religion, age etc), compensation, union and labor laws, whistle blowing, health and safety of the employees etc. Of all the organizational issues or

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problems, ethical issues are the most difficult ones to handle or deal with. Issues arise in employment, remuneration and benefits, industrial relations and health and safety.

Diagrammatic representation of HR Ethical Issues Cash and Compensation Plans There are ethical issues pertaining to the salaries, executive perquisites and the annual incentive plans etc. The HR manager is often under pressure to raise the band of base salaries. There is increased pressure upon the HR function to pay out more incentives to the top management and the justification for the same is put as the need to retain the latter. Further ethical issues crop in HR when long term compensation and incentive plans are designed in consultation with the CEO or an external consultant. While deciding upon the payout there is pressure on favoring the interests of the top management in comparison to that of other employees and stakeholders. Race, gender and Disability In many organizations till recently the employees were differentiated on the basis of their race, gender, origin and their disability. Not anymore ever since the evolution of laws and a regulatory framework that has standardized employee behaviours towards each other. In good organizations the only differentiating factor is performance! In addition the power of filing litigation has made put organizations on the back foot. Managers are trained for aligning behavior and avoiding discriminatory practices. Employment Issues Human resource practitioners face bigger dilemmas in employee hiring. One dilemma stems from the pressure of hiring someone who has been recommended by a friend, someone from your family or a top executive. Yet another dilemma arises when you have already hired someone and he/she is later found to have presented fake documents. Two cases may arise and both are critical. In the first case the person has been trained and the position is critical. In the second case the person has been highly appreciated for his work during his short stint or he/she has a unique blend of skills with the right kind of attitude. Both the situations are sufficiently dilemmatic to leave even a seasoned HR campaigner in a fix. Privacy Issues Any person working with any organization is an individual and has a personal side to his existence which he demands should be respected and not intruded. The employee wants the Business Ethics and Corporate Governance Page 30

organization to protect his/her personal life. This personal life may encompass things like his religious, political and social beliefs etc. However certain situations may arise that mandate snooping behaviours on the part of the employer. For example, mail scanning is one of the activities used to track the activities of an employee who is believed to be engaged in activities that are not in the larger benefit of the organization. Similarly there are ethical issues in HR that pertain to health and safety, restructuring and layoffs and employee responsibilities. There is still a debate going on whether such activities are ethically permitted or not. Layoffs, for example, are no more considered as unethical as they were thought of in the past. ETHICS IN RECRUITMENT AND SELECTION: Introduction: Ethics are the principles or standards that guide day-to-day business activities in accordance with established corporate values. Ethical business conduct offers a wide range of organizational integrity, involving strategy, business goals, policies and activities. Among ethical values are trust, respect, honesty, responsibility and the overall pursuit of perfection. RECRUITMENT: refers to the processes followed by organisations when they wish to attract applicants for vacant or new positions. SELECTION: follows the recruiting process with the appointment of the most suited applicant to the position. Ethics in the field of hiring, staffing and recruitment is based on a combination of things and depends on who is actually involved in the hiring process. Certainly the job searcher, hiring manager and recruiter are just three possible people involved in a hiring decision. ETHICAL ISSUES IN RECRUITING Organisations comprise employees who need respect as people. Streamlining has lead to downsizing or right-sizing of organisations. Those employees who are left behind often mistrust management and feel insecure about their own jobs. Job insecurity can result in stress for the employee who increases the likelihood of mistakes being made or accidents occurring As organisations become more complex with fewer employees, legislative requirements become crucial to maintain the psychological well-being of employees. Legislative requirements include: EEO legislation, Affirmative Action legislation, Workers Compensation Acts and Regulations and so on. Discriminatory recruitment practices may inhibit the success of women or people from minority backgrounds, but also older applicants. Code of ethics for employers Treat all jobseekers equally No discrimination based on race, origin, religious or political views, gender, age or sexual orientation Do not request Jobseekers to include their photos in the resume Rely only on relevant and job-related information when making hiring decisions Code of ethics for jobseekers Ensure Resume accuracy Accept and expect employment history verification Assume personal responsibility for publishing resume, pictures and other. DISCRIMINATION IN EMPLOYEMENT ON THE BASIS OF UTILITY, RIGHTS, AND JUSTICE: Business Ethics and Corporate Governance Page 31

The arguments mustered against discrimination generally fall into three groups namely utilitarian, rights, justice.

Utility: The standard utilitarian argument against racial and sexual discrimination is based on the idea that a societys productivity will be optimized to the extent that jobs are awarded on the basis of competency. Different jobs, the argument goes, require different skills and personality traits if they are to be carried out in as productive manner as possible. Furthermore, different people have different skills and personality traits. Consequently, to ensure that jobs are maximally productive, they must be assigned o those individuals whose skills and personality traits qualify them as the most competent for the job. Insofar as jobs are assigned to individuals on basis of other criteria unrelated to competency, productivity must necessarily decline. Discriminating among job applicants on the basis of race, sex, religion, or other characteristics unrelated to job performance is necessarily inefficient and, therefore , contrary to utilitarian principles. Rights: Nonutilitarian arguments against racial and sexual discrimination may take the approach that discrimination is wrong because it violates a persons basic moral rights. Kantian theory for example, holds that human beings should be treated as ends and never as means. At a minimum, this principle means that each individual has moral right to be treated as a free person equal to any other person and that all individuals have a correlative moral duty to treat each individual as a free and equal person. Discriminatory practices violate the principle in two ways. First, discrimination is based on the belief that one group is inferior to the other groups, that blacks, for example, are less competent or worthy of respect than men. Racial and sexual discrimination, for instance, may be based on stereotypes that see minorities as lazy or shitless and see women as emotional and week such degrading stereotypes undermine the self esteem of those groups against whom stereotypes are directed and thereby violate their right to be treated as equals. Second discrimination places the member of group that is discriminated against in lower social and economic position: women and minorities have fewer job opportunities and are given lower salaries. Again, the right to be treated as a free job and equal person is violated. Justice: A second group of nonutilitarian arguments against discrimination view it is as a violation of the principle of justice. Social and economic inequalities are to be arranged so that they are attached to offices and positions open to all under conditions of fair equality of opportunity. Discriminatory practices Regardless of the problem inherent in some of the arguments against discrimination, it is clear that there are strong reasons for holding that discrimination is wrong. It is consequently understandable that the law has gradually been changed to conform to these moral requirements and that there has been a growing recognition of the various ways in which discrimination in employment occurs. Among the practices now widely recognized as discriminatory are the following. Recruitment practices Firms that rely solely on the word-of-mouth referrals of present employees to recruit new workers tend to recruit only from those racial and sexual groups that are already represented in their labour force. When a firms labour force is composed of only white males, this recruitment policy will tend to discriminate against minorities and women. Also, when desirable job positions are only advertised in Business Ethics and Corporate Governance Page 32

media that are not used by minorities or women or are classified as for men only, recruitment will also tend to be discriminatory. Screening practice Job qualifications are discriminatory when they are not relevant to the job to be performed. Aptitude or intelligence tests used to screen applicants become discriminatory when they serve to disqualify members from minority culture who are unfamiliar with the language, concepts, and social situations used in the tests but who are in fact fully qualified for the job. Job interviews are discriminatory if the interviewer routinely disqualifies women and minorities by relying on sexual or racial stereotypes. These stereotypes may include assumptions about the sort of occupations proper for women, the sort of work and time burdens that may fittingly be imposed on women, the ability of women or minority person to maintain commitment to job, the propriety of putting women in male environments, the assumed effects women or minorities would have on employee morale or on customers, and the extent to which women or minorities are assumed to have personality and aptitude traits that make them unsuitable for a job. Such generalizations about women or minorities are not only discriminatory, they are also false. Promotion practices Promotion, job progression, and transfer practice are discriminatory when employers place white males on job tracks separate from those open to women and minorities. Seniority systems will be discriminatory if past discrimination has eliminated minorities and women from the higher, more senior positions on the advancement ladder. To rectify the situation, individuals who have specifically suffered from discrimination in seniority system should be given their rightful place in the seniority system and provide with whatever training is necessary for visors, promotion policy will be discriminatory to the extent that supervisory rely on racial or sexual stereotypes. Conditions of employment: Wages and salaries are discriminatory to the extent that equal wages and salaries are not given to people who are doing essentially the same work. If past discrimination or present cultural traditions result in some job classification being disproportionately filled with women or minorities steps should be taken to make their compensation and benefits comparable to those of other classification. Discharge: Firing an employee on the basis of race or sex is a clear form of discrimination. Less blatant but still discriminatory are layoff policies that rely on a seniority system, in which women and minorities have the lowest seniority because of past discriminations. Sexual Harassment Women are victims of a particularly troublesome kind of discrimination that is both overt and coercive: They are subjected to sexual harassment. Although males are also frequent victims. For all acknowledge frequency, sexual harassment still remains difficult to define and to police and prevent. In 1978, the Equal Employment opportunity commission published a set of guidelines defining sexual harassment and setting out what, in its view, was prohibited by the law. In their current form, the guidelines state: Unwelcome sexual advances, requests for sexual favors and other verbal or physical contacts of sexual nature constitute sexual harassment (1) when submission to such individuals made either explicitly or implicitly a term or condition of an individuals employment,(submission to or rejection of such conduct by an individual is used as the basis for employment decision affecting such individual, (3) such conduct has the purpose or effect of unreasonably interfering with an individuals work performance or creating an intimidating, hostile or offensive working environment. How can we promote ethical practices Business Ethics and Corporate Governance Page 33

How can we promote ethical practices within our field and reduce the negative stigma attached to the 'headhunter'? As there is no policing agency that oversees recruiting practices, ethics must be selfenforced. Ethical behavior begins with the definition of roles and responsibilities when interacting with candidates, clients, and other recruiters. One of the ways in which recruiters can foster an ethical relationship from the out start is by creating a mission statement or ethical code that emphasizes key values and guiding ethical practices. Ensuring that agreements are in writing can resolve complicated issues more quickly, both protecting your interests and allowing you to be upfront in relationships. Additionally, it is important to examine what is occurring around you. Detecting and effectively handling unethical behavior is central to maintaining upstanding business practices. Although the bulk of this article places ethical responsibility on the recruiter, it is important to remember that commitments are made from all sides when entering into the hiring process. Candidates must also grapple with ethical issues, being honest throughout the process, from interviewing, to selection, to accepting an offer. Misinforming a recruiter to obtain an interview or cinch the job can place recruiters in compromising positions with clients. Both parties have a responsibility to maintain ethical standards. The benefits of ethical practices during each step of the hiring process are numerous. Recruiters often build their client bases through referrals. Both clients and candidates will refer business to reliable, highquality recruiters. Upon placement, candidates have no loyalty to recruiters and poor practices may quickly become public knowledge. As in other industries, we all have a responsibility to uphold the reputation of our profession. Our daily business practices reveal a professional standard against which we all are measured. We should use this daily opportunity to reflect a positive image. A brief review of, why the selection decision is so difficult and hence why so many defensive mechanisms are used, will both throw light on the subject and raise the ethical dimension again. First, the inherent difficulties in the selection decision. Given that human beings are complex entities, and that all the mental activity that sits behind overt behavior is invisible to the observer, finding an objective way of define the capability available in the candidate is a challenge from the start. Given that organizations are just groups of (complex) human beings transacting together in a common cause well, at least thats the theory! then there is a large extension to the level of complexity involved, and the job of objectively defining what is needed for success in a job is possibly even more challenging than defining what is available in candidates. Those two difficulties add up to a serious challenge for the knowledge and skills of the person making the selection decision - this is the third challenge. There is, however, an assumption in all of this that needs airing. It is about the objectives to be achieved through the selection decision. If they are about fit with the culture and style of the business that would lead in a particular direction. If they are about fit with the rest of the management team, the direction would be different. If they are about the new manager being able to project the right image of the company, which would lead to yet another different direction. If the desire is for someone who will be a good team worker, and a safe pair of hands, the direction would be different again. If the key is experience of the industry, and especially if good contacts are the order of the day, then the direction shifts once more. If these are for someone who will be a good team worker, and a safe pair of hands, the direction would be different again. If the key is experience of the industry, and especially if good contacts are the order of the day, then the direction shifts once more. Business Ethics and Corporate Governance Page 34

If these are the objectives, then there are a lot of tools and techniques out there, to assist with the decision. They range from the standard selection interview, through aptitude tests, critical reasoning tests, psychometric inventories, emotional intelligence inventories and even graphology, all the way through to 'motivation in action' profiles. The problem is that all of these tools and techniques only make sense if the objectives are as suggested above. If, however, the objectives are rather more prosaic and useful, then the tools and techniques noted above make no sense whatsoever. If there are selection objectives that are grounded in reality, they will be all about whether or not the new manager will be able to perform adequately in the job the performance objective. Implicit in all this is the need to motivate and carry people through the achievement of the business objectives, coping with complexity and a rapidly changing environment along the way, as that is what managing is all about. The performance objective reduces the focus of the selection decision down to skills and only skills. As there is no evidence of a causal relationship between personality, hand writing, experience, aptitudes or any other characteristic assessed by the various state-of-the-art inventories out there, on the one hand, and the performance delivered by the assessed manager, on the other, there is only one possible justification left for using them. That is the defense mechanism noted above. That raises the ethical dimension again. Is it ethical to rely on varieties of the standard selection interview and defensive assessments, and ignore the skills issue that is central to achieving required business results? If the skills issue is ignored, then the manager making the selection decision is playing Russian roulette with the candidate, and leaving that person to suffer the consequences if the selection decision is wrong. Even worse, is when managers making poor selection decisions punish the new manager twice. First, is the transformation from success into failure; second is when the failing manager is fired by the very same manager who created the problem in the first place by the poor selection decision.

Ethics in Training and Development:


Competent employees do no remain competent forever. So organization needs a good training and development for the employees. By which people get skills, knowledge. Some unethical practices in T&D Trainers are less qualified and less interested Trainers are not as per needs Trainees not take the training seriously Planning the training with assessing the needs of training Supply of outdated material Partiality in training and assessment Training in peak seasons.

Work-Place Ethics
One of the most important responsibilities that we place on the leaders of organizations is upholding the highest standards of ethical behavior. In a nutshell, this comes down to doing the right thing even when the wrong thing might also have some attraction. Work-place ethics are most often related to decisionmaking processes. Most leaders face the opportunity to choose between alternative courses of action Business Ethics and Corporate Governance Page 35

in their work situations and other aspects of their lives. Work-place ethics refer to choosing the option that is determined to be the moral or legal right choice, even if the other alternative(s) are very attractive and even if you can get away with the less ethical choice. IMPORTANCE TO EXERCISE WORK-PLACE ETHICS Leaders are often put in decisions where they must choose among options that vary in their degree of ethical behavior. One of the reasons why this is a common issue for leaders is that there are often competing priorities for businesses. On the one hand, organizations exist to generate profits for their shareholders, which may encourage leaders to act in ways that are less ethical in order to cut costs or increase revenues. On the other hand, organizations are made up of human beings who are personally invested in the company and often live in the communities in which they work. If the individuals are harmed by decisions that maximize company profitability, then the decision is not an ethical one. Only one stakeholder is getting their needs met, at the expense of other stakeholders. According to one theory, leaders may make bad ethical decisions and rationalize these decisions: For example, a leader may tell themselves it is not really illegal or immoral, or perhaps that it will never be found out or that their bad behavior will be rewarded. Its very difficult to define ethics in the workplace. Generally, being ethical involves conducting yourself in accordance with accepted principles of right and wrong. Ethics is a matter of using integritybased decision-making procedures to guide your decisions and actions. In the workplace, being ethical may involve acting morally right, being honest, not cheating your employer, co-workers, or customers, not stealing from the supply closet, and generally treating your co-workers well. Other ethical situations may involve harassment, inappropriate use of the Internet, outside-of-work activities, etc. Some of the primary forms of employee misconduct or unethical behavior include the following: Misrepresenting time or hours worked; lying to supervisors; Lying to co-workers, customers, vendors, or the public; Misuse of your employers assets; and Lying on reports or falsifying records. As you can see, there is a widespread need for ethics in your workplace. A code of ethics can provide guidelines for your conduct and help improve the overall atmosphere of your workplace. Your employers workplace ethics policy deters employee misconduct, avoids conflicts of interest, helps keep you and your co-workers honest, provides you with guidelines for resolving sensitive issues, and helps make clear that all employees are responsible for their unethical behavior. Ethics in Performance appraisal Performance Appraisals is the assessment of individuals performance in a systematic way. It is a developmental tool used for all round development of the employee and the organization. The performance is measured against such factors as job knowledge, quality and quantity of output, initiative, leadership abilities, supervision, dependability, co-operation, judgment, versatility and health. Assessment should be confined to past as well as potential performance also. The second definition is more focused on behaviors as a part of assessment because behaviors do affect job results. Use of Performance Appraisals 1. Promotions 2. Confirmations 3. Training and Development Business Ethics and Corporate Governance Page 36

4. Compensation reviews 5. Competency building 6. Improve communication 7. Evaluation of HR Programs 8. Feedback & Grievances Performance Appraisal Process 1. Objectives definition of appraisal 2. Job expectations establishment 3. Design an appraisal program 4. Appraise the performance 5. Performance Interviews 6. Use data for appropriate purposes 7. Identify opportunities variables 8. Using social processes, physical processes, human and computer assistance TECHNIQUES / METHODS OF PERFORMANCE APPRAISALS Numerous methods have been devised to measure the quantity and quality of performance appraisals. Each of the methods is effective for some purposes for some organizations only. None should be dismissed or accepted as appropriate except as they relate to the particular needs of the organization or an employee. Broadly all methods of appraisals can be divided into two different categories. Past Oriented Methods Future Oriented Methods Past Oriented Methods 1. Rating Scales: Rating scales consists of several numerical scales representing job related performance criterions such as dependability, initiative, output, attendance, attitude etc. Each scales ranges from excellent to poor. The total numerical scores are computed and final conclusions are derived. Advantages Adaptability, easy to use, low cost, every type of job can be evaluated, large number of employees covered, no formal training required. Disadvantages Raters biases 2. Checklist: Under this method, checklist of statements of traits of employee in the form of Yes or No based questions is prepared. Here the rater only does the reporting or checking and HR department does the actual evaluation. Advantages economy, ease of administration, limited training required, standardization. Disadvantages Raters biases, use of improper weighs by HR, does not allow rater to give relative ratings 3. Forced Choice Method: The series of statements arranged in the blocks of two or more are given and the rater indicates which statement is true or false. The rater is forced to make a choice. HR department does actual assessment. Advantages Absence of personal biases because of forced choice. Disadvantages Statements may be wrongly framed. 4. Forced Distribution Method: here employees are clustered around a high point on a rating scale. Rater is compelled to distribute the employees on all points on the scale. It is assumed that the performance is conformed to normal distribution. Advantages Eliminates Disadvantages Assumption of normal distribution, unrealistic, errors of central tendency. 5. Critical Incidents Method: The approach is focused on certain critical behaviors of employee that makes all the difference in the performance. Supervisors as and when they occur record such incidents. Advantages Evaluations are based on actual job behaviors, ratings are supported by descriptions, feedback is easy, reduces regency biases, chances of subordinate improvement are high. Disadvantages Negative incidents can be prioritized, forgetting incidents, overly close supervision; feedback may be too much and may appear to be punishment. Business Ethics and Corporate Governance Page 37

6. Behaviorally Anchored Rating Scales: statements of effective and ineffective behaviors determine the points. They are said to be behaviorally anchored. The rater is supposed to say, which behavior describes the employee performance. Advantages helps overcome rating errors. Disadvantages Suffers from distortions inherent in most rating techniques. 7. Field Review Method: This is an appraisal done by someone outside employees own department usually from corporate or HR department. Advantages Useful for managerial level promotions, when comparable information is needed, Disadvantages Outsider is generally not familiar with employees work environment, Observation of actual behaviors not possible. 8. Performance Tests & Observations: This is based on the test of knowledge or skills. The tests may be written or an actual presentation of skills. Tests must be reliable and validated to be useful. Advantage Tests may be apt to measure potential more than actual performance. Disadvantages Tests may suffer if costs of test development or administration are high. 9. Confidential Records: Mostly used by government departments, however its application in industry is not ruled out. Here the report is given in the form of Annual Confidentiality Report (ACR) and may record ratings with respect to following items; attendance, self expression, team work, leadership, initiative, technical ability, reasoning ability, originality and resourcefulness etc. The system is highly secretive and confidential. Feedback to the assessee is given only in case of an adverse entry. Disadvantage is that it is highly subjective and ratings can be manipulated because the evaluations are linked to HR actions like promotions etc. 10. Essay Method: In this method the rater writes down the employee description in detail within a number of broad categories like, overall impression of performance, promoteability of employee, existing capabilities and qualifications of performing jobs, strengths and weaknesses and training needs of the employee. Advantage It is extremely useful in filing information gaps about the employees that often occur in a better-structured checklist. Disadvantages It its highly dependent upon the writing skills of rater and most of them are not good writers. They may get confused success depends on the memory power of raters. 11. Cost Accounting Method: Here performance is evaluated from the monetary returns yields to his or her organization. Cost to keep employee, and benefit the organization derives is ascertained. Hence it is more dependent upon cost and benefit analysis. 12. Comparative Evaluation Method (Ranking & Paired Comparisons): These are collection of different methods that compare performance with that of other co-workers. The usual techniques used may be ranking methods and paired comparison method. 13 Ranking Methods: Superior ranks his worker based on merit, from best to worst. However how best and why best are not elaborated in this method. It is easy to administer and explanation. 14 Paired Comparison Methods: In this method each employee is rated with another employee in the form of pairs. The number of comparisons may be calculated with the help of a formula as under. N x (N-1) / 2 Future Oriented Methods 1. Management By Objectives: It means management by objectives and the performance is rated against the achievement of objectives stated by the management. MBO process goes as under. Establish goals and desired outcomes for each subordinate Setting performance standards Comparison of actual goals with goals attained by the employee Establish new goals and new strategies for goals not achieved in previous year. Advantage It is more useful for managerial positions. Disadvantages Not applicable to all jobs, allocation of merit pay may result in setting short-term goals rather than important and long-term goals etc. Business Ethics and Corporate Governance Page 38

2. Psychological Appraisals: These appraisals are more directed to assess employees potential for future performance rather than the past one. It is done in the form of in-depth interviews, psychological tests, and discussion with supervisors and review of other evaluations. It is more focused on employees emotional, intellectual, and motivational and other personal characteristics affecting his performance. This approach is slow and costly and may be useful for bright young members who may have considerable potential. However qualities of these appraisals largely depend upon the skills of psychologists who perform the evaluation. 3. Assessment Centers: This technique was first developed in USA and UK in 1943. An assessment center is a central location where managers may come together to have their participation in job related exercises evaluated by trained observers. It is more focused on observation of behaviors across a series of select exercises or work samples. Assesses are requested to participate in in-basket exercises, work groups, computer simulations, role playing and other similar activities which require same attributes for successful performance in actual job. The characteristics assessed in assessment center can be assertiveness, persuasive ability, communicating ability, planning and organizational ability, self confidence, resistance to stress, energy level, decision making, sensitivity to feelings, administrative ability, creativity and mental alertness etc. Disadvantages Costs of employees traveling and lodging, psychologists, ratings strongly influenced by assessees inter-personal skills. Solid performers may feel suffocated in simulated situations. Those who are not selected for this also may get affected. Advantages well-conducted assessment center can achieve better forecasts of future performance and progress than other methods of appraisals. Also reliability, content validity and predictive ability are said to be high in assessment centers. The tests also make sure that the wrong people are not hired or promoted. Finally it clearly defines the criteria for selection and promotion. 4. 360-Degree Feedback: It is a technique which is systematic collection of performance data on an individual group, derived from a number of stakeholders like immediate supervisors, team members, customers, peers and self. In fact anyone who has useful information on how an employee does a job may be one of the appraisers. This technique is highly useful in terms of broader perspective, greater self-development and multi-source feedback is useful. 360-degree appraisals are useful to measure inter-personal skills, customer satisfaction and team building skills. However on the negative side, receiving feedback from multiple sources can be intimidating, threatening etc. Multiple raters may be less adept at providing balanced and objective feedback. Ethics of Performance Appraisals / Legally defensible Performance Appraisals Ethics of Procedures 1. Formal Standardized Performance Appraisal Systems 2. Uniform to all employees, no illegal differentiations based on cast, religion etc. 3. Standards formally communicated to all employees 4. Freedom to review performance appraisal results 5. Formal appeal process about ratings and judgments 6. Written instructions and training to raters 7. All personal decision makers should be aware of anti-discrimination laws. Ethics of Contents 1. Content based on job analysis 2. Traits based appraisals should be avoided 3. Objectively verifiable data should be used 4. Constraints on performance beyond control should be prevented 5. Specific job related dimensions to be used rather than single or global dimensions. 6. Dimensions must be assigned weight to reflect relative importance in performance score Ethics of Documentation of Results Business Ethics and Corporate Governance Page 39

1. A thoroughly written record of evidence leading to termination should be maintained 2. Written documentation of extreme ratings should be maintained 3. Documentation should be consistent among the raters. Ethics of Raters 1. The raters should be trained in how to use an appraisal system 2. The rater must have opportunity to observe rates first hand and review important rate performance products. 3. Use of more than one rater is desirable to reduce biases. Organizational Support Factors for Performance Appraisal Systems Performance appraisal serves many organizational objectives and goals. Besides encouraging high level of performance, the evaluation system is useful in identifying employees with potential, rewarding them equitably, and determining employee needs for development. All these activities are instrumental in achieving corporate plans and long-term growth, typical appraisal system in most organizations have been focused on short-term goals only. From the strategic management point of views, organizations can be grouped under 3 different categories as defenders, prospectors and analyzers. Defenders: They have narrow and stable product market domain. They dont need to make any adjustment in technology, structure or methods of operations etc. They devote entire attention on improving existing operations. Because of emphasis on skill building successful defenders use appraisals as means for identifying training needs. It is more behavior oriented. Prospectors: They continuously search for new products and opportunities. They experiment regularly to new and emerging trends. They more focus on skills identification and acquisition of human resources from external sources prospectors often use appraisals for identifying staffing needs. The focus is on results. Analyzers: They operate in two type of product domain markets. One is stable and other is changing. They watch their competitors closely and rapidly adopt the ideas that are promising. They use cost effective technologies for stable products and matrix technologies for new products. Analyzers tend to emphasize on skills building and skills acquisitions and employ extensive training programs. Hence they use appraisal more for training and staffing purposes. However performance appraisal systems have strategic importance in three different ways. Feedback Mechanism: Performance evaluation is the central mechanism that not only provides feedback to individuals but also aids in the assessment of the progress of organization as a whole. Without appraisals managers of any firm can only guess as to whether or not employees are working towards realization of the organization goals. Consistency between strategy and job behavior: Performance appraisal not only is a means of knowing if the employee behavior is consistent with the overall strategies focus but also a way of bringing to the fore any negative consequence of the strategy behavior fit. Thus the performance appraisal system is an important mechanism to elicit feedback on the consistency of the strategy behavior link. Consistency between Values and Job Behavior link: Performance evaluation is a mechanism to reinforce values and culture of the organization. Another importance is to align appraisal with organizational culture. Thus the purpose of performance evaluation is to make sure that employees goals, employees behavior and feedback of information about performance are all linked to the corporate strategy. Essentials of a Good Performance Appraisal System: Business Ethics and Corporate Governance Page 40

1. Standardized Performance Appraisal System 2. Uniformity of appraisals 3. Defined performance standards 4. Trained Raters 5. Use of relevant rating tools or methods 6. Should be based on job analysis 7. Use of objectively verifiable data 8. Avoid rating problems like halo effect, central tendency, leniency, severity etc. 9. Consistent Documentations maintained 10. No room for discrimination based on cast, creed, race, religion, region etc. Advancing the organization's purpose, enhancing the dignity of harmed parties, and sustaining the moral sensibility of those performing the task provide a small, simple, but illuminating set of standards. These standards highlight underlying ethical challenges that arise in performing the work of HRM, and they orient. It managers towards not only the targeted party, but also to themselves and to the organization as a whole. As important as procedural justice is, it becomes more powerful when standing alongside ethical standards that promote due consideration of organizational objectives, active efforts to promote the dignity of harmed parties, and care and development of the very people asked to perform the tasks of HRM.

Whistle Blowing
Whistle blowing is reporting the company you work for, or someone above you in the company hierarchy, for doing something unethical or illegal. there have been laws passed to protect people who report such behavior, because in the past, they have been subject to sanctions, such as losing their jobs or being demoted for reporting things that are in the public interest to be reported. Whistle-blowing takes place when a government employee, company employee or independent contractor goes public with claims of illegal or unethical business practices or activities within his company. Many times, the whistle-blower has attempted to communicate the problem internally and has received no response from management. Making disclosures of serious wrongdoing is colloquially known as whistle-blowing. Employees who have inside knowledge (which is not usually available to those outside the organization) are often reluctant to disclose serious wrongdoing for fear of retaliation by their employer. WHISTLE-BLOWING PROCEDURE The Procedure STAGE 1 An employee who has concerns of malpractice within the Institute should write to their Line Manager in a sealed envelope marked Confidential, to be opened by the addressee, detailing the alleged malpractice. In the event that the concerns involve the individuals Line Manager or the Principal, the employee should write to the Registrar or another appropriate senior manager. STAGE 2 On receiving the document, an appropriate body will be appointed to investigate the allegation. Dependent on the nature of the concern, internal or external audit may be the appropriate body to conduct an investigation. The issues raised may be considered as gross misconduct and a decision may be made to suspend all or some of those staff who are under investigation on full pay. Business Ethics and Corporate Governance Page 41

Should the allegation be made against the Principal, then the Chair of the Corporation will take the above action. 3. Investigation Procedure Due to the various different types of concern that may arise, it is not possible to establish a set procedure with identified timescales. The following principles will apply:a) The investigation will be carried out as rapidly as possible; b) All investigations will be carried out in strict confidence; c) Any communication with the employee raising the concern will be to their home address; d) Any person (people) alleged to be involved should be informed of the broad nature of the concern, that at this stage it is an investigation (although dependent on the outcome of the investigation, disciplinary action may be taken) and their right to be accompanied by a work colleague or trade union representative; e) At any investigatory meeting, the individual(s) may be accompanied by a note-taker; f) All the notes of the investigation and the final report will be passed to the Line Manager (or others as stipulated above) with a statement saying whether the investigation shows that the complaint should be upheld. The Line Manager will decide what action is required and inform the person (people) being investigated. Should the allegations be made against the Principal, then the Chair of the Corporation will receive the information and take the appropriate action. STAGE 3 Any disciplinary action deemed necessary against those accused of malpractice will be instigated immediately in accordance with the Disciplinary Procedure. The employee who raised the concern will be informed of the outcome of the investigation. Where the investigation shows that the employee raised concerns for personal gain or for personal motives, disciplinary action will be taken against the employee. 4. Review This procedure will remain in force until amended or withdrawn after consultation with staff. WHAT SHOULD THE PROCEDURE CONTAIN? The purpose of the procedure is to identify the process for receiving and dealing with disclosures of serious wrongdoing. It should obviously be tailored to the individual needs of the organisation. However it is sensible for the procedure to mirror the philosophy and protections in the Act. The following issues should be considered when preparing a procedure. Who can make a protected disclosure? The procedure needs to identify those who can use it. For the reasons discussed above the procedure should be wide enough to cover all individuals who may be in a position to discover serious wrongdoing. Under the Act employees who are protected include former employees, home workers, seconded individuals, independent contractors and individuals responsible for the management of an organization (for example directors). When should the procedure be used? Obviously not all disclosures that an employee may wish to make will warrant protection. For example the procedure will not be intended to deal with management/staffing issues. It should be limited to the specific purpose of actual whistle-blowing in terms of the Act. It is therefore important to identify the elements that must be present before a disclosure will be protected. Assistance with this can be gained from the Act which protects disclosures where: there is suspected serious wrongdoing in or by an organization; and the employee reasonably believes that the information is true or likely to be true; and the employee wishes to disclose the information so that the wrongdoing can be investigated; and Business Ethics and Corporate Governance Page 42

The employee wishes the disclosure to be protected.

Serious Wrongdoing The procedure should identify the definition of serious wrongdoing. Under the Act serious wrongdoing includes: unlawful, corrupt, or irregular use of public funds or resources; an act, omission, or course of conduct: that poses a serious risk to public health or safety, or the environment; or that poses a serious risk to the maintenance of the law, including the prevention, investigation and detection of offences and the right to a fair trial; or that constitutes an offence; or by public officials that is grossly improper. Protection The procedure should record the protection that will be given to employees who make a disclosure. Examples include protection against: retaliatory action by the employer; discrimination/victimization under the Human Rights Act 1993; and Criminal or civil liability arising from the disclosure (unless the whistleblower was personally involved in the serious wrongdoing). Confidentiality Confidentiality needs to be specifically addressed. Generally the person receiving the disclosure would be expected to use their best endeavors to keep the whistleblowers identity secret. However there will be some circumstances in which it will be appropriate to identify the whistleblower. Under the Act these are: the whistleblower provides written consent the person receiving the disclosure believes that disclosure of identifying information is essential: to the investigation of the disclosure; to prevent serious risk to public health or safety or the environment; or having regard to the principles of natural justice. Internal disclosures The procedure should clearly explain how an employee should make a protected disclosure. This will cover the manner in which disclosures are to be made, for example by telephone to a specific number, or in writing to a nominated person. Provision to make the disclosure to another named person must be included where the first named person is believed to be involved in the wrongdoing. The procedure will need to outline the steps that the person receiving the disclosure must take. Issues to consider addressing include: acknowledgement of receipt of the disclosure; persons to be notified of the disclosure; process for investigating the disclosure; involvement of insurers; who the outcome of investigation will be communicated to; and time frames. Disclosures outside the organization The procedure should record that employees are expected to exhaust the internal whistle blowing procedure before going outside the organization with their disclosures. Some organizations may wish to Business Ethics and Corporate Governance Page 43

specifically list the external appropriate authorities to whom disclosures may be made once the internal procedure has been exhausted. The appropriate authorities named in the Act, to who protected disclosures may be made are the: Commissioner of Police; Controller and Auditor-General; Director of the Serious Fraud Office; Inspector-General of Intelligence and Security; Ombudsmen; Parliamentary Commissioner for the Environment; Police Complaints Authority; Solicitor-General; State Services Commissioner; and Health and Disability Commissioner. The organization may wish to clarify that an appropriate authority to make a protected disclosure to does not include; A Minister of the Crown; A member of Parliament; or The media. OTHER When preparing a procedure you should have regard to the following matters: Disclosures of serious wrongdoing must be taken seriously; A whistle-blowing procedure must comply with the requirements of natural justice; Information about the existence of the internal procedure must be published widely within the organization; The procedure should be regularly reviewed to ensure that it is effective. There are many advantages to having a whistle-blowing procedure. Public disclosure of serious wrongdoing is very damaging for an organization. No organization wants to find out for the first time about alleged serious wrongdoing in the public arena. An effective procedure acts as a risk management tool by helping to ensure that no legitimate disclosures are made without the organizations knowledge. An internal whistle-blowing procedure will also act as a deterrent to serious wrongdoers. It sends a message that the organization will support genuine whistleblowers. Individuals who have knowledge of serious wrongdoing will know how to raise their concerns internally. A procedure will reassure whistle blowers that they will not put their job at risk by speaking out. A procedure also provides an organization with an appropriate and effective means of dealing with disclosures of serious wrongdoing. It means that the organization will not be caught off balance and is unlikely to inadvertently make mistakes in dealing with the disclosure. An effective procedure increases the likelihood that matters can be dealt with internally, which may avoid damage to the organizations reputation. There is the added benefit that if an organization has knowledge of the disclosure it can take steps to control potentially serious matters. If the disclosure subsequently becomes public, the organization will be in a better position to deal with adverse publicity if it has already investigated the matter internally and is aware of the issues involved. Why is Whistle blowing important? The Council is committed to high quality services and being open, fair and honest. Managers have a duty to prevent dangerous or illegal actions at work. All staff, including those who work for a contractor or agency, has an important part to play. Often it is only through whistle blowing that information comes to light. Business Ethics and Corporate Governance Page 44

Why does the Council need a Whistle blowing procedure? This procedure: Supports the Public Interest Disclosure Act. Gives you a way of raising concerns in a structured and supportive environment within the Council. Means that you can feel confident to bring up genuinely held concerns without fear of recrimination. Shows the Councils commitment to investigating and taking firm management action where wrongdoing may be proven. Encourages and enables you to raise concerns within RBK rather than overlooking problems or "blowing the whistle" outside the Council. Who can use the Councils whistle blowing procedure? All staff, whether full time or part time, permanent or temporary councilors; All staff working in schools (including volunteers and students); Contractors working for the Council on Council premises e.g. agency workers, builders or drivers; and The Councils external contractors and those providing services under a contract with the Council in their own premises e.g. care homes. When should I raise a concern? If you find out about activities that harm clients of the Council, colleagues working for the Council, or the Council itself. These may include: Illegal activities Miscarriages of justice Risks to health and safety Damage to the environment Misuse of public funds Fraud and corruption Abuse of clients Other wrongdoing, (including attempts to cover up wrongdoing) For example, you could raise a serious concern about service provision, the actions of officers, or the actions of others acting on behalf of the Council, which: Fall below the Councils standards of practice, including the Councils Code of Conduct for Employees Are against the Councils Standing Orders and policies Amount to improper conduct

Advantages
1: Public Safety: One of the principle reasons to blow the whistle on illegal or unethical activities is to protect the public, colleagues or others from risk. The more immediate and the more significant the risk, the more important to take action efficiently. When companies engage in activities that could cause physical or mental harm to people, or environmental damage, many believe it is your duty to make those activities known. 2: Moral Responsibility: Blowing the whistle out of a sense of moral obligation is generally regarded as the best reason to do so. In his Denver Business Journal article "`Blowing the Whistle' Requires Courage," Marshall Colt explains that "What motivates you?" is a key question you should ask before whistle-blowing. If you are attempting to protect the public or fulfill a sense of moral duty, you are likely justified. If revenge against your organization is the motive, you may not have a good motivation for action. Business Ethics and Corporate Governance Page 45

Disadvantage 1: Retaliation: One of the primary disadvantages of blowing the whistle is the potential retaliation you face from management and colleagues. Some federal protections are in place to encourage whistleblowing, but those offer little support when you show up at the office each day to a sense of resentment and hate from your co-workers. Colt encourages whistle-blowers to have a physical and mental escape plan should things turn ugly at the office. 2: Conflicts of Interest: For many potential whistle-blowers, the conflict of interest between serving one's company, co-workers and friends and protecting the public is very real and challenging. You must weigh the possible damage to your working relationships and your career against the merits of blowing the whistle in a given situation. Many people feel a sense of loyalty to their company that prohibits whistle-blowing. Others simply are too burdened by the thought of making bold accusations against an employer. The purpose of the whistle blowing policy is to encourage employees to disclose any malpractice or misconduct of which they become aware and importantly to provide protection for employees who report allegations of such malpractices or misconduct. The policy applies to all employees, suppliers, agents, contractors and customers of the group. A potential whistleblower should have good documentation of the evidence of the evidence of wrongdoing before disclosing it to others. The whistleblower should also be prepared to deal with employer retaliation and have a contingency plan. ----------------------------------**************************-----------------------------------------------------------Unit IV Ethics in Finance Ethics in Finance financial Services- Ethical audit Financial Market System Ethical Tax Planning & tax practitioners insider trading Ethical Investment combating fraud.

Ethics in Finance
Ethics in general is concerned with human behavior that is acceptable or "right" and that is not acceptable or "wrong" based on conventional morality. General ethical norms encompass truthfulness, honesty, integrity, respect for others, fairness, and justice. They relate to all aspects of life, including business and finance. Financial ethics is, therefore, a subset of general ethics. Ethical norms are essential for maintaining stability and harmony in social life, where people interact with one another. Recognition of others' needs and aspirations, fairness, and cooperative efforts to deal with common issues are, for example, aspects of social behavior that contribute to social stability. In the process of social evolution, we have developed not only an instinct to care for ourselves but also a conscience to care for others. There may arise situations in which the need to care for ourselves runs into conflict with the need to care for others. In such situations, ethical norms are needed to guide our behavior. As Demsey (1999) puts it: "Ethics represents the attempt to resolve the conflict between selfishness and selflessness; between our material needs and our conscience." Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the conceptual framework of modern financial-economic theory and the widespread use of a principal-agent model of relationship in financial transactions. The financial-economic theory that underlies the modern capitalist system is based on the rational-maximizer paradigm, which holds that individuals are self-seeking (egoistic) and that they behave rationally when they seek to maximize their own interests. The principalagent model of relationships refers to an arrangement whereby one party, acting as an agent for another, carries out certain functions on behalf of that other. Such arrangements are an integral part of the modern economic and financial system, and it is difficult to imagine it functioning without them. Business Ethics and Corporate Governance Page 46

The behavioral assumption of the modern financial-economic theory runs counter to the ideas of trustworthiness, loyalty, fidelity, stewardship, and concern for others that underlie the traditional principal-agent relationship. The traditional concept of agency is based on moral values. But if human beings are rational maximizers, then agency on behalf of others in the traditional sense is impossible. As Duska (1992) explains it: "To do something for another in a system geared to maximize self-interest is foolish. Such an answer, though, points out an inconsistency at the heart of the system, for a system that has rules requiring agents to look out for others while encouraging individuals to look out only for themselves, destroys the practice of looking out for others" (p. 61). The ethical dilemma presented by the problem of conflicting interests has been addressed in some areas of finance, such as corporate governance, by converting the agency relationship into a purely contractual relationship that uses a carrot-and-stick approach to ensure ethical behavior by agents. In corporate governance, the problem of conflict between management (agent) and stockholders (principal) is described as an agency problem. Economists have developed an agency theory to deal with this problem. The agency theory assumes that both the agent and the principal are self-interested and aim to maximize their gain in their relationship. A simple example would be the case of a store manager acting as an agent for the owner of the store. The store manager wants as much pay as possible for as little work as possible, and the store owner wants as much work from the manager for as little pay as possible. This theory is value-free because it does not pass judgment on whether the maximization behavior is good or bad and is not concerned with what a just pay for the manager might be. It drops the ideas of honesty and loyalty from the agency relationship because of their incompatibility with the fundamental assumption of rational maximization. "The job of agency theory is to help devise techniques for describing the conflict inherent in the principal-agent relationship and controlling the situations so that the agent, acting from self-interest, does as little harm as possible to the principal's interest" (DeGeorge, 1992). The agency theory turns the traditional concept of agency relationship into a structured (contractual) relationship in which the principal can influence the actions of agents through incentives, motivations, and punishment schemes. The principal essentially uses monetary rewards, punishments, and the agency laws to command loyalty from the agent. Most of our needs for financial services management of retirement savings, stock and bond investing, and protection against unfore-seen events, to name a fewer such that they are better entrusted to others because we have neither the ability nor the time to carry them out effectively. The corporate device of contractualization of the agency relationship is, however, too difficult to apply to the multitude of financial dealings between individuals and institutions that take place in the financial market every day. Individuals are not as well organized as stockholders, and they are often unaware of the agency problem. Lack of information also limits their ability to monitor an agent's behavior. Therefore, what we have in our complex modern economic system is a paradoxical situation: the everincreasing need for getting things done by others on the one hand, and the description of human nature that emphasizes selfish behavior on the other. This paradoxical situation, or the inconsistency in the foundation of the modern capitalist system, can explain most of the ethical problems and declining morality in the modern business and finance arena. ETHICAL VIOLATIONS The most frequently occurring ethical violations in finance relate to insider trading, stakeholder interest versus stockholder interest, investment management, and campaign financing. Businesses in general and financial markets in particular are replete with examples of violations of trust and loyalty in both public and private dealings. Fraudulent financial dealings, influence peddling and corruption in governments, brokers not maintaining proper records of customer trading, cheating customers of their Business Ethics and Corporate Governance Page 47

trading profits, unauthorized transactions, insider trading, misuse of customer funds for personal gain, mispricing customer trades, and corruption and larceny in banking have become common occurrences. Insider trading is perhaps one of the most publicized unethical behaviors by traders. Insider trading refers to trading in the securities of a company to take advantage of material "inside" information about the company that is not available to the public. Such a trade is motivated by the possibility of generating extraordinary gain with the help of nonpublic information (information not yet made public). It gives the trader an unfair advantage over other traders in the same security. Insider trading was legal in some European countries until recently. In the United States, the 1984 Trading Sanctions Act made it illegal to trade in a security while in the possession of material nonpublic information. The law applies to both the insiders, who have access to nonpublic information, and the people with whom they share such information. Campaign financing in the United States has been a major source of concern to the public because it raises the issue of conflict of interest for elected officials in relation to the people or lobbying groups that have financed their campaigns. The United States has a long history of campaign finance reform. The Federal Election Commission (FEC) administers and enforces the federal campaign finance statutes enacted by the Congress from time to time. Many states have also passed lobbying and campaign finance laws and established ethics commissions to enforce these statutes. ETHICAL CODES Approaches to dealing with ethical problems in finance range from establishing ethical codes for financial professionals to efforts to replace the rational-maximizer (egoistic) paradigm that underlies the modern capitalist system by one in which individuals are assumed to be altruistic, honest, and basically virtuous. It is not uncommon to find established ethical codes and ethical offices in American corporations and in financial markets. Ethical codes for financial markets are established by the official regulatory agencies and self-regulating organizations to ensure ethically responsible behavior on the part of the operatives in the financial markets. One of the most important and powerful official regulatory agencies for the securities industry in the United States is the Securities and Exchange Commission (SEC). It is in charge of implementing federal securities laws, and, as such, it sets up rules and regulations for the proper conduct of professionals operating within its regulatory jurisdiction. Many professionals play a role within the securities industry, among the most important of which are accountants, broker-dealers, investment advisers, and investment companies. Any improper or unethical conduct on the part of these professionals is of great concern to the SEC, whose primary responsibility is to protect investor interests and maintain the integrity of the securities market. The SEC can censure, suspend, or bar professionals who practice within its regulatory domain for lack of requisite qualifications or unethical and improper conduct. The SEC also oversees self-regulatory organizations (SROs), which include stock exchanges, the National Association of Security Dealers (NASD), the Municipal Securities Rulemaking Board (MSRB), clearing agencies, transfer agents, and securities information processors. An SRO is a membership organization that makes and enforces rules for its members based on the federal securities laws. The SEC has the responsibility of reviewing and approving the rules made by SROs. Other rule-making agencies include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and state finance authorities. Congress has entrusted to the Federal Reserve Board the responsibility of implementing laws pertaining to a wide range of banking and financial activities, a task that it carries out through its regulations. One such regulation has to do with unfair or deceptive acts or practices. The FDIC has its own rules and regulations for the banking industry, and it also draws its power to regulate from various banking laws passed by Congress. Business Ethics and Corporate Governance Page 48

In addition to federal and state regulatory agencies, various professional associations set their own rules of good conduct for their members. The American Institute of Certified Public Accountants (AICPA), the American Institute of Certified Planners (AICP), the Investment Company Institute (ICI), the American Society of Chartered Life Underwriters (ASCLU), the Institute of Chartered Financial Analysts (ICFA), the National Association of Bank Loan and Credit Officers (also known as Robert Morris Associates), and the Association for Investment Management and Research (AIMR) are some of the professional associations that have well-publicized codes of ethics. TOWARD A PARADIGM SHIFT There has been an effort to address the ethical problems in business and finance by reexamining the conceptual foundation of the modern capitalist system and changing it to one that is consistent with the traditional model of agency relationship. The proponents of a paradigm shift question the rationalmaximizer assumption that underlies the modern financial-economic theory and reject the idea that all human actions are motivated by self-interest. They embrace an alternative assumption that human beings are to some degree ethical and altruisticnd emphasize the role of the traditional principal-agent relationship based on honesty, loyalty, and trust. Duska (1992) argues: "Clearly, there is an extent to which [Adam] Smith and the economists are right. Human beings are self-interested and will not always look out for the interest of others. But there are times they will set aside their interests to act on behalf of others. Agency situations were presumably set up to guarantee those times." The idea that human beings can be honest and altruistic is an empirically valid assumption; it is not hard to find examples of honesty and altruism in both private and public dealings. There is no reason this idea should not be embraced and nurtured. If the financial-economic theory accepts the fact that behavioral motivations other than that of wealth maximization are both realistic and desirable, then the agency problem that economists try to deal with will be a nonproblem. For Dobson (1993), the true role of ethics in finance is to be found in the acceptance of "internal good" ("good" in the sense of "right" rather than in the sense of "physical product"), which, he adds, is what classical philosophers describe as "virtue hat is, the internal good toward which all human endeavor should strive. He contends: "If the attainment of internal goods were to become generally accepted as the ultimate objective of all human endeavors, both personal and professional, then financial markets would become truly ethical" Ethical Issues in the Financial Services Industry Ethical issues in the financial services industry affect everyone, because even if you dont work in the field, youre a consumer of the services. That was the message of Ronald F. Duska and James A. Mitchell in their presentation at a recent meeting of the Business and Organizational Ethics Partnership. The public seems to have the perception that the financial services sector is more unethical than other areas of business, Mitchell began. For the past five years, he has been Executive Fellow-Leadership at the Center for Ethical Business Cultures, which is affiliated with the University of St. Thomas College of Business. He assists business leaders in developing ethical and profitable cultures. This misperception persists for several reasons, Mitchell said. First of all, the industry itself is quite large. It encompasses banks, securities firms, insurance companies, mutual fund organizations, investment banks, pensions funds, mortgage lendersany company doing business in the financial arena. Because of its vast size, the industry tends to garner lots of headlines, many of which tout its ethical lapses. This business that were talking about is really big. It is, to be precise, $50 trillion in assets. Its growing 8 percent a year, which is more than twice as fast as the gross domestic product, Mitchell said. Its also highly profitable. The financial services sector of the S&P 500 represents 20 percent of this indexs Business Ethics and Corporate Governance Page 49

market capitalization. These companies are making a lot of money serving you. So, he theorized, with trillions of dollars of assets, billions of transactions every yearevery day probablywhen a small percentage of them is inappropriate, the absolute numbers are still pretty big.The industry is also highly regulated, so its likely that a higher percentage of these bad transactions are identified and reported, perhaps more so than in other less regulated industries.But ethical lapses do occur, and Duska discussed five reasons why these misdeeds may happen. He holds the Charles Lamont Post Chair of Ethics and the Professions at The American College. The Post Chair supports research and studies of the social responsibilities and ethical challenges facing the financial services industry. 1) Self-interest sometimes morphs into greed and selfishness, which is unchecked self-interest at the expense of someone else. This greed becomes a kind of accumulation fever. If you accumulate for the sake of accumulation, accumulation becomes the end, and if accumulation is the end, theres no place to stop, he said. The focus shifts from the long-term to the short-term, with a big emphasis on profit maximization. For example, swaps (where two communication companies agree to exchange the right to use excess bandwidth on their networks) fall into this category. Each company recognizes the income generated in the quarter earned and defers the expenses through capitalizing them as an asset and logging the cost as a recognized expense over time, resulting in an inflated bottom line. This is what happened at Qwest during the first three quarters of 2001, when the company was selling $870 million of capacity, while at the same time buying $868 million of capacity. These swaps appeared to be round-trip transactions, which served no purpose other than to inflate Qwests revenues, Duska said. Companies were making money out of their finance departmentnot from selling products, not from doing what the company did, not from fulfilling the companys mission, but from playing around with its asset mix, he said. 2) Some people suffer from stunted moral development: I think this happens in three areas: the failure to be taught, the failure to look beyond ones own perspective, and the lack of proper mentoring, Duska said. Business schools, he said, too often reduce everything to an economic entity. They do this by saying the fundamental purpose of a business is to make money, maximize profit, or the really jazzy words maximize shareholder value, or something like that. And it never gets questioned, he said. Now if the fundamental purpose never gets questioned, the ethics never get questioned, because the fundamental purpose of something gives you the reason for its existence. It tells you whether you're doing it well or not. It's the ultimate ethical question: What's your purpose? 3) Some people equate moral behavior with legal behavior, disregarding the fact that even though an action may not be illegal, it still may not be moral. You ought to remember that the reason for all laws is that the moral agreement begins to break down, and the way to get other people in line is to legislate so that we can stipulate punishments, Duska said. Yet some people contend that the only requirement is to obey the law. They tend to ignore the spirit of the law in only following the letter of the law. For example, IRS regulations repeatedly single out actions with no legitimate business purpose (like swaps.) If you are doing things with no legitimate business purpose in order to avoid taxation, what are you doing? Youre violating the spirit, are you not? Youre staying within the letter, but theres no purpose there except to get you around the law, he said. 4) Professional duty can conflict with company demands. For example, a faulty reward system can induce unethical behavior. A purely self-interested agent would choose that course of action which contains the highest returns to himself or herself, he said. For example, consider the misguided practice of selling indexed annuities to the elderly. If a company is paying a high commission for that product, say 15 percent, versus a lower commission for a more appropriate product, say 3 percent, a salesperson may disregard the needs of the client and/or assume that the company supports this product and its applicability by its willingness to pay five fold the compensation. Sooner or later, people are going to give in to that temptation. The purely self-interested agent is just responding to the reward system that Business Ethics and Corporate Governance Page 50

is in place, Duska said. You need to take a look at what you are rewarding. In general, organizations get exactly what they reward. They just dont realize that their rewards structures are encouraging dysfunctional or counter-productive behavior or turn a blind eye to the outcome 5) Individual responsibility can wither under the demands of the client. Sometimes the push to act unethically comes from the client. How many people expect their accountants to pad their expenses where possible? How many clients expect their insurance agents to falsify their applications or claims? Thats the temptationyou like your client, youve gotten to know your client, you really want to help your client outthats just another conflicting loyalty, Duska said. Mitchell concluded the presentation with several suggestions for improvements in the industry to encourage more ethical behavior. My experience *in the financial services industry] is that people who do business are, for the most part, highly ethical people trying to do the right thing most of the time. Most of them are trying to help their clients achieve their financial objectives, he said. But how could this be better, because clearly, even if Im right, there are still a lot of issues and problems in the business? First of all, consumers need to be better informed. It is your responsibility to take control of your own financial security, he said, which doesnt mean you need to know everything about the product you are buying in advance, but you should read enough to know what some of the right questions are to ask. Ask those insightful questions of an advisor whom you know, trust, and who has the proper credentials, if applicable. The ethics of auditing Accountancy and auditing are complex and technical processes. Ethics, in contrast, might be considered relatively simple. The difficult part of ethics, it may be argued, is not knowing what we ought to do, but getting ourselves, and others, to do the right thing. Truthfulness, honesty, care, loyalty, integrity: we Know what they require, but we do not know if and how these requirements can be met. If this is indeed the case, and we want to promote ethical auditing, then we need to attract decent people into the profession, train them well, and not subject them to more temptation than they can cope with. Beyond that, all that is required is a code of ethics laying down minimum standards of professional conduct, with a complaints and disciplinary process to deal with any errant behaviour that comes to the attention of professional bodies. There is sufficient truth in this scenario to explain, but not to justify, the minimal attention that is given to ethics in the training of accountants and auditors, despite the growing international literature on the subject (Albrecht 1992; Maurice 1996; Morse & Blake 1998), and the absence of ethical debate and concern within the profession. Provided the expertise is there, it is assumed that ordinary moral sensibility, together with the good example of senior colleagues, can take care of the ethical side of the business. Attention to the ethics of auditing engages the professional firms only with respect to risk minimization in relation to the serious illegal activities of the occasional bad apple and the likelihood of legal liabilities and a general concern for their reputation. In these circumstances, it is understandable that research into the ethics of accountants and auditors is focused on discovering how to maximize compliance with generally accepted principles of professional conduct. The crisis of public confidence in the accounting profession arising from these events is perceived as a threat not only to the business of auditors but to business itself. If there have to be unexpected major corporate insolvencies before serious auditing irregularities come to light, what trust can we have in the reliability of the accounting and auditing standards and procedures generally? And, more specifically, if we cannot trust an audit, has it any value? Gross auditing failures can always be dismissed as atypical lapses deriving from the wickedness of key players involved. This feeds off the assumption that ethical Business Ethics and Corporate Governance Page 51

problems relate to occasional non-compliance with agreed standards of professional conduct. Yet focussing on ethics in the context of auditing catastrophes reveals that determining what is ethical or legal in auditing is not such a simple matter after all (see McBarnet, Chapter 2). We may easily elicit a large measure of agreement as to the relevant moral values and their accompanying virtues, such as truthfulness, honesty and law-abidingness, but what these should be taken to mean with respect to conduct in the context of assessing the financial reports of business organisations turns out to be far from clear when we get down to the not very fine detail. Determining what is and is not ethical in auditing turns out not to be simply a matter of detecting fraud, corruption and other criminal conduct. Ethical disagreement about auditing arises, in part, because there is no agreement as to what the central purpose of an audit is. And since the ethical significance of the conduct of individual players in the audit depends on the moral justification of the system in place, disagreement about the purpose of the audit generates disagreement about how audits ought to be conducted. This means that, although ethics in auditing does involve the conduct of auditors, any serious attempt to assess that conduct must take account of the nature and purpose of auditing and the economic and social functions it is intended to serve. Evaluating auditor performance requires, for instance, raising questions as to what constitutes conformity with official guidelines and the standard of professional practice, and about the attitude of those involved to auditing and accounting rules, legal and otherwise, and the ways in which they are interpreted and applied. It requires reference to the systems for decision-making and control within auditing firms, and the openness and honesty of the corporations under audit. All this goes far beyond seeking conformity with obvious and agreed standards and conduct. Beyond these matters, the ethics of auditing involves a critique of the content of legal and professional norms and the regulatory system within which they feature, including the adequacy of the legal frameworks in which accounting and auditing takes place. Do the existing professional cultures and accounting norms adequately serve the ends that justify the existence of the economic system they purport to serve? In raising the complex interrelationship of issues concerning how auditors ought to behave, what rules and principles they ought to adopt and follow, and how to promote a culture in which we can expect compliance with these norms, it is helpful to classify the ethical issues that arise in relation to auditing by distinguishing three spheres of activity; (1) the practice of auditor(s), (2) the management and culture of auditing firms, and (3) the setting of auditing standards and laws. Ethically, things may seem relatively straightforward at the level of the individual auditors engaged in the practice of auditing. Auditors ought to carry out their standard procedures carefully, diligently and punctually in accordance with their instructions and the appropriate auditing standards and procedures. The virtues of integrity, objectivity, independence, confidentiality, upholding technical and professional standards, competence and due care, which are all highlighted in the Australian Code of Professional Conduct, seem particularly appropriate in this first sphere. Even supposing the adequacy of such categorisations of virtues (Libby & Thorne 2004), putting these virtues into practice is not a simple matter. There may be morally relevant problems for practicing auditors when tasks are set that go beyond what the time and expertise available render feasible. In these circumstances, should those involved seek to disguise the limitations of their work, thereby risking the displeasure of their superiors and hazarding their career prospects, or should they just do what they can, perhaps in the dim wareness that their superiors might prefer not to be informed of weaknesses in the process that they are not themselves in a position to remedy? The options available to the hard-pressed auditor may be analysed purely in terms of self-interest. How hard to work, how often to seek assistance, how open to be about difficulties Business Ethics and Corporate Governance Page 52

these may be regarded as tactical questions within a career strategy that is aimed at personal advancement and material gain, questions best approached through a calculation of the short- and longterm benefits of alternative courses of action for the individuals concerned. These calculations may turn out to be in conflict with more evidently moral or ethical questions: considerations of fairness to other members of the team, obligations to employers, duties to clients, and perhaps a concern for other groups who may rely on the audit for one reason or another. Only a little reflection is required to demonstrate the difficulty of balancing such a variety of considerations. What weight, if any, should be given to self-interest in such circumstances? Some would say none at all. Morality is all about considering other people, not calculating ones own gains and losses. Yet there is also a powerful moral tradition that endorses the idea of people having duties to themselves which may be balanced against duties to others. And every system of morality has a place for legitimate self-interest. Even if we put self-interest to one side, similar problems arise when we consider the interests of other people and try to think through how to approach employees duties to their colleagues, their employers and the public. Are all these interests morally relevant? If so, how can these be compared? And when making such comparisons, should we consider short- or long-term consequences, and what sort of consequences are morally salient anyway? At this point it is easy to fall back on a few simple maxims. Individual auditors should work as hard as they can, in accordance with their instructions, and they should always make a full report to their superiors of any problems they encounter. Slacking, fudging and dissemblance are simply wrong. If there are complex moral balances to be taken into account, this is not something that should affect practicing auditors at work. Their duties are clear and they should do their best to fulfill them. It is also almost certainly in their long-term self-interest so to do. But that is not a calculation for them to make. A similarly firm line may be taken to another ethical dilemma that is said to be endemic in auditing. This arises when pressure is brought to bear on the auditor not to draw attention to irregularities or problems that have emerged in the course of the audit, pressure that is often related to a real or perceived threat to the future commercial relationship between the auditee and the auditor. This is a manifestation of what is a straight conflict of interest at the core of the standard auditee/auditor relationship that the auditor is financially dependent on the auditee (see Spence, Chapter 6). The integrity of a professional auditor might suggest that such pressure is always to be totally resisted, but the legitimate need to earn a living, and retain clients in a way that the auditors employers have a right to expect, mean that there will always be some moral reason to compromise on such matters from time to time. The more robust approach to such moral dilemmas is characteristic of deontology, the view that morality is all about duty and duty is all about not wronging other people (Fried 1978; Nagel 1986, Chapter 10). Ethics, according to the deontologist, is a matter of understanding and following certain general imperatives or rules, such as the Ten Commandments: work hard, tell the truth and be kind are examples of such moral imperatives. Moral rules are held to be binding independently of the consequences of putting them into practice. Murder is wrong, full stop. It is not for us to calculate the consequences of truthfulness, just to be truthful. A moral person knows what is right and must be what is right simply because it is right (Kant 1953). The standard view is that deontology (or rule-morality) comes into direct conflict with consequentialism, the theory that an act is right or wrong depending on its consequences for all those affected by the action, including the agent in question (Mill 1910 (1861)). The most famous brand of consequentialism utilitarianism holds that the consequences that matter morally are pleasures and pains, the morally right act being that which maximizes the balance of pleasure over pain, with each persons hedonic experiences being given equal weight in the calculation. This is summed up in Jeremy Benthams famous commitment to the greatest happiness of the greatest number (Bentham 1948 (1823)). Business Ethics and Corporate Governance Page 53

Other consequentialists argue that other types of consequence may feature in moral calculations, including, most typically, well-being in the sense of interests, and within economics, wealth either in monetary terms (welfare economics) or with respect to consumer goods. In all moral choices there is a tension between doing what is right according to the rules and working out what is right according to the consequences. It is dogmatic to say that one is characteristically more moral than the other, yet trite to hold that an adequate moral approach requires a measure of both ingredients. The trouble is that appeals to consequences do undermine a commitment to rules, and an absolute commitment to rules drives out what may be seen as a proper sensitivity to the social consequences of conduct. Moreover, allowing people to pick and choose between rules and consequences opens the way for self-serving choices that are determined by the self-interest of the particular agent. This is central to auditing ethics and regulation, as it is to ethics in general (see Campbell, Chapter 5; Tweedie 1988). However, the sharp contrast between rules and consequences can be misleading, especially in a technical field such as auditing. One attempted compromise between deontology and consequentialism, a compromise that seeks to avoid the twin problems of partiality and insensitivity, is rule-consequentialism. According to rule-consequentialism, individuals ought to follow pre-established moral rules when making particular decisions, but the rules themselves should be determined by consequentialist moral reasoning (Hare 1981; Smart & Williams 1973). This analysis is certainly an improvement on the sort of pure deontology in which the moral rightness of rules is simply intuited. Many rules are quite evidently justified in terms of the good consequences that flow from their general application. However, problems remain to the extent that at least some rules (such as not killing one innocent person to save the lives of many innocent persons) appear to have a powerful non-consequentialist basis. And, even for rule consequentialists, questions still arise as to whether it is ever right to depart from a rule in a specific case because of its exceptionally bad consequences. There is also controversy over the question of who has the authority to decide which rules should be adopted albeit on the grounds of their perceived beneficial consequences and at what point in time they may engage in such rulemaking and rulereform. In matters of private morality, both making exceptions to rules in particular cases and changing the rules themselves is something for each individual to consider and determine, although they must be prepared to take the consequences in terms of other peoples responses to their behaviour. But when it comes to working within an organization or carrying out a public function, there are moral and practical constraints that go along with such involvement. Organizations must have their internal rules, and those offering a service to the public have to take notice of what are regarded as the legitimate expectations of society. In such circumstances, individuals have less room for man oeuvre with respect to the moral stances that they take. In these contexts, authorities normally set the rules and, as a matter of individual morality in collective circumstances, it is up to those involved to follow them in all but exceptional circumstances. Thus, in the case of the hard-pressed auditors, it would appear that they ought to take a deontological or rule-morality approach to their work-related moral choices, whereas those who set the rules within or for the organization might be expected to take a more consequentialist view, at least when making the rules. It may be, therefore, that as we ascend the ladder of authority within an organization, the moral choices become more consequentialist, and therefore more open and more complex. And beyond the organization, there are further hierarchies of standard-setters, professional bodies and regulators, culminating in the State, which has the political and perhaps the moral right to establish the legal rights and duties of all individuals and groups within a society. This hierarchy of authority with the associated differences in moral reasoning seems to apply in most institutional settings. The ethics of organizational Business Ethics and Corporate Governance Page 54

life must assume that, on the whole, members of organisations have a moral obligation to conform to the organisational or community rules that they had no part in creating. And it is certainly true that moral choices have to be made by those in authority that are much more complex than those that arise for others lower down in an organisation. Further, there is no doubt that joining an organization rather like being a member of a society and a citizen of a country does involve a certain commitment to abiding by the rules of such entities. However, it is a defining feature of morality at least within the Western tradition, with its stress on individual autonomy (Kant 1953) that all moral persons have, ultimately, to make up their own minds as to what is morally right and wrong, and this includes deciding whether or not to conform to socially and institutionally authoritative moral norms. Notwithstanding that there are moral reasons to abide by the rules of the group, there is always an overriding moral responsibility for the individual to accept or reject those reasons in particular circumstances. Where they judge the rules to be grossly immoral, or the consequences of following generally beneficial rules in certain circumstances are on balance morally unacceptable, then every moral agent has a duty to make up their own mind as to how they ought to act. It is therefore a general feature of ethics that no one can entirely excuse themselves by saying that they were just following the rules or obeying a higher authority or doing what everyone else is doing. Ethics begins and (some would hold) ends with individual responsibility. This is particularly the case with members of a group or profession which is publicly committed to following certain values that transcend their own self-interest and the normal obligations that apply to all competent human beings. In such circumstances, there is something like a collective obligation to uphold these professional values that includes both a commitment to follow the rules of the profession in a way that serves the values of the profession, and a duty to resist and if necessary disobey rules that the individual member believes to be morally wrong in the context of those values, even when they carry the imprimatur of higher authority. It follows that, while all accountants and auditors have moral reasons to conform to the norms of conduct accepted as authoritative in their profession, nevertheless all accountants and auditors, even those with limited experience and seniority, have an obligation to take a critical attitude to their own and their colleagues' conduct and to the rules and procedures that define and govern their professional practice. The appropriate ethical attitude for rank and file members of a profession towards rules of practice may appear quite straightforward, but this is not the case. The straightforward aspect is rule compliance: that the rules are there to be followed conscientiously and meticulously without the intrusion of the practitioners personal opinions as to what these rules should be or departures prompted by inattention or lack of effort. The complicating factor is that this attitude of deference to rules should not be a matter of blind obedience to their authority, but should be based on an awareness of the rationales behind having such rules and the purposes that the activity in question is designed to serve. Awareness of rule rationales is possible only after a professional education that enables the qualified professional to understand what accounting and auditing systems are designed to do, and the role that their constitutive and regulative rules play in enabling them to fulfil these purposes. The importance of such awareness is not primarily a matter of motivating compliance, although knowledge of the function of rules does promote rule-following (see Plummer, Chapter 12). Its significance lies more in its contribution to the understanding of rules and how they are best interpreted and implemented in particular circumstances. Some accounting procedures are purely computational and can be understood and applied without an appreciation of the larger purpose of the exercise in which they feature. However, these rules are all normally related to other rules in which the categorisation of what is being Business Ethics and Corporate Governance Page 55

subjected to arithmetical analysis involves judgments that are far from mechanical. The creative or flexible accounting practices that typify the seedy side of much contemporary business practice involve stretching the conceptual boundaries of what counts as interest as distinct from capital expenditure, or whether this or that business entity is a subsidiary from a legal point of view (see McBarnet, Chapter 2). The categorisation of financial transactions requires transparency and consistency so that the processes involved can be duplicated, and can thus be used to make meaningful historical and cross-organisational comparisons between the financial standing of companies. An appreciation of the importance of consistency in ruleinterpretation involves an appreciation of the purpose of accounting practices, whether this be internal control, provision of data relevant to rational business decision-making, or external assessments of profitability. For these reasons, it is as much the consistency of the ruleapplication as the content of the rules themselves which ensures the validity of the process and the comparisons that are derived from it. The ethics of rule-interpretation and rule-following here are a function of the value of the particular accounting or auditing system and the purposes it serves thus the importance in an audit of checking that accounting systems are consistently following preestablished categories in the representation of their financial position. It is this that enables those using the accounts to make meaningful and reliable comparisons between the performance of different companies. It follows that conformity to the rules that determine how business phenomena are to be financially represented is a crucial accounting and auditing virtue. It is not only a technical accounting Failure not to follow such rules, but a moral failure in that it undermines the purposes that justify external accounting, and hence also the worth of auditors reviews of such accounts. This point is often lost in emotive critiques of moral legalism (Maurice 1996, p. 18), which might be better directed at those who try to twist the rules to suit their own illicit ends (see McBarnet, Chapter 2) than those who seek to promote the benefits of consistency through competent ruleinterpretation and a commitment to rule-conformity. Not all departures from ordinary accounting standards are due to incompetence or lack of awareness of the nature of the process. Sometimes accounting deviations and failure to pick them up and respond to them on the part of auditors is brought about by the self-interest of the auditee (and maybe also auditor) in giving a false and misleading view of their financial situation (and on the auditors part, in putting the commercial relationship with the auditee in jeopardy). Indeed, the core ethical issue of external accounting is that there is a vested interest on the part of companies to misrepresent their financial position in order to maintain or attract investment and enhance the (short-term) profitability of the company. The fundamental ethical issue in auditing is that there is a business interest on the part of auditors to collude with the auditee who is the source of the fees from which they derive their income. Here we come to the need for rules of a different kind; not rules that govern the presentation and inspection of accounts so that they can be reliably used for comparative purposes, but rules that are designed to counter the tendency of companies and their auditors to depart from or manipulate accounting and auditing standards in their own illicit financial interests. With respect to auditing, these rules are designed to promote what is called auditor independence that is, to promote both the reality and the appearance of an objective assessment of the truth or accuracy of the auditees accounts. Such rules may prohibit auditors having a financial interest in the company being audited, or providing non-audit services to that company. These rules are designed to ensure the trustworthiness of the process in itself, so that it is not contaminated by extraneous factors. Thus, in accordance with professional norms and legal requirements, no one may audit the financial reports of an organisation in which they have a financial interest. To break this rule is immediately to bring the independence of the audit into question. These are rules that have a significance that derives from their application in each and every case because the consequences of Business Ethics and Corporate Governance Page 56

ignoring the rules are directly harmful to the exercise in question. This is independent of any contribution this may make to the consistency, and hence the validity, of a system. Clearly audit firms are subject to the same ethical duties as practising auditors with respect to the observance of the accounting rules and standards that serve to make audits useful to their end-users. However, firms have additional collective responsibility to provide support and guidance for individual auditors in carrying out their tasks and working with auditees. The provision of adequate resources and training, the creation of a culture that supports auditor integrity, and the subordination of maximising profit to the maintenance of auditing standards are amongst the particular responsibilities of auditing firms. Lacking that leadership, employee auditors and junior partners cannot be expected to sustain ethical conduct in the field. Traditionally, rules of both kinds, those establishing accounting and auditing procedures and those establishing auditing independence, have their origins within the domain of the accounting and auditing profession. In theory this has meant that auditing firms as well as individual auditors have been subject to the governance of the profession as a whole, or a plurality of professional bodies, although the recent dominance of the profession by a few exceptionally large accounting firms has blurred the practical distinction between accounting firms and accounting bodies. The ethical issues that arise in the setting of standards, and how they are to be enforced, have all the complexity of consequentialist reasoning in institutional settings, with the additional problems of identifying which consequences matter, and for whom. At this point, the interests of the auditors clients have to be juxtaposed with the public interest in having a reliable auditing system. Working that out is a highly technical matter, but these technicalities do not exclude indeed, they ought properly to be at the service of the moral justifications that underpin the economic and social system of which the audited companies are part. This need for taking a broader view has bearing on a particular ethical issue that arises where the professional bodies may be tempted to adopt or recommend rules and standards that benefit the auditing profession at the expense of the public interest (see Simnett & Smith, Chapter 3). Perhaps on account of this moral hazard, accounting and auditing standards and the regulation of the auditing process have increasingly been shared between professional bodies and governments intent on shoring up the publics trust in the professional conduct of auditors. This co-regulation (rather than selfregulation) model is explored in Part II of this book. It is a topic that adds another layer of moral complexity, for governmental views of ethical auditing may differ from those of some of the more professional groups, thus creating not only moral disagreement, but also a moral dilemma on the part of auditors as to whether or not they ought to conform to legal requirements where these conflict with what they see as their duty to their profession. These substantive issues are approached via a number of different disciplines and theoretical perspectives. Most contributions come from academic auditors with considerable professional experience who have conducted empirical and theoretical research on auditing practice and its regulation. They deploy a variety of techniques, including behavioural and economic empirical methodologies, drawing on a diversity of experience in the practice and governance of auditing. These are supplemented by legal, philosophical and sociological contributions that place professional auditing expertise in the wider context that is, I argue, required for addressing the ethics of auditing. Insider trading Insider trading is the trading of a corporation's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. Business Ethics and Corporate Governance Page 57

However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the US, defined as beneficial owners of 10% or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (such as about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares). The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. However, economists cannot be confident of this conclusion because data on illegal insider trading is not available; the nature of the activity renders it impossible to gather data. Insiders can easily profit using "open market repurchases." Such transactions are legal and generally encouraged by regulators through safe harbors against insider trading liability. Legal insider trading Legal trades by insiders are common, as employees of publicly traded corporations often have stock or stock options. These trades are made public in the United States through Securities and Exchange Commission filings, mainly Form 4. Prior to 2001, U.S. law restricted trading such that insiders mainly traded during windows when their inside information was public, such as soon after earnings releases.[6] SEC Rule 10b5-1 clarified that the prohibition against insider trading does not require proof that an insider actually used material nonpublic information when conducting a trade; possession of such information alone is sufficient to violate the provision, and the SEC would infer that an insider in possession of material nonpublic information used this information when conducting a trade. However, SEC Rule 10b5-1 also created for insiders an affirmative defense if the insider can demonstrate that the trades conducted on behalf of the insider were conducted as part of a pre-existing contract or written binding plan for trading in the future. For example, if an insider expects to retire after a specific period of time and, as part of retirement planning, the insider has adopted a written binding plan to sell a specific amount of the company's stock every month for two years and later comes into possession of material nonpublic information about the company, trades based on the original plan might not constitute prohibited insider trading. Illegal insider trading Rules against insider trading on material non-public information exist in most jurisdictions around the world, but the details and the efforts to enforce them vary considerably. Sections 16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider trading. Congress enacted this act after the stock market crash of 1929. The United States is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them. Definition of "insider" In the United States and Germany, for mandatory reporting purposes, corporate insiders are defined as a company's officers, directors and any beneficial owners of more than 10% of a class of the company's equity securities. Trades made by these types of insiders in the company's own stock, based on material non-public information, are considered to be fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders. The corporate insider, simply by accepting employment, has undertaken a legal obligation to the shareholders to put the shareholders' interests before their own, in Business Ethics and Corporate Governance Page 58

matters related to the corporation. When the insider buys or sells based upon company owned information, he is violating his obligation to the shareholders. For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over and then bought shares in Company A while knowing that the share price would likely rise. In the United States and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if the corporate insider trades on the basis of this information. Liability for insider trading Liability for inside trading violations cannot be avoided by passing on the information in an "I scratch your back; you scratch mine" or quid pro quo arrangement as long as the person receiving the information knew or should have known that the information was company property. It should be noted that when allegations of a potential inside deal occur, all parties that may have been involved are at risk of being found guilty. For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred (albeit by proxy by passing it on to a "non-insider" so Company A's CEO wouldn't get his hands dirty). Misappropriation theory A newer view of insider trading, the misappropriation theory, is now part of US law. It states that anyone who misappropriates (steals) information from their employer and trades on that information in any stock (either the employer's stock or the company's competitor stocks) is guilty of insider trading. For example, if a journalist who worked for Company B learned about the takeover of Company A while performing his work duties and bought stock in Company A, illegal insider trading might still have occurred. Even though the journalist did not violate a fiduciary duty to Company A's shareholders, he might have violated a fiduciary duty to Company B's shareholders (assuming the newspaper had a policy of not allowing reporters to trade on stories they were covering). Proof of responsibility Proving that someone has been responsible for a trade can be difficult because traders may try to hide behind nominees, offshore companies, and other proxies. Nevertheless, the Securities and Exchange Commission prosecutes over 50 cases each year, with many being settled administratively out of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious activity. Trading on information in general Not all trading on information is illegal insider trading, however. For example, if while dining at a restaurant, one hears the CEO of Company A at the next table telling the CFO that the company's profits will be higher than expected and then buys the stock, one is not guilty of insider trading unless there was some closer connection between you, the company, or the company officers. However, information about a tender offer (usually regarding a merger or acquisition) is held to a higher standard. If this type of information is obtained (directly or indirectly) and there is reason to believe it is nonpublic, there is a duty to disclose it or abstain from trading. Tracking insider trades Since insiders are required to report their trades, others often track these traders, and there is a school of investing which follows the lead of insiders. This is, of course, subject to the risk that an insider is Business Ethics and Corporate Governance Page 59

making a buy specifically to increase investor confidence or making a sell for reasons unrelated to the health of the company (such as a desire to diversify or pay a personal expense). American insider trading law The United States has been the leading country in prohibiting insider trading made on the basis of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S. Securities and Exchange Commission (SEC) summarize the development of US insider trading laws. Insider trading has a base offense level of 8, which puts it in Zone A under the U.S. Sentencing Guidelines. This means that first-time offenders are eligible to receive probation rather than incarceration. Members of the US Congress are not exempt from the laws that ban insider trading, but as they generally do not have a confidential or fiduciary relationship with the source of the information they receive and accordingly, they do not meet the definition of an "insider." Common law US insider trading prohibitions are based on English and American common law prohibitions against fraud. In 1909, well before the Securities Exchange Act was passed, the United States Supreme Court ruled that a corporate director, who bought that company's stock when he knew it was about to jump up in price, committed fraud by buying but not disclosing his inside information. Section 15 of the Securities Act of 1933 contained prohibitions of fraud in the sale of securities which were greatly strengthened by the Securities Exchange Act of 1934. Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases and sales within any six-month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares. Under Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits fraud related to securities trading. The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for penalties for illegal insider trading to be as high as three times the profit gained or the loss avoided from the illegal trading. SEC regulations SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material nonpublic information to one person, it must simultaneously disclose that information to the public at large. In the case of an unintentional disclosure of material non-public information to one person, the company must make a public disclosure "promptly."Insider trading, or similar practices, are also regulated by the SEC under its rules on takeovers and tender offers under the Williams Act. Court decisions Much of the development of insider trading law has resulted from court decisions. In SEC v. Texas Gulf Sulphur Co. (1966), a federal circuit court stated that anyone in possession of inside information must either disclose the information or refrain from trading. In 1909, the Supreme Court of the United States ruled in Strong v. Repide that a director upon whose action the value of the shares depends cannot avail of his knowledge of what his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his expected action and the resulting value of the shares. Even though in general, ordinary relations between directors and shareholders in a business corporation are not of such a fiduciary nature as to make it the duty of a director to disclose to a shareholder the general knowledge which he may possess regarding the value of the shares of the company before he purchases any from a shareholder, yet there are cases where, by reason of the special facts, such duty exists. In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that tippees (receivers of second-hand information) are liable if they had reason to believe that the tipper had breached a fiduciary duty in disclosing confidential information and the tipper received any personal benefit from the disclosure. (Since Dirks disclosed the information in order to expose a fraud, rather than for personal gain, nobody was liable for insider trading violations in his case.) The Dirks case also defined the concept of "constructive insiders," who are lawyers, investment bankers and others who receive confidential Business Ethics and Corporate Governance Page 60

information from a corporation while providing services to the corporation. Constructive insiders are also liable for insider trading violations if the corporation expects the information to remain confidential, since they acquire the fiduciary duties of the true insider. In United States v. Carpenter (1986) the US Supreme Court cited an earlier ruling while unanimously upholding mail and wire fraud convictions for a defendant who received his information from a journalist rather than from the company itself. The journalist R. Foster Winans was also convicted, on the grounds that he had misappropriated information belonging to his employer, the Wall Street Journal. In that widely publicized case, Winans traded in advance of "Heard on the Street" columns appearing in the Journal. The court ruled in Carpenter: "It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom." However, in upholding the securities fraud (insider trading) convictions, the justices were evenly split. In 1997, the U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v. O'Hagan, 521 U.S. 642, 655 (1997). O'Hagan was a partner in a law firm representing Grand Metropolitan, while it was considering a tender offer for Pillsbury Company. O'Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4 million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so he did not commit fraud by purchasing Pillsbury options. The Court rejected O'Hagan's arguments and upheld his conviction. The "misappropriation theory" holds that a person commits fraud "in connection with" a securities transaction and thereby violates 10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-turned-trader's deception of those who entrusted him with access to confidential information. The Court specifically recognized that a corporation's information is its property: "A company's confidential information... qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty...constitutes fraud akin to embezzlement the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." In 2000, the SEC enacted SEC Rule 10b5-1, which defined trading "on the basis of" inside information as any time a person trades while aware of material nonpublic information. It is no longer a defense for one to say that one would have made the trade anyway. The rule also created an affirmative defense for pre-planned trades. Insider trading by members of Congress Members of Congress are exempted from insider trading laws and thus can act on information they are bound to gain in the course of their congressional activities, although house rules may consider it unethical. A 2004 study found that stock sales and purchases by Senators outperformed the market by 12.3% per year Peter Schweizer points out several examples of insider trading by members of Congress, including action taken by Spencer Bachus following a private, behind-the-doors meeting on the evening of September 18, 2008 when Hank Paulson and Ben Bernanke informed members of Congress about the imminent financial crisis, Bachus then shorted stocks the next morning and cashed in his profits within a week. Also attending the same meeting were Senator Dick Durbin and John Boehner; the same day (trade effective the next day), Durbin sold mutual-fund shares worth $42,696, and reinvested it all with Business Ethics and Corporate Governance Page 61

Warren Buffett. Also the same day (trade effective the next day), Congressman Boehner cashed out of an equity mutual fund. Security analysis and insider trading Security analysts gather and compile information, talk to corporate officers and other insiders, and issue recommendations to traders. Thus their activities may easily cross legal lines if they are not especially careful. The CFA Institute in its code of ethics states that analysts should make every effort to make all reports available to all the broker's clients on a timely basis. Analysts should never report material nonpublic information, except in an effort to make that information available to the general public. Nevertheless, analysts' reports may contain a variety of information that is "pieced together" without violating insider trading laws, under the Mosaic theory. This information may include non-material nonpublic information as well as material public information, which may increase in value when properly compiled and documented. In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge Act, or STOCK Act" was introduced that would hold congressional and federal employees liable for stock trades they made using information they gained through their jobs and also regulate analysts or "Political Intelligence" firms that research government activities.[31] The bill has not passed. Arguments for legalizing insider trading Some economists and legal scholars (such as Henry Manne, Milton Friedman, Thomas Sowell, Daniel Fischel, and Frank H. Easterbrook) argue that laws making insider trading illegal should be revoked. They claim that insider trading based on material nonpublic information benefits investors, in general, by more quickly introducing new information into the market. Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market. Other critics argue that insider trading is a victimless act: a willing buyer and a willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to this view) having been made between the parties to refrain from trading if there is asymmetric information. The Atlantic has described the process as "arguably the closest thing that modern finance has to a victimless crime". Legalization advocates also question why "trading" where one party has more information than the other is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data. Nevertheless, circumstances can occur when the geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose the information; for example, if he had been hired by Farmer Smith to assess the geology of the farm. Advocates of legalization make free speech arguments. Punishment for communicating about a development pertinent to the next day's stock price might seem to be an act of censorship. If the information being conveyed is proprietary information and the corporate insider has contracted to not expose it, he has no more right to communicate it than he would to tell others about the company's confidential new product designs, formulas, or bank account passwords. There are very limited laws against "insider trading" in the commodities markets if, for no other reason than that the concept of an "insider" is not immediately analogous to commodities themselves (corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under US commodity and futures trading laws. For example, a commodity broker can be charged with fraud by receiving a large purchase order from a client (one likely to affect the price of that commodity) and then purchaseing that commodity before executing the client's order to benefit from the anticipated price increase. Business Ethics and Corporate Governance Page 62

Legal differences among jurisdictions The US and the UK vary in the way the law is interpreted and applied with regard to insider trading. In the UK, the relevant laws are the Criminal Justice Act 1993, Part V, Schedule 1, and the Financial Services and Markets Act 2000, which defines an offence of Market Abuse. It is also illegal to fail to trade based on inside information (whereas without the inside information the trade would have taken place). The principle is that it is illegal to trade on the basis of market-sensitive information that is not generally known. No relationship to the issuer of the security is required; all that is required is that the guilty party traded (or caused trading) whilst having inside information. Japan enacted its first law against insider trading in 1988. Roderick Seeman said, "Even today many Japanese do not understand why this is illegal. Indeed, previously it was regarded as common sense to make a profit from your knowledge." In accordance with EU Directives, Malta enacted the Financial Markets Abuse Act in 2002, which effectively replaced the Insider Dealing and Market Abuse Act of 1994.The "Objectives and Principles of Securities Regulation" published by the International Organization of Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the three objectives of good securities market regulation are: 1. Investor protection, 2. Insuring that markets are fair, efficient and transparent, and 3. Reducing systemic risk. The discussion of these "Core Principles" state that "investor protection" in this context means "Investors should be protected from misleading, manipulative or fraudulent practices, including insider trading, front running or trading ahead of customers and the misuse of client assets." More than 85 percent of the world's securities and commodities market regulators are members of IOSCO and have signed on to these Core Principles. The World Bank and International Monetary Fund now use the IOSCO Core Principles in reviewing the financial health of different country's regulatory systems as part of these organizationss financial sector assessment program, so laws against insider trading based on non-public information are now expected by the international community. Enforcement of insider trading laws varies widely from country to country, but the vast majority of jurisdictions now outlaw the practice, at least in principle. Larry Harris claims that differences in the effectiveness with which countries restrict insider trading help to explain the differences in executive compensation among those countries. The US, for example, has much higher CEO salaries than do Japan or Germany, where insider trading is less effectively restrained. Ethical Investment Ethical investment combines the social or environmental considerations of the investor with their financial objectives. It can be found throughout the industry, in the form of Unit Trusts, Investment Trusts, pensions and savings schemes, and is growing at an impressive rate. Traditional ethical funds are involved with a positive and negative selection process, where money is invested in companies that make a positive contribution to the world and withheld from companies that do not. This strict screening method has perhaps fuelled the idea that ethical funds have been unable to compete with their non-ethical counterparts in terms of performance, but it is not true to say that following your conscience will mean poor performance and ultimately poor returns on your investment. The first ethical fund was launched in 1984 and there are now around 50 retail ethical funds in the UK. Further interest in the sector can be seen in the Ethical Investment Research Service (EIRIS) figures, which state that the ethical funds industry totalled 4 billion in August 2001. Along with the obvious growth of ethical investment products in the market, the Government has also started to pay serious attention to the ethical issue by the recent introduction of new pension regulation. The developments in Business Ethics and Corporate Governance Page 63

the ethical sector suggests that we are changing the way in which we make our investment decisions, thinking more about our influence as shareholders. Ethical investing begins with your ideas and principles; what issues you believe to be important. Just as different people have different views on the definition of ethical, not all funds have the same objective. Ethical Screening Companies that are included in the portfolio of an ethical fund are at first 'screened', a process that determines whether the company matches the fund's investment standards and ethical policy. The investment objective of a fund may have a combination of negative and positive criteria, in other words actively avoid those companies, for example, that are known to harm the environment and invest in companies involved in socially progressive business. Each fund should clearly state their ethical criteria and provide you with information on the companies they invest in. According to EIRIS, examples of negative criteria include: animal testing, gambling, human rights abuses, military production and sale, pornography, alcohol, genetic engineering, pollution and Third World concerns. The areas of positive criteria include equal opportunities, environmental programmes, conservation of energy, fair trade, education and training and support of community projects. Research Most ethical fund managers choose their portfolio of investments from an approved list created by a specialized research team. Some fund management groups have their own in-house research panels, while others look to external providers for ethical information. The Ethical Investment Research Service (EIRIS) is the leading independent provider of research into the ethical performance of companies and assists many management groups in their investment decisions. In July 2001, the Financial Times Stock Exchange (FTSE) with the help of EIRIS created a series of indices called FTSE4Good, which aims to include companies with strong environmental and social records. This has prompted some management groups to launch tracker funds based on the new ethical indices, and requires little ethical research by the groups themselves. Ethical or Socially Responsible Investment: The origins of modern ethical investment can be traced back to the beginning of the 1900's. The Methodist Church decided to invest in the stock market, purposely avoiding those companies involved in alcohol and gambling. The church was also behind the proposal for the first ethical trust in the UK in 1973, but it failed to win approval. The first ethical fund was finally launched in 1984, by Friends Provident. As the ethical investment market has developed, so too have its terms and policies. If you have ever considered investing ethically you may have come across the term of Socially Responsible Investment (SRI). Some believe SRI is interchangeable with the more common term of ethical, while others believe there is a clear distinction between the two. Those that think there is a difference describe ethical investment as simply avoiding companies through negative screening and SRI as a process that considers all companies for investment with the aim of encouraging change. This inconsistency highlights that ethical investment can mean so many different things to different people. Whatever the opinion the basic concept should be the same: investment with environmental, social and ethical consideration. Progress Along with the growth in the number of funds available in the ethical investment market, there is also an increase in the demand for ethical products. Investment providers now offer products for all types of ethical investor. Shades of Green Ethical funds have many different investment objectives. To make your investment choice easier many groups use a system to categorize their investment style. The main categories are dark green and light green, some groups also refer to a fund as medium green. Many believe that this system has widened the appeal of ethical funds. Dark green funds use the strictest investment criteria. Suited to investors Business Ethics and Corporate Governance Page 64

with strong ethical beliefs, investment usually excludes the largest companies in the UK. This type of fund shuns companies involved in such activities as animal testing, tobacco and arms manufacture. Investment in oil, pharmaceuticals and banking is also very limited. Fund managers of dark green funds would employ a negative screening process. The Aegon Ethical Fund is an example of a dark green fund; it has recently moved from being 'vegetarian' to 'vegan'. Light green funds use a positive approach to portfolio selection. Although these funds are still opposed to those companies involved in areas such as animal testing and tobacco, they do consider investment in mainstream companies that have shown an improvement in their environmental or social policies. For example, an oil company, rejected by a dark green fund could be considered for a light green portfolio if the company had taken positive action to help the environment, such as the use of solar power. This approach is commonly termed 'best of sector' or 'best of class'. These funds are considered a less risky investment due to the increased number of companies available to light green fund managers to choose from when investing. Developments: There has been a renewed investor interest in ethical investment over recent times. Public awareness of environmental and social issues has been heightened, which has prompted some change in government attitudes. In July 2000 the government introduced new pension fund regulation. The regulation requires pension fund trustees to disclose the extent to which ethical, social and environmental factors are considered when making investment decisions; the first time that a government has enforced such a rule. There have also been developments in the investment process of ethical funds. While the traditional negative and positive screening approach is still used by many ethical products, other concepts have started to emerge from this new investment environment. Engagement is an attempt by fund managers to engage the companies in which they invest in a discussion about their social and environmental policies. For example, if a fund invests in a company that is involved in arms manufacture, engagement does not ask for the fund to withdraw its investment, but to use its power as a shareholder to question the decisions being made. Friends Provident has developed the engagement concept which they call 'Responsible Engagement Overlay'. The group has applied the concept to its major equity investment portfolios, a total of 15 billion of assets. Prudential, Schroders and CGNU have also now adopted this approach. Ethical funds are defined by their active avoidance of those companies that harm the world, but without investment in those companies they have no power to change them. The light green approach of engagement may help ethical investment gain the support it needs to effect real change. Risk Understanding the risks associated with this type of investment is equally as important to some investors as identifying the ethical areas in which you want to invest. Are ethical funds more risky than conventional funds and how is performance affected, if at all? Performance Traditional ethical investing, because of its negative screening methods, is often perceived as a risky investment. Dark green funds tend to exclude larger companies from their portfolio, such as oil and pharmaceuticals, areas that have been known to provide the best gains. They also invest a higher percentage of shares in small to medium sized companies, sometimes considered unpredictable investments. All collective investment funds both ethical and non-ethical have an element of risk. It can alter with your investment choice and the length of time you invest. New ideas and approaches, the introduction of light green funds for example, are changing the way in which ethical funds are perceived. Fund managers of light green funds have a broader selection of investments to choose from. They may also take advantage of market trends, offering better potential for higher returns. Past performance suggests that some ethical funds have equalled or beaten their conventional counterparts. Although Business Ethics and Corporate Governance Page 65

past performance is not necessarily a guide to the future, the new developments to the industry may strengthen this record. Ethical Indices The performance of a Unit Trust or Investment Trust is generally measured against an index, so investors can easily view the direction of a particular area of the market in comparison to their chosen fund. A conventional fund and an ethical fund may both be compared to the same index, for example the FTSE All Share Index. A conventional fund has many companies to choose from that satisfy its investment objectives, whereas an ethical fund can be restricted somewhat by negative screening. As a result some ethical funds may under-perform the benchmark they have been measured against. Tax Planning and Ethical Tax planning and taxation: Tax planning involves an intelligent application of the various provisions of the direct tax laws to practical situations in such a manner as to reduce the tax impact on the assessee to the minimum. A thorough understanding of the principles, practices and procedures of tax laws and the ability to apply such knowledge to various practical situations is expected at the final level. Tax planning is the formulation of a system which in its implementation is designed to achieve a specific result. Economic planning is the privilege of the state tax planning is that of the subject. Men material and money are the resources available at the disposable of a nation and to conserve the same the state resorts to economic planning. Tax planning aims to reduce the outflow of cash resources made available to the government by way of taxes so that the same may be effectively utilized for the benefit of the individual or the business as the case may be. Just as sound economic planning is indispensable for a welfare state, a sound tax planning is equally indispensable for the welfare of the citizen. Tax planning may be defined as an arrangement of ones financial affairs in such a way that, without violating in any way the legal provisions, full advantage is taken of all tax exemptions, deductions, concessions, rebates, allowances and other reliefs or benefits permitted under the act so that the burden of taxation on the assessee is reduced to the minimum. It involves arranging ones financial affairs by intelligently anticipating the effects which the tax laws will have on the arrangements now being adopted. As such it is very stimulating intellectual exercise. Tax Planning and Tax avoidance: Reduction of taxes by legitimate means may take 2 forms tax planning and tax avoidance. Tax planning is wider range. At this stage, the distinction between tax avoidance and tax evasion may be noted. The dividing line between tax evasion and tax avoidance is very thin. The direct taxes enquiry committee (Wanchoo Committee) has tried to draw a distinction between the two items in the following words. The distinction between evasion and avoidance, therefore, is largely dependent on the difference in methods of escape resorted to. Some are instances of merely availing, strictly in accordance with law, the tax exemptions or tax privileges offered by the government. Others are maneuvers involving an element of deceit, misrepresentation of facts, and falsification of accounting calculations or downright fraud. The first represents what is truly tax planning and the latter tax evasion. Ethical principles to be compiled by tax practitioner: Certain fundamental principles have to be adhered to by practicing the profession to ensure compliance with tax laws and effective tax management. The fundamental principles to be observed when developing ethical requirements relating to tax practice include all the fundamental principles by which a members if governed in the conduct of his professional relations with others. The principles are: a. Integrity: a professional accountant should be straightforward and honest in performing professional services. b. Objectivity: a professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. Business Ethics and Corporate Governance Page 66

c. Professional competence and due care: a professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up to date developments in practice, legislation and techniques. d. Confidentiality: a professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority unless there is a legal or professional right or duty to disclose. e. Professional behavior: a professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. Role of judiciary in enforcing ethical compliance by tax payers: tax payers also tent to distort ethics by resorting to unfair accounting and business practices like a. Claiming personal expenditure as business expenditure b. Claiming capital expenditure as revenue expenditure c. Treating revenue receipts as capital receipt d. Accounting for amount paid as salaries as business expenditure by classifying the same under different account heads like conveyance, tour and travel, employee welfare. e. Altering the form of transaction f. Breaking up of large value contracts into smaller contracts to avoid attracting TDS Provisions. g. Transferring their income/property to avoid tax.etc. h. Misclassifying goods and services to avoid excise duty, customs duty and service tax The tax system in India is generally perceived to be complex and difficult to understand. Often, these complexities force the assesses to adopt unethical means for avoiding taxes. This may be done with the intention of evading tax or merely to escape the tiresome, difficult and exhaustive process of computing correct tax liability. This issue has been a cause of great concern for the government in the last few years. The ethics of levy of taxes by the government can be measured by the relationship between outlays and the quality of outcomes.

Combating Fraud
A fraud is an intentional deception made for personal gain or to damage other individual the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent discoveries. A corrupt practice is the offering, giving, receiving or solicitation directly or indirectly of anything of value to influence improperly the actions of another party. A fraudulent practice; is any act or omission, including a misrepresentation, that knowingly or recklessness misleads or attempts to mislead a party to obtain a financial or other benefit or to avoid an obligation. Corruption is among the greatest obstacles to economic and social development. The harmful effects of corruption are especially severe on the poor, who are hardest hit by economic decline, most reliant on the provision of public services, and least capable of paying the extra costs associated with bribery, fraud, and the misappropriation of economic privileges. Corruption also represents a significant additional cost of doing business in many developing countries. It undermines development by distorting the rule of law and weakening the institutional foundation upon which economic growth depends.

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Corruption damages policies and programs that aim to reduce poverty, so attacking corruption is critical to the achievement of IFC's overarching mission of poverty reduction. Countering corruption is therefore aligned with IFCs overarching mission to promote sustainable private sector investment in developing countries, to help reduce poverty and improve people's lives. IFC has always expected its staff and clients to maintain the highest standards of ethical behavior and compliance with the law and is at the forefront of the market and of development institutions in guarding against fraud and corruption in its work. This approach complements and supports IFC's determination to act as a leader on sustainability. Avoiding fraud and corruption is necessary to ensure that IFC's investments are successful, that its resources are being used effectively, and that its development objectives are met. IFCs Sanctions Process sets clear standards and procedures if there are allegations against clients or partners. These standards have gained broader acceptance. Multilateral Development Banks (MDBs) have stepped up their fight against corruption with the signing on April 9, 2010, of a joint Sanction Accord with Cross Debarment as a new enforcement tool, greatly increasing potential penalties for firms engaging in fraud and corruption, and adding a strong deterrent. The World Bank Group is committed to improving governance and fighting corruption in member countries through the Governance Anti-Corruption framework, which has three main pillars: Helping countries build capable, transparent, and accountable institutions Expanding partnerships with multilateral and bilateral development institutions, civil society, the private sector, and other actors in joint initiatives to address corruption Minimizing corruption in World Bank-funded projects by assessing corruption risk in projects upstream, actively investigating allegations of fraud and corruption, and strengthening project oversight and supervision

------------------------------------------**********************----------------------------------------------------------Unit V Ethical Issues in Information Technology Ethical issues in IT challenges & guidelines Security & threats Threats to IT Intellectual property rights patents, trademarks, rights, copyrights, TRIPS & TRIMS Cyber Crime Cyber Crime ACT - Types of Cyber Criminals. Introduction: Information technology (IT) can be defined in various ways, but is broadly considered to encompass the use of computers and telecommunications equipment to store, retrieve, transmit and manipulate data. The term is commonly used as a synonym for computers and computer networks, but it also encompasses other information distribution technologies such as television and telephones. In a business context, the Information Technology Association of America has defined information technology (IT) as "the study, design, development, application, implementation, support or management of computer-based information systems". In an academic context, the Association for Computing Machinery defines it as "undergraduate degree programs that prepare students to meet the computer technology needs of business, government, healthcare, schools, and other kinds of organizations .... IT specialists assume responsibility for selecting hardware and software products Business Ethics and Corporate Governance Page 68

appropriate for an organization, integrating those products with organizational needs and infrastructure, and installing, customizing, and maintaining those applications for the organizations computer users. Examples of these responsibilities include the installation of networks; network administration and security; the design of web pages; the development of multimedia resources; the installation of communication components; the oversight of email systems; and the planning and management of the technology lifecycle by which an organizations technology is maintained, upgraded, and replaced." Ethics is something that is universal to the human condition but this is not where we try to explain its origin or justify its ubiquity. Instead we take these as given and explore how it impacts people and businesses who are involved with information technology. Wendell Berry, farmer and philosopher, had famously said that If you eat, youre involved in agriculture and for us in the age of Google, it is but a little stretch to conclude that If you use a computer or a smart phone, youre involved with information technology. So the issues of ethics in information technology are as universal as ethics in general. However in this section we will first look at issues confronting information technology professionals and then look at some broader and more fundamental issues that concern the population at large. Information Technology Professionals In its early days, India as a nation with a burgeoning population and cheap labour was a hesitant user of what was viewed as labour-saving computers and even today the level of penetration of this technology is low when compared to the more mature economies. However the profession exploded into the mindscape of the Indian population on the back of the immense employment opportunities that surfaced prior to the Y2K scare -- when panicky American companies were on a desperate search for computer programmers to make changes to ancient computer programs that were expected to malfunction at the turn of the century and bring the computer dependent economy to a grinding halt. Whether the panic in the US was justified or not, the fallout for India was very beneficial as hundreds of companies took advantage of the opportunity to not only earn a lot of immediate money but also to lay the foundation of a vibrant profession that is anchored by mega-corporations like TCS, Infosys, cognizant and Wipro that employs lakhs of programmers today. While programmers are the most visible members of the IT community, the range of people who claim to be IT professionals is quite diverse. At one end we have the mathematicians who practice computer science while at the other we have people who install and repair our laptops and in between we have programmers, systems analysts, architects, network specialists, database administrators, hardware engineers and many other job descriptions. Unlike doctors, lawyers, chartered accountants and company secretaries there is no statutory body that certifies a person as an IT professional nor is there any specific educational qualification that is either necessary or sufficient for a person perform any of these roles. So the definition of an IT professional can be expanded to include anyone who delivers a product or service related to digital devices -- including but not limited to computers, telephones, gaming consoles, industrial equipment and other components of a modern society. Once we have identified an IT professional it is easier to identify the categories of people that the professional interacts with and the ethical issues that emerge with each kind of interaction.

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Employers Clients Suppliers Other IT professionals

Software Piracy, Trade Secret and Whistle blowing Fraud, Misrepresentation and Breach of Contract Bribery Resume Inflation, Conflict of Interest

IT users and society at large Code of Ethics, Certification and Malpractice

Many of these issues are certainly not unique to IT professionals but some of them are more common in their occurrence because of the nature of products and services provided by the IT industry. For example :

Software Piracy : Software is a key tool or equipment that is used to deliver software services and very often an employer encourages the employee to use pirated software tools to deliver services. Such a scenario is extremely unlikely in other professions where the use of stolen tools like screwdriver, spanner, wrench or stolen machinery is highly improbable. Trade Secrets : While designs of products and the machinery required to create and deliver them are always closely guarded in any organisation, the nature of the products in the IT industry is such that they are far easier to copy, retain and transmit through widely used communication channels. This leads to greater risks. Resume Inflation : Given the large number of people in the IT business, the similarity of backgrounds and qualifications among them and the fact that almost every company has large requirements of largely similar people -- for example Java Programmers or SAP consultants, the rate at which people change jobs is very high in the IT business. In fact, IT professionals are said to be more loyal to the profession than to the organisation ! In this volatile scenario of rapid recruitment to counter high employee turnover it is very difficult to verify the competence and credentials of job applicants adequately. Conflict of Interest : The high turnover of IT professionals also results in situation where colleagues working for the same company very often find themselves in competing companies and personal relationships can and does fall foul of professional relationships. Somebody who was your boss and mentor, someone whom you admire and respect, is now working for rival. So could be the case with a spouse or the significant other since relationships within the industry are very common. In this case, the nature and quantum of information that you can share is very debatable.

Most of these issues can be categorised into three major areas of concern : Intellectual Property, Privacy and Freedom of Information that we explore in greater detail in subsequent sections. However what makes the issues difficult to address is the fact that from a legal perspective, IT workers are not recognised as professionals since there is no statutory mechanism to license them to practice as in the case with doctors -- the Medical Council of India, lawyers -- The Bar Council of a particular court or chartered accountants -- The Institute of Chartered Accountants. As a consequence there is no statutory body that can adjudicate on the correctness of their behaviour. Nor is there any legally enforceable code of conduct -- other than the law of the land -- against which debatable behaviour can be measured which in turn means that an IT professional cannot be held legally liable for professional malpractice. Business Ethics and Corporate Governance Page 70

However this is equally true for many other service lines like banking, insurance or even education but unfortunately that is no excuse to either duck the debate on ethics in the IT industry or, what is worse, use it as a fig-leaf to hide behavioural traits that are indeed unethical. Moral Values in Information Recording We live in a world rich in data and the technology to record and store vast amounts of this data has grown rapidly. The primary moral concern here is that when we collect, store, and/or access information it is done in a just manner that anyone can see is fair and in the best interests of all parties involved. As was mentioned above, each of us produces a vast amount of information every day that could be recorded and stored as useful data to be accessed later when needed. But moral conundrums arise when that collection, storage and use of our information is done by third parties without our knowledge or done with only our tacit consent. The control of information is power. The social institutions that have traditionally exercised this power are things like, religious organizations, universities, libraries, healthcare officials, government agencies, banks and corporations. These entities have access to stored information that gives them a certain amount of power over their customers and constituencies. Today each citizen has access to more and more of that stored information without the necessity of utilizing the traditional mediators of that information and therefore a greater individual share of social power. Moral Values in Communicating and Accessing Information Information technology has forced us to rethink a simple notion of privacy into more complex theories that recognize both the benefits and risks of communicating all manner of information. The primary moral values of concern are privacy, ownership, trust and the veracity of the information being communicated. Privacy, then we should give all the control of access to personal information to the individual. Most corporate entities resist this notion as information about users has become a primary commodity in the digital world boosting the fortunes of corporations like Google or face book. There is a great deal of utility each of us gains from the services of internet search companies. It might actually be a fair exchange that they provide search results for free based on collecting data from individual user behavior that helps them rank the results. This service comes with advertising that is directed at the user based on his or her search history. That is, each user tacitly agrees to give up some privacy whenever they use the service. If we follow the argument raised above that privacy is equivalent to information control then we do seem to be ceding our privacy away little by little. Information security is also an important moral value that impacts the communication and access of user information. If we grant the control of our information to third parties in exchange for the services they provide, then these entities must also be responsible for restricting the access to that information by others who might use it to harm us. With enough information, a person's entire identity might be stolen and used to facilitate fraud and larceny. The victims of these crimes can have their lives ruined as they try to rebuild such things as their credit rating and bank accounts. This has led to the design of computer systems that are more difficult to access and the growth of a new industry dedicated to securing computer systems. Moral Values in Organizing and Synthesizing Information : In addition to storing and communicating information, many information technologies automate the organizing of information as well as synthesizing or mechanically authoring or acting on new information.

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The Moral Paradox of Information Technologies Several of the issues raised above result from the moral paradox of Information technologies. Many users want information to be quickly accessible and easy to use and desire that it should come at as low a cost as possible, preferably free. But users also want important and sensitive information to be secure, stable and reliable. Maximizing our value of quick and low cost minimizes our ability to provide secure and high quality information and the reverse is true also. Thus the designers of information technologies are constantly faced with making uncomfortable compromises. Social Media and Networking Social networking is a term given to sites and applications that facilitate online social interactions that typically focus on sharing information with other users referred to as friends. The most famous of these sites today is Facebook. There are a number of moral values that these sites call into question. There are, of course, privacy issues that abound in the use of social media. James Parrish following Mason (1986) recommends four policies that a user of social media should follow to ensure proper ethical concern for other's privacy: 1. When sharing information on SNS (social network sites), it is not only necessary to consider the privacy of one's personal information, but the privacy of the information of others who may be tied to the information being shared. 2. When sharing information on SNS, it is the responsibility of the one desiring to share information to verify the accuracy of the information before sharing it. 3. A user of SNS should not post information about themselves that they feel they may want to retract at some future date. Furthermore, users of SNS should not post information that is the product of the mind of another individual unless they are given consent by that individual. In both cases, once the information is shared, it may be impossible to retract. 4. It is the responsibility of the SNS user to determine the authenticity of a person or program before allowing the person or program access to the shared information. (Parrish 2010) These systems are not typically designed to protect individual privacy, but since these services are typically free there is a strong economic drive for the service providers to harvest at least some information about their user's activities on the site in order to sell that information to advertisers for directed marketing. Online Games and Worlds The first moral impact one encounters when contemplating online games is the tendency for these games to portray violence. There are many news stories that claim a cause and effect relationship between violence in computer games and real violence. While violence is easy to see in online games, there is a much more substantial moral value at play and that is the politics of virtual worlds. Malware, Spyware and Informational Warfare Malware and computer virus threats are growing at an astonishing rate. Security industry professionals report that while certain types of malware attacks such as spam are falling out of fashion, newer types Business Ethics and Corporate Governance Page 72

of attacks focused on mobile computing devices and the hacking of cloud computing infrastructure are on the rise outstripping any small relief seen in the slowing down of older forms of attack (Cisco Systems 2011; Kaspersky Lab 2011). What is clear is that this type of activity will be with us for the foreseeable future. In addition to the largely criminal activity of malware production, we must also consider the related but more morally ambiguous activities of hacking, hacktivism, commercial spyware, and informational warfare. Each of these topics has its own suite of subtle moral ambiguities. We will now explore some of them here. While there may be wide agreement that the conscious spreading of malware is of questionable morality there is an interesting question as to the morality of malware protection and anti-virus software. With the rise in malicious software there has been a corresponding growth in the security industry which is now a multi-billion dollar market. Even with all the money spent on security software there seems to be no slowdown in virus production, in fact quite the opposite has occurred. This raises an interesting business ethics concern, what value are customers receiving for their money from the security industry? The massive proliferation of malware has been shown to be largely beyond the ability of anti-virus software to completely mitigate. There is an important lag in the time between when a new piece of malware is detected by the security community and the eventual release of the security patch and malware removal tools. The anti-virus modus operandi of receiving a sample, analyzing the sample, adding detection for the sample, performing quality assurance, creating an update, and finally sending the update to their users leaves a huge window of opportunity for the adversary even assuming that anti-virus users update regularly. The primary moral challenge of informational warfare is determining how to use weaponized information technologies in a way that honors our commitments to just and legal warfare. Since warfare is already a morally questionable endeavor it would be preferable if information technologies could be leveraged to lessen violent combat. For instance, one might argue that the Stuxnet virus did damage that in generations before might have been accomplished by an air raid incurring significant civilian casualtiesand that so far there have been no reported human casualties resulting from Stuxnet. The malware known as Flame seems to be designed to aid in espionage and one might argue that more accurate information given to decision makers during wartime should help them make better decisions on the battlefield. On the other hand, these new informational warfare capabilities might allow states to engage in continual low level conflict eschewing efforts for peacemaking which might require political compromise. Information security threats and challenges: Information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, perusal, inspection, recording or destruction. The terms information security, computer security and information assurance are frequently used interchangeably. These fields are interrelated often and share the common goals of protecting the confidentiality, integrity and availability of information; however, there are some subtle differences between them. These differences lie primarily in the approach to the subject, the methodologies used, and the areas of concentration. Information security is concerned with the confidentiality, integrity and availability of data regardless of the form the data may take: electronic, print, or other forms. Computer security can focus on ensuring the availability and correct operation of a computer system without concern for the information stored or processed by the computer. Information assurance focuses on the reasons for assurance that information is protected, and is thus reasoning about information security.

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Governments, military, corporations, financial institutions, hospitals, and private businesses amass a great deal of confidential information about their employees, customers, products, research, and financial status. Most of this information is now collected, processed and stored on electronic computers and transmitted across networks to other computers. Should confidential information about a business' customers or finances or new product line fall into the hands of a competitor, such a breach of security could lead to negative consequences. Protecting confidential information is a business requirement, and in many cases also an ethical and legal requirement. For the individual, information security has a significant effect on privacy, which is viewed very differently in different cultures. The field of information security has grown and evolved significantly in recent years. There are many ways of gaining entry into the field as a career. It offers many areas for specialization including: securing network(s) and allied infrastructure, securing applications and databases, security testing, information systems auditing, business continuity planning and digital forensics science, etc.

Key concepts The CIA triad (confidentiality, integrity and availability) is one of the core principles of information security. There is continuous debate about extending this classic trio. Other principles such as Accountability[3] have sometimes been proposed for addition it has been pointed out that issues such as Non-Repudiation do not fit well within the three core concepts, and as regulation of computer systems has increased (particularly amongst the Western nations) Legality is becoming a key consideration for practical security installations. In 1992 and revised in 2002 the OECD's Guidelines for the Security of Information Systems and Networks proposed the nine generally accepted principles: Awareness, Responsibility, Response, Ethics, Democracy, Risk Assessment, Security Design and Implementation, Security Management, and Reassessment. Building upon those, in 2004 the NIST's Engineering Principles for Information Technology Security proposed 33 principles. From each of these derived guidelines and practices. Business Ethics and Corporate Governance Page 74

In 2002, Donn Parker proposed an alternative model for the classic CIA triad that he called the six atomic elements of information. The elements are confidentiality, possession, integrity, authenticity, availability, and utility. The merits of the Parkerian hexad are a subject of debate amongst security professionals. Confidentiality Confidentiality is the term used to prevent the disclosure of information to unauthorized individuals or systems. For example, a credit card transaction on the Internet requires the credit card number to be transmitted from the buyer to the merchant and from the merchant to a transaction processing network. The system attempts to enforce confidentiality by encrypting the card number during transmission, by limiting the places where it might appear (in databases, log files, backups, printed receipts, and so on), and by restricting access to the places where it is stored. If an unauthorized party obtains the card number in any way, a breach of confidentiality has occurred. Confidentiality is necessary (but not sufficient) for maintaining the privacy of the people whose personal information a system holds. Integrity In information security, integrity means that data cannot be modified undetectably. This is not the same thing as referential integrity in databases, although it can be viewed as a special case of Consistency as understood in the classic ACID model of transaction processing. Integrity is violated when a message is actively modified in transit. Information security systems typically provide message integrity in addition to data confidentiality. Availability For any information system to serve its purpose, the information must be available when it is needed. This means that the computing systems used to store and process the information, the security controls used to protect it, and the communication channels used to access it must be functioning correctly. High availability systems aim to remain available at all times, preventing service disruptions due to power outages, hardware failures, and system upgrades. Ensuring availability also involves preventing denialof-service attacks. Authenticity In computing, e-Business, and information security, it is necessary to ensure that the data, transactions, communications or documents (electronic or physical) are genuine. It is also important for authenticity to validate that both parties involved are who they claim they are. Non-repudiation In law, non-repudiation implies one's intention to fulfill their obligations to a contract. It also implies that one party of a transaction cannot deny having received a transaction nor can the other party deny having sent a transaction. Electronic commerce uses technology such as digital signatures and public key encryption to establish authenticity and non-repudiation. Steps to overcome threats to Information Security These are the following six steps for security 1. Change the default password 2. Change service set identifier (SSID) 3. Specify authorized media access control addresses 4. Limit devices connected at one time 5. Enable an encryption solution 6. Disable devices during non business hours. In the ever changing technological environment security that is state of the art today may be obsolete tomorrow. Therefore security protection must keep pace with these changes.

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Intellectual Property Rights in India


Introduction With the advent of the new knowledge economy, the old and some of the existing management constructs and approaches would have to change. The knowledge economy places a tag of urgency on understanding and managing knowledge based assets such as innovation and know- how. The time for grasping knowledge has become an important parameter for determining the success of an institution, enterprise, government and industry: the shorter the time better are the chances of success. Intellectual Property Rights (IPR) have become important in the face of changing trade environment which is characterized by the following features namely global competition, high innovation risks, short product cycle, need for rapid changes in technology, high investments in research and development(R&D), production and marketing and need for highly skilled human resources. Geographical barriers to trade among nations are collapsing due to globalization; a system of multilateral trade would be on the increase order. It is therefore quite obvious that the complexities of global trade would be on the increase as more and more variables are introduced leading to uncertainties. Many products and technologies are simultaneously marketed and utilized in many countries. With the opening up of trade in goods and services intellectual property rights (IPR) have become more susceptible to infringement leading to inadequate return to the creators of knowledge. Developers of such products and technologies would like to ensure R&D costs and other costs associated with introduction of new products in the market are recovered and enough profits are generated for investing in R&D to keep up the R&D efforts. One expects that a large number of IP rights would be generated and protected all over the world including India in all areas of science and technology, software and business methods. More than any other technological area, drugs and pharmaceuticals match the above description most closely. Knowing that the cost of introducing a new drug into the market may cost a company anywhere between $ 300 million to $600 million along with all the associated risks at the developmental stage, no company will like to risk its intellectual property becoming a public property without adequate returns. Creating, obtaining, protecting and managing intellectual property must become a corporate activity in the same manner as the raising of resources and funds. The knowledge revolution will demand a special pedestal for intellectual property and treatment in the overall decision- making process. It is also important to realize that each product is amalgamation of many different areas of science and technologies. In the face of the competition being experienced by the global community, many industries are joining hands for sharing their expertise in order to respond to market demands quickly and keeping the prices competitive. In order to maintain a continuous stream of new ideas and experimentations, public private partnership in R&D would need to be nurtured to arrive at a win-win situation. Therefore all publicly funded institutions and agencies will have to come to terms with the new ground realities and take positive steps to direct research suitably to generate more intellectual property rights, protect and manage them efficiently.

It is therefore quite obvious that the complexities of global trade would be on the increase as more and more variables are introduced leading to uncertainties. Many products and technologies are simultaneously marketed and utilized in many countries. With the opening up of trade in goods and services intellectual property rights (IPR) have become more susceptible to infringement leading to inadequate return to the creators of knowledge. Developers of such products and technologies would like to ensure R&D costs and other costs associated with introduction of new products in the market are recovered and enough profits are generated for
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investing in R&D to keep up the R&D efforts. One expects that a large number of IP rights would be generated and protected all over the world including India in all areas of science and technology, software and business methods. More than any other technological area, drugs and pharmaceuticals match the above description most closely. Knowing that the cost of introducing a new drug into the market may cost a company anywhere between $ 300 million to $600 million along with all the associated risks at the developmental stage, no company will like to risk its intellectual property becoming a public property without adequate returns. Creating, obtaining, protecting and managing intellectual property must become a corporate activity in the same manner as the raising of resources and funds. The knowledge revolution will demand a special pedestal for intellectual property and treatment in the overall decision- making process. It is also important to realize that each product is amalgamation of many different areas of science and technologies. In the face of the competition being experienced by the global community, many industries are joining hands for sharing their expertise in order to respond to market demands quickly and keeping the prices competitive. In order to maintain a continuous stream of new ideas and experimentations, public private partnership in R&D would need to be nurtured to arrive at a win-win situation. Therefore all publicly funded institutions and agencies will have to come to terms with the new ground realities and take positive steps to direct research suitably to generate more intellectual property rights, protect and manage them efficiently. Intellectual Property Rights (IPR) Intellectual property rights as a collective term includes the following independent IP rights which can be collectively used for protecting different aspects of an inventive work for multiple protection:Patents Copyrights Trademarks Registered (industrial) design Protection of IC layout design, Geographical indications, and Protection of undisclosed information Nature of Intellectual Property Rights IPR are largely territorial rights except copyright, which is global in nature in the sense that it is immediately available in all the members of the Berne Convention. These rights are awarded by the State and are monopoly rights implying that no one can use these rights without the consent of the right holder. It is important to know that these rights have to be renewed from time to time for keeping them in force except in case of copyright and trade secrets. IPR have fixed term except trademark and geographical indications, which can have indefinite life provided these are renewed after a stipulated time specified in the law by paying official fees. Trade secrets also have an infinite life but they dont have to be renewed. IPR can be assigned, gifted, sold and licensed like any other property. Unlike other moveable and immoveable
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properties, these rights can be simultaneously held in many countries at the same time. IPR can be held only by legal entities i.e., who have the right to sell and purchase property. In other words an institution, which is not autonomous may not in a position to own an intellectual property. These rights especially, patents, copyrights, industrial designs, IC layout design and trade secrets are associated with something new or original and therefore, what is known in public domain cannot be protected through the rights mentioned above. Improvements and modifications made over known things can be protected. It would however, be possible to utilize geographical indications for protecting some agriculture and traditional products. Patents
A patent is an exclusive right granted by a country to the owner of an invention to make,use, manufacture and market the invention, provided the invention satisfies certain conditions stipulated in the law. Exclusive right implies that no one else can make, use, manufacture or market the invention without the consent of the patent holder. This right is available for a limited period of time. In spite of the ownership of the rights, the use or exploitation of the rights by the owner of the patent may not be possible due to other laws of the country which has awarded the patent. These laws may relate to health, safety, food, security etc. Further, existing patents in similar area may also come in the way. A patent in the law is a property right and hence, can be gifted, inherited, assigned, sold or licensed. As the right is conferred by the State, it can be revoked by the State under very special circumstances even if the patent has been sold or licensed or manufactured or marketed in the meantime. The patent right is territorial in nature and inventors/their assignees will have to file separate patent applications in countries of their interest, along with necessary fees, for obtaining patents in those countries. A new chemical process or a drug molecule or an electronic circuit or a new surgical instrument or a vaccine is a patentable subject matter provided all the stipulations of the law are satisfied. The Indian Patent Act The first Indian patent laws were first promulgated in 1856. These were modified from time to time. New patent laws were made after the independence in the form of the Indian Patent Act 1970. The Act has now been radically amended to become fully compliant with the provisions of TRIPS. The most recent amendment was made in 2005 which were preceded by the amendments in 2000 and 2003. While the process of bringing out amendments was going on, India became a member of the Paris Convention, Patent Cooperation Treaty and Budapest Treaty. The salient and important features of the amended Act are explained here. Definition of invention A clear definition has now been provided for an invention, which makes it at par with definitions followed by most countries. Invention means a new product or process involving an inventive step and capable of industrial application. New invention means any invention or technology which has not been anticipated by publication in any document or used in the country or elsewhere in the world before the date of filing of patent application with complete specification i.e., the subject matter has not fallen in public domain or it does not form part of the state of the art. Inventive step means a feature of an invention that involves technical advance as compared to existing knowledge or having economic significance or both and that makes the invention not obvious to a person skilled in the art. capable of industrial application means that the invention is capable of being made or used in an industry" Novelty An invention will be considered novel if it does not form a part of the global state of the art. Information appearing in magazines, technical journals, books, newspapers etc. constitutes the state of the art. Oral description of the invention in a seminar/conference can also spoil novelty. Novelty is assessed in a Business Ethics and Corporate Governance Page 78

global context. An invention will cease to be novel if it has been disclosed in the public through any type of publications anywhere in the world before filing a patent application in respect of the invention. Therefore it is advisable to file a patent application before publishing a paper if there is a slight chance that the invention may be patentable. Prior use of the invention in the country of interest before the filing date can also destroy the novelty. Novelty is determined through extensive literature and patent searches. It should be realized that patent search is essential and critical for ascertaining novelty as most of the information reported in patent documents does not get published anywhere else. For an invention to be novel, it need not be a major breakthrough. No invention is small or big. Modifications to the existing state of the art, process or product or both, can also be candidates for patents provided these were not earlier known. In a chemical process, for example, use of new reactants, use of a catalyst, new process conditions can lead to a patentable invention. Inventiveness (Non-obviousness) A patent application involves an inventive step if the proposed invention is not obvious to a person skilled in the art i.e., skilled in the subject matter of the patent application. The prior art should not point towards the invention implying that the practitioner of the subject matter could not have thought about the invention prior to filing of the patent application. Inventiveness cannot be decided on the material contained in unpublished patents. The complexity or the simplicity of an inventive step does not have any bearing on the grant of a patent. In other words a very simple invention can qualify for a patent. If there is an inventive step between the proposed patent and the prior art at that point of time, then an invention has taken place. A mere 'scintilla' of invention is sufficient to found a valid patent. It may be often difficult to establish the inventiveness, especially in the area of upcoming knowledge areas. The reason is that it would depend a great deal on the interpretative skills of the inventor and these skills will really be a function of knowledge in the subject area. Usefulness An invention must possess utility for the grant of patent. No valid patent can be granted for an invention devoid of utility. The patent specification should spell out various uses and manner of practicing them, even if considered obvious. If you are claiming a process, you need not describe the use of the compound produced thereby. Nevertheless it would be safer to do so. But if you claim a compound without spelling out its utility, you may be denied a patent.

A Patent gives an inventor the right for a limited period of time to stop others from making, using, selling or importing the patented invention without the permission of the inventor. That is why a patent is called a "negative right" Patents are generally concerned with functional and technical aspects of products and processes and must fulfill specific conditions to be granted. Most patents are for incremental improvements in known technology - evolution rather than revolution. The technology does not have to be complex. Patent rights are territorial; an Indian patent does not confer any rights outside India. Patent rights last for up to 20 years in India and in most countries outside India. Depending on where you wish your patent to be in effect, you must apply to the appropriate body. In India, it is The Indian Patent Office. There are various Patent Offices around the world. Alternatively, a Patent Agent can apply on your behalf.

Copyrights
Copyright is a right, which is available for creating an original literary or dramatic or musical or artistic work. Cinematographic films including sound track and video films and recordings on discs, tapes, perforated roll or other devices are covered by copyrights. Computer programs and software are Business Ethics and Corporate Governance Page 79

covered under literary works and are protected in India under copyrights. The Copyright Act, 1957 as amended in 1983, 1984, 1992, 1994 and 1999 governs the copyright protection in India. The total term of protection for literary work is the authors life plus sixty years. For cinematographic films, records, photographs, posthumous publications, anonymous publication, works of government and international agencies the term is 60 years from the beginning of the calendar year following the year in which the work was published. For broadcasting, the term is 25 years from the beginning of the calendar year following the year in which the broadcast was made. Copyright gives protection for the expression of an idea and not for the idea itself. For example, many authors write textbooks on physics covering various aspects like mechanics, heat, optics etc. Even though these topics are covered in several books by different authors, each author will have a copyright on the book written by him / her, provided the book is not a copy of some other book published earlier. India is a member of the Berne Convention, an international treaty on copyright. Under this Convention, registration of copyright is not an essential requirement for protecting the right. It would, therefore, mean that the copyright on a work created in India would be automatically and simultaneously protected through copyright in all the member countries of the Berne Convention. The moment an original work is created, the creator starts enjoying the copyright. However, an undisputable record of the date on which a work was created must be kept. When a work is published with the authority of the copyright owner, a notice of copyright may be placed on publicly distributed copies. The use of copyright notice is optional for the protection of literary and artistic works. It is, however, a good idea to incorporate a copyright notice. As violation of copyright is a cognizable offence, the matter can be reported to a police station. It is advised that registration of copyright in India would help in establishing the ownership of the work. The registration can be done at the Office of the Registrar of Copyrights in New Delhi. It is also to be noted that the work is open for public inspection once the copyright is registered. Computer program in the Copyright Act has been defined as a set of instructions expressed in words, codes, schemes or any other form, including a machine-readable medium, capable of causing a computer to perform a particular task or achieve a particular result. It is obvious that algorithms, source codes and object codes are covered in this definition. It is advisable to file a small extract of the computer program at the time of registration rather than the full program. It is important to know that the part of the program that is not being filed would remain a trade secret of the owner but would have to be kept well guarded by the owner. It may be noted that computer programs will become important in the area of medicines when one talks about codification of DNA and gene sequencing. Generally, all copyrightable expressions embodied in a computer program, including screen displays, are protectable. However, unlike a computer program, which is a literary work, screen display is considered an artistic work and therefore cannot be registered through the same application as that covering the computer program. A separate application giving graphical representation of all copyrightable elements of the screen display is essential. In the digital era, copyright is assuming a new importance as many works transacted through networks such as databases, multi media work, music, information etc. are presently the subject matter of copyright. Coverage provided by copyright i. Literary, dramatic and musical work. Computer programs/software are covered within the definition of literary work. ii. Artistic work iii. Cinematographic films, which include sound track and video films. iv. Recording on any disc, tape, perforated roll or other device. Infringement of copyright Business Ethics and Corporate Governance Page 80

Copyright gives the creator of the work the right to reproduce the work, make copies, translate, adapt, sell or give on hire and communicate the work to public. Any of these activities done without the consent of the author or his assignee is considered infringement of the copyright. There is a provision of fair use in the law, which allows copyrighted work to be used for teaching and research and development. In other words making one photocopy of a book for teaching students may not be considered an infringement, but making many photocopies for commercial purposes would be considered an infringement. There is one associated right with copyright, which is known as the moral right, which cannot be transferred and is not limited by the term. This right is enjoyed by the creator for avoiding obscene representation of his /her works. Following acts are considered infringement of copyrights:1) In the case of literary, dramatic or musical work, not being a computer program (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinematography film or sound recording in respect of the work; (v) to make any translation of the work; to make any adaptation of the work; (vi) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in Sub-clauses (i) to (vi); (b) in the case of computer program (i) to do any acts specified in clauses (a); (ii) to sell or give on hire, or offer for sale or hire any copy of t he computer program, regardless of whether such copy has been sold or given on hire on earlier occasions; 2) (c ) in the case of an artistic work (i) to reproduce the work in any material form including depiction in three dimensions of a two dimensional work or in two dimensions of a three dimensional work; (ii) to communicate the work to the public; (iii) to issue copies of the work to the public not being copies already in circulation; (iv) to include the work in any cinematography film . (v) to make any adaptation of the work; (vi) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi); 3) (d) in the case of a cinematography film (i) to make a copy of the film including a photograph of any image forming part thereof; (ii) to sell or give on hire or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; 4) (e) in the case of sound recording (i) to make any other sound recording embodying it; (ii) to sell or give on hire or offer for sale or hire, any copy of the ,sound recording, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the sound recording to the public; Business Ethics and Corporate Governance Page 81

Industrial Design We see so many varieties and brands of the same product (e.g. car, television, personal computer, a piece of furniture etc.) in the market, which look quite different from each other. If the products have similar functional features or have comparable price tags, the eye appeal or visual design of a product determines the choice. Even if the similarities are not close, a person may decide to go for a more expensive item because that item has a better look or colour scheme. What is being said is that the external design or colour scheme or ornamentation of a product plays a key role in determining the market acceptability of the product over other similar products. If you have a good design that gives you an advantage, then you must have a system to protect its features otherwise there would be wide scale imitation. Design as per the Indian Act means the features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article - whether in two dimensional or three dimensional or in both forms - by any industrial process or means, whether manual, mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye; but it does not include any mode or principle of construction or anything which is in substance a mere mechanical device. In this context an article means any article of manufacture and any substance, artificial, or partly artificial and partly natural; and includes any part of an article capable of being made and sold separately. Stamps, labels, tokens, cards, etc cannot be considered an article for the purpose of registration of design because once the alleged design i.e., ornamentation is removed only a piece of paper, metal or like material remains and the article referred to ceases to exist. An article must have its existence independent of the designs applied to it. So, the design as applied to an article should be integral with the article itself. The essential requirements for the registration of design 1. The design should be new or original, not previously published or used in any country before the date of application for registration. The novelty may reside in the application of a known shape or pattern to a new subject matter. However, if the design for which the application is made does not involve any real mental activity for conception, then registration may not be considered. 2. The design should relate to features of shape, configuration, pattern or ornamentation applied or applicable to an article. Thus, designs of industrial plans, layouts and installations are not registrable under the Act. 3. The design should be applied or applicable to any article by any industrial process. Normally, designs of artistic nature such as painting, sculptures and the like which are not produced in bulk by any industrial process are excluded from registration under the Act. 4. The features of the designs in the finished article should appeal to and are judged solely by the eye. This implies that the design must appear and should be visible on the finished article, for which it is meant. Thus, any design in the inside arrangement of a box, money purse or almirah may not be considered for showing such articles in the open state, as those articles are generally put in the market in the closed state. 5. Any mode or principle of construction or operation or any thing, which is in substance a mere mechanical device, would not be a registrable design. For instance, a key having its novelty only in the shape of its corrugation or bend at the portion intended to engage with levers inside the lock it is associated with, cannot be registered as a design under the Act. However, when any design suggests any mode or principle of construction or mechanical or other action of a mechanism, a suitable disclaimer in respect thereof is required to be inserted on its representation, provided there are other registrable features in the design. Business Ethics and Corporate Governance Page 82

6. The design should not include any trademark or property mark or artistic works. 7. It should be significantly distinguishable from known designs or combination of known designs. 8. It should not comprise or contain scandalous or obscene matter. Duration of the registration of a design The total term of a registered design is 15 years. Initially the right is granted for a period of 10 years, which can be extended, by another 5 years by making an application and by paying a fee of Rs. 2000/- to the Controller before the expiry of initial 10 years period. The proprietor of design may make the application for such extension even as soon as the design is registered. Strategy for protection First to file rule is applicable for registrability of design. If two or more applications relating to an identical or a similar design are filed on different dates, the first application will be considered for registration of design. Therefore the application should be filed as soon as you are ready with the design. After publication in the official gazette on payment of the prescribed fee of Rs. 500/- all registered designs are open for public inspection. Therefore, it is advisable to inspect the register of designs to determine whether the design is new or not. There is yet another important provision for ensuring that the design is different from anything published anywhere in the world. This is quite a strict condition. There would be many designs, which are not protected, and these would not be part of any database maintained by design offices. An applicant has to take the responsibility of ensuring that he has done an extensive search and satisfied himself of the novelty of his design. However, in practice as the cost involved in filing and obtaining a design registration is not high, a design application is made if the stakes involved are not high and you have not copied any design. The application for registration of design can be filed by the applicant himself or through a professional person (i.e. patent agent, legal practitioner etc.). An agent residing in India has to be employed by the applicants not resident of India. Trademarks A trademark is a distinctive sign, which identifies certain goods or services as those produced or provided by a specific person or enterprise. Trademarks may be one or combination of words, letters, and numerals. They may also consist of drawings, symbols, three dimensional signs such as shape and packaging of goods, or colours used as distinguishing feature. Collective marks are owned by an association whose members use them to identify them with a level of quality. Certification marks are given for compliance with defined standards. (Example ISO 9000.). A trademark provides to the owner of the mark by ensuring the exclusive right to use it to identify goods or services, or to authorize others to use it in return for some consideration (payment). Well-known trademark in relation to any goods or services, means a mark which has become so to the substantial segment of the public which uses such goods or receives such services that the use of such mark in relation to other goods or services would be likely to be taken as indicating a connection in the course of trade or rendering of services between those goods or services and a person using the mark in relation to the first-mentioned goods or services. Enactment of the Indian Trademarks Act 1999 is a big step forward from the Trade and Merchandise Marks Act 1958 and the Trademark Act 1940. The newly enacted Act has some features not present in the 1958 Act and these are:1. Registration of service marks, collective marks and certification trademarks. 2. Increasing the period of registration and renewal from 7 years to 10 years. 3. Allowing filing of single application for registration in more than one class. Business Ethics and Corporate Governance Page 83

4. Enhanced punishment for offences related to trademarks. 5. Exhaustive definitions for terms frequently used. 6. Simplified procedure for registration of registered users and enlarged scope of permitted use. 7. Constitution of an Appellate Board for speedy disposal of appeals and rectification applications which at present lie before High Court. Well-known trademarks and associated trademarks A well-known trademark in relation to any goods or services, means a mark which has become known to the substantial segment of the public that uses such goods or receives such services. Associated Trademarks are, in commercial terms, marks that resemble each other and are owned by the same owner, but are applied to the same type of goods or services. For example, a company dealing in readymade garments may use associated marks for shirts, trousers etc. means trademarks deemed to be, or required to be, registered as associated trademarks under this Act. Service marks The Indian Act of 1958 did not have any reference to service marks. Service means service of any description that is made available to potential users and includes the provision of services in connection with the business of industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising. Marks used to represent such services are known as service marks. Certification Trademarks and Collective Marks A certification trade mark means a guarantee mark which indicates that the goods to which it is applied are of a certain quality or are manufactured in a particular way or come from a certain region or uses some specific material or maintains a certain level of accuracy. The goods must originate from a certain region rather from a particular trader. Certification marks are also applicable to services and the same parameters will have to be satisfied. Further these marks are registrable just like any other trademark. Agmark used in India for various food items is a kind of certification mark although it is not registered as a certification mark; the concept of certification mark was not in vogue at the time of introduction of Agmark. A collective mark means a trademark distinguishing from those of others, the goods or services of members of an association of persons (not being a partnership within the meaning of the Indian Partnership Act, 1932), which is the proprietor of the mark. Term of a registered trademark The initial registration of a trademark shall be for a period of ten years but may be renewed from time to time for an unlimited period by payment of the renewal fees. Protection of Geographical Indications Indications which identify a good as originating in the territory of a member or a region or a locality in that territory, where a given quality reputation or other characteristics of the good is attributable to its geographical origin. The concept of identifying GI and protecting them is a new concept in India, perhaps in most developing countries, and has come to knowledge in these countries after they signed the TRIPS Agreement. It may be noted that properly protected GI will give protection in domestic and international market. Stipulations of TRIPS would be applicable to all the member countries. According to TRIPS, GI which is not or cease to be protected in its country of origin or which has fallen into disuse in that country cannot be protected. Homonymous GI for wines will get independent protection. Each state shall determine conditions under which homonymous indications will be differentiated from each other. Principles of national treatment Business Ethics and Corporate Governance Page 84

and fair competition are applicable. TRIPS provide for seizure of goods bearing false indications of GI. TRIPS provide for refusal or invalidation of registration of a trademark containing a GI with respect to goods not originating in the territory indicated. The Geographical Indication of Goods (Registration and Protection) Act came into being in 2000. (The Act is not implemented at the time of writing the article as the rules have not been notified.) The term GI has been defined as "Geographical Indications", in relation to goods, means an indication which identifies such goods as agricultural goods, natural goods or manufactured goods as originating, or manufactured in the territory of a country, or a region or locality in that territory, where a given quality, reputation or other characteristics of such goods is essentially attributable to its geographical origin and in case where such goods are manufactured goods one of the activities of either the production or of processing or preparation of the goods concerned takes place in such territory, region or locality, as the case may be. Applicants for GI's registration Any association of persons or producers or any organization or authority established by or under any law for the time being in force representing the interest of the producers of the concerned goods, who are desirous of registering geographical indication in relation to such goods shall apply in writing to the Registrar in such' form and in such manner and accompanied by such fees as may be prescribed for the registration of the geographical indication. Non-registrable geographical indications Geographical indications having following cannot be registered: The use of which would be likely to deceive or cause confusion or contrary to any law. Which comprises or contains scandalous or obscene matter or any matter likely to hurt religion susceptibility of any class or section of citizens of India? Which would otherwise be disentitled to protection in a court? Which are determined to be generic names or indications of goods and are, therefore, not or ceased to be protected in their country of origin or which have fallen into disuse in that Country. Which, although literally true as to the territory, region or locality in which the goods originate, but falsely represent to the persons that the goods originate in another territory, region or locality, as the case may be. Punishment for falsifying GI A sentence of imprisonment for a term between six months to three years and a fine between fifty thousand rupees and two lakh rupees is provided in the Act. The court may reduce the punishment under special circumstances. Term of GI protection The registration of a GI shall be for a period of ten years but may be renewed from time to time for an unlimited period by payment of the renewal fees.

Cyber Crime
INTRODUCTION:

The term cyber crime is a misnomer. This term has nowhere been defined in any statute /Act passed or enacted by the Indian Parliament. The concept of cyber crime is not radically different from the concept of conventional crime. Both include conduct whether act or omission, which cause breach of rules of law and counterbalanced by the sanction of the state.
Before evaluating the concept of cyber crime it is obvious that the concept of conventional crime be discussed and the points of similarity and deviance between both these forms may be discussed. Business Ethics and Corporate Governance Page 85

CONVENTIONAL CRIMECrime is a social and economic phenomenon and is as old as the human society. Crime is a legal concept and has the sanction of the law. Crime or an offence is a legal wrong that can be followed by criminal proceedings which may result into punishment.(1) The hallmark of criminality is that, it is breach of the criminal law. Per Lord Atkin the criminal quality of an act cannot be discovered by reference to any standard but one: is the act prohibited with penal consequences. (2) A crime may be said to be any conduct accompanied by act or omission prohibited by law and consequential breach of which is visited by penal consequences. CYBER CRIME Cyber crime is the latest and perhaps the most complicated problem in the cyber world. Cyber crime may be said to be those species, of which, genus is the conventional crime, and where either the computer is an object or subject of the conduct constituting crime (13). Any criminal activity that uses a computer either as an instrumentality, target or a means for perpetuating further crimes comes within the ambit of cyber crime(12) A generalized definition of cyber crime may be unlawful acts wherein the computer is either a tool or target or both(3) The computer may be used as a tool in the following kinds of activity- financial crimes, sale of illegal articles, pornography, online gambling, intellectual property crime, e-mail spoofing, forgery, cyber defamation, cyber stalking. The computer may however be target for unlawful acts in the following cases- unauthorized access to computer/ computer system/ computer networks, theft of information contained in the electronic form, e-mail bombing, data didling, salami attacks, logic bombs, Trojan attacks, internet time thefts, web jacking, theft of computer system, physically damaging the computer system. DISTINCTION BETWEEN CONVENTIONAL AND CYBER CRIMEThere is apparently no distinction between cyber and conventional crime. However on a deep introspection we may say that there exists a fine line of demarcation between the conventional and cyber crime, which is appreciable. The demarcation lies in the involvement of the medium in cases of cyber crime. The sine qua non for cyber crime is that there should be an involvement, at any stage, of the virtual cyber medium. REASONS FOR CYBER CRIME: Hart in his work The Concept of Law has said human beings are vulnerable so rule of law is required to protect them. Applying this to the cyberspace we may say that computers are vulnerable so rule of law is required to protect and safeguard them against cyber crime. The reasons for the vulnerability of computers may be said to be: Business Ethics and Corporate Governance Page 86

1. Capacity to store data in comparatively small spaceThe computer has unique characteristic of storing data in a very small space. This affords to remove or derive information either through physical or virtual medium makes it much more easier. 2. Easy to accessThe problem encountered in guarding a computer system from unauthorised access is that there is every possibility of breach not due to human error but due to the complex technology. By secretly implanted logic bomb, key loggers that can steal access codes, advanced voice recorders; retina imagers etc. that can fool biometric systems and bypass firewalls can be utilized to get past many a security system. 3.ComplexThe computers work on operating systems and these operating systems in turn are composed of millions of codes. Human mind is fallible and it is not possible that there might not be a lapse at any stage. The cyber criminals take advantage of these lacunas and penetrate into the computer system. 4.NegligenceNegligence is very closely connected with human conduct. It is therefore very probable that while protecting the computer system there might be any negligence, which in turn provides a cyber criminal to gain access and control over the computer system. 5. Loss of evidenceLoss of evidence is a very common & obvious problem as all the data are routinely destroyed. Further collection of data outside the territorial extent also paralyses this system of crime investigation. CYBER CRIMINALS: The cyber criminals constitute of various groups/ category. This division may be justified on the basis of the object that they have in their mind. The following are the category of cyber criminals1. Children and adolescents between the age group of 6 18 years The simple reason for this type of delinquent behaviour pattern in children is seen mostly due to the inquisitiveness to know and explore the things. Other cognate reason may be to prove themselves to be outstanding amongst other children in their group. Further the reasons may be psychological even. E.g. the Bal Bharati (Delhi) case was the outcome of harassment of the delinquent by his friends. 2. Organised hackersThese kinds of hackers are mostly organised together to fulfil certain objective. The reason may be to fulfil their political bias, fundamentalism, etc. The Pakistanis are said to be one of the best quality hackers in the world. They mainly target the Indian government sites with the purpose to fulfil their political objectives. Further the NASA as well as the Microsoft sites is always under attack by the hackers. 3. Professional hackers / crackers Business Ethics and Corporate Governance Page 87

Their work is motivated by the colour of money. These kinds of hackers are mostly employed to hack the site of the rivals and get credible, reliable and valuable information. Further they are ven employed to crack the system of the employer basically as a measure to make it safer by detecting the loopholes. 4. Discontented employeesThis group include those people who have been either sacked by their employer or are dissatisfied with their employer. To avenge they normally hack the system of their employee. MODE AND MANNER OF COMMITING CYBER CRIME: 1. Unauthorized access to computer systems or networks / HackingThis kind of offence is normally referred as hacking in the generic sense. However the framers of the information technology act 2000 have no where used this term so to avoid any confusion we would not interchangeably use the word hacking for unauthorized access as the latter has wide connotation. 2. Theft of information contained in electronic formThis includes information stored in computer hard disks, removable storage media etc. Theft may be either by appropriating the data physically or by tampering them through the virtual medium. 3. Email bombingThis kind of activity refers to sending large numbers of mail to the victim, which may be an individual or a company or even mail servers there by ultimately resulting into crashing. 4. Data diddlingThis kind of an attack involves altering raw data just before a computer processes it and then changing it back after the processing is completed. The electricity board faced similar problem of data diddling while the department was being computerised. 5. Salami attacksThis kind of crime is normally prevalent in the financial institutions or for the purpose of committing financial crimes. An important feature of this type of offence is that the alteration is so small that it would normally go unnoticed. E.g. the Ziegler case wherein a logic bomb was introduced in the banks system, which deducted 10 cents from every account and deposited it in a particular account. 6. Denial of Service attackThe computer of the victim is flooded with more requests than it can handle which cause it to crash. Distributed Denial of Service (DDoS) attack is also a type of denial of service attack, in which the offenders are wide in number and widespread. E.g. Amazon, Yahoo. 7. Virus / worm attacksViruses are programs that attach themselves to a computer or a file and then circulate themselves to other files and to other computers on a network. They usually affect the data on a computer, either by altering or deleting it. Worms, unlike viruses do not need the host to attach themselves to. They merely make functional copies of themselves and do this repeatedly till they eat up all the available space on a computer's memory. E.g. love bug virus, which affected at least 5 % of the computers of the globe. The losses were accounted to be $ 10 million. The world's most famous worm was the Internet worm let loose on the Internet by Robert Morris sometime in 1988. Almost brought development of Internet to a complete halt. 8. Logic bombsThese are event dependent programs. This implies that these programs are created to do something only when a certain event (known as a trigger event) occurs. E.g. even some viruses may be termed logic bombs because they lie dormant all through the year and become active only on a particular date (like the Chernobyl virus). 9. Trojan attacksThis term has its origin in the word Trojan horse. In software field this means an unauthorized programme, which passively gains control over anothers system by representing itself as an authorised programme. The most common form of installing a Trojan is through e-mail. E.g. a Trojan Business Ethics and Corporate Governance Page 88

was installed in the computer of a lady film director in the U.S. while chatting. The cyber criminal through the web cam installed in the computer obtained her nude photographs. He further harassed this lady. 10. Internet time theftsNormally in these kinds of thefts the Internet surfing hours of the victim are used up by another person. This is done by gaining access to the login ID and the password. E.g. Colonel Bajwas casethe Internet hours were used up by any other person. This was perhaps one of the first reported cases related to cyber crime in India. However this case made the police infamous as to their lack of understanding of the nature of cyber crime. 11. Web jackingThis term is derived from the term hi jacking. In these kinds of offences the hacker gains access and control over the web site of another. He may even mutilate or change the information on the site. This may be done for fulfilling political objectives or for money. E.g. recently the site of MIT (Ministry of Information Technology) was hacked by the Pakistani hackers and some obscene matter was placed therein. Further the site of Bombay crime branch was also web jacked. Another case of web jacking is that of the gold fish case. In this case the site was hacked and the information pertaining to gold fish was changed. Further a ransom of US $ 1 million was demanded as ransom. Thus web jacking is a process where by control over the site of another is made backed by some consideration for it. CLASSIFICATION: The subject of cyber crime may be broadly classified under the following three groups. They are1. Against Individuals a. their person & b. their property of an individual 2. Against Organization a. Government c. Firm, Company, Group of Individuals. 3. Against Society at large The following are the crimes, which can be committed against the followings group Against Individuals: i. Harassment via e-mails. ii. Cyber-stalking. iii. Dissemination of obscene material. iv. Defamation. v. Unauthorized control/access over computer system. vi. Indecent exposure vii. Email spoofing viii. Cheating & Fraud

Against Individual Property: i. Computer vandalism. ii. Transmitting virus. Business Ethics and Corporate Governance Page 89

iii. Netrespass iv. Unauthorized control/access over computer system. v. Intellectual Property crimes vi. Internet time thefts

Against Organization: i. Unauthorized control/access over computer system ii. Possession of unauthorized information. iii. Cyber terrorism against the government organization. iv. Distribution of pirated software etc.

Against Society at large: i. Pornography (basically child pornography). ii. Polluting the youth through indecent exposure. iii. Trafficking iv. Financial crimes v.Sale of illegal articles vi.Online gambling vii. Forgery The above mentioned offences may discussed in brief as follows: 1. Harassment via e-mailsHarassment through e-mails is not a new concept. It is very similar to harassing through letters. Recently I had received a mail from a lady wherein she complained about the same. Her former boy friend was sending her mails constantly sometimes emotionally blackmailing her and also threatening her. This is a very common type of harassment via e-mails. 2. Cyber-stalkingThe Oxford dictionary defines stalking as "pursuing stealthily". Cyber stalking involves following a person's movements across the Internet by posting messages (sometimes threatening) on the bulletin boards frequented by the victim, entering the chat-rooms frequented by the victim, constantly bombarding the victim with emails etc. 3. Dissemination of obscene material/ Indecent exposure/ Pornography (basically child pornography) / Polluting through indecent exposurePornography on the net may take various forms. It may include the hosting of web site containing these prohibited materials. Use of computers for producing these obscene materials. Downloading through the Internet, obscene materials. These obscene matters may cause harm to the mind of the adolescent and tend to deprave or corrupt their mind. Two known cases of pornography are the Delhi Bal Bharati case and the Bombay case wherein two Swiss couple used to force the slum children for obscene photographs. The Mumbai police later arrested them. 4. Defamation It is an act of imputing any person with intent to lower the person in the estimation of the rightthinking members of society generally or to cause him to be shunned or avoided or to expose him to hatred, contempt or ridicule. Cyber defamation is not different from conventional defamation except the involvement of a virtual medium. E.g. the mail account of Rohit was Business Ethics and Corporate Governance Page 90

hacked and some mails were sent from his account to some of his batch mates regarding his affair with a girl with intent to defame him. 4. Unauthorized control/access over computer systemThis activity is commonly referred to as hacking. The Indian law has however given a different connotation to the term hacking, so we will not use the term "unauthorized access" interchangeably with the term "hacking" to prevent confusion as the term used in the Act of 2000 is much wider than hacking. 5. E mail spoofingA spoofed e-mail may be said to be one, which misrepresents its origin. It shows it's origin to be different from which actually it originates. Recently spoofed mails were sent on the name of Mr. Na.Vijayashankar (naavi.org), which contained virus. Rajesh Manyar, a graduate student at Purdue University in Indiana, was arrested for threatening to detonate a nuclear device in the college campus. The alleged e- mail was sent from the account of another student to the vice president for student services. However the mail was traced to be sent from the account of Rajesh Manyar.(15) 6. Computer vandalismVandalism means deliberately destroying or damaging property of another. Thus computer vandalism may include within its purview any kind of physical harm done to the computer of any person. These acts may take the form of the theft of a computer, some part of a computer or a peripheral attached to the computer or by physically damaging a computer or its peripherals. 7. Transmitting virus/wormsThis topic has been adequately dealt herein above. 8. Intellectual Property crimes / Distribution of pirated softwareIntellectual property consists of a bundle of rights. Any unlawful act by which the owner is deprived completely or partially of his rights is an offence. The common form of IPR violation may be said to be software piracy, copyright infringement, trademark and service mark violation, theft of computer source code, etc. The Hyderabad Court has in a land mark judgement has convicted three people and sentenced them to six months imprisonment and fine of 50,000 each for unauthorized copying and sell of pirated software. 9. Cyber terrorism against the government organization At this juncture a necessity may be felt that what is the need to distinguish between cyber terrorism and cyber crime. Both are criminal acts. However there is a compelling need to distinguish between both these crimes. A cyber crime is generally a domestic issue, which may have international consequences, however cyber terrorism is a global concern, which has domestic as well as international consequences. The common form of these terrorist attacks on the Internet is by distributed denial of service attacks, hate websites and hate emails, attacks on sensitive computer networks, etc. Technology savvy terrorists are using 512-bit encryption, which is next to impossible to decrypt. The recent example may be cited of Osama Bin Laden, the LTTE, attack on Americas army deployment system during Iraq war. Cyber terrorism may be defined to be the premeditated use of disruptive activities, or the threat thereof, in cyber space, with the intention to further social, ideological, religious, political or similar objectives, or to intimidate any person in furtherance of such objectives Another definition may be attempted to cover within its ambit every act of cyber terrorism. A terrorist means a person who indulges in wanton killing of persons or in violence or in disruption of services or means of communications essential to the community or in damaging property with the view to Business Ethics and Corporate Governance Page 91

(1) putting the public or any section of the public in fear; or (2) affecting adversely the harmony between different religious, racial, language or regional groups or castes or communities; or (3) coercing or overawing the government established by law; or (4) endangering the sovereignty and integrity of the nation and a cyber terrorist is the person who uses the computer system as a means or ends to achieve the above objectives. Every act done in pursuance thereof is an act of cyber terrorism. 10.Trafficking Trafficking may assume different forms. It may be trafficking in drugs, human beings, arms weapons etc. These forms of trafficking are going unchecked because they are carried on under pseudonyms. A racket was busted in Chennai where drugs were being sold under the pseudonym of honey. 11. Fraud & Cheating Online fraud and cheating is one of the most lucrative businesses that are growing today in the cyber space. It may assume different forms. Some of the cases of online fraud and cheating that have come to light are those pertaining to credit card crimes, contractual crimes, offering jobs, etc. Recently the Court of Metropolitan Magistrate Delhi found guilty a 24-year-old engineer working in a call centre, of fraudulently gaining the details of Campa's credit card and bought a television and a cordless phone from Sony website. Metropolitan magistrate Gulshan Kumar convicted Azim for cheating under IPC, but did not send him to jail. Instead, Azim was asked to furnish a personal bond of Rs 20,000, and was released on a year's probation. STATUTORY PROVISONS: The Indian parliament considered it necessary to give effect to the resolution by which the General Assembly adopted Model Law on Electronic Commerce adopted by the United Nations Commission on Trade Law. As a consequence of which the Information Technology Act 2000 was passed and enforced on 17th May 2000.the preamble of this Act states its objective to legalise e-commerce and further amend the Indian Penal Code 1860, the Indian Evidence Act 1872, the Bankers Book Evidence Act1891 and the Reserve Bank of India Act 1934. The basic purpose to incorporate the changes in these Acts is to make them compatible with the Act of 2000. So that they may regulate and control the affairs of the cyber world in an effective manner. The Information Technology Act deals with the various cyber crimes in chapters IX & XI. The important sections are Ss. 43,65,66,67. Section 43 in particular deals with the unauthorised access, unauthorised downloading, virus attacks or any contaminant, causes damage, disruption, denial of access, interference with the service availed by a person. This section provide for a fine up to Rs. 1 Crore by way of remedy. Section 65 deals with tampering with computer source documents and provides for imprisonment up to 3 years or fine, which may extend up to 2 years or both. Section 66 deals with hacking with computer system and provides for imprisonment up to 3 years or fine, which may extend up to 2 years or both. Further section 67 deals with publication of obscene material and provides for imprisonment up to a term of 10 years and also with fine up to Rs. 2 lakhs. ANALYSIS OF THE STATUTORY PROVISONS: The Information Technology Act 2000 was undoubtedly a welcome step at a time when there was no legislation on this specialised field. The Act has however during its application has proved to be inadequate to a certain extent. The various loopholes in the Act are1. The hurry in which the legislation was passed, without sufficient public debate, did not really serve the desired purpose Business Ethics and Corporate Governance Page 92

Experts are of the opinion that one of the reasons for the inadequacy of the legislation has been the hurry in which it was passed by the parliament and it is also a fact that sufficient time was not given for public debate. 2. Cyberlaws, in their very preamble and aim, state that they are targeted at aiding e-commerce, and are not meant to regulate cybercrime(6) Mr. Pavan Duggal holds the opinion that the main intention of the legislators has been to provide for a law to regulate the e-commerce and with that aim the I.T.Act 2000 was passed, which also is one of the reasons for its inadequacy to deal with cases of cyber crime. At this point I would like to express my respectful dissent with Mr. Duggal. I feel that the above statement by Mr. Duggal is not fundamentally correct. The reason being that the preamble does state that the Act aims at legalising e-commerce. However it does not stop here. It further amends the I.P.C., Evidence Act, Bankers Book Evidence and RBI Act also. The Act also aims to deal with all matters connected therewith or incidental thereto. It is a cardinal rule of interpretation that text should be read as a whole to gather the meaning. It seems that the above statement has been made in total disregard of this rule of interpretation. The preamble, if read as a whole, makes it very clear that the Act equally aims at legalising e-commerce and to curb any offences arising there from. 3.Cyber tortsThe recent cases including Cyber stalking cyber harassment, cyber nuisance, and cyber defamation have shown that the I.T.Act 2000 has not dealt with those offences. Further it is also contended that in future new forms of cyber crime will emerge which even need to be taken care of. Therefore India should sign the cyber crime convention. However the I.T.Act 2000 read with the Penal Code is capable of dealing with these felonies. 4.Cyber crime in the Act is neither comprehensive nor exhaustiveMr. Duggal believes that we need dedicated legislation on cyber crime that can supplement the Indian Penal Code. The contemporary view is held by Mr. Prathamesh Popat who has stated"The IT Act, 2000 is not comprehensive enough and doesn't even define the term 'cyber crime". (8) Mr. Duggal has further commented, India, as a nation, has to cope with an urgent need to regulate and punish those committing cyber crimes, but with no specific provisions to do so. Supporters of the Indian Penal Code School vehemently argue that IPC has stood the test of time and that it is not necessary to incorporate any special laws on cyber crime. This is because it is debated by them that the IPC alone is sufficient for all kinds of crime. However, in practical terms, the argument does not have appropriate backing. It has to be distinctly understood that cyber crime and cyberspace are completely new whelms, where numerous new possibilities and opportunities emerge by the day in the form of new kinds of crimes. I feel that a new legislation on cyber crime is totally unwarranted. The reason is that the new legislation not come alone but will bring with it the same confusion, the same dissatisfaction and the same desire to supplant it by further new legislation. Mr. Duggal has stated above the need to supplement IPC by a new legislation. If that is the issue then the present legislation along with the Penal Code when read harmoniously and co- jointly is sufficient to deal with the present problems of cyber crime. Further there are other legislations to deal with the intellectual property crimes on the cyber space such as the Patents Act, Copy Right Act, Trade Marks Act. 5.Ambiguity in the definitionsThe definition of hacking provided in section 66 of the Act is very wide and capable of misapplication. There is every possibility of this section being misapplied and in fact the Delhi court has misapplied it. The infamous go2nextjob has made it very clear that what may be the Business Ethics and Corporate Governance Page 93

fate of a person who is booked under section 66 or the constant threat under which the netizens are till s. 66 exists in its present form. Further section 67 is also vague to certain extent. It is difficult to define the term lascivious information or obscene pornographic information. Further our inability to deal with the cases of cyber pornography has been proved by the Bal Bharati case. 6. Uniform lawMr. Vinod Kumar (9) holds the opinion that the need of the hour is a worldwide uniform cyber law to combat cyber crime. Cyber crime is a global phenomenon and therefore the initiative to fight it should come from the same level. E.g. the author of the love bug virus was appreciated by his countrymen. 7.Lack of awarenessOne important reason that the Act of 2000 is not achieving complete success is the lack of awareness among the s about their rights. Further most of the cases are going unreported. If the people are vigilant about their rights the law definitely protects their right. E.g. the Delhi high court in October 2002 prevented a person from selling Microsoft pirated software over an auction site. Achievement was also made in the case before the court of metropolitan magistrate Delhi wherein a person was convicted for online cheating by buying Sony products using a stolen credit card 8. Jurisdiction issuesJurisdiction is also one of the debatable issues in the cases of cyber crime due to the very universal nature of cyber space. With the ever-growing arms of cyber space the territorial concept seems to vanish. New methods of dispute resolution should give way to the conventional methods. The Act of 2000 is very silent on these issues. 9. Extra territorial applicationThough S.75 provides for extra-territorial operations of this law, but they could be meaningful only when backed with provisions recognizing orders and warrants for Information issued by competent authorities outside their jurisdiction and measure for cooperation for exchange of material and evidence of computer crimes between law enforcement agencies. 10. Raising a cyber armyBy using the word cyber army by no means I want to convey the idea of virtual army, rather I am laying emphasis on the need for a well equipped task force to deal with the new trends of hi tech crime. The government has taken a leap in this direction by constituting cyber crime cells in all metropolitan and other important cities. Further the establishment of the Cyber Crime Investigation Cell (CCIC) of the Central Bureau of Investigation (CBI) 11) is definitely a welcome step in this direction. There are man cases in which the C.B.I has achieved success. The present position of cases of cyber crime (17) is Case 1: When a woman at an MNC started receiving obscene calls, CBI found her colleague had posted her personal details on Mumbaidating.com. Status: Probe on Case 2: CBI arrested a man from UP, Mohammed Feroz, who placed ads offering jobs in Germany. He talked to applicants via e-mail and asked them to deposit money in his bank account in Delhi. Status: Chargesheet not filed Case 3: The official web-site of the Central Board of Direct Taxes was hacked last year. As Pakistan-based hackers were responsible, authorities there were informed through Interpol. Status: Pak not cooperating. 11. Cyber savvy benchBusiness Ethics and Corporate Governance Page 94

Cyber savvy judges are the need of the day. Judiciary plays a vital role in shaping the enactment according to the order of the day. One such stage, which needs appreciation, is the P.I.L., which the Kerela High Court has accepted through an email. The role of the judges in todays word may be gathered by the statement- judges carve law is to law ought to be. Mr T.K.Vishwanathan, member secretary, Law Commission , has highlighted the requirements for introducing e-courts in India. In his article published in The Hindu he has stated if there is one area of Governance where IT can make a huge difference to Indian public is in the Judicial System. 12. Dynamic form of cyber crimeSpeaking on the dynamic nature of cyber crime FBI Director Louis Freeh has said, "In short, even though we have markedly improved our capabilities to fight cyber intrusions the problem is growing even faster and we are falling further behind. The (de)creativity of human mind cannot be checked by any law. Thus the only way out is the liberal construction while applying the statutory provisions to cyber crime cases. 13. Hesitation to report offencesAs stated above one of the fatal drawbacks of the Act has been the cases going unreported. One obvious reason is the non-cooperative police force. This was proved by the Delhi time theft case. "The police are a powerful force today which can play an instrumental role in preventing cybercrime. At the same time, it can also end up wielding the rod and harassing innocent s, preventing them from going about their normal cyber business."(10) This attitude of the administration is also revelled by incident that took place at Merrut and Belgam. (for the facts of these incidents refer to naavi.com). For complete realisation of the provisions of this Act a cooperative police force is require. PREVENTION OF CYBER CRIME: Prevention is always better than cure. It is always better to take certain precaution while operating the net. A should make them his part of cyber life. Saileshkumar Zarkar, technical advisor and network security consultant to the Mumbai Police Cyber crime Cell, advocates the 5P mantra for online security: Precaution, Prevention, Protection, Preservation and Perseverance. A netizen should keep in mind the following things1. To prevent cyber stalking avoid disclosing any information pertaining to oneself. This is as good as disclosing your identity to strangers in public place. 2. Always avoid sending any photograph online particularly to strangers and chat friends as there have been incidents of misuse of the photographs. 3. Always use latest and update antivirus software to guard against virus attacks. 4. Always keep back up volumes so that one may not suffer data loss in case of virus contamination 5. Never send your credit card number to any site that is not secured, to guard against frauds. 6. Always keep a watch on the sites that your children are accessing to prevent any kind of harassment or depravation in children. 7. it is better to use a security programme that gives control over the cookies and send information back to the site as leaving the cookies unguarded might prove fatal. 8. Web site owners should watch traffic and check any irregularity on the site. Putting host-based intrusion detection devices on servers may do this. 9. Use of firewalls may be beneficial. 10. Web servers running public sites must be physically separate protected from internal corporate network. Business Ethics and Corporate Governance Page 95

Adjudication of a Cyber Crime - On the directions of the Bombay High Court the Central Government has by a notification dated 25.03.03 has decided that the Secretary to the Information Technology Department in each state by designation would be appointed as the AO for each state. CONCLUSION: Capacity of human mind is unfathomable. It is not possible to eliminate cyber crime from the cyber space. It is quite possible to check them. History is the witness that no legislation has succeeded in totally eliminating crime from the globe. The only possible step is to make people aware of their rights and duties (to report crime as a collective duty towards the society) and further making the application of the laws more stringent to check crime. Undoubtedly the Act is a historical step in the cyber world. Further I all together do not deny that there is a need to bring changes in the Information Technology Act to make it more effective to combat cyber crime. I would conclude with a word of caution for the pro-legislation school that it should be kept in mind that the provisions of the cyber law are not made so stringent that it may retard the growth of the industry and prove to be counter-productive.

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Unit VI Corporate governance Purpose Importance Mechanism- Benefits Theories Ethics and Values Evolution - current Developments

Introduction CORPORATE GOVERNANCE: THE CONCEPT


The concept of corporate governance is gaining momentum because of various factors as well as the changing business environment. The EEC, GATT and WTO regulations have also contributed to the rising awareness and are compelling us to think in terms of adhering to the good governance practices. Corporate governance, by the very nature of the concept, cannot be exactly defined. However, there can be no two opinions that effective accountability to all shareholders is the essence of corporate governance. The following definition should help us to understand the concept better. Corporate governance is not just corporate management; it is something much broader to include 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 achieve 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 practiced under a well-laid out system, it leads to the building of a legal, commercial and institutional framework and demarcates the boundaries within which these functions are performed. Corporate governance cannot disregard the diverse interestsshareholders, lenders, employees, government, etc. It is believed that shareholders would increasingly assert their rights, hitherto virtually unknown; similarly the lending institutions, having to justify their performance in a market-driven environment, have no choice but to demand effective and efficient corporate governance; besides FIIs with substantial foreign investment in India would demand greater transparency and internationally recognized sound corporate practices. The new paradigm of governance to bring about quality corporate governance is not only a necessity to serve the diverse corporate interests, but it is also a key requirement in the best interests of the corporate themselves. Corporate practices in the matter of disclosure, transparency, group accounting, role of directors, and degree of accountability to the shareholders, lenders and overall public good are some of the critical issues which require a fresh and closer look. A framework for addressing concerns public good, such as regard for environment, overall conservation of resources, cost effective managerial inputall these would, among other things form part of the core of corporate governance. Government can play a catalytic role in creating the environment for quality governance through an appropriate regulatory framework. Corporate leadership and its mindset would also determine the sort of governance that would ultimately evolve. In India, the question of corporate governance has come up mainly in the wake of economic liberalization and deregulation of industry and business, as well as the demand for a new corporate ethos and stricter compliance with the law of the land. In the context of the unique situation in India where the financial institutions hold substantial stakes in companies, the accountability of the directors, including nonexecutive directors and nominees, has come into sharp focus. Introduction: A society cannot function without a set of values. A corporate is formed of one body with many individuals. Corporate Governance (CG) is an ethical code of business of companies. It is a system by which companies are directed and controlled. The Board of Directors is responsible for the governance of their companies and to ensure that appropriate governance structure is in place. The shareholders appoint the directors and the auditors. Governance in relation to business organization is concerned with the intrinsic nature, purpose, integrity and identity of the organization and focuses primarily on its Business Ethics and Corporate Governance Page 97

relevance, continuity and fiduciary aspects. It involves monitoring and overseeing strategic direction, socio economic and cultural contexts, externalities and constituencies of the organization.

Definition: The root of the word governance is from gubernate which means to steer. Corporate governance would mean to steer an organization in the desired direction. The responsibility to steer lies with the board of directors/governing board. Corporate or corporation is derived from Latin term corpus which means a body. Governance means administering the processes and systems placed for satisfying stakeholders expectation. When combined Corporate Governance means a set of systems procedures, polices, practices, standards put in place by a coporate to ensure that relationship with various stakeholders is maintained in transparent and honest manner. There is no universal definition of corporate governance. Some good definitions are given hereunder for better understanding:Corporate governance is concerned with the way corporate entities are governed, as distinct from the way businesses within those companies are managed. Corporate Governance address the issues facing Board of directors such as the interaction with top management and relationships with the owners and others interested in the affairs of the company Robert Ian Tricker (who introduced the words corporate governance for the first time in his book in 1984). Corporate Governance is a field of economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms such as contracts, organizational designs and legislations. Experts of Organization for Economic Cooperation and Development (OECD) defined a system by which business corporations are directed and controlled. Corporate governance structure specifies the distribution of rights and responsibilities among different participants in the company such as board, management, share holders and other stakeholders; and spells out the rules and procedures for corporate decision making. By doing this, it provides the structure through which the companys objectives are set along with the means of attaining these objectives as well as for monitoring performance.
The Cadbury committee has also defined the term Corporate Governance and according to the committee, it means, (It is) the system by which companies are directed and controlled. It may also be defined as a system of structuring, operating and controlling a company with the following specific aims:(i) Fulfilling long-term strategic goals of owners; (ii) Taking care of the interests of employees; (iii) A consideration for the environment and local community; (iv) Maintaining excellent relations with customers and suppliers; (v) Proper compliance with all the applicable legal and regulatory requirements. We may also note what the CII constituted committee has to say on the definition, Corporate governance deals with laws, procedures, practices and implicit rules that determine a companys ability to take informed managerial decisions vis--vis its claimantsin particular, its shareholders, creditors, customers, the State and employees. There is global consensus about the objective of good corporate governance: maximizing long-term shareholder value.

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Further the Kumar Mangalam Birla committee constituted by SEBI has observed that, Strong corporate governance is indispensable financial reporting structure. According to ICSI, We may define corporate governance as a blend of rules, regulations, laws and voluntary practices that enable companies to attract financial and human capital, perform efficiently and thereby maximize long term value for the shareholders besides respecting the aspirations of multiple stakeholders including that of the society. ICSI Principles of Corporate governance: Sustainable development of all Stakeholders: Ensure growth of all individuals associated with or affected by the enterprise on sustainable basis. Effective management and distribution of wealth: ensure that enterprise creates maximum wealth and judiciously uses the wealth so created for providing maximum benefits to all stakeholders and enhancing its wealth creation capabilities to maintain sustainability. Discharge of social responsibility: ensure that enterprise is acceptable to the society in which it is functioning Application of best management practices: ensure excellence in functioning of enterprise and optimum creation of wealth on sustainable basis Compliance of law in letter and spirit: ensure value enhancement for all stakeholders guaranteed by the law for maintaining socio economic balance. Adherence to ethical standards: ensure integrity, transparency, independence and accountability in dealings with all stakeholders. Need for Corporate Governance: Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure. It refers to compliance with all the moral & ethical values, legal framework and voluntary adopted practices. This enhances customer satisfaction, shareholder value and wealth. Corporate Performance: improved governance structures and processes help ensure quality decision making, encourage effective succession planning for senior management and enhance the long term prosperity of companies, independent of the type of company and its sources of finance. This can be linked with improved corporate performance either in terms of share price or profitability. Enhanced Investor Trust: investors consider corporate governance as important as financial performance when evaluating companies for investment. Investors who are provided with high levels of disclosure & transparency are likely to invest openly in those companies. Better access to global Market: Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector. Combating Corruption: Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide environment where corruption will certainly fade out. Corporate governance enables a corporation to compete more efficiently and prevent fraud and malpractices within the organization. Easy Finance from Institutions: Several structural changes like increased role of financial intermediaries and institutional investors, size of the enterprises, investment choices available to investors, increases competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need of good corporate governance. Enhancing Enterprise Valuation: improved management accountability and operational transparency fulfill investors expectations and confidence on management and corporations and return increase the value of corporations. Reduced risk of corporate crisis and scandals: Effective corporate governance ensures efficient risk mitigation system in place. The transparent and accountable system that corporate governance makes the board of a company aware of all the risks involved in particular strategy, thereby placing various control systems to monitor the related issues.

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Accountability: Investor relations are essential part of good corporate governance. Investors have directly/ indirectly entrusted management of the company for the creating enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its share holders in order to maintain good investors relation. Good corporate governance practices create the environment where boards cannot ignore their accountability to these stake holders.

Principles /Pillars of Corporate Governance:


Corporate Governance is managing, monitoring and overseeing various corporate systems in such a manner that corporate reliability, reputation are not put at stake. Corporate Governance Pillars on transparency and fairness in action satisfying accountability and responsibility towards the stake holders.

Fairness Corporate Governance Accountabilit y Transparency

Responsibility

Dimensions: Dimensions

Promoters

Directors

Auditors

Corporate

Elements of good corporate Governance: Some of the important elements of good corporate governance are discussed as under: 1. Role and Powers of Board: Good governance is decisively the manifestation of personal beliefs and values which configure the organizational values, beliefs and actions of its board. The board as a main functionary is primary responsible to ensure value creation for its stakeholders. The absence of clearly designated role and powers of board weakens accountability mechanism and threatens the achievement of organizational goals. Therefore, the foremost requirement of good governance is the clear identification of powers, roles, responsibilities and accountability of the board, CEO and the chairman of the board. The role of the board should be clearly documented in a board charter. 2. Legislation: clear and unambiguous legislation and regulations are fundamental to effective corporate governance. Legislation that requires continuing legal interpretations or is difficult to interpret on a day to day Business Ethics and Corporate Governance Page 100

3.

4.

5.

6.

7.

8.

basis can be subject to deliberate manipulation or inadvertent misinterpretation. Management Environment: management environment includes setting up of clear objectives and appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skill for the jobs, establishing clear boundaries for acceptable behavior, establishing performance evaluation measures and evaluating performance and sufficiently recognizing individual and group contribution. Board Skills: to be able to undertake its functions efficiently and effectively, the board must possess the necessary blend of qualities, skills, knowledge and experience. Each of the directors should make quality contribution. A board should have a mix of the following skills, knowledge and experience: Operations or technical expertise, commitment to establish leadership Financial skills Legal skills Knowledge of government and regulatory requirement Board appointments: To ensure that the most competent people are appointed in the board, the board positions should be filled through the process of extensive search. A well defined and open procedure must be in place for reappointments as well as for appointment of new directors. Appointment mechanism should satisfy all statutory and administrative requirements. High on the priority should be an understanding of skill requirements of the board particularly at the time f making a choice for appointing a new director. All new directors should be provided with a letter of appointment setting out in detail their duties and responsibilities. Board induction and training: directors must have a broad understanding of the area of operation of the companys business, corporate strategy and challenges being faced by the board. Attendance at continuing education and professional development programmes is essential to ensure that directors remain abreast of all developments, which are or may impact on their corporate governance and other related duties. Board independence: independent board is essential for sound corporate governance. This goal may be achieved by associating sufficient number of independent directors with the board. Independence of directors would ensure that there are no actual or perceived conflicts of interest. It also ensures that the board is effective in supervising and where necessary challenging the activities of management. The board needs to be capable of assessing the performance of managers with an objective perspective. Accordingly, the majority of board members should be independent of both the management team and any commercial dealings with the company. Board Meetings: directors must devote sufficient time and give due attention to meet their obligations. Attending board meetings regularly and preparing thoroughly before entering the boardroom increases the quality of interaction at board meetings. Board meetings are the forums for board decision making. These meetings of board meetings are dependent on carefully planned agendas and providing relevant papers and materials to directors sufficiently prior to board meetings. Page 101

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9. Code of Conduct: it is essential that organizations explicitly prescribed norms of practices and code of conduct are communicated to all stakeholders and are understood and followed by each member of the organization. Systems should place to periodically measure, evaluate and if possible recognize the adherence to code of conduct. 10. Strategy Setting: the objectives of the company must be clearly documented in a long term corporate strategy including an annual business plan together with achievable and measurable performance targets and milestones.

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