CONTENTS

1. INTRODUCTION TO BUSINESS ETHICS

2. PERSONAL ETHICS

3. ETHICS IN MANAGEMENT

4. ROLE OF CORPORATE CULTURE IN BUSINESS

5. CORPORATE GOVERNANCE
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 Unit 1

Business Ethics

What is Ethics? A
system of moral principles, rules and conduct. The ability to distinguish between right and
wrong and act accordingly.

Introduction
In Latin language ethics is called Ethicus. In Greek it is called Ethikos and root word Ethos
which means character, custom or habits also means ―way of living‖. Ethics is a branch of
philosophy that is concerned with human conduct. It consists in a code of conduct of human
beings living in a society. It studies what is morally right or wrong, just or unjust.

For instance, a doctor has his medical ethics to follow. It is ethical for a doctor to treat a person
be it a terrorist or a soldier from the opposite army. However, his morals may be totally against
it.
Similarly for morals, an example regarding abortion can be placed. Abortion is totally legal and
allowed in the medical ethics. However, it is against the morality of human kind.

Sources of Ethics
General Inheritance
Religion
Philosophical & Legal Systems
Differences between ethics & morals
Morals are personal codes while ethics are codes followed by a group or culture.
Morals of a person do not change with time while his ethics can.
Morals differ from person to person while ethics are similar in the group.
Morals are based on religion whereas ethics are based on philosophy.
Differences between Ethics & Law
Ethics are rules of conduct. Laws are rules developed by governments in order to provide
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balance in society and protection to its citizens.

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Ethics comes from people‘s awareness of what is right and wrong. Laws are enforced by
 governments to its people.
Ethics are moral codes which every person must conform to. Laws are codifications of ethics
meant to regulate society.
Ethics does not carry any punishment to anyone who violates it. The law will punish anyone who
happens to violate it.
Ethics comes from within a person‘s moral values. Laws are made with ethics as a guiding
principle.
Thus ethics can be considered as the source of character of a person expressed as right or wrong,
conduct or action.

Nature of Ethics

1. Ethics is the study of human conduct with respect to its rightness or wrongness in the
light of a supreme standard.

2. Ethics is a science, concerned with a particular sphere of nature that deals with certain
judgments that we make about human conduct. It also talks about systematic explanation
of rightness or wrongness in a man‘s life.

3. Ethics is not an art. Art deals with acquiring new skills to produce objects. Rather it helps
us to justify rightness or goodness which can lead to the supreme goal of human life

4. Ethics is a branch of philosophy and moral philosophy which is concerned about what is
good for the society. It covers a whole family of things that have a real importance in
everyday life. Philosophy means love of wisdom and is the study of general and
fundamental problems concerning matters such as existence, knowledge, values, reason,
mind, and language.

5. Ethics is derived from religions, philosophies and culture

Role of Ethics

 The moral obligation and sense of duty, the responsibility for actions are included within
the scope of ethics.

 Ethics deals with moral good in order to query the nature of human behaviour.

 It enquires into the actions, motives, intentions of human.

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 It merely debates over the moral consciousness and the various problems associated to it.
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  It is concerned with the highest and absolute good.

Scope of Ethics

 It determines rightness or wrongness of human actions. It does not enquire into the origin
and growth of human conduct.
 Ethics is concerned with the highest good or absolute good. It investigates the nature of
its fundamental notions i.e. right, duty and good.

 Ethics covers the following dilemmas:

how to live a good life

our rights and responsibilities
the language of right and wrong
moral decisions - what is good and bad?

 Ethics discusses the nature of human freedom. Ethics investigates what constitutes good
or bad, just or unjust.
 Ethics is essentially related to all other branches of knowledge like sociology, political
science, economic, jurisprudence, law and legal study, psychology, anthropology, culture
study, ecology and environmental study, economics, religion, aesthetics and other similar
areas.
 Studies human behavior and makes evaluative assessment about them as moral or
immoral.
 Establishes moral standards/norms of behavior.
 Ethics is a branch of social science. It deals with moral principles and social values. It
helps us to classify, what is good and what is bad? It tells us to do good things and avoid
doing bad things.

THUS If we ask this simple question: ‗why do we have to study ethics?‘ the simplest answer
is: It tells us how to act rightly. It has the value in guiding people in the practice of right
conduct or the art of living the good life.

Importance of Ethics

 Social concern and responsibility – concern for consumers, are products safe and well
designed
 Value in business – quality, team work, client focus, integrity, customer centric
 Improves organizational effectiveness – clarity & streamline decision making at each
operating level
 Healthy competition – expand your boundaries of abilities, better yourself, growth
 Benefit for stakeholders – internal are owners employees managers, eternal are suppliers,
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society, government, creditors, customers

 Types of Ethics

 Transactional Ethics
Man is a social animal. He has to react with others through different transactions.
Business transaction are the interaction between business and their customer. The
practice of ethics in all these transactions is called as transactional ethics. Eg. We need
vegetables & fruits likewise the vendor needs customers like us for survival and we both
are dependent on each other.
Equality Honesty & Reciprocity is indicated as the domain of transactional ethics.

 Participatory Ethics
Guided by common good, all the participations follow some ethical practices.
Participatory ethics is an integral part of business ethics these are the action some of
which are guided by common interest and some share interest all participatory involved
in the business.
It is the ethics of the civil society. By participating on a regular basis in common projects
on behalf of general welfare, a corporation demonstrates that it can take seriously its
corporate citizenship.

 Recognition Ethics
As human beings people are endowed with the ability to understand the problems of
others. This quality leads to the recognition of individuals, institutions, and societies.
Conflicting situations can be solved by the correct recognition of the situation.
Eg. The strong is helping the weak, The learned is helping the lesser learned, The
experienced is helping the new entrant.

Business Ethics
Definition of Business Ethics

According to ICAI
―The principles and standards that determine acceptable conduct in business organization.‖

According to Raymond C. Baumhart

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"The ethics of business is the ethics of responsibility. The business man must promise that he
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will not harm knowingly." In short application of ethics to business is business ethics.
 Good Business Ethics
 The businessmen must give a regular supply of good quality goods and services at
reasonable prices to their consumers.
 They must avoid indulging in unfair trade practices like adulteration, promoting
misleading advertisements, cheating in weights and measures, black marketing, etc.
 They must give fair wages and provide good working conditions to their workers.
 They must not exploit the workers.
 They must encourage competition in the market.
 They must protect the interest of small businessmen. They must avoid unfair competition.
 They must avoid monopolies.
 They must pay all their taxes regularly to the government.
 In short, business ethics means to conduct business with a human touch in order to give
welfare to the society.

Characteristics or Features of business ethics

Code of conduct : Business ethics is a code of conduct. It tells what to do and what not to do for
the welfare of the society. All businessmen must follow this code of conduct.
Based on moral and social values : Business ethics is based on moral and social values. It
contains moral and social principles (rules) for doing business. This includes self-control,
consumer protection and welfare, service to society, fair treatment to social groups, not to exploit
others, etc.
Gives protection to social groups : Business ethics give protection to different social groups
such as consumers, employees, small businessmen, government, shareholders, creditors, etc.
Provides basic framework : Business ethics provide a basic framework for doing business. It
gives the social cultural, economic, legal and other limits of business. Business must be
conducted within these limits.
Voluntary : Business ethics must be voluntary. The businessmen must accept business ethics on
their own. Business ethics must be like self-discipline. It must not be enforced by law.
Requires education and guidance : Businessmen must be given proper education and guidance
before introducing business ethics. The businessmen must be motivated to use business ethics.
They must be informed about the advantages of using business ethics. Trade Associations and
Chambers of Commerce must also play an active role in this matter.
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 Relative Term : Business ethics is a relative term. That is, it changes from one business to
another. It also changes from one country to another. What is considered as good in one country
may be taboo in another country.
New concept : Business ethics is a newer concept. It is strictly followed only in developed
countries. It is not followed properly in poor and developing countries.

Basics of business ethics

1. Accounting Practices
Being honest and transparent with finances is a basic expectation of shareholders, customers and
employees. It serves no one when organizations ―cook the books‖ whether it be intentionally or
accidentally. Careless accounting practices limit an organization‘s ability to operate with good
financial management. How can an organization budget be accurate when there is not complete
transparency in spending?

2. Truth-in-Selling
When an organization markets a product or service, they are obligated to deliver what was
promised to the customer. Whether it is a television ad or a print ad in the newspaper, the product
described should be what is delivered to the customer. Customer speaks ―We responded to a
furniture ad one time and when we went to the department store we discovered they were out of
that particular item and the sales person tried to sell us a similar item that was more expensive.
Needless to say we walked out and unfortunately the sting of the ―bait-and-switch‖ experience
kept us from visiting that department store again.‖

3. Integrity in Management Practices

Management practices are the underlying foundation for organizational integrity whether it is
commitment to good customer service or fair employment practices. A businesses reputation can
be tarnished by unresolved service or product issues and employees observe how leadership
resolves issues and follows up on promises made.

4. Customer Service Integrity

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Service after the sale is what service integrity is all about. It is easy to make promises before a
 sale but following up and ensuring a great customer experience is what makes some
organizations stand out over others.

Eg. Your satisfaction is a top priority Pearle

Vision customer service guarantee

We want you to be happy with your new glasses. That‘s why we‘ll repair or exchange them for
up to 30 days at no charge to you. This guarantee does not cover accidental damage, scratches or
breakage. Valid at participating locations.

5. Personal Integrity
It is important for business leaders to live a lifestyle of honesty, integrity and high ethical
standards because what these leaders do can harm the reputation of the organization. Two former
Tyco executives who have become the poster children for failed ethical leadership are a good
example of this. Both were sentenced up to 25 years in prisonafter stealing hundreds of millions
of dollars from the company. The scandal sadly generated negative press for Tyco and ultimately
affected the company‘s value and profitability.

6. Product Integrity
Product integrity is important to those of us who purchase products and services. This is when
public perception and brand recognition come into play.

7. Honesty
It applies to every part of business activity while making a profit. Honest businesses make profit
through ethical business strategies.

Need/ Importance/Advantages/Arguments for Business Ethics

Goodwill
A high ethical business organization enjoys high goodwill from its customers. Customers
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confidence increases about the quality, quantity, price etc of the products. They trust that ethical
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businessmen will not cheat them and build a long lasting relationship with such concerns.
 Profitability
Business ethics are important to develop good and friendly relations between business and
society. This will result in regular supply of quality goods and services to the society, and in
return results in profits and growth of the economy.
Stop business malpractices : Some unscrupulous businessmen do business malpractices by
indulging in unfair trade practices like black-marketing, artificial high pricing, adulteration,
cheating in weights and measures, selling of duplicate and harmful products, hoarding, etc.
These business malpractices are harmful to the consumers. Business ethics help to stop these
business malpractices.
Improve customers' confidence : Business ethics are needed to improve the customers'
confidence about the quality, quantity, price, etc. of the products. The customers have more trust
and confidence in the businessmen who follow ethical rules. They feel that such businessmen
will not cheat them.
Survival of business : Business ethics are mandatory for the survival of business. The
businessmen who do not follow it will have short-term success, but they will fail in the long run.
This is because they can cheat a consumer only once. After that, the consumer will not buy
goods from that businessman. He will also tell others not to buy from that businessman. So this
will defame his image and provoke a negative publicity. This will result in failure of the
business. Therefore, if the businessmen do not follow ethical rules, he will fail in the market. So,
it is always better to follow appropriate code of conduct to survive in the market.
Safeguarding consumers' rights : The consumer has many rights such as right to health and
safety, right to be informed, right to choose, right to be heard, right to redress, etc. But many
businessmen do not respect and protect these rights. Business ethics are must to safeguard these
rights of the consumers.
Protecting employees and shareholders : Business ethics are required to protect the interest of
employees, shareholders, competitors, dealers, suppliers, etc. It protects them from exploitation
through unfair trade practices.
Develops good relations : Business ethics are important to develop good and friendly relations
between business and society. This will result in a regular supply of good quality goods and
services at low prices to the society. It will also result in profits for the businesses thereby
resulting in growth of economy.
Creates good image : Business ethics create a good image for the business and businessmen. If
the businessmen follow all ethical rules, then they will be fully accepted and not criticised by the
society. The society will always support those businessmen who follow this necessary code of
conduct.
Smooth functioning : If the business follows all the business ethics, then the employees,
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shareholders, consumers, dealers and suppliers will all be happy. So they will give full
cooperation to the business. This will result in smooth functioning of the business. So, the
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 business will grow, expand and diversify easily and quickly. It will have more sales and more
profits.
Consumer movement : Business ethics are gaining importance because of the growth of the
consumer movement. Today, the consumers are aware of their rights. Now they are more
organised and hence cannot be cheated easily. They take actions against those businessmen who
indulge in bad business practices. They boycott poor quality, harmful, high-priced and
counterfeit (duplicate) goods. Therefore, the only way to survive in business is to be honest and
fair.
Consumer satisfaction : Today, the consumer is the king of the market. Any business simply
cannot survive without the consumers. Therefore, the main aim or objective of business is
consumer satisfaction. If the consumer is not satisfied, then there will be no sales and thus no
profits too. Consumer will be satisfied only if the business follows all the business ethics, and
hence are highly needed.
Importance of labour : Employees or workers play a very crucial role in the success of a
business. Therefore, business must use business ethics while dealing with the employees. The
business must give them proper wages and salaries and provide them with better working
conditions. There must be good relations between employer and employees. The employees must
also be given proper welfare facilities.
Healthy competition : The business must use business ethics while dealing with the
competitors. They must have healthy competition with the competitors. They must not do cut-
throat competition. Similarly, they must give equal opportunities to small-scale business. They
must avoid monopoly. This is because a monopoly is harmful to the consumers.
Reasons for upholding Business ethics:

 A higher moral within your employees and the organization

 It helps to attract new customers
 It builds higher customer loyalty
 It reduces the risk of negative press or backlash caused by doing ―the wrong‖ things
 It helps to make a positive impact on the community
 If you want to run a sustainable business having a high set of ethics is critical, and there
can be serious consequences if poor ethical decisions are made.

Regardless of whether you believe good business ethics contribute to profits or not, poor ethics
will have a major impact on your bottom line. Without standards you have misinformed,
misguided and bad decisions being made, which can cause financial loss or injury to other
people, or the business. Many legal cases are raised because of people seeking compensation for
their losses as a result of business people making unethical decisions.

Rules or Principles of Business Ethics

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 Rules or principles of business ethics are the code of conduct for businessmen. It tells us how
businessmen should do business for social good. These principles are related to consumers,
employees, investors, local community and the society as a whole.
The important rules or principles of business ethics are as follows:-
Avoid exploitation of consumers : Don't cheat and exploit consumers by using
bad business practices such as artificial price rise and adulteration.
Avoid profiteering : Don't indulge in unscrupulous activities like hoarding, black-marketing,
sale and use of banned or harmful goods, etc., for the sake of greed to earn exorbitant profits.
Encourage healthy competition : Don't destroy a healthy competitive atmosphere in the market
which offers certain benefits to the consumers. Do not engage in a cut-throat competition. Avoid
making attempts to malign and spoil the image of competitors by unfair means.
Ensure accuracy : Always check and verify the accuracy in weighing, packaging and quality
while supplying goods to the consumers.
Pay taxes regularly : Pay taxes and other charges or duties to the government honestly and
regularly. Avoid bribing government officials and lobbying for special favours.
Get accounts audited : Maintain accurate business records, accounts and make them available
to all authorised persons and authorities.
Fair treatment to employees : Pay fair wages or salaries, provide facilities and incentives and
give humane treatment to employees.
Keep investors informed : Supply reliable information to shareholders and investors about the
financial position and important decisions of the company.
Avoid injustice and discrimination : Avoid injustice and partiality to employees in transfers
and promotions. Avoid discrimination among them based on gender, race, religion, language,
nationality, etc.
No bribe and corruption : Don't give expensive gifts, secret commissions, kickbacks, payoffs
to politicians, bureaucrats, government officials and suppliers. Say no to bribe and avoid
corruption.
Discourage secret agreement : Do not make a secret agreement with other businessmen for
controlling production, distribution, pricing or for any other activity, which is harmful to the
consumers.
Keep service before profit : Accept the principle of "service first and profit next." The customer
or consumer is the most important part of any business. All business activities are done for
meeting his needs and for increasing his satisfaction and welfare.
Practice fair business : Make your business fair, humane, efficient and dynamic. Give the
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benefits of these qualities to the consumers.

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 Avoid monopoly : Avoid forming private monopolies and concentration of economic power.
Monopolies are bad for consumers.
Fullfill customers expectations : Adjust your business activities as per the demands, needs and
expectations of the customers.
Respect consumers rights : Give full respect and honour to the basic rights of the consumers
like right to be informed, right to be heard, right to seek redressal.
Accept social responsibilities : Responsibilities towards different social groups.
Satisfy consumers wants : Find out and satisfy the wants of the consumers. Use the available
resources to produce good quality goods and services. Supply these goods and services regularly
to the consumers. Charge reasonable prices for the goods and services. Give proper after-sales
services. Do not produce goods and services, which are harmful to the health and life of the
consumers. Remember, the main objective of the business is to satisfy the consumers wants.
Service motive : Give more importance to service and consumer's satisfaction and less
importance to profit-maximization. Make profits by providing services to the consumers. Do not
make profits by exploiting the consumers.
Protect group interests : Protect the interest of the group i.e give employees better wages and
good working conditions, give shareholders better rate of dividend, give consumers good quality
goods and services at low prices, etc.
Optimum utilisation of resources : Ensure better and optimum utilisation of natural and human
resources and minimise wastage of these resources. Use the resources to remove poverty and to
increase the standard of living of people.
Intentions of business : Use pure, legal and sacred means to do business. Do not use illegal,
unscrupulous and evil means to do business.
Rule of publicity : According to this principle, the business must tell the people what it is going
to do. It must not create doubts, misunderstanding, suspicion, secrets, etc.
Rule of equivalent price : According to this principle, the customer must be given proper value
for their money. So the business must not sell below standard, outdated and inferior (poor) goods
for high prices.
Rule of conscience in business : If the business is conducted properly, then it is beneficial to the
society. Otherwise, it is harmful to the society. Therefore, the businessman must have a
conscience, i.e. a morale sense of judging what is right and what is wrong. He must be very
careful while taking business decisions because these decisions affect the entire society.
Rule of spirit of service : The business must give importance to the service motive. That is,
priority must be given to render service to human beings over profit.
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Thus, 12 individual principles that form the basis of business ethics, and are what you
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need to hold yourself accountable to:

 Honesty
You need to be honest in all of your actions, and every communication you make. When people
see you making honest decisions, they start to trust your company because you‘re not only being
truthful, you‘re being upfront and candid.
Integrity
Being ethical in business means maintaining a high level of personal integrity. This is how you
earn the trust of others, whether they are your customers, team or your superiors.

Keeping Your Promises

Your word is one of the most important tools in your arsenal as a business manager. Keep every
promise that you make, and always fulfill a commitment. Just do what you said you were going
to do.

Loyalty
You need to be loyal to both your company, your team and yourself, while operating within a
strong moral compass.

Fair
In all of your actions, you must strive to be fair and just. Being an ethical executive means that
you are committed to being fair, employ justice in your decisions and treat all people equally,
with tolerance and acceptance of diversity.

Caring
This involves having a genuine concern for others, as well as a sense of compassion.

Respect
Being ethical means treating everyone with respect, demonstrating this by being courteous and
having an equal treatment of people regardless of who they are.

Obeying the law

An ethical executive always obeys the law, and never breaks the rules, regulations or laws
surrounding their business activities.

Excellence
Being ethical in business is also about pursuing excellence in everything that you do.

Being a Leader
You need to demonstrate the principles and ethics you want your team to live by, and take an
active role as a leader to be a positive role model.
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Morale
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 Ethical business managers enhance the good reputation of a company, which at the same time
boosts the morale if its employees. The company reputation is very important, as well as the
pride and morale of their employees.

Accountable
Being ethical means holding yourself accountable, and acknowledging and accepting personal
accountability for their decisions, and any consequences.

Scope/Purpose of Business Ethics

Ethical problems and phenomena arise across all the functional areas of companies and at all
levels within the company.

1.Ethics in Compliance

Compliance is about obeying and adhering to rules and authority.

It is an important department in the organization.
Monitors the processes that are mapped for internal & external regulations.
Failing to meet compliance would lead to penalties.

2.Ethics in Finance

The ethical issues in finance that companies and employees are confronted with include:

 In accounting – window dressing, misleading financial analysis.

 Insider trading, securities fraud leading to manipulation of the financial markets.
 Executive compensation.
 Bribery, kickbacks, over billing of expenses, facilitation payments.
 Fake reimbursements

4.Ethics in Marketing

Marketing ethics is the area of applied ethics which deals with the moral principles behind the
operation and regulation of marketing. The ethical issues confronted in this area include:
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 Pricing: price fixing, price discrimination, price skimming.

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  Anti-competitive practices like manipulation of supply, exclusive dealing arrangements, tying
arrangements etc.
 Misleading advertisements
 Content of advertisements eg. Statutory warning for cigarettes not enough
 Children and marketing.
 Black markets, grey markets (un-official).

3.Ethics in Human Resources

The ethics of human resource management (HRM) covers those ethical issues arising around the
employer-employee relationship, such as the rights and duties owed between employer and
employee.

The issues of ethics faced by HRM include:

 Discrimination issues i.e. discrimination on the bases of age, gender, race, religion,
disabilities, weight etc.
 Sexual harassment.
 Issues surrounding the representation of employees and the democratization of the workplace.
 Issues affecting the privacy of the employee: workplace surveillance, drug testing.
 Issues affecting the privacy of the employer: whistle-blowing.
 Issues relating to the fairness of the employment contract and the balance of power between
employer and employee.
 Occupational safety and health.
Companies tend to shift economic risks onto the shoulders of their employees. The boom of
performance-related pay systems and flexible employment contracts are indicators of these
newly established forms of shifting risk.

5.Ethics of Production
This area of business ethics deals with the duties of a company to ensure that products and
production processes do not cause harm.

The issues of ethics faced by production include:

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 Defective, addictive and inherently dangerous products and services eg. Tobacco, alcohol,
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weapons, drugs, chemical manufacturing etc.

  Ethical relations between the company and the environment include pollution, environmental
ethics, and carbon emissions trading.
 Ethical problems arising out of new technologies for eg. Genetically modified food
 Product testing ethics.

6. Ethics of Intellectual property, knowledge and skills

Who as the greater rights to an idea: the company who trained the employee or the
employee themselves? As a result attempts to assert ownership and ethical disputes over
ownership arise.

The issues of ethics faced by intellectual property, knowledge & skills include

 The practice of employing all the most talented people in a specific field,
regardless of need, in order to prevent any competitors employing them.

 Employee raiding: the practice of attracting key employees away from a

competitor to take unfair advantage of the knowledge or skills they may possess.

 Patent misuse, copyright misuse.

7. Ethics in Technology

The computer and world wide web are two most significant inventions of the twentieth
century. There are many ethical issues that arise from this technology. It is easy to gain
access to information. This leads to data mining (hacking), privacy invasion.

Social Responsibilities/Ethics of Business towards different stakeholders

 Ethics at stakeholders level

Employees
Security of job Better working conditions
Better recommendation
Participative management
Welfare facilities
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Customers
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Better quality of goods

 Goods and services at reasonable price
Not to make false claims about products in advertisements
Shareholders
Ensure capital appreciation
Ensure steady and regular dividends
Disclose all relevant information
Protect minority shareholders interests
Not to window dress balance sheets
Protect interests in times of mergers, amalgamations and takeovers
Banks and other lending institutions
Guarantee safety of borrowed funds
Prompt repayment of loans
Government
Complying with rules and regulations
Honesty in paying taxes and other dues
Acting as partner in the progress of the country
Not to indulge in monopolistic and restrictive trade practices Conforming
to pollution control norms set up by the government Not to
indulge in corruption through bribing and unlawful activities
Owners
Run the Business efficiently
Proper utilization of capital and resources
Growth and appreciation of capital
Regular and fair return on capital invested
Suppliers
Giving regular orders for purchase of goods
Dealing on fair terms and conditions
Availing reasonable credit period

 Ethics at societal level

Concern for poor and downtrodden
No discrimination against any particular section of the society
Concern for clean environment
preservation of scarce resources for posterity
Contributing for better quality of life
 Ethics at personal policy level
Not to use office car, stationery and other facilities for personal use
Not to misuse others for personal gain
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Not to indulge in politics to gain power

Not to spoil promotional chances of others
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 Promise keeping
Mutual help
 Ethics at management policy level
Fair practices relating to requirements, compensations, layoffs, perks, promotions
Transformational leadership to motivate employees to aim at better and higher things in
life Better
communication at all levels

Disadvantages of business ethics/ Arguments against business ethics

1.Business ethics reduce a company's freedom to maximize its profit. For example, a
multinational company may move its manufacturing facility to a developing country to reduce
costs. Practices acceptable in that country, such as child labor, poor health and safety, poverty-
level wages and coerced employment, will not be tolerated by an ethical company.
Improvements in working conditions, such as a living wage and minimum health and safety
standards reduce the level of cost-savings that the company generates. However, it could be
argued that the restrictions on company freedom benefit wider society.

2.People, Planet, Profit

Companies increasingly recognize the need to commit to business ethics and measure their
success by more than just profitability. This has led to the introduction of the triple bottom line,
also known as "people, planet, profit." This type of performance reporting acknowledges that
companies must make a profit to survive, but encourages ethical and sustainable business
conduct.

3.Customer to bear costs Some economists like Friedman believed that if business ethics is a
part of corporate culture, the customer would have to bear the cost of ethical practices of the
organization as some ethical practices increase product prices.

Difference between Business Ethics and Social Responsibility

Though business ethics and social responsibility seem to be overlapping, there has always been a
contradiction between the two. Companies, though they are committed to be socially responsible
for their behaviour have been found to be engaging in acts that cannot be called ethical.

What is good for the society is sometimes not good for the business, and what is good for the
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business is almost always not good for the society.

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 If the society is conscious, it responds in such a way that businesses are forced to behave
responsibly. The same applies to the administration and the judiciary of any country.

Selling of liquor and tobacco in any society is not against business ethics though it may be
against the principles of social responsibility. The same applies to lotteries and gambling. But it
is certainly against business ethics as well as against social responsibility to entice minors to
engage in smoking and drinking.

Factors Influencing Business Ethics

In taking decisions involving ethical issues a business must consider
1.Leadership
Leader is a person who leads people towards achieving a common goal. Not all
leaders are considered to be perfect in decision making, as every decision they
make will depend upon the character of the person which differs from person to
person. Leaders are models and mentors and should have strong commitment
towards ethics and ethical conduct and should give a constant leadership in
renewing the values of an organization. They play a key role in creating,
maintaining and changing the ethical culture. Its necessary for leaders to set good
examples and follow ethics. Where there are good leaders there will be good
ethical practices in business. Eg. JRD Tata, Dhirubhai Ambani, N.R. Narayana
Murthy.

2.Individual Characteristics
It refers to the attitude and lifestyles of each person individually. It includes values
(belief about right and wrong), Ego (strength of one‘s convictions) and degree of one‘s
control.

3.Environment
It refers to things around us. An organization uses abundant natural resources for its
production purposes and hence should be ethical in its utilization. It should follow the
principle of sustainable development and not exhaustive development.

4. Corporate Culture
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It is the set of shared values, beliefs, goals, norms that prevail within an organization.
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As in the case of Tyco where its organizational culture supports unethical practices. If the
 company makes huge profits in unethical way then individuals who join the organization
would also have to practice unethical activities to survive in the company. As in the case
of Enron where many executives and managers knew the company was following some
illegal and unethical practices, but the executives and managers did not know how to
make the ethical decisions and corporate ethical culture. Thus they fall back and
managers have to pay in the form of fines and imprisonment.

5. Strategy and performance

To integrate ethics into the business strategy, business people have to add three more
questions
 What do we stand for? What is our purpose? What values do we have?

6. Corporate governance
It is a set of systems and processes that a company follows to ensure that it is in the
best interest of the stake holders. Stake holders are the shareholders, customers, creditors,
government, suppliers and the community.

7. Other factors include

 Identification of stakeholders of the business their rights and responsibilities.
Stakeholders include customers, government, employees, shareholders, suppliers,
business partners, other statutory organizations and the general public.
 Importance of profit and other similar motives of the business and its managers in
relation to the importance of morality, honesty and other similar values.
 The extent of responsibility of business for specific areas and to the community in
general. It includes environmental protection, equality and fairness in dealing with
stakeholders, product quality and reliability and abetting corruption.
 Personal value system and beliefs of the owners and managers of the business.
 Impact of ethical behavior on short and long term prospects and performance of
business.
 The company policies, rules, work-procedures and system.
 The organizational culture and shared values.

Corporate Social Responsibility

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 Definition of Corporate Social Responsibility

The idea of CSR came up in 1953 in H.R Bowen‘s ―Social Responsibilities of the Business‖. It is
responsibility of the business towards the society.

CSR can be explained as Corporate – means organized business, Social – means everything
dealing with people, Responsibility – means the accountability between the two i e Corporate &
Society.

Thus CSR means open and transparent business practice that is based on ethical values and
respect for the employees, communities & the environment.
Corporations are primarily business organizations run for the benefit of shareholders who have
responsibilities towards employees, customers, suppliers, communities, society.

In today‘s digital, fast speed world, each business, small or big, needs to have a CSR program in
place. If CSR is not yet part of your daily business practice, you must act fast. Or else you‘ll
loose the trust of the people who are important to your business.

So why CSR?

1. Satisfied employees.

Employees want to feel proud of the organization they work for. An employee with a positive
attitude towards the company, is less likely to look for a job elsewhere. It is also likely that you
will receive more job applications because people want to work for you.

More choice means a better workforce. Because of the high positive impact of CSR on employee
wellbeing and motivation, the role of HR in managing CSR projects is significant. Leads to
achievement of long term objective – decrease in crime, reduced employee turnover and
absenteeism.
2. Satisfied customers

Research shows that a strong record of CSR improves customers‘ attitude towards the company.
If a customer likes the company, he or she will buy more products or services and will be less
willing to change to another brand. Thus enhanced brand image and reputation
3. Positive PR

CSR provides the opportunity to share positive stories online and through traditional media.
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Companies no longer have to waste money on expensive advertising campaigns. Instead they
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generate free publicity and benefit from word of mouth marketing.

 4. Costs reductions

A CSR program if conducted properly a company can reduce costs through CSR.

Companies reduce costs by:

 More efficient staff hire and retention- Safe-guarding interests of employees which
reduces labor-turnover
 Implementing energy savings programs-like work at home, pooling cars to save energy
and creating a good image in the eyes of the society
 Managing potential risks and liabilities more effectively-like changing the school timings
to avoid traffic menance indirectly helping the society
 Less investment in traditional advertising-School giving free value added week-end
courses to be recognized in the vicinity, so need to advertise much for admissions in
papers.

5. More business opportunities

A CSR program requires an open, outside oriented approach. The business must be in a constant
dialogue with customers, suppliers and other parties that affect the organization. Because of
continuous interaction with other parties, your business will be the first to know about new
business opportunities.

6. Long term future for your business

CSR is not something for the short term. It‘s all about achieving long term results and business
continuity.

Types of CSR

1. Environment-Focused Corporate Social Responsibility (CSR)

Focuses on eco-issues such as climate change.

The corporation innovates in its manufacturing stage to reduce the production of environment
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harming by-products. It also promotes the use of non-renewable energy sources to prevent harm
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caused to the environment by burning of fossil fuels.

 2. Community-Based Corporate Social Responsibility (CSR)

Businesses work with other organizations to improve the quality of life of the people in the
local community. The corporation joins hands with other organizations (usually Non-Profit
ones) to ensure the welfare of a local community‘s people. These organizations either fund
or receive funding from corporations to perform tasks that can improve the living
conditions of the community‘s people.

3. Human Resource (HR)-Based Corporate Social Responsibility (CSR) Projects that improve
the wellbeing of the staff. Corporations focus on the well-being of their own staff and improve
their living conditions. The companies may extend compassionate leaves like paternity leaves so
that the employee can look after his newborn. They can also provide medical insurance to their
employees to take care of accidents caused due to occupational hazards.

4. Charity Based Corporate Social Responsibility (CSR)

Philanthropy love for human, businesses donate money to a good cause, usually through
a charity partner. In a charity-based CSR, corporations donate to organizations or
individuals (usually through a charity partner) to improve their financial condition and for
their general upliftment. This is the most common form of a CSR activity. Most
corporations provide direct financial support to organizations or individuals who require
such assistance.

Advantages Corporate Social Responsibility

 Improvement in the image of the Corporation

The most obvious advantage that a corporation can obtain by implementing CSR policies is that
of an increased goodwill value. This serves a dual purpose – Firstly, people will want to buy the
product that the corporation is selling because of its good and clean image. Secondly, other
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enterprises will want to do business and be associated with the corporation. This increases the
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 corporation‘s prestige to such a high level that its name may become synonymous with reliability
and goodness.

 Increased Attraction and Retention of Employees

Companies having solid CSR commitments find it easier to recruit and retain employees. People
want to work for companies that care about the well-being of their employees and provide good
working conditions. Compassionate attitude towards employees is highly desired by both new
recruits and old employees alike. Eg. Appraisals, financial assistance in times of need, and
attention given to personal achievements and special days (like birthdays) make employees want
to remain with the company.
In short, if the company‘s workforce is happy, the company gets more profits due to increased
efficiency in production.

 Regulatory Authorities become less hostile

A corporation with strong CSR programs will not be scrutinized by regulatory authorities as
much as companies without CSR programs. The authorities will be lenient in their regulation
because they feel that the company must be complying with all regulations as it is supported by
firms and people alike for its welfare work. A company with strong CSR programs will always
work within regulations to get benefits (other than profits) from these CSR programs.
The authorities will give fast-track preference to this company.

 Attracts more Capital Inflow from Various Sources

A company‘s image plays a huge role in attracting investors. If the company is engaged in CSR
programs, its image gets a massive boost, and so, people invest in its operations heavily. This
company will attract capital even from abroad in the form of FII, thus, helping the country to get
valuable foreign exchange. It will also attract investment from other firms and industries, and it
will become a name that can be trusted easily.
Even the Government of the country may be willing to invest in the company, leading to less
red-tapism.

 Generation of Clean and Renewable Energy from Environmental CSR

If the company has invested in an environmental CSR program, it will make sure that its
operations do not harm the environment in any way. Inventing machines and techniques to
reduce the harmful effects of its operational activities will give the community a clean
environment. It will also give the company a chance to explore the usage of renewable energy
for its operations.
This will reduce the cost of acquiring fossil fuels and can reduce the cost of production by a one-
time investment in renewable energy production. Minimizes ecological imbalance
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  Positive Publicity
A popular business principle is that any publicity is good publicity. You should be known to the
people to sell your product. A good CSR program will always give good publicity and even act
as an advertisement for the company.
It also sets the company apart from its competitors. They may be selling a similar product at
lower rates, but you are keeping the interests of your environment and community intact, and so
the people do not mind a little extra charge for this thoughtfulness.

Other Benefits of CSR

Reduced Operating costs
Increased Sales and Customer loyalty
Increased productivity and quality of work life by efforts to improve working conditions
Society gains in the form of better neighborhood and employment opportunities.
Satisfaction of changed consumer needs and expectations
Promotes national and economic welfare and growth

Disadvantages Corporate Social Responsibility

Now we will see why CSR is criticized in business circles.

 Shift from the Profit-Making Objective
Milton Friedman, an economist, is the biggest critic of CSR. He says that CSR shifts the focus of
the company from the objective that made it a financial entity in the first place – profit-making.
The company forgets about its obligations towards its shareholders that they have to make profits
for them. Instead of focusing on making profits, they engage in CSR programs and use up funds
for community welfare.
So basically, instead of an income, the company is effecting an outflow of cash and not fulfilling
its profit-making obligations.

 Company reputation takes a hit

According to CSR policies, companies have to disclose shortcomings of even their own products
if they are found to violate the CSR program. For example, car manufacturing companies calling
back their vehicles in large numbers when they find glitches in the model after having sold them
wallops their reputation.
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This creates inconvenience to the customers, and they lose trust in the manufacturer.
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  Customer Conviction
Initially, customers like to see the companies that they trust are engaged in social welfare
programs. They like the fact that these programs are for a good cause. Later, they grow wary of
it. If they don‘t see instant results from these programs, they think that these are nothing but PR
stunts. So it becomes difficult to convince customers that the results will take some time in
coming and that they should continue believing in the good intentions of the company.

 Increase in Cost of Production

More often than not, CSR programs increase the expenditure of the company. This increased
expenditure is reflected in the increased prices of the product for which, ultimately, the
customers have to pay.
Large corporations can absorb this increased expenditure. They may not increase their products‘
prices, but small businesses have no other option but to increase their products‘ prices to meet
their increased expenses.

Need and Scope of CSR

 CSR refers to the concept whereby companies voluntarily contribute to a better society
and cleaner environment.
 Societal approach is very important to business organizations which demands their
responsiveness towards the society.
 To establish a good corporate image business organizations include social responsibility
as corporate objective.
 Legal laws pertaining to environment also make CSR necessary.
 Donations to approved NGO‘s are also exempted from income-tax
 It enhances corporate image and better business environment.
 Increases market shares.

Core elements of CSR Policy

Care for all stakeholders
Companies should respect the interest of and be responsive towards stakeholders- employees,
suppliers, distributors, society, government, shareholders, customers and the nation at large.
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Ethical functioning
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 Their governance should be based on ethics, transparency and accountability ad not engage in
abusive, unfair, corruption.
Respect for Workers rights and welfare
Companies should provide a working environment that is safe, hygienic and humane. Access to
training and development of necessary skills for career advancement on an equal non-
discriminatory basis. Provide equal opportunities to all employees not employ child or forced
labour.

Respect for human rights

Companies should respect all human rights and avoid complicity with human rights.
Respect for environment
Companies should take measures to prevent pollution, reduce and recycle wastes, manage natural
resources in a sustainable manner. Promote efficient use of energy and environment friendly
technologies.
Activities for social and inclusive development
It includes education, skill building for livelihood of people, health, cultural and social welfare
especially to the disadvantaged sections of society.

Approaches to CSR
Community-based development approach
The corporations work with local communities to better themselves. Eg Hosmat hospital and
Purvankara group have adapted to plant saplings on main roads and circles. Infosys and Times
group have adapted villages to educate their community children as well as develop new skills
for adults
Philanthropy Approach
Includes monetary donations an aids given to local organizations and impoverished communities
in developing countries. Eg Bill Gates foundation for African nations, Azim Premji Foundation
in India.
Incorporate CSR strategy into the Business strategy of an organization
Some organizations prohibit trading on products made from endangered animals like tiger skins,
snake skins, elephant ivory, deer skins etc.
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Increasing Corporate Responsibility Interest Approach

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 This is called Shared Value. A business needs a healthy, educated workforce, sustainable
resources and trusting government to compete effectively.

Crisis Management

What is Crisis?
Crisis is defined as any emergency situation which disturbs the employees as well as leads to
instability in the organization. Crisis affects an individual, group, organization or society on the
whole.

Characteristics of Crisis

 Crisis is a sequence of sudden disturbing events harming the organization.

 Crisis generally arises on a short notice.
 Crisis triggers a feeling of fear and threat amongst the individuals.

Why Crisis?

Crisis can arise in an organization due to any of the following reasons:

 Technological failure and Breakdown of machines lead to crisis. Problems in internet,

corruption in the software, errors in passwords all result in crisis.
 Crisis arises when employees do not agree to each other and fight amongst themselves.
Crisis arises as a result of boycott, strikes for indefinite periods, disputes and so on.
 Violence, thefts and terrorism at the workplace result in organization crisis.
 Neglecting minor issues in the beginning can lead to major crisis and a situation of
uncertainty at the work place. The management must have complete control on its
employees and should not adopt a casual attitude at work.
 Illegal behaviors such as accepting bribes, frauds, data or information tampering all lead
to organization crisis.
 Crisis arises when organization fails to pay its creditors and declares itself a bankrupt
organization.

Crisis Management means

The art of dealing with sudden and unexpected events which disturbs the employees,
organization as well as external clients refers to Crisis Management.
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The process of handling unexpected and sudden changes in organization culture is called as
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crisis management.
 Need for Crisis Management

 Crisis Management prepares the individuals to face unexpected developments and

adverse conditions in the organization with courage and determination.
 Employees adjust well to the sudden changes in the organization.
 Employees can understand and analyze the causes of crisis and cope with it in the best
possible way.
 Crisis Management helps the managers to devise strategies to come out of uncertain
conditions and also decide on the future course of action.
 Crisis Management helps the managers to feel the early signs of crisis, warn the
employees against the aftermaths and take necessary precautions for the same.

Essential Features of Crisis Management

 Crisis Management includes activities and processes which help the managers as well as
employees to analyze and understand events which might lead to crisis and uncertainty in
the organization.
 Crisis Management enables the managers and employees to respond effectively to
changes in the organization culture.
 It consists of effective coordination amongst the departments to overcome emergency
situations.
 Employees at the time of crisis must communicate effectively with each other and try
their level best to overcome tough times. Points to keep in mind during crisis
 Don‘t panic or spread rumours around. Be patient.
 At the time of crisis the management should be in regular touch with the employees,
external clients, stake holders as well as media.
 Avoid being too rigid. One should adapt well to changes and new situations.

What is a Crisis Management Team?

A Crisis Management Team is formed to protect an organization against the adverse effects of
crisis. Crisis Management team prepares an organization for inevitable threats.

Role of Crisis Management Team

The role of Crisis Management Team is to analyze the situation and formulate crisis management
plan to save the organization‘s reputation and standing in the industry.

Crisis Management team primarily focuses on:

 Detecting the early signs of crisis.

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 Identifying the problem areas

 Sit with employees face to face and discuss on the identified areas of concern
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 Prepare crisis management plan which works best during emergency situations
  Encourage the employees to face problems with courage, determination and smile.
Motivate them not to lose hope and deliver their level best.
 Help the organization come out of tough times and also prepare it for the future.

Crisis Management Team

Head of departments/Team Leader: To take decisions on behalf of the organization

Chief executive officer and people closely associated with Heads

Board of directors

Media Advisors

HR Director/Human Resource Representatives: Has access to personnel records, helps the

information officers reach affected individuals and their families

Finance Director: To assess the financial implications of each type of disaster covered by the
plan, arrangement and disbursement of funds, maintains records of cost of crisis of the company.

Legal Counsel: Advises the team on possible legal implications of recommended actions.
How does Crisis Management Team function ?

Crisis Management Process

Step 1: Establish a planning team
Provide broad perspective on the issues
Establish a schedule and budget
Step 2: Analyze capabilities and hazards
Meet with outside groups (government agencies, community organizations)
Identify applicable federal, state and local regulations
Identify internal and external resources and capabilities
Establish probability and potential impact
Step 3: Develop a plan
Develop emergency response procedures
Identify challenges and prioritize activities
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Establish a training schedule

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Step 4: Implement the plan

 Integrate the plan into company operations

Types of Crisis
Crisis refers to sudden unplanned events which cause major disturbances in the organization and
trigger a feeling of fear and threat amongst the employees.

Following are the types of crisis:

1. Natural Crisis
 Disturbances in the environment and nature lead to natural crisis.
 Such events are generally beyond the control of human beings.
 Tornadoes, Earthquakes, Hurricanes, Landslides, Tsunamis, Flood, Drought all
result in natural disaster.
2.
3. Technological Crisis
 Technological crisis arises as a result of failure in technology. Problems in the
overall systems lead to technological crisis.
 Breakdown of machine, corrupted software and so on give rise to technological
crisis.
4. Confrontation Crisis
 Confrontation crises arise when employees fight amongst themselves. Individuals
do not agree to each other and eventually depend on non productive acts like
boycotts, strikes for indefinite periods and so on.
5. Crisis of Malevolence
 Organizations face crisis of malevolence when some notorious employees take the
help of criminal activities and extreme steps to fulfill their demands.
 Acts like kidnapping company‘s officials, false rumours all lead to crisis of
malevolence.
6. Crisis of Organizational Misdeeds
 Crises of organizational misdeeds arise when management takes certain decisions
knowing the harmful consequences of the same towards the stakeholders and
external parties.

Crisis of organizational misdeeds can be further classified into following three types:

 Crisis of Skewed Management Values

Crisis of Skewed Management Values arises when management supports short term
growth and ignores broader issues.
 Crisis of Deception
Organizations face crisis of deception when management purposely tampers data and
information.
Management makes fake promises and wrong commitments to the customers.
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Communicating wrong information about the organization and products lead to crisis of
deception.
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 Crisis of Management Misconduct

 Organizations face crisis of management misconduct when management indulges in
deliberate acts of illegality like accepting bribes, passing on confidential information and so on.
Crisis due to Workplace Violence

 Such a type of crisis arises when employees are indulged in violent acts such as
beating employees, superiors in the office premises itself.
Crisis Due to Rumours
 Spreading false rumours about the organization and brand lead to crisis.
Employees must not spread anything which would tarnish the image of their
organization.
Bankruptcy
 A crisis also arises when organizations fail to pay its creditors and other parties.
 Lack of fund leads to crisis.
Crisis Due to Natural Factors
 Disturbances in environment and nature such as hurricanes, volcanoes, storms,
flood; droughts, earthquakes etc result in crisis.
Sudden Crisis
 As the name suggests, such situations arise all of a sudden and on an extremely
short notice.
 Managers do not get warning signals and such a situation is in most cases beyond
any one‘s control.

Unit 2

Personal Ethics

What is ethics?

At its simplest, ethics is a system of moral principles. They affect how people make decisions
and lead their lives.

Ethics is concerned with what is good for individuals and society and is also described as moral
philosophy.

The term is derived from the Greek word ethos which can mean custom, habit, character or
disposition.

Ethics covers the following dilemmas:

 how to live a good life

 our rights and responsibilities
 the language of right and wrong
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 moral decisions - what is good and bad?

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 Our concepts of ethics have been derived from religions, philosophies and cultures. They infuse
debates on topics like abortion, human rights and professional conduct.

Approaches to ethics
Philosophers nowadays tend to divide ethical theories into three areas: metaethics, normative
ethics and applied ethics.

 Meta-ethics deals with the nature of moral judgement. It looks at the origins and meaning of
ethical principles.
 Normative ethics is concerned with the content of moral judgements and the criteria for what
is right or wrong.
 Applied ethics looks at controversial topics like war, animal rights and capital punishment

Where does ethics come from?

Philosophers have several answers to this question:

 God and religion

 Human conscience and intuition
 a rational moral cost-benefit analysis of actions and their effects
 the example of good human beings
 a desire for the best for people in each unique situation
 political power

Virtue ethics
Virtue ethics looks at virtue or moral character, rather than at ethical duties and rules, or the
consequences of actions - indeed some philosophers of this school deny that there can be such
things as universal ethical rules.

Virtue ethics is particularly concerned with the way individuals live their lives, and less
concerned in assessing particular actions.

It develops the idea of good actions by looking at the way virtuous people express their inner
goodness in the things that they do.

To put it very simply, virtue ethics teaches that an action is right if and only if it is an action that
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a virtuous person would do in the same circumstances, and that a virtuous person is someone
who has a particularly good character.
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 Situation ethics
Situation ethics rejects prescriptive rules and argues that individual ethical decisions should be
made according to the unique situation.

Rather than following rules the decision maker should follow a desire to seek the best for the
people involved. There are no moral rules or rights - each case is unique and deserves a unique
solution.

Personal ethics
It is a category of philosophy that determines what an individual believes about morality and
right and wrong. This is usually distinguished from business ethics or legal ethics. These
branches of ethics come from outside organizations or governments, not the individual‘s
conscience. These branches of ethics occasionally overlap. Personal ethics can affect all areas of
life, including family, finances and relationships.
The basic principles and values that govern interactions among individuals.
Basically, ethics are your sense of right and wrong. Your morals and values that define how you
are as a person are your personal ethics. On the contrary, how you behave and conform to the
rules in a professional setting are your professional ethics

Personal Ethics Professional Ethics

Includes your personal values and Rules imposed on an employee in a company, or as

moral qualities. member of a profession, e.g. doctor or lawyer.

Learnt when you are a part of a professional setting or

Incorporated by family, friends and
when you are being trained or educated for working
surroundings since your childhood.
there.

Examples: honesty, care, and Examples: no gossiping, time management, punctuality,

sincerity. confidentiality, transparency.

Not conforming to these may harm or Not adhering to these may harm your professional
hurt others. reputation.

Your personal needs are satisfied by

Your professional needs are satisfied by following these.
following these.

What is a code of ethics for an organization?

A code of ethics, also known as a code of conduct, clarifies ―an organization's mission, values,
and principles, linking them with standards of professional conduct.‖.
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A code of conduct serves as a reference for managers and employees when making decisions at
work.
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 The primary aspect of codes of ethics is to provide the basic framework for ethical judgment for
a professional.

Features of code of ethics

O Statements of values and principles which define the purpose of the company
O Codes of ethics defines the ethics of the corporation and its responsibilities to different
group of stakeholders (employees, shareholders, society, government etc)
O The codes of ethics are guidelines for specific group of professionals to help them
perform their roles.
O To know how to conduct themselves, and to know how to resolve various ethical issues.
O The codes of ethics help the professionals to apply moral and ethical principles to the
specific situations encountered in professional practice.
O These codes convey the rights, duties, and obligations of the members of the profession.

Importance of code of ethics

O Inspiration
O Guidance
O Support for responsible conduct
O Deterring and disciplining unethical professional conduct
O Education and promoting of mutual understanding
O Contributing to a positive public image of the profession
O Protecting the status quo and suppressing dissent within the profession
O Promoting business interests through restraint of trade

Principles of Personal Ethics for Managers

They are generally accepted principles of right and wrong governing the conduct of individuals.
They are the basic principles and values that govern interactions among individuals.
1. Honesty
Be honest in all communications and actions. Individuals must be worthy of trust and
honesty is the cornerstone of trust. They must not deliberately mislead or deceive others
by misrepresentations, overstatements, partial truths or any other means.
2. Integrity
Maintain personal integrity, we earn the trust of others only through integrity. Integrity
refers to a wholeness of character demonstrated by consistency between thoughts, words
and actions. Live by ethical principles despite pressure to do otherwise.
3. Promise-keeping
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Keep promises and fulfill commitments

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 4. Loyalty
Be loyal within the framework of other principles and give no room or excuses for
unprincipled conduct. For instance managers justify trust by being loyal to their
organization and the people they work with.
5. Fairness
Try to be fair and just in all dealings. Do not use overreaching or indecent means to either
gain or take undue advantage of another‘s mistakes or difficulties. Manifest commitment
to justice, equal treatment of individuals, tolerance for and acceptance of diversity.
6. Caring
Demonstrate compassion and a genuine concern for the well-being of others. Business
must be caring, compassionate and kind towards stakeholders. Accomplish business
objectives in a manner that causes least harm and the greatest positive good.
7. Respect for others
Treat everyone with respect regardless of sex, race or national origin. Treat others the
way you would like to be treated.
8. Law abiding
Abide by laws, rules and regulations relating to business activities.
9. Commitment to excellence
Pursue excellence in performing duties, being well informed and prepared to increase
proficiency in all areas of responsibility.
10. Leadership
Exemplify honor and ethics, be conscious of responsibilities and opportunities seeking to
be role models.
11. Reputations and morale Build and protect and build the company‘s god reputation and
the morale of its employees. Avoid words and actions that might undermine respect and
take steps to correct and prevent inappropriate conduct of others.
12. Accountability
Accept personal accountability for the ethical quality in decisions. Be accountable
towards the companies and communities.

Personal Values
They signify the basis of all order whether social or moral. Leaders with strong virtuous
values are more likely to act ethically than leaders with non-existent value system.
Personal values for Indian Mangers
1. Honesty
Be honest with oneself and others. This builds integrity and transparency.
2. Hard work
We need to make a nation of hard workers. It was not resources but hard work that
transformed nations such as Japan after World War II.
3. Self-confidence
This has to be an intrinsic part of our approach in demanding what is due for our
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merit and ability and not undersell ourselves to the outside world, no matter what our
internal compulsions may be.
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4. Humility
 Humility is a prerequisite for continuous learning from the environment. No matter
how good you are, someone out knows how to do things a little better.
5. Persistence
Nothing is ever achieved in one go. You owe it to yourself to make that one more try
that could make all the difference.
6. Passion in whatever you do
Passion is giving your 100 percent to what ever you take up, no matter how small or
seemingly unimportant.

Virtues of Personal Ethics

1.Emotional Honesty
It means expressing you‘re your true feelings. Emotional honesty is an important personal ethics
for living goodlife and for gaining success in personal as well as professional life. Emotional
honesty means being honest about human emotions.
Firstly it means recognizing and consciously understanding different kinds of our emotions and
feelings This is a process of analytical self awareness and requires self introspection. This self
knowledge is a sign of string and mature personality.
Secondly it means ability to perceive accurately the emotions aroused in other people we interact
with and how they value these emotions. The most important personal virtue for understanding
another‘s internal feelings is empathy where you place yourself in other‘s position to know and
feel their emotions and experiences. It includes ability to appreciate even the unexpressed needs
and concerns of others and respond to them positively.
Appreciating and understanding our emotions as well as those of others is called emotional
intelligence and using this knowledge to live and work more effectively and to grow as a good
and competent human being is emotional honesty.

2.Virtue of humility
Good things about you are your virtues. Humility is claimed to be a moral virtue in an ethical
system. It is the mother of all virtues. Humility is the quality or condition of being meek and
submissive. It is the opposite of pride. It guards against the common human feeling of egoist and
arrogance. Humility is the ultimate self-sacrifice. It is the sacrifice of one‘s ego. The virtue of
humility makes us modest and level headed about our achievements. It encourages us to abstain
from resting on our past achievements and help in growth and achieving further success in life.
Humility is the strength of the character of any person and not his weakness. But sometimes
people artificially show off humility through overly polite, over courteous behavior. Such
pretense of humility is a weakness of a character.
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 The virtue of humility may be defined: ―A quality by which a person considering his own defects
has a lowly opinion of himself. And willingly submits himself to God and to others for God‘s
sake.
In ethics it means freedom from pride and arrogance, humbleness of mind, a modest estimate of
one‘s own worth. Pride brings trouble, destroys character and leads to destruction. Humility is
the opposite of pride.
Benefits of virtue of humility
 The virtue of humility keeps God‘s command and will for us.
 It brings self-honesty and understanding.
 It enables us to lead an honorable life.
 It reaps spiritual health.
 It helps one to keep God‘s command and enter into heaven.
 How to develop humility in oneself?
 Conduct and hold an honest evaluation of yourself
 Understand your limitations and possibilities.
 Appreciate and esteem others.
 Stop comparing it leads to pride.
 Seek guidance from God
3.Proactive
Proactive means creating or controlling a situation rather than just responding to it after it has
happened. In other words it means acting in advance to deal with an expected difficulty. It is
thinking and acting ahead of anticipated events. This means using foresight.
Reactive is the opposite of proactive. Reactive people often hold a belief that they have no
control over a situation. This could relate to the behavior of an unreasonable stakeholder or the
issues that arise during a project. They surrender and wait until a potential problem has become a
burning issue before they take action. To be productive and effective you need to take a
proactive approach to managing. You can‘t sit back and simply hope for the best. You can‘t wait
to see what happens- you have to make things happen.
Being proactive does not mean being aggressive toward people. It does not mean wasting frantic
energy and creating chaos. Being proactive means stepping on to the plate in a calm, cool,
collected manner to get the job done.
To become more proactive mangers must engage in the following:
 Spend time on your own with the team members identifying anything which could go
wrong in the organization. Do this as often as possible.
 Ask team members as often as you can what is preventing them from moving forward or
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what could make them work more effectively.

 Build strong relationships with all key players in the organization.
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  Carry out project reviews and encourage a culture of learning and contribution. Discuss
how past issues can be avoided and take actions to make improvements.
 Demonstrate and prototype the solution to the customer and end users as often as
possible. Ask for feedback and verify that what you are building matches their
requirements and expectations.
 Identify and review your project controls on a regular basis. Assess if they are working as
expected and keeping cost, quality and time under control.
 Actively manage your stakeholders‘ expectations through face to face meetings and
regular reporting. Make them appreciate which risks, issues and constraints you are
facing. Make sure there are no negative surprises.
 Organize knowledge sharing and fun team building activities to improve morale and
motivation.
Here are some suggestions to become a proactive person
 What kind of tasks come in large groups?
 What kind of task need attention when they arrive?
 Examine critically how you might perform those tasks more efficiently
 Try to prevent problems from ever rising This means tackling possible failings in
advance to prevent them from becoming a reality. Get into the habit of taking precautions
and developing fallback plans.
 Develop a mindset that looks to solve problems instead of dwelling on them.
 Get and stay ahead of less-urgent, day-to-day tasks Doing so means that they will be out
of the way when rushes come and will not be worrying you unnecessarily.
 Know which tasks are priorities and which can wait. Write out daily lists of tasks and
head the list of those to do and not to do. Boldly cross off each item as it is achieved.
 Eliminate any task that is unnecessary Some things do not need doing, or do not need to
be done by you. Do not waste time on them and do not allow a misplaced sense of guilt
lead you thinking that somehow you are responsible for them.
 Evaluate your procedures and processes as you use them What works and what does not?
Make notes for improvements and incorporate those improvements in future.
 Try to anticipate needs are rushes seasonal? Are there extra activities associated with
certain times of day, week, month or quarter? Can you prepare in advance? Look ahead
and do not be afraid of the unknown.
 Try to anticipate things you will need to know

Proactive Business Ethics: Helping Build a Better Company

It is essential for companies, no matter what the size, to include a proactive approach to ethics
into their business to build a better and more stable company.
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Be accountable for your activities

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Accountability is taking responsibility for the consequences of your actions, whether they be
 good or bad. Every company should have an officer or a team of people to monitor a company‘s
compliance to ethical standards, ensure transparency in all their actions, and to take
responsibility for whatever actions the company makes. These accountability teams serve as a
reminder to the company about how it is expected to perform.

Keep channels of communication open

Ensuring a company‘s compliance to ethical business practices should not rest on the shoulders
of the accountability office or team alone. Each employee should be a part of the company‘s
ethical practice programs. They should know the proper way to act in whatever business
situation they may face. To achieve this, companies should put channels of communication in
place, whether informal or formal, so that management can easily inform and train employees.

Creating policies and procedures

As each company is different, it is essential for each company to draft a unique set of policies
and procedures that may be used as a guide for proper ethical behavior for employees.
Furthermore, these policies and procedures should be reviewed regularly, to ensure that they
remain timely.

Ensure transparency and proper enforcement of ethical standards

Policies and procedures are only as good as they are enforced. A company should not stop with
the creation of rules, but must make sure that they are followed as well. Managers should see to
it that the people in their charge adhere to the ethical standards imposed by the company.

Extend a company’s ethical practices to cover the community

A company‘s ethical practices should cover not only the company‘s internal processes, but the
company‘s interactions with the community as well. Social responsibility is about building a
good relationship with the community by voluntarily heading projects that contribute to the
common good. These actions don‘t just create a better working environment, it also helps
increase consumer trust in the brand, creating a halo of goodwill for the company.

Proactivity is more effective than being reactive because it allows a company more control and
heads off crisis and issues before they explode. It also mitigates any possible damage that may
arise from unforeseen events beyond the company‘s control. Being proactive is truly the key for
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business ethics.
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4.Purity of Mind
 The world is based on the mind. All that happens in the world--joy or sorrow, sin or virtue, truth
or untruth--has its origin in the mind. The mind is like a mirror; it has no inherent power of its
own. Man commits many offences, knowingly or unknowingly, it is necessary to cleanse the
mirror of impurities on it. How is this to be done?
All that you have to do to achieve purity in thought, word and deed is to follow these five
injunctions: See no evil; see what is good. Think no evil; think what is good. Hear no evil; hear
what is good. Talk no evil; talk what is good. Do no evil; do what is good. When you adhere to
these five prescriptions as the very breath of your life, you will achieve purity of mind and
experience ineffable bliss.
Shaucha or purity is stressed in every religion. As a matter of fact, there cannot be any form of
spiritual life without purity in some form or the other. Blessed are the pure in heart, for they shall
see God. Purity, patience, and perseverance are the three essentials to success. Purification, thus,
in its true sense, is not something to be attained by a gradual process but an attitude of mind
which asserts one's true, pure, divine nature – either in relation to God or as the pure Atman.
We become pure or impure according to the object we love. Since God is supremely pure, to
love Him is to become truly pure.
How to attain purity?
First of all, we must stop leading a careless, unguarded life. The whole atmosphere around us is
polluted, not merely physically with dust, dirt, fumes and smoke, but also by vicious sounds and
sights, and by harmful thoughts and mental vibrations. Unfortunately, we are so impure that we
cannot detect these unholy thoughts and thus, we allow ourselves to be affected by them. The
already accumulated dirt within our subconscious mind gets stirred up by such evil associations.
The first step therefore, is to be aware of the internal and external evil environment, without
condemning ourselves or others.

The second step is to stop all evil inputs from the senses. If it requires one to stop seeing and
doing the impurities in the world, meeting with objectionable people, gossiping and talking ill of
others--it must be stopped and done with courage and determination.
Thirdly, brooding over the past, thinking of past follies and moral slips and failures, must be
given up. This may not be easy. We must therefore pray to God for help in forgetting the past
evil deeds. Brooding over the past never helps.
Purity of mind indicates a mind that has become one with divinity. God is thus the greatest
purifier. The ease with which divine thoughts arise in the mind indicates how pure the mind
really is. The more we think of God, the more we grow in purity.
Purity of mind is an important virtue of Indian managers.
Following are the important features of purity of mind given by S. K. Chakraborty:
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 To aim and strive for a pure mind.

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  Work must be done without personal claims to selfish results as the primary driving
force.
 Work = Desire less work
 Balance is the keynote of Indian thought. It tries to maintain balance between short term
goals to material achievement and the ultimate divine protection.
 Human personality complies to have an in-depth awareness of the inner self which is
crucial for effective self-management.
 The reliability of a leader rests on the quality of impersonal love.
 The Indian thoughts take the individual as a contra focus. If I am good then the world is
good.
 No work is inferior or superior.
 Knowledge in Indian thought speaks of two fundamental concepts CREATOR and
CREATION.
 The Indian thought tries to seek knowledge about the creator rather than the creation.

5.Promote Happiness
To promote happiness foremost requirement is to nurture relationships. One can promote
happiness only by taking control of one‘s body, be it by meditation or exercise which reduces
stress, worry and promote calm and positive emotions.
Express gratitude and appreciating life in general and all of its small gifts on a regular basis will
always boost your happiness. You will love this exercise and it will always bring you back to
what is truly important in your life. Doing acts of kindness will lead others to like and appreciate
you more. This will improve your social relationships. Kindness also increases confidence,
optimism, compassion and promotes purpose and meaning in life.
One should try to live in the present moment and find joy in everything you do. Worrying about
the future is prevalent in our information drenched society. Devote yourself to a goal. Happy
people find meaning and purpose in life through committing goals. We become more confident
as we accomplish our goals. Finding a goal provides structure in our lives. Find a goal that will
be personally rewarding and meaningful for you today.

Factors that promote happiness

 Optimism, self-confidence, gratitude, hope, compassion, purpose, empathy—these are
all qualities that anyone can own. You just have to learn how. And doing so will change
your life. Happiness doesn't just feel good. A review of hundreds of studies has found
compelling evidence that happier people have better overall health and live longer than
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their less happy peers.

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  Anxiety, depression, pessimism and a lack of enjoyment of daily activities have all been
found to be associated with higher rates of disease and shorter lifespans
 Our happiness influences the people we know and the people they know.
 Research shows that people who are optimistic tend to be happier, healthier and cope
better in tough times.

"Go confidently in the direction of your dreams. Live the life you have imagined"
- Henry David Thoreau

1. Accept your emotions.

Psychologist Ryan Howes says ―When you feel safe enough to let your guard down, whether
that‘s alone or with someone you trust, you can focus on the situation, fully experience the
feelings and may then be able to better understand why it hurts and what you want to do about
the situation,‖ Howes said.

2. Take daily risks

Structure and routine are important. Taking certain risks can be healthy and rewarding, he said.
New risks bring new challenges and makes ones life more interesting. Try setting a tough goal or
anything that pushes you out of your comfort zone.
3. Live in the present
Live in the present without hyper focusing on the future or the past. This helps in avoiding
worries about future and remorse the past which helps in increasing ones happiness.

4. Be introspective
Stepping back and considering where your thoughts, feelings and behaviors are coming from.
You might ask: Is that thought helpful? It that behavior necessary? Is there a better option? It
involves focusing and asking yourself if what you are doing or have done was right? Whether
such an action is required? This helps in reducing mistakes and overreacting in any situation.

5. Laugh
―Sometimes, we take life far too seriously,‖. Laughter may help make you happier, healthier and
releases stress. Research has identified that kids laugh about ten times more than adults and
hence live a happier life.
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6. Determine and live your personal values

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Knowing and living your values will lead to a sense of balance, confidence and fulfillment.
 7. Identify and use your individual strengths
Using your strengths helps you feel energized and empowered.

8. Keep tabs on your thoughts

Without even knowing it, you might be caught in a vicious cycle of negative thoughts, which
seem to sprout naturally. Not only do these thoughts sink our mood but we also start to see them
as truths. Monitoring your thoughts and challenging and replacing negative ones promote
happiness.

9. Practice gratitude
Being thankful makes one modest and improves ones image in others eyes. And when we
express our gratitude to someone, we get kindness and gratitude in return. The simple act of
identifying and then appreciating the things people do for us is a modern-day wonder drug.
-.

10. Discover or rediscover a passion

Take the time to consider your passions and practice on it

11. Do what makes you happy first thing

This removes your depressed feelings and making the day positive. It is important to do things
you like as long as they don‘t hurt someone else.

12. Get rid of rotten eggs. ―There‘s usually at least one rotten egg in your life that‘s dragging
down your mental outlook,‖ Identify your rotten eggs and figure out how to remove them. Your
rotten eggs might seem small. But even annoyances can add up and chip away at your mood and
well-being.

13. Aspire Feeling hopeful, having a sense of purpose, being optimistic. Study after study shows
that people who have created meaning in their lives are happier and more satisfied with their
lives. Using one's strengths in daily life, studies have found, curbs stress and increases self-
esteem and vitality.
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 14.Give
Everything about giving is a no-brainer. Obviously, when you give someone something, you
make them happier. Numerous studies show that being kind not only makes us feel less
stressed, isolated and angry, but it makes us feel considerably happier, more connected
with the world, and more open to new experiences
15. Empathize
It's the ability to care about others. It is sais that people who have more self-compassion lead
healthier, more productive happier lives than those who are self-critical.

6.Karma Yoga

WHAT IS KARMA ?

Karma is a Sanskrit term. It means action or deed. Any physical or mental action is Karma.
Thinking is mental Karma. Karma is the sum total of our acts, both in the present life and in the
preceding births.

Karma means not only action, but also the result of an action. There is a hidden power in Karma
or action termed 'Adrishta' which brings in fruits of Karmas for the individual. The consequence
of an action is really not a separate thing. It is a part of the action and cannot be divided from it.

HOW KARMA IS FASHIONED

Man is threefold in his nature. He consists of Iccha, Jnana and Kriya. Iccha is desire or feeling.
Jnana is knowing. Kriya is willing. These three fashion his Karma. He knows objects like chair,
tree. He feels joy and sorrow. He wills - to do this, or not to do that.

Behind the action, there are desire and thought. A desire for an object arises in the mind. Then
you think how to get it. Then you exert to possess it. Desire, thought and action always go
together. They are the three threads, as it were, that are twisted into the cord of Karma.

Desire produces Karma. You work and exert to acquire the objects of your desire. Karma
produces its fruits as pain or pleasure. You will have to take births after births to reap the fruits
of your Karma. This is the Law of Karma.

KINDS OF KARMA

Karma is of three kinds, viz. Sanchita or the accumulated works, Prarabdha or the fructifying
works, and Kriyamana or the current works. Sanchita is all the accumulated Karmas of the past.
Part of it is seen in the character of man, in his tendencies and aptitudes, capacities, inclinations
and desires. Prarabdha is that portion of the part of Karma which is responsible for the present
body. It is ripe for reaping. It cannot be avoided or changed. It is only exhausted by being
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experienced. You pay your past debts. Kriyamana is that Karma which is now being made for the
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future.
 God tells us ―As a man sows, so he shall reap.‖

BENEFITS OF KARMA YOGA

By doing selfless service you purify your heart. Egoism, hatred, jealousy, ideas of superiority
and all the kindred negative qualities will vanish. You will develop humility, pure love,
sympathy, tolerance and mercy. Selfishness will be eradicated. You will get a broad and liberal
outlook on life. You will begin to feel oneness and unity. Eventually you will obtain knowledge
of the Self. You will realize One in all and All in one.

Karma yoga or Yoga of action is the process of achieving perfection in selfless action. Karma
Yoga is primarily the practise of selfless service to humanity whereby a spiritual seeker attempts
to give their actions selflessly without hoping for merit, fame or glory. This tendency for a
human being to have attachment to 'reward' from action. Practising Karma Yoga eventually
takes the seeker to the point of mental purification, oneness with humanity and inner peace by
continually offering action selflessly to God and humanity. Ultimately Karma Yoga practise
brings true Knowledge of the Self and prepares one to be receptive to the divine light of God.
Karma Yoga is the path of yoga that achieves mystical knowledge through the work done in day-
to-day life, by doing one‘s duty and work in such a way that the inmost knowledge comes
through. Karma means work or action. It is concerned with the correct way of doing work.
Karma Yoga is important because of the following reasons:
 It ensures that we perform our obligations whether personal or professional in a truthful
way.
 It help us to acquire the truth and integrity.
 Karma yoga also says that when we work without attachment, we produce the best work.
 It helps us to capture evils such as anger, hatred, fear etc.
 It shows us how to tackle the infinite diversions that affect a practical life.
 How to fulfil our duties and responsibilities in such a way that work itself leads us to
realization.

Principles of Karma Yoga

Right Attitude
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It‘s not what you do that counts, it‘s the attitude while doing it that determines if a job is a karma
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yoga job, i.e. a liberating job, or a binding job. Work is worship.

 Right Motive

Same as attitude. It is not what you do that counts but your real motive behind it. Your motive
must be pure. Man generally plans to get the fruits of his works before he starts any kind of
work. The mind is so framed that it cannot think of any kind of work without remuneration or
reward. A selfish man cannot do any service. He will weigh the work and the money in a
balance.

Do Your Duty

Often "duty" is referred to as "righteousness". You will incur demerit if you shun your duty.
Your duty is towards God, or Self, or the Inner Teacher who teaches you through all the specific
circumstances of your life as they appear.

Do Your Best

Whatever you have to do, do your best. If you know of a better way to serve, you must use it. Do
not hold back because of fear of effort or because of fear of criticism. Do not work in a sloppy
manner just because no one is watching or because you feel the work is not for you. Give your
best. Try to do such actions that can bring maximum good and minimum evil. Do Karma Yoga
increasingly.

Give up Results

God is the doer. You are not the doer. You are only the instrument. The way to realize this truth
is to constantly work for work‘s sake and let go of the results, good or bad. It is the desire for
action that binds the individual.

Serve God

Do to others what you would like to be done to yourself. Love thy neighbor as thyself. Adapt,
adjust, accommodate. Bear insult, bear injury. Unity in Diversity. We are parts of the same body.
Practice humility in action. Beware of power, fame, name, praise, censure.

Follow the Discipline of the Job

Each job is a teacher of some sort. You can learn different skills by doing different jobs. Each
job has different requirements in terms of time, degree of concentration, skills or experience,
emotional input, physical energy, will. Try to do whatever job you are doing, well.
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7.Flexibility
 Effective managers and business leaders will have to develop themselves in order to progress
with their companies. Leaders are facilitators of change for organizations. They are the ones who
must first define and implement the changes that will lead the business to success. As change is
necessary for growth managers should be flexible and ready to accept change.
Managers who are unwilling to change have distinct characteristics that put them at risk for
dealing their company. If a manager continues to do things the old way while still expecting to
produce new results, it will be difficult for him to bring required consequences. It is
understandable that managers are cautious when considering a change, but it is essential that they
embrace the idea of adaptation to thrive and flexible to change.
Firstly, Managers must adapt to changes. Some find changes exciting and embrace it, while
others find it threatening. A balance of both opinions that is for and against change is healthy for
an organization.
Secondly, help the manager to understand his natural aversion to change. Once he is fully aware
of his aversion he will be flexible enough to develop his own way of helping himself to adapt to
change and demonstrate how the change will benefit both the organization and the individual.
Thirdly, ensure that the manager is focused on the importance and benefits of new priorities.
Change is not easy- humans are creatures of habit. Managers need to be aware that change is
essential without which companies will suffer. With substantial information supporting change
and increased awareness of the benefits of change, leaders should be flexible to adapt that and
develop for success.
………………………………………………………………………………………

Unit 3

Ethics in Management

Ethics in Management covers

1. Ethics in HRM
2. Ethics in Marketing
3. Ethics in Financial Management
4. Ethics in Technology
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Ethics in Management refers to the ethical treatment of all its various stakeholders as well as the
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general public.
 Expectations of the stakeholders from the corporate (management)

Shareholders :
A regular return(dividend) on investment * Capital appreciation and increase in the market
capitalization of investment * Increase in the future earnings of the company * Better prospects
in future for the company

Employees:
Fair remuneration and incentives * stability and security of employment * improve standard of
living * opportunity to grow within the organization

Customers :
Provide quality goods and services at a fair price and on fair terms * Restrain from unfair trade
practices or restrictive trade practices * customer satisfaction * regular and prompt delivery of
goods and services

Competitors:
Restraint from adopting unfair trade practices and not violate competition law norms

Creditors:
Ability to pay the amount due on time as per contractual obligations * regular order of goods and
services

Government:
Behave as a responsible corporate citizen * prompt payment of all kinds of taxes, due taxes and
non-evasion of taxes * involvement in social causes like charities and donations

Community:
Growth in employment generation * protection of environment

Public:
Full environmental protection * avoidance of fraud within the company * caring for employees

Ethics in Human Resource Management

HRM is the process of planning, organizing, directing and controlling human activities to
achieve the organizational goal and individual goals.
Ethics in HRM indicates the treatment of employees with ordinary decency and distributive
justice. The ethical business contributes to the business goals as the employees will feel
motivated and they will work with efficiency and effectiveness. Ethics in HRM basically deals
with the affirmative moral obligations of the employer towards employees to maintain equality
and equity justice. 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
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safety issues.
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 Areas of HRM ethics
Basic human rights
Civil and employment fight. (E.g. Job security, feedback from tests)
Safety in the workplace
Privacy
Justifiable treatment to employees. (E.g. Equity and equal opportunity)
Respect, fairness and honesty based process in the workplace
Role of HR in Promoting Ethics
1. Improve recruitment and selection tests, follow the recruitment policy that is identification of
the recruitment needs, monetary aspects, criteria of selection and preference etc.
2. Conduct ethics training. It is a short term process of training given to the HR of the
organization to do their work in adherence to the ethical code of conduct. The main advantages
are increased productivity, higher employee morale, less supervision, less wastage, etc.
3. Ensure that there are no pitfalls in performance appraisal. Performance appraisal should be
factual and there should not be any partiality or bias in the attitude towards the employees.
4. Rewards and disciplinary system
5. Improve and facilitate two way communication among all in the organization.
6. Avoid any kind of discrimination among the employees based on certain factors like caste,
colour, culture, religion, appearances etc.
7. Equal opportunities must be given to every employee for his advancement and development.
8. Measures should be taken for employee safety while working in the organization.
Unethical Practices of HRM
1. EMPLOYERS
Creating split in union leaders.
Biased attitude in selection, transfer, promotion etc.
Off-shoring and exploiting ‗cheap‘ labour markets.
Child labour & Sexual harassment.
Reneging on company pension agreements.
Physical violence.
Coercion.
Longer and inflexible working hours.
Putting on more stress on employees for increasing the productivity.
The use of disputed and dubious practices in hiring and firing of personnel.
Allowing differences in pay, discipline, promotion due to friendship with top management.
2. EMPLOYEES
False claim of personal details like age, qualifications etc.
Producing false certificates.
Taking decisions as per their convenience.
3. GOVERNMENT
Announcing the vacancies and not taking any action further.
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Functioning of government offices is not transparent and reliable.

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 Selection committees will be excessively cautious of reservation quotas and possible court cases
rather than gaining through the responsibilities.

Ethical Issues in Human Resource Management

Labor Costs
HR must deal with conflicting needs to keep labor costs as low as possible and to offer fair
wages. HR can create a public relations problem if consumers object to using underpaid workers
to save money.

Opportunity for New Skills

If your HR department chooses who gets training, it can run into ethical issues. Because training
is an opportunity for advancement and expanded opportunities, employees who are left out of
training may argue that they are not being given equal opportunities in the workplace. HR must
make certain to clarify the business reason behind its training decisions so employees understand
why specific individuals receive training when others don't.
Working Conditions
HR must work to maintain safety standards and clean working conditions for employees based
on Occupational Safety and Health Administration requirements. Employees also have the right
to expect a workplace free of sexually suggestive signs or comments, and disabled employees
must have access to the building. HR must make sure lighting and air quality are adequate.
Honoring Benefit Provisions
HR has an ethical responsibility to make sure that any benefits offered to employees actually
pay as intended. This means monitoring company-managed benefits as well as insurance
companies to make sure there are no financial problems that would shortchange employees.
Fair Hiring and Justified Termination
Hiring and termination decisions must be made without regard to ethnicity, race, gender, sexual
preference or religious beliefs. HR must take precautions to eliminate any bias from the hiring
and firing process by making sure such actions adhere to strict business criteria.
Employment Issues:
HR professionals are likely to face maximum ethical dilemmas in the areas of hiring of
employees. Challenges in Recruitment
a. Pressure to hire a friend or relative of a highly placed executive.
b. Faked credentials submitted by a job applicant.
c. Discovery that an employee who has been with the organisation for some time, is skilled and
has established a successful record, had lied about his educational credentials.

Cash and Compensation Plans

These are ethical issues pertaining to the salaries, executive perquisites and the annual & Long
Term incentive plans etc. Often employees believe that they are under-paid for their work and
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that employers do not appreciate and treat them fairly. Disparity in payment of salary scales,
provident funds and other benefits exist in some organizations.While deciding upon the payout
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 there is pressure on favouring the interests of the top management in comparison to that of other
employees and stakeholders.

Race, gender and Disability

Employers should not discriminate on the basis of race, gender, origin and their disability.
Discrimination on basis of casteism, religion and nationality with respect to employment,
including job advertisements, recruitment, transfer, promotions, compensation, fringe benefits,
retirement plans etc is unethical. Managers are trained for aligning behaviour and avoiding
discriminatory practices.

Privacy Issues
The four main types of employee privacy violations are Intrusion (locker and rest room
surveillance), publication of private matter, disclosure of medical records, appropriation of an
employee‘s name. Any person working with any organisation is an individual and has a personal
side to his existence which he demands should be respected and not intruded. The employee
wants the organisation 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 organisation.

Safety and Health:

Industrial work is often hazardous to the safety and health of the employees. Legislations have
been created making it mandatory on the organisations and managers to compensate the victims
of occupational hazards. Ethical dilemmas of HR managers arise when the justice is denied to the
victims by the organisation.

Restructuring and layoffs:

Restructuring of the organisations often result in layoffs and retrenchments. This is not unethical,
if it is conducted in an atmosphere of fairness and equity and with the interests of the affected
employees in mind. If the restructuring company requires closing of the plant, the process by
which the plant is chosen, how the news is to be communicated and the time frame for
completing the layoffs is ethically important. During restructuring and layoffs employers have to
refer to values like empathy, patience and integrity.
Wage empowerment
The need for wage empowerment to ensure that members of the society meet their basic needs,
to enhance and protect people‘s capabilities to be adequately nourished, extension of formal
social security and to avoid preventable mortality.
Employee discipline
The purpose of discipline to encourage employees adhere to rules and regulations. A fair and just
discipline process based on clear rules and regulations, a system of progressive penalties and an
appeals process helps to ensure that supervisors take disciplinary actions fairly and equitably.
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Performance appraisal
Performance appraisal means evaluating the performance of employees based on performance
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 standards. It aims at performance improvement. The technical problems likely to occur are
unclear standards, halo effect, leniency and personal bias.
Whistle blowing
Whistle blowing occurs when an employee informs the public of inappropriate activities going
on inside the organizations. Whistleblowing must be done based on an appropriate moral motive,
to avoid or expose moral violations etc.Responsibility of the Whistle Blower
Understand
own
Motivation,

Check for
Collect
simpler
evidence
solution

Personal Danger
Compliance Prevention

What should HR do?

Monitor the current practices

against established norms

Monitor the
selection/appraisal/compensati
on system to check for any
discrimination

Pursue violations and defend

organisation against unfounded
claims

Way to promoting HR ethics

In recruitment and selection: ensure that all assessment measures are fair and just.
In reward management: ensure fairness in allocation of pay and benefits.
In promotion and development: ensure equal opportunities and equal access.
Ensure a safe working environment.
Ensure that procedures are not unduly stressful, and that the needs of employees‘ work–life
balance are not compromised.
When redundancies occur, to be fair and just in handling job losses.
Deal effectively with all forms of bullying and harassment.
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In outsourcing and offshoring: ensure that contractors, consultants and franchisees are fair and
honest in their dealings with employees, clients and customers.
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 Avoid any kind of discrimination among the employees based on certain factors like caste,
colour, culture, religion, appearances.
Performance appraisal should be factual and there should not be any partiality or bias in the
attitude towards the employees. .
Conduct ethics training
Ensure privacy to employees
Basic Human rights
Treat people with dignity, respect and compassion to foster a trusting work environment free of
harassment and unlawful discrimination.
Giving opportunities to the employees equally to develop their competency skills.
Bring in the feeling of owning the organization, within employees so that the employees would
be committed towards the organization.
Laying down such policies and procedure which will ensure equitable treatment for all.
The individual goals on an employee must be streamlined with the organizational goals.

What is Sexual Harassment?

Quid pro quo is the type of harassment that occurs when some type of employment benefit is
made contingent on sexual favors in some capacity. For example, this might be a supervisor
offering a promotion if an employee will meet his or her sexual demands.
o Favorable performance reviews or recommendations,
o Promotions,
o Raises, and
o Sought-after work assignments or work shifts.

Hostile work environment is the type of sexual harassment that occurs when there are frequent
or pervasive unwanted sexual comments, advances, requests, or other similar conduct. It can also
occur when there is other verbal or physical conduct that is sexual in nature. This could include:
o Displays of inappropriate or offensive materials;
o Sexual jokes;
o Interference with someone‘s ability to move freely and
o Persistent, unwanted interactions, such as asking for dates continually.

******************************************************************************

Ethics in Marketing
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Ethics is Is the art and science of determining good and bad or right or wrong moral behavior.
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 Marketing Is the process of communicating the value of a product or service to customers, for
the purpose of selling the product or service.
Marketing ethics Refers to the application of marketing ethics into the marketing process. It is
the area of applied ethics which deals with the moral principles behind the operation and
regulation of marketing.
In short it means a standard by which a marketing action may be judged right or wrong
Why do we need ethics in marketing?
When an organization behaves ethically, customers develop more positive attitudes about the
firm, its products and its services.

To create values or trust with the company.

To build good image about the organization in the minds of costumer, employee, companies and
society.
Marketing ethics include marketing effectiveness, market research, market dominance,
marketing management, marketing strategy and market segmentation.
Ethical issues in marketing
Each facet of marketing has ethical danger points as discussed below.
We discuss Marketing issues by using 4P’S OF MARKETING
PRODUCT • Consumer safety • Product liability and reliability • Designing for special needs
PACKAGING  Label information  Packaging graphics  Packaging safety  Environmental
implication of packaging
PRICE • Bid rigging • Price fixing • Price skimming • Predatory pricing • Price war • Dumping
(pricing policy) • Variable pricing
PLACING: DISTRIBUTION  Product distribution (or place) is one of the four elements of the
Marketing MIX.  Distribution of product or service is transporting them from manufacture to
stockiest, wholesalers, retailer and then to consumers.
Ethical Issues In Distribution • 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.
ADVERTISING &BRANDING • Promotion is one of the four elements of marketing mix
(product, price, promotion, place). It is the communication link between sellers and buyers for
the purpose of influencing, informing, or persuading a potential buyer's purchasing decision. • To
present information to consumers as well as others • To increase demand • To differentiate a
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product
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 Major Ethical Issues in Marketing
1.Market Research
Market research is the collection and analysis of information about consumers, competitors and
the effectiveness of marketing programs. Some ethical problems in market research are Invasion
of privacy.
As companies conduct research they also come into contact with confidential and personal
information, which comes with a level of risk for both the business as well as the individual.
2.Stereotyping
Portraying an ideal body, weight or physical appearance can have potential harmful effects on
the individual such as low self-esteem issues.
3.Confidential information or Trade secrets
Confidential business information is a valuable corporate asset to the company that, if
inappropriately disclosed could harm the company, its associates, its customers and its
stockholders. Confidential information includes personnel data, technical information, research
data, marketing strategies and techniques. Employees should hold in strict confidence and should
not disclose to any person or entity any information deemed confidential by the company, except
for the benefit of the company‘s business and in strict compliance with company rules.
4.Fair Competition
The company should support competition based on quality, service and price. They should
conduct their affairs honestly, directly and fairly. They should comply with the antitrust laws and
follow policy of fair competition. The employees must never discuss with competitors any matter
directly involved in competition between their company and the competitor. E.g. sales price,
marketing strategies, market shares and sales policies. Must never engage in commercial bribery.
5.Fair dealing
Employees should deal fairly with the company‘s customers, suppliers, competitors and each
other. No associate should take unfair advantage of anyone through manipulation, concealment,
abuse of privileged information, misrepresentation of material facts or any other unfair dealing
practice. All employees are required to comply with trade laws. Violation of trade laws results in
penalties for the company and for any associate or other person who participates in the violation.
6.Accepting gifts and bestowing benefits
Employees shall not seek or accept personal gain, directly or indirectly from anyone soliciting
business from or doing business with the company. Employees are not permitted to accept gifts
or to have any travel, living or entertainment expenses paid for themselves or members of their
families.
7.Unfair or Deceptive marketing practices
Misrepresentation, Omission or misleading practice when dealing with any element of the
marketing mix. Selling Hazardous or defective products without disclosing the dangers. Not
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honouring warranty obligations. False or greatly exaggerated product or service claims. Packages
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 intentionally mislabelled as to contents, size, weight or use information that constitutes deceptive
packaging.
8.Offensive materials and objectionable marketing practices
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.
9.Product and distribution practices
Among the most frequently voiced complaints are ones about products that are unsafe, that are of
poor quality in content, that do not contain what is promoted or that go out of style or become
obsolete before they actually need replacing. Pressuring vendors to buy more than they need ad
pushing items that will result in higher commissions are temptations.
10.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.
11.Pricing Ethics
Predatory pricing (also undercutting & destroyer pricing) is a pricing strategy where a
product or service is set at a very low price, intending to drive competitors out of the market, or
create barriers to entry for potential new competitors. In many countries predatory pricing is
considered anti-competitive and is illegal under competition laws.
Price skimming - Discriminating through time. When the price for a product is first sold at a
very high price and then gradually lowered, a pricing strategy in which a marketer sets a
relatively high price for a product or service at first, then lowers the price over time. It allows the
firm to recover its sunk costs quickly before competition steps in and lowers the market price.
Price discrimination :Anti-favoritism
Price discrimination is the strategy of selling the same product at different prices to different
groups of consumers from the same provider, usually based on the maximum they are willing to
pay. The practice also surfaces in hiding lower priced items from customers who have a higher
willingness to pay.
Bid rigging: Favoritism- an agreement between two or more competitors. It is a form of
collusion, which is illegal in most countries. It is a form of price fixing and market allocation,
and it involves an agreement in which one party of a group of bidders will be designated to win
the bid. It is often practised where contracts are determined by a call for bids, for example in the
case of government construction contracts.
Price war - One competitor will lower its price, then others will lower their prices to match. In
the short-term, price wars are good for consumers who are able to take advantage of lower
prices. Typically they are not good for the companies involved. The lower prices reduce profit
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margins and can threaten survival. Etc.

Price fixing An agreement between business competitors to sell the same product or service at
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the same price. It fraudulently prevents other businesses from being able to compete in the open
 market. Price fixing violates competition law because it controls the market price or the supply
and demand of a good or service. This prohibits other businesses from being able to compete
against the businesses in the price fixing agreement, which prevents the public from being able to
expect the benefits of free competition.

Unethical Marketing Practices

Ethical marketing entails making honest claims and satisfying the needs of potential and existing
customers. It boosts credibility and trust, develops brand loyalty, increases customer retention,
and prompts customers to spread word about the products or services you‘re marketing.
Unethical marketing, on the other hand, can send wrong signals about your products and
services, destroy your brand‘s reputation, and possibly lead to legal problems. This explains why
you should avoid them like a plague.
1. Making false, exaggerated, or unverified claims
In a desperate bid to compel potential and existing customers to buy their products or services,
some marketers use false statements, exaggerated benefits, or make unverifiable claims about
their offers. This is common in the weight loss industry, where marketers convince potential
buyers that a particular product can help them shed so-and-so pounds within two weeks without
exercise or dieting!

2. Distortion of facts to mislead or confuse potential buyers

This is another common unethical marketing practice. A typical example is when a food
processing company claims that its products are sugar-free or calorie-free when indeed they
contain sugar or calories. Such a company is only trying to mislead potential buyers, since they
are unlikely to buy the products if it is made known that they contain sugar or calories.
3. Concealing dark sides or side effects of products or services
This unethical marketing practice is rife in the natural remedies industry, where most
manufacturers deceive potential buyers that their products have no side effects because they are
―made from natural products‖. But in reality, most of these products have been found to have
side effects, especially when used over a long period. In fact, there‘s no product without side
effects—it‘s just that the side effects might be unknown. It‘s better to say, “There are no known
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side effects” than to say “there are no side effects“.

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4. Bad-mouthing rival products

 Emphasizing the dark sides of your rival‘s products in a bid to turn potential customers towards
your own products is another common but unethical marketing practice. Rather than resort to this
bad strategy, you should emphasize on those aspects that make your offer stand out from the rest
of the pack. That‘s professional and ethical.
5. Using women as sex symbols for advertising
The rate at which even reputable brands are resorting to this unethical marketing practice is quite
alarming. If you observe TV, billboard, and magazine adverts, there‘s something common to
most of them; a half-naked lady is used to attract attention to the product or service being
advertised. While it might be intuitive to use models in adverts for beauty products and
cosmetics, having half-naked models in adverts for generators, heavy machinery, smartphones,
and other products not strongly related to women is both nonsensical and unethical.
5. Using fear tactics
This is another common unethical marketing practice among snake oil salespersons. You will
hear them saying something like: “This price is a limited-time offer. If you don’t buy now, you
might have to pay much more to buy it later because the offer will end up in two days time, and
the price will go up.” The only motive behind those statements is to prompt the potential buyer to
make a decision on the spot. And that’s wrong. Why subject someone to undue pressure because
you want to make money off him or her?
7. Plagiarism (copycats) of marketing messages
Though uncommon, some business owners and salespersons engage in using the exact marketing
messages of their competitors to market their own products or services. Creativity is a huge part
of marketing, and using other businesses‘ marketing messages just passes you off as being
creatively bankrupt and fraudulent.
8. Exploitation
This is charging for much more than the actual value of a product or service. For marketing
efforts to remain with ethical limits; the prices of your offers must be equal to or less than the
value they give the buyer. If the value is less than the cost, it‘s unethical.
9. Demeaning references to races, age, sex, or religion
Ethical marketing must be devoid of all forms of discrimination. If your marketing messages
contain lines that place people of certain age range, sex, religion, nationality, or race at a higher
level than others, then you are crossing the bounds of ethical marketing.
10. Spamming
Spamming is when you send unsolicited emails to potential customers, encouraging them to buy
your products or services. This is the commonest unethical marketing practice done online.
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 Advertising is primarily a means by which sellers communicate to prospective buyers. Ethics in
advertising means a set of well defined principles which govern the ways of communication
taking place between the seller and the buyer.

Role or Functions of Advertising in Modern Business

Economic Function

• Advertising communicates the message in persuasive language

• It create wide markets as the information is delivered to people far and wide
• It inclines people favorably to the products and affect our attitudes
• Therefore, advertising performs an economic function by being an art of persuasion
• Advertising is also an economic process—it helps the product to become known and it
facilitates exchange between those who need the product and those who can satisfy the
need
• Provides employment opportunities (in advertising industry)

Social Function

• Advertising affects the core cultural values and subsidiary cultural values
• Advertising is a mirror to the society in which it operates. It reflects the cultural values of
that society
• Advertising protects the consumer by educating them and by forcing the manufacturers to
maintain quality and to be fair.
• Advertising brings about consumer welfare by improving standard of living &product
quality e.g. we buy TV, AC, Computers, Cars etc after getting interested in these products
through advertising
• We have accepted new ideas such as microwave, electric shaving, detergents etc through
advertising
• Whatever is used in society is reflected in advertising
• e.g. Indian society is highly family oriented (example ads: savings for children,
daughter’s marriage)
• Indian society is people-oriented, and not self-oriented
• For the sake of our family and others, we Indians can postpone our own gratification

Psychological functions
• Advertising is closely linked to consumer behavior, therefore,
it affects personality of consumer, his concept of self, his attitudes, beliefs, opinions, his
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life-style etc
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• Advertising appeals to our physiological and psychological motives

 Ethics In AdvertisingShould not mislead the consumer.
What it promises must be there in the performance of products.
Ads should not be indecent and obscene.
As advertising is also a social process, it must honor the norms of social behavior, and should not
offend our moral sense.
ASCI (Advertising Standards Council of India) regulates the advertising in India  has the
set guidelines
• To ensure the truthfulness and honesty of representations and claims made by
advertisements and to safeguard against misleading advertising.
• To ensure that advertisements are not offensive to generally accepted standards of public
decency.
• To safeguard against indiscriminate use of advertising for promotion of products which
are regarded as hazardous to society or to individuals.
• To ensure that advertisements observe fairness in competition so that consumers need to
be informed on choices in the market place and the canons of generally accepted
competitive behavior in business are both served.

Ethical Issues In Advertising

Advertising is a highly visible business activity and any lapse in ethical standards can often be
risky for the company.
Some of the common examples of ethical issues in advertising are give below:
• Vulgarity/Obscenity used to gain consumers‘ attention
• Misleading information and deception
• Puffery
• Stereotypes
• Racial issues
• Controversial products (e.g. alcohol, gambling, tobacco etc)
• Promote Unhealthy Products
Ways of unethical advertisement
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• Surrogate advertisement
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Is prominently seen in cases where advertising a particular product is banned by law.

 Advertisement for products like cigarettes or alcohol which are injurious to heath are
prohibited by law in several countries and hence these companies have to come up with
several other products that might have the same brand name and indirectly remind
people of the cigarettes or beer bottles of the same brand Common examples
include:Fosters and Kingfisher beer brands, which are often seen to promote their brand
with the help of surrogate advertising.
• Puffery
Advertisers try to persuade people to buy a product or service through various methods.
A company may deliver an entertaining message about its product, compare the product
to a similar item, list facts about the product, or make vague claims about the product
which cannot be proved or disproved. This last method is known as "puffery" — the
advertiser "puffs up" the product to seem like more than it is. • A two-year old might
believe that polar bears enjoy sipping Coca-Cola, but we know better.
• Exaggeration
Using false claims in the advertisements about the product. For example:- Tide detergent
– ―White ho to Tide ho.‖, Vodafone Essar – ―Wherever you go our network follows,
Vim-One Drop Challenge‖
• Unverified claimsIt includes advertisements of ―energy drinks‖ which tells us about the
number of vitamins and how they help children to grow strong and tall. There is no way
of verifying these false claims. For example:-Horlicks, Maltova, Tiger biscuits.
• Women stereotyping
Women are generally associated with household works and is not supposed to be a good
decision maker which contributes to women stereotyping. Women are shown as doing
domestic work which reflects stereotype image of women.
• Women used as sex symbols for promoting products-Women in advertising used as
sex symbols. Amul macho Axe dark temptation
• Comparative advertisements
Nowadays advertisers are engaged in unhealthy brand comparison with the help of
advertising. Such comparisons create problems and confusions for the right choice of the
product as far as audience are concerned. Example can be cited of colgate and pepsodent
toothpaste.
• Use of children in advertising
Children are easily persuaded and have a large pull on today's markets, as is known by all
advertisers, even ones who do not intend for their products to be consumed by children.
• Negative Advertising Techniques
Such as attack ads. In negative advertising, the advertiser highlights the disadvantages of
competitor products rather than the advantages of their own
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 BASIC PRINCIPALS OF ADVERTISING • Decency • Honesty • Social Responsibility •
Truthful presentation • No Comparisons • No Imitations • Safety and health • Avoidance of
Harm • Environmental behavior & Fair with competitors

*******************************************************************

Ethical aspects in Financial Management

WHAT DOES FINANCE MEANS?
Finance means fund or other financial resources; it deals with matter related to money and the
market. The field of finance refers to the concept of time, money and risk and how they are
interrelated. Banks are the main facilitators of funding. Funding means asset in the form of
money. Finance is the set of activities that deals with the management of funds. It helps in
making the decision like how to use the collected fund. It is also art and science of determining if
the funds of an organization are being used in a right manner or not. Through financial analysis,
any company or business can take decision in making financial investments, acquisition of
company, selling of company, to know the financial standing of their business in present, past
and future. It helps to stay competitive with others in making strategic financial decisions.
Finance is the backbone of business; no business can run without finance.
WHAT IS ETHICS AND WHAT IS ETHICS IN FINANCE?
Ethics is the study of human behavior which is right or wrong. In general, ethics means doing
right things to others, being honest to others, being fair and justice to others. Ethics in finance is
one of the main things which everyone has to follow from the small, medium and big level
company. The assumption of modern financial-economic theory runs counter to the ideas of
honesty, devotion, dependability and loyalty. Ethics in finance may vary from different
industries to different industries but everyone is liable to-do their work at utmost good faith.
Peoples who involved in finance activity have to serve both their company and their customers at
utmost good faith.
Areas where ethics is finance has to be covered

Book keeping

Raising of Financial
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finance Accounting
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Management
Payroll
Accounting
 ETHICS IN FINANCE IN DIFFERENT FIELDS:
People trained in finance may enter in to different fields and in different line of work in which
they will identify different ethical values followed in different line of work. People in finance
involved in lot of activities which depend not only in handling of financial asset but also
involved in using of those asset and taking care of it. Everyday billions of financial transaction
takes place with a high level of integrity.
However, there are several opportunities in finance for some people to gain at others‘ expenses.
Finance simply concern with other people‘s money and other people‘s money invites
misconduct. Some of the professionals in the financial service whom are bound to serve their
clients are as follows they are stock brokers, bankers, financial advisers, mutual fund, pension
manager and insurance agents.
Financial manager in corporations, government, and other organizations have to take care of
their employers and manage their asset as well. In finance everyone is trusted to carry certain
duties from financial analyst to market regulators. Ethics in finance is not only a concerned for
an individual in a particular occupation or profession but also for financial market and financial
institution.
Finance is a main function of every business enterprises and many non-profit organizations and
governmental units. Corporate financial manager are responsible for making a decision like
invest capital to the planning of merger and acquisitions. While in other hand public finance is
concerned mostly with raising and disbursing fund for governmental purposes.

NEED OF ETHICS IN FINANCIAL MARKET, SERVICE INDUSTRY AND PEOPLE IN

ORGANIZATON:
Despite the diversity of financial roles and activities, there are three major areas where there is
need of ethics are as follows: Need of ethics in finance market– In financial market there are
some barrier which includes unequal information, bargaining power, and resources. Finally,
market transactions between two parties often have third-party effects. These are the few things
which affect ethics in financial market. Need of ethics in financial service industry– This
financial service industry will affect most people directly.
This industry has a duty to develop the product according to people‘s need and market them in
correct manner. But this kind of financial service industry normally deals with client and try to
gain clients confidence on them and finally do the duties which will satisfy their clients and not
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to people‘s. Their main aim is to stay competitive with others. Need of ethics for financial people
in organization– Huge number of people in finance are employee of an organization.
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 This include person who approve some project which should not be approved, they approve in
order to gain money in the term of bribe. Most of the unethical activities like giving wrong report
and wrong data to the company in order to get more money start from here which pushes whole
financial market and financial service industry down because all most in all organization there
are lot a number of people who are held in finance roles and activities.
No business and company can run without finance. It is LIFEBLOOD for all the organization. So
if almost all the fields in finance follows ethics in their duty almost all other process will
function very well without any discrepancies.

Ethical violations in Finance-Accounts which Insider Trading

leads to ethical issues Stakeholder Interest vs. Stockholder interest

Investment Management

Fraudulent Financial Dealings

Cheating Customers of profits

Unauthorised accounting Transaction

Frauds and Manipulations

Unequal Bargaining power

Unethical takeover and mergers

Insider Trading
It is perhaps one of the most publicized unethical behaviours by traders. Insider trading refers to
trading in the securities of a company to take advantage 0f 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 non-public information. It gives the trader an
unfair advantage over other traders in the same security.

Stakeholders vs Shareholders interest

The only aim of business is to maximize profits. The modern business is characterized by limited
liability with a divorce between management and ownership. The objectives of the shareholders
and stakeholders may differ and conflict with each other. The financial manager has a difficult
task of reconciling and balancing these conflicting objectives. They may take to unethical
practices to impress upon one or other party.
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Investment management
 In order to attract public investment sometimes the companies hike their share prices to make
fresh issue more attractive. Some highlight their social responsibility measures which in fact are
only bogus claims. Some companies print names of famous executives on board and unauthentic
foreign collaborations. Attractive future plans and high returns are shown to impress the
investors.

Fraudulent financial dealings

Deception is one of the ways of deceiving the clients in financial dealings. Sometimes the
brokers and agents use confusing language which hides the risk element in financial dealing.
They do not disclose their commission and other benefits. They deceive the public by using the
misleading statements like tax free or 0% interest etc.

Cheating customers of their trading profits

Sometimes the brokers resort to excessive trading on account of customers with the intention of
earning more commission rather than giving benefit to the client. They cheat innocent investors
by suggesting unsuitable type of security while trading under margins and options. Brokers
sometimes don‘t even maintain proper account of their clients.

Unauthorized accounting transactions

Some of the ethical issues surrounding accounting practices are under reporting incomes,
falsifying documents, allowing or taking questionable deductions, illegally evading income tax
or otherwise engaging in a fraud. Other unethical transactions can be delay in payment of wages,
interest cheating employees of their dues, bogus purchase bills, taking personal benefits out of
company‘s dealings.

Frauds and manipulation in markets

Investors are exposed to frauds because the value of the financial information depends on the
information available in the market. Since it is very difficult for the investors to verify this
information and when a company fails to report proper information it leads to fraud. Moreover
manipulation in buying and selling of securities in order to create a misleading impression about
the prices and to induce them to buy or sell the securities.
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Unequal bargaining power

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 It is an unethical practice to have competition in the market between parties with equal
information. All parties should have equal bargaining power. Therefore, anyone possessing
unequal information will be unfair if that information has been acquired illegally and violates
some obligation to others. But if someone has invested time and money to get that information
and everyone else could have also got the information by making the same investment then they
are entitled to use the information for their own benefit.

Unethical practices during takeovers and mergers

In order to finance takeovers many firms take on huge internal debts, paid off only as long the
company is doing well but left as a market loss when the company is threatened with higher
costs. The firm being to be taken over may also respond by issuing high risk bonds in order to
repurchase stock. The decision makers have the duty to increase the stock prices but they keep
the stock prices low for repurchase. More over if there has never been any real intent to complete
the takeover but instead merely to increase the price and sell back then the practice would be
considered unethical.

ETHICS IN FINANCE:
1. Act with honesty and integrity, avoiding real or clear conflicts of interest in personal and
professional relationships.
2. To provide information which is full, fair, accurate, complete, objective, relevant, timely and
understandable, including in and for reports and documents that the Company files with, or
submits to, the other public communications made by the Company.
3.Act in accordance with all applicable laws, rules and regulations of governments and other
appropriate private and public regulatory agencies.
4.Act in good faith, responsibly, with due care, competence and carefulness, without
misrepresenting material facts.
5.Respect the confidentiality of information acquired in the course of business except when
authorized or otherwise legally obligated to disclose the information.
6.To promote ethical behavior among associates.
7.Assist in the production of full, fair, accurate, timely and understandable disclosure in reports
and documents that the firm and its subsidiaries file with, or submit to, the Securities and
Exchange Commission and other regulators and in other public communications made by the
firm.
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8.Take all reasonable measures to protect the confidentiality of non-public information relating
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to firm and its clients.

 9.Carry out their responsibilities honestly, in good faith and with integrity, due care and
diligence, exercising at all times their best independent judgment.
10.Never take, directly or indirectly, any action to coerce, manipulate, mislead or fraudulently
influence the firm's independent auditors in the performance of their audit or review of the firm's
financial statements.

SEBI & Code of Ethics

SEBI has to be responsive to the needs of three groups, which constitute the market:
 the issuers of securities
 the investors
 the market intermediaries.

RBI & Code of Ethics

It regulates the banking industry by regulating the various laws passed by the government. One
task is to curb unfair practices within the Indian Banking system

What is AICPA?
American Institute of Certified Public Accountants
It sets ethical standards for the profession and U.S. auditing standards for audits of private
companies, non-profit organizations, federal, state and local governments. It also develops and
grades the Uniform CPA Examination.

Major Financial Scams in India

Scam Scamster Year Description Loss
2g A Raja Undervaluing spectrum and selling to Rs.1.76
Spectrum favourites lac crore
Satyam Ramalinga 2009 Falsifying accounts $1.47 bn
Scam Raju
IPO Roopalben 2005 Karvy, IndiaBulls etc opened fake accounts Rs. 61 Cr
Scam Panchal to purchase IPO shares
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DSQ Dinesh 2001 Dubious Acquisitions & allotments Rs. 595

Software Dalmia cr
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Telgi Abdul Printing fake stamp papers Rs. 200

 Scam Karim cr
Securities Ketan 2000 Rigging price by buying penny stocks & Rs. 1500
Scam Parekh selling them at profits cr

Ethics in Technology

Skimming phishing spyware

Ethical Issues in Information Technology

1 Ethical dilemmas There are various ethical dilemmas in relation to I.T. that need to be
addressed. What are and are not ethical issues in I.T.? In regard to hackers, for example, are they
testing the system or performing an immoral action? Will genetic engineering improve the
quality of peoples‘ lives or start to destroy it? How do we recognise when an ethical dilemma
exists? There are, indeed, many grey ethical areas.

 2 Plagiarism Plagiarism is where the work of others is copied, but the author presents it as
his or her own work. This is a highly unethical practice, but happens quite frequently, and
with all the information that is now available on the Internet it is much easier to do and is
happening more often. Copying media (especially images) from other websites to paste
them into your own papers or websites. Making a video using footage from others‘ videos or
using copyrighted music as part of the soundtrack. Performing another person‘s copyrighted
music (i.e., playing a cover). Composing a piece of music that borrows heavily from another
composition.

3 Piracy Piracy, the illegal copying of software, is a very serious problem, and it is estimated
that approximately 50% of all programs on PCs are pirated copies. Programmers spend hours
and hours designing programs, using elaborate code, and surely need to be protected. Although
some might argue that some pirating at least should be permitted as it can help to lead to a more
computer literate population. But, for corporations, in particular, this is a very serious issue, and
can significantly damage profit margins.
4 Hacking Hackers break into, or ‗hack‘ into a system. In computer jargon, "hacker" has a
variety of meanings, including being synonymous with programmers and advanced computer
users. In these cases, it refers to someone who hacks away at a keyboard for long periods of time,
performing any number of computer-related tasks. In recent years, hacking has come to mean the
same as another term "cracker," which is a person who cracks the security of a system or
computer application. Hacking (and cracking) now refers to the act of gaining unauthorized
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access to a computer, network, Web site, or areas of a system.A person may hack their way into
a system for a variety of reasons; curiosity, the challenge of breaking through security measures,
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 or to perform malicious actions and destroy or steal data. All too often, it involves performing
mischief and damaging a Web site or corporate network in some manner.
5 Computer crime. Many different computer crimes are committed, which clearly poses ethical
questions for society. Various illegal acts are performed on computers, such as fraud and
embezzlement. This includes, for example, using imaging and desktop publishing to create, copy
or alter official documents and graphic images. There are also various ethical dilemmas, such as
whether copying such files is as bad as stealing something.
6 Viruses Clearly writing and spreading virus programs are unethical acts; they have very
serious consequences, and cause systems to crash and organisations to cease operating for certain
periods. One of the most concerning consequences of such actions is when viruses interrupt the
smooth functioning of an organisation such as a hospital, which could in extreme cases even
cause people to die. Logic bombs are also sometimes planted. There is obviously a lot of anti-
virus software on the market now though that helps to deal with this ever-growing problem.
7 Ergonomics/health issues. There are many ergonomic/health issues related to I.T.
Responsible/ethically-minded employers will, hopefully, give due consideration to this, as
indeed should all employers. This includes issues such as the importance of taking adequate
breaks from using the computer and ensuring that the screens comply with the regulations. Also,
ensuring that the positioning of the chair and the computer is appropriate for the user and
providing foot rests, when required. Some organisations will give special advice to their
employees on these matters. When I worked at Clifford Chance, an international law company,
for example, they had specialised staff who would come round to each employee individually,
and discuss their ergonomic needs, if the employee requested this. Having enough light and
having plants in the room can also be important factors. Without such ethical/moral awareness
and taking the necessary action, many workers will suffer health problems directly from I.T.,
such as back problems, eyestrain and eye infections and repetitive strain injury (RSI).
8 Job displacement/work pressures imposed on computer professionals Computers are
changing the face of the work scene. For some people, their jobs are becoming redundant or they
have to play quite different roles, and others are suffering increasing levels of stress from work
pressures. Others are, obviously, reaping the benefits of having more rewarding jobs, and there is
certainly more emphasis on knowledge, information and I.T. skills than ever before. However,
this all clearly poses various ethical issues. Should those that lose their jobs be compensated?
How can the pressure be eased on those that are suffering stress? Is it acceptable for computer
programmers to be made redundant ‗on the spot‘ etc? There are many ethical issues that need to
be addressed here.
9 Digital divideThe digital divide poses a serious problem today. A new breed of haves‘ and
‗have nots‘ are being created, between those that have access and can use a computer and the
Internet, and those that do not have such access. Digital divide describes a gap in terms of access
to and usage of information and communication technology. There are clearly serious ethical
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implications here. Those that do not have such access may well be discriminated against, feel
‗socially excluded‘ and miss out on many life opportunities.
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 10 Gender There are also ethical issues in regard to gender and computers, given the fact that
females are often discriminated against in various ways in this new I.T. age. The number of
females in computing academia is low. Furthermore, when females do work closely with
computers, it is often in the lower level of work. Also, computer screens and layouts are
frequently designed and programmed by men, and they might not be ideally suited to women,
which could affect the quality of the work that women produce. Men tend to obtain the better
quality I.T. jobs, earn more money, and make far more of the important decisions in relation to
I.T. Basically, men are driving the I.T. age forward, whereas females are playing more passive
roles, confined to working with the systems that men have already created, but which might not
be ideally suited to them. These are all ethical issues that people should be made more aware of,
and efforts need to be made to try to remedy the situation.
11 NanotechnologyNanotechnology presents a new set of ethical dilemmas. Nanotechnology
could help humankind and help to provide adequate food and shelter. On the other hand, it could
be very dangerous. There are also various environmental issues to consider, such as the effect
that nanomaterials have on living systems. There is a relatively low investment in environmental
nanotechnology, which must surely give us cause for concern. These are all very serious ethical
issues that need to be confronted sooner rather than later. If it appears to be the case that
advanced aspects of I.T. are seriously threatening our way of life, then something surely needs to
be done about it as soon as possible.
12 Expert systemsExpert systems are a body of information in a specific field that is held in an
electronic format, such as a ‗doctor expert system‘, that houses detailed medical information on a
database. Various questions can be posed in regard to expert systems, such as what is the basis of
ownership? Is it the different elements that comprise the total system or the total package? These
issues are related to intellectual property rights and the moral aspects in regard to this. There are
also wider ethical issues in regard to expert systems that need to be explored. In regard to a
'doctor expert system‘, for example, such a system can provide accurate information, but the
face-to-face contact is missing. Such face-to-face contact might prove to be essential in order to
ensure that the right diagnosis is made, and it is possible that some individuals could even die as
a result of a wrong diagnosis given through this lack of face-to-face contact. In other ways expert
systems could help to save lives. The patient might, for example, be given a speedier response.
All these ethical issues need to be considered further.
13 Genetic engineering and the patenting of life- forms Many ethical issues are raised in regard
to genetic engineering and the patenting of life forms. Is such behaviour morally acceptable?
Such debates can sit alongside debates on subjects such as euthanasia and abortion.
14 Netiquette. There are also ethical/moral codes that should be adhered to, in the use of
networks and email correspondence. As already indicated, the setting up of such codes has
become necessary as people have not always addressed each other in an appropriate manner
through this means of communication, and in this way they have behaved unethically. For
example, not wasting peoples‘ time and not taking up network storage with large files.
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Furthermore, not looking at other peoples‘ files or using other systems without permission and
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not using capital letters, as this denotes shouting (unless one does actually want to shout at
 someone through email!). Also, people that become too obnoxious can be banned or ignored. A
‗kill file‘ can be set-up, which will automatically, erases messages from that person.
15 Intellectual property rights: the moral rights There are moral rights embedded within much
intellectual property rights legislation, agreements and directives, for the benefit of creators of
works and copyright holders. Furthermore, there are penalties for those that violate such
legislation, (such as violating copyright legislation), although this can sometimes be difficult to
enforce in practice. The legislation, though, is often complex and difficult to understand, which
means that some creators of works do not obtain the moral rights that they are entitled to.
However, sometimes, moral rights are actually excluded from agreements.
16 Issues of data collection, storage and access. There are many moral issues that need to be
considered in regard to the collection, storage and access of data in electronic form. Under what
circumstances, for example, should one seek permission from or inform those whose records are
on file? Furthermore, how accurate is the data and who has access to it?
17Speed of computers. The pure speed at which computers operate can cause ethical problems
in themselves. It can allow people to perform unethical issues quickly, or perform operations that
it was difficult or impossible to perform before, such as browsing through files that one is not
authorised to. It can also mean that people do not give enough consideration before performing
various actions.
18 Vendor-client issues. Ethical issues also arise in regard to vendor-client relationships, the
vendor being the computer supplier and the client being the person that is buying the computer
system, whether this be the hardware or software or both. If the user continually changes the
system specification, for example, to what extent should the vendor be prepared to adjust the
system specification accordingly? Other unethical acts include, for example, consultants selling
the program to the second client, after being paid to develop the program for the first client only.
Also, the vendor might provide hardware maintenance according to a written contract and for
hardware to be repaired in a ‗timely manner‘, but the client might not believe that the repairs
have been timely. Drawing up more precise contracts might help here, but in some instances the
outcome can probably only depend on peoples‘ individual moral consciences.
19. Logic Bombs
A logic bomb is a program that runs at a specific date and/or time to cause unwanted and/or
unauthorized functions. It can effect software or data, and can cause serious damage to a system.
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 Ways to prevent computer crimes

Keep your computer current with the latest patches and updates
One of the best ways to keep attackers away from your computer is to apply patches and other
software fixes when they become available. By regularly updating your computer, you block
attackers from being able to take advantage of software flaws (vulnerabilities) that they could
otherwise use to break into your system.

While keeping your computer up-to-date will not protect you from all attacks, it makes it much
more difficult for hackers to gain access to your system, blocks many basic and automated
attacks completely, and might be enough to discourage a less-determined attacker to look for a
more vulnerable computer elsewhere.

More recent versions of Microsoft Windows and other popular software can be configured to
download and apply updates automatically so that you do not have to remember to check for the
latest software. Taking advantage of "auto-update" features in your software is a great start
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toward keeping yourself safe online.

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 Make sure your computer is configured securely
Keep in mind that a newly purchased computer may not have the right level of security for you.
When you are installing your computer at home, pay attention not just to making your new
system function, but also focus on making it work securely.

Configuring popular Internet applications such as your Web browser and email software is one
of the most important areas to focus on. For example, settings in your Web browser such as
Internet Explorer or Firefox will determine what happens when you visit Web sites on the
Internet—the strongest security settings will give you the most control over what happens online
but may also frustrate some people with a large number of questions ("This may not be safe, are
you sure you want do this?") or the inability to do what they want to do.

Choosing the right level of security and privacy depends on the individual using the
computer Oftentimes security and privacy settings can be properly configured without any sort
of special expertise by simply using the "Help" feature of your software or reading the vendor's
Web site. If you are uncomfortable configuring it yourself consult someone you know and trust
for assistance or contact the vendor directly.

Choose strong passwords and keep them safe

Passwords are a fact of life on the Internet today—we use them for everything from ordering
flowers and online banking to logging into our favorite airline Web site to see how many miles
we have accumulated. The following tips can help make your online experiences secure:

 Selecting a password that cannot be easily guessed is the first step toward keeping passwords
secure and away from the wrong hands. Strong passwords have eight characters or more and
use a combination of letters, numbers and symbols (e.g., # $ % ! ?). Avoid using any of the
following as your password: your login name, anything based on your personal information
such as your last name, and words that can be found in the dictionary. Try to select especially
strong, unique passwords for protecting activities like online banking.
 Keep your passwords in a safe place and try not to use the same password for every service
you use online.
 Change passwords on a regular basis, at least every 90 days. This can limit the damage caused
by someone who has already gained access to your account. If you notice something
suspicious with one of your online accounts, one of the first steps you can take is to change
your password.
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Protect your computer with security software

Several types of security software are necessary for basic online security. Security software
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essentials include firewall and antivirus programs. A firewall is usually your computer's first line
 of defense-it controls who and what can communicate with your computer online. You could
think of a firewall as a sort of "policeman" that watches all the data attempting to flow in and out
of your computer on the Internet, allowing communications that it knows are safe and blocking
"bad" traffic such as attacks from ever reaching your computer.

The next line of defense many times is your antivirus software, which monitors all online
activities such as email messages and Web browsing and protects an individual from viruses,
worms, Trojan horse and other types malicious programs. More recent versions of antivirus
programs, such as Norton AntiVirus, also protect from spyware and potentially unwanted
programs such as adware. Having security software that gives you control over software you
may not want and protects you from online threats is essential to staying safe on the Internet.
Your antivirus and antispyware software should be configured to update itself, and it should do
so every time you connect to the Internet.

Integrated security suites such as Norton Internet Security combine firewall, antivirus,
antispyware with other features such as antispam and parental controls have become popular as
they offer all the security software needed for online protection in a single package. Many people
find using a security suite an attractive alternative to installing and configuring several different
types of security software as well as keeping them all up-to-date.

Protect your personal information

Exercise caution when sharing personal information such as your name, home address, phone
number, and email address online. To take advantage of many online services, you will
inevitably have to provide personal information in order to handle billing and shipping of
purchased goods. Since not divulging any personal information is rarely possible, the following
list contains some advice for how to share personal information safely online:

 Keep an eye out for phony email messages. Things that indicate a message may be
fraudulent are misspellings, poor grammar, odd phrasings, Web site addresses with strange
extensions, Web site addresses that are entirely numbers where there are normally words, and
anything else out of the ordinary. Additionally, phishing messages will often tell you that you
have to act quickly to keep your account open, update your security, or urge you to provide
information immediately or else something bad will happen. Don't take the bait.
 Don't respond to email messages that ask for personal information. Legitimate companies
will not use email messages to ask for your personal information. When in doubt, contact the
company by phone or by typing in the company Web address into your Web browser. Don't
click on the links in these messages as they make take you to a fraudulent, malicious Web
sites.
 Steer clear of fraudulent Web sites used to steal personal information. When visiting a
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Web site, type the address (URL) directly into the Web browser rather than following a link
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within an email or instant message. Fraudsters often forge these links to make them look
 convincing. A shopping, banking or any other Web site where sensitive information should
have an "S" after the letters "http" (i.e. https://www.yourbank.com not
http://www.yourbank.com)/. The "s" stands for secure and should appear when you are in an
area requesting you to login or provide other sensitive data. Another sign that you have a
secure connection is the small lock icon in the bottom of your web browser (usually the right-
hand corner).
 Pay attention to privacy policies on Web sites and in software. It is important to
understand how an organization might collect and use your personal information before you
share it with them.
 Guard your email address. Spammers and phishers sometimes send millions of messages to
email addresses that may or may not exist in hopes of finding a potential victim. Responding
to these messages or even downloading images ensures you will be added to their lists for
more of the same messages in the future. Also be careful when posting your email address
online in newsgroups, blogs or online communities.

Review bank and credit card statements regularly

The impact of identity theft and online crimes can be greatly reduced if you can catch it shortly
after your data is stolen or when the first use of your information is attempted. One of the easiest
ways to get the tip-off that something has gone wrong is by reviewing the monthly statements
provided by your bank and credit card companies for anything out of the ordinary.

 Use Software with Security Updates

 Security Tips for Using Mobile Applications
 Acceptable Use of the Internet
 Keeping Self Awareness for Information Security
 Handling User Accounts & Passwords
 Securing Access Using e-Authentication
 Handling Your Personal Information
 Protecting Mobile Devices
 Using Instant Messaging Safely
 Using Webmail Wisely
 Using Software
 Use Public Wi-Fi and Computers Carefully
 Safe Online Social Networking
 Surfing the Web and e-Shopping
 Security Incident Handling for Individuals
 Protecting Against Spam Emails
 Protecting Against Phishing Attacks
 Protecting Against Malicious Codes
 Protecting Against Spyware & Adware
 Blog Safely
 Securing Your Wireless Network
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 Professional Ethics
Honesty
 A profession is a job that requires Integrity
specific training and is regulated by Transparency
certain standards Accountability

 Professional ethics the ethical norms, Confidentiality

Objectivity
values, and principles that guide a
profession and the ethics of decisions Respectfulness

made within the profession.

 Lecturer
 Doctor
 Accountant

 Professional ethics encompass the personal, organizational, and corporate standards of

behaviour expected of professionals. Professional ethics are often established by
professional organizations to help guide members in performing their job functions
according to sound and consistent ethical principles.

Characteristics of a Profession

 Common body of knowledge

 Formal educational process
 Standards of entry
 Recognition of public responsibility
 The Public Interest
 Integrity
 Objectivity and independence
 Due Care
 Scope and Nature of Services

Elements of Professional Ethics.

 Group Identity
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 Shared Training

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Common knowledge
  penalties for substandard performance

The professional responsibility of a manager

 Personal responsibility
 Responsibility to the Organisation
 Responsibility to the Community

Importance of Employee Code of Conduct

Employee code of conduct guides individuals as to how they should behave at the
workplace. Employees need to be aware as to what is expected out of them in the office. You
just can‘t behave the same way at office as you behave at home. Your Boss can be your best
friend outside office but at work you have to respect him and also treat him like your superior.
Employee ethics is essential for maintaining discipline at the workplace.

There has to be a proper dress code for employees. Individuals just can‘t enter into the office
wearing anything. Employee code of conduct decides what individuals ought to wear to office.
Some organizations are very particular of what their employees wear to work. Employee dress
code ensures uniformity among employees.

Employee code of conduct ensures career growth and also benefits the organization in the
long run. If employees understand the difference between what to do and what not to do at the
workplace, problems would never arise. We bunk offices because we do not realize that such a
practice is wrong and unethical. Employee ethics ensures employees adhere to the rules and
regulations and also work for the organization. Employee ethics motivates employees not to
indulge in gossiping, nasty politics, criticizing fellow workers, bunking office and so on.

Employee ethics ensures employees attend office on time and genuinely respect their
superiors. Most of the times it has been observed that employees have a hate relationship with
their Bosses. Understand that employee ethics is not meant to downgrade employees but make
them aware of their duties and responsibilities in the organization.

Most essentially, employee ethics is important as it goes a long way in making the value
system of employees strong. This way, employees on their own develop a feeling of attachment
and loyalty towards the organization. Remember, employee ethics is not meant to bind you but
make you an indispensable employee.
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 The ethical traits of functional Managers
Marketing HRM Finance
Honesty Honesty Honesty
Responsibility Responsibility
Fairness Fairness Fairness
Respect Respect
Openness Openness
Citizenship
Leadership
Diplomacy
Integrity
Objectivity
Due Care
Confidentiality

UNIT 4-
ROLE OF CORPORATE CULTURE IN BUSINESS
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What is Culture?
 Culture is a complex system of behaviour, values, beliefs and traditions which is transmitted
through generations.
Culture is beliefs, customs, traditions and values shared by the members of the organisation.
It is the set of important understanding that members of a community share in common.
Why is Culture Important?
Culture is the invisible bond which ties people together.
Culture is a key component in business and has an impact on the strategic direction of business.
Culture influences management, decisions and all business functions from accounting to
production.
Culture is defined as the way we do things around here. It is the shared beliefs top managers
have
It refers to the pattern of human activity.
The art, literature, language, and religion of a community represent its culture.
Our moral values represent our culture.
The importance of culture lies in its close association with the ways of thinking and living.
Differences in cultures have led to a diversity in the people from different parts of the world.
Culture is related to the development of our attitude.
Our cultural values influence how we approach living.
Culture Influences behaviour.
Culture shapes our value and belief systems, which influence our personalities.
What are the elements of culture? Language, Nationality, Sex, Education, Profession, Ethnic
group, Religion, Social class, Corporate culture Family, Values, Norms, Attitudes, Customs
What are the characteristics of culture?
Every culture has its own identity.
Culture defines the internal environment.
It differentiates one company from another company.
Culture is relatively stable.
It is perceived by members.
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It controls attitude, behaviour and performance of the employees.

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Culture is learned and not biological.

 What is Cross Culture?
It is the aim to establish and understand how people from different cultures communicate with
each other. Eg Indians doing business in China
What is Corporate Culture?
 Corporate culture refers to the beliefs and behaviours that determine how a company's
employees and management interact and handle outside business transactions.
 It is the shared social knowledge within an organisation regarding the rules, norms and
values that shape the attitudes and behavior of its employees.
 Corporate culture is the set of characteristics that define a business. It involves employee
attitudes, standards(policies &procedures)and rites & rituals.
 How people dress, act, conduct work, interact with supervisors, interact across
departments and the public.

What is a corporate organization?

A corporation is a business or organization formed by a group of people, and it has rights and
liabilities separate from those of the individuals involved.

A company's culture will be reflected in its dress code, business hours, office setup, employee
benefits, turnover, hiring decisions, treatment of clients, client satisfaction and every other aspect
of operations.
How Is Corporate Culture Created?
(1) The national culture in which it operates or from which it draws its employees;
(2) Functional or professional culture , based on the professional, technical and vocational
groups which make up the workforce in the organisation;
(3) Ethnic culture comprising the norms drawn from the mix of the ethnicity of the employees.
(4) Industrial culture , based on the general cultural influences prevailing in a particular industry.
(5) The leaders of an organisation need to establish their personal value –set and their lives
accordingly.
(6) The vision and mission should be clear defined and communicated to all the employees.
(7) The leaders should be both a coach as well as a mentor to employees in order to ensure that
these values are driven deep into each employees.
(8)Hire only those people who demonstrate the right attitude towards other people, good work
ethics and quality customer service.
(9)Commit to an unbiased work environment.
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(10) Respect and treat your employees equally, but reward those best who do what you want.
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 WHAT ARE THE TYPES OF CULTURE?

Authoritarian Participative Mechanistic Organic

Dominant Academic Baseball

Club Culture
sub culture culture Team culture
IMPORTANCE OF ORGANISATIONAL CULTURE

 Attracts talent
 Retains Talent
 Engages people
 Creates energy & momentum
 Changes the view of ‗work‘
 Makes everyone more successful

FUNCTIONS OF ORGANISATIONAL CULTURE

1.The Sense of Identity
The first function that organizational culture performs is providing group members with
a sense of identity. The culture of an organization provides its members with a way to
'define who we are.' Because the culture of every organization is unique, being a part of
an organization gives members a sense of identity that is shared only by the people who
belong to that organization.

2.Definition of Boundaries
The next function that organizational culture performs is that it defines the boundaries for
members of an organization. These invisible boundaries are the way members of an
organization determine 'what makes us different' from other organizations. The culture of
an organization gives members of that organization a sense of belonging to the group and
a feeling that the organization they belong to is different than any other organization.
This sense of belonging is strengthened when members of an organization observe
contrary behaviors from members of an opposing organization.
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3.Generation of Commitment
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 Another function of organizational culture is that it generates commitment from the
members of an organization. This causes members of an organization to feel dedication to
the group. The unique culture of an organization provides its members with a feeling that
they share common goals. Achieving the goals of the organization often becomes a
higher priority than the individual goals of group members. This shared feeling of
commitment gives group members a reason to perform their tasks at their highest ability.

4.Rules and Standards

The last function that organizational culture provides to members of an organization is a
set of unwritten rules and standards that define the rules of the game to its members.
Culture acts as a social glue that helps to hold the organization together by providing
appropriate rules and standards that guide group members while they complete tasks for
the organization. These rules and standards also function as a control mechanism that
rewards acceptable behavior and punishes unacceptable behavior by group members.

5.Decision Making
Shared beliefs give members a consistent set of basic assumptions which may lead to a
more efficient decision-making process due to fewer disagreements.

6.Communication
Culture reduces communication problems.

7.Culture promotes a code of conduct

A strong culture is an organization explicitly communicates accepted modes of behaviour
which make the people to be conscious.

8.Culture facilitates recognition

Every organization is recognized by its culture. It is a known fact whenever we name an
organization we immediately remember the culture attached to the organization

9.Culture provides self-satisfaction

Organizational culture enables employees to be satisfied internally. They get internal
satisfaction with an esteemed culture.

10.Culture provides opportunities to set performance standards

Organizational culture provides employees to get an opportunity to set the standards of
performance. They try to achieve the standards. It becomes a self control mechanism
which helps the organisation to grow and flourish.

11.Culture guides and controls the employees

Organizational culture acts as a motivator that guides and controls employees.

12.Culture directs employee behaviour towards goal achievement

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A sound culture directs the attitude and behaviour of the employees towards the
achievement of goals.
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 13.Culture makes people development oriented
Organizational culture develops implicit rules which make people oriented. These rules
are more effective than explicit rules. Confirmity of implicit rules makes the employees
developed and self disciplined.

14.Culture develops a positive attitude

It develops a positive attitude and behaviour of employees. Culture leads to develop a
good behaviour and good behaviour makes a good culture.

15.Co-operation
By providing shared values and assumptions, culture may enhance goodwill and mutual
trust, encouraging cooperation.

CHARACTERISTICS OF CORPORATE CULTURE

 Innovation (RISK ORIENTATION)
The degree to which employees are encouraged to be innovative and take risks.
Innovation is the application of better solution that meets new requirement or existing
market needs.

 Attention to details (PRECISION ORIENTATION)

The degree to which the employees are expected to exhibit precision, analysis and
attention to details. Attention to the details work schedule and performance. The
organisation should maintain the details contents regarding its workforce resource etc

 Outcome Orientation (ACHIEVEMENT ORIENTATION)

The degree to which management focuses on the results or outcomes rather than on the
techniques and process used to achieve them. Emphasizes achievement results and action
as important values.

 People Orientation (FAIRNESS ORIENTATION)

The degree to which management decisions take into consideration the effect of outcome
on people within the organisation. The working situation and conditions are highly
influenced by skilled employees those who contributes their performance to complete a
task with a particular time .

 Customers orientation
It mostly focuses on customized services to satisfy the customer

 Team orientation (COLLABORATION ORIENTATION)

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The degree to which work activities are organised around teams rather than individuals.
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  Aggressiveness (COMPETITIVE ORIENTATION)
The degree to which people are competitive rather than easy going. It indicates the
employees aggressiveness towards works and better performance

 Stability (RULE ORIENTATION)

The degree to which organisational activities emphasize maintaining the status quo in
contrast to growth.

HOW TO TEACH CULTURE TO EMPLOYEES

 Story Telling
 Rituals or repetitive activities
 Material symbols Eg points, gift voucher, thank u cards
 Core Values Eg honesty integrity
 Heroes Eg star performer of the year
 Celebrate cultural events Eg Indepence day, Christmas
 Language Eg common language and not other languages

IMPACT OF CORPORATE CULTURE IN BUSINESS

EMPLOYEE RELATION, IMPROVES PRODUCTIVITIY, REPUTATION, QUALITY, INCREASE

MAKERTABILITY, UNITED EMPLOYEES

Corporate culture represents the professional values a company adopts that dictate how it
interacts with employees, vendors, partners and clients. The mission strategy of an organization
is a summary of how the company perceives its role and the beliefs it uses to achieve its goals.
Because the corporate culture is a driving force in how the company does business, it has an
impact on developing business strategy.
1.It helps in giving the organizational members an organizational identity or sense of belonging.
2.It helps in planning, organizing, leading and controlling functions of the organization.
3.It promotes social system stability in developing cordial relationships between all the members
of the organization.
4.It encourages stability in the organization.
5.It provides a climate that the employees can work in and be motivated to work in.
6 .It facilitates collective commitment.
7.It acts as a service touch point for customers and help in understanding the values and norms of
the organization.
8.It helps in shaping behaviour by helping members make sense of their surroundings.
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9.It influences the perceptions of both the people inside as well as outside the organization.
10.It provides boundary-defining roles.
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 11.It helps in decision making by clearly defining the values and shared beliefs of the
organization that will act as a background or base for making decisions.
12.It enhances control within the organization.
13.It provides a sort of
formal and informal communication channel within the organization.

EFFECTS OF NEGATIVE CULTURE ON ETHICAL BEHAVIOUR

1.Lack of Moral Leadership

When managers are unethical, employees will emulate the bad behaviour. Eventually, the
unethical environment will hinder business. For example, if managers take credit for
subordinates‘ work, some employees will start to imitate the behaviour. Honest employees will
begin to protect themselves by hiding their work from their colleagues and supervisors. The
resulting lack of teamwork and collaboration will limit the company‘s potential. In contrast, if
managers model ethical behaviour for employees and reward good behaviour, the positive
corporate culture will instil how ethical behaviour makes good business sense and helps
everyone succeed.

2.Hyper competitiveness
If a company‘s culture rewards employees who pursue personal advantage rather than focus on
contributing to the performance of the entire team, employees might overstep ethical boundaries
to get ahead. For example, suppose a manager rewards top performers without analyzing how
they achieved their results. Some employees might use unethical methods to move ahead, such as
stealing others‘ ideas. Once a few dishonest employees prosper in this way, the rest of the
employees will soon see that stealing others‘ ideas is an effective way to move up in your
company.

3.Poor Discipline
A lax corporate culture makes it easy for unethical behaviour to prosper. If your company doesn't
act quickly to punish or remove unethical employees, they will run rampant over ethical
employees. As a business owner, you have a responsibility to maintain order within your
organization by disciplining employees who are ethically out of line and by rewarding ethical
employees.

4.Lack of Discussion
Corporate cultures that discourage honest discussion allow unethical behaviour to spread
unimpeded. Instead, a company should encourage employees to report unethical behaviour
before it becomes a widespread problem. Providing whistle blowers with protection and
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encouraging employees to report problems help foster an organization that is ethical from top to
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bottom.
 ROLE OF CORPORATE CULTURE
Every small business, even those with only a handful of employees, can benefit from cultivating
a corporate culture that keeps people engaged and productive while improving business
performance.
However, creating a great corporate culture isn‘t the type of project that can be accomplished
within a specific time period.
Small business leaders need to consciously plant seeds and put in consistent effort. Over time,
these efforts can help to foster the habits and values they want their staff to embrace.

 Corporate culture can make your business stronger by following a particular pattern or
uniformity in treating your stakeholders. That is no compromise on efficiency, client
realtions etc.

 Corporate culture should convey how the business sets expectations and rewards desired
behaviours. These definitions can be established within a mission statement, the business
goals, the brand strategy and even a company logo.

 Across all departments, from accounting and finance to operations, sales and marketing,
corporate culture plays a vital role in the success of a small business.

 Corporate culture can have a direct impact on hiring(the best), employee retention,
collaboration, policy compliance and communication, as well as the effectiveness of
change management.

 Maintaining a positive, vibrant working climate can help small businesses to weather
economic downturns, staffing and technology changes, and shifts in the marketplace.

 It's about more than just sharing the vision

 One way that small business leaders can help maintain a positive corporate culture is by
including all members of the company when communicating short- and long-term
company goals. Employees who clearly understand their company‘s strategic objectives
will be more motivated to help the company achieve them(participative culture).

 Managers should go beyond simply sharing the vision, however. They also need to show
their workers how their contributions support efforts to reach organizational goals. Even
startups and other fast-growing businesses still refining their vision should communicate
their initial business objectives to employees, and continually update staff members on
progress toward achieving those goals.
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 This strategy can also help to improve retention: When employees understand how they
specifically make a difference in the organization, they are more likely to feel valued.
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 What is the difference between Organisational culture vs. National culture?
Our national culture relates to our deeply held values regarding, for ex ample, good
vs. evil, normal vs. abnormal, safe vs. dangerous, and rational vs. irrational.
National cultural values are learned early, held deeply and change slowly over the
course of generations.

Organizational culture, on the other hand, is comprised of broad guidelines which are
rooted in organizational practices learned on the job. Experts agree that changing
organizational culture is difficult and takes time.

IMPORTANCE OF CORPORATE CULTURE

UNITY: A shared organizational culture helps to unite employees of different

demographics. Many employees within an organization comes from different
backgrounds, families and traditions and have their own culture. Having a shared
culture at the workplace gives them a sense of unity and understanding towards one
another, promoting better communication and less conflict organizational culture
promotes equality by ensuring no employee is neglected at the work place and that
each is treated equally.
LOYALTY: Organizational culture helps to keep employees motivated and loyal to
the management of the organization. If employees view themselves as a part of their
organization‘s culture, they are more eager to contribute the entity‘s success. They
feel a higher sense of accomplishment for being a part of organization they care
about and work harder without having to be coerced.
• DIRECTION: Guidelines contributes to organizational culture. They provide
employees with a sense of direction and expectations that keep employe es on task.
Each employee understands what his roles and responsibilities are and how to
accomplish tasks prior to established deadlines.
• COMPETITION: Healthy competition among the employees is one of the results of
shared organizational culture. Employees will strive to perform at their best to earn
recognition and appreciation from theirs superiors. This in turn increases the quality
of their work, which helps the organization prosper and flourish.
• IDENTITY: An organisation‘s culture defines its identity. An entity‘s way of doing
business is perceived by both the individuals who comprise the organisation as well
as its clients and customers, and it is determined by its culture. The values and
beliefs of an organisation to the brand image by which it becomes known and
respected.
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CROSS CULTURAL ISSUES IN ETHICS

 Cross culture is the interaction of people from different backgrounds in the
business world. Cross culture is a vital issue in international business, as the
success of international trade depends upon the smooth interaction of
employees from different cultures and regions.

Culture-specific value system

In a cross cultural business environment one finds it difficult to operate because of certain
culture-specific value systems. The value systems of both the home and host countries
have to be properly handled. The ethical prospective has to be properly reviewed in order
to maintain a moral standard which is rationally acceptable across the cultures. Values
followed in Middle East countries differ from Indian values, Wine common in US not in
Middle East
2. Language
Among the most often cited barriers to conflict-free cross-cultural business
communication is the use of different languages. Eg because of language barriers you
cannot express completely which effects the business.

3. Social organization and history

Social organisation as it affects the workplace is often culturally determined. For example those
from United States may find it difficult to remain neutral on cultural class structures that do not
reflect American values of equality. Eg Americans are all treated equally whereas not amongst
Indians (caste system, gender discrimination)
4.Conceptions of authority
Different cultures often view the distribution of authority in their society differently.
Views of authority in a given society affects communication in the business environment
significantly. Since it shapes the view of how a message will be received based on the
relative status or rank of the message‘s sender to its receiver. Eg. Indian culture students
are beaten up but in western culture it becomes a court case

5.Nonverbal communication
Among the most varying dimensions of intercultural communication is nonverbal
behaviour. Knowledge of a culture conveyed through what a person says represents only
a portion of what that person has communicated. Indeed body language, clothing choices,
eye contact, touching behaviour and conceptions of personal space all communicate
information, no matter what the culture. Eg. In the west anger is expressed by silence
whereas in Indians anger shown by words.

6.National Differences
Cultural norms and values influence important business practices. Such as how women
and minorities are treated on jobs, attitudes towards gift giving and bribery and
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expectations regarding conformity to written laws. Religion and the legal system are the
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 key social institutions that affect what ethical issues are important in a society and how
they are typically managed.
……………………………………………………………………………..

UNIT 5 –
CORPORATE GOVERNANCE

INDEX

1. CORPORATE GOVERNANCE
a. MEANING
b. SCOPE OR OBJECTIVES
c. CHARACTERISTICS
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d. ADVANTAGES
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e. DISADVANTAGES
 f. EXAMPLES OF CORPORATE GOVERNANCE
g. REQUIREMENTS FOR HAVING A PROPER CORPORATE GOVERNANCE

2. BOARD OF DIRECTORS
a. MEANING
b. SCOPE OF B OARD OF DIRECTORS
c. FUNCTIONS
d. REGULATIONS CONCERNING BOARD OF DIRECTORS

3. COMMITTEES FOR REGULATING CORPORATE GOVERNANCE- OBJECTIVES AND

RECOMMENDATION
a. KUMARAMANGALA
b. NARESH CHANDRA
c. NARAYANMURTHY
d. CADBURY

CORPORATE GOVERNANCE

WHAT IS CORPORATE GOVERNANCE?

CORPORATE GOVERNANCE REFERS TO THE WAY A CORPORATION IS GOVERNED . IT IS THE
TECHNIQUE BY WHICH COMPANIES ARE DIRECTED AND MANAGED . IT MEANS CARRYING THE
BUSINESS AS PER THE STAKEHOLDERS ‘ DESIRES . IT IS ACTUALLY CONDUCTED BY THE BOARD
OF D IRECTORS AND THE CONCERNED COMMITTEES FOR THE COMPANY ‘S STAKEHOLDER ‘S
BENEFIT. IT IS ALL ABOUT BALANCING INDIVIDUAL AND SOCIETAL GOALS , AS WELL AS ,
ECONOMIC AND SOCIAL GOALS .

CORPORATE GOVERNANCE IS THE INTERACTION BETWEEN VARIOUS PARTICIPANTS

(SHAREHOLDERS, BOARD OF DIRECTORS , AND COMPANY ‘S MANAGEMENT) IN SHAPING
CORPORATION ‘S PERFORMANCE AND THE WAY IT IS PROCEEDING TOWARDS . THE
RELATIONSHIP BETWEEN THE OWNERS AND THE MANAGERS IN AN ORGANIZATION MUST BE
HEALTHY AND THERE SHOULD BE NO CONFLICT BETWEEN THE TWO . THE OWNERS MUST SEE
THAT INDIVIDUAL ‘S ACTUAL PERFORMANCE IS ACCORDING TO THE STANDARD PERFORMANCE .
THESE DIMENSIONS OF CORPORATE GOVERNANCE SHOULD NOT BE OVERLOOKED .
CORPORATE GOVERNANCE DEALS WITH THE MANNER THE PROVIDERS OF FINANCE GUARANTEE
THEMSELVES OF GETTING A FAIR RETURN ON THEIR INVESTMENT. CORPORATE GOVERNANCE
CLEARLY DISTINGUISHES BETWEEN THE OWNERS AND THE MANAGERS . THE MANAGERS ARE
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THE DECIDING AUTHORITY. IN MODERN CORPORATIONS, THE FUNCTIONS / TASKS OF OWNERS

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AND MANAGERS SHOULD BE CLEARLY DEFINED , RATHER , HARMONIZING .

 CORPORATE GOVERNANCE DEALS WITH DETERMINING WAYS TO TAKE EFFECTIVE STRATEGIC
DECISIONS . IT GIVES ULTIMATE AUTHORITY AND COMPLETE RESPONSIBILITY TO THE BOARD OF
DIRECTORS. IN TODAY‘S MARKET- ORIENTED ECONOMY , THE NEED FOR CORPORATE
GOVERNANCE ARISES . A LSO , EFFICIENCY AS WELL AS GLOBALIZATION ARE SIGNIFICANT
FACTORS URGING CORPORATE GOVERNANCE . CORPORATE G OVERNANCE IS ESSENTIAL TO
DEVELOP ADDED VALUE TO THE STAKEHOLDERS .

CORPORATE GOVERNANCE ENSURES TRANSPARENCY WHICH ENSURES STRONG AND BALANCED

ECONOMIC DEVELOPMENT . THIS ALSO ENSURES THAT THE INTERESTS OF ALL SHAREHOLDERS
(MAJORITY AS WELL AS MINORITY SHAREHOLDERS) ARE SAFEGUARDED . IT ENSURES THAT ALL
SHAREHOLDERS FULLY EXERCISE THEIR RIGHTS AND THAT THE ORGANIZATION FULLY
RECOGNIZES THEIR RIGHTS .

CORPORATE GOVERNANCE HAS A BROAD SCOPE. IT INCLUDES BOTH SOCIAL AND

INSTITUTIONAL ASPECTS . CORPORATE GOVERNANCE ENCOURAGES A TRUSTWORTHY , MORAL,
AS WELL AS ETHICAL ENVIRONMENT.

OBJECTIVES/SCOPE OF CORPORATE GOVERNANCE

 HEALTHY ENVIRONMENT
 TRUST & CONFIDENCE IN ITS ABILITIES
 PROMOTE BUSINESS DEVELOPMENT
 IMPROVE EFFICIENCY OF CAPITAL MARKETS
 ENHANCE EFFECTIVENESS OF SERVICE OF THE REAL ECONOMY
 ENSURE ADEQUATE DISCLOSURE AND EFFECTIVE DECISION MAKING TO ACHIEVE
CORPORATE OBJECTIVES .
 ENSURE TRANSPARENCY IN BUSINESS TRANSACTIONS.
 COMPLY WITH STATUTORY AND LEGAL COMPLIANCES
 PROTECT INTEREST OF SHAREHOLDERS.
 TO GIVE MORE HEED TO COMMITMENT TO VALUES AND ETHICAL CONDUCT OF
BUSINESS .
 TO HAVE EFFECTIVE CONTROL OVER THE AFFAIRS OF THE COMPANY AT ALL TIMES.
 TO ENSURE THAT THE BOARD EFFECTIVELY AND REGULARLY MONITORS THE
FUNCTIONING OF THE MANAGEMENT TEAM .
 TO ENHANCE SHAREHOLDERS VALUE.
 TO WIN INVESTORS CONFIDENCE.

ADVANTAGES OF CORPORATE GOVERNANCE

 PROFESSIONAL GOVERNANCE
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CORPORATE GOVERNANCE IS OFTEN ASSOCIATED WITH PUBLIC COMPANIES, BUT SMALL

BUSINESSES CAN ALSO BENEFIT FROM THIS PRACTICE. CORPORATE GOVERNANCE
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CONSISTS OF
RULES THAT DIRECT THE ROLES AND ACTIONS OF KEY PEOPLE RATHER THAN PROCESSES .
 UNLIKE SIMPLE POLICIES AND PROCEDURES , SUCH AS A DRESS CODE OR EXPENSE
REIMBURSEMENT PROCEDURE, CORPORATE GOVERNANCE RULES FOCUS ON CREATING BETTER
MANAGEMENT AND FEWER ETHICAL OR LEGAL PROBLEMS . EXAMPLES OF CORPORATE
GOVERNANCE INCLUDE SETTING RULES FOR USING BUSINESS FUNDS FOR PERSONAL USE ;
SERVING ON A BOARD OF DIRECTORS ; HIRING FAMILY MEMBERS; CONFLICTS OF INTEREST;
NOTIFYING OWNERS , INVESTORS AND PARTNERS OF KEY MEETINGS AND DECISIONS ; AND
DISBURSING PROFITS .

 IMPROVED REPUTATION
A CORPORATE GOVERNANCE PROGRAM CAN BOOST YOUR COMPANY 'S REPUTATION . IF YOU
PUBLICIZE YOUR CORPORATE GOVERNANCE POLICIES AND DETAIL HOW THEY WORK , MORE
STAKEHOLDERS WILL BE WILLING TO WORK WITH YOU. THIS CAN INCLUDE LENDERS WHO SEE
YOU HAVE STRONG FISCAL POLICIES AND INTERNAL CONTROLS , CHARITIES YOU MIGHT
PARTNER WITH TO PROMOTE YOUR BUSINESS , GOVERNMENT AGENCIES , EMPLOYEES , THE
MEDIA, VENDORS AND SUPPLIERS. THE PRACTICE OF SHARING INTERNAL INFORMATION WITH
KEY STAKEHOLDERS IS KNOWN AS TRANSPARENCY, WHICH ALLOWS PEOPLE TO FEEL MORE
CONFIDENT YOU HAVE LITTLE OR NOTHING TO HIDE.
 FEWER FINES, PENALTIES, LAWSUITS
CORPORATE GOVERNANCE INCLUDES INSTITUTING POLICIES THAT REQUIRE THE COMPANY TO
TAKE SPECIFIC STEPS TO STAY COMPLIANT WITH LOCAL, STATE AND FEDERAL RULES,
REGULATIONS AND LAWS . FOR EXAMPLE , AS PART OF CORPORATE GOVERNANCE , AN
EXECUTIVE MANAGEMENT TEAM OR BOARD OF DIRECTORS MIGHT CONDUCT A REVIEW OF THE
COMPANY ‘S HIRING PRACTICES IF IT FALLS UNDER THE GUIDELINES OF THE EQUAL
OPPORTUNITY EMPLOYMENT COMMISSION. YOU MIGHT REQUIRE THAT YOUR ACCOUNTING
DEPARTMENT UNDERGO AN EXTERNAL AUDIT BY AN INDEPENDENT AUDITOR EVERY QUARTER
OR YEAR .
 DECREASED CONFLICTS AND FRAUD
CORPORATE GOVERNANCE LIMITS THE POTENTIAL FOR BAD BEHAVIOR OF EMPLOYEES BY
INSTITUTING RULES TO REDUCE POTENTIAL FRAUD AND CONFLICT OF INTEREST. FOR EXAMPLE ,
THE COMPANY MIGHT DRAFT A CONFLICT OF INTEREST STATEMENT THAT TOP EXECUTIVES
MUST SIGN , REQUIRING THEM TO DISCLOSE AND AVOID POTENTIAL CONFLICTS , SUCH AS
AWARDING CONTRACTS TO FAMILY MEMBERS OR CONTRACTS IN WHICH AN EXECUTIVE HAS AN
OWNERSHIP INTEREST. THE COMPANY MIGHT FORBID LOANS TO OFFICERS AND FAMILY
MEMBERS OR THE HIRING OF FAMILY MEMBERS . EXTERNAL AUDITS OR REQUIRING CHECKS
OVER A CERTAIN AMOUNT TO BE APPROVED AND SIGNED BY TWO PEOPLE HELP REDUCE ERRORS
AND FRAUD .
DISADVANTAGES OF CORPORATE GOVERNANCE
 CORPORATIONS GOVERNED BY STATUTES
CORPORATIONS ARE GOVERNED BY FEDERAL AND STATE STATUTES . ONE MAJOR REASON
BUSINESS OWNERS FORM CORPORATIONS IS TO LIMIT THE OWNERS ' LIABILITY TO THE AMOUNT
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OF THEIR INVESTMENTS . ANOTHER REASON FOUNDERS FORM CORPORATIONS IS BECAUSE

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CORPORATIONS ARE PERMITTED TO RAISE CAPITAL BY SELLING STOCK TO INVESTORS AND

 HAVE A LONG LEGAL AND CASE HISTORY TO SUPPORT THIS . W ITH THIS CORPORATE STRUCTURE
COMES CERTAIN REQUIREMENT.
 FIDUCIARY DUTY OF B OARD
OFFICERS AND THE BOARD OF DIRECTORS HAVE FIDUCIARY DUTIES TO ACT IN THE BEST
INTEREST OF THE CORPORATION . IF THEY BREACH THOSE DUTIES BY NOT EXERCISING HONEST
AND PRUDENT CARE , THEY CAN BE HELD LIABLE. THIS IS WHY COMPANIES WHERE
SHAREHOLDERS ELECT NON-SHAREHOLDER DIRECTORS OFTEN PROVIDE DIRECTORS AND
OFFICERS , OR D&O, INSURANCE . D&O INSURANCE DOES NOT PROTECT AGAINST OUTRIGHT
FRAUD, BUT IT DOES PROTECT AGAINST FALLOUT FROM BAD BUSINESS DECISIONS.
 INCREASED COSTS
CORPORATIONS HAVE HIGHER ADMINISTRATIVE COSTS BECAUSE OF GREATER ADMINISTRATIVE
REQUIREMENTS THAN THOSE REQUIRED OF LLCS AND LIMITED PARTNERSHIPS . CORPORATE
BOARDS MUST EITHER MEET OR CREATE RESOLUTIONS TO ENTER INTO FINANCIAL
ARRANGEMENTS OR CONTRACTUAL ARRANGEMENTS .
CORPORATIONS MUST MAINTAIN
CORPORATE DOCUMENTATION, INCLUDING STOCK PURCHASES AND SALES , LEGAL COMPLIANCE
AND ANNUAL REGISTRATION.
 MAINTENANCE OF SEPARATION
CORPORATIONS, SHAREHOLDERS AND BOARD DIRECTORS AND OFFICERS MUST FOLLOW ALL
THE CORPORATE FORMALITIES , INCLUDING KEEPING ANNUAL MEETING MINUTES FOR BOTH
SHAREHOLDERS ‘ MEETING AND BOARD OF DIRECTORS ‘ MEETINGS , DOCUMENTING MAJOR
DECISIONS AS BOARD - APPROVED . EVEN CORPORATIONS OWNED AND GOVERNED BY ONE
SHAREHOLDER IN MULTIPLE DIRECTOR ROLES MUST ADHERE TO ALL FORMALITIES . P RINCIPAL
AGENT CONFLICT
CONFLICTS ARISE WHEN A CORPORATION ‘S SHAREHOLDERS DO NOT ACTIVELY PARTICIPATE IN
THE BUSINESS AND INSTEAD HIRE PROFESSIONAL MANAGEMENT TO RUN THE BUSINESS . THE
MANAGER REPRESENTS THE SHAREHOLDERS BUT OFTEN HAS DIFFERENT GOALS AND
PERSPECTIVES . THE MANAGER ACTS IN HIS BEST INTEREST AS AN EMPLOYEE BUT NOT IN THE
BEST INTEREST OF THE SHAREHOLDERS . FOR EXAMPLE , A MANAGER MAY MAKE DECISIONS
THAT HELP HIM KEEP HIS JOB AND A NICE SALARY BUT THAT REDUCE THE AMOUNT OF PROFITS
THAT GO TO THE SHAREHOLDERS. SHAREHOLDERS MUST STRUCTURE EMPLOYMENT
AGREEMENTS TO REDUCE OR ELIMINATE THIS CONFLICT.

ESSENTIAL ELEMENTS OF GOOD CORPORATE GOVERNANCE

1) ROLE OF THE BOARD

2) LEGISLATION
3) MANAGEMENT ENVIRONMENT
4) BOARD SKILLS
 TECHNICAL /OPERATIONAL EXPERTISE
 FINANCIAL SKILLS
 LEGAL SKILLS
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 KNOWLEDGE OF GOVERNANCE
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5) BOARD APPOINTMENTS
 6) BOARD INDUCTION & TRAINING
7) BOARD INDEPENDENCE
8) BOARD MEETINGS
9) CODE OF CONDUCT
10) STRATEGY SETTING
11) BUSINESS AND COMMUNITY OBLIGATIONS
12) FINANCIAL & O PERATIONAL OBLIGATIONS
13) MONITORING THE B OARD’S PERFORMANCE
14) AUDIT COMMITTEES
15) RISK MANAGEMENT

CHARACTERISTICS OF GOOD CORPORATE GOVERNANCE

Good governance has 8 major characteristics. It is participatory, consensus oriented,

accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows
the rule of law. It assures that corruption is minimized, the views of minorities are taken into
account and that the voices of the most vulnerable in society are heard in decision-making. It is
also responsive to the present and future needs of society.

1. Participation
Participation by both men and women is a key cornerstone of good governance.
Participation could be either direct or through legitimate intermediate institutions or
representatives. It is important to point out that representative democracy does not
necessarily mean that the concerns of the most vulnerable in society would be taken into
consideration in decision making. Participation needs to be informed and organized. This
means freedom of association and expression on the one hand and an organized civil
society on the other hand.

2. Rule of law
Good governance requires fair legal frameworks that are enforced impartially. It also
requires full protection of human rights, particularly those of minorities. Impartial
enforcement of laws requires an independent judiciary and an impartial and incorruptible
police force.

3. Transparency
Transparency means that decisions taken and their enforcement are done in a manner that
follows rules and regulations. It also means that information is freely available and
directly accessible to those who will be affected by such decisions and their enforcement.
It also means that enough information is provided and that it is provided in easily
understandable forms and media.

4. Responsiveness
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Good governance requires that institutions and processes try to serve all stakeholders
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 within a reasonable timeframe.

5. Consensus oriented
There are several actors and as many view points in a given society. Good
governance requires mediation of the different interests in society to reach a broad
consensus in society on what is in the best interest of the whole community and how this
can be achieved. It also requires a broad and long-term perspective on what is needed for
sustainable human development and how to achieve the goals of such development. This
can only result from an understanding of the historical, cultural and social contexts of a
given society or community.

6. Equity and inclusiveness

A society's well being depends on ensuring that all its members feel that they have a
stake in it and do not feel excluded from the mainstream of society. This requires all
groups, but particularly the most vulnerable, have opportunities to improve or maintain
their well being.

7. Effectiveness and efficiency

Good governance means that processes and institutions produce results that meet the
needs of society while making the best use of resources at their disposal. The concept of
efficiency in the context of good governance also covers the sustainable use of natural
resources and the protection of the environment.

8. Accountability
Accountability is a key requirement of good governance. Not only governmental
institutions but also the private sector and civil society organizations must be accountable
to the public and to their institutional stakeholders. Who is accountable to whom varies
depending on whether decisions or actions taken are internal or external to an
organization or institution. In general an organization or an institution is accountable to
those who will be affected by its decisions or actions. Accountability cannot be enforced
without transparency and the rule of law.
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 Need of Corporate Governance:
The need for corporate governance has arisen because of the increasing concern about the non-
compliance of standards of financial reporting and accountability by boards of directors and
management of corporate inflicting heavy losses on investors.

The collapse of international giants likes Enron, World Com of the US and Xerox of Japan are
said to be due to the absence of good corporate governance and corrupt practices adopted by
management of these companies and their financial consulting firms.

The failures of these multinational giants bring out the importance of good corporate governance
structure making clear the distinction of power between the Board of Directors and the
management which can lead to appropriate governance processes and procedures under which
management is free to manage and board of directors is free to monitor and give policy
directions.

In India, SEBI realised the need for good corporate governance and for this purpose appointed
several committees such as Kumar Manglam Birla Committee, Naresh Chandra Committee and
Narayana Murthy Committee.

Importance of Corporate Governance:

A good system of corporate governance is important on account of the following:

1. Investors and shareholders of a corporate company need protection for their investment
due to lack of adequate standards of financial reporting and accountability. It has been
noticed in India that companies raised capital from the market at high valuation of their shares by
projecting wrong picture of the company‘s performance and profitability.

The investors suffered a lot due to unscrupulous management of corporate that performed much
less than reported at the time of raising capital. ―Bad governance was also exemplified by
allotment of promoters‘ share at preferential prices disproportionate to market value affecting
minority holders interest‖.

There is increasing awareness and consensus among Indian investors to invest in companies
which have a record of observing practices of good corporate governance. Therefore, for
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encouraging Indian investors to make adequate investment in the stock of corporate companies
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 and thereby boosting up rate of growth of the economy, the protection of their interests from
fraudulent practices of corporate of boards of directors and management are urgently needed.

2. Corporate governance is considered as an important means for paying heed to investors’

grievances. Kumar Manglam Birla Committee on corporate governance found that companies
were not paying adequate attention to the timely dissemination of required information to
investors in by India.

Though some measures have been taken by SEBI and RBI but much more required to be taken
by the companies themselves to pay heed to the investors grievances and protection of their
investment by adopting good standards of corporate governance.

3. The importance of good corporate governance lies in the fact that it will enable the
corporate firms to (1) attract capital and (2) perform efficiently. This will help in winning
investors confidence. Investors will be willing to invest in the companies with a good record of
corporate governance.

New policy of liberalization and deregulation adopted in India since 1991 has given greater
freedom to management which should be prudently used to promote investors‘ interests. In India
there are several instances of corporate‘ failures due to lack of transparency and disclosures and
instances of falsification of accounts. This discourages investors to make investment in the
companies with poor record of corporate governance.

4. Global Perspective. The extent to which corporate enterprises observe the basic
principles of good corporate governance has now become an important factor for
attracting foreign investment. In this age of globalisation when quantitative restrictions have
been removed and trade barriers dismantled, the relationship between corporate governance and
flows of foreign investment has become increasingly important.

Studies in India and abroad show that foreign investors take notice of well- managed companies
and respond positively to them, capital flows from foreign institutional investors (FII) for
investment in the capital market and foreign direct investment (FDI) in joint ventures with Indian
corporate companies will be coming if they are convinced about the implementation of basic
principles of good corporate governance.
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Thus, ―International flows of capital enable companies to access financing from a large pool of
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investors. If countries are to reap the full benefits of the global capital markets, and if they are to
 attract long-term capital, corporate governance arrangements must be credible and well
understood across borders‖. The large inflows of foreign investment will contribute immensely
to economic growth.

5. Indispensable for healthy and vibrant stock market. An important advantage of strong
corporate governance is that it is indispensable for a vibrant stock market. A healthy stock
market is an important instrument for investors protection. A bane of stock market is insider
trading. Insider trading means trading of shares of a company by insiders such directors,
managers and other employees of the company on the basis of information which is not known to
outsiders of the company.

It is through insider trading that the officials of a corporate company take undue advantage at the
expense of investors in general. Insider trading is a kind of fraud committed by the officials of
the company. One way of dealing with the problem of insider trading is enacting legislation
prohibiting such trading and enforcing criminal action against violators.

In India, insider trading has been rampant and therefore it was prohibited by SEBI. However, the
experience shows prohibiting insider trading by law is not the effective way of dealing with the
problem of insider trading because legal process of providing punishment is a lengthy process
and conviction rate is very low.
According to Sandeep Parekh, an advocate (Securities and Financial Regulations), the effective
way of tackling the problem is by encouraging the companies to practice self regulation and
taking prophylactic action. This is inherently connected to the field of corporate governance.

It is a means by which the company signals to the market that effective self-regulation is in place
and that investors are safe to invest in their securities. In addition to prohibiting inappropriate
actions (which might not necessarily be prohibited) self-regulation is also considered an effective
means of creating shareholders value. Companies can always regulate their directors/officers
beyond what is prohibited by the law‖.

Conclusion:
It is evident from above that it is essential that good governance practices must be effectively
implemented and enforced preferably by self-regulation and voluntary adoption of ethical code
of business conduct and if necessary through relevant regulatory laws and rules framed by
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Government or its agencies such as SFBI, RBI.

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 The effective implementation of good governance practices would ensure investors confidence in
the corporate companies which will lead to greater investment in them ensuring their sustained
growth. Thus good corporate governance would greatly benefit the companies enabling them to
thrive and prosper.

Further, in the context of liberalization and globalisation there is growing realization in the
emerging economies including India that a country‘s business environment must be maintained
and operated in a manner that is conducive to investors‘ confidence so that both domestic and
foreign investors are induced to make adequate investment in corporate companies. This will be
conducive to rapid capital formation and sustained growth of the economy.

Some persons regard certain good corporate practices as ‗irritants‘ to the growth of their busi-
nesses since they require the implementation of minimum standards of corporate governance.
However, fact of the matter is that the observance of practices of good corporate governance will
ensure investors‘ confidence in the companies which have record of good corporate governance.

Further, it needs to be emphasized that practices and principles of good corporate governance
have been evolved which stimulate business rather than stifle it. In fact in good corporate
governance structure what is ensured is that companies must preferably follow voluntarily ethical
code of business conduct which are conducive to the expansion of investment in them and ensure
good outcome in terms of rates of return.

THE 10 WORST CORPORATE ACCOUNTING SCANDALS OF ALL TIME

IF THERE IS ONE THEME TO RIVAL TERRORISM FOR DEFINING THE LAST DECADE-AND-A-
HALF, IT WOULD HAVE TO BE CORPORATE GREED AND MALFEASANCE . MANY OF THE
BIGGEST CORPORATE ACCOUNTING SCANDALS IN HISTORY HAPPENED DURING THAT TIME .
HERE'S A CHRONOLOGICAL LOOK BACK AT SOME OF THE WORST EXAMPLES .

WASTE MANAGEMENT SCANDAL (1998)

COMPANY: HOUSTON-BASED PUBLICLY TRADED WASTE MANAGEMENT COMPANY

WHAT HAPPENED: REPORTED $1.7 BILLION IN FAKE EARNINGS.
MAIN PLAYERS: FOUNDER/CEO/CHAIRMAN DEAN L . BUNTROCK AND OTHER TOP
EXECUTIVES ; ARTHUR ANDERSEN COMPANY ( AUDITORS )
HOW THEY DID IT : THE COMPANY ALLEGEDLY FALSELY INCREASED THE DEPRECIATION
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TIME LENGTH FOR THEIR PROPERTY , PLANT AND EQUIPMENT ON THE BALANCE SHEETS.
HOW THEY GOT CAUGHT : A NEW CEO AND MANAGEMENT TEAM WENT THROUGH THE
BOOKS .
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 PENALTIES: SETTLED A SHAREHOLDER CLASS -ACTION SUIT FOR $457 MILLION. SEC FINED
ARTHURANDERSEN $7 MILLION .
FUN FACT: AFTER THE SCANDAL , NEW CEO A. MAURICE MEYERS SET UP AN ANONYMOUS
COMPANY HOTLINE WHERE EMPLOYEES COULD REPORT DISHONEST OR IMPROPER
BEHAVIOR .

ENRON SCANDAL (2001)

COMPANY: HOUSTON-BASED COMMODITIES , ENERGY AND SERVICE CORPORATION

WHAT HAPPENED: SHAREHOLDERS LOST $74 BILLION, THOUSANDS OF EMPLOYEES AND
INVESTORS LOST THEIR RETIREMENT ACCOUNTS , AND MANY EMPLOYEES LOST THEIR JOBS .
MAIN PLAYERS: CEO JEFF SKILLING AND FORMER CEO KEN LAY .
HOW THEY DID IT : KEPT HUGE DEBTS OFF BALANCE SHEETS .
HOW THEY GOT CAUGHT : TURNED IN BY INTERNAL WHISTLEBLOWER SHERRON WATKINS ;
HIGH STOCK PRICES FUELED EXTERNAL SUSPICIONS .
PENALTIES: LAY DIED BEFORE SERVING TIME; SKILLING GOT 24 YEARS IN PRISON . THE
COMPANY FILED FOR BANKRUPTCY . ARTHUR ANDERSEN WAS FOUND GUILTY OF FUDGING
ENRON'S ACCOUNTS .
FUN FACT: FORTUNE MAGAZINE NAMED ENRON "AMERICA'S MOST INNOVATIVE
COMPANY " 6 YEARS IN A ROW PRIOR TO THE SCANDAL .

WORLDCOM SCANDAL (2002)

COMPANY: TELECOMMUNICATIONS COMPANY; NOW MCI, INC.

WHAT HAPPENED: INFLATED ASSETS BY AS MUCH AS $11 BILLION, LEADING TO 30,000
LOST JOBS AND $180 BILLION IN LOSSES FOR INVESTORS .
MAIN PLAYER: CEO BERNIE EBBERS
HOW HE DID IT : UNDERREPORTED LINE COSTS BY CAPITALIZING RATHER THAN EXPENSING
AND INFLATED REVENUES WITH FAKE ACCOUNTING ENTRIES .
HOW HE GOT CAUGHT : WORLDCOM 'S INTERNAL AUDITING DEPARTMENT UNCOVERED $3.8
BILLION OF FRAUD .
PENALTIES: CFO WAS FIRED , CONTROLLER RESIGNED , AND THE COMPANY FILED FOR
BANKRUPTCY . EBBERS SENTENCED TO 25 YEARS FOR FRAUD , CONSPIRACY AND FILING
FALSE DOCUMENTS WITH REGULATORS .
FUN FACT: WITHIN WEEKS OF THE SCANDAL , CONGRESS PASSED THE SARBANES-OXLEY
ACT, INTRODUCING THE MOST SWEEPING SET OF NEW BUSINESS REGULATIONS SINCE THE
1930S.
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TYCO SCANDAL (2002)

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COMPANY: NEW JERSEY -BASED BLUE -CHIP SWISS SECURITY SYSTEMS.

 WHAT HAPPENED: CEO AND CFO STOLE $150 MILLION AND INFLATED COMPANY INCOME
BY $500 MILLION .
MAIN PLAYERS: CEO DENNIS KOZLOWSKI AND FORMER CFO MARK SWARTZ.
HOW THEY DID IT : SIPHONED MONEY THROUGH UNAPPROVED LOANS AND FRAUDULENT
STOCK SALES . M ONEY WAS SMUGGLED OUT OF COMPANY DISGUISED AS EXECUTIVE
BONUSES OR BENEFITS .
HOW THEY GOT CAUGHT : SEC AND MANHATTAN D .A. INVESTIGATIONS UNCOVERED
QUESTIONABLE ACCOUNTING PRACTICES , INCLUDING LARGE LOANS MADE TO KOZLOWSKI
THAT WERE THEN FORGIVEN.
PENALTIES: KOZLOWSKI AND SWARTZ WERE SENTENCED TO 8-25 YEARS IN PRISON. A
CLASS -ACTION LAWSUIT FORCED TYCO TO PAY $2.92 BILLION TO INVESTORS .
FUN FACT: AT THE HEIGHT OF THE SCANDAL KOZLOWSKI THREW A $2 MILLION BIRTHDAY
PARTY FOR HIS WIFE ON A MEDITERRANEAN ISLAND, COMPLETE WITH A JIMMY BUFFET
PERFORMANCE .

HEALTHSOUTH SCANDAL (2003)

COMPANY: LARGEST PUBLICLY TRADED HEALTH CARE COMPANY IN THE U.S.

WHAT HAPPENED: EARNINGS NUMBERS WERE ALLEGEDLY INFLATED $1.4 BILLION TO
MEET STOCKHOLDER EXPECTATIONS .
MAIN PLAYER: CEO RICHARD SCRUSHY .
HOW HE DID IT : ALLEGEDLY TOLD UNDERLINGS TO MAKE UP NUMBERS AND
TRANSACTIONS FROM 1996-2003.
HOW HE GOT CAUGHT : SOLD $75 MILLION IN STOCK A DAY BEFORE THE COMPANY POSTED
A HUGE LOSS , TRIGGERING SEC SUSPICIONS.
PENALTIES: SCRUSHY WAS ACQUITTED OF ALL 36 COUNTS OF ACCOUNTING FRAUD, BUT
CONVICTED OF BRIBING THE GOVERNOR OF ALABAMA , LEADING TO A 7-YEAR PRISON
SENTENCE .
FUN FACT: SCRUSHY NOW WORKS AS A MOTIVATIONAL SPEAKER AND MAINTAINS HIS
INNOCENCE .

FREDDIE MAC (2003)

COMPANY: FEDERALLY BACKED MORTGAGE-FINANCING GIANT .

WHAT HAPPENED: $5 BILLION IN EARNINGS WERE MISSTATED.
MAIN PLAYERS: PRESIDENT /COO DAVID GLENN , CHAIRMAN/CEO LELAND BRENDSEL , EX-
CFO VAUGHN CLARKE , FORMER SENIOR VPS ROBERT DEAN AND NAZIR DOSSANI .
HOW THEY DID IT : INTENTIONALLY MISSTATED AND UNDERSTATED EARNINGS ON THE
BOOKS .
HOW THEY GOT CAUGHT : AN SEC INVESTIGATION .
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PENALTIES: $125 MILLION IN FINES AND THE FIRING OF GLENN , CLARKE AND BRENDSEL .
FUN FACT: 1 YEAR LATER, THE OTHER FEDERALLY BACKED MORTGAGE FINANCING
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COMPANY , FANNIE MAE , WAS CAUGHT IN AN EQUALLY STUNNING ACCOUNTING SCANDAL .

 AMERICAN INTERNATIONAL GROUP (AIG) SCANDAL (2005)

COMPANY: MULTINATIONAL INSURANCE CORPORATION .

WHAT HAPPENED: MASSIVE ACCOUNTING FRAUD TO THE TUNE OF $3.9 BILLION WAS
ALLEGED , ALONG WITH BID -RIGGING AND STOCK PRICE MANIPULATION .
MAIN PLAYER: CEO HANK GREENBERG .
HOW HE DID IT : ALLEGEDLY BOOKED LOANS AS REVENUE , STEERED CLIENTS TO INSURERS
WITH WHOM AIG HAD PAYOFF AGREEMENTS , AND TOLD TRADERS TO INFLATE AIG STOCK
PRICE .
HOW HE GOT CAUGHT : SEC REGULATOR INVESTIGATIONS, POSSIBLY TIPPED OFF BY A
WHISTLEBLOWER .
PENALTIES: SETTLED WITH THE SEC FOR $10 MILLION IN 2003 AND $1.64 BILLION IN 2006,
WITH A LOUISIANA PENSION FUND FOR $115 MILLION , AND WITH 3 OHIO PENSION FUNDS
FOR $725 MILLION . GREENBERG WAS FIRED , BUT HAS FACED NO CRIMINAL CHARGES .
FUN FACT: AFTER POSTING THE LARGEST QUARTERLY CORPORATE LOSS IN HISTORY IN
2008 ($61.7 BILLION ) AND GETTING BAILED OUT WITH TAXPAYER DOLLARS, AIG EXECS
REWARDED THEMSELVES WITH OVER $165 MILLION IN BONUSES .

LEHMAN BROTHERS SCANDAL (2008)

COMPANY: GLOBAL FINANCIAL SERVICES FIRM .

WHAT HAPPENED: HID OVER $50 BILLION IN LOANS DISGUISED AS SALES .
MAIN PLAYERS: LEHMAN EXECUTIVES AND THE COMPANY 'S AUDITORS, ERNST & YOUNG.
HOW THEY DID IT : ALLEGEDLY SOLD TOXIC ASSETS TO CAYMAN ISLAND BANKS WITH THE
UNDERSTANDING THAT THEY WOULD BE BOUGHT BACK EVENTUALLY . CREATED THE
IMPRESSION LEHMAN HAD $50 BILLION MORE CASH AND $50 BILLION LESS IN TOXIC
ASSETS THAN IT REALLY DID .
HOW THEY GOT CAUGHT : WENT BANKRUPT .
PENALTIES: FORCED INTO THE LARGEST BANKRUPTCY IN U .S. HISTORY. SEC DIDN'T
PROSECUTE DUE TO LACK OF EVIDENCE .
FUN FACT: IN 2007 LEHMAN BROTHERS WAS RANKED THE #1 "MOST ADMIRED SECURITIES
FIRM " BY FORTUNE MAGAZINE .

BERNIE MADOFF SCANDAL (2008)

COMPANY: BERNARD L. MADOFF INVESTMENT SECURITIES LLC WAS A WALL STREET

INVESTMENT FIRM FOUNDED BY MADOFF .
WHAT HAPPENED: TRICKED INVESTORS OUT OF $64.8 BILLION THROUGH THE LARGEST
PONZI SCHEME IN HISTORY .
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MAIN PLAYERS: BERNIE MADOFF, HIS ACCOUNTANT , DAVID FRIEHLING, AND FRANK
DIPASCALLI .
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 HOW THEY DID IT : INVESTORS WERE PAID RETURNS OUT OF THEIR OWN MONEY OR THAT
OF OTHER INVESTORS RATHER THAN FROM PROFITS.
HOW THEY GOT CAUGHT : MADOFF TOLD HIS SONS ABOUT HIS SCHEME AND THEY
REPORTED HIM TO THE SEC . HE WAS ARRESTED THE NEXT DAY .
PENALTIES: 150 YEARS IN PRISON FOR MADOFF + $170 BILLION RESTITUTION. PRISON
TIME FOR FRIEHLING AND DIPASCALLI .
FUN FACT: MADOFF'S FRAUD WAS REVEALED JUST MONTHS AFTER THE 2008 U.S.
FINANCIAL COLLAPSE .

SATYAM SCANDAL (2009)

COMPANY: INDIAN IT SERVICES AND BACK -OFFICE ACCOUNTING FIRM.

WHAT HAPPENED: FALSELY BOOSTED REVENUE BY $1.5 BILLION.
MAIN PLAYER: FOUNDER/CHAIRMAN RAMALINGA RAJU.
HOW HE DID IT : FALSIFIED REVENUES , MARGINS AND CASH BALANCES TO THE TUNE OF 50
BILLION RUPEES .
HOW HE GOT CAUGHT : ADMITTED THE FRAUD IN A LETTER TO THE COMPANY'S BOARD OF
DIRECTORS .
PENALTIES: RAJU AND HIS BROTHER CHARGED WITH BREACH OF TRUST, CONSPIRACY,
CHEATING AND FALSIFICATION OF RECORDS . R ELEASED AFTER THE CENTRAL BUREAU OF
INVESTIGATION FAILED TO FILE CHARGES ON TIME .
FUN FACT: IN 2011 RAMALINGA RAJU 'S WIFE PUBLISHED A BOOK OF HIS EXISTENTIALIST ,
FREE -VERSE POETRY .

Corporate Governance Board of Directors

Recommendations to Implement Corporate Governance

Listed companies in India follow strict corporate governance rules
After a slew of scandals, politicians and regulators, executives and shareholders are all preaching
the governance gospel. Corporate governance has come to dominate the political and business
agenda.
Regulations are only one part of the answer to improved governance. Corporate governance is
about how companies are directed and controlled.
Culture is necessary but not sufficient to ensure good corporate governance. The right structures,
policies and processes must also be in place. Transparency about a company‘s governance
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policies is critical. Too few companies are genuinely transparent, however this is an area where
most organisations can and should do much more.
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 Corporate governance should be considered as an obligation not a luxury.

Principles of Corporate Governance - Refer Q-7 answer section C

Requirements of a good Corporate Governance – Refer Q-6 answer Section C

Characteristics of Corporate Governance in study material & Refer Q-7 answer in Section
B

ADVANTAGES OF CORPORATE GOVERNANCE / also read Advantages &

Importance, Need in study material and Refer Q-8 answer Section B
Good corporate governance ensures corporate success and economic growth.
Strong corporate governance maintains investors‘ confidence, as a result of which, company can
raise capital efficiently and effectively.
It lowers the capital cost.
There is a positive impact on the share price.
It provides proper inducement to the owners as well as managers to achieve objectives that are in
interests of the shareholders and the organization.
Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
It helps in brand formation and development.
It ensures organization in managed in a manner that fits the best interests of all.
Enhances performance of companies
Enhances access to capital
Enhances long term prosperity
Provides a barrier to corrupt dealings- limiting discretionary decision making
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Introducing Codes of Ethics

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Impacts on the society as a whole: Better companies, Better societies.

 Participants of corporate governance
Board of directors, Non-executive director, Institutional director, Audit committee, Company
secretaries, Government and other law-making agencies, Other participants – accounting
professionals, small investors, consumers, vendor and strategic partners, employees, media, stock
exchanges, employee representatives (trade unions), company secretaries, regulators and
governments

BOARD OF DIRECTORS
Meaning-
A board of directors is a group of individuals that are elected as, or elected to act as,
representatives of the stockholders to establish corporate management related policies and to
make decisions on major company issues.
The formal link between shareholders and the managers of an organisation
Powers to the BOD is given by the memorandum of association and articles of association.
BOD are the key persons in corporate governance
What is the composition and committees of board of directors
The BOD of the company shall have combination of executive and non-executive directors with
not less than 50% of them comprising of non-executive directors. The ultimate control as to the
composition of the board of directors rests with the shareholders, who can always appoint, and –
more importantly, sometimes – dismiss a director. The shareholders can also fix the minimum
and maximum number of directors.
Executive director: An executive director is a chief executive officer (CEO) or managing
director of an organization, company, or corporation. Closely associated in the day to day
management. He is a full time director and a paid employee of the company.
Non Executive director: A non-executive director is a member of a company's board of
directors who is not part of the executive team. A non-executive director typically does not
engage in the day-to-day management of the organization, but is involved in policy making and
planning exercises. He is normally a promoter of the company having high stakes in the
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company.
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 Independent director: They are not full time directors but are outside directors and do not own
the shares of the company. Eg: Narayan Murthy as a board member of XYZ Co; who advises it
on its affairs.
The board of directors consists of 13 members, including:
3 independent directors;
3 executive directors;
7 non-executive directors who do not perform any management function in the company or any
of its subsidiaries

Committees for Directors

The Company constituted Audit Committee, Stakeholders Relationship Committee,
Compensation and Remuneration Committee, Executive Committee, Nomination and
Governance Committee and Corporate Social Responsibility (CSR) Committee.
Audit Committee
The main function of Audit Committee is to oversee the company‘s financial reporting process
and the disclosure of its financial information to ensure that the financial statement is correct,
sufficient and credible. The Audit Committee can recommend to the Board, the appointment, re-
appointment and, if required, the replacement or removal of the statutory auditor and the fixation
of audit fees. The members of Audit Committee should have formal knowledge of accounting
and financial management or experience of interpreting financial statements.
Stakeholders Relationship Committee
To supervise and ensure efficient share transfers, share transmission, transposition, etc;
To approve allotment, transfer, transmission, transposition, consolidation, split, name deletion
and issue of duplicate share certificate of equity shares of the Company;
To redress shareholder and depositor complaints like non-receipt of Balance Sheet, non-receipt
of declared Dividend, etc.
To address all matters pertaining to Depositories for dematerialization of shares of the Company
and other matters connected therewith; and
Remuneration Committee
To advise the Board in framing remuneration policy for key managerial persons of the Company
from time to time. The function of remuneration committee is to ensure transparent policy in
determining and accounting for specific remuneration packages for executive directors including
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pension rights and any compensation payments. To review general compensation policy of the
Company (including that of ESOPs) and convey its recommendation to the Board.
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 Executive Committee
To review and follow up on the action taken on the Board decisions;
To review the operations of the Company in general;
To review the systems followed by the Company;
To review, propose and monitor annual budget including additional budget, if any, subject to the
ratification of the Board;
To review capital expenditure against the budget;
To authorize opening and closing of bank accounts;
To delegate authority to the Company officials to represent the Company at various courts,
government authorities and so on; and
Nomination and Governance Committee
To develop a pool of potential director candidates for consideration in the event of a vacancy on
the Board of Directors;
To determine the future requirements for the Board as well as its Committees and make
recommendations to the Board for its approval;
To identify, screen and review individuals qualified to serve as executive directors, non-
executive directors and independent directors;
To provide its recommendation to the Board for appointment of CEO;
To evaluate the current composition and governance of the Board of Directors and its
Committees and make appropriate recommendations to the Board, whenever necessary;
To evaluate and recommend termination of membership of an individual director for cause or for
other appropriate reasons;
To evaluate and make recommendations to the Board of Directors concerning the appointment of
Directors to Board Committees and the Chairman for each of the Board Committees;

Corporate Social Responsibility (CSR) Committee

The committee is constituted with powers and responsibilities
To formulate and recommend to the Board a CSR policy which will define the focus areas and
indicate the activities to be undertaken by the Company under CSR domain.
To monitor the budget under the CSR activities of the Company.
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To accomplish the various CSR projects of the Company independently or through ‗Persistent
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Foundation‘ and / or any other eligible NGO / Social Institute, as the case may be.
 Duties & responsibilities of board of directors

Responsibilities of board of directors

The directors must always exercise their powers for a ‗proper purpose‘ – that is , in furtherance
of the reason for which they were given those powers by the shareholders.
Directors must act with due skill and care.
Directors must consider the interests of the employees of the company.
Directors must act in good faith.

Duties of the board of directors

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The board should provide training for directors.

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 The board should enable quality decision-making by giving the members timely access to
information.
The board should put in systems of risk management and review them every six months.
The board should review its own performance annually and state its methods in its annual
reports.
The board should put in a system to ensure compliance with law.

Roles of board of directors

Establishes visions, mission and values.
Sets strategies and structure.
Exercise accountability to shareholders and be responsible to relevant stakeholders.
Selection, compensating, monitoring.
Formal and transparent board nomination.
Overseeing the process of disclosure and communications.

Functions of board of directors

The board of directors lays down the corporate strategy, annual business plan, budget and
general policy of the company.
Monitoring the effectiveness of the company‘s governance practices.
It controls and gives direction to the management of the company and the group and provides
monitoring of risks.
It also ensures that the principles of good governance are respected.
Selecting, Recruiting, compensating, monitoring key executives and overseeing succession
planning.
Executive and board remuneration.
Supply direction for the organization and set up a policy based governance system
Fiduciary responsibility to protect the organisation‘s assets and member‘s speculation
Responsible for corporate and financial objectives
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Formulate major corporate policies

Ensure continuous improvement in services and products
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 Manage relations with investors, major customers and regulators.
Responsible for company‘s long-term sustainability
Ensuring the integrity of the corporation‘s accounting and financial reporting systems.
Monitoring and managing potential conflicts of interests of management, board members and
shareholders, including misuse of corporate assets and abuse in related party transactions.

@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@
@@@@

CORPORATE GOVERNANCE COMMITEES

What is a committee?
Committee is the system by which companies are directed and controlled. it is generally
understood as the framework of rules and relationships, system and processes within and by
which authority is exercised and controlled in corporations .
Corporate Governance in India
Concerns about corporate governance in India were, however, largely triggered by a spate of
crises in the early 90‘s – the Harshad Mehta stock market scam of 1992 followed by incidents of
companies allotting preferential shares to their promoters at deeply discounted prices as well as
those of companies simply disappearing with investors‘ money. These concerns about corporate
governance stemming from the corporate scandals as well as opening up to the forces of
competition and globalization gave rise to several investigations into the ways to fix the
corporate governance situation in India.
1. KUMAR MANGALAM BIRLA COMMITTEE
In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee under
Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of good
corporate governance.The report submitted by the committee is the first formal and
comprehensive attempt to evolve a ‗Code of Corporate Governance, in the context of prevailing
conditions of governance in Indian companies, as well as the state of capital markets.

WHY WAS THE COMMITTEE FORMED?

Primary objective was to view corporate governance from perspective of investors &
shareholders and to prepare a ‗Code' to suit the Indian corporate environment.
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To promote and raise the standards of corporate governance.

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To improve corporate governance standards in listed companies in areas such as -

 Disclosure of material information(financial & non-financial)
Responsibilities of independent & non-independent directors
To draft a code of corporate best practice
Members of the committee :
ANAND RATHI- President of stock exchange ltd.
N.R. NARAYAN MURTHY- Chairman and managing director of Infosys.
A.K NARAYAN - President of Tamil Nadu investor association
Mandatory Recommendations:
Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above
Composition Of Board Of Directors – Optimum Combination Of Executive & Non-Executive
Directors .
Audit Committee – With 3 Independent Directors With One Having Financial And Accounting
Knowledge.
Remuneration Committee.
 Board Procedures – Atleast 4 Meetings Of The Board In A Year With Maximum Gap Of 4
Months Between 2 Meetings. To Review Operational Plans, Capital Budgets, Quarterly Results,
Minutes Of Committees Meeting.
Director Shall Not Be A Member Of More Than 10 Committee And Shall Not Act As Chairman
Of More Than 5 Committees Across All Companies
 Management Discussion And Analysis Report Covering Industry Structure, Opportunities,
Threats, Risks, Outlook, Internal Control System
 Information Sharing With Shareholders
Non-Mandatory Recommendations:
 Role Of Chairman
 Remuneration Committee Of Board
 Shareholders Right For Receiving Half Yearly Financial Performance
Postal Ballot Covering Critical Matters Like Alteration In Memorandum Etc
 Sale Of Whole Or Substantial Part Of The Undertaking
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 Corporate Restructuring
 Further Issue Of Capital
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  Venturing Into New Businesses

2.NARESH CHANDRA COMMITTEE REPORT

Naresh Chandra (b. 1934) is an Indian Civil Servant who has served as the Cabinet
Secretary (1990-92) and the Indian Ambassador to the US (1996-2001).He was awarded
thePadma Vibhushan for his service, in 2007.
While SEBI was making efforts to introduce corporate governance standards among Indian
corporates, the Department of Company Affairs took another initiative in this direction.
The Naresh Chandra Committee was appointed as a high level committee to examine various
corporate governance issues by the Department of Company Affairs on 21 August, 2002 to
examine various corporate governance issues.
Objectives :
o Statutory auditor-company relationship.
o Rotation of statutory audit firms.
o Procedure for appointment of auditors.
o Settlement of financial affairs.
o Certifications of accounts and financial statements.
o Transparent system of random scrutiny.
o Adequacy of regulation of CA.
o Setting up an independent regulator.
o Role of independent directors.

Recommendations :
 The committee‘s recommendations relate to-
 Disqualifications for audit assignments
 List of prohibited non audit services
 Independence standards
 Compulsory audit partner rotation
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 Auditors disclosure of contingent liabilities

 Auditors disclosure of qualifications and consequent action
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  Management certification in the event of auditors replacement
 Auditors annual certification of independence
 Appointment of auditors
 Setting up of independent quality review board
 Proposed disciplinary mechanism for auditors
 Defining an independent director
 Percentage of independent directors
 Minimum board size of listed companies.
 Disclosure on duration of board meetings/committee meetings.
 Additional disclosure to directors.
 Independent directors on audit committees of listed companies.
 Audit committee charter.
 Remuneration of non executive directors.
 Exempting non executive directors from certain liabilities.
 Training of independent directors.
 SEBI and subordinate legislation .
 Corporate serious fraud office.
Naresh Chandra committee (2009) :
The Naresh Chandra committee was appointed in August 2002 by the Department of Company
Affairs (DCA) under the Ministry of Finance and Company Affairs to examine various
corporate governance issues. The Committee submitted its report in December 2002. It made
recommendations in two key aspects of corporate governance: financial and non-financial
disclosures: and independent auditing and board oversight of management.
The committee submitted its report on various aspects concerning corporate governance such as
role, remuneration, and training etc. of independent directors, audit committee, the auditors and
then relationship with the company and how their roles can be regulated as improved. The
committee stingily believes that ―a good accounting system is a strong indication of the
management commitment to governance.
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 3. N.R. NARAYANA MURTHY COMMITTEE (2002-2003)
Committee was set up by SEBI under the chairmanship of Mr. N.R.NARAYANA
MURTHY , in order to review the clause 49, to suggest measure to improve corporate
governance standard.
To review the performance of corporate governance.
To determine the role of companies in responding to rumour and other price sensitive
information circulating in the market in order to enhance the transparency and integrity of the
market.
Narayana Murthy committee (SEBI) recommendations

With the rise of demands on openness, transparency, regular auditing and participation of all
stakeholders on important decisions, SEBI has constituted a committee under chairmanship of
Narayan Murthy. Narayan Murty Committee was set up by SEBI in 2002 to suggest measures to
evaluate and improve the situation of Corporate Governance in the country. In India, all
initiatives toward the Corporate Governances are taken by Ministry of Corporate Affairs and
SEBI in improving corporate governance practices in our country. The committee submitted its
report in February 2003.
Recommendations
Narayan Murthy Committee report recommends following mandatory points on which MCA and
SEBI are looking to implement in phased manner:
(1.) Making Auditing a regular task and strengthening the Auditing committee by providing them
autonomy.
(2). Approval of stock holders and board of director for payments and compensation and
payment paid to non-executive directors.
(3.) To bring in code of conducts and rules to be followed.
(4.) Requiring corporate executive boards to make stakeholders and share holders aware of any
risks company may face in future in every annual reports.
(5.) Improving the quality of financial disclosures, including those related to related party
transactions and proceeds from initial public offerings

WHISTLE-BLOWER PROTECTION: employees should have the access to the audit

committee to report any unethical practices (not necessarily illegal acts) without informing the
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supervisor. It‘s opposed by high corporate officials on various grounds.

AUDIT COMMITTEE: independence of audit committee was emphasized by limiting the
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tenure and only appointing non-executive directors, to maintain the

 independence of directors. But partially it conflicts with the naresh Chandra committee
recommendations.
FINANCIAL DISCLOSURE: better information to all stake holders especially investors by
improved financial disclosure practices such as assess and disclose business
risk in annual report, stock holder approval, legal compliance report, analysis
of financial status etc.
CODE OF CONDUCT: for the board members for ethical conduct
Apart from these there are some non-mandatory recommendations such as training and
evaluation of performance of board members.
Many of these recommendations have been included in the new companies act of 2013. This will
not only improve corporate governance but also prevent another Satyam from happening. Hence
through the mentioned it is clear that recommendation is toward disciplining corporate
governance and making it more transparent and stakeholder‘s friendly.
Mandatory
 Strengthening the responsibility of audit committee.
 Improving the quality of financial disclosures.
 Disclose business risks in the annual reports of companies.
 Boards to adopt formal codes of conduct.
 Stock holder approval and improved disclosures.
Nonmandatory
 Moving to a regime where corporate financial statements are not qualified.
 System of training of board members.
 Performance of board members.

Corporate Governance in United Kingdom

1. CADBURY COMMITTEE :
o CADBURY REPORT (1992) - The Cadbury Committee was set-up in May 1991 by the
Financial Reporting Council of the London Stock Exchange. The Cadbury Report, titled
‗Financial Aspects of Corporate Governance‘ is a report of a committee chaired by
Adrian Cadbury that sets out recommendations on the arrangement of company boards
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and accounting systems to mitigate corporate governance risks and failures. The report
was published in 1992. The committee published its report in December 1992. 
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Adrian Cadbury the chairman of the Cadbury committee.

 Objectives:
o Addressing the financial aspects of corporate governance.
o Ability of auditors to provide the safeguard.
o Review the structure, rights and roles.
o Address various aspects of accountancy profession.
o Raise the standard of corporate governance.
Role of Board of Directors, duties of the board and its compositions.
Role of Non-Executive Directors.
Dealing with their Remunerations.
Addressing questions of financial reporting and financial controls.
Recommendations
o The board should meet regularly, retain full and effective control over the company and
monitor the executive management. The board should include non-executive directors
of sufficient caliber and number for their views to carry significant weight in the board‘s
decisions. All directors should have access to the advice and services of the company
secretary, who is responsible to the board for ensuring that board procedures are followed
and that applicable rules and regulations are complied with. Any question of the removal
of the company secretary should be a matter for the board as a whole.

o Non-executive directors should bring an independent judgment to bear on issues of

strategy, performance, resources, including key appointments, and standards of conduct.
Non-executive directors should be appointed for specified terms and reappointment
should not be automatic. Non-executive directors should be selected through a formal
process and both this process and their appointment should be a matter for the board as a
whole.

o We recommend that future service contracts should not exceed three years without
shareholders‘ approval and that the Companies Act should be amended inline with this
recommendation. Shareholders require that the remuneration of directors should be
both fair and competitive. The Annual General Meeting provides the opportunity for
shareholders to make their views on such matters as director‘s benefit known to their
boards.

o It is the board‘s duty to present a balanced and understandable assessment of the

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company‘s position.
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 o The board should ensure that an objective and professional relationship is maintained
with the auditors.

o The board should establish an audit committee of at least three non-executive directors
with written terms of reference which deal clearly with its authority and duties.

o The directors should explain their responsibility for preparing the accounts next to a
statement by the auditors about their reporting responsibilities.

o The directors should report on the effectiveness of the company‘s system of internal
control.

o The directors should report that the business is a going concern, with supporting
assumptions or qualifications as necessary.

o A single person should not be vested with the decision making power. i.e., the role of
chairman and chief executive should be separated clearly.

o The Non-executive directors should act independently while giving their judgment on
issue of strategy, performance, allocation of resources, and designing the code of
conduct.

o A majority of directors should be independent non- executive directors, i.e., they should
not have any financial interests in the company.

o The term of the Directors can be extended beyond three years only after the prior
approval of the shareholders.

o A remuneration committee with majority of non- executive directors should decide on the
pay of the executive directors.

o The interim company report should give the balance sheet information and reviewed by
the auditor.

o The information regarding the audit fee should be made public and there should be
regular rotation of the auditors.

o An objective and professional relationship with the auditors must be ensured.

o It must be reported that a business is a growing concern.

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 Corporate Governance in United States
1. SARBANES OXYLEY ACT.
Post Enron and WorldCom failures, the US Government had been heavily criticized, which in
turn, served as catalysts for legislative change (Sarbanes-Oxley Act of 2002) and regulatory
change (new governance guidelines from the NYSE and NASDAQ).
Sarbanes-Oxley Act: The Sarbanes-Oxley Act of 2002 (enacted July 30, 2002), also known as
the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly
called Sarbanes-Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002,
as a reaction to a number of major corporate and accounting scandals like Tyco International,
Enron, Adelphia, Peregrine Systems and WorldCom. The legislation set new or enhanced
standards for all U.S. public company boards, management and public accounting firms. It does
not apply to privately held companies.
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